September 11, 2023 (updated November 10, 2023)

New SEC disclosure requirements on Rule 10b5-1 trading plans and share buybacks, together with accounting guidance on spring-loaded awards, should prompt public companies — including foreign private issuers (FPIs) — to refresh their equity grant timing and insider trading policies or adopt formal policies if they don’t have them. A refresh is warranted because the disclosures will spotlight when companies grant stock awards in close proximity to the release of material nonpublic information (MNPI) and when executives and directors trade in company stock in close proximity to company stock buybacks. The disclosures are designed to address concerns that executives and directors are benefiting from MNPI and are mandated whether or not executives or directors enter into trading plans and whether or not a company implements a share repurchase program. (Note: A U.S. appeals court is reviewing the buyback rule and, unless the SEC can address concerns raised, it may not go into effect.)

Securities laws prohibit trading in company stock on the basis of MNPI. A trader need not have “relied on” or “used” the information in making the trade; mere “awareness” is sufficient to create liability. To facilitate trading by insiders (large shareholders, officers and directors) and other individuals who are often in possession of MNPI, Rule 10b5-1 under the Securities Exchange Act of 1934 provides an affirmative defense to a charge of insider trading for trades made under a written plan that meets certain requirements and is established before the individual became aware of MNPI.

After years of concerns that insiders were using trading plans to achieve above-market returns, the SEC amended Rule 10b5-1 to impose new conditions for the affirmative defense and to require disclosures around insider use of trading plans and company policies on insider trading and equity grant timing. SEC staff compliance and disclosure interpretations issued August 25, 2023 clarify the new requirements.

The new requirements for the affirmative defense to be available include:

• A cooling-off period before the first trade after a plan is adopted or modified
• Certifications by directors and officers when adopting or modifying a plan that they are acting in good faith and aren’t in possession of MNPI
• Limits on multiple overlapping plans and single-trade plans

For more information on these amendments and the disclosures described below, see Executive and director trading under new SEC Rule 10b5-1.

Some of the disclosure requirements are already in effect while others are pending.

In effect. Under the amended rule, companies must disclose the following information when insiders use 10b5-1 trading plans:

_{^*Disclosure of termination of a plan isn’t required if the plan ends due to its expiration or completion.}

Also, bona fide gifts must be reported within two business days on Form 4 on or after April 1, 2023 (previously, gifts were reported on Form 5, which is due 45 days after the fiscal year end).

Pending. Several disclosures required in 2025 will highlight company policies on insider trading and stock option grants in close proximity to the release of MNPI whether or not the company’s officers or directors use 10b5-1 trading plans. These disclosures will cover 2024 grants (which typically occur in February for calendar-year companies) so they should be top-of-mind for compensation committees. They supplement existing requirements to describe policies and practices for the timing and pricing of stock option grants and other equity awards in the proxy statement’s Compensation Discussion & Analysis (CD&A).

The option grant table will show the following information for each grant to NEOs in the last completed fiscal year within four business days before or one business day after the applicable filing:

The popularity of share buybacks continues to spark controversy about the practice and its effect on executive pay and corporate governance. Critics of share repurchases claim resulting stock price increases may be temporary, and warn that buybacks encourage executive short-term thinking, create opportunities for stock price manipulation, and limit long-term growth. 

The new SEC buyback rule is currently under review by an appeals court but, if it takes effect, it requires increased reporting of share repurchases in exhibits to quarterly and annual filings, including the following table showing daily repurchase activity and narrative disclosure of the objective of share repurchases, and the process and criteria for determining repurchase amounts: 

These disclosures are required beginning with the first 10-Q or 10-K filing that covers the first full fiscal quarter beginning on or after October 1, 2023. For calendar-year companies, this means the first disclosures will be in the Form 10-K for the year ending December 31, 2023, with such disclosure covering repurchase activities that occurred in the fourth quarter of 2023. FPIs have until the first full fiscal quarter that begins on or after April 1, 2024 to make the disclosures on new Form F-SR.

In addition, to address concerns that insider trading during (or in close proximity to) a repurchase program may unfairly benefit executives, the rule also requires the following 2024 disclosures:

SEC Staff Accounting Bulletin No. 120 provides guidance about the proper recognition and disclosure of compensation cost for “spring-loaded” awards made to executives. Spring-loaded awards are where a company “grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or a significant transaction.” Under the guidance, companies must consider the impact of the release of the MNPI on the share price and reflect the estimated additional value given to recipients in the compensation cost as shown on the company’s financial statements and the Summary Compensation Table and Grants of Plan-based Awards Table in the proxy statement. The SEC will closely scrutinize spring-loaded grants that aren’t routine (e.g., prescheduled annual grants). 

In light of these developments, companies should refresh their policies on insider trading and equity grant timing or adopt formal policies if they don’t have them. 

Most companies have formal insider trading policies that permit trading only during designated “window” periods or stipulate “blackout” periods when trading is prohibited. Under either approach, insiders typically can’t trade shortly before and for several days after the release of the company’s quarterly or annual financial results. A policy may also permit insiders and other key employees to trade only under a Rule 10b5-1 trading plan or require them to preclear their trades with a designated compliance officer to ensure that an inadvertent violation doesn’t occur. Regardless of whether a trading window is open or a blackout period is in effect, an individual who possesses MNPI must refrain from trading until the information becomes public or is no longer material.

Companies should take the following steps to comply with (or avoid where possible) the pending 10b5-1 and share buyback disclosures and to ensure trades by insiders are consistent with the new conditions for the Rule 10b5-1 affirmative defense:

• Review their trading policy for alignment with best practices and revise as appropriate (or adopt a policy if they don’t have one); for example, consider whether to:
  
  • Prohibit purchases and sales of company stock by insiders within four business days before or after the announcement of a repurchase program if the buyback rule takes effect
  • Continue to require, if applicable, that insiders trade only through Rule 10b5-1 plans if the new conditions are too inflexible and the company has preclearance procedures or other controls sufficient to prevent opportunistic trading.
• Document, communicate to insiders, and enforce the enhanced conditions for using Rule 10b5-1 trading plans
  
  
• Assess the adequacy of the company’s controls and procedures for tracking the use of Rule 10b5-1 trading plans and insider transactions, including trades under 10b5-1 trading plans, trades in close proximity to or during a repurchase program (if permitted), and bona fide gifts
  
  
• Draft pro forma disclosures describing the policy in preparation for inclusion in SEC filings

It’s a good governance practice to adopt an equity grant policy that, among other things, specifies the timing of annual and off-cycle grants. The chief benefit of a formal policy is that grants made under a pre-established process shouldn’t be affected by the possession of MNPI.

Currently, the two most prevalent approaches are to make annual grants as follows:

• At the same compensation committee meeting each year (e.g., February meeting) that the awards are approved (assuming the meeting date is scheduled in advance) or

• A specified number of days following the company's release of earnings for the completed quarter/year following the committee meeting at which grants are approved

For off-cycle grants (e.g., new hire, promotion, and retention awards), the policy will typically specify monthly or quarterly dates for approval, particularly for grants to non-executives. Companies sometimes make exceptions to this cadence to recruit or retain key executives or other employees.

To prepare for the pending 10b5-1 and share buyback disclosures, and considering the 2021 SEC staff accounting guidance, companies should:

• Review their equity grant policy (or adopt a policy if they don’t have one) for alignment with best practices and revise as appropriate; for example, consider:
  • Prohibiting granting awards within four days before or one day after filing of any Form 10-Q or 10-K or a Form 8-K with MNPI
  • Limiting off-cycle grants to open window periods and/or require preclearance by legal and finance to confirm there’s no planned release of market moving information that could impact an award’s grant date value
• Draft pro forma disclosures describing the policy in preparation for inclusion in SEC filings