How narrow will the 10b5-1 safe harbor get? Business community calls for major changes to SEC proposals | Bryan Cave Leighton Paisner

The comment period for the SEC proposed amendments to Rule 10b5-1 expired on April 1, 2022. A review of some representative submissions generally showed strong support from institutional and retail investors. In contrast, the business community – including trade groups, public companies and law firms – generally opposed the key elements as presented and proposed specific changes.

As discussed in our December 16 Customer Alertproposed changes would include:

  • Cooling off periods for insiders (120 days) and companies (30 days) following the adoption and modification of the Rule 10b5-1 plan
  • Prohibition of accumulation of plans
  • Only one unique exchange plan (bullet) every 12 months
  • Certification by insiders that they have no knowledge of material nonpublic information (MNPI)
  • Good Faith Requirement for the Operation of Trading Plans
  • Enhanced issuer disclosure requirements for trading plans and transactions, equity issuance policies and transactions, and insider trading policies

Support from the investment community

As expected, institutional and retail investors and investor groups, such as Institutional Investors Council, New York Comptroller’s Office and Colorado PERAas well as groups such as NASAAA, AFL-CIO and public citizen, applauded the proposals and generally refrained from suggesting changes, other than a few recommendations for disclosing adoption or termination of plans on Form 8-K instead of Form 10-Q. Suggestions included the following:

  • NASAA recommended extending the 120-day cooling-off period to all trade deals (not just insider trade deals), including those of rank-and-file employees and issuers
  • NASAA also recommended extending the prohibition on overlapping plans to agreements involving all of the issuer’s equity securities and derivatives, including warrants and options; and completely eliminate chipped plans from the Safe Harbor
  • Charles Morris — Greenhouse Fund proposed that the SEC consider a different form of Section 16 filing (e.g., a Form 4A or 4X) for non-10b5-1 transactions so that they can be more easily identified, believing that such transactions “opportunistic” (compared to planned trades) provides more useful information to other investors for signaling purposes.

Changes Proposed by Corporate Advisors and Groups

The business community raised a number of specific and detailed objections to key aspects of the proposal, noting that creating binding requirements to rely on Safe Harbor Rule 10b5-1(c) could reduce the usefulness of the safe harbor. Commentators included the ABA Securities Regulatory Committee, SIFMA, Society for Corporate Governance, United States Chamber of Commerce, NYSE and 383 listed companies and National Association of Manufacturers (NAM)and a number of law firms, public companies and other organizations. Several comments noted that the concerns cited in the proposed version could be addressed through enforcement action under existing law without reducing the usefulness of Safe Harbor in general. Although the opinions of commentators varied, the recommendations included:

  • Reduce the proposed cooling-off period to 120 days, with alternatives ranging from 30 to 45 days, or the shorter of 45 or 60 days and one or two business days after the next earnings release, or no cooling-off period at all ( one commenter suggested no cooling-off period when plans are concluded within five days of earnings release)
    • A number of proposed exclusions for employee benefit plan and certain other types of transactions that do not present the potential for abuse
    • A number insisted that only material changes trigger a new cooling off period
    • Some have suggested excluding issuer-imposed suspensions
  • Eliminate any cooling-off period for transmittersnoting the lack of any supporting evidence of abuse and concerned that the requirement interferes with legitimate buyout activity
    • Alternatively, reduce the reflection period – for example, to ten days or two weeks
    • If an issuer cooling-off period is adopted, some commentators have proposed excluding accelerated share buy-back (ASR) programs and other OTC transactions, as well as immaterial amendments or modifications to plans
  • Do not extend any cooling-off period to employees who are not officers and directors, as they may have more limited financial resources and are less likely to have access to MNPI
  • Clarify and/or reduce proposed restriction on overlapping plans
    • It’s not clear that a ban is really necessary, as overlapping plans that result in ineligible hedges are already prohibited, and it’s unclear how overlapping plans can be used to circumvent cooling-off periods – especially in the case of transmitter plans
    • Alternatively, the SEC could limit the prohibition on overlapping plans to those contemplating transactions that would offset, in whole or in part, transactions under another Rule 10b5-1 plan.
    • Clarify that the prohibition would not apply to the adoption of a new plan while an existing plan is in effect as long as no trading can begin under the new plan until the existing plan has expired
    • Clarify that the ban would only apply to the extent that the plans contemplate potential business activity on the same day
    • If adopted, exclude legitimate agreements that do not create the potential for abuse, such as hedging and net equity holdback agreements; separate stock pools managed by different brokers; gifts, estate planning transactions and derivatives; and certain benefit transactions, such as ESPPs
    • Allow issuers to make simultaneous 10b5-1 or 10b-18 redemptions at the same time as an ASR
  • Clarify or eliminate the proposed 12-month ban on single business arrangements
    • It is not clear that a ban is really necessary with a ban correctly defined on several overlapping planes
    • If adopted, should exclude issuers and only apply to directors and executive officers
    • Should exclude employee benefit plans such as sale to cover and withholding tax
    • Relax to allow one transaction per quarter or two transactions per year
  • Eliminate certification and related record keeping requirements as they are unnecessary and burdensome, thus discouraging the use of 10b5-1 plans
    • The proposal duplicates existing legal requirements (i.e. the plan cannot be adopted while in MNPI’s possession) and imposes an administrative burden with no corresponding legal benefit
    • Executing brokers usually already require equivalent representations
    • If adopted, the representations could instead be included as part of the Form 4 filing; or required as part of any written safe harbor based business plan
    • Should explicitly provide that certification does not establish an independent basis of liability
  • Eliminate the proposed new requirement that the plan be “operated in good faith”
    • Too vague and ambiguous; creates uncertainty about the behavior intended to be outlawed
    • The cooling-off period would already address any concerns about terminating or changing plans; a corporate disclosure decision is unlikely to be considered to result from an insider’s failure to act in good faith
  • Quarterly disclosure requirement should be removed or clarified
    • Proposal duplicates Form 4 filings
    • If adopted, issuers should be allowed to exclude dates, prices, share amounts or other economic conditions to prevent front-running or other market manipulation.
  • Requirement for annual disclosure of insider trading policies should be removed or simplified
    • Would not provide useful information to investors
    • If passed, should allow issuers to simply reference their corporate website or attach as an attachment to the filing, similar to the code of ethics
    • Alternatively, should require disclosure by an issuer only if it doesn’t an insider trading policy
  • The requirement to disclose the timing of grants of options and similar equity instruments should be removed
    • Significantly duplicates other disclosure requirements
    • Following the adoption of the SAB 120, spring loading or dodging bullets is no longer problematic; unnecessary and unduly cumbersome rule-making, with potential inappropriate implication of abusive subsidy activity
    • If adopted, should reduce duration of coverage window

Pushing back on SEC stance on securities donations

As stated in our December 16 Customer Alertthe SEC included in its proposals a caveat regarding the timing of securities donations. Some commentators strongly objected to the SEC’s warning, noting the lack of any court or SEC precedent for its position, and its failure to explain the circumstances in which a charitable donation would involve a fraudulent breach of trust. Instead, a donor should be able to avoid insider trading liability by obtaining an undertaking from the charitable donee not to dispose of the securities until any MNPI known to the donor at the time of the donation has become public or obsolete.

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