On December 14, 2022, the US Securities and Exchange Commission adopted amendments to Rule 10b5-1 of the Securities Exchange Act of 1934. The purpose of the amendments is to strengthen investor protections against insider trading.
Rule 10b5-1, adopted in August 2000, provides an affirmative defense to liability for insider trading under Section 10(b) of the Exchange Act if the trade was made pursuant to a binding contract, a written plan adopted before the trader was aware of material nonpublic information, or an instruction to a third person to execute the trade.
The amended rule imposes a good faith requirement on anyone trading under a Rule 10b5-1 plan, and establishes a cooling-off period on persons other than issuers prior to trading pursuant to a Rule 10b5-1 plan. When adopting such a plan, officers and directors must certify that they are not aware of material nonpublic information about the issuer or its securities, and that they are not adopting the plan in order to evade the prohibitions of Rule 10b-5. The amended rule curtails the use of overlapping trading plans, and limits to once in twelve months the use of the affirmative defense created by Rule 10b-5 by persons other than issuers.
Pursuant to the amended rule, issuers will have to submit quarterly disclosures about their use of Rule 10b5-1 plans. The rule also requires issuers to disclose their policies and practices concerning the release of material nonpublic information and the timing of options grants – and they will have to report option awards beginning four business days prior to filing a periodic report or current Form 8-K report disclosing material nonpublic information (there are exceptions for Form 8-K disclosures of new option grants under Item 5.02(e)).
The amended rule will become effective 60 days after publication in the Federal Register. Compliance will be required beginning in April 2023.