On Friday afternoon, Corp Fin issued several new CDIs regarding Rule 10b5-1 plans. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; (3) adoption or termination by officers of directors of any 10b5-1 plan or “non-Rule 10b5-1 trading arrangement”; and (4) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. (See this PubCo post.)
The new CDIs, summarized below, address calculation of the cooling-off period, overlapping plans involving 401(k) plans, the new Form 4 checkbox and disclosures about adoption and termination of trading arrangements.
Exchange Act Rules—Section 120. Manipulative and Deceptive Devices and Contrivances: Rule 10b5-1
Question 120.29 This CDI addresses calculation of the required cooling-off period for Section 16 officers and directors under Rule 10b5-1(c)(1)(ii)(B)(1). That rule provides that the required cooling-off period is the later of 90 days after the adoption of the 10b5-1 contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” The staff advised that the filing date of the financials does not count as the first business day. Rather, “the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date.” For example, if the Form 10-Q or 10-K is filed on a Monday, trading may commence under the 10b5-1 plan, assuming no Federal holidays, on Thursday. The staff also advised that “whether a form is filed before or after trading opens on a given day has no bearing on the calculation.” To determine the filing date of the relevant form, the staff referred interested parties to Rule 13(a)(2) of Reg S-T.
Question 120.30 This CDI addresses overlapping plans under Rule 10b5-1(c)(1)(ii)(D). In this example, the plan administrator of a 401(k) plan uses issuer cash advances to purchase stock in the open market to make matching grants to plan participants. Notably, these purchases are made at the direction of the plan administrator, not at the direction of the plan participant. The staff advised that, in that circumstance, a participant that relies on Rule 10b5-1 to participate in the 401(k) plan can also rely on Rule 10b5-1 for a concurrent plan for purchases or sales on the open market. According to the staff, although “participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan.”
Question 120.31 The Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan does not apply to trading plans adopted prior to the effective date of the amendments to Rule 10b5-1. The staff advised that the check box on Form 4 “applies to transactions that are 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 amended Rule 10b5-1(c).” This CDI is repeated as New Question 135.04 under Form 4 of the Section 16 CDIs.
Reg S-K—Section 133A. Item 408?Insider Trading Arrangements and Policies
Question 133A.01 Item 408(a)(1) of Reg S-K does not require disclosure of the termination of a plan that ends due to its expiration or completion (e.g., the plan ends by its own terms and without any action by an individual).
Question 133A.02 Item 408(a) of Reg S-K requires disclosure of whether any Section 16 officer or director adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. The staff advised that, where “the officer or director has made the decision to adopt or terminate,” the Item 408(a) requirement applies to trading arrangements covering securities in which the officer or director has a direct or indirect pecuniary interest reportable under Section 16.
