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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, and 249
[Release Nos. 33-11138; 34-96492; File No. S7-20-21]
RIN 3235-AM86
Insider Trading Arrangements and Related Disclosures
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: We are adopting amendments to the rule under the Securities Exchange Act of
1934 (“Exchange Act”) that provides affirmative defenses to trading on the basis of material
nonpublic information in insider trading cases. The amendments add new conditions to this rule
that are designed to address concerns about abuse of the rule to trade securities opportunistically
on the basis of material nonpublic information in ways that harm investors and undermine the
integrity of the securities markets. We are also adopting new disclosure requirements regarding
the insider trading policies and procedures of issuers, the adoption and termination (including
modification) of plans that are intended to meet the rule’s conditions for establishing an
affirmative defense, and certain other similar trading arrangements by directors and officers. In
addition, we are adopting amendments to the disclosure requirements for director and executive
compensation regarding equity compensation awards made close in time to the issuer’s
disclosure of material nonpublic information. Finally, we are adopting amendments to Forms 4
and 5 to require filers to identify transactions made pursuant to a plan intended to meet the
rule’s conditions for establishing an affirmative defense, and to require disclosure of bona fide
gifts of securities on Form 4.
1
DATES: Effective date: The final rules are effective on February 27, 2023.
Compliance dates: See Section III for further information on transitioning to the final rules.
FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, Office of
Rulemaking, at (202) 551-3430, Division of Corporation Finance, 100 F Street NE, Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: We are amending:
Commission Reference
CFR Citation
(17 CFR)
Regulation S-K
[17 CFR 229.10 through 229.1305]
Item 402
Item 408
Item 601
§ 229.402
§ 229.408
§ 229.601
Regulation S-T
[17 CFR 232.11 through 232.903]
Item 405
Securities Exchange Act of 1934 (Exchange Act)
[15 U.S.C. 78a et seq.]
Rule 10b5-1
Schedule 14A
Rule 16a-3
Form 4
Form 5
Form 20-F
Form 10-Q
Form 10-K
2
§ 232.405
§ 240.10b5-1
§ 240.14a-101
§240.16a-3
§ 249.104
§ 249.105
§249.220f
§ 249.308a
§ 249.310
Table of Contents
I. Introduction ........................................................................................................................... 5
II. Discussion of the Final Amendments ................................................................................. 12
A. Amendments to Rule 10b5-1 ................................................................................................. 12
1. Cooling-off Period.......................................................................................................... 15
2. Director and Officer Certifications ................................................................................ 37
3. Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and SingleTrade Arrangements....................................................................................................... 47
4. The Amended Good Faith Condition ............................................................................. 63
B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements .............................. 68
1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements .... 70
2. Disclosure of Insider Trading Policies and Procedures ................................................. 80
3. Identification of Rule 10b5-1 and non-Rule 10b5-1 Transactions on Forms 4 and 5 .... 88
C. Disclosure Regarding Option Grants and Similar Equity Instruments Made Close in Time to
the Release of Material Nonpublic Information ............................................................... 93
1. Proposed Amendments ................................................................................................... 93
2. Comments on the Proposed Amendments ..................................................................... 98
3. Final Amendments ....................................................................................................... 101
D. Structured Data Requirements............................................................................................. 105
1. Proposed Amendments ................................................................................................. 105
2. Comments on the Proposed Amendments ................................................................... 106
3. Final Amendments ....................................................................................................... 106
E. Reporting of Gifts on Form 4 .............................................................................................. 108
1. Proposed Amendments ................................................................................................. 108
2. Comments on the Proposed Amendments ................................................................... 109
3. Final Amendments ....................................................................................................... 111
III. Transition Matters ............................................................................................................ 114
IV. Other Matters .................................................................................................................... 116
V. Economic Analysis ............................................................................................................... 116
A. Broad Economic Considerations ............................................................................................ 117
B. Amendments to Rule 10b5-1(c)(1) ........................................................................................ 127
1. Baseline and Affected Parties .......................................................................................... 128
2. Benefits ............................................................................................................................ 140
3. Costs ................................................................................................................................ 150
4. Effects on Efficiency, Competition, and Capital Formation ........................................... 161
5. Reasonable Alternatives .................................................................................................. 162
C. Disclosure of Trading Arrangements and Policies and Procedures in New Item 408 of
Regulation S-K and Mandatory Rule 10b5-1 Checkbox in Amended Forms 4 and 5 ... 169
1. Baseline and Affected Parties .......................................................................................... 170
2. Benefits ............................................................................................................................ 171
3. Costs ................................................................................................................................ 176
4. Effects on Efficiency, Competition, and Capital Formation ........................................... 181
5. Reasonable Alternatives .................................................................................................. 184
D. Additional Disclosure of the Timing of Option Grants and Related Company Policies and
3
Practices .......................................................................................................................... 189
1. Baseline and Affected Parties .......................................................................................... 192
2. Benefits ............................................................................................................................ 194
3. Costs ................................................................................................................................ 201
4. Effects on Efficiency, Competition, and Capital Formation ........................................... 205
5. Reasonable Alternatives .................................................................................................. 207
E. Additional Disclosure of Insider Gifts of Stock ..................................................................... 211
1. Baseline and Affected Parties .......................................................................................... 211
2. Benefits ............................................................................................................................ 211
3. Costs ................................................................................................................................ 213
4. Effects on Efficiency, Competition, and Capital Formation ........................................... 214
5. Reasonable Alternatives .................................................................................................. 215
VI. Paperwork Reduction Act ................................................................................................ 215
A. Summary of the Collections of Information ........................................................................ 215
B. Summary of Comment Letters ............................................................................................ 217
C. Summary of Collections of Information Requirements ...................................................... 217
D. Burden and Cost Estimates Related to the Amendments .................................................... 222
VII. Final Regulatory Flexibility Act Analysis ....................................................................... 225
A. Need for, and Objectives of, the Amendments ................................................................... 226
B. Significant Issues Raised by Public Comments .................................................................. 226
C. Small Entities Subject to the Amendments ......................................................................... 227
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ..................... 228
E. Agency Action to Minimize Effect on Small Entities ......................................................... 230
Statutory Authority .................................................................................................................. 232
4
I.
Introduction
Congress enacted the Federal securities laws to promote fair and transparent securities
markets, “avoid[] frauds,” and “substitute a philosophy of full disclosure for the philosophy of
caveat emptor and thus to achieve a high standard of business ethics in the securities industry.”1
The securities laws’ antifraud prohibitions that proscribe certain insider trading, including
Section 10(b) of the Exchange Act,2 play an essential role in maintaining the fairness and
integrity of our securities markets. The Securities and Exchange Commission (the
“Commission”) has long recognized that insider trading3 and the fraudulent misuse of material
nonpublic information by corporate insiders4 harms not only individual investors but also
undermines the foundations of our markets by eroding investor confidence.5 Congress has
recognized the harmful impact of insider trading on multiple occasions, such as by providing for
enhanced civil penalties specifically for insider trading.6
1
Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972); accord Lorenzo v. SEC, 139 S. Ct.
1094, 1103 (2019).
2
15 U.S.C. 78j(b).
3
“Insider trading” as used in this release refers to the purchase or sale of a security of any issuer, on the basis of
material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is
owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to
any other person who is the source of the material nonpublic information. See Rule 10b5-1(a).
4
We use the terms “insider” and “corporate insider” in this release to refer to persons (other than issuers) for
whom the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that
security or issuer, would represent a breach of a fiduciary duty or a duty of trust or confidence that is owed
directly, indirectly, or derivatively, to the issuer of a security or the shareholders of that issuer, or to any other
person who is the source of the material nonpublic information. See Rule 10b5-1(a).
5
See In re Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638, at *4 n. 15 (1961) (“A significant purpose of
the Exchange Act was to eliminate the idea that the use of inside information for personal advantage was a
normal emolument of corporate office.”); see also United States v. O’Hagan, 521 U.S. 642, 658 (1997) (The
insider trading prohibition is consistent with the “animating purpose” of the Federal securities laws: “to insure
honest securities markets and thereby promote investor confidence.”)
6
See Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, 98 Stat. 1264; Insider Trading and Securities
Fraud Enforcement Act of 1988, Pub. L. No. 100-704, 102 Stat. 4677, codified at Section 21A of the Exchange
Act, 15 U.S.C. 78u-1. Congress has enacted other laws that build on the insider trading prohibition. See, e.g.,
Section 20(d) of the Exchange Act, 15 U.S.C. 78t(d); Section 20A of the Exchange Act, 15 U.S.C. 78t-1;
STOCK Act, Pub. L. No. 112-105, 126 Stat. 291 (2012).
5
Section 10(b) is one of the securities laws’ primary antifraud provisions. This provision
makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security. . .
any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe.”7 The Supreme Court has recognized that the
“manipulative or deceptive device[s] or contrivance[s]” prohibited by Section 10(b) and Rule
10b-5 include the purchase or sale of a security of any issuer on the basis of material nonpublic
information about that security or its issuer, in breach of a duty owed directly, indirectly, or
derivatively to the issuer of that security, to the shareholders of that issuer, or to any person who
is the source of the material nonpublic information.8
The Commission adopted Rule 10b5-1 in 2000 to provide more clarity regarding the
meaning of “manipulative or deceptive device[s] or contrivance[s]” prohibited by Section 10(b)
and Rule 10b-5 with respect to trading on the basis of material nonpublic information.9 At the
7
Rule 10b-5, adopted pursuant to Section 10(b), prohibits the use of “any device, scheme, or artifice to defraud”;
the making of “any untrue statement of a material fact” or the “omi[ssion]” of “a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were made, not
misleading”; or “any act, practice, or course of business which operates or would operate as a fraud or deceit
upon any person” [17 CFR 240.10b-5]. In addition to potential insider trading liability, issuers—and those
acting on their behalf—are also subject to other prohibitions under the Federal securities laws.
8
See Salman v. United States, 137 S.Ct. 420, 425 n. 2 (2016) (explaining that, under the classical theory of
insider-trading liability, an insider who trades in the securities of his corporation on the basis of material
nonpublic information “breaches a duty to, and takes advantage of, the shareholders of his corporation” while,
under the misappropriation theory, “a person commits securities fraud ‘when he misappropriates confidential
information for securities trading purposes, in breach of a duty owed to the source of the information,’ such as
an employer or client”); O’Hagan, 521 U.S. at 651-53 (“Under the ‘traditional’ or ‘classical theory’ of insider
trading liability, §10(b) and Rule 10b–5 are violated when a corporate insider trades in the securities of his
corporation on the basis of material, nonpublic information,” and “the misappropriation theory outlaws trading
on the basis of nonpublic information by a corporate ‘outsider’ in breach of a duty owed not to a trading party,
but to the source of the information.”); Chiarella v. United States, 445 U.S. 222, 228-29 (1980); see also 15
U.S.C. 78u-1(a)(1); 17 CFR 240.10b5-2 (setting forth a non-exclusive definition of circumstances in which a
person has the requisite duty for purposes of the “misappropriation” theory of insider trading liability). Liability
for insider trading under Section 10(b) and Rule 10b-5 requires “scienter,” i.e., “an intent on the part of the
defendant to deceive, manipulate or defraud.” Aaron v. SEC, 446 U.S. 680, 686 & n. 5 (1980); see also
Selective Disclosure and Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [65 FR 51716 (Aug. 24, 2000)]
(“2000 Adopting Release”) at 51727.
9
See 2000 Adopting Release, supra note 8.
6
time, Federal appellate courts diverged on the issue of what, if any, connection must be shown
between a trader’s possession of material nonpublic information and his or her trading to
establish liability under Section 10(b) and Rule 10b-5. The Commission addressed this issue by
providing that a purchase or sale of an issuer’s security is on the basis of material nonpublic
information about that security or issuer for purposes of Section 10(b) and Rule 10b-5 if the
person making the purchase or sale was aware of the material nonpublic information when the
person made the purchase or sale.10 In addition, Rule 10b5-1(c) established an affirmative
defense to liability under Section 10(b) and Rule 10b-5 for insider trading, which the
Commission intended “to cover situations in which a person can demonstrate that the material
nonpublic information did not factor into the trading decision.”11 To that end, this defense
provided that the trading was not made on the basis of material nonpublic information if the
person can demonstrate, among other things, that the trade was made pursuant to a binding
contract, an instruction to another person to execute the trade for the instructing person’s
account, or a written plan for the trading of securities (each a “trading arrangement” and
collectively “trading arrangements”) adopted at a time that the person was not aware of material
10
See Rule 10b5-1(b) (emphasis added). The final amendments do not alter the “awareness” standard, which
courts have held is “entitled to deference.” United States v. Royer, 549 F.3d 886, 899 (2d Cir. 2008) (applying
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984)), cert. denied, 558 U.S.
934, and 558 U.S. 935 (2009); see also United States v. Rajaratnam, 719 F.3d 139, 157-61 (2d Cir. 2013), cert.
denied, 134 S. Ct. 2820 (2014). Under that standard, a person is aware of material nonpublic information if they
know, consciously avoid knowing, or are reckless in not knowing that the information is material and
nonpublic. See SEC v. Obus, 693 F.3d 276, 286-88, 293 (2d Cir. 2012); United States v. Gansman, 657 F.3d
85, 91 n.7, 94 (2d Cir. 2011). The decision in Fried v. Stiefel Labs., Inc., 814 F.3d 1288, 1295 (11th Cir. 2016),
which concerned a private action that did not involve Rule 10b5-1, erroneously suggests that a person must
“use” the inside information to purchase or sell securities. See also infra at p. 45 n. 145.
11
2000 Adopting Release, supra note 8 at 51728.
7
nonpublic information.12 The Commission believed that this defense would “provide appropriate
flexibility to those who would like to plan securities transactions in advance, at a time when they
are not aware of material nonpublic information, and then carry out those pre-planned
transactions at a later time, even if they later become aware of material nonpublic information.”13
Rule 10b5-1(c)(2) provides a separate affirmative defense designed solely for non-natural
persons (e.g., entities) that trade.14
Since the adoption of the Rule 10b5-1(c)(1) affirmative defense, courts,15 commenters,16
and members of Congress17 have expressed concern that traders have sought to benefit from its
12
Rule 10b5-1 does not modify or address any other aspect of insider trading law. It also does not provide an
affirmative defense for other securities fraud claims, such as a claim under Rule 10b-5 for an “untrue statement
of a material fact.” 17 CFR 240.10b-5(b).
13
2000 Adopting Release, supra note 8 at 51728.
14
See Rule 10b5–1(c)(2) [17 CFR 240.10b5–1(c)(2)]. This affirmative defense is available to a person other than
a natural person that can demonstrate that the individual making the investment decision on behalf of the person
was not aware of the material nonpublic information, and the person had implemented reasonable policies and
procedures to prevent insider trading.
15
District courts in private securities law actions have “acknowledge[d] the possibility that a clever insider might
‘maximize’ their gain from knowledge of an impending [stock] price drop over an extended amount of time,
and seek to disguise their conduct with a 10b5-1 plan.” In re Immucor Inc. Sec. Litig., 2006 WL 3000133, at
*18 n.8 (N.D. Ga. Oct. 4, 2006); accord Nguyen v. New Link Genetics Corp., 297 F. Supp. 3d 472, 494–96
(S.D.N.Y. 2018); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 200 (S.D.N.Y. 2010); Malin v. XL
Cap. Ltd., 499 F. Supp. 2d 117, 156 (D. Conn. 2007), aff’d, 312 F. App’x 400 (2d Cir. 2009).
16
In Dec. 2020, the Commission proposed to amend Forms 4 and 5 to add a checkbox to permit filers to indicate
that the reported transaction satisfied Rule 10b5-1. See Rule 144 Holding Period and Form 144 Filings, Release
No. 33-10991 (Dec. 22, 2020) [85 FR 79936]. The Commission received several comment letters in response
expressing concern about potential abuse of Rule 10b5-1. See, e.g., letter from David Larcker et al. (Mar. 10,
2021), https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf; letter from Council of
Institutional Investors (“CII”) (Apr. 22, 2021), https://www.sec.gov/comments/s7-14-20/s71420-8709408236962.pdf; letter from CII (Mar. 18, 2021), https://www.sec.gov/comments/s7-24-20/s72420-8519687230183.pdf. In response to its Fall 2018 semiannual regulatory agenda, the Commission also received a letter
requesting that the Commission amend Rule 10b5-1 to address potential abuses of Rule 10b5-1 plans. See letter
from CII (Dec. 13, 2018), https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf.
17
See, e.g., “Waters and McHenry Introduce Bipartisan Legislation to Curb Illegal Insider Trading,” U.S. House
Committee on Financial Services, (Jan. 18, 2019)
https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401725; letter from Senators
Elizabeth Warren, Sherrod Brown and Chris Van Hollen (Feb. 10, 2021),
https://www.warren.senate.gov/imo/media/doc/02.10.2021%20Letter%20from%20Senators%20Warren,%20Br
own,%20and%20Van%20Hollen%20to%20Acting%20Chair%20Lee.pdf.
8
liability protections while trading securities opportunistically on the basis of material nonpublic
information. Furthermore, some academic studies have found that corporate insiders trading
pursuant to Rule 10b5-1 plans18 consistently outperform the trading of corporate insiders that is
not conducted under such plans. These studies raise concerns that corporate insiders may be
trading under Rule 10b5-1 in ways that harm investors and undermine the integrity of the
securities markets.19 Practices that have raised public concern include corporate insiders adopting
multiple overlapping plans and subsequently selectively canceling certain trades under such
plans while they are aware of material nonpublic information (allowing such insiders to buy or
sell securities under the plans that provide the most advantageous price) or commencing trades
pursuant to a new plan shortly after the adoption of such plan (in some cases on the same day as
said adoption, which, when combined with comparatively larger trades made closer in time to
adoption of a plan, suggests that those trades may be on the basis of material nonpublic
information).20 In September 2021, the Commission’s Investor Advisory Committee (“IAC”)21
18
We use the terms “Rule 10b5-1 plan” and “Rule 10b5-1 trading arrangement” throughout this release to refer to
a contract, instruction or written plan that is intended to satisfy the affirmative defense conditions of Rule 10b51(c)(1).
19
See, e.g., Alan D. Jagolinzer, SEC Rule 10b5-1 and Insiders’ Strategic Trade, 55 MGMT. SCI. 224 (2009); M.
Todd Henderson et al., Offensive Disclosure: How Voluntary Disclosure Can Increase Returns from Insider
Trading, 103 GEO. L.J. 1275 (2015); Taylan Mavruk & H. Nejat Seyhun, Do SEC’s 10b5-1 Safe Harbor Rules
Need to Be Rewritten?, 2016 COLUM. BUS. L. REV. 133 (2016); Artur Hugon & Yen-Jung Lee, SEC Rule 10b51 Plans and Strategic Trade Around Earnings Announcements, (2016), https://ssrn.com/abstract=2880878.
20
See, e.g., John P. Anderson, Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to
Rational Reform, 2015 UTAH L. REV. 339 (2015); David Larcker et al., Gaming the System: Three “Red Flags”
of Potential 10b5-1 Abuse, STAN. CLOSER LOOK SERIES (Jan. 2021) (“Gaming the System”) (noting from their
analysis of a sample of sales transactions made pursuant to Rule 10b5-1 plans between Jan. 2016 and May 2020
that trades occurring within 30 days of adoption of a Rule 10b5-1 plan are approximately 50 percent larger than
trades made six or more months later); see also infra note 40 and accompanying text.
21
The IAC was established in Apr. 2012 pursuant to Section 911 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act [Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] to advise and make
recommendations to the Commission on regulatory priorities, the regulation of securities products, trading
strategies, fee structures, the effectiveness of disclosure, and initiatives to protect investor interests and to
promote investor confidence and the integrity of the securities marketplace.
9
recommended that we “take the necessary steps to establish meaningful guardrails around the
adoption, modification, and cancellation of Rule 10b5-1 trading plans,” by addressing certain
gaps in the rule that allow corporate insiders to unfairly exploit informational asymmetries.22
On January 13, 2022, the Commission proposed several rule and form amendments to
address potentially abusive practices associated with Rule 10b5-1 plans, grants of options and
other equity instruments with similar features, and the gifting of securities.23 We received over
160 comment letters on the proposals, which we discuss in context below.24 Having considered
these comments, we are adopting the following amendments, which include modifications from
the proposal in response to the comments:
Amend the affirmative defense of Rule 10b5-1(c)(1) to: (1) include a cooling-off period
applicable to directors and “officers” (as defined by 17 CFR 240.16a-1(f) (“Rule 16a1(f)”) and a shorter cooling off period applicable to all other persons other than the
issuer; (2) include a certification condition for directors and officers; (3) limit the ability
22
See Recommendations of the Investor Advisory Committee Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (“IAC
Recommendations”), at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1recommendation.pdf. The IAC also held a panel discussion regarding Rule 10b5-1 plans at its June 10, 2021
meeting. See IAC, Meeting Minutes (June 10, 2021), https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061021-minutes.pdf.
23
See Rule 10b5-1 and Insider Trading, Release No. 33–11013 (Jan. 13, 2022) [87 FR 8686 (Feb. 15, 2022)]
(“Proposing Release”).
24
The public comments we received are available at https://www.sec.gov/comments/s7-20-21/s72021.htm. Unless
otherwise indicated, the comment letters cited herein are those received in response to the Proposing Release.
One comment letter, dated Jan. 10, 2022, urged that the comment period for this proposal, among others, be
extended to at least 60 days. See letter from Senator Pat Toomey and Representative Patrick McHenry. The
Commission voted to issue the proposal at an open meeting on Dec. 15, 2021. The release was posted on the
Commission website that day, and comment letters were received beginning that same date. On Jan. 13, 2022,
the Commission voted to approve and issue a revised release that reflected certain, limited changes to the
Paperwork Reduction Act and Initial Regulatory Flexibility Act Analysis sections. This proposal was posted on
the Commission’s website that same day, superseding the Dec. 15, 2021 release, and was published in the
Federal Register on Feb. 15, 2022. The comment period closed on Apr. 1, 2022. We have considered all
comments received since Dec. 15, 2021, and do not believe an extension of the comment period was necessary.
Another comment letter raised concerns about the rulemaking process at the agency more broadly. See letter
from Senator Thom Tillis. The process followed in adopting these amendments has complied with the
Administrative Procedure Act and other legal requirements.
10
of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans; (4) limit
the ability of these persons to rely on the affirmative defense for a single-trade plan to
one single-trade plan during any consecutive 12-month period; and (5) add a condition
that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to
that plan;25
Require: (1) quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans
and certain other trading arrangements by a registrant’s directors and officers for the
trading of its securities; and (2) annual disclosure regarding a registrant’s insider trading
policies and procedures in new Item 408 of Regulation S-K and corresponding
amendments to Forms 10-Q and 10-K;
Add a mandatory Rule 10b5-1(c) checkbox to Forms 4 and 5;
Require certain tabular and narrative disclosures regarding awards of options, stock
appreciation rights (“SARs”), and/or similar option-like instruments granted to corporate
insiders shortly before and immediately after the release of material nonpublic
information in new paragraph (x) to Item 402 of Regulation S-K;
Require registrants to tag the information specified by new Items 402(x), 408(a), and
408(b)(1) in Inline XBRL; and
Require reporting of dispositions of equity securities by bona fide gifts on Form 4, rather
than on Form 5.
These amendments are intended to improve investor confidence in the securities markets, and by
extension enhance liquidity and capital formation, while continuing to provide appropriate
25
We use the term “the issuer” in this release to refer to the issuer of the particular security or securities that are
the subject of trades for which a person seeks the benefit of the affirmative defense under Rule 10b5-1(c)(1).
11
flexibility to traders who would like to plan securities transactions in advance, when they are not
aware of material nonpublic information. To achieve these goals, the amendments are designed
to significantly reduce opportunities for corporate insiders to misuse Rule 10b5-1 to trade on
material nonpublic information. Further, the amendments will increase transparency regarding
the use of Rule 10b5-1 plans, issuers’ insider trading policies and procedures, and their policies
and practices with respect to awards of options, SARs, and/or similar option-like instruments
close in time to the release of material nonpublic information.
II.
Discussion of the Final Amendments
A. Amendments to Rule 10b5-1
Rule 10b5-1(c)(1) provides an affirmative defense to Section 10(b) and Rule 10b-5
liability if a person satisfies its conditions. First, the person must demonstrate that, before
becoming aware of the material nonpublic information, they entered into a binding contract to
purchase or sell the security, provided instruction to another person to execute the trade for the
instructing person’s account, or adopted a written plan for trading the securities.26 Second, the
person must demonstrate that the contract, instruction, or plan:
Specified the amount of securities to be purchased or sold and the price at which and the
date on which the securities were to be purchased or sold;
Included a written formula or algorithm, or computer program, for determining the
amount of securities to be purchased or sold and the price at which and the date on which
the securities were to be purchased or sold; or
Did not permit the person to exercise any subsequent influence over how, when, or
whether to effect purchases or sales; provided, in addition, that any other person who,
26
Rule 10b5-1(c)(1)(i)(A).
12
pursuant to the contract, instruction, or plan, did exercise such influence must not have
been aware of the material nonpublic information when doing so.27
Third, the person must demonstrate that the purchase or sale was pursuant to this contract,
instruction, or plan.28 A purchase or sale is not pursuant to a contract, instruction, or plan if,
among other things, the person who entered into the contract, instruction, or plan altered or
deviated from the contract, instruction, or plan (whether by changing the amount, price, or timing
of the purchase or sale), or entered into or altered a corresponding or hedging transaction or
position with respect to the securities.29 Finally, this defense is only available if the contract,
instruction, or plan “was given or entered into in good faith and not as part of a plan or scheme to
evade the prohibitions” of Rule 10b-5.30
We are concerned that some corporate insiders use Rule 10b5-1 plans in ways that are not
consistent with the objectives of the rule, and that harm investors and undermine the integrity of
the securities markets. As the use of Rule 10b5-1 plans has become more widespread,31
commentators have raised concerns that the design of Rule 10b5-1(c)(1) has enabled corporate
insiders to trade on the basis of material nonpublic information while avoiding liability under
27
Rule 10b5-1(c)(1)(i)(B).
28
Rule 10b5-1(c)(1)(i)(C).
29
Id.
30
Rule 10b5-1(c)(1)(ii).
31
According to one survey, corporate insiders at 51% of S&P 500 companies used Rule 10b5-1 trading
arrangements in 2015. See Morgan Stanley & Shearman & Sterling LLP, “Defining the Fine Line: Mitigating
Risk with 10b5-1 Plans” (2018) https://advisor.morganstanley.com/austin.cornish/documents/field/a/au/austincornish/Mitigating%20Risk%20with%2010b5-1%20Plans.pdf. Rule 10b5-1 plans are also used by issuers. See
Skadden Insights: Share Repurchases 4-6 (Mar. 16, 2020)
https://www.skadden.com/insights/publications/2020/03/share-repurchases (discussing the use of Rule 10b5-1
plans for issuer share repurchases).
13
Section 10(b) and Rule 10b-5.32 Several commenters on the proposals reiterated those
concerns.33 These concerns stem from, among other things, the ability of corporate insiders to
adopt multiple Rule 10b5-1 plans at a time when they lack material nonpublic information, and
subsequently terminate some of the plans based on later-obtained material nonpublic information
(notwithstanding the provision of the current affirmative defense that it is applicable only when
the contract, instruction, or plan was entered into in good faith). For example, such plans might
take financial positions that authorize trades at price points above and/or below the issuer’s
current stock price. When the insider becomes aware of material nonpublic information
indicating likely future changes in the company’s stock price, the insider could cancel the less
advantageous plan or plans. Corporate insiders also could adopt multiple Rule 10b5-1 plans that
direct trades only at price points above the current share price, anticipating that they will
subsequently learn material nonpublic information that would reveal which of the plans would be
most profitable. Then, when they become aware of material non-public information, they might
cancel the less profitable ones. We are concerned that, in these situations, an insider’s awareness
of material nonpublic information may still “factor into the trading decision,” even if the
insider’s plans appear to satisfy the requirements of Rule 10b5-1(c)(1).34
Furthermore, multiple studies examining Rule 10b5-1 plans have identified potentially
abusive activity, including when trades occur shortly after adoption of a plan. Some of these
32
See Tom McGinty & Mark Maremont, CEO Stock Sales Raise Questions about Insider Trading, Wall St. J.
(June 29, 2022) (retrieved from Factiva database); see also Jean Eaglesham & Rob Barry, Trading Plans Under
Fire: Despite 2007 Warning, Experts Say Loopholes Remain for Corporate Insiders, WALL ST. J. (Dec. 13,
2012) (retrieved from Factiva database).
33
See, e.g., letters from American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”),
Colorado Public Employees’ Retirement Association (“CO PERA”), Council of Institutional Investors (“CII”),
International Corporate Governance Network (“ICGN”), Better Markets (“Better Markets”), Public Citizen
(“Public Citizen”), and North American Securities Administrators Association, Inc. (“NASAA”).
34
See 2000 Release, supra note 8, at 51728.
14
studies have observed, among other things, that trades that occur shortly after adoption of a Rule
10b5-1 plan demonstrate abnormal profitability, which suggests that some corporate insiders
may be aware of material nonpublic information at the time of adoption of a Rule 10b5-1 plan
that otherwise appears to meet the existing requirements of Rule 10b5-1.35
To address all of these concerns, we are amending Rule 10b5-1(c)(1) to apply a coolingoff period on persons other than the issuer, impose a certification requirement on directors and
officers, limit the ability of persons other than the issuer to use multiple-overlapping Rule 10b5-1
plans, limit the use of single-trade plans by persons other than the issuer to one such single-trade
plan in any 12-month period, and add a condition that all persons entering into a Rule 10b5-1
plan must act in good faith with respect to that plan.
1.
Cooling-off Period
a.
Proposed Amendments
Rule 10b5-1(c)(1) does not currently impose a waiting period between the date that a
trading plan is adopted and the date of the first transaction to be executed under the plan. A
trader can therefore adopt a Rule 10b5-1 plan and execute a trade under it as early as the day of
adoption. Investors and other commentators have suggested that requiring a minimum waiting
35
See, e.g., Gaming the System, supra note 19 (observing that trades under Rule 10b5-1 plans systematically
avoid losses and foreshadow considerable stock declines over the subsequent six months when: (1) trades
executed under the plan occur as much as 60 days after plan adoption; or (2) a Rule 10b5-1 plan is adopted in a
given quarter and begins trading before that quarter’s earnings announcement); Yen-Jun Lee, Insiders’
Foreknowledge of Earnings Results and Rule 10b5-1 Sales Trades, 38 J. ACCTG., AUDITING & FIN. 1, 9, 17, 19
(2020) (finding that insiders utilizing 10b5-1 plans tend to sell before negative earnings results, and that insiders
particularly apt to engage in this behavior are also more likely to begin trading within three months of
establishing the plan); Mavruk & Seyhun, supra note 19, at 165 (observing that first trade pursuant to a Rule
10b5-1 plan showed abnormal profitability, suggesting that insiders set up Rule 10b5-1 plans when in
possession of material nonpublic information); McGinty & Maremont, supra note 32; see also Jagolinzer, supra
note 19, at 234-35 (finding that Rule 10b5-1 plans appear to allow insiders to trade close in time to earnings
releases, and that there is a statistical relationship between plan adoption and upcoming negative news events).
We provide additional discussion of these sources, including potential caveats about the data they analyze, infra
Section V.B.1.
15
period (a “cooling-off period”) between the adoption of a Rule 10b5-1 plan and the date on
which trading can commence reduces the risk that corporate insiders could benefit from any
material nonpublic information of which they may have been aware when adopting the plan.36
The Commission proposed to amend Rule 10b5-1(c)(1) to add the following cooling-off periods
as conditions of the affirmative defense: (1) a minimum 120-day cooling-off period after the date
of adoption of any Rule 10b5-1 plan (including adoption of a modified trading arrangement) by a
director or “officer” (as defined in Rule 16a-1(f))37 before any purchases or sales under the new
or modified trading arrangement; and (2) a minimum 30-day cooling-off period after the date of
adoption of any Rule 10b5-1 plan by an issuer before any purchases or sales under the new or
modified trading arrangement.
The Commission proposed the cooling-off periods to address concerns that some insiders
may be adopting Rule 10b5-1 plans while aware of material nonpublic information, such as an
issuer’s upcoming quarterly earnings results, and then shortly thereafter trading before the
information becomes public. We understand that corporate insiders are often aware of material
nonpublic information. Although Rule 10b5-1(c)(1) precludes reliance on the affirmative defense
when a person is aware of such information at the time of adoption of a Rule 10b5-1 plan, in
practice, it is difficult for an outside party to determine whether the insider satisfied this
36
See Rulemaking petition regarding Rule 10b5-1 Trading Plans, File No. 4-658 (Jan. 2, 2013) (“CII Rulemaking
Petition”) at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf; Alan D. Jagolinzer et al, How the SEC
Can and Should Fix Insider Trading Rules, The Hill (Dec. 17, 2020),
https://thehill.com/opinion/finance/530668-how-the-sec-can-and-should-fix-insider-trading-rules; IAC
Recommendations, supra note 22.
37
Exchange Act Rule 16a-1(f) provides that the term “officer” “shall mean an issuer’s president, principal
financial officer, or principal accounting officer (or, if there is no such accounting officer, the controller), any
vice-president of the issuer in charge of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-making function, or any other person who
performs similar policy-making functions for the issuer. Officers of the issuer’s parent(s) or subsidiaries shall be
deemed officers of the issuer if they perform such policy-making functions for the issuer.”
16
condition.38 With cognizance of this difficulty, some corporate insiders may use Rule 10b5-1
plans to execute trades on the basis of material nonpublic information and seek to assert the
affirmative defense to avoid potential liability. The academic studies discussed above suggest
that this may be the case as researchers have observed that trades made under Rule 10b5-1 plans
that occur before the next earnings announcement are abnormally profitable.39 Some corporate
insiders also undertake other actions, such as cancellation of sales scheduled under Rule 10b5-1
plans ahead of favorable issuer disclosures, which appears consistent with an effort to exploit
material nonpublic information.40
To address concerns that certain corporate insiders misuse Rule 10b5-1 by adopting and
trading under trading arrangements despite their awareness of material nonpublic information,
and in light of the evidence that suggests that trading arrangements that commence close in time
to the plan’s adoption and prior to an earnings announcement are more likely to result in
abnormal returns, the Commission proposed requiring insiders to wait a period of time before
trading under a new (or modified) plan could commence. Although many companies already
impose such a cooling-off period for their own insiders,41 not all do so, and, furthermore, among
those that have a cooling-off period, there is little uniformity with respect to the duration of such
38
See Henderson et al., supra note 19, at 1289.
39
See Gaming the System, supra note 19 (“[P]lans that execute a trade in the window between when the plan is
adopted and that quarter’s earnings announcement anticipate large losses and foreshadow considerable stock
price declines”).
40
See Jagolinzer, supra note 19, at 235 (observing that there is evidence “that participants terminate sales plans
before positive shifts in firm returns”); Mavruk & Seyhun, supra note 19, at 120, 125 (noting patterns of trading
consistent with cancellation of some planned trades are abnormally profitable). Based on our review of the data
sources used in the sources cited, we understand them to use the term “earnings announcement” to refer to the
earliest of quarterly or annual reporting or other earnings announcements for which the issuer furnishes a
corresponding Form 8-K.
41
This practice suggests that many companies have concluded that in general a cooling-off period, rather than
individualized efforts to identify instances where an executive is aware of material nonpublic information,
strikes an appropriate balance of precision, cost of implementation, and investor confidence.
17
periods. The Commission proposed a 120-day cooling-off period for officers and directors
because such a period would extend beyond the fiscal quarter42 in which the trading arrangement
is established, meaning that trading generally would not occur under a Rule 10b5-1 plan adopted
during a particular quarter until after the registrant announced its financial results for that
quarter. Although the cooling-off period proposed by the Commission for officers and directors
may have been longer than the cooling-off period used by many issuers or recommended by
certain financial advisors, the Commission believed that the proposed duration would deter
insiders from exploiting material nonpublic information for the relevant quarter. In addition, the
Commission noted that a 120-day cooling-off period would align with the recommendations of a
wide range of commentators.43
Under the proposed amendments, the cooling-off periods would have applied to directors
and “officers” (as defined in Rule 16a-1(f)) of the issuer, as well as to an issuer that structures a
share repurchase plan as a Rule 10b5-1 plan, although in the latter case the Commission
proposed a shorter, 30-day cooling-off period. This requirement would prevent directors,
officers, and issuers who might be aware of material nonpublic information from adopting or
modifying a trading arrangement and trading immediately pursuant to the arrangement. The
proposed cooling-off period also was intended to discourage issuers, directors, and officers from
selectively terminating or cancelling a planned trade under a Rule 10b5-1 plan because any
42
Quarters are about 90 days long and public reporting companies are required to disclose their quarterly results
no later than 40 or 45 days after the end of their fiscal quarter, depending on their filing status. See 17 CFR
249.308(a). Nevertheless, companies on average disclose their quarterly results within 30 days of the end of the
fiscal quarter. See Morgan Stanley & Shearman & Sterling LLP, supra note 29.
43
See IAC Recommendations, supra note 14 (recommending a cooling off period of four months); Gaming the
System, supra note 12, at 3 (recommending a minimum cooling-off period and noting that “[a] cooling-off
period of four to six months . . . is supported by the data in our sample”); letter from Senators Elizabeth Warren,
Sherrod Brown and Chris Van Hollen supra note 17 (recommending a cooling off period of four to six months).
18
subsequent trades upon the adoption of a new or modified plan would also be subject to a new
cooling-off period.
The Commission noted that applying a cooling-off period to directors and “officers” as
defined in Rule 16a-1(f) was appropriate because such individuals are more likely than others to
be aware of material nonpublic information in the general course of events, and also more likely
to be involved in making or overseeing key corporate decisions that have the potential to affect
the issuer’s stock price, including decisions about the timing of the disclosure of such
information.44 The Commission also requested comment, however, on whether the Rule 16a-1(f)
definition was the appropriate definition of “officer” for purposes of the proposed amendment
and further inquired whether the cooling-off period should apply to all traders who rely on the
Rule 10b5-1(c)(1) affirmative defense.45
In addition, the Commission stated that applying a cooling-off period to issuers may help
address the concern that issuers may conduct stock buybacks while aware of material nonpublic
information. For example, corporate insiders who are aware of positive material nonpublic
information can cause the issuer to buy its stock at a lower price from current shareholders who
are unaware of this information because, once the information is publicly disclosed, the issuer’s
share price may increase. The Commission proposed a 30-day cooling-off period for issuers to
help reduce the likelihood of this potential abuse and promote investor confidence.
The Commission also proposed a note to Rule 10b5-1(c)(1) stating that any modification
or amendment to a prior contract, instruction, or written plan would be deemed to be the
44
See O’Hagan, 521 U.S. at 651-52; Chiarella, 445 U.S. at 227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5
(2d Cir. 2014); see also Colby v. Klune, 178 F.2d 872 (2d Cir. 1949).
45
Proposing Release, supra note 22, at 17.
19
termination of such prior contract, instruction, or written plan, and the adoption of a new
contract, instruction, or written plan.46
b.
Comments on the Proposed Amendments
Commenters expressed a range of views on the proposed cooling-off periods. Many
commenters expressed general support for a cooling-off period for directors and officers.47
Several of these commenters supported the proposed cooling-off period of 120 days.48 For
example, one commenter agreed that the proposed 120-day cooling-off period would deter
officers and directors from adopting or modifying a Rule 10b5-1 plan while aware of material
nonpublic information and prevent insiders from gaming Rule 10b5-1 plans by opportunistically
canceling trades or modifying plans.49 In addition, in expressing the view that this duration was
appropriate, another commenter stated the concern that, given that directors and officers are
more likely than other traders to be aware of material nonpublic information and involved in
making or overseeing key corporate decisions that could affect the stock price, they could be
involved with decisions regarding the timing of a range of issuer disclosures, including
disclosures related to a merger or acquisition, departure of a named executive officer, or the
46
The proposed note would have codified prior Commission guidance on Rule 10b5-1(c)(1)(i)(C). See infra note
122 and accompanying text.
47
See, e.g., letters from American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”),
Better Markets, Colorado Public Employees’ Retirement Association (“CO PERA”), Council of Institutional
Investors (“CII”), Cravath, Swaine & Moore LLP (“Cravath”), Davis Polk & Wardwell LLP (“Davis Polk”),
DLA Piper (“DLA”), Fenwick & West (“Fenwick”), International Corporate Governance Network (“ICGN”),
Craig M. Lewis et al. (“Lewis”), Manulife Financial Corp. (“Manulife”), Committee on Securities Law of the
Business Law Section of the Maryland State Bar (“MD Bar”), North American Securities Administrators
Association, Inc. (“NASAA”), New York City Comptroller (“NYCC”), NYSE Group, Inc. (“NYSE”), PNC
Financial Services Group, Inc. (“PNC”), Public Citizen, Anthony O'Reilly (“O’Reilly”), Securities Industry and
Financial Markets Association (“SIFMA”) (letter dated Apr. 1, 2022, from Kevin Carroll, “SIFMA 3”), and
Sullivan & Cromwell LLP (“Sullivan”).
48
See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, Public Citizen, O’Reilly, and NASAA.
49
See letter from CII.
20
financial statements.50 Finally, another commenter, who did not support the proposed duration of
the cooling-off period, nonetheless asserted that a cooling-off period would increase investor
confidence that insiders were not using Rule 10b5-1 plans to benefit from nonpublic material
information.51
At the same time, many commenters, including several commenters that expressed
support for a cooling-off period for directors and officers, contended that the duration of the
proposed cooling-off period was unnecessarily long.52 For example, some of these commenters
asserted that a 120-day cooling-off period would discourage insiders from adopting Rule 10b5-1
plans53 and therefore result in larger, more concentrated volumes of insider-directed trades taking
place during trading windows rather than being spread out under a Rule 10b5-1 plan, which
50
See letter from ICGN.
51
See letter from Manulife.
52
See, e.g., letters from Federal Regulation of Securities Committee of the Business Law Section of the American
Bar Association (“ABA”); ACCO Brands Corp. (“ACCO”); Chevron Corp. (“Chevron”); Cravath; Davis Polk;
DLA; Dow Inc. (“Dow”); Empire State Realty Trust (“Empire Trust”); FedEx Corporation (“FedEx”); Fenwick;
HR Policy Association Center on Executive Compensation (“HRPA”); Jones Day; Kirkland & Ellis
(“Kirkland”); Manulife, National Association of Manufacturers (“NAM”); National Venture Capital
Association (“NVCA”); New York City Bar Association (“NYC Bar”); NYSE; Paul, Weiss, Rifkind, Wharton
& Garrison LLP (“Paul Weiss”); PNC; Quest Diagnostics Inc. (“Quest”); William Quinn (“Quinn”); US
Chamber of Commerce (letter dated Apr. 1, 2022) (“Chamber of Chamber 2”); American Property Casualty
Insurance Association, American Securities Association, Center On Executive Compensation, U.S. Chamber of
Commerce, Nareit, National Association of Manufacturers, and NIRI: The Association for Investor Relations
(“Coalition Letter”); Shearman & Sterling LLP (“Shearman”); SIFMA 3; Simpson Thacher & Bartlett LLP
(“Simpson”); Sullivan; and Wilson, Sonsini, Goodrich & Rosati (“Wilson Sonsini”).
53
See letter from NYC Bar. This comment letter was initially submitted in Apr. 2022 and posted on the
Commission website on Oct. 2022. The delayed posting of this comment letter to the website is unrelated to the
technological error that resulted in the Oct. 2022 reopening of the comment files of certain other Commission
releases. See Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases
Due to a Technological Error in Receiving Certain Comments, Release Nos. 33-11117, 34-96005, IA-6162, IC34724; File Nos. S7-32-10, S7-18-21, S7-21-21, S7-22-21, S7-03-22, S7-08-22, S7-09-22, S7-10-22, S7-13-22,
S7-16-22, S7-17-22, S7-18-22 (Oct. 7, 2022). In Apr. 2022, the submitter of this comment letter withdrew the
comment letters submitted on this rule and the proposing release for another rule and submitted replacement
comment letters. Staff posted the replacement comment letter on the other rule, but inadvertently failed to post
the replacement comment letter for the Proposing Release until the submitter of the comment letter again
contacted Commission staff in Oct. 2022.
21
could increase market volatility.54
Some of these commenters recommended alternative durations for the cooling-off period
for directors and officers.55 Shorter alternatives ranged from a cooling-off period of 30 days from
the date of adoption of a Rule 10b5-1 plan,56 which some commenters asserted is a common
practice many issuers have implemented,57 to a maximum cooling-off period of 90 days after the
adoption of a Rule 10b5-1 plan.58 Other commenters recommended shortening the cooling-off
period, in part, by taking into account when the issuer publishes its earnings announcement or
results. These commenters suggested that the cooling-off period last until: (1) the earlier of 60
days or one business day after the earnings release for the fiscal quarter of adoption;59 (2) the
earlier of 60 days or 48 hours after the next release of annual or quarterly results;60 (3) 90 days or
fewer or, if the officer or director enters into the Rule 10b5-1 plan within five trading days of an
earnings release, 30 days;61 (4) the earlier of 90 days or the publication of results for the quarter
during which the plan was adopted;62 (5) one trading day after the next earnings announcement
covering at least one fiscal quarter and filed or furnished with an Exchange Act report;63 and (6)
54
See, e.g., letters from Chamber of Commerce 2, Davis Polk, DLA, Fenwick, NYSE, SIFMA 3, Simpson, and
Sullivan.
55
See, e.g., letters from ACCO, Chamber of Commerce 2, Dow, DLA, Fenwick, NAM, NYSE, Paul Weiss,
Quinn, Simpson, and Sullivan.
56
See, e.g., letters from ACCO, Chamber of Commerce 2, DLA, Fenwick, NYC Bar, NYSE, Paul Weiss, Quinn,
and Sullivan.
57
See, e.g., letters from Chamber of Commerce 2, NYSE, Paul Weiss, and Simpson.
58
See, e.g., letters from Chevron, Dow, and Cleary, Gottlieb, Steen & Hamilton LLP (“Cleary”).
59
See letter from ABA.
60
See letter from Manulife.
61
See letter from Dow.
62
See letter from Cleary.
63
See letter from Davis Polk.
22
the earlier of 30 days or the release of quarterly earnings with an exception for plans entered into
within five business days after an earnings release.64 Another commenter, however, urged the
Commission to consider lengthening the cooling-off period to 180 days.65
Among commenters who recommended that we link the end of the cooling-off period to
the release of earnings or other financial results, most did not specify whether the end of the
cooling-off period should be tied to the publication of such results in the form of a quarterly
report on Form 10-Q or annual report on Form 10-K, or instead to the announcement of such
results in a Form 8-K, that is filed or furnished with the Commission.66 Some commenters
suggested that the end of the cooling-off period should be tied to the “next” (relative to the
adoption or modification of the Rule 10b5-1 plan) such release;67 we understand that if an
earnings announcement accompanied by a Form 8-K is made, it typically precedes the filing of a
Form 10-Q or Form 10-K. One commenter suggested that the end of the cooling-off period
should be tied to the earlier of the release of financial results or the start of the issuer’s open
trading window under the insider’s trading policy.68
Finally, some commenters asked the Commission to provide exceptions from the coolingoff period. For example, one commenter asked that the cooling-off period not apply in cases of
financial hardship for the officer or director, such as an unanticipated financial liability that is
64
See letter from NAM.
65
See letter from Senators Elizabeth Warren, Chris Van Hollen, Tammy Baldwin, and Bernard Sanders (“Sen.
Warren et al.”).
66
See, e.g., letters from ABA, Cleary, and PNC.
67
See, e.g., letters from Davis Polk, DLA, and Simpson.
68
See letter from DLA; see also letter from Quest (suggesting that there is no incremental material nonpublic
information disclosed in a Form 10-Q when an issuer has already released an earnings announcement).
23
unrelated to the trading of securities.69 Another commenter asked the Commission to exclude
venture capital funds from the cooling-off period condition, or to provide a shorter cooling-off
period for venture capital funds.70
Many commenters opposed a cooling-off period for issuers,71 largely due to issuers’ use
of Rule 10b5-1 plans in connection with share repurchase plans under Exchange Act Rule 10b18.72 One of these commenters stated that Rule 10b5-1 plans allow issuers to more effectively
coordinate and execute their share repurchases during open and closed trading windows.73 Given
this practice, several commenters contended that the proposed cooling-off period would limit the
usefulness of Rule 10b5-1 plans and impede the ability of issuers to effectively carry out share
repurchases and other transactions used by issuers to manage their capital.74 Some of these
commenters stated the concern that a cooling-off period for issuers could increase market
volatility as issuer repurchase activity would be limited to much shorter trading windows.75
69
See letter from Wilson Sonsini.
70
See letter from NVCA.
71
See, e.g., letters from the Bank Policy Institute and the American Bankers Association (“BPI”), Home Depot,
Inc. (“Home Depot”), Dow, Chevron, Empire Trust, FedEx, International Bancshares Corporation (“IBC”),
Manulife, NYSE, HudsonWest LLC (“HudsonWest”), Guzman & Company (“Guzman”),Quest, Coalition
Letter, Chamber of Commerce 2, HRPA, Lewis, NAM, NVCA, NYC Bar, Society for Corporate Governance
(“SCG”), SIFMA (letter dated Apr. 1, 2022, from Joseph P. Corcoran) (“SIFMA 2”), ABA, Cravath, Davis
Polk, Dorsey & Whitney LLP (“Dorsey”), Fenwick, Jones Day, Kirkland, Paul Weiss, Simpson, Shearman,
Sullivan, Wilson Sonsini, and Vistra Corp. (“Vistra”).
72
17 CFR 240.10b-18. Rule 10b-18 provides issuers with a safe harbor from liability for manipulation under
Sections 9(a)(2) and 10(b) of the Exchange Act [15 U.S.C. 78i(a)(2) and 78j(b)] when they repurchase their
common stock in the market in accordance with the Rule’s manner, timing, price, and volume conditions.
73
See letter from Simpson.
74
See, e.g., letters from BPI, Home Depot, Dow, Chevron, FedEx, Quest, Chamber of Commerce 2, Coalition
Letter, NAM, SCG, SIFMA 2, ABA, Cravath, Davis Polk, Jones Day, Paul Weiss, Simpson, Shearman, and
Wilson Sonsini.
75
See, e.g., letters from NYSE and Sullivan.
24
In addition, several of these commenters asserted that a cooling-off period for issuers was
unnecessary because existing safeguards under the Federal securities laws and market practices
protect investors from issuer abuse of Rule 10b5-1 plans.76 Some commenters contended the
Commission did not set forth any evidence of issuers abusing Rule 10b5-1 trading arrangements
to justify this cooling-off period.77
In contrast, other commenters supported a cooling-off period for issuers.78 One of these
commenters contended that the proposed 30-day period was too short to address the concerns
underlying the proposal and advocated for a 120-day cooling-off period for issuers, similar to the
proposed cooling-off period for directors and officers.79
Several commenters urged the Commission to clarify that immaterial or administrative
modifications to an existing Rule 10b5-1 trading arrangement would not constitute a
modification that triggers a new cooling-off period.80 For example, some commenters asserted
that modifications should not trigger the cooling-off period unless they address the pricing,
amount of securities to be purchased or sold, and/or the timing of purchases or sales.81 In
addition, another commenter urged the Commission not to trigger a new cooling-off period upon
a modification of a Rule 10b5-1 plan.82
76
See, e.g., letters from Cravath, Davis Polk, Dow, FedEx, Fenwick, Lewis, NAM, Paul Weiss, Quest, SCG,
SIFMA 2, and Wilson Sonsini.
77
See, e.g., letters from BPI, Davis Polk, Cravath, and Wilson Sonsini.
78
See, e.g., letters from CO PERA, CII, ICGN, NYCC, Better Markets, Public Citizen, Stern Tannenbaum Bell
LLP (“Stern”), ACCO, PNC, NASAA, and Sen. Warren et al.
79
See letter from NASAA.
80
See, e.g., letters from Chamber of Commerce 2, NAM, SIFMA 2, ABA, Cleary, Cravath, Davis Polk, DLA,
Fenwick, and Sullivan.
81
See, e.g., letters from Cravath, Cleary, Davis Polk, and DLA.
82
See letter from NAM.
25
We also received comment on whether some or all of the proposed amendments should
apply only to directors and officers, as defined in Rule 16a-1(f), or whether they should also
apply to other insiders or traders more broadly. Several commenters indicated that the proposed
cooling-off period and limitations on overlapping and single-trade plans should apply to all
traders or all natural persons.83 One of these commenters generally observed that the limitations
should apply broadly because other officers and employees can potentially have access to and
trade on material nonpublic information.84 Another commenter suggested that any individual
involved in a company’s trading program or “corporate decisions” should be subject to the
cooling-off requirement.85 Two commenters also suggested that we extend the new Item 408(a)
reporting obligation to cover any employee who adopts a 10b5-1 plan.86
Other commenters opposed any expansion of the amendments beyond directors and Rule
16a-1(f) officers.87 Some of these commenters agreed with our observation that these officers
were those most likely to have access to material nonpublic information.88 Two commenters
argued that trading by employees other than Rule 16a-1(f) officers is unlikely to adversely affect
financial markets because of the limited authority of these employees over corporate decisions. 89
One of these commenters further observed that because other employees do not generally file
Form 4, their trading activities are unlikely to affect public confidence in a company’s
83
See letters from Better Markets, NASAA; see also letter from Sen. Warren et al. (suggesting the limitation
apply to “all employees”).
84
See letter from NASAA.
85
See letter from ICGN.
86
See letters from BrilLiquid LLC (“BrilLiquid”) and NASAA.
87
See letters from Chamber of Commerce 2, CII, Cravath, Davis Polk, NAM, SCG, and SIFMA.
88
See letters from CII, Cravath, and SIFMA.
89
See letters from Cravath and Davis Polk.
26
securities.90 Two other commenters suggested that non-executive employees are particularly
likely to need to liquidate and diversify their company stock holdings, and so would be
disproportionately harmed by limitations such as the cooling-off period.91 One commenter also
stated that making the affirmative defense more difficult to establish would reduce the likelihood
that companies would require their non-executive employees to use Rule 10b5-1 plans, reducing
the benefits of the rule.92
c.
Final Amendment
After consideration of the comments, we are adopting a modified cooling-off period that
will apply to all persons other than the issuer, with directors and “officers” (as defined in Rule
16a-1(f))93 of the issuer subject to a longer cooling-off period than applies to other persons (other
than the issuer) who rely on the Rule 10b5-1(c)(1) affirmative defense.
Under the final rule, a director or “officer” (as defined in Rule 16a-1(f)) who adopts
(including a modification of) a Rule 10b5-1 plan would not be able to rely on the Rule 10b5-1
affirmative defense unless the plan provides that trading under the plan will not begin until the
later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2) two business days following
the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter
in which the plan was adopted or, for foreign private issuers, in a Form 20-F or Form 6-K that
90
See letter from Davis Polk.
91
See letters from Chamber of Commerce 2 and NAM.
92
See letter from Davis Polk.
93
We are declining the request from one commenter to adopt a definition of “officer or director” that would
expressly exclude certain venture capital funds whose partners may serve as a director on the board of an issuer.
As we have noted, Rule 10b5-1 does not alter the law of insider trading and any potential liability under the
circumstances described by the commenter would be determined according to established principles. We also
are not convinced that the business circumstances of such a director are unique and thus warrant a distinctive set
of affirmative defense requirements. We further note that Rule 10b5-1(c)(2) can provide an alternative
affirmative defense for persons other than natural persons.
27
discloses the issuer’s financial results (but in any event, the required cooling-off period is subject
to a maximum of 120 days after adoption of the plan).94
This cooling-off period is intended to deter opportunistic trading that may be occurring
under the current rule and, by extension, as noted by commenters, it may increase investor
confidence that directors and officers are not using Rule 10b5-1 plans for such purposes.95 The
purpose of a cooling-off period is to provide a separation in time between the adoption of the
plan and the commencement of trading under the plan so as to minimize the ability of an insider
to benefit from any material nonpublic information. In addition, academic studies documenting
abnormal trading results indicate that opportunistic trading may be occurring notwithstanding
current Rule 10b5-1(c)(1) and that certain corporate insiders are earning profits unavailable to
others.96 For example, directors, officers, and other corporate insiders commonly have access to
preliminary quarterly financial data before it is released to the public. As academic commentary
has observed, “[q]uarterly earnings announcements . . . offer the most important and frequent
dates of material information disclosure by firms.”97 A cooling-off period could serve to avoid a
situation in which, for example, an insider adopts a Rule 10b5-1 plan while aware of likely
directional trends in quarterly results and trades under the plan before the disclosure of such
information.
In addition, as the Proposing Release indicated, we are concerned that this type of
opportunistic trading could occur in contexts other than in connection with quarterly results. For
94
The good faith requirement in Rule 10b5-1(c)(1)(ii) will continue to apply as a condition of the affirmative
defense.
95
See, e.g., letters from AFL-CIO, CII, and Manulife.
96
See supra note 35 and accompanying text.
97
See U. Ali & D. Hirshleifer, Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits
and Misconduct, 126 J. FIN. ECON. 490, 491 (2017).
28
example, as a commenter noted, corporate insiders may be aware of material nonpublic
information related to other types of upcoming events, such as a potential merger, acquisition, or
departure of a named executive officer, and, with such information, adopt a Rule 10b5-1 plan
and trade under it before that information is made public.98
Accordingly, the cooling-off period for officers and directors that we are adopting
includes both a fixed (90-day) and a variable (two business days after the disclosure of the
issuer’s financial results) component. This cooling-off period is targeted at reducing information
asymmetries in general as well as providing separation in time between adoption of the plan and
trading under the plan so as to reduce the ability of corporate insiders to trade on material
nonpublic information.
The approach we are adopting takes into account considerations raised by commenters.
Some commenters observed that we could accomplish our goals by linking the end of the
cooling-off period to the release of earnings results for the current quarter instead of a fixed
period of days, and suggested that we adopt a variable cooling-off period that ends one or two
business days following the issuer’s next reporting of quarterly results.99 Others suggested that
we adopt a cooling-off period that would be the earlier of this date or some other fixed period,
such as 60 days.100 In addition, while several commenters supported a 120-day cooling-off
period,101 other commenters expressed concerns that this duration would discourage the use of
98
See letter from ICGN; see also Henderson et al., supra note 19, at 1301 (noting that 25% of the price changes
observed in their data are the results of corporate news events other than earnings).
99
See supra note 63.
100
See supra note 59.
101
See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, Public Citizen, O’Reilly, and NASAA.
29
Rule 10b5-1 plans.102 We agree that, in some cases, a full 120-day cooling-off period would be
longer than needed to prevent the opportunistic trading with which we are concerned. Therefore,
we have shortened the cooling off period for officers and directors from 120 days to the later of
90 days or the second business day following disclosure of the issuer’s financial results for the
fiscal quarter in which the plan was adopted.103 This will result in a shortened cooling-off period,
relative to what was proposed, when such results are disclosed sooner than 120 days following
adoption of the plan.
In addition, to enhance clarity, the final rule provides that an issuer will be considered to
have disclosed its financial results at the time it files a Form 10-Q or Form 10-K, or, in the case
of foreign private issuers, files a Form 20-F or furnishes a Form 6-K that discloses the financial
results. We disagree with commenters who suggested that there cannot be material nonpublic
information contained in a Form 10-Q or similar filing when the issuer has already announced its
earnings results.104 For example, some academic researchers have found that information in
periodic filings affects stock prices for issuers that also made an earlier earnings announcement
for the same quarter.105
102
See, e.g., letters from Chamber of Commerce 2, Davis Polk, DLA, Fenwick, SIFMA 3, Simpson, and Sullivan.
103
If financial results are disclosed more than 120 days after adoption of the plan, 120 days would be the maximum
duration of the required cooling-off period. In those circumstances, we agree with commenters who asserted
that a 120-day cooling-off period would be an appropriate duration to better ensure that a corporate insider
would not benefit from material nonpublic information related to earnings. See, e.g., letters from AFL-CIO, and
CII. The final rule would not foreclose issuers that may choose to impose a longer cooling-off period.
104
See letters from DLA and Quest.
105
See Erik R. Holzman et al., Is All Disaggregation Bad for Investors? Evidence from Earnings Announcements,
26 REV. ACCTG. STUDIES 520, 540-41 (2021); Yifan Li et al., Opportunity Knocks But Once: Delayed
Disclosure of Financial Items in Earnings Announcements and Neglect of Earnings News, 25 REV. ACCTG.
STUDIES 159 (2020); Bin Miao et al., Limited Attention, Statement of Cash Flow Disclosure, and the Valuation
of Accruals, 21 REV. ACCTG. STUDIES 473 (2016). Some earlier work finds that there are incremental market
responses to Form 10-K filings but not to Form 10-Q filings. Edward Xuejun Li & K. Ramesh, Market Reaction
Surrounding the Filing of Periodic SEC Reports, 84 ACCTG. REV. 1171 (2009).
30
Further, the cooling-off period for officers and directors includes a two-business day
period following the disclosure of the issuer’s financial results, which provides a short interval
for investors and other market participants to analyze those results.106 Although some
commenters suggested that the next business day after results are released would be adequate to
ensure that market participants have access to the same information as the corporate insider, we
have adopted a cooling-off period that extends to the second business day after results are
released, as other commenters suggested.107 We disagree with those commenters who suggested
that a next-day approach would provide all market participants with the same access as the
corporate insider, as it may be challenging to obtain and analyze the full details of an issuer’s
quarterly results within one day. In some cases, allowing trading such a short period after release
would effectively authorize the director or officer to trade in the first minutes after that
information’s availability to the market.
While some commenters suggested that the cooling-off period need only take into
account the publication of an issuer’s quarterly results, we find that including a minimum
duration of 90 days for the cooling-off period is necessary to deter the full scope of opportunistic
trading that we intend to address and appropriately balances the comments, academic studies,
and the purpose of an affirmative defense. This minimum period is a reduction from the
proposed 120-day cooling-off period, in response to comments received stating that the length of
the proposed cooling-off period could discourage corporate insiders from using Rule 10b5-1
plans, although we acknowledge that some of these commenters requested a shorter period than
106
See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 & n.18 (2d Cir. 1968) (noting that the “permissible
timing of insider transactions after disclosures of various sorts is one of the many areas of expertise for
appropriate exercise of the SEC’s rule-making power”).
107
See supra note 63.
31
we are adopting.108 Given that directors and officers may be aware of material nonpublic
information related to upcoming events other than quarterly results, a cooling-off period based
solely on the timing of the publication of quarterly results would be too narrow to accomplish the
objective of assuring that trading under these plans is not on the basis of material nonpublic
information.109 For example, as noted above, directors and officers may be aware of material
nonpublic information about a potential merger, acquisition, or departure of a named executive
officer.110
Further, a cooling-off period that is linked only to the release of the next quarterly results
(plus two business days) would in some cases cause the time between plan adoption and initial
trading to be very short, such as two to three days, raising the risk that directors and officers
could easily adopt and trade under a Rule 10b5-1 plan while aware of material nonpublic
information that is unrelated to the earnings information that has been released. For all of these
reasons, we are requiring a minimum cooling-off period of 90 days for officers and directors
regardless of the date of the release of the subsequent quarter’s results.111
We acknowledge that the cooling-off period that we are adopting for directors and
officers is longer than many of the cooling-off periods recommended by several commenters and
that academic studies do not provide a precise estimate of the length of time a cooling-off period
108
See, e.g., letters from Fenwick, Simpson, and Sullivan.
109
See letter from ICGN.
110
See Jagolinzer, supra note 18, at 234 (finding that 10b5-1 plan adoption is associated with adverse news events
occurring an average of 72.2 days after adoption).
111
We also note that, consistent with this view, many commenters stated that a cooling-off period for a fixed
period of days (i.e., one which in some cases would necessarily extend beyond release of the next quarter’s
results) is a common industry practice.
32
should be to prevent insiders from realizing abnormal returns on their trades.112 However, we
have tailored the cooling-off period to provide a greater separation in time between plan adoption
and commencement of trading under the plan to better ensure that the affirmative defense is
available only in situations in which material nonpublic information, including information other
than earnings information, did not factor into the trading decision. Finally, although a commenter
recommended increasing the length of the cooling-off period,113 we decline to do so to minimize
the risk of excessively long cooling-off periods, which, as commenters stated, may discourage
the use of Rule 10b5-1 plans.
Moreover, while we recognize that some issuers impose their own cooling-off periods,
those cooling-off periods are voluntary and vary in duration. Including a cooling-off period as a
condition of the affirmative defense will provide greater consistency for Rule 10b5-1 plans and
thereby help address the investor protection concerns that motivated the adoption of Rule 10b51.
In choosing an appropriate cooling-off period for officers and directors, we are mindful
of some commenters’ concerns that a cooling-off period might reduce the appeal of Rule 10b5-1
112
One study found that abnormal returns persist on average among all observed Rule 10b5-1 plans for up to 60
days after plan adoption, but that abnormal returns for single-trade plans, which represent about half of the
observed Rule 10b5-1 plans, persist for 120 days or more. See Gaming the System, supra note 20, at 2-3. The
authors conclude that a cooling-off period of four to six months would be “supported by our data,” id. at 3,
although the study did not consider whether this would still be the case if there were also limits on single-trade
plans. A second study consistently found abnormal returns for the 60-day period after a Rule 10b5-1 plan is
adopted, and found such returns under two of the three statistical methods employed for the 90-day period after
plan adoption. See McGinty & Maremont supra note 32. Another study reported evidence that insiders trade on
information that on average has value for between three and six months, and the authors suggest that a coolingoff period of that length would curtail these trades. See Mavruk & Seyhun, supra note 19 at 136, 163, 179. And
another study found that insiders continue to earn abnormal returns after the fifth planned trade over a 350-day
period, suggesting that Rule 10b5-1 plans do not on average involve very short-run information. See Jagolinzer,
supra note 19, at 234-35. It also found that Rule 10b5-1 plans are statistically associated with negative news
items occurring an average of 72.2 days after a plan is established.
113
See supra note 65.
33
plans, which could have undesirable effects on investor confidence.114 We expect, however, that
the period we are adopting will not have a significant impact on directors’ and officers’ desire to
satisfy the requirements of the affirmative defense. Directors and officers have strong incentives
to rely on a Rule 10b5-1 plan, due to the potential effects of the affirmative defense on the
likelihood and outcome of any litigation. In addition, many issuers maintain trading windows
that may restrict the trading activity of corporate insiders during an issuer’s “closed window”
period except through the use of a Rule 10b5-1 plan, and such periods may cover significant
portions of the year. Similarly, Section 306 of the Sarbanes-Oxley Act,115 and our implementing
regulations,116 prohibit most trades during issuer pension blackout periods other than through the
use of a plan that satisfies the affirmative defense conditions of Rule 10b5-1(c).117 Accordingly,
for these reasons, we have selected a cooling-off period for officers and directors that we
conclude strikes the proper balance in deterring insider trading without unduly discouraging the
adoption of Rule 10b5-1 plans.
We are not imposing the same cooling-off period required for directors and officers to
other persons, as some commenters suggested,118 Instead, we are requiring a cooling-off period
of 30 days for persons other than directors, officers or the issuer. We generally agree that persons
other than directors and officers often have access to material nonpublic information. At the
same time, we recognize that each of the proposed requirements of the affirmative defense may
114
See, e.g., letters from Chamber of Commerce 2, NAM and SIFMA.
115
15 U.S.C. 7244.
116
See 17 CFR 245.100 et seq.
117
See 17 CFR 245.101(c)(2). Our rules also provide trades made pursuant to a Rule 10b5-1 plan more flexibility
with respect to when an insider must report the trade on Form 4. See 17 CFR 240.16a-3(g)(2); 17 CFR 240.16a3(g)(4).
118
See letters from Better Markets, NASAA, and Senator Warren et al.
34
impose costs on such persons, whose needs for diversification and liquidity may differ from
those of officers and directors, as some commenters noted.119 In particular, we recognize that
some persons will experience meaningful delays in their ability to liquidate a stock position,
which may cause some financial strain particularly for employees who may lack the resources
and access to alternative liquidity sources available to directors and officers. Therefore, we
disagree with commenters who urged us to impose the same cooling-off period required for
directors and officers to all other traders.
The 30-day cooling-off period we are adopting for persons other than directors, officers,
or the issuer reflects a balancing of the considerations we have outlined above. We believe that
when any insider enters into a Rule 10b5-1 plan, a period of time should elapse before trading
under the plan can commence to help ensure that a trade is not on the basis of material nonpublic
information. At the same time, we recognize the heightened burdens a cooling-off period may
impose on insiders who are not directors or officers, and who may have more limited financial
resources. In light of these considerations, we have adopted a shorter cooling-off period for
persons other than officers and directors that is still long enough to reduce the potential for some
opportunistic trades.120
We are not implementing commenters’ suggestions to adopt a financial hardship
exception from the cooling-off period due to the practical difficulties of administering this type
119
See letters from Chamber of Commerce 2 and NAM.
120
We recognize that we have previously observed that the affirmative defense would be available to an employee
who acquires company stock through an employee stock purchase plan or a Section 401(k) plan. See 2000
Adopting Release, supra note8, at 51728. We do not believe that a 30-day cooling-off period will significantly
affect non-officer employees’ use of such plans, as we think that employees employ these plans primarily to
make relatively regular purchases over long periods of time, such that a waiting period of two biweekly pay
periods before planned trades can begin will not appreciably affect the employees’ preferences.
35
of exception.121 Assessing financial hardship would require careful scrutiny and balancing of
each insider’s assets, liabilities, and obligations, and this fact-intensive inquiry would undermine
the predictability that the affirmative defense is intended to provide.
In addition, we agree with commenters that only certain types of modifications of an
existing Rule 10b5-1 plan should trigger a new cooling-off period. We therefore are adopting a
new paragraph to Rule 10b5-1(c)(1) that specifically provides that a modification or change to
the amount, price, or timing of the purchase or sale of the securities (or a modification or change
to a written formula or algorithm, or computer program that affects the amount, price, or timing
of the purchase or sale of the securities) underlying a contract, instruction, or written plan as
described in Rule 10b5-1(c)(1)(i)(A) is a termination of such contract, instruction, or written
plan, and the adoption of a new contract, instruction, or written plan, and such new adoption will
trigger a new cooling-off period. The final amendment codifies prior Commission guidance on
existing Rule 10b5-1(c)(1)(i)(C) about the effect of modifications.122 Under the final amendment,
modifications that do not change the sales or purchase prices or price ranges, the amount of
securities to be sold or purchased, or the timing of transactions under a Rule 10b5-1 plan (such as
an adjustment for stock splits or a change in account information) will not trigger a new coolingoff period. We disagree with the commenter that urged us to not trigger a new cooling-off period
upon a modification, because a corporate insider could easily change the key terms of an existing
plan at a time when they are aware of material nonpublic information, such as by increasing the
sales price to take advantage of favorable news, allowing the insider to profit from such
information.123
121
See supra note 69.
122
See 2000 Adopting Release, supra note 8, at 51718 n 111.
123
See letter from NAM.
36
Finally, we are not adopting a cooling-off period for the issuer at this time. In light of the
comments we received on this aspect of the proposed rules, we believe that further consideration
of potential application of a cooling-off period to the issuer is warranted.124 Although we are
aware that many issuers currently use cooling-off periods in connection with their securities
transactions and that such cooling-off periods may significantly mitigate the risk of investor
harm, we are also mindful that the use and length of such cooling off periods is not uniform and
that the misuse of material nonpublic information by issuers when trading in their own securities
can result in significant investor harm because transactions by issuers often involve substantial
quantities of securities. We are continuing to consider whether regulatory action is needed to
mitigate any risk of investor harm from the misuse of Rule 10b5-1 plans by the issuer, such as in
the share repurchase context. We note that, in general, a corporation is considered an insider with
regard to its duty to either disclose or abstain when purchasing its own shares on the basis of
material, nonpublic information.125
2.
Director and Officer Certifications
a.
Proposed Amendments
124
See supra note 71 and accompanying text.
125
See, e.g., McCormick v. Fund Am. Cos., 26 F.3d 896 (9th Cir. 1994) (“Numerous authorities have held or
otherwise stated that the corporate issuer in possession of material nonpublic information must, like other
insiders in the same situation, disclose that information to its shareholders or refrain from trading with them.”)
(citations omitted); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1203-04 (1st Cir. 1996) (“Courts … have
treated a corporation trading in its own securities as an ‘insider’ for purposes of the ‘disclose or abstain’ rule.”)
(citations omitted); Rogen v. Ilikon Corp., 361 F.2d 260, 266-68 (1st Cir. 1966); Levinson v. Basic Inc., 786
F.2d 741, 746 (6th Cir. 1986), vacated on other grounds, 485 U.S. 224, 108 S. Ct. 978 (1988) (“[c]ourts have
held that a duty to disclose [merger] negotiations arises in situations, such as where the corporation is trading in
its own stock”); Kohler v. Kohler Co., 319 F.2d 634, 638 (7th Cir. 1963) (the “underlying principles” regarding
trading on inside information “apply not only to majority stockholders of corporations and corporate insiders,
but equally to corporations themselves”). Other rules promulgated pursuant to Section 10(b) demonstrate that
issuers trading in their own stock have a duty to disclose or abstain. For example, Exchange Act Rule 10b-18
provides an issuer with a “‘safe harbor’ from liability” under Rule 10b-5 under certain circumstances when the
issuer is repurchasing its own stock. [17 CFR 240.10b-18]. But, as the Commission has explained, Rule 10b-18
“confers no immunity from possible Rule 10b-5 liability where the issuer engages in repurchases while in
possession of favorable, material non-public information concerning its securities.” Purchases of Certain Equity
Securities by the Issuer and Others, Release No. 33-6434, 1982 WL 33916 at *2, *16 n.5 (Nov. 17, 1982).
37
The Commission proposed to amend Rule 10b5-1(c)(1)(ii) to impose a certification
requirement as a condition to the affirmative defense. Under the proposed amendment, if a
director or officer (as defined in Rule 16a-1(f)) of the issuer of the securities adopts a new
written Rule 10b5-1 plan, such director or officer would be required, as a condition to the
affirmative defense, to promptly furnish to the issuer a separate written certification, certifying
that at the time of the adoption of the plan:
They are not aware of material nonpublic information about the issuer or its securities;
and
They are adopting the plan in good faith and not as part of a plan or scheme to evade the
prohibitions of Exchange Act Section 10(b) and Exchange Act Rule 10b-5.
In doing so, the Commission indicated that the use of the term “officer” as defined in
Rule 16a-1(f) is appropriate for the reasons discussed above with respect to the cooling-off
period (i.e., these individuals are more likely to be aware of material nonpublic information
regarding the issuer and its securities, as well as more likely to be involved in making or
overseeing corporate decisions about whether and when to disclose information).
The Commission intended the proposed certification requirement to reinforce directors’
and officers’ cognizance of their obligation not to trade or adopt a trading plan while aware of
material nonpublic information, their responsibility to determine whether they are aware of
material non-public information when adopting Rule 10b5-1 plans, and the fact that the
affirmative defense under Rule 10b5-1 requires them to act in good faith and not to adopt such
plans as part of a plan or scheme to evade the insider trading laws. The Commission noted in the
Proposing Release that the proposed certification involves important considerations, especially
because directors and officers are often aware of material nonpublic information.
38
In addition, the Commission clarified that, subject to their confidentiality obligations,
directors and officers can consult with experts to determine whether they can make this
representation truthfully. Legal counsel can assist directors and officers in understanding the
meaning of the terms “material” and “nonpublic information.”126 The Commission stated,
however, that the issue of whether a director or officer has material nonpublic information is an
inherently fact-specific analysis. Thus, a director’s or officer’s completion of the proposed
certification would reflect their personal determination that they do not have material nonpublic
information at the time of adoption of a Rule 10b5-1 plan.
The proposed amendment also included an instruction that a director or officer seeking to
rely on the affirmative defense should retain a copy of the certification for a period of ten years.
The proposed amendments would not require a director, officer, or the issuer to file the
certification with the Commission, and the proposed certification would not be an independent
basis of liability for directors or officers under Section 10(b) and Rule 10b-5. Rather, the
Commission intended the proposed certification to underscore the certifiers’ awareness of their
126
As the Commission has stated previously, we rely on existing definitions of the terms “material” and
“nonpublic” established in case law. Information is material if “there is a substantial likelihood” that its
disclosure “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.” See Basic v. Levinson, 485 U.S. 224, 231 (1988) (quoting and applying TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) to the Section 10(b) and Rule 10b-5 context); Rule
405 [17 CFR 230.405] of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. 77a et seq.]; Exchange
Act Rule 12b-2 [17 CFR 240.12b-2]. Information is nonpublic until the information is broadly disseminated in a
manner sufficient to ensure its availability to the investing public generally, without favoring any special person
or group. See Dirks v. SEC, 463 U.S. 646, 653-54 & n.12 (1983); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,
854 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969); Regulation FD [17 CFR 243.101(e)]. For purposes of
insider trading law, insiders must wait a “reasonable” time after disclosure before trading. What constitutes a
reasonable time depends on the circumstances of the dissemination. In re Faberge, Inc., 45 S.E.C. 249, 255
(1973) (citing Texas Gulf Sulphur, 401 F.2d at 854). Under the misappropriation doctrine, a recipient of inside
information must make a “full disclosure” to the sources of the information that they plan to trade on or tip the
information within a reasonable time before doing so. O’Hagan, 521 U.S. at 655, 659 n.9; see also SEC v.
Rocklage, 470 F.3d 1, 11-12 (1st Cir. 2006).
39
legal obligations under the Federal securities law related to trading in the issuer’s securities.127
b.
Comments on the Proposed Amendments
Commenters were divided on the certification requirement. Several commenters
generally supported the proposed certification requirement for directors and officers.128 Some of
these commenters agreed that the proposed certification could reinforce directors’ or officers’
awareness of their legal obligations under the Federal securities law.129 Another commenter
noted that the certification should increase investor confidence.130
A number of commenters, however, did not support the proposed certification
requirement.131 Many of these commenters contended that the certification was unnecessary
because broker-dealers who execute Rule 10b5-1 plans usually require the director or officer to
make similar representations.132 Several commenters stated that any final rules should clearly
provide that the certification does not establish an independent basis of liability for directors or
officers under Section 10(b) and Rule 10b-5.133 Another commenter expressed concern that the
language included in the proposed certification indicating that the director or officer is “not
aware of material nonpublic information about the issuer or its securities” at the time of adoption
of a Rule 10b5-1 plan is inconsistent with Rule 10b-5 and insider trading jurisprudence.134 This
commenter asserted that, for trading activity to be unlawful under Exchange Act Section
127
See, e.g., O’Hagan, 521, U.S. at 651-52; Chiarella, 445 U.S. at 227; Steginsky v. Xcelera Inc., 741 F.3d 365,
370 n.5 (2d Cir. 2014).
128
See, e.g., letters from CII, CO PERA, ICGN, NYSE, and O’Reilly.
129
See letters from CII and O’Reilly.
130
See letter from ICGN.
131
See, e.g., letters from ACCO, Cravath, Davis Polk, DLA, Kirkland, MD Bar, NAM, Quinn, SGC, Shearman,
Sullivan, and Wilson Sonsini.
132
See, e.g., letters from ACCO, Cravath, DLA, Kirkland, Shearman, and Sullivan.
133
See, e.g., letters from Cravath, DLA, Kirkland, Shearman, and Sullivan.
134
See letter from MD Bar.
40
10(b)(5), the person trading must not have been aware of material nonpublic information at the
time that they made the purchase or sale. This commenter claimed that the affirmative defense
should be available if either: (1) the person trading was not aware of any material nonpublic
information about the issuer or the security when they entered into the Rule 10b5-1 trading
arrangement; or (2) any such material nonpublic information is either public or no longer
material at the time of the trade.
Several commenters suggested alternatives to requiring a separate certification. A few
commenters suggested that the proposed amendment should provide that the certification should
instead be included in the documentation for the Rule 10b5-1 plan.135 Another commenter
recommended that the Commission rely on the representations that traders make to the broker
executing the Rule 10b5-1 plan.136
c.
Final Amendment
We are adopting Rule 10b5-1(c)(1)(ii)(C) largely as proposed, but with certain
modifications. Under the final rule, if a director or “officer” (as defined in Rule 16a-1(f)) of the
issuer of the securities adopts a Rule 10b5-1 plan, as a condition to the availability of the
affirmative defense, such director or officer will be required to include a representation in the
plan certifying that at the time of the adoption of a new or modified Rule 10b5-1 plan: (1) they
are not aware of material nonpublic information about the issuer or its securities; and (2) they are
adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to
evade the prohibitions of Rule 10b-5.137
135
See, e.g., letters from Cravath and SIFMA 3.
136
See letter from ACCO.
137
The rule will not require these personal certifications where a director or officer terminates an existing Rule
10b5-1 plan and does not adopt a new/modified trading arrangement for which the affirmative defense is
41
Since its adoption, Rule 10b5-1(c)(1) has required, as a condition of the affirmative
defense, that a person “demonstrate[]” that they adopted their trading plan before becoming
aware of material nonpublic information. The rule has also provided that the affirmative defense
only applies when the trading arrangement was entered into in good faith. As discussed above,
we are concerned that, notwithstanding these requirements, corporate insiders may be using Rule
10b5-1 plans in ways that are not consistent with the affirmative defense and that harm investors
and undermine the integrity of the securities markets.138
The certification condition is intended to reinforce directors’ and officers’ cognizance of
their obligation not to trade or enter into a trading plan while aware of material nonpublic
information about the issuer or its securities, that it is their responsibility to determine whether
they are aware of material non-public information when adopting Rule 10b5-1 plans, and that the
affirmative defense under Rule 10b5-1 requires them to act in good faith and not to adopt such
plans as part of a plan or scheme to evade the insider trading laws. As noted in the Proposing
Release, we recognize that this certification involves important considerations, especially
because directors and officers are often aware of material nonpublic information. Subject to their
confidentiality obligations, directors and officers can consult with experts to determine whether
they can make this representation truthfully. Legal counsel can assist directors and officers in
understanding the meaning of the terms “material” and “nonpublic information.”139 However, the
sought. However, new Item 408 of Regulation S-K will require registrants to disclose whether any director or
officer has terminated a Rule 10b5-1 plan or non-Rule 10b5-1 trading arrangement. See infra Section II.B.1.
An issuer’s insider trading policies and procedures may otherwise govern such plan terminations. See infra at
Section II.B.2. Finally, whether an inference can be drawn that an individual unlawfully traded on the basis of
inside information may be informed by the manner in which they trade (see, e.g., SEC v. Warde, 151 F.3d, 42,
47 (2d Cir.1998), including where termination of a Rule 10b5-1 trading arrangement is soon followed by nonRule 10b5-1 trades in the same security or issuer.
138
See supra Section II.A.
139
See supra note 126.
42
issue of whether a director or officer has material nonpublic information is an inherently factspecific analysis. Thus, a director or officer’s completion of the proposed certification would
reflect their personal determination that they do not have material nonpublic information at the
time of adoption of a Rule 10b5-1 plan.
As suggested by some commenters,140 however, we have modified the final amendment
to require that the certification be included in the Rule 10b5-1 plan as representations, rather than
prepared as a separate document to be presented to the issuer. Consistent with the intent behind
the proposal, this approach will reinforce directors’ and officers’ cognizance of their obligations
discussed above, but will eliminate any additional burden that separate documentation may
create.
We are not persuaded, however, that any representations that corporate insiders may
already make to broker-dealers obviate the need for a certification. While we note that brokerdealers may require similar representations from directors and officers before executing a Rule
10b5-1 plan, given that there is no requirement that they do so, such practices may not be
universal, and the requirement may differ among the various broker-dealers that do require such
representations. This rule therefore will better ensure that corporate insiders provide these
representations. Further, because issuers must provide disclosure regarding the material terms
(other than price) of their directors’ and officers’ Rule 10b5-1 plans under new Item 408(a) of
Regulation S-K as described below, any representation made as part of such plans will also likely
be requested by and made available to the issuer to facilitate its compliance with the disclosure
requirement. To the extent that directors and officers provide issuers with these representations,
they would likely have a greater effect on investor confidence that the officer or director in fact
140
See, e.g., letters from Cravath and SIFMA 3.
43
was not aware of material nonpublic information when making the representation due to the
issuer’s close relationship to its officers and directors.
In addition, we are not adopting the proposed instruction that a director or officer seeking
to rely on the affirmative defense should retain a copy of the certification for a period of ten
years. The burden of establishing that the requirements of the affirmative defense have been met
will fall on the corporate insider who wishes to rely on it. As a result, we find that the proposed
instruction is unnecessary as directors and officers already have reason to keep accurate records,
including the representations, to establish that they have satisfied the conditions of the
affirmative defense.
Finally, we disagree with the commenter who argued that requiring directors or officers
to certify that they lack material nonpublic information at the time of adopting a Rule 10b5-1
plan would be inconsistent with insider trading jurisprudence.141 Specifically, the commenter
argued that the certification should instead allow a trader to certify that any material nonpublic
information the trader holds at the time the plan is entered into will be either public or no longer
material at the time of the trade.142 We concur with this commenter that, in general, liability
under Rule 10b-5 and Section 10(b) requires a showing that a covered individual was aware of
material nonpublic information at the time that a trade was executed. Rule 10b5-1, however, is
intended to provide an affirmative defense against liability under circumstances where it is
141
See letter from MD Bar.
142
The Commission is not adopting this alternative because of the difficulties a trader would face in assessing at
the time of certification whether the information will become nonpublic or no longer material at the time of
their future trading. For example, a trader may not be able to make a determination about whether and when
other persons will disclose nonpublic information on behalf of an issuer by a certain time in the future. See 2000
Adopting Release, supra note 8 (noting that public companies frequently “designat[e] a limited number of
persons who are authorized to make disclosures” that can be considered as made “on behalf of an issuer” to
comply with the securities laws); see also 17 CFR 243.100, 101(c). The certification condition that the
Commission is adopting permits traders to make the relatively more straightforward determination whether they
are aware of material nonpublic information at a given point in time.
44
relatively unlikely that a trader will be able to trade on material nonpublic information. As noted
earlier, this defense is designed to cover situations where a person can demonstrate that a trade
was not based on material nonpublic information. Requiring a representation that a director or
officer was not aware of material nonpublic information when adopting a Rule 10b5-1 plan as a
condition of the affirmative defense better ensures that the defense is available only in those
circumstances. Moreover, by its nature, an affirmative defense does not affect the substance of
the underlying prohibition. Individuals who cannot satisfy this condition because they are aware
of material nonpublic information at the time that they enter into a Rule 10b5-1 plan may still be
able to trade without liability if they lack material nonpublic information at the time that their
trade is actually executed. In such circumstances, however, they would not be able to benefit
from the affirmative defense provided by Rule 10b5-1(c)(1). We also disagree with the
commenter’s suggestion that the representation condition we are adopting is a substantive change
in what knowledge an individual may possess when adopting a plan that satisfies the conditions
of Rule 10b5-1(c)(1).143 The representation condition rather adds a requirement about how that
knowledge is documented for purposes of the affirmative defense.
Finally, the Commission also proposed a technical change to incorporate the Preliminary
Note to Rule 10b5-1 into Rule 10b5-1(b).144 The Preliminary Note to Rule 10b5-1 states that the
rule defines when a purchase or sale constitutes trading “on the basis of” material nonpublic
information in insider trading cases brought under Section 10(b) of the Exchange Act and Rule
143
The 2000 adopting release made clear that a person could adopt a plan “while the person was not aware of any
inside information.” 2000 Adopting Release at 51737 (emphasis added); accord Selective Disclosure and
Insider Trading, Release No. 33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)] at 72601 (“If the insider
provides the instructions without awareness of any material nonpublic information, the Rule would permit him
or her to complete the previously instructed sales plan even if he or she later became aware of inside
information.”) (emphasis added).
144
See Proposing Release at 8689.
45
10b-5 thereunder, that the law of insider trading is otherwise defined by judicial opinions
construing Rule 10b-5, and that Rule 10b5-1 does not modify the scope of insider trading law in
any other respect.145 We are adopting this change as proposed.
The existing law of insider trading provides an established legal framework that makes
directors and officers liable if they fraudulently purchase or sell securities on the basis of
material nonpublic information in breach of a duty of trust or confidence. Rule 10b5-1 provides
that a purchase or sale of a security of an issuer is on the basis of material nonpublic information
for purposes of Section 10(b) and Rule 10b-5 if the person making the purchase or sale was
aware of the material nonpublic information when the person made the purchase or sale. Rule
10b5-1 expressly “does not modify the scope of insider trading law in any other respect.” We
think it is sufficiently clear that the certification would not create an independent basis of
liability for insider trading and do not believe it is necessary to amend the rule in this regard, as
145
See 2000 Adopting Release supra note 8 at 51727. The Commission adopted an “awareness” standard in 2000
that provides that a purchase or sale of a security of an issuer is on the basis of material nonpublic information
about that security or issuer “if the person making the purchase or sale was aware of the material nonpublic
information when the person made the purchase or sale.” 17 CFR 240.10b5-1(b) (2000). The Commission
explained at that time that one view was that a trader may be liable for trading while in “knowing possession of
information,” while a contrary view was that a trader is not liable unless it is shown that the trader “used” the
information for trading. Selective Disclosure and Insider Trading, 65 FR 51716-01, 51726-27 (Aug. 24, 2000).
The Commission ultimately adopted the “awareness” standard that balanced considerations of both views while
being “closer” to the “knowing possession” standard than to the “use” standard. Id. One commenter suggested
that the Commission lacked authority “in the year 2000” to adopt Rule 10b5-1(b)’s awareness standard. See
letter from Pacific Legal Foundation. However, none of the modifications the Commission is adopting in this
Release would alter the “awareness” standard that the Commission adopted in 2000. See supra at p.8 n. 9. In
any event, by prohibiting any manipulative or deceptive device or contrivance “in contravention of such rules
and regulations as the Commission may prescribe as necessary or appropriate in the public interest or the
protection of investors” (Exchange Act Section 10(b)), Congress thereby authorized the Commission to
“prescribe legislative rules” like Rule 10b5-1, and courts must accord Rule 10b5-1 “controlling weight.”
O’Hagan, 521 U.S. at 673 (quoting Chevron, 467 U.S. at 844). Since its adoption in 2000, courts have
appropriately deferred to the Commission’s “awareness” standard, holding that the Commission’s determination
is “entitled to deference.” Royer, 549 F.3d at 899 (applying Chevron); see also United States v. Rajaratnam,
719 F.3d 139, 157-61 (2d Cir. 2013), cert. denied, 134 S. Ct. 2820 (2014). Furthermore, Congress has
expressly authorized the Commission to seek and district courts to impose civil monetary penalties where a
person has violated the securities laws by purchasing or selling a security “while in possession of” material
nonpublic information. Exchange Act Section 21A(a)(1) [15 U.S.C. 78u–1(a)(1)]; see also Exchange Act
Section 20(d) (liability for trading “while in possession of” material nonpublic information) [15 U.S.C. 78t(d)].
46
suggested by several commenters.146
3.
Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and
Single-Trade Arrangements
a.
Proposed Amendments
Currently, a person is not entitled to the Rule 10b5-1(c)(1) affirmative defense for a trade
if they enter into or alter a “corresponding or hedging transaction or position” with respect to the
planned transactions.147 In proposing this requirement, the Commission explained that it was
designed to prevent persons from devising schemes to exploit material nonpublic information by
setting up pre-existing hedged trading programs, and then canceling execution of the unfavorable
side of the hedge, while permitting execution of the favorable transaction.148
In the Proposing Release, the Commission recognized that multiple overlapping plans can
be used for these hedging purposes and in other ways that might allow material nonpublic
information to “factor into the trading decision” of an insider who had complied with the other
provisions of Rule 10b5-1. In particular, currently, a person can adopt and employ multiple
overlapping Rule 10b5-1 trading arrangements and exploit material nonpublic information by
setting up trades timed to occur around dates on which they expect that the issuer will likely
release material nonpublic information (such as earnings releases) and then selectively cancel
trades or terminate plans on the basis of material nonpublic information before the information is
publicly disclosed. In this same vein, the Commission noted its concern that a person could
circumvent the proposed cooling-off period by setting up multiple overlapping Rule 10b5-1
146
See, e.g., letters from Cravath, DLA, Kirkland, Shearman, and Sullivan.
147
See Rule 10b5-1(c)(1).
148
See Selective Disclosure and Insider Trading, Release No. 33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28,
1999)].
47
trading arrangements, and deciding later which trades to execute and which to cancel after they
become aware of material nonpublic information, but before its release.
To address these concerns, the Commission proposed to amend Rule 10b5-1(c)(1) to
provide as a condition of the affirmative defense that the person who has entered the plan has no
outstanding (and does not subsequently enter into another) Rule 10b5-1 plan for open market
purchases or sales of the same class of securities. The Commission also requested comment on
whether it was appropriate to exclude multiple trading arrangements for open market purchases
or sales of the same class of securities, and specifically asked commenters to weigh in on
whether allowing a concurrent trading arrangement for each class of securities would “create
incentives for corporate insiders to own different classes of stock.”149
This proposed limitation was designed to eliminate the ability of traders to use multiple
plans to strategically execute trades based on material nonpublic information and still claim the
protection of the affirmative defense for such trades.
The proposed amendment would not apply to transactions where a person acquires (or
sells) securities through participation in employee stock ownership plans (“ESOPs”) or dividend
reinvestment plans (“DRIPs”), which are not executed by the person on the open market.
Participation in these programs is sometimes effected through Rule 10b5-1 plans, and because
these transactions are directly with the issuer, the Commission concluded they were less likely to
give rise to insider trading concerns.150 Thus, the Commission proposed this exception to
149
Proposing Release, supra note 22, at 8692 (request for comment number 13).
150
However, the Supreme Court has explained that lower courts “should consider the extent to which an ERISAbased obligation either to refrain on the basis of inside information from making a planned trade or to disclose
inside information to the public could conflict with the complex insider trading and corporate disclosure
requirements imposed by the federal securities laws or with the objectives of those laws.” Fifth Third Bancorp
v. Dudenhoeffer, 573 U.S. 409, 429 (2014). Officers and directors also need to follow Regulation Blackout
Trading Restrictions, see 17 CFR 245.100 through 245.104.
48
preserve the benefits of flexibility for plan participants with respect to such plans.
In addition to restricting the use of multiple overlapping trading arrangements, the
Commission proposed to amend Rule 10b5-1(c)(1)(ii) to limit the availability of the affirmative
defense for a trading arrangement designed to cover a single trade, by providing that the
affirmative defense would only be available for one single-trade plan during any 12-month
period. Under the proposed amendment, the affirmative defense would not be available for a
single-trade plan if the trader had purchased or sold securities pursuant to another single-trade
plan within the preceding 12-month period. In proposing this amendment, the Commission noted
that some recent research indicated that single-trade plans are consistently loss-avoiding and
their adoption often precedes stock price declines.151 At the same time, the Commission
recognized the use of single–trade plans to address one-time liquidity needs. The proposed
limitation on single-trade plans was intended to balance accommodating the use of single-trade
plans for one-time liquidity needs against the potential for abuse of such plans.
b.
Comments on the Proposed Amendments
Several commenters generally supported both the proposed restriction on multiple
overlapping trading arrangements, and the limitation on single-trade plans.152 One commenter
expressed support for the prohibition on multiple overlapping trading arrangements, but did not
address single-trade plans.153 A few commenters supported the proposed prohibition on multiple
overlapping trading arrangements but asked the Commission to limit the prohibition to directors
and officers, noting that individuals have many legitimate reasons to have overlapping plans,
151
See Gaming the System, supra note 20; see also infra Section V.B.
152
See, e.g., letters from AFL-CIO, Better Markets, CO PERA, MD Bar, NYCC, NASAA, and Public Citizen.
153
See letter from Kirkland.
49
such as gifts and estate-planning transactions, and that directors and officers are the group most
likely to have material nonpublic information.154
With respect to single-trade plans specifically, commenters had mixed responses. One
commenter expressed support for the limitation on single-trade plans,155 while another
commenter recommended that the Commission eliminate the availability of the Rule 10b5-1
affirmative defense for all single-trade plans.156 On the other hand, some commenters noted that
single-trade plans often have legitimate uses.157 For example, one commenter maintained that, if
adopted, the Commission should provide exceptions for derivative transactions, gifts, estateplanning transactions, and employee benefit plan transactions.158 Other commenters indicated
that the proposed restriction could be evaded by splitting one trade that would be authorized
under such a plan into two trades.159
In addition, several commenters expressed concern that the proposed restrictions on
multiple overlapping and single-trade Rule 10b5-1 plans would negatively impact certain
employee compensation plan transactions that are structured as Rule 10b5-1 plans, such as sales
of securities used to generate funds to cover the withholding taxes associated with equity vesting
and elections under 401(k) plans or employee stock purchase plans that may be structured as
Rule 10b5-1 plans (“sell-to-cover transactions”).160 Some of these commenters asserted that
154
See, e.g., letters from SIFMA 3 and Sullivan.
155
See letter from NYSE.
156
See letter from Sen. Warren et al.
157
See, e.g., letters from Monday.com Ltd (“Monday.com”), BioNJ, SCG, SIFMA 3, Davis Polk, Fenwick, Jones
Day, Shearman, and Wilson Sonsini
158
See letter from Sullivan.
159
See letter from Cravath and Davis Polk.
160
See, e.g., letters from Fenwick, HP, Monday.com, SCG, Sullivan, and Wilson Sonsini.
50
these transactions do not implicate the concerns that the proposed amendment is intended to
address because a corporate insider has limited discretion as to the timing or the number of
shares sold to cover the tax liability.161 Other commenters generally stated that under the
proposed limitations, insiders could not maintain both a traditional Rule 10b5-1 plan and a plan
designed to execute sell-to-cover transactions.162
With respect to the aspect of the proposed definition of “multiple concurrent trading
arrangements” under which an insider could establish a separate arrangement for each “class of
securities,” several commenters generally supported the limitation on multiple overlapping plans
as proposed.163 One commenter, however, argued that the proposed definition would encourage
insiders to establish parallel trading arrangements for common stock, preferred stock, and
options.164 Because the values of these instruments are all highly correlated, the commenter
stated, the proposed rule would still allow insiders to opportunistically use material nonpublic
information by establishing such parallel arrangements and then cancelling one or more of them.
Many commenters did not support the proposed restriction on multiple overlapping Rule
10b5-1 plans.165 Some commenters asserted that this limitation was unnecessary, because, given
that the affirmative defense already does not permit adoption of hedged plans in which a person
takes offsetting financial positions, there is no additional abusive conduct to address.166
161
See, e.g., letters from BioNJ, Monday.com, and Simpson Thatcher.
162
See, e.g., Sullivan and Wilson Sonsini.
163
See letters from Better Markets, CII, and CO PERA.
164
See letter from NASAA.
165
See, e.g., letters from ABA, ACCO, BioNJ, Chamber of Commerce 2, Chevron, Coalition Letter, Cravath,
Davis Polk, DLA, Dow, FedEx, Fenwick, HP, HRPA, HudsonWest, Jones Day, K&L Gates, Kirkland,
Manulife, Monday.com, NAM, NVCA, NYC Bar, Paul Weiss, PNC, Quest, Quinn, SCG, Shearman, Simpson,
and Wilson Sonsini.
166
See, e.g., letters from Davis Polk and Shearman.
51
As with single-trade plans, a number of commenters indicated that there are legitimate,
common uses of multiple, overlapping Rule 10b5-1 plans.167 Some commenters noted, for
example, that issuers often use multiple concurrent Rule 10b5-1 plans with different brokers to
execute share repurchase transactions.168 Other commenters indicated that directors and officers
often employ multiple Rule 10b5-1 plans because they hold shares in different accounts with
multiple financial institutions.169 They noted, for example, that a corporate insider may hold
shares received upon the exercise of stock options in an account with the financial institution that
is the administrator of the issuer’s incentive equity plan, and hold shares acquired through open
market transactions or other means in a separate account with a different financial institution.
A number of commenters expressed concern that the wording of the proposed
amendment regarding multiple overlapping plans was overly broad as it could encompass every
open market transaction, including transactions that are not executed under a Rule 10b5-1
plan.170 Several commenters urged the Commission to clarify that this provision would not
prohibit the adoption of a new Rule 10b5-1 plan while an existing plan is in effect as long as no
trades could commence under the new plan until the existing plan has expired.171
Finally, several commenters contended that the proposed cooling-off period for Rule
10b5-1 plans was a more effective method to address the concerns over potential abusive uses of
multiple overlapping and single-trade Rule 10b5-1 plans.172
167
See, e.g., letters from Chamber of Commerce 2, Cravath, Davis Polk, Dow, FedEx, HP, Jones Day, Manulife,
Monday.com, NVCA, NYC Bar, Quest, Shearman, Sullivan, and Wilson Sonsini.
168
See, e.g., letters from Cravath, Davis Polk, Dow, FedEx, Quest, Shearman, and Sullivan.
169
See, e.g., letters from Quest, and Wilson Sonsini.
170
See, e.g., letters from Dow, SCG, ABA, Cleary, Paul Weiss, Shearman, Sullivan, and Wilson Sonsini.
171
See, e.g., letters from Jones Day, Kirkland, Paul Weiss, Simpson, Shearman, and Wilson Sonsini.
172
See, e.g., letters from Manulife, Cravath, NAM, and Cleary.
52
c.
Final Amendments
After considering the comments, we are adopting the proposed amendment addressing
multiple overlapping Rule 10b5-1 plans with certain modifications. With respect to multiple
overlapping Rule 10b5-1 contracts, instructions or plans, the final amendment will add a
condition to the Rule 10b5-1(c)(1) affirmative defense that persons, other than issuers, may not
have another outstanding (and may not subsequently enter into any additional) contract,
instruction or plan that would qualify for the affirmative defense under the amended Rule 10b5-1
for purchases or sales of any class of securities of the issuer on the open market during the same
period. We disagree with commenters who urged us to limit these provisions only to directors
and officers.173 While it is true, as commenters note and as we observed in the Proposing
Release, that officers and directors are most likely to have access to material nonpublic
information,174 other traders may at times also have such access. Trading by these other persons
can impact investors and investor confidence in much the same ways as trading by officers and
directors. For example, we think it could undermine investor confidence to learn that insiders
who are not Section 16 officers were able to opportunistically manipulate their trading after
receiving material nonpublic information, so that the insider could profit at the expense of
uninformed investors. As we explain below, we think that any financial impact on insiders other
than officers and directors resulting from these limitations will be more limited than in the case
of the cooling-off period.
Accordingly, we disagree with those commenters who suggested that trades by
individuals other than officers and directors would not affect the integrity of securities
173
See letters from Sullivan and SIFMA 3.
174
See Proposing Release at 17; letters from CII, Cravath, and SIFMA.
53
markets.175 While other traders may not necessarily control corporate trading or disclosure
decisions, they still may stand to profit substantially from trading on any material nonpublic
information to which they have access. Further, because Form 4 may reveal potentially
opportunistic trades to the public, we think the fact that most persons, other than Section 16
officers, do not file Form 4 is a reason for more safeguards with respect to their trading, not
fewer.
In reaching our determination, we are mindful that some traders, such as rank-and-file
employees, may have liquidity and diversification needs that are greater than those of more
highly compensated officers, as commenters noted.176 In recognition of these needs, we are
adopting a modification to the proposed limitations, described in more detail below, under which
traders may employ multiple plans to satisfy certain tax obligations incident to equity
compensation. For insiders who are already trading under an existing plan when such liquidity
needs arise, meeting those needs will typically require the insider to modify the existing plan, as
our limitation on multiple plans will prevent the insider from adopting an additional plan to
cover the newly planned transactions. This modification will in turn likely require the insider to
pause trading under the preexisting plan for the duration of the insider's cooling-off period.
Because the cooling-off period for insiders other than officers and directors is 30 days, however,
we believe that any resulting impact on the insider should be limited. While we agree that it is
possible this cost, or other barriers, may reduce the appeal of requiring non-officers to make use
of a Rule 10b5-1 plan, as one commenter noted,177 we think on balance that it is better to ensure
that any Rule 10b5-1 plans that are adopted in fact impose meaningful limits on opportunistic
175
See letters from Cravath and Davis Polk.
176
See letters from Chamber of Commerce 2 and NAM.
177
See letter from Davis Polk.
54
trading. More widespread adoption of Rule 10b5-1 plans is unlikely to be helpful to investors or
markets if such plans do not constrain many opportunistic trades.
We are modifying the original proposal by removing the reference to “same class of
securities,” so that the multiple overlapping plans restriction will apply to contracts, instructions
or plans for any class of securities of the issuer. We agree with the commenter who argued that,
given the strong likelihood that the values of different classes of securities of a given issuer are
highly correlated, allowing the use of multiple plans for trading in the securities of one issuer
would allow for significant possibility of opportunistic behavior.178 As a result, persons (other
than the issuer) may only have one such contract, instruction or plan, rather than one contract,
instruction or plan for each class of securities.
This condition is intended to address the concerns discussed above about an insider’s use
of multiple overlapping plans in ways that could allow material nonpublic information to factor
into the trading decision. Because these concerns are not limited to hedged plans where a trader
takes offsetting financial positions, we disagree with those commenters who asserted that the
existing hedging restriction of the Rule 10b5-1 affirmative defense renders this limitation
unnecessary. With a sufficient number of different plans, an insider could achieve a desired
trading outcome. For example, an insider could adopt several plans to sell their company stock at
varying prices in excess of the current share price, and then cancel the plans authorizing trades at
the lowest of these prices upon learning nonpublic information that the insider expects to
substantially increase the share price. For similar reasons, we disagree with commenters that the
cooling-off period sufficiently addresses our concerns given that an insider could maintain
multiple overlapping plans that satisfy the cooling-off period and then cancel plans based on
178
See letter from NASAA.
55
later-obtained material nonpublic information.
In light of comments received, we are making three further modifications to this
condition. The first addresses an insider’s use of multiple brokers to execute trades pursuant to a
single Rule 10b5-1 plan that covers securities held in different accounts. Specifically, a series of
separate contracts with different broker-dealers or other agents acting on behalf of the person
(other than the issuer) to execute trades thereunder may be treated as a single “plan,” provided
that the contracts with each broker-dealer or other agent, when taken together as a whole, meet
all of the applicable conditions of and remain collectively subject to the provisions of Rule 10b51(c)(1). A modification of any such contract will be a modification of each other contract or
instruction such single plan. We agree with commenters that in circumstances where a corporate
insider holds securities in separate accounts with different financial institutions, the execution of
trades by multiple brokers under a Rule 10b5-1 plan is less likely to raise the concerns
underlying this condition of the rule. We recognize that a trader will typically enter into a
formally distinct contract or agreement with each agent authorized to conduct trades. Thus, for
purposes of the multiple overlapping plans restriction, a series of formally distinct such contracts
may be treated as a single “plan” where taken together the contracts otherwise satisfy the
conditions of the rule. As we have described, the overlapping-plans condition is intended to
prevent selective alteration or cancellation of Rule 10b5-1 plans to achieve a particular trading
outcome when an insider is aware of material nonpublic information, and for that reason, we are
providing that modification (as defined in the Rule) of a contract with any given agent will also
be treated as a modification of the other contracts making up the plan.
In addition, the final amendment provides that a broker-dealer or other agent executing
trades on behalf of the insider pursuant to the Rule 10b5-1 plan may be substituted by a different
56
broker-dealer or other agent as long as the purchase or sales instructions applicable to the
substituted broker and the substitute are identical, including with respect to the prices of
securities to be purchased or sold, dates of the purchases or sales to be executed, and amount of
securities to be purchased or sold. Under this provision, an insider will not lose the benefit of the
affirmative defense where the insider closes a securities account with a financial institution and
transfers the securities to a different financial institution. If an insider provides instructions to the
new broker-dealer in accordance with this provision, there is more limited possibility for
selective cancellation because substituting a broker authorized to trade under a Rule 10b5-1 plan
would not change the remaining trades in ways that likely would allow the insider to profit on
material nonpublic information. We note, however, that a plan modification, such as the
substitution or removal of a broker that is executing trades pursuant to a Rule 10b5-1
arrangement on behalf of the insider that changes the purchase or sale amount, price or date on
which purchases or sales are to be executed is a termination of such plan and the adoption of a
new plan. This will further limit opportunities for opportunistic manipulation of broker-dealers
executing trades on behalf of the insider.
The second change permits persons (other than the issuer) to maintain two separate Rule
10b5-1 plans at the same time so long as trading under the later-commencing plan is not
authorized to begin until after all trades under the earlier-commencing plan are completed or
expire without execution.179 This provision would not be available for the later-commencing
179
See Rule 10b5-1(c)(1)(ii)(D) which provides that a contract, instruction, or plan that would meet the other
requirements of Rule 10b5-1(c)(1)(i) may still qualify for the affirmative defense where the director or officer
has one other contract, instruction, or plan that would qualify for the affirmative defense for purchases or sales
of the same class of securities on the open market and trading under one contract, instruction, or plan (“latercommencing plan”) is not authorized to begin until after all trades under the other contract, instruction, or plan
(“earlier-commencing plan”) are completed.
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plan, however, if the first trade under the later-commencing plan is scheduled to begin during the
“effective cooling-off period”—namely, the cooling-off period that would be applicable under
paragraph (c)(1)(ii)(B) to the later-commencing plan if the date of adoption of the latercommencing plan were deemed to be the date of termination of the earlier-commencing plan.180
Absent this qualification, an insider might cancel the earlier-commencing plan before its
scheduled completion but still trade under the later-commencing plan in fewer than the minimum
90 days (or 30 days) that would otherwise be required for a new plan that is established after a
plan termination. Both plans must meet all other conditions of the affirmative defense, including
the cooling-off period. Under these circumstances, we agree with commenters that there would
be a much lower risk of a corporate insider who is aware of material nonpublic information
profiting by opportunistically canceling a trading plan as the Rule 10b5-1 plans would not
authorize trading during the same period of time.
Third, we are adopting a modification for plans authorizing certain “sell-to-cover”
transactions in which an insider instructs their agent to sell securities in order to satisfy tax
withholding obligations at the time an award vests. Under this modification, an insider will not
lose the benefit of the affirmative defense with respect to an otherwise eligible Rule 10b5-1 plan
if the insider has in place another plan that would qualify for the affirmative defense, so long as
the additional plan or plans only authorize qualified sell-to-cover transactions. Such plans that
authorize only such qualified sell-to-cover transactions are eligible for the affirmative defense
180
For example, an insider who is not an officer or director has in place an existing Rule 10b5-1 plan with a
scheduled date for the latest authorized trade of May 31, 2023. On May 1, 2023, that insider adopts a latercommencing plan, intended to qualify for the affirmative defense under Rule 10b5-1, with a scheduled date for
the first authorized trade of June 1, 2023. If the insider terminates the earlier-commencing plan on May 15, the
later-commencing plan will not receive the benefit of the affirmative defense, because June 1 is within 30 days
of May 15, the date of termination of the earlier-commencing plan, and thus June 1 is during the “effective
cooling-off period.” However, if the later-commencing plan were scheduled to begin trading on July 1, 2023, it
could still receive the benefit of the affirmative defense because July 1, 2023 is more than 30 days after May 15
and thus is outside the “effective cooling-off period.”
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notwithstanding the fact that the insider may have another plan eligible for the affirmative
defense in place. A plan authorizing sell-to-cover transactions is qualified for this provision
where the plan authorizes an agent to sell only such securities as are necessary to satisfy tax
withholding obligations incident to the vesting of a compensatory award, such as restricted stock
or stock appreciation rights, and the insider does not otherwise exercise control over the timing
of such sales.181
We are providing this modification because we agree with commenters who contended
that under these limited circumstances, there is little danger of opportunistic trading. Because
vesting schedules are generally set in advance by the issuer, the amount of securities to be sold
would be determined by the value of the award and the taxes due on that value. We are further
stipulating that eligible plans cannot provide the insider with control over the timing of any sales.
For these reasons, we think it is highly unlikely that insiders would be able to make opportunistic
use of such additional plans.
We are not extending this modification to include sales incident to the exercise of option
awards because it could create a risk of opportunistic trading. Option exercises occur at the
discretion of the insider, and such decisions could occur when the insider later obtains material
nonpublic information. To the extent that commenters have suggested that an insider with a sellto-cover plan tied to an option exercise could not use the revised Rule 10b5-1 affirmative
defense, we disagree.182 The revised affirmative defense would not prevent a corporate insider
from entering into a Rule 10b5-1 plan that includes instructions directing a broker to sell
181
In our view, a plan that authorizes an agent to sell only such securities as are necessary to satisfy tax
withholding obligations incident to the vesting of a compensatory award meets the requirement that the plan
does “not permit the person to exercise any subsequent influence over how, when, or whether to effect …sales,”
Rule 10b5-1(c)(1)(B)(3) [17 CFR 240.10b5-1(c)(1)(B)(3)].
182
See supra note 161.
59
securities sufficient to meet the tax withholding obligations incident to an option or similar
award exercise. For example, the insider might provide that a designated agent is authorized to
sell sufficient securities to cover any tax withholding obligations incident to an option exercise.
Such instructions can be included in a single Rule 10b5-1 plan along with instructions to sell
based on other financial variables. Accordingly, an officer or director may take advantage of the
affirmative defense both for sell-to-cover transactions and other planned trades, provided that the
conditions of the affirmative defense are met, including the cooling-off period.
In addition, we are not adopting the proposed limitation on multiple plans and singletrade plans for the issuer at this time. As with the cooling-off period, we believe that further
consideration of potential application to the issuer is warranted.
Finally, we are adopting the proposed limitation on single-trade plans with modifications.
Consistent with the approach to multiple overlapping plans, the limitation will apply to the Rule
10b5-1 plans of all persons, other than the issuer. As a result, the final rule provides that if the
contract, instruction, or plan is designed to effect the open-market purchase or sale of the total
amount of securities as a single transaction, the contract, instruction or plan will not receive the
benefit of the affirmative defense unless: (1) the person who entered into the contract,
instruction, or plan has not, during the prior 12-month period, adopted another contract,
instruction, or plan that was designed to effect the open-market purchase or sale of the total
amount of securities subject to that plan in a single transaction; and (2) such other contract,
instruction, or plan in fact was eligible to receive the affirmative defense. A person (other than
the issuer) will be able to rely on the Rule 10b5-1(c)(1)(ii) affirmative defense for only one
single-trade plan during any 12-month period. The defense will only be available for a singletrade plan if the person had not, during the preceding 12-month period, adopted another single-
60
trade plan, where the other plan qualified for the affirmative defense under Rule 10b5-1.183 We
disagree with the commenter who argued that, due to the possibility that an insider might divide
their planned single trade into multiple trades, any limit on single-trade plans would be
ineffective.184 For example, certain insiders who divide a planned trade over several days are
likely to realize reduced profits from trading after a Form 4 is filed, which at least in part, will
reduce an insider’s incentives to engage in trading while aware of material nonpublic
information.
For this purpose, a plan is “designed to effect” the purchase or sale of securities as a
single transaction when the contract, instruction, or plan has the practical effect of requiring such
a result. In contrast, a plan is not designed to effect a single transaction where the plan leaves the
person’s agent discretion over whether to execute the contract, instruction, or plan as a single
transaction. Similarly, a plan is also not designed to effect the purchase or sale of securities as a
single transaction when (1) the contract, instruction, or plan does not leave discretion to the
agent, but instead provides that the agent’s future acts will depend on events or data not known at
the time the plan is entered into, such as a plan providing for the agent to conduct a certain
volume of sales or purchases at each of several given future stock prices; and (2) it is reasonably
foreseeable at the time the plan is entered into that the contract, plan, or instruction might result
in multiple transactions.
We are adopting the limitation on single-trade plans because we are concerned that trades
under such plans may provide particularly profitable opportunities for insiders who are trading
183
We have added this qualification because we do not intend for a plan that is ineligible for the affirmative
defense to preclude the affirmative defense for another plan, even if both trades are single-trade plans.
184
See letter from Davis Polk.
61
while aware of material nonpublic information. As we described in the Proposing Release, a
recent study found that trades under a single-trade plan avoid losses that appear statistically
unlikely to be avoided by uninformed traders.185 This pattern persisted even when the first such
trade occurred more than 120 days after adoption of the plan, suggesting that a cooling-off period
alone may not be sufficient to prevent opportunistic single-trade plans.186 For these reasons, we
disagree with the commenters who suggested that the cooling-off period would be sufficient to
address the problem addressed by the single-trade limitation.187
Several commenters expressed concern about potential ambiguity or uncertainty around
the concept of a single-trade plan and asked us to clarify the scope of this provision, such as its
potential application to block trades of venture capital funds.188 We agree with those commenters
who indicated that an insider should not be at risk of losing the benefit of the affirmative defense
due to decisions outside the insider’s control when the insider did not design the Rule 10b5-1
plan to effect the authorized purchases or sales in a single transaction, such as in the case where
the insider’s agent exercises their own discretion to complete all authorized trading in a single
transaction. For that reason, we have added the “designed to effect” provision discussed above.
We are concerned, however, that further delineating what constitutes a single transaction for
purposes of this rule could create incentives to design Rule 10b5-1 plans that avoid application
of the single-trade plan limitation.
For reasons similar to those we have explained with respect to multiple overlapping
trades, in response to comments, we are modifying the proposed single-trade limitation with
185
See Gaming the System, supra note 20 at 2, 14 (observing that “trades of single-trade plans are consistently
loss-avoiding regardless of cooling-off period”). But see infra note 400.
186
See id.
187
See letters from Manulife, Cravath, NAM, and Cleary.
188
See letters from Sullivan, SIFMA 3 and NVCA.
62
respect to qualified sell-to-cover transactions. This modification applies to the same plans
eligible for the sell-to-cover provision of the overlapping trade limitation. Again, we think that
such plans present little, if any risk, of opportunistic trading.
Also for reasons similar to those we have explained with respect to multiple overlapping
trades, we are applying the single-trade limitation to all persons other than the issuer. The singletrade limitation helps to ensure that the affirmative defense provides meaningful constraints on
the extent to which material nonpublic information affects an insider’s decision to trade. While
we recognize that the limitation also may impose some moderate limitations on insiders’ ability
to obtain liquidity and diversification, as noted, we think that there are alternative means for such
insiders to achieve these goals.
Because single-trade plans may have legitimate uses to address one-time liquidity needs,
we also disagree with the commenter who suggested that the affirmative defense should not be
available for any single-trade plan.189 Overall, the limitation we are adopting is intended to
balance legitimate uses of single-trade plans against the potential for abuse.
4.
The Amended Good Faith Condition
a.
Proposed Amendments
The Rule 10b5-1(c)(1) affirmative defense is only available if a trading arrangement was
entered into in good faith and not as part of a plan or scheme to evade the prohibitions of the
rule. The Commission proposed to amend this condition to require that the contract, instruction,
or plan also be “operated” in good faith.
In proposing this amendment, the Commission noted its concern that some corporate
insiders may try to improperly influence the timing of corporate disclosures to benefit their
189
See letter from NASAA.
63
trades under a Rule 10b5-1 trading arrangement, such as by delaying or accelerating the release
of material nonpublic information.190 The Commission also noted its concern that a Rule 10b5-1
plan may be canceled or modified in an attempt to evade the prohibitions of the rule without
affecting the availability of the affirmative defense. Moreover, the Commission stated that
requiring that a trader both enter into and operate a Rule 10b5-1 plan in good faith would help
deter fraudulent and manipulative conduct and enhance investor protection throughout the
duration of the trading arrangement. Thus the Commission intended the proposed amendment to
make clear that the affirmative defense would not be available to a trader who, for example,
modifies their plan in an effort to evade the prohibitions of the rule or uses their influence to
affect the timing of corporate disclosure to occur before or after a planned trade to make it more
profitable or to avoid or reduce a loss.
b.
Comments on the Proposed Amendments
Several commenters generally supported the proposed amendment.191 Some of these
commenters indicated that the proposed amendment would deter opportunistic trading in
connection with Rule 10b5-1 plans and increase investor confidence.192 One of these
commenters also expressed the view that, among other things, this requirement would ensure that
there is liability where persons attempt to manipulate the timing of corporate announcements to
benefit trades made pursuant to a Rule 10b5-1 plan.193 Another commenter asserted that adding
the “operate in good faith” requirement would be helpful in improving the insider trading
190
See Proposing Release, supra note 23, at 8693.
191
See, e.g., letters from CII, AFL-CIO, Better Markets, CO PERA, NYCC, NASAA, NYSE, and O’Reilly.
192
See, e.g., letters from AFL-CIO, Better Markets, CII, and NASAA.
193
See letter from Better Markets.
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compliance programs of issuers.194
A number of commenters, however, opposed adding the condition that a Rule 10b5-1
plan be “operated” in good faith.195 Many of these commenters indicated that the concept of
“operated in good faith” was not sufficiently clear and would lead to uncertainty surrounding the
availability of the affirmative defense.196 Similarly, another commenter asked the Commission to
clarify the extent to which a failure to operate a Rule 10b5-1 plan in good faith would invalidate
the affirmative defense for transactions that were executed under the plan.197 Some commenters
contended that, given that the scope of conduct or activity covered by the phrase was potentially
extensive, this condition could inhibit the use of Rule 10b5-1 plans.198 Finally, another
commenter suggested requiring that a Rule 10b5-1 plan be “modified in good faith” as an
alternative.199 This commenter contended that “modified” is a clearer term and would cover
circumstances where a trader amends or terminates a Rule 10b5-1 plan based on material
nonpublic information.
c.
Final Amendment
Having considered the comments received, we are adopting the amendment to Rule
10b5-1(c)(1)(ii) with a modification in response to comments concerning the term “operated in
good faith.” The final rules add the condition that the person who entered into the Rule 10b5-1
194
See letter from O’Reilly.
195
See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath, Davis Polk, DLA, Fenwick, Shearman, Wilson
Sonsini, PNC, SIFMA 2, and SIFMA 3.
196
See, e.g., letters from Quest, Cleary, Cravath, Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, and PNC,
SIFMA 2, SIFMA 3 and Chamber of Commerce 2.
197
See letter from PNC.
198
See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath, Davis Polk, DLA, Fenwick, Shearman, Wilson
Sonsini, PNC, SIFMA 2, and SIFMA 3.
199
See letter from Fenwick.
65
contract, instruction, or plan “has acted in good faith with respect to” the contract, instruction, or
plan. As discussed above, since the time that Rule 10b5-1 was adopted, we have become
concerned that corporate insiders may take actions after adopting a Rule 10b5-1 plan to benefit
from material nonpublic information the insider acquires after establishment of the plan. We
therefore agree with commenters that this requirement will help ensure that traders do not engage
in opportunistic trading in connection with Rule 10b5-1 plans, and will help deter corporate
insiders from improperly influencing the timing of corporate disclosures to benefit their trades
under such a plan.200
Many commenters appeared to understand that the proposed “operated in good faith”
language was intended to govern the behavior of the trader.201 Some commenters, however,
expressed concern that the term “operated” could be ambiguous or cause confusion because it
could be read to apply, or might apply only, to the insider’s agents, such as brokers who executed
the trades authorized by the insider.202 To make clear that the good faith obligation applies to the
activities of the insider (including the insider’s efforts to direct the activities of others), we have
modified this language to state that the trader must “act[] in good faith with respect to the
contract, instruction, or plan.”
In adopting this amendment, we disagree with commenters that the expanded good faith
requirement is not sufficiently clear. The concept of “good faith” should be familiar to corporate
insiders as it has been a component of Rule 10b5-1 since its adoption two decades ago.203 This
200
See, e.g., letters from AFL-CIO, Better Markets, CII, and NASAA.
201
See letters from Davis Polk, DLA Piper, Dow, Home Depot, and Shearman & Sterling.
202
See letters from Cravath, Fenwick, and PNC.
203
See 2000 Adopting Release, supra note 8.
66
amendment extends this familiar concept from the time of adoption through the duration of the
Rule 10b5-1 plan to better ensure that material nonpublic information does not factor into the
decision to trade under such plans, as it would when, for example, a corporate insider materially
modifies a planned trade at their own direction and to their own benefit,204 based on material
nonpublic information acquired after the plan was entered into. Indeed, a corporate insider would
not be operating a Rule 10b5-1 plan in good faith if the corporate insider, while aware of
material nonpublic information, directly or indirectly induces the issuer to publicly disclose that
information in a manner that makes their trades under a Rule 10b5-1 plan more profitable (or less
unprofitable). In such a scenario, notwithstanding that the Rule 10b5-1 plan may have been
adopted or entered into in good faith, the corporate insider would not be entitled to the
affirmative defense. Moreover, we disagree with commenters who argue that this requirement
will deter adoption of Rule 10b5-1 plans by individuals who do not intend to misuse material
nonpublic information.
Commenters also asked us to clarify whether the obligation to act in good faith would not
be met in other factual settings, such as in the event an issuer halts any trading by insiders under
Rule 10b5-1 plans due to a possible merger, or where it similarly blocks sales transactions after
learning of material nonpublic information that it expects will lead to a decline in the market
price of its securities.205 As we have stated, this amendment relates to activities within the
control of the insider. Accordingly, we agree with the commenter that cancellations directed by
204
A modification of a Rule 10b5-1 plan in an effort to allow the individual to trade on the basis of material
nonpublic information would not constitute acting in good faith. In light of our adoption of a limitation on
multiple plans, however, we anticipate that an individual will generally not be able to engage in any trade under
a Rule 10b5-1 plan following a cancellation of such a plan, and therefore the applicability of the affirmative
defense will not be at issue in that situation.
205
See, e.g., letters from Davis Polk, Shearman (requesting that we clarify that cancellations for legitimate reasons
are not bad faith); and Wilson Sonsini (requesting we clarify that cancellations are not per se bad faith).
67
the issuer where such cancellations are outside the control or influence of the insider may not, by
themselves, implicate the good faith condition.
Finally, we disagree with the commenter who recommended that we instead require good
faith “modification” of a plan as this narrower condition would not address all of our concerns.
For example, as we have noted, efforts to manipulate the timing of releases of corporate
information to benefit an officer’s or a director’s planned trades may not involve a modification
of a plan but would be inconsistent with established notions of good faith. While the condition
that we are adopting would cover such efforts, the commenter’s alternative might not do so.
B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements
Currently, there are no mandatory disclosure requirements concerning the use of Rule
10b5-1 trading arrangements or other trading arrangements by issuers or corporate insiders.206
The lack of comprehensive public information about the use of these arrangements—whether
pursuant to a Rule 10b5-1 plan or otherwise—creates an environment in which it is more
difficult for investors to assess whether those parties may be misusing their access to material
nonpublic information. This lack of transparency may allow improper trading to go undetected
and thereby undermine the deterrent impact of our insider trading laws. In addition, the lack of
public information about the use of these arrangements by corporate insiders limits investors’
ability to assess potential incentive conflicts and information asymmetries when making
investment and voting decisions. Requiring more robust disclosure of particular trading
206
Form 144 (17 CFR 239.144) under the Securities Act contains a representation that is used by a filer of the form
to indicate whether such person has adop
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