Insiders Take Note: SEC Finalizes Amendments to Trading Plans Rule
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Insiders Take Note: SEC Finalizes Amendments to Trading Plans Rule

Brownstein Client Alert, Dec. 20, 2022

The U.S. Securities and Exchange Commission has released its much-anticipated rule amendments regarding the use of trading plans by insiders.

On Dec. 14, 2022, the SEC finalized amendments to Rule 10b5-1 of the Securities Exchange Act of 1934 focused on enhancing investor protections against insider trading, including added disclosure requirements. Rule 10b5-1 is a clarification to the oft-used Rule 10b-5, which targets securities fraud by making it illegal for anyone to directly or indirectly defraud, make false statements, omit material information or otherwise deceive investors in connection with the sale of securities. Most of the SEC’s securities fraud investigations are grounded in Rule 10b-5, at least in part. 

In turn, Rule 10b5-1 allows insiders (e.g. directors and officers) of publicly traded companies to set up a trading plan for selling their stocks without risk of liability under Rule 10b-5. The trading plans allow insiders to make predetermined trades at predetermined times prior to receiving material nonpublic information. Once established, the insiders can only rely on Rule 10b5-1 if they make no changes or amendments to their trading plans after acquiring material nonpublic information. Assuming they properly follow the trading plan, however, insiders are entitled to an affirmative defense to Rule 10b-5 liability.

Against this backdrop, the SEC’s finalized amendments to Rule10b5-1 make several material adjustments. Most significantly, the amendments:

  • adopt cooling-off periods for persons other than issuers before trading can commence pursuant to a trading plan;
  • add a condition that all persons entering into a trading plan must act in good faith with respect to the plan;
  • require directors and officers to include representations in their plans certifying at the time of the adoption of a new or modified trading plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5;
  • restrict the use of multiple overlapping trading plans and limit the ability to rely on the affirmative defense for more than one single-trade plan per 12-month period for all persons other than issuers; and
  • require more comprehensive disclosure about issuers’ policies and procedures regarding insider trading, along with disclosures regarding issuers’ directors and officers trading plans and certain other trading arrangements. Issuers will be required to comply with the new disclosure requirements in Forms 10-Q, 10-K and 20-F, along with in any proxy statements, starting with a new fiscal period beginning after April 1, 2023.

The amendments to Rule 10b5-1 are further indication that the SEC is engaged in heightened enforcement activity, which the SEC asserts is aimed at increasing investor confidence in the markets and lowering the cost of capital for businesses seeking to raise capital.

Public companies whose insiders already have adopted or may want to adopt trading plans in the future should update their insider trading policies to address the new Rule 10b5-1 amendments. Companies who choose not to update their policies run an increased risk of an enforcement action given current SEC policies. 

This document is intended to provide you with general information regarding changes to the Securities Exchange Act of 1934's rules related to insider trading plans. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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