SEC Rules - Proposed Changes
2 new rule changes have been proposed by the Securities and Exchange Commission (“SEC”) as further outlined below.
FIRST: Issuer share repurchase
On December 15, 2021, the Securities and Exchange Commission (SEC) proposed a new Rule 13a-21 under the Securities Exchange Act of 1934, as amended (Exchange Act), and corresponding Form SR that would require an issuer to report any repurchase made on or behalf of the issuer or any affiliated purchaser of the issuer’s registered equity securities by the end of the first business day following the day on which the issuer executes the share repurchase. The proposals also purport to expand the disclosure requirements of Item 703 of Regulation S-K by requiring additional disclosures about an issuer’s share repurchases. Finally, the amendments propose issuers to tag information pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-CSR, and Form SR in a structured, machine-readable data language.
Under current rule Section 12 of the Exchange Act, which governs share repurchases, issuers are required to (1) disclose the total number of shares purchased by the issuer or an affiliated purchaser during the relevant period, reported on a monthly basis and by class; (2) the average price paid per share; (3) the total number of shares purchased as a part of a publicly announced share repurchase plan or program; and (4) the maximum number of shares that may yet be purchased under the plan. The rules also mandate footnote disclosure of the key terms of all publicly announced share repurchase plans, the number of shares purchased, other than publicly announced plans, and the nature of the transaction. The proposed rule would mandate a more detailed disclosure schedule for the repurchase of shares by the issuer or an affiliated purchaser.
The proposed rule would require an issuer to furnish a Form SR through the SEC’s EDGAR system within one business day of the execution of the share repurchase and would mandate the disclosure of the following: (1) the date of the repurchase; (2) identification of the class of securities repurchased; (3) the total number of shares repurchased, including all issuer repurchases whether or not made pursuant to publicly announced plans; (4) the average price per share paid; (5) the aggregate total number of shares repurchased on the open market; (6) the aggregate total number of shares repurchased in reliance on the safe harbor in Exchange Act Rule 10b-18; and (7) the aggregate total number of shares repurchased pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act.
The fact that the Form SR would be furnished, rather than filed, means that issuers would not be subject to liability under Section 18 of the Exchange Act for disclosure in the form, nor to liability under Section 11 of the Securities Act of 1933, as amended, unless the issuer expressly incorporates by reference the information in the Form SR into other filings on EDGAR. The SEC believes that the heightened disclosure requirements will enhance transparency and enable investors to more accurately evaluate an issuer’s share repurchases.
The proposed amendments to Item 703 of Regulation S-K would require an issuer to disclose (1) the objective for its share repurchases and the process used to determine the amount of shares repurchased; (2) any policies relating to the purchase or sale of the issuer’s shares by directors or officers, including any restrictions on such transactions; (3) whether the repurchases were made pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and the adoption or termination date of the plan; and (4) whether the repurchases were made in reliance on the non-exclusive safe harbor existing in Rule 10b-18 under the Exchange Act. Additionally, the proposed amendments would require issuers to disclose if any of its directors or officers, who are subject to reporting requirements under Section 16(a) of the Exchange Act, purchased or sold shares of the issuer’s equity securities subject to an issuer share repurchase plan within 10 business days before or after the announcement of such a plan by checking a box before the tabular disclosure of issuer repurchases of equity securities.
The SEC also is proposing to require issuers to tag information disclosed pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-CSR, and Form SR in a structured, machine-readable data language. Specifically, issuers would be required to “tag the disclosures in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.” The stated rationale for requiring disclosure in Inline XBRL is to make disclosures “more readily available and easily accessible” to investors and other market participants, so as to bridge the information gap between issuers and investors.
The proposed amendments to Item 703 of Regulation S-K and the proposed new rule of Exchange Act 13a-21 were announced on the same day as proposed amendments to Rule 10b5-1 regarding trading plans. We recommend companies to consider both of the proposed amendments in conjunction with one another.
SECOND: Insider Trading Plans (Rule 10b5-1)
On December 15, 2021, the Securities and Exchange Commission (SEC) proposed amendments to Rule 10b5-1 to “enhance disclosure requirements and investor protections against insider trading.” The proposed amendments seek to update the requirements for an affirmative defense to insider trading under Rule 10b5-1(c), impose on officers and directors a 120-day cooling-off period before trading may commence under a Rule 10b5-1 plan, prohibit overlapping Rule 10b5-1 trading plans, and limit single-trade Rule 10b5-1 plans to one trading plan for every 12-month period. In addition, the proposed rules require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into Rule 10b5-1 plans and expand the existing good faith requirement for trading under 10b5-1 plans.
Rule 10b5-1 trading plans permit corporate insiders to buy and sell a company’s securities if they are in the possession of material nonpublic information, as long as they establish trading plans that adhere to Rule 10b5-1(c). Under existing Rule 10b5-1, a trading plan must be established in good faith and the insider cannot be in possession of any material nonpublic information at the time such plan is established. The SEC’s proposed amendments to the rules follow on the heels of courts, commentators, and Congress expressing concern that the affirmative defense under Rule 10b5-1(c)(1)(i) has allowed corporate insiders to take advantage of liability protections to trade securities on the basis of material nonpublic information.
Cooling-off Periods
The proposed amendments first seek to require 10b5-1 trading plans entered into by directors or executive officers to include a 120-day mandatory cooling-off period (with a 30-day cooling-off period for issuers), before any trading can commence under any Rule 10b5-1(c)(1) trading arrangement—including any modified trading arrangement. The SEC’s rationale behind implementing the extended cooling-off period is to deter insiders from seeking to capitalize on unreleased material nonpublic information for an upcoming quarter.
Certifications
The SEC proposes to amend Rule 10b5-1(c)(1)(ii) and require directors and officers to certify during the adoption of a Rule 10b5-1 trading arrangement that they are not aware of material nonpublic information and they adopt the trading plan in good faith. The proposed certification would not have to be filed with the SEC, nor would it be an “independent basis of liability” for directors or officers under Section 10(b). Rather, the proposed certification is a means to underscore the importance of the certifiers’ awareness of his or her responsibilities under the rule and the federal securities laws.
Limit on Overlapping and Single Trade Plans
The SEC has proposed restricting multiple overlapping Rule 10b5-1 trading arrangements and single-trade arrangements in order to prevent an individual from circumventing 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 it is publicly released. The proposed rules would eliminate multiple overlapping trading arrangements and limit the availability of the 10b5-1(c) affirmative defense to a trading arrangement designed to cover a single trade for any 12-month period.
Disclosures
Under current rules, issuers are not required to disclose the trading arrangements, or any termination or modification to the arrangements, by directors, officers, or the issuer itself when conducting a share buyback. The proposed rule, amending Item 408(a) of Regulation S-K, would require registrants to disclose quarterly whether the registrant had adopted or terminated any agreement to buy or sell securities of the registrant, provide the material terms of the agreement, and identify how it will satisfy the affirmative defense conditions of 10b5-1(c). These proposed requirements would also apply to a registrant’s directors and officers. The SEC proposes that these potential new disclosures appear in a company’s Form 10-Q and Form 10-K.
Concurrently, the proposed amendment to Regulation S-K 408(b) would require an issuer to disclose in its Form 10-K and proxy and information statements on Schedules 14A and 14C whether or not the issuer has adopted insider trading policies governing the purchase or sale of the registrant’s securities by directors, officers, and employees. Such disclosures also would be subject to the principal executive officer and principal financial officer certifications required under Section 302 of the Sarbanes-Oxley Act.
Moreover, as a response to concerns over whether Rule 10b5-1 trading arrangements are being used to engage in opportunistic insider trading, the SEC proposes to add a Rule 10b5-1(c) box as a mandatory disclosure requirement on Forms 4 and 5. The box would require a Form 4 or 5 filer to indicate whether a sale or purchase reported on that form was made pursuant to a Rule 10b5-1(c) trading arrangement. In addition, filers would be required to provide the date of adoption of the Rule 10b5-1 trading arrangement.
In addition, the SEC is proposing amendments that would require a registrant to disclose an option award made to a director or officer within a certain proximity of the release of material nonpublic information, such as an earnings announcement. Under the current executive compensation disclosure rules, compensation-related equity interests (including options and restricted stock) are required to be presented in a tabular format and accompanied by appropriate narrative disclosure. The proposed new Item 402(x) of Regulation S-K would require the tabular disclosure of option awards that are granted within 14 days before or after the filing of a periodic report, an issuer share repurchase, or the filing of a Form 8-K.
Finally, the proposed amendments would require that gifts of securities to insiders be disclosed on a Form 4 within two business days after the gift is made, rather than 45 days after the issuer’s fiscal year end, as is currently required under Form 5.
Both of these proposed rules are subject to a 45-day comment period.