SEC Issues Proposed Rules on Stock Repurchases and Rule 10b5-1 Plans and Insider Trading

ESG Collaborative Update

Date: December 15, 2021

During 2021, the SEC has placed a much greater focus on environmental, social and governance (ESG) issues than in the past, to the degree that issues traditionally considered compliance areas, such as insider trading and stock repurchases, are now falling under the ESG umbrella. In addition, climate-based and other ESG rulemaking has been a top priority on the SEC’s agenda during 2021.

Today the SEC kicked off its ESG rulemaking by issuing proposed rules regarding stock repurchases and Rule 10b5-1 plans and insider trading. Comments are due on both proposals within 45 days after publication in the Federal Register.

In light of these proposed changes, companies should begin reviewing their controls and procedures to incorporate these changes, especially as they relate to equity grants and insider trading policies, plans and practices.

Company Stock Repurchases

Companies often repurchase their outstanding equity securities (also referred to as buybacks) through a variety of methods, including open market purchases and private transactions. The proposed rules would require more frequent and detailed disclosures regarding such buybacks, as well as iXBRL tags for certain information.

  • Form SR: The proposed rules would create a new Form SR, which would provide daily detail regarding purchases of any class of registered equity securities made by or on behalf of a company or an affiliate. The company would need to furnish a new Form SR by the end of the first business day following any share repurchase transaction. Among other things, Form SR would disclose the total number of shares repurchased (even if not purchased pursuant to a publicly announced plan or program); the average price paid per share; and the aggregate total number of shares purchased (i) on the open market, (ii) in reliance on Rule 10b-18 (a safe harbor for buybacks), and (iii) pursuant to a Rule 10b5 1 plan (which are described further below).
  • Additional disclosures in Forms 10-K and 10-Q: Item 703 of Regulation S-K would be revised to require additional information regarding buybacks in annual and quarterly reports on Forms 10-K and 10-Q, as applicable, including the objective or rationale for the buybacks and the process or criteria used to determine the amounts repurchased; any policies and procedures, including any restrictions, relating to transactions by officers and directors during a repurchase program; and whether the repurchases were made pursuant to a Rule 10b5-1 plan (and, if so, the date of the plan’s adoption or termination) and/or in reliance on Rule 10b-18. A check box would also be added above the Item 703 share repurchase table, indicating whether any officers or directors purchased or sold securities that are the subject of a repurchase plan or program within 10 business days before or after the announcement of such plan or program.
Rule 10b5-1 Trading Plans, Insider Trading Policies and Section 16 Beneficial Reporting Changes

Rule 10b5-1 is a safe harbor established to allow company insiders to trade shares during trading blackouts pursuant to a written plan adopted while not in possession of material non-public information. In light of concerns regarding potential abuse of such plans, the proposed amendments to Rule 10b5-1 are intended to enhance disclosure requirements and investor protections against insider trading.

Proposed amendments to Rule 10b5-1 include:

  • Cooling-off period: New or modified 10b5-1 trading plans adopted by directors and officers would need to include a 120-day “cooling-off” period (lengthier than waiting periods under current “best practices”), while new or modified 10b5-1 stock repurchase plans adopted by companies would need to include a 30-day cooling-off period. In either case, trades under the plan could not begin until after the end of the applicable cooling-off period.
  • Prohibition on overlapping plans: The Rule 10b5-1 safe harbor would not be available for multiple, overlapping 10b5-1 plans covering open market trades in the same class of securities.
  • Limitations on single-trade plans: The Rule 10b5-1 affirmative defense for a single-trade plan would be limited to only one such plan per 12-month period.
  • D&O certifications: When adopting a new or modified 10b5-1 plan, directors and officers would be required to provide a written certification to the company indicating (i) they are not aware of material non-public information about either the company or the security (which represents an expansion of the current Form 144 requirement) and (ii) they are adopting the plan in good faith.
  • Good faith requirement: Rule 10b5-1 would now require any such plan be “operated” in good faith.

The proposed rules would also impose new disclosure requirements regarding insider trading policies and procedures, option grants and Rule 10b5-1 and other trading arrangements. Some of the proposed disclosures would require iXBRL tags.

  • Insider trading policies and procedures: Companies would be required to disclose whether or not (and if not, why not) they have adopted insider trading policies and procedures in their annual report on Form 10-K/proxy statement. Any such policies and procedures would also need to be disclosed.
  • Option grants: In light of concerns relating to “spring-loaded” option grants, companies would be required to include, as part of their compensation disclosures in their annual report on Form 10-K/proxy statement, (i) a description of their option grant policies and practices and (ii) a new table providing certain information about option grants made within 14 calendar days of the release of material non-public information.
  • 10b5-1 plan adoption or termination: Information regarding the adoption, modification or termination, and material terms of any Rule 10b5-1 or other trading arrangements by directors, officers or companies would be required in Forms 10-Q (under Item 5. Other Information) and 10-K (under Item 10. Directors, Executive Officers and Corporate Governance).
  • Section 16 changes: Forms 4 and 5 would include a mandatory check box indicating whether transactions were made pursuant to a Rule 10b5-1 plan and the date of adoption of the plan; they would also include an optional check box indicating whether the transactions were made pursuant to any other trading arrangement. In addition, gift transactions would be required to be reported on Form 4 within two business days (rather than being permitted to be included on a Form 5).
FOR MORE INFORMATION

For more information, please contact:

Jurgita Ashley
216.566.8928
Jurgita.Ashley@ThompsonHine.com

Julia Miller
216.566.5831
Julia.Miller@ThompsonHine.com

or another member of our Securities, Capital Markets & Corporate Governance team. For ESG matters, please contact a member of our ESG Collaborative.

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