Rule 10b5-1, Insider Trading, Form Changes and Updates

Overview

Insider Trading Arrangements and Related Disclosures, a new SEC rule, implements cooling-off periods for directors and officers to minimize potentially inappropriate trading and new disclosure requirements for companies and their insiders. SEC Chair Gary Gensler stated that the amendments “will help close potential gaps in our insider trading regime. The core issue is that company insiders regularly have material information that the public doesn’t have.” The amendments to Rule 10b5-1 governing insider trading were adopted by the SEC on Dec. 14, 2022.

Overview:

This final SEC rule provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases. The amendments add new conditions to the existing insider trading rules which are designed to address potential abuse to trade securities opportunistically based on material nonpublic information.

To be in compliance, companies, and corporate insiders must understand this complex array of disclosure and technical changes including:

An issuer’s insider trading policies and procedures
The adoption and termination (including modification) of plans that are intended to meet the rule’s conditions for establishing an affirmative defense
Director and executive compensation regarding equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information

The changes listed above for issuers will require Inline XBRL tagging in their corporate filings.

Section 16 disclosure and technical changes on Form 4 and 5

On March 20, 2023, the SEC will implement EDGAR Release 23.1 which will include changes related to Section 16 reporting.

Forms 4 and 5 will be updated to include a new checkbox to allow filers to identify whether the reported transaction was subject to a contract, instruction, or written plan intended to meet the conditions of Rule 10b5-1. While EDGAR will be updated on March 20, 2023, to support the new checkboxes, filers will be required to comply with the new disclosure filings beginning on or after April 1, 2023.

New check box: Form 4

□ Check this box to indicate that a transaction was made pursuant to a contract, instruction or written plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

New check box: Form 5

□ Check this box to indicate that a transaction was made pursuant to a contract, instruction or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

In addition to checking the new affirmative defense box to indicate that the Form 4 or Form 5 reports applicable transaction activity, filers should also “provide the date of adoption of the Rule 10b5-1(c) plan in the “Explanation of Responses” portion of the Form” (see Instruction 10 of each Form).

Finally, the new SEC rule requires gifts of bona fide equity securities must be reported on Form 4 instead of Form 5 effective February 27, 2023.

Form 144 filing deadline change

The SEC released a final rule extending the filing hours to receive a same-day filing date on Form 144 to 10 pm EST. These filing hours align with current Section 16 reporting for corporate insiders on Forms 3, 4 and 5. Beginning March 20, 2023, Forms 144 and 144/A can be submitted, accepted and disseminated until 10 pm EST.

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