Insider Trading Enforcement In 2022

• Published date: 11 May 2023
• Subject Matter: Corporate/Commercial Law, Criminal Law, Compliance, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Jones Day
• Author: Mr Henry Klehm III, Kevin Comeau, James P. Loonam, Joan McKown, David Peavler, Brian C. Rabbitt, Bethany Biesenthal, James Burnham, Scott Brady, Shireen Matthews, Theodore Chung, Shirlethia V. Franklin, W. Anders Folk, Louis P. Gabel, Rasha Gerges Shields, Adam Hollingsworth, Justin Herdman, Karen Hewitt, James T. Kitchen, Andrew E. Lelling, Sarah L. Levine, Cristina Pérez Soto, Kayla J. Quigley, Jeff Rabkin, Joshua B. Sterling, Neal Stephens, Jayant W. Tambe, Jason S. Varnado, Alexander Wilson and Hank Walther

LEGAL DEVELOPMENTS IN 2022

Amendments to Rule 10b5-1 Trading Plans & Disclosures

On December 14, 2022, the SEC adopted new requirements for so-called "10b5-1 plans" that act as an affirmative defense to insider trading allegations for senior executives.¹ Given the growth of equity compensation as a portion of total executive compensation in recent decades, companies and executives rely on 10b5-1 plans to sell company securities in a manner designed to prevent insider trading. For almost as long as 10b5-1 plans have existed, regulators and industry analysts have expressed concern that corporate insiders have manipulated the rules to their benefit. Specifically, these concerns related to insiders (i) entering into multiple, overlapping trading plans; (ii) entering into plans that become effective soon after adoption and in advance of corporate news; and (iii) opportunistically entering into plans contemplating a single transaction. The new rules come after a year-long review by the SEC and a 10b5-1 trading sweep from the DOJ and the SEC earlier in 2022.

Exchange Act Rule 10b5-1 provides issuers and corporate insiders with an affirmative defense to insider trading claims if a person trades'subject to certain conditions'pursuant to a binding contract, an instruction to another to execute the trade for the person's account, or a written plan, in each case adopted in good faith and when the person is not aware of material nonpublic information ("MNPI"). The new rules impose a variety of new conditions on trading plans intended to satisfy the affirmative defense offered by Rule 10b5-1. Among other new requirements, plans for officers and directors may not become effective until the later of (i) two business days after the issuer files a Form 10-Q or 10-K or (ii) 90 days. At the time of adoption, directors and officers must certify that they are not aware of MNPI related to the issuer and that they are adopting the plan in good faith. And no person except an issuer can have multiple, temporally overlapping plans, though the rules exempt qualified "sell-to-cover" transactions to satisfy tax withholding arising from equity award vesting where the individual does not exercise timing control.

The final rules also impose on issuers more frequent and comprehensive disclosure requirements related to directors' and officers' use of Rule 10b5-1 plans, issuer insider trading policies, and issuer grants of certain equity compensation awards. For more information regarding...