[Part 2 of 5]
Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans)
By George Wilson
As we overviewed in the first post in this series, in late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.
This is the second of five posts that provide details and suggestions to help companies analyze and implement these changes in upcoming periodic reports. This post goes into detail about the disclosure changes from the SEC’s December 2022 Final Rule “Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans).”
And, to help keep track of the topics we will explore, here is a reminder list of our current and future posts in this series to help you implement all these new disclosure requirements:
Current posts:
Future posts:
Details of Form 10-Q Changes for Insider Trading Arrangements and Related Disclosures
The changes to Form 10-Q from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in Part II - Item 5 - Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required.
This change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – i.e., now.
The mechanics of this change start with this modification to the instructions to Part II – Item 5, adding new paragraph (c):
Item 5. Other Information.
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(c) Furnish the information required by Item 408(a) of Regulation S-K (17 CFR 229.408(a)).
S-K Item 408(a) requires the following disclosures:
§229.408 (Item 408) Insider trading arrangements and policies.
(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:
(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or
(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.
(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:
(A) The name and title of the director or officer;
(B) The date on which the director or officer adopted or terminated the trading arrangement;
(C) The duration of the trading arrangement; and
(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.
(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.
(Note: Company 10b5-1 plan disclosure is required by the Share Repurchase Final Rule and will be reviewed in Post 4 of 5.)
Details of Form 10-K Changes for Insider Trading Arrangements and Related Disclosures
The four changes to Form 10-K from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in:
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1. Part II - Item 9B. Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required. This change is effective for Form 10-K if it contains a fourth quarter that begins on or after April 1, 2023. Thus, it will also be effective for a fiscal year that ends on or after June 30, 2023.
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2. Part III - Item 10. Directors, Executive Officers and Corporate Governance, which now includes information about insider trading policies. This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
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3. Part III - Item 11. Executive Compensation, which now requires disclosures about policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information. This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
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4. Part IV - Item 15. Exhibit and Financial Statement Schedules, which now includes exhibit 19 for insider trading policies. This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024.
1. The mechanics of the change to Item 9B start with this modification to the instructions:
PART II - Item 9B. Other Information
Furnish the information required by Item 408(a) of Regulation S-K (§ 229.408(a) of this chapter).
S-K Item 408(a) requires the following disclosures:
§229.408 (Item 408) Insider trading arrangements and policies.
(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:
(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or
(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.
(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:
(A) The name and title of the director or officer;
(B) The date on which the director or officer adopted or terminated the trading arrangement;
(C) The duration of the trading arrangement; and
(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.
(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.
2. The mechanics of the change to Item 10 start with this modification to the instructions to include S-K Item 408(b):
Item 10. Directors, Executive Officers and Corporate Governance
Furnish the information required by Items 401, 405, 406, 407(c)(3), (d)(4), (d)(5), and 408(b) of Regulation S-K (§ 229.401, § 229.405, § 229.406, § 229.407(c)(3), (d)(4), (d)(5), and § 229.408(b) of this chapter).
S-K Item 408(b) requires the following disclosures:
§229.408 (Item 408) Insider trading arrangements and policies.
(b)(1) Disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities by directors, officers and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such policies and procedures, explain why it has not done so.
(2) If the registrant has adopted insider trading policies and procedures, the registrant must file such policies and procedures as an exhibit. If all of the registrant’s insider trading policies and procedures are included in its code of ethics (as defined in 17 CFR 229.406(b)) and the code of ethics is filed as an exhibit pursuant to 17 CFR 229.406(c)(1), that would satisfy the exhibit requirement of this paragraph.
(3) The disclosure provided pursuant to paragraph (b)(1) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 in accordance with the EDGAR Filer Manual.
3. The mechanics of the change to Item 11. Executive Compensation do not require any updates to the instructions to the form, as the Item 11 instructions already refer to S-K Item 402. New paragraph (x) has been added to S-K item 402.
§229.402 (Item 402) Executive compensation.
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(x) Disclosure of the registrant's policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information.
(1) Discuss the registrant’s policies and practices on the timing of awards of options in relation to the disclosure of material nonpublic information by the registrant, including how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award, and, if so, how the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award; and whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.
(2) (i) If, during the last completed fiscal year, the registrant awarded options to a named executive officer in the period beginning four business days before the filing of a periodic report on Form 10-Q (§ 249.308a of this chapter) or Form 10-K (§ 249.310 of this chapter), or the filing or furnishing of a current report on Form 8-K (§ 249.308 of this chapter) that discloses material nonpublic information (other than a current report on Form 8-K disclosing a material new option award grant under Item 5.02(e) of that form), and ending one business day after the filing or furnishing of such report provide the information specified in paragraph (x)(2)(ii) of this section, concerning each such award for each of the named executive officers in the following tabular format:
(ii) The Table shall include:
(A) The name of the named executive officer (column (a));
(B) On an award-by-award basis, the grant date of the option award reported in the table (column (b));
(C) On an award-by-award basis, the number of securities underlying the options, (column (c));
(D) On an award-by-award basis, the per-share exercise price of the options (column (d));
(E) On an award-by-award basis, the grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles (column (e)).
(F) For each instrument reported in column (b), disclose the percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and the trading day beginning immediately following the disclosure of material nonpublic information (column (f)).
Instruction to paragraph (x)(2). A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.
(3) The disclosure provided pursuant to this paragraph (x) must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.
4. The mechanics of the change to Item 15. Exhibit and Financial Statement Schedules are to add new exhibit 19:
(b)* * *
(19) Insider trading policies and procedures. Any insider trading policies and procedures, or amendments thereto, that are the subject of the disclosure required by § 229.408(b) (Item 408(b) of Regulation S-K).
(Note: S-K Item 408(b) is reviewed above with Item 10 changes.)
To implement all these new disclosure requirements companies will need to establish a process and appropriate disclosure controls and procedures to accumulate information from officers and directors about their 10b5-1 plans. In addition, adopting a compliant insider trading policy, or, as necessary, updating insider trading policies, will be necessary.
You can find more information about the changes to the use of Rule 10b5-1 plans, including the cooling-off period and certification provisions, in this blog post.
As always, your thoughts and comments are welcome!
#10Q #10K #SEC