Insider Trading Arrangements and Related Disclosures

Federal RegisterDec 29, 2022

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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.

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

§ 229.402

Item 408

§ 229.408

Item 601

§ 229.601

Regulation S-T [17 CFR 232.11 through 232.903]

Item 405

§ 232.405

Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78a

et seq.

]

Rule 10b5-1

§ 240.10b5-1

Schedule 14A

§ 240.14a-101

Rule 16a-3

§ 240.16a-3

Form 4

§ 249.104

Form 5

§ 249.105

Form 20-F

§ 249.220f

Form 10-Q

§ 249.308a

Form 10-K

§ 249.310

Table of Contents

I. Introduction

II. Discussion of the Final Amendments

A. Amendments to Rule 10b5-1

1. Cooling-Off Period

2. Director and Officer Certifications

3. Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and Single-Trade Arrangements

4. The Amended Good Faith Condition

B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangement

1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements

2. Disclosure of Insider Trading Policies and Procedures

3. Identification of Rule 10b5-1 and non-Rule 10b5-1 Transactions on Forms 4 and 5

C. Disclosure Regarding Option Grants and Similar Equity Instruments Made Close in Time to the Release of Material Nonpublic Information

1. Proposed Amendments

2. Comments on the Proposed Amendments

3. Final Amendments

D. Structured Data Requirements

1. Proposed Amendments

2. Comments on the Proposed Amendments

3. Final Amendments

E. Reporting of Gifts on Form 4

1. Proposed Amendments

2. Comments on the Proposed Amendments

3. Final Amendments

III. Transition Matters

IV. Other Matters

V. Economic Analysis

A. Broad Economic Considerations

B. Amendments to Rule 10b5-1(c)(1)

1. Baseline and Affected Parties

2. Benefits

3. Costs

4. Effects on Efficiency, Competition, and Capital Formation

5. Reasonable Alternatives

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

1. Baseline and Affected Parties

2. Benefits

3. Costs

4. Effects on Efficiency, Competition, and Capital Formation

5. Reasonable Alternatives

D. Additional Disclosure of the Timing of Option Grants and Related Company Policies and Practices

1. Baseline and Affected Parties

2. Benefits

3. Costs

4. Effects on Efficiency, Competition, and Capital Formation

5. Reasonable Alternatives

E. Additional Disclosure of Insider Gifts of Stock

1. Baseline and Affected Parties

2. Benefits

3. Costs

4. Effects on Efficiency, Competition, and Capital Formation

5. Reasonable Alternatives

VI. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Summary of Comment Letters

C. Summary of Collections of Information Requirements

D. Burden and Cost Estimates Related to the Amendments

VII. Final Regulatory Flexibility Act Analysis

A. Need for, and Objectives of, the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

Statutory Authority

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.”

The securities laws' antifraud prohibitions that proscribe certain insider trading, including Section 10(b) of the Exchange Act,

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 trading

and the fraudulent

misuse of material nonpublic information by corporate insiders

harms not only individual investors but also undermines the foundations of our markets by eroding investor confidence.

Congress has recognized the harmful impact of insider trading on multiple occasions, such as by providing for enhanced civil penalties specifically for insider trading.

Affiliated Ute Citizens of Utah

United States,

406 U.S. 128, 151 (1972); accord

Lorenzo

SEC,

139 S. Ct. 1094, 1103 (2019).

15 U.S.C. 78j(b).

“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).

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).

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

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

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.

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.

At the 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.

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.”

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 nonpublic information.

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.”

Rule 10b5-1(c)(2) provides a separate affirmative defense designed solely for non-natural persons (

e.g.,

entities) that trade.

See

2000 Adopting Release,

supra

note 8.

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

Royer,

549 F.3d 886, 899 (2d Cir. 2008) (applying

Chevron U.S.A., Inc.

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

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).

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”).

See

2000 Release,

supra

note 8, at 51728.

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 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.

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.

To address all of these concerns, we are amending Rule 10b5-1(c)(1) to apply a cooling-off 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 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.

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))

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.

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.

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.”

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 condition.

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.

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.

See

Henderson et al.,

supra

note 19, at 1289.

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”).

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.

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,

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 periods. The Commission proposed a 120-day cooling-off period for officers and directors because such a period would extend beyond the fiscal quarter

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.

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.

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.

See

IAC Recommendations,

supra

note 22 (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).

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 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.

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.

See O'Hagan,

521 U.S. at 651-52;

Chiarella,

445 U.S. at 227;

Steginsky

Xcelera Inc.,

741 F.3d 365, 370 n.5 (2d Cir. 2014);

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).

Finally, some commenters asked the Commission to provide exceptions from the cooling-off 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 unrelated to the trading of securities.

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.

See

letter from Wilson Sonsini.

See

letter from NVCA.

Many commenters opposed a cooling-off period for issuers,

largely due to issuers' use of Rule 10b5-1 plans in connection with share repurchase plans under Exchange Act Rule 10b-18.

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.

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.

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.

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”).

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.

See

letter from Simpson.

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.

See, e.g.,

letters from NYSE and Sullivan.

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.

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.

See, e.g.,

letters from Cravath, Davis Polk, Dow, FedEx, Fenwick, Lewis, NAM, Paul Weiss, Quest, SCG, SIFMA 2, and Wilson Sonsini.

See, e.g.,

letters from BPI, Davis Polk, Cravath, and Wilson Sonsini.

In contrast, other commenters supported a cooling-off period for issuers.

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.

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.

See

letter from NASAA.

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.

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.

In addition, another commenter urged the Commission not to trigger a new cooling-off period upon a modification of a Rule 10b5-1 plan.

See, e.g.,

letters from Chamber of Commerce 2, NAM, SIFMA 2, ABA, Cleary, Cravath, Davis Polk, DLA, Fenwick, and Sullivan.

See, e.g.,

letters from Cravath, Cleary, Davis Polk, and DLA.

See

letter from NAM.

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.

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.

Another commenter suggested that any individual involved in a company's trading program or “corporate decisions” should be subject to the cooling-off requirement.

Two commenters also suggested that we extend the new Item 408(a) reporting obligation to cover any employee who adopts a 10b5-1 plan.

See

letters from Better Markets, NASAA;

see also

letter from Sen. Warren et al. (suggesting the limitation apply to “all employees”).

See

letter from NASAA.

See

letter from ICGN.

See

letters from BrilLiquid LLC (“BrilLiquid”) and NASAA.

Other commenters opposed any expansion of the amendments beyond directors and Rule 16a-1(f) officers.

Some of these commenters agreed with our observation that these officers were those most likely to have access to material nonpublic information.

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.

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 securities.

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.

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.

See

letters from Chamber of Commerce 2, CII, Cravath, Davis Polk, NAM, SCG, and SIFMA.

See

letters from CII, Cravath, and SIFMA.

See

letters from Cravath and Davis Polk.

See

letter from Davis Polk.

See

letters from Chamber of Commerce 2 and NAM.

See

letter from Davis Polk.

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))

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.

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.

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 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).

The good faith requirement in Rule 10b5-1(c)(1)(ii) will continue to apply as a condition of the affirmative defense.

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.

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.

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.”

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.

See, e.g.,

letters from AFL-CIO, CII, and Manulife.

See supra

note 35 and accompanying text.

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).

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 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.

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).

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.

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 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.

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.

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.

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

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).

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.

106

See SEC

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.

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 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

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).

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 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.

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 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.

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 cooling-off 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.

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 10b5-1.

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 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.

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 240.16a-3(g)(4).

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 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.

118

See

letters from Better Markets, NASAA, and Senator Warren et al.

119

See

letters from Chamber of Commerce 2 and NAM.

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 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.

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 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.

121

See supra

note 69.

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 cooling-off 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

122

See

2000 Adopting Release,

supra

note 8, at 51718 n 111.

123

See

letter from NAM.

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

124

See supra

note 71 and accompanying text.

125

See, e.g., McCormick

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

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

Ilikon Corp.,

361 F.2d 260, 266-68 (1st Cir. 1966);

Levinson

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

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

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).

2. Director and Officer Certifications

a. Proposed Amendments

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.

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.

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

Levinson,

485 U.S. 224, 231 (1988) (quoting and applying

TSC Industries, Inc.

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

SEC,

463 U.S. 646, 653-54 & n.12 (1983);

SEC

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 SEC. 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

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.

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).

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 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.

144

See

Proposing Release at 8689.

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

Exchange Act Section 20(d) (liability for trading “while in possession of” material nonpublic information) [15 U.S.C. 78t(d)].

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 suggested by several commenters.

146

See, e.g.,

letters from Cravath, DLA, Kirkland, Shearman, and Sullivan.

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

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)].

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 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

Proposing Release,

supra

note 23, at 8692 (request for comment number 13).

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 preserve the benefits of flexibility for plan participants with respect to such plans.

150

However, the Supreme Court has explained that lower courts “should consider the extent to which an ERISa-based 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

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.

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.

151

See

Gaming the System,

supra

note 20;

see also infra

Section V.B.

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, such as gifts and estate-planning transactions, and that directors and officers are the group most likely to have material nonpublic information.

154

152

See, e.g.,

letters from AFL-CIO, Better Markets, CO PERA, MD Bar, NYCC, NASAA, and Public Citizen.

153

See

letter from Kirkland.

154

See, e.g.,

letters from SIFMA 3 and Sullivan.

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, estate-planning 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

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.

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 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

160

See, e.g.,

letters from Fenwick, HP, Monday.com, SCG, Sullivan, and Wilson Sonsini.

161

See, e.g.,

letters from BioNJ, Monday.com, and Simpson Thatcher.

162

See, e.g.,

Sullivan and Wilson Sonsini.

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.

163

See

letters from Better Markets, CII, and CO PERA.

164

See

letter from NASAA.

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

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.

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.

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.

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

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.

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

See, e.g.,

letters from Manulife, Cravath, NAM, and Cleary.

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.

173

See

letters from Sullivan and SIFMA 3.

174

See

Proposing Release at 23; letters from CII, Cravath, and SIFMA.

Accordingly, we disagree with those commenters who suggested that trades by individuals other than officers and directors would not affect the integrity of securities 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.

175

See

letters from Cravath and Davis Polk.

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 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.

176

See

letters from Chamber of Commerce 2 and NAM.

177

See

letter from Davis Polk.

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.

178

See

letter from NASAA.

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 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 10b5-1(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 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 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 later-commencing 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.

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 (“later-commencing plan”) is not authorized to begin until after all trades under the other contract, instruction, or plan (“earlier-commencing plan”) are completed.

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 later-commencing 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.”

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 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

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)].

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 sell-to-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 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.

182

See supra

note 161.

In addition, we are not adopting the proposed limitation on multiple plans and single-trade 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 single-trade plan if the person had not, during the preceding 12-month period, adopted another single-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.

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.

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 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

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.

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.

188

See

letters from Sullivan, SIFMA 3 and NVCA.

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 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 single-trade 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.

189

See

letter from NASAA.

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 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.

190

See

Proposing Release,

supra

note 23, at 8693.

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 compliance programs of issuers.

194

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.

194

See

letter from O'Reilly.

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.

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.

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 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

See, e.g.,

letters from AFL-CIO, Better Markets, CII, and NASAA.

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.”

201

See

letters from Davis Polk, DLA Piper, Dow, Home Depot, and Shearman & Sterling.

202

See

letters from Cravath, Fenwick, and PNC.

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 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,

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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.

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See

2000 Adopting Release,

supra

note 8.

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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.

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.

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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 the issuer where such cancellations are outside the control or influence of the insider may not, by themselves, implicate the good faith condition.

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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).

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.

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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 arrangements should reduce potential abuse of the rule, and inform investors and the Commission regarding potential violations of Rule 10b-5.

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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 adopted a written trading plan or given trading instructions to satisfy Rule 10b5-1. Form 144 is a notice form that must be filed with the Commission by an affiliate of an issuer who intends to resell restricted or “control” securities of that issuer in reliance upon Securities Act Rule 144 (17 CFR 230.144). In 2002, the Commission proposed amendments to Form 8-K that, among other things, would have required registrants to report on the form any adoption, modification or termination of a Rule 10b5-1 trading arrangement by any director and certain officers of the regist

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