10B5-1 Proposed Rules

The proposed rules would introduce the following new disclosure requirements for companies: Currently, corporate insiders may disclose bona fide gifts of equity securities on a Form 5 in a deferred reporting schedule (within 45 days of the issuer`s fiscal year). In some circumstances, this led the company insider to report the gift more than a year after the donation. The SEC believes that the delay in reporting may have led to abuses, for example by anti-giving a donation for maximum tax benefit. The proposed rule requires that bona fide gifts of equity be reported on Form 4 before the end of the second business day following the transaction, which expedites disclosure at a date close to the event. This information would be required in the annual reports on Forms 10-K and 20-F and in the powers of attorney and information statements relating to Schedules 14A and 14C. In addition, the proposed rule includes a new section 16J on Form 20-F that requires foreign private issuers to provide the same annual information. While the rules for implementing and adopting 10b5-1 plans are relatively simple, the SEC`s proposal is based on the belief that there are gaps related to the creation of plans and the timing of transactions. On December 15, 2021, the SEC proposed major changes to Rule 10b5-1 that, among other things, would require a cooling-off period for directors and officers who buy and sell shares, while requiring personal certification. The SEC has identified concerns that corporate insiders simultaneously enter into multiple 10b5-1 plans to strategically execute transactions under one plan and terminate transactions under another to take advantage of MNPI. There are no restrictions for business insiders or companies to use multiple overlapping 10b5-1 plans. To address this issue, the SEC has proposed eliminating the ability of insiders to rely on an affirmative defense if they maintain multiple overlapping 10b5-1 plans for the same class of securities. Many corporations do not allow officers and directors to enter into overlapping regimes under Rule 105b-1 as part of their commercial policy.

The SEC also proposes to include an optional second checkbox that applicants could use for transactions “conducted under a pre-programmed contract, direction, or written plan that is not intended to comply with the terms of Rule 10b5-1(c).” This information is intended to enable investors to better assess compliance with insider dealing and to facilitate the supervision of the company in order to prevent infringements. Given the increased disclosure burden, some insiders may seek to enter into trade agreements outside the scope of Rule 10b5-1. Note, however, that the same disclosure requirements would apply to the acceptance or termination of other pre-planned contracts, instructions or business plans that do not comply with the terms of Rule 10b5-1(c)(1), but by which the Company, officer or directors attempt to deal with the Company`s securities. The Securities and Exchange Commission today proposed amendments to Rule 10b5-1 of the Securities Exchange Act of 1934 to improve disclosure requirements and investor protection from insider trading. The proposal includes updates to Rule 10b5-1(c), which provides a positive defense against insider trading for parties who often have access to important non-public information, including officers, directors and issuers. 4 Disclosure would be required under new section 408(a) of Regulation S-K. As proposed, such disclosures would not be required for REITs. The SEC has sought comment on how the restriction of the overlapping plan could affect withholding tax on equity pledges, and it is possible that the SEC will address this issue in the final rules by exempting withholding tax transactions from restrictions on overlapping regimes, such as the same concerns about potentially abusive practices for “sell to hedge” transactions.

which are intended only to meet withholding tax obligations do not exist. Rule 10b5-1 of the Securities Exchange Act of 1934 (Exchange Act) provides an affirmative defense against insider trading for individuals and corporations trading shares under plans entered into in good faith and at a time when the person or entity does not possess material non-public information. The SEC`s proposed amendments to Rule 10b5-1 would add new conditions to the availability of a positive defense against insider trading liability under The 10b5-1 trading plans, including: As described above, business insiders must “enter into” 10b5-1 business agreements in good faith and not as part of a plan to circumvent compliance with 10b5-1. To address the SEC`s concerns about insiders manipulating the timing of MNPI`s disclosure to align with its predetermined 10b5-1 transactions, the SEC proposed to add the explicit requirement that the regime be “operated” in good faith. The application is intended to address the Commission`s concern that the company`s insiders are timing the publication of NPMIs in accordance with transactions made under a plan that would not execute the plan in good faith. Interestingly, the proposed rule suggests that terminating or amending a plan could be considered a plan that is not operated in good faith. This will be an important clarification to be found in any final regulation. 3 Disclosure would be required under the new Order in S-K, paragraph 408(b). REITs would also be required to provide similar information in their annual reports in accordance with a new proposal for item 16J of Form 20-F. Some of the proposed changes are broadly consistent with existing current practices, such as restrictions on multiple plans.

The cooling-off period may be considered excessively long for most executives and directors. And if terminating a plan is seen as a violation of the new, broader bona fide requirement, many officers and directors may not see the benefit of entering into a plan at all. Requiring disclosure in these areas can also be a catalyst for changing policies and practices regarding insider trading, disclosure of NPMIs, and the timing of equity compensation. We anticipate that the expanded disclosures could open the door to further scrutiny by shareholders. While some companies already have policies in place and make disclosures in accordance with the proposed rule, others need to act. To improve investors` understanding of these insider trading policies and procedures, the SEC has proposed a new 408(b) under Regulation S-K, which requires annual disclosure of a registrant`s insider trading policies and procedures. The proposals include: The SEC`s proposals for Article 10b5-1 plans are broad and represent a significant break from current regulations for such plans. The main changes are divided into two parts: the requirements of the proposed plan, which must be met for the affirmative defence to be available, and the proposed disclosure requirements, which are intended to improve transparency. Currently, an insider does not have to wait to complete a transaction under a newly adopted or amended plan under Rule 10b5-1, which means that transactions can be made immediately under a plan.

While the rule currently requires the insider to enter into a plan without being aware of the MNPI, the SEC believes that adding a cooling-off period would reduce the risk of an insider adopting or modifying a 10b5-1 plan based on the MNPI.