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Scope
The final SEC insider trading rule generally applies to all issuers including smaller reporting companies (SRCs), emerging growth companies (EGCs), business development companies (BDCs), and foreign private issuers (FPIs). SRCs and EGCs are permitted to use a scaled approach for certain disclosures, limiting their disclosures in specific cases. Registered investment companies and asset-backed issuers are exempt.
New conditions under Rule 10b5-1
Cooling-off period
Directors or officers, as defined in Exchange Act Rule 16a-1(f), cannot trade under a new or modified 10b5-1 plan until the later of 1) 90 days after the adoption of modification of the plan, or 2) two business days following the filing of the Form 10-Q or Form 10-K for the quarter in which the plan was adopted. The director or officer cooling-off period is a maximum of 120 days. Nondirector or officer insiders have a cooling-off period of 30 days.
Crowe observation: Issuers can voluntarily adopt insider cooling-off periods that exceed the minimum requirements. As explained in the final insider trading rule, director and officer insiders have a longer required cooling-off period because they are more likely to have access to material nonpublic information.
Certifications
At the time of adoption or modification of a 10b5-1 plan, directors and officers must certify that: 1) they are not aware of material nonpublic information about the issuer or its securities, and 2) they are adopting the plan in good faith.
Good faith requirement
Existing Rule 10b5-1 requires that a plan be “entered into in good faith,” but the final rule expands the time frame of good faith beyond plan inception. The final rule requires persons entering a Rule 10b5-1 plan to “act in good faith with respect to that plan” (that is, during the entirety of the plan).
Plan restrictions
The SEC insider trading final rule generally prohibits individuals, other than an issuer, from having multiple overlapping 10b5-1 plans and limits individuals to one single-trade plan in any 12-month period. Overlapping arrangement exceptions include:
- Separate trading contracts with different broker-dealers or agents are allowed under an individual trading plan; however, modification of one contract is deemed to modify all contracts.
- Substitutions of brokers or agents are allowed if trading instructions remain identical.
- Two separate 10b5-1 plans are allowed if trading under the latter plan cannot commence until trading is either completed or expired under the former plan or, in the case of a terminated plan, the cooling-off period passes.
- “Sell-to-cover” arrangements structured to satisfy the tax withholding obligations from the vesting of a compensatory award – for example, restricted stock units – when the individual does not control the timing of sales are allowed. A stock option exercise would not qualify for the sell-to-cover exception because the holder controls the timing.
Crowe observation: The cooling-off and plan restriction aspects of the final insider trading rule do not apply to issuers, which would have affected issuer share buybacks; however, the SEC continues to assess whether further rulemaking is needed.
Disclosures
Under the SEC insider trading final rule, new Regulation S-K disclosures include:
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S-K item number
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Summary of disclosure requirement
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Location*
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402(x)
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Disclose issuer’s policies and procedures, including governance, over the timing of option or similar awards and the disclosure of material nonpublic information.
Provide annual tabular summary (format below) of options or similar awards granted during the period four business days before and one day after:
- A filing on Form 10-K or 10-Q
- The release of material nonpublic information on Form 8-K
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Annually in Form 10-K or proxy statement
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408(a)
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Disclose material terms of any director or officer 10b5-1 plan adopted, modified, or terminated during the period. Material terms include name and title of the director or officer, date of event, duration of plan, and number of securities covered under the plan. Disclosure of pricing terms is not required.
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Form 10-Q and Form 10-K
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Disclose whether the issuer has adopted insider trading policies and procedures. If not, discuss why.
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Form 10-K or proxy statement
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601
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File, as an exhibit, the issuer’s insider trading policies and procedures.
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Form 10-K
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Crowe observation: Item 408(a) disclosures are not required for the issuer's trading plans; however, as noted for cooling-off and plan restrictions, the SEC continues to evaluate rulemaking in this area, including a December 2021 proposed rule, "Share Repurchase Disclosure Modernization."
The Item 402(x) tabular disclosure format follows:
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Name*
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Grant date
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Number of securities underlying the award
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Exercise price of the award ($/share)
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Grant date fair value of the award
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Percentage change in the closing market price of the securities underlying the award between the trading day ending immediately prior to the disclosure of material nonpublic information and the trading day beginning immediately following the disclosure of material nonpublic information
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PEO
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PFO
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A
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B
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C
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Section 16 reporting by officers, directors, and 10% shareholders
Section 16 reporting persons must use a new checkbox on Form 4 or Form 5 if the reported transaction was made under a 10b5-1 plan; if so, they must supply the date the plan was adopted. Certain changes to gift reporting also are included in the final rule.
XBRL
Issuers must use inline extensible business reporting language (XBRL) to tag the new 402(x), 408(a), and 408(b) disclosures.
Effective date and transition
The final rule indicates:
- Rule 10b5-1 plans executed or modified after Feb. 27, 2023, must comply with the final rule (the final rule does not affect existing plans unless those plans are substantively modified).
- Issuers other than SRCs must comply with the new disclosure and XBRL requirements in the first filing covering the first full fiscal period that begins on or after April 1, 2023.
- SRCs must comply with disclosure and XBRL requirements in the first filing covering the first full fiscal period that begins on or after Oct. 1, 2023.
- Section 16 insider compliance with the revised Form 4 and Form 5 is required for any filings on or after April 1, 2023 (changes to gift reporting begin Feb. 27, 2023).
Near-term considerations for management and those charged with governance
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Governance. Has the board considered whether changes to the issuer’s insider trading policies are needed? If no insider trading policies exist, has the board considered whether to adopt insider trading policies and procedures? Has the compensation committee considered whether current equity compensation policies and procedures, including timing of award grants, should be revised?
- Controls and procedures. What disclosure controls and procedures are needed to comply with the new rule?
- Content. How will management gather data required to prepare the required disclosures?
- Transition. Does management have a plan to be ready to provide the required disclosures in its SEC filings? Has management considered providing draft disclosures in advance to the board?
