[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Rules and Regulations]
[Pages 80362-80432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27675]



[[Page 80361]]

Vol. 87

Thursday,

No. 249

December 29, 2022

Part III





 Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 229, 232, 240, et al.





Insider Trading Arrangements and Related Disclosures; Final Rule

  Federal Register / Vol. 87 , No. 249 / Thursday, December 29, 2022 / 
Rules and Regulations  

[[Page 80362]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 232, 240, and 249

[Release Nos. 33-11138; 34-96492; File No. S7-20-21]
RIN 3235-AM86


Insider Trading Arrangements and Related Disclosures

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: We are adopting amendments to the rule under the Securities 
Exchange Act of 1934 (``Exchange Act'') that provides affirmative 
defenses to trading on the basis of material nonpublic information in 
insider trading cases. The amendments add new conditions to this rule 
that are designed to address concerns about abuse of the rule to trade 
securities opportunistically on the basis of material nonpublic 
information in ways that harm investors and undermine the integrity of 
the securities markets. We are also adopting new disclosure 
requirements regarding the insider trading policies and procedures of 
issuers, the adoption and termination (including modification) of plans 
that are intended to meet the rule's conditions for establishing an 
affirmative defense, and certain other similar trading arrangements by 
directors and officers. In addition, we are adopting amendments to the 
disclosure requirements for director and executive compensation 
regarding equity compensation awards made close in time to the issuer's 
disclosure of material nonpublic information. Finally, we are adopting 
amendments to Forms 4 and 5 to require filers to identify transactions 
made pursuant to a plan intended to meet the rule's conditions for 
establishing an affirmative defense, and to require disclosure of bona 
fide gifts of securities on Form 4.

DATES: 
    Effective date: The final rules are effective on February 27, 2023.
    Compliance dates: See Section III for further information on 
transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, Office 
of Rulemaking, at (202) 551-3430, Division of Corporation Finance, 100 
F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are amending:

------------------------------------------------------------------------
          Commission reference                CFR citation (17 CFR)
------------------------------------------------------------------------
Regulation S-K [17 CFR 229.10 through
 229.1305]
    Item 402...........................  Sec.   229.402
    Item 408...........................  Sec.   229.408
    Item 601...........................  Sec.   229.601
Regulation S-T [17 CFR 232.11 through
 232.903]
    Item 405...........................  Sec.   232.405
Securities Exchange Act of 1934
 (Exchange Act) [15 U.S.C. 78a et seq.]
    Rule 10b5-1........................  Sec.   240.10b5-1
    Schedule 14A.......................  Sec.   240.14a-101
    Rule 16a-3.........................  Sec.   240.16a-3
    Form 4.............................  Sec.   249.104
    Form 5.............................  Sec.   249.105
    Form 20-F..........................  Sec.   249.220f
    Form 10-Q..........................  Sec.   249.308a
    Form 10-K..........................  Sec.   249.310
------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Discussion of the Final Amendments
    A. Amendments to Rule 10b5-1
    1. Cooling-Off Period
    2. Director and Officer Certifications
    3. Restricting Multiple Overlapping Rule 10b5-1 Trading 
Arrangements and Single-Trade Arrangements
    4. The Amended Good Faith Condition
    B. Additional Disclosures Regarding Rule 10b5-1 Trading 
Arrangement
    1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 
Trading Arrangements
    2. Disclosure of Insider Trading Policies and Procedures
    3. Identification of Rule 10b5-1 and non-Rule 10b5-1 
Transactions on Forms 4 and 5
    C. Disclosure Regarding Option Grants and Similar Equity 
Instruments Made Close in Time to the Release of Material Nonpublic 
Information
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Amendments
    D. Structured Data Requirements
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Amendments
    E. Reporting of Gifts on Form 4
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    3. Final Amendments
III. Transition Matters
IV. Other Matters
V. Economic Analysis
    A. Broad Economic Considerations
    B. Amendments to Rule 10b5-1(c)(1)
    1. Baseline and Affected Parties
    2. Benefits
    3. Costs
    4. Effects on Efficiency, Competition, and Capital Formation
    5. Reasonable Alternatives
    C. Disclosure of Trading Arrangements and Policies and 
Procedures in New Item 408 of Regulation S-K and Mandatory Rule 
10b5-1 Checkbox in Amended Forms 4 and 5
    1. Baseline and Affected Parties
    2. Benefits
    3. Costs
    4. Effects on Efficiency, Competition, and Capital Formation
    5. Reasonable Alternatives
    D. Additional Disclosure of the Timing of Option Grants and 
Related Company Policies and Practices
    1. Baseline and Affected Parties
    2. Benefits
    3. Costs
    4. Effects on Efficiency, Competition, and Capital Formation
    5. Reasonable Alternatives
    E. Additional Disclosure of Insider Gifts of Stock
    1. Baseline and Affected Parties
    2. Benefits
    3. Costs
    4. Effects on Efficiency, Competition, and Capital Formation
    5. Reasonable Alternatives
VI. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of Comment Letters
    C. Summary of Collections of Information Requirements
    D. Burden and Cost Estimates Related to the Amendments
VII. Final Regulatory Flexibility Act Analysis
    A. Need for, and Objectives of, the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
    Statutory Authority

I. Introduction

    Congress enacted the Federal securities laws to promote fair and 
transparent securities markets, ``avoid[ ] frauds,'' and ``substitute a 
philosophy of full disclosure for the philosophy of caveat emptor and 
thus to achieve a high standard of business ethics in the securities 
industry.'' \1\ The securities laws' antifraud prohibitions that 
proscribe certain insider trading, including Section 10(b) of the 
Exchange Act,\2\ play an essential role in maintaining the fairness and 
integrity of our securities markets. The Securities and Exchange 
Commission (the ``Commission'') has long recognized that insider 
trading \3\ and the fraudulent

[[Page 80363]]

misuse of material nonpublic information by corporate insiders \4\ 
harms not only individual investors but also undermines the foundations 
of our markets by eroding investor confidence.\5\ Congress has 
recognized the harmful impact of insider trading on multiple occasions, 
such as by providing for enhanced civil penalties specifically for 
insider trading.\6\
---------------------------------------------------------------------------

    \1\ Affiliated Ute Citizens of Utah v. United States, 406 U.S. 
128, 151 (1972); accord Lorenzo v. SEC, 139 S. Ct. 1094, 1103 
(2019).
    \2\ 15 U.S.C. 78j(b).
    \3\ ``Insider trading'' as used in this release refers to the 
purchase or sale of a security of any issuer, on the basis of 
material nonpublic information about that security or issuer, in 
breach of a duty of trust or confidence that is owed directly, 
indirectly, or derivatively, to the issuer of that security or the 
shareholders of that issuer, or to any other person who is the 
source of the material nonpublic information. See Rule 10b5-1(a).
    \4\ We use the terms ``insider'' and ``corporate insider'' in 
this release to refer to persons (other than issuers) for whom the 
purchase or sale of a security of any issuer, on the basis of 
material nonpublic information about that security or issuer, would 
represent a breach of a fiduciary duty or a duty of trust or 
confidence that is owed directly, indirectly, or derivatively, to 
the issuer of a security or the shareholders of that issuer, or to 
any other person who is the source of the material nonpublic 
information. See Rule 10b5-1(a).
    \5\ See In re Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638, 
at *4 n. 15 (1961) (``A significant purpose of the Exchange Act was 
to eliminate the idea that the use of inside information for 
personal advantage was a normal emolument of corporate office.''); 
see also United States v. O'Hagan, 521 U.S. 642, 658 (1997) (The 
insider trading prohibition is consistent with the ``animating 
purpose'' of the Federal securities laws: ``to insure honest 
securities markets and thereby promote investor confidence.'')
    \6\ See Insider Trading Sanctions Act of 1984, Public Law 98-
376, 98 Stat. 1264; Insider Trading and Securities Fraud Enforcement 
Act of 1988, Public Law 100-704, 102 Stat. 4677, codified at Section 
21A of the Exchange Act, 15 U.S.C. 78u-1. Congress has enacted other 
laws that build on the insider trading prohibition. See, e.g., 
Section 20(d) of the Exchange Act, 15 U.S.C. 78t(d); Section 20A of 
the Exchange Act, 15 U.S.C. 78t-1; STOCK Act, Public Law 112-105, 
126 Stat. 291 (2012).
---------------------------------------------------------------------------

    Section 10(b) is one of the securities laws' primary antifraud 
provisions. This provision makes it unlawful ``[t]o use or employ, in 
connection with the purchase or sale of any security . . . any 
manipulative or deceptive device or contrivance in contravention of 
such rules and regulations as the Commission may prescribe.'' \7\ The 
Supreme Court has recognized that the ``manipulative or deceptive 
device[s] or contrivance[s]'' prohibited by Section 10(b) and Rule 10b-
5 include the purchase or sale of a security of any issuer on the basis 
of material nonpublic information about that security or its issuer, in 
breach of a duty owed directly, indirectly, or derivatively to the 
issuer of that security, to the shareholders of that issuer, or to any 
person who is the source of the material nonpublic information.\8\
---------------------------------------------------------------------------

    \7\ Rule 10b-5, adopted pursuant to Section 10(b), prohibits the 
use of ``any device, scheme, or artifice to defraud''; the making of 
``any untrue statement of a material fact'' or the ``omi[ssion]'' of 
``a material fact necessary in order to make the statements made, in 
the light of the circumstances under which they were made, not 
misleading''; or ``any act, practice, or course of business which 
operates or would operate as a fraud or deceit upon any person'' [17 
CFR 240.10b-5]. In addition to potential insider trading liability, 
issuers--and those acting on their behalf--are also subject to other 
prohibitions under the Federal securities laws.
    \8\ See Salman v. United States, 137 S.Ct. 420, 425 n. 2 (2016) 
(explaining that, under the classical theory of insider-trading 
liability, an insider who trades in the securities of his 
corporation on the basis of material nonpublic information 
``breaches a duty to, and takes advantage of, the shareholders of 
his corporation'' while, under the misappropriation theory, ``a 
person commits securities fraud `when he misappropriates 
confidential information for securities trading purposes, in breach 
of a duty owed to the source of the information,' such as an 
employer or client''); O'Hagan, 521 U.S. at 651-53 (``Under the 
`traditional' or `classical theory' of insider trading liability, 
Sec.  10(b) and Rule 10b-5 are violated when a corporate insider 
trades in the securities of his corporation on the basis of 
material, nonpublic information,'' and ``the misappropriation theory 
outlaws trading on the basis of nonpublic information by a corporate 
`outsider' in breach of a duty owed not to a trading party, but to 
the source of the information.''); Chiarella v. United States, 445 
U.S. 222, 228-29 (1980); see also 15 U.S.C. 78u-1(a)(1); 17 CFR 
240.10b5-2 (setting forth a non-exclusive definition of 
circumstances in which a person has the requisite duty for purposes 
of the ``misappropriation'' theory of insider trading liability). 
Liability for insider trading under Section 10(b) and Rule 10b-5 
requires ``scienter,'' i.e., ``an intent on the part of the 
defendant to deceive, manipulate or defraud.'' Aaron v. SEC, 446 
U.S. 680, 686 & n. 5 (1980); see also Selective Disclosure and 
Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [65 FR 51716 
(Aug. 24, 2000)] (``2000 Adopting Release'') at 51727.
---------------------------------------------------------------------------

    The Commission adopted Rule 10b5-1 in 2000 to provide more clarity 
regarding the meaning of ``manipulative or deceptive device[s] or 
contrivance[s]'' prohibited by Section 10(b) and Rule 10b-5 with 
respect to trading on the basis of material nonpublic information.\9\ 
At the time, Federal appellate courts diverged on the issue of what, if 
any, connection must be shown between a trader's possession of material 
nonpublic information and his or her trading to establish liability 
under Section 10(b) and Rule 10b-5. The Commission addressed this issue 
by providing that a purchase or sale of an issuer's security is on the 
basis of material nonpublic information about that security or issuer 
for purposes of Section 10(b) and Rule 10b-5 if the person making the 
purchase or sale was aware of the material nonpublic information when 
the person made the purchase or sale.\10\ In addition, Rule 10b5-1(c) 
established an affirmative defense to liability under Section 10(b) and 
Rule 10b-5 for insider trading, which the Commission intended ``to 
cover situations in which a person can demonstrate that the material 
nonpublic information did not factor into the trading decision.'' \11\ 
To that end, this defense provided that the trading was not made on the 
basis of material nonpublic information if the person can demonstrate, 
among other things, that the trade was made pursuant to a binding 
contract, an instruction to another person to execute the trade for the 
instructing person's account, or a written plan for the trading of 
securities (each a ``trading arrangement'' and collectively ``trading 
arrangements'') adopted at a time that the person was not aware of 
material nonpublic information.\12\ The Commission believed that this 
defense would ``provide appropriate flexibility to those who would like 
to plan securities transactions in advance, at a time when they are not 
aware of material nonpublic information, and then carry out those pre-
planned transactions at a later time, even if they later become aware 
of material nonpublic information.'' \13\ Rule 10b5-1(c)(2) provides a 
separate affirmative defense designed solely for non-natural persons 
(e.g., entities) that trade.\14\
---------------------------------------------------------------------------

    \9\ See 2000 Adopting Release, supra note 8.
    \10\ See Rule 10b5-1(b) (emphasis added). The final amendments 
do not alter the ``awareness'' standard, which courts have held is 
``entitled to deference.'' United States v. Royer, 549 F.3d 886, 899 
(2d Cir. 2008) (applying Chevron U.S.A., Inc. v. Natural Res. Def. 
Council, Inc., 467 U.S. 837, 843-44 (1984)), cert. denied, 558 U.S. 
934, and 558 U.S. 935 (2009); see also United States v. Rajaratnam, 
719 F.3d 139, 157-61 (2d Cir. 2013), cert. denied, 134 S. Ct. 2820 
(2014). Under that standard, a person is aware of material nonpublic 
information if they know, consciously avoid knowing, or are reckless 
in not knowing that the information is material and nonpublic. See 
SEC v. Obus, 693 F.3d 276, 286-88, 293 (2d Cir. 2012); United States 
v. Gansman, 657 F.3d 85, 91 n.7, 94 (2d Cir. 2011). The decision in 
Fried v. Stiefel Labs., Inc., 814 F.3d 1288, 1295 (11th Cir. 2016), 
which concerned a private action that did not involve Rule 10b5-1, 
erroneously suggests that a person must ``use'' the inside 
information to purchase or sell securities. See also infra at p. 45 
n. 145.
    \11\ 2000 Adopting Release, supra note 8 at 51728.
    \12\ Rule 10b5-1 does not modify or address any other aspect of 
insider trading law. It also does not provide an affirmative defense 
for other securities fraud claims, such as a claim under Rule 10b-5 
for an ``untrue statement of a material fact.'' 17 CFR 240.10b-5(b).
    \13\ 2000 Adopting Release, supra note 8 at 51728.
    \14\ See Rule 10b5-1(c)(2) [17 CFR 240.10b5-1(c)(2)]. This 
affirmative defense is available to a person other than a natural 
person that can demonstrate that the individual making the 
investment decision on behalf of the person was not aware of the 
material nonpublic information, and the person had implemented 
reasonable policies and procedures to prevent insider trading.

---------------------------------------------------------------------------

[[Page 80364]]

    Since the adoption of the Rule 10b5-1(c)(1) affirmative defense, 
courts,\15\ commenters,\16\ and members of Congress \17\ have expressed 
concern that traders have sought to benefit from its liability 
protections while trading securities opportunistically on the basis of 
material nonpublic information. Furthermore, some academic studies have 
found that corporate insiders trading pursuant to Rule 10b5-1 plans 
\18\ consistently outperform the trading of corporate insiders that is 
not conducted under such plans. These studies raise concerns that 
corporate insiders may be trading under Rule 10b5-1 in ways that harm 
investors and undermine the integrity of the securities markets.\19\ 
Practices that have raised public concern include corporate insiders 
adopting multiple overlapping plans and subsequently selectively 
canceling certain trades under such plans while they are aware of 
material nonpublic information (allowing such insiders to buy or sell 
securities under the plans that provide the most advantageous price) or 
commencing trades pursuant to a new plan shortly after the adoption of 
such plan (in some cases on the same day as said adoption, which, when 
combined with comparatively larger trades made closer in time to 
adoption of a plan, suggests that those trades may be on the basis of 
material nonpublic information).\20\ In September 2021, the 
Commission's Investor Advisory Committee (``IAC'') \21\ recommended 
that we ``take the necessary steps to establish meaningful guardrails 
around the adoption, modification, and cancellation of Rule 10b5-1 
trading plans,'' by addressing certain gaps in the rule that allow 
corporate insiders to unfairly exploit informational asymmetries.\22\
---------------------------------------------------------------------------

    \15\ District courts in private securities law actions have 
``acknowledge[d] the possibility that a clever insider might 
`maximize' their gain from knowledge of an impending [stock] price 
drop over an extended amount of time, and seek to disguise their 
conduct with a 10b5-1 plan.'' In re Immucor Inc. Sec. Litig., 2006 
WL 3000133, at *18 n.8 (N.D. Ga. Oct. 4, 2006); accord Nguyen v. New 
Link Genetics Corp., 297 F. Supp. 3d 472, 494-96 (S.D.N.Y. 2018); 
Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 200 
(S.D.N.Y. 2010); Malin v. XL Cap. Ltd., 499 F. Supp. 2d 117, 156 (D. 
Conn. 2007), aff'd, 312 F. App'x 400 (2d Cir. 2009).
    \16\ In Dec. 2020, the Commission proposed to amend Forms 4 and 
5 to add a checkbox to permit filers to indicate that the reported 
transaction satisfied Rule 10b5-1. See Rule 144 Holding Period and 
Form 144 Filings, Release No. 33-10991 (Dec. 22, 2020) [85 FR 
79936]. The Commission received several comment letters in response 
expressing concern about potential abuse of Rule 10b5-1. See, e.g., 
letter from David Larcker et al. (Mar. 10, 2021), https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf; letter from 
Council of Institutional Investors (``CII'') (Apr. 22, 2021), 
https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf; 
letter from CII (Mar. 18, 2021), https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf. In response to its Fall 2018 
semiannual regulatory agenda, the Commission also received a letter 
requesting that the Commission amend Rule 10b5-1 to address 
potential abuses of Rule 10b5-1 plans. See letter from CII (Dec. 13, 
2018), https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf.
    \17\ See, e.g., ``Waters and McHenry Introduce Bipartisan 
Legislation to Curb Illegal Insider Trading,'' U.S. House Committee 
on Financial Services, (Jan. 18, 2019) https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401725; letter from Senators 
Elizabeth Warren, Sherrod Brown and Chris Van Hollen (Feb. 10, 
2021), https://www.warren.senate.gov/imo/media/doc/02.10.2021%20Letter%20from%20Senators%20Warren,%20Brown,%20and%20Van%20Hollen%20to%20Acting%20Chair%20Lee.pdf.
    \18\ We use the terms ``Rule 10b5-1 plan'' and ``Rule 10b5-1 
trading arrangement'' throughout this release to refer to a 
contract, instruction or written plan that is intended to satisfy 
the affirmative defense conditions of Rule 10b5-1(c)(1).
    \19\ See, e.g., Alan D. Jagolinzer, SEC Rule 10b5-1 and 
Insiders' Strategic Trade, 55 Mgmt. Sci. 224 (2009); M. Todd 
Henderson et al., Offensive Disclosure: How Voluntary Disclosure Can 
Increase Returns from Insider Trading, 103 Geo. L.J. 1275 (2015); 
Taylan Mavruk & H. Nejat Seyhun, Do SEC's 10b5-1 Safe Harbor Rules 
Need to Be Rewritten?, 2016 Colum. Bus. L. Rev. 133 (2016); Artur 
Hugon & Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade 
Around Earnings Announcements, (2016), https://ssrn.com/abstract=2880878.
    \20\ See, e.g., John P. Anderson, Anticipating a Sea Change for 
Insider Trading Law: From Trading Plan Crisis to Rational Reform, 
2015 Utah L. Rev. 339 (2015); David Larcker et al., Gaming the 
System: Three ``Red Flags'' of Potential 10b5-1 Abuse, Stan. Closer 
Look Series (Jan. 2021) (``Gaming the System'') (noting from their 
analysis of a sample of sales transactions made pursuant to Rule 
10b5-1 plans between Jan. 2016 and May 2020 that trades occurring 
within 30 days of adoption of a Rule 10b5-1 plan are approximately 
50 percent larger than trades made six or more months later); see 
also infra note 40 and accompanying text.
    \21\ The IAC was established in Apr. 2012 pursuant to Section 
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] to advise 
and make recommendations to the Commission on regulatory priorities, 
the regulation of securities products, trading strategies, fee 
structures, the effectiveness of disclosure, and initiatives to 
protect investor interests and to promote investor confidence and 
the integrity of the securities marketplace.
    \22\ See Recommendations of the Investor Advisory Committee 
Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (``IAC 
Recommendations''), at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf. The IAC 
also held a panel discussion regarding Rule 10b5-1 plans at its June 
10, 2021 meeting. See IAC, Meeting Minutes (June 10, 2021), https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf.
---------------------------------------------------------------------------

    On January 13, 2022, the Commission proposed several rule and form 
amendments to address potentially abusive practices associated with 
Rule 10b5-1 plans, grants of options and other equity instruments with 
similar features, and the gifting of securities.\23\ We received over 
160 comment letters on the proposals, which we discuss in context 
below.\24\ Having considered these comments, we are adopting the 
following amendments, which include modifications from the proposal in 
response to the comments:
---------------------------------------------------------------------------

    \23\ See Rule 10b5-1 and Insider Trading, Release No. 33-11013 
(Jan. 13, 2022) [87 FR 8686 (Feb. 15, 2022)] (``Proposing 
Release'').
    \24\ The public comments we received are available at https://www.sec.gov/comments/s7-20-21/s72021.htm. Unless otherwise 
indicated, the comment letters cited herein are those received in 
response to the Proposing Release. One comment letter, dated Jan. 
10, 2022, urged that the comment period for this proposal, among 
others, be extended to at least 60 days. See letter from Senator Pat 
Toomey and Representative Patrick McHenry. The Commission voted to 
issue the proposal at an open meeting on Dec. 15, 2021. The release 
was posted on the Commission website that day, and comment letters 
were received beginning that same date. On Jan. 13, 2022, the 
Commission voted to approve and issue a revised release that 
reflected certain, limited changes to the Paperwork Reduction Act 
and Initial Regulatory Flexibility Act Analysis sections. This 
proposal was posted on the Commission's website that same day, 
superseding the Dec. 15, 2021 release, and was published in the 
Federal Register on Feb. 15, 2022. The comment period closed on Apr. 
1, 2022. We have considered all comments received since Dec. 15, 
2021, and do not believe an extension of the comment period was 
necessary. Another comment letter raised concerns about the 
rulemaking process at the agency more broadly. See letter from 
Senator Thom Tillis. The process followed in adopting these 
amendments has complied with the Administrative Procedure Act and 
other legal requirements.
---------------------------------------------------------------------------

     Amend the affirmative defense of Rule 10b5-1(c)(1) to: (1) 
include a cooling-off period applicable to directors and ``officers'' 
(as defined by 17 CFR 240.16a-1(f) (``Rule 16a-1(f)'') and a shorter 
cooling off period applicable to all other persons other than the 
issuer; (2) include a certification condition for directors and 
officers; (3) limit the ability of persons other than the issuer to use 
multiple overlapping Rule 10b5-1 plans; (4) limit the ability of these 
persons to rely on the affirmative defense for a single-trade plan to 
one single-trade plan during any consecutive 12-month period; and (5) 
add a condition that all persons entering into a Rule 10b5-1 plan must 
act in good faith with respect to that plan; \25\
---------------------------------------------------------------------------

    \25\ We use the term ``the issuer'' in this release to refer to 
the issuer of the particular security or securities that are the 
subject of trades for which a person seeks the benefit of the 
affirmative defense under Rule 10b5-1(c)(1).
---------------------------------------------------------------------------

     Require: (1) quarterly disclosure by registrants regarding 
the use of Rule 10b5-1 plans and certain other trading arrangements by 
a registrant's directors and officers for the trading of its 
securities; and (2) annual disclosure regarding a registrant's insider 
trading policies and procedures in new Item 408 of Regulation S-K and 
corresponding amendments to Forms 10-Q and 10-K;
     Add a mandatory Rule 10b5-1(c) checkbox to Forms 4 and 5;
     Require certain tabular and narrative disclosures 
regarding awards

[[Page 80365]]

of options, stock appreciation rights (``SARs''), and/or similar 
option-like instruments granted to corporate insiders shortly before 
and immediately after the release of material nonpublic information in 
new paragraph (x) to Item 402 of Regulation S-K;
     Require registrants to tag the information specified by 
new Items 402(x), 408(a), and 408(b)(1) in Inline XBRL; and
     Require reporting of dispositions of equity securities by 
bona fide gifts on Form 4, rather than on Form 5.
    These amendments are intended to improve investor confidence in the 
securities markets, and by extension enhance liquidity and capital 
formation, while continuing to provide appropriate flexibility to 
traders who would like to plan securities transactions in advance, when 
they are not aware of material nonpublic information. To achieve these 
goals, the amendments are designed to significantly reduce 
opportunities for corporate insiders to misuse Rule 10b5-1 to trade on 
material nonpublic information. Further, the amendments will increase 
transparency regarding the use of Rule 10b5-1 plans, issuers' insider 
trading policies and procedures, and their policies and practices with 
respect to awards of options, SARs, and/or similar option-like 
instruments close in time to the release of material nonpublic 
information.

II. Discussion of the Final Amendments

A. Amendments to Rule 10b5-1

    Rule 10b5-1(c)(1) provides an affirmative defense to Section 10(b) 
and Rule 10b-5 liability if a person satisfies its conditions. First, 
the person must demonstrate that, before becoming aware of the material 
nonpublic information, they entered into a binding contract to purchase 
or sell the security, provided instruction to another person to execute 
the trade for the instructing person's account, or adopted a written 
plan for trading the securities.\26\ Second, the person must 
demonstrate that the contract, instruction, or plan:
---------------------------------------------------------------------------

    \26\ Rule 10b5-1(c)(1)(i)(A).
---------------------------------------------------------------------------

     Specified the amount of securities to be purchased or sold 
and the price at which and the date on which the securities were to be 
purchased or sold;
     Included a written formula or algorithm, or computer 
program, for determining the amount of securities to be purchased or 
sold and the price at which and the date on which the securities were 
to be purchased or sold; or
     Did not permit the person to exercise any subsequent 
influence over how, when, or whether to effect purchases or sales; 
provided, in addition, that any other person who, pursuant to the 
contract, instruction, or plan, did exercise such influence must not 
have been aware of the material nonpublic information when doing 
so.\27\
---------------------------------------------------------------------------

    \27\ Rule 10b5-1(c)(1)(i)(B).
---------------------------------------------------------------------------

    Third, the person must demonstrate that the purchase or sale was 
pursuant to this contract, instruction, or plan.\28\ A purchase or sale 
is not pursuant to a contract, instruction, or plan if, among other 
things, the person who entered into the contract, instruction, or plan 
altered or deviated from the contract, instruction, or plan (whether by 
changing the amount, price, or timing of the purchase or sale), or 
entered into or altered a corresponding or hedging transaction or 
position with respect to the securities.\29\ Finally, this defense is 
only available if the contract, instruction, or plan ``was given or 
entered into in good faith and not as part of a plan or scheme to evade 
the prohibitions'' of Rule 10b-5.\30\
---------------------------------------------------------------------------

    \28\ Rule 10b5-1(c)(1)(i)(C).
    \29\ Id.
    \30\ Rule 10b5-1(c)(1)(ii).
---------------------------------------------------------------------------

    We are concerned that some corporate insiders use Rule 10b5-1 plans 
in ways that are not consistent with the objectives of the rule, and 
that harm investors and undermine the integrity of the securities 
markets. As the use of Rule 10b5-1 plans has become more 
widespread,\31\ commentators have raised concerns that the design of 
Rule 10b5-1(c)(1) has enabled corporate insiders to trade on the basis 
of material nonpublic information while avoiding liability under 
Section 10(b) and Rule 10b-5.\32\ Several commenters on the proposals 
reiterated those concerns.\33\ These concerns stem from, among other 
things, the ability of corporate insiders to adopt multiple Rule 10b5-1 
plans at a time when they lack material nonpublic information, and 
subsequently terminate some of the plans based on later-obtained 
material nonpublic information (notwithstanding the provision of the 
current affirmative defense that it is applicable only when the 
contract, instruction, or plan was entered into in good faith). For 
example, such plans might take financial positions that authorize 
trades at price points above and/or below the issuer's current stock 
price. When the insider becomes aware of material nonpublic information 
indicating likely future changes in the company's stock price, the 
insider could cancel the less advantageous plan or plans. Corporate 
insiders also could adopt multiple Rule 10b5-1 plans that direct trades 
only at price points above the current share price, anticipating that 
they will subsequently learn material nonpublic information that would 
reveal which of the plans would be most profitable. Then, when they 
become aware of material non-public information, they might cancel the 
less profitable ones. We are concerned that, in these situations, an 
insider's awareness of material nonpublic information may still 
``factor into the trading decision,'' even if the insider's plans 
appear to satisfy the requirements of Rule 10b5-1(c)(1).\34\
---------------------------------------------------------------------------

    \31\ According to one survey, corporate insiders at 51% of S&P 
500 companies used Rule 10b5-1 trading arrangements in 2015. See 
Morgan Stanley & Shearman & Sterling LLP, ``Defining the Fine Line: 
Mitigating Risk with 10b5-1 Plans'' (2018) https://advisor.morganstanley.com/austin.cornish/documents/field/a/au/austin-cornish/Mitigating%20Risk%20with%2010b5-1%20Plans.pdf. Rule 
10b5-1 plans are also used by issuers. See Skadden Insights: Share 
Repurchases 4-6 (Mar. 16, 2020) https://www.skadden.com/insights/publications/2020/03/share-repurchases (discussing the use of Rule 
10b5-1 plans for issuer share repurchases).
    \32\ See Tom McGinty & Mark Maremont, CEO Stock Sales Raise 
Questions about Insider Trading, Wall St. J. (June 29, 2022) 
(retrieved from Factiva database); see also Jean Eaglesham & Rob 
Barry, Trading Plans Under Fire: Despite 2007 Warning, Experts Say 
Loopholes Remain for Corporate Insiders, Wall St. J. (Dec. 13, 2012) 
(retrieved from Factiva database).
    \33\ See, e.g., letters from American Federation of Labor and 
Congress of Industrial Organizations (``AFL-CIO''), Colorado Public 
Employees' Retirement Association (``CO PERA''), Council of 
Institutional Investors (``CII''), International Corporate 
Governance Network (``ICGN''), Better Markets (``Better Markets''), 
Public Citizen (``Public Citizen''), and North American Securities 
Administrators Association, Inc. (``NASAA'').
    \34\ See 2000 Release, supra note 8, at 51728.
---------------------------------------------------------------------------

    Furthermore, multiple studies examining Rule 10b5-1 plans have 
identified potentially abusive activity, including when trades occur 
shortly after adoption of a plan. Some of these studies have observed, 
among other things, that trades that occur shortly after adoption of a 
Rule 10b5-1 plan demonstrate abnormal profitability, which suggests 
that some corporate insiders may be aware of material nonpublic 
information at the time of adoption of a Rule 10b5-1 plan that 
otherwise appears to meet the existing requirements of Rule 10b5-1.\35\
---------------------------------------------------------------------------

    \35\ See, e.g., Gaming the System, supra note 19 (observing that 
trades under Rule 10b5-1 plans systematically avoid losses and 
foreshadow considerable stock declines over the subsequent six 
months when: (1) trades executed under the plan occur as much as 60 
days after plan adoption; or (2) a Rule 10b5-1 plan is adopted in a 
given quarter and begins trading before that quarter's earnings 
announcement); Yen-Jun Lee, Insiders' Foreknowledge of Earnings 
Results and Rule 10b5-1 Sales Trades, 38 J. Acctg., Auditing & Fin. 
1, 9, 17, 19 (2020) (finding that insiders utilizing 10b5-1 plans 
tend to sell before negative earnings results, and that insiders 
particularly apt to engage in this behavior are also more likely to 
begin trading within three months of establishing the plan); Mavruk 
& Seyhun, supra note 19, at 165 (observing that first trade pursuant 
to a Rule 10b5-1 plan showed abnormal profitability, suggesting that 
insiders set up Rule 10b5-1 plans when in possession of material 
nonpublic information); McGinty & Maremont, supra note 32; see also 
Jagolinzer, supra note 19, at 234-35 (finding that Rule 10b5-1 plans 
appear to allow insiders to trade close in time to earnings 
releases, and that there is a statistical relationship between plan 
adoption and upcoming negative news events). We provide additional 
discussion of these sources, including potential caveats about the 
data they analyze, infra Section V.B.1.

---------------------------------------------------------------------------

[[Page 80366]]

    To address all of these concerns, we are amending Rule 10b5-1(c)(1) 
to apply a cooling-off period on persons other than the issuer, impose 
a certification requirement on directors and officers, limit the 
ability of persons other than the issuer to use multiple-overlapping 
Rule 10b5-1 plans, limit the use of single-trade plans by persons other 
than the issuer to one such single-trade plan in any 12-month period, 
and add a condition that all persons entering into a Rule 10b5-1 plan 
must act in good faith with respect to that plan.
1. Cooling-Off Period
a. Proposed Amendments
    Rule 10b5-1(c)(1) does not currently impose a waiting period 
between the date that a trading plan is adopted and the date of the 
first transaction to be executed under the plan. A trader can therefore 
adopt a Rule 10b5-1 plan and execute a trade under it as early as the 
day of adoption. Investors and other commentators have suggested that 
requiring a minimum waiting period (a ``cooling-off period'') between 
the adoption of a Rule 10b5-1 plan and the date on which trading can 
commence reduces the risk that corporate insiders could benefit from 
any material nonpublic information of which they may have been aware 
when adopting the plan.\36\ The Commission proposed to amend Rule 10b5-
1(c)(1) to add the following cooling-off periods as conditions of the 
affirmative defense: (1) a minimum 120-day cooling-off period after the 
date of adoption of any Rule 10b5-1 plan (including adoption of a 
modified trading arrangement) by a director or ``officer'' (as defined 
in Rule 16a-1(f)) \37\ before any purchases or sales under the new or 
modified trading arrangement; and (2) a minimum 30-day cooling-off 
period after the date of adoption of any Rule 10b5-1 plan by an issuer 
before any purchases or sales under the new or modified trading 
arrangement.
---------------------------------------------------------------------------

    \36\ See Rulemaking petition regarding Rule 10b5-1 Trading 
Plans, File No. 4-658 (Jan. 2, 2013) (``CII Rulemaking Petition'') 
at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf; Alan D. 
Jagolinzer et al, How the SEC Can and Should Fix Insider Trading 
Rules, The Hill (Dec. 17, 2020), https://thehill.com/opinion/finance/530668-how-the-sec-can-and-should-fix-insider-trading-rules; 
IAC Recommendations, supra note 22.
    \37\ Exchange Act Rule 16a-1(f) provides that the term 
``officer'' ``shall mean an issuer's president, principal financial 
officer, or principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president of the 
issuer in charge of a principal business unit, division or function 
(such as sales, administration or finance), any other officer who 
performs a policy-making function, or any other person who performs 
similar policy-making functions for the issuer. Officers of the 
issuer's parent(s) or subsidiaries shall be deemed officers of the 
issuer if they perform such policy-making functions for the 
issuer.''
---------------------------------------------------------------------------

    The Commission proposed the cooling-off periods to address concerns 
that some insiders may be adopting Rule 10b5-1 plans while aware of 
material nonpublic information, such as an issuer's upcoming quarterly 
earnings results, and then shortly thereafter trading before the 
information becomes public. We understand that corporate insiders are 
often aware of material nonpublic information. Although Rule 10b5-
1(c)(1) precludes reliance on the affirmative defense when a person is 
aware of such information at the time of adoption of a Rule 10b5-1 
plan, in practice, it is difficult for an outside party to determine 
whether the insider satisfied this condition.\38\ With cognizance of 
this difficulty, some corporate insiders may use Rule 10b5-1 plans to 
execute trades on the basis of material nonpublic information and seek 
to assert the affirmative defense to avoid potential liability. The 
academic studies discussed above suggest that this may be the case as 
researchers have observed that trades made under Rule 10b5-1 plans that 
occur before the next earnings announcement are abnormally 
profitable.\39\ Some corporate insiders also undertake other actions, 
such as cancellation of sales scheduled under Rule 10b5-1 plans ahead 
of favorable issuer disclosures, which appears consistent with an 
effort to exploit material nonpublic information.\40\
---------------------------------------------------------------------------

    \38\ See Henderson et al., supra note 19, at 1289.
    \39\ See Gaming the System, supra note 19 (``[P]lans that 
execute a trade in the window between when the plan is adopted and 
that quarter's earnings announcement anticipate large losses and 
foreshadow considerable stock price declines'').
    \40\ See Jagolinzer, supra note 19, at 235 (observing that there 
is evidence ``that participants terminate sales plans before 
positive shifts in firm returns''); Mavruk & Seyhun, supra note 19, 
at 120, 125 (noting patterns of trading consistent with cancellation 
of some planned trades are abnormally profitable). Based on our 
review of the data sources used in the sources cited, we understand 
them to use the term ``earnings announcement'' to refer to the 
earliest of quarterly or annual reporting or other earnings 
announcements for which the issuer furnishes a corresponding Form 8-
K.
---------------------------------------------------------------------------

    To address concerns that certain corporate insiders misuse Rule 
10b5-1 by adopting and trading under trading arrangements despite their 
awareness of material nonpublic information, and in light of the 
evidence that suggests that trading arrangements that commence close in 
time to the plan's adoption and prior to an earnings announcement are 
more likely to result in abnormal returns, the Commission proposed 
requiring insiders to wait a period of time before trading under a new 
(or modified) plan could commence. Although many companies already 
impose such a cooling-off period for their own insiders,\41\ not all do 
so, and, furthermore, among those that have a cooling-off period, there 
is little uniformity with respect to the duration of such periods. The 
Commission proposed a 120-day cooling-off period for officers and 
directors because such a period would extend beyond the fiscal quarter 
\42\ in which the trading arrangement is established, meaning that 
trading generally would not occur under a Rule 10b5-1 plan adopted 
during a particular quarter until after the registrant announced its 
financial results for that quarter. Although the cooling-off period 
proposed by the Commission for officers and directors may have been 
longer than the cooling-off period used by many issuers or recommended 
by certain financial advisors, the Commission believed that the 
proposed duration would deter insiders from exploiting material 
nonpublic information for the relevant quarter. In addition, the 
Commission noted that a 120-day cooling-off period would align with the 
recommendations of a wide range of commentators.\43\
---------------------------------------------------------------------------

    \41\ This practice suggests that many companies have concluded 
that in general a cooling-off period, rather than individualized 
efforts to identify instances where an executive is aware of 
material nonpublic information, strikes an appropriate balance of 
precision, cost of implementation, and investor confidence.
    \42\ Quarters are about 90 days long and public reporting 
companies are required to disclose their quarterly results no later 
than 40 or 45 days after the end of their fiscal quarter, depending 
on their filing status. See 17 CFR 249.308(a). Nevertheless, 
companies on average disclose their quarterly results within 30 days 
of the end of the fiscal quarter. See Morgan Stanley & Shearman & 
Sterling LLP, supra note 29.
    \43\ See IAC Recommendations, supra note 22 (recommending a 
cooling off period of four months); Gaming the System, supra note 
12, at 3 (recommending a minimum cooling-off period and noting that 
``[a] cooling-off period of four to six months . . . is supported by 
the data in our sample''); letter from Senators Elizabeth Warren, 
Sherrod Brown and Chris Van Hollen supra note 17 (recommending a 
cooling off period of four to six months).
---------------------------------------------------------------------------

    Under the proposed amendments, the cooling-off periods would have 
applied to directors and ``officers'' (as defined in Rule 16a-1(f)) of 
the issuer, as well as to an issuer that structures a share repurchase 
plan as a Rule 10b5-1 plan,

[[Page 80367]]

although in the latter case the Commission proposed a shorter, 30-day 
cooling-off period. This requirement would prevent directors, officers, 
and issuers who might be aware of material nonpublic information from 
adopting or modifying a trading arrangement and trading immediately 
pursuant to the arrangement. The proposed cooling-off period also was 
intended to discourage issuers, directors, and officers from 
selectively terminating or cancelling a planned trade under a Rule 
10b5-1 plan because any subsequent trades upon the adoption of a new or 
modified plan would also be subject to a new cooling-off period.
    The Commission noted that applying a cooling-off period to 
directors and ``officers'' as defined in Rule 16a-1(f) was appropriate 
because such individuals are more likely than others to be aware of 
material nonpublic information in the general course of events, and 
also more likely to be involved in making or overseeing key corporate 
decisions that have the potential to affect the issuer's stock price, 
including decisions about the timing of the disclosure of such 
information.\44\ The Commission also requested comment, however, on 
whether the Rule 16a-1(f) definition was the appropriate definition of 
``officer'' for purposes of the proposed amendment and further inquired 
whether the cooling-off period should apply to all traders who rely on 
the Rule 10b5-1(c)(1) affirmative defense.\45\
---------------------------------------------------------------------------

    \44\ See O'Hagan, 521 U.S. at 651-52; Chiarella, 445 U.S. at 
227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d Cir. 
2014); see also Colby v. Klune, 178 F.2d 872 (2d Cir. 1949).
    \45\ Proposing Release, supra note 22, at 17.
---------------------------------------------------------------------------

    In addition, the Commission stated that applying a cooling-off 
period to issuers may help address the concern that issuers may conduct 
stock buybacks while aware of material nonpublic information. For 
example, corporate insiders who are aware of positive material 
nonpublic information can cause the issuer to buy its stock at a lower 
price from current shareholders who are unaware of this information 
because, once the information is publicly disclosed, the issuer's share 
price may increase. The Commission proposed a 30-day cooling-off period 
for issuers to help reduce the likelihood of this potential abuse and 
promote investor confidence. The Commission also proposed a note to 
Rule 10b5-1(c)(1) stating that any modification or amendment to a prior 
contract, instruction, or written plan would be deemed to be the 
termination of such prior contract, instruction, or written plan, and 
the adoption of a new contract, instruction, or written plan.\46\
---------------------------------------------------------------------------

    \46\ The proposed note would have codified prior Commission 
guidance on Rule 10b5-1(c)(1)(i)(C). See infra note 122 and 
accompanying text.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Commenters expressed a range of views on the proposed cooling-off 
periods. Many commenters expressed general support for a cooling-off 
period for directors and officers.\47\ Several of these commenters 
supported the proposed cooling-off period of 120 days.\48\ For example, 
one commenter agreed that the proposed 120-day cooling-off period would 
deter officers and directors from adopting or modifying a Rule 10b5-1 
plan while aware of material nonpublic information and prevent insiders 
from gaming Rule 10b5-1 plans by opportunistically canceling trades or 
modifying plans.\49\ In addition, in expressing the view that this 
duration was appropriate, another commenter stated the concern that, 
given that directors and officers are more likely than other traders to 
be aware of material nonpublic information and involved in making or 
overseeing key corporate decisions that could affect the stock price, 
they could be involved with decisions regarding the timing of a range 
of issuer disclosures, including disclosures related to a merger or 
acquisition, departure of a named executive officer, or the financial 
statements.\50\ Finally, another commenter, who did not support the 
proposed duration of the cooling-off period, nonetheless asserted that 
a cooling-off period would increase investor confidence that insiders 
were not using Rule 10b5-1 plans to benefit from nonpublic material 
information.\51\
---------------------------------------------------------------------------

    \47\ See, e.g., letters from American Federation of Labor and 
Congress of Industrial Organizations (``AFL-CIO''), Better Markets, 
Colorado Public Employees' Retirement Association (``CO PERA''), 
Council of Institutional Investors (``CII''), Cravath, Swaine & 
Moore LLP (``Cravath''), Davis Polk & Wardwell LLP (``Davis Polk''), 
DLA Piper (``DLA''), Fenwick & West (``Fenwick''), International 
Corporate Governance Network (``ICGN''), Craig M. Lewis et al. 
(``Lewis''), Manulife Financial Corp. (``Manulife''), Committee on 
Securities Law of the Business Law Section of the Maryland State Bar 
(``MD Bar''), North American Securities Administrators Association, 
Inc. (``NASAA''), New York City Comptroller (``NYCC''), NYSE Group, 
Inc. (``NYSE''), PNC Financial Services Group, Inc. (``PNC''), 
Public Citizen, Anthony O'Reilly (``O'Reilly''), Securities Industry 
and Financial Markets Association (``SIFMA'') (letter dated Apr. 1, 
2022, from Kevin Carroll, ``SIFMA 3''), and Sullivan & Cromwell LLP 
(``Sullivan'').
    \48\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, Public 
Citizen, O'Reilly, and NASAA.
    \49\ See letter from CII.
    \50\ See letter from ICGN.
    \51\ See letter from Manulife.
---------------------------------------------------------------------------

    At the same time, many commenters, including several commenters 
that expressed support for a cooling-off period for directors and 
officers, contended that the duration of the proposed cooling-off 
period was unnecessarily long.\52\ For example, some of these 
commenters asserted that a 120-day cooling-off period would discourage 
insiders from adopting Rule 10b5-1 plans \53\ and therefore result in 
larger, more concentrated volumes of insider-directed trades taking 
place during trading windows rather than being spread out under a Rule 
10b5-1 plan, which could increase market volatility.\54\
---------------------------------------------------------------------------

    \52\ See, e.g., letters from Federal Regulation of Securities 
Committee of the Business Law Section of the American Bar 
Association (``ABA''); ACCO Brands Corp. (``ACCO''); Chevron Corp. 
(``Chevron''); Cravath; Davis Polk; DLA; Dow Inc. (``Dow''); Empire 
State Realty Trust (``Empire Trust''); FedEx Corporation 
(``FedEx''); Fenwick; HR Policy Association Center on Executive 
Compensation (``HRPA''); Jones Day; Kirkland & Ellis (``Kirkland''); 
Manulife, National Association of Manufacturers (``NAM''); National 
Venture Capital Association (``NVCA''); New York City Bar 
Association (``NYC Bar''); NYSE; Paul, Weiss, Rifkind, Wharton & 
Garrison LLP (``Paul Weiss''); PNC; Quest Diagnostics Inc. 
(``Quest''); William Quinn (``Quinn''); US Chamber of Commerce 
(letter dated Apr. 1, 2022) (``Chamber of Chamber 2''); American 
Property Casualty Insurance Association, American Securities 
Association, Center On Executive Compensation, U.S. Chamber of 
Commerce, Nareit, National Association of Manufacturers, and NIRI: 
The Association for Investor Relations (``Coalition Letter''); 
Shearman & Sterling LLP (``Shearman''); SIFMA 3; Simpson Thacher & 
Bartlett LLP (``Simpson''); Sullivan; and Wilson, Sonsini, Goodrich 
& Rosati (``Wilson Sonsini'').
    \53\ See letter from NYC Bar. This comment letter was initially 
submitted in Apr. 2022 and posted on the Commission website on Oct. 
2022. The delayed posting of this comment letter to the website is 
unrelated to the technological error that resulted in the Oct. 2022 
reopening of the comment files of certain other Commission releases. 
See Resubmission of Comments and Reopening of Comment Periods for 
Several Rulemaking Releases Due to a Technological Error in 
Receiving Certain Comments, Release Nos. 33-11117, 34-96005, IA-
6162, IC-34724; File Nos. S7-32-10, S7-18-21, S7-21-21, S7-22-21, 
S7-03-22, S7-08-22, S7-09-22, S7-10-22, S7-13-22, S7-16-22, S7-17-
22, S7-18-22 (Oct. 7, 2022). In Apr. 2022, the submitter of this 
comment letter withdrew the comment letters submitted on this rule 
and the proposing release for another rule and submitted replacement 
comment letters. Staff posted the replacement comment letter on the 
other rule, but inadvertently failed to post the replacement comment 
letter for the Proposing Release until the submitter of the comment 
letter again contacted Commission staff in Oct. 2022.
    \54\ See, e.g., letters from Chamber of Commerce 2, Davis Polk, 
DLA, Fenwick, NYSE, SIFMA 3, Simpson, and Sullivan.
---------------------------------------------------------------------------

    Some of these commenters recommended alternative durations for the 
cooling-off period for directors and officers.\55\ Shorter alternatives 
ranged from a cooling-off period of 30 days

[[Page 80368]]

from the date of adoption of a Rule 10b5-1 plan,\56\ which some 
commenters asserted is a common practice many issuers have 
implemented,\57\ to a maximum cooling-off period of 90 days after the 
adoption of a Rule 10b5-1 plan.\58\ Other commenters recommended 
shortening the cooling-off period, in part, by taking into account when 
the issuer publishes its earnings announcement or results. These 
commenters suggested that the cooling-off period last until: (1) the 
earlier of 60 days or one business day after the earnings release for 
the fiscal quarter of adoption; \59\ (2) the earlier of 60 days or 48 
hours after the next release of annual or quarterly results; \60\ (3) 
90 days or fewer or, if the officer or director enters into the Rule 
10b5-1 plan within five trading days of an earnings release, 30 days; 
\61\ (4) the earlier of 90 days or the publication of results for the 
quarter during which the plan was adopted; \62\ (5) one trading day 
after the next earnings announcement covering at least one fiscal 
quarter and filed or furnished with an Exchange Act report; \63\ and 
(6) the earlier of 30 days or the release of quarterly earnings with an 
exception for plans entered into within five business days after an 
earnings release.\64\ Another commenter, however, urged the Commission 
to consider lengthening the cooling-off period to 180 days.\65\
---------------------------------------------------------------------------

    \55\ See, e.g., letters from ACCO, Chamber of Commerce 2, Dow, 
DLA, Fenwick, NAM, NYSE, Paul Weiss, Quinn, Simpson, and Sullivan.
    \56\ See, e.g., letters from ACCO, Chamber of Commerce 2, DLA, 
Fenwick, NYC Bar, NYSE, Paul Weiss, Quinn, and Sullivan.
    \57\ See, e.g., letters from Chamber of Commerce 2, NYSE, Paul 
Weiss, and Simpson.
    \58\ See, e.g., letters from Chevron, Dow, and Cleary, Gottlieb, 
Steen & Hamilton LLP (``Cleary'').
    \59\ See letter from ABA.
    \60\ See letter from Manulife.
    \61\ See letter from Dow.
    \62\ See letter from Cleary.
    \63\ See letter from Davis Polk.
    \64\ See letter from NAM.
    \65\ See letter from Senators Elizabeth Warren, Chris Van 
Hollen, Tammy Baldwin, and Bernard Sanders (``Sen. Warren et al.'').
---------------------------------------------------------------------------

    Among commenters who recommended that we link the end of the 
cooling-off period to the release of earnings or other financial 
results, most did not specify whether the end of the cooling-off period 
should be tied to the publication of such results in the form of a 
quarterly report on Form 10-Q or annual report on Form 10-K, or instead 
to the announcement of such results in a Form 8-K, that is filed or 
furnished with the Commission.\66\ Some commenters suggested that the 
end of the cooling-off period should be tied to the ``next'' (relative 
to the adoption or modification of the Rule 10b5-1 plan) such release; 
\67\ we understand that if an earnings announcement accompanied by a 
Form 8-K is made, it typically precedes the filing of a Form 10-Q or 
Form 10-K. One commenter suggested that the end of the cooling-off 
period should be tied to the earlier of the release of financial 
results or the start of the issuer's open trading window under the 
insider's trading policy.\68\
---------------------------------------------------------------------------

    \66\ See, e.g., letters from ABA, Cleary, and PNC.
    \67\ See, e.g., letters from Davis Polk, DLA, and Simpson.
    \68\ See letter from DLA; see also letter from Quest (suggesting 
that there is no incremental material nonpublic information 
disclosed in a Form 10-Q when an issuer has already released an 
earnings announcement).
---------------------------------------------------------------------------

    Finally, some commenters asked the Commission to provide exceptions 
from the cooling-off period. For example, one commenter asked that the 
cooling-off period not apply in cases of financial hardship for the 
officer or director, such as an unanticipated financial liability that 
is unrelated to the trading of securities.\69\ Another commenter asked 
the Commission to exclude venture capital funds from the cooling-off 
period condition, or to provide a shorter cooling-off period for 
venture capital funds.\70\
---------------------------------------------------------------------------

    \69\ See letter from Wilson Sonsini.
    \70\ See letter from NVCA.
---------------------------------------------------------------------------

    Many commenters opposed a cooling-off period for issuers,\71\ 
largely due to issuers' use of Rule 10b5-1 plans in connection with 
share repurchase plans under Exchange Act Rule 10b-18.\72\ One of these 
commenters stated that Rule 10b5-1 plans allow issuers to more 
effectively coordinate and execute their share repurchases during open 
and closed trading windows.\73\ Given this practice, several commenters 
contended that the proposed cooling-off period would limit the 
usefulness of Rule 10b5-1 plans and impede the ability of issuers to 
effectively carry out share repurchases and other transactions used by 
issuers to manage their capital.\74\ Some of these commenters stated 
the concern that a cooling-off period for issuers could increase market 
volatility as issuer repurchase activity would be limited to much 
shorter trading windows.\75\
---------------------------------------------------------------------------

    \71\ See, e.g., letters from the Bank Policy Institute and the 
American Bankers Association (``BPI''), Home Depot, Inc. (``Home 
Depot''), Dow, Chevron, Empire Trust, FedEx, International 
Bancshares Corporation (``IBC''), Manulife, NYSE, HudsonWest LLC 
(``HudsonWest''), Guzman & Company (``Guzman''), Quest, Coalition 
Letter, Chamber of Commerce 2, HRPA, Lewis, NAM, NVCA, NYC Bar, 
Society for Corporate Governance (``SCG''), SIFMA (letter dated Apr. 
1, 2022, from Joseph P. Corcoran) (``SIFMA 2''), ABA, Cravath, Davis 
Polk, Dorsey & Whitney LLP (``Dorsey''), Fenwick, Jones Day, 
Kirkland, Paul Weiss, Simpson, Shearman, Sullivan, Wilson Sonsini, 
and Vistra Corp. (``Vistra'').
    \72\ 17 CFR 240.10b-18. Rule 10b-18 provides issuers with a safe 
harbor from liability for manipulation under Sections 9(a)(2) and 
10(b) of the Exchange Act [15 U.S.C. 78i(a)(2) and 78j(b)] when they 
repurchase their common stock in the market in accordance with the 
Rule's manner, timing, price, and volume conditions.
    \73\ See letter from Simpson.
    \74\ See, e.g., letters from BPI, Home Depot, Dow, Chevron, 
FedEx, Quest, Chamber of Commerce 2, Coalition Letter, NAM, SCG, 
SIFMA 2, ABA, Cravath, Davis Polk, Jones Day, Paul Weiss, Simpson, 
Shearman, and Wilson Sonsini.
    \75\ See, e.g., letters from NYSE and Sullivan.
---------------------------------------------------------------------------

    In addition, several of these commenters asserted that a cooling-
off period for issuers was unnecessary because existing safeguards 
under the Federal securities laws and market practices protect 
investors from issuer abuse of Rule 10b5-1 plans.\76\ Some commenters 
contended the Commission did not set forth any evidence of issuers 
abusing Rule 10b5-1 trading arrangements to justify this cooling-off 
period.\77\
---------------------------------------------------------------------------

    \76\ See, e.g., letters from Cravath, Davis Polk, Dow, FedEx, 
Fenwick, Lewis, NAM, Paul Weiss, Quest, SCG, SIFMA 2, and Wilson 
Sonsini.
    \77\ See, e.g., letters from BPI, Davis Polk, Cravath, and 
Wilson Sonsini.
---------------------------------------------------------------------------

    In contrast, other commenters supported a cooling-off period for 
issuers.\78\ One of these commenters contended that the proposed 30-day 
period was too short to address the concerns underlying the proposal 
and advocated for a 120-day cooling-off period for issuers, similar to 
the proposed cooling-off period for directors and officers.\79\
---------------------------------------------------------------------------

    \78\ See, e.g., letters from CO PERA, CII, ICGN, NYCC, Better 
Markets, Public Citizen, Stern Tannenbaum Bell LLP (``Stern''), 
ACCO, PNC, NASAA, and Sen. Warren et al.
    \79\ See letter from NASAA.
---------------------------------------------------------------------------

    Several commenters urged the Commission to clarify that immaterial 
or administrative modifications to an existing Rule 10b5-1 trading 
arrangement would not constitute a modification that triggers a new 
cooling-off period.\80\ For example, some commenters asserted that 
modifications should not trigger the cooling-off period unless they 
address the pricing, amount of securities to be purchased or sold, and/
or the timing of purchases or sales.\81\ In addition, another commenter 
urged the Commission not to trigger a new cooling-off period upon a 
modification of a Rule 10b5-1 plan.\82\
---------------------------------------------------------------------------

    \80\ See, e.g., letters from Chamber of Commerce 2, NAM, SIFMA 
2, ABA, Cleary, Cravath, Davis Polk, DLA, Fenwick, and Sullivan.
    \81\ See, e.g., letters from Cravath, Cleary, Davis Polk, and 
DLA.
    \82\ See letter from NAM.
---------------------------------------------------------------------------

    We also received comment on whether some or all of the proposed 
amendments should apply only to directors and officers, as defined in 
Rule

[[Page 80369]]

16a-1(f), or whether they should also apply to other insiders or 
traders more broadly. Several commenters indicated that the proposed 
cooling-off period and limitations on overlapping and single-trade 
plans should apply to all traders or all natural persons.\83\ One of 
these commenters generally observed that the limitations should apply 
broadly because other officers and employees can potentially have 
access to and trade on material nonpublic information.\84\ Another 
commenter suggested that any individual involved in a company's trading 
program or ``corporate decisions'' should be subject to the cooling-off 
requirement.\85\ Two commenters also suggested that we extend the new 
Item 408(a) reporting obligation to cover any employee who adopts a 
10b5-1 plan.\86\
---------------------------------------------------------------------------

    \83\ See letters from Better Markets, NASAA; see also letter 
from Sen. Warren et al. (suggesting the limitation apply to ``all 
employees'').
    \84\ See letter from NASAA.
    \85\ See letter from ICGN.
    \86\ See letters from BrilLiquid LLC (``BrilLiquid'') and NASAA.
---------------------------------------------------------------------------

    Other commenters opposed any expansion of the amendments beyond 
directors and Rule 16a-1(f) officers.\87\ Some of these commenters 
agreed with our observation that these officers were those most likely 
to have access to material nonpublic information.\88\ Two commenters 
argued that trading by employees other than Rule 16a-1(f) officers is 
unlikely to adversely affect financial markets because of the limited 
authority of these employees over corporate decisions.\89\ One of these 
commenters further observed that because other employees do not 
generally file Form 4, their trading activities are unlikely to affect 
public confidence in a company's securities.\90\ Two other commenters 
suggested that non-executive employees are particularly likely to need 
to liquidate and diversify their company stock holdings, and so would 
be disproportionately harmed by limitations such as the cooling-off 
period.\91\ One commenter also stated that making the affirmative 
defense more difficult to establish would reduce the likelihood that 
companies would require their non-executive employees to use Rule 10b5-
1 plans, reducing the benefits of the rule.\92\
---------------------------------------------------------------------------

    \87\ See letters from Chamber of Commerce 2, CII, Cravath, Davis 
Polk, NAM, SCG, and SIFMA.
    \88\ See letters from CII, Cravath, and SIFMA.
    \89\ See letters from Cravath and Davis Polk.
    \90\ See letter from Davis Polk.
    \91\ See letters from Chamber of Commerce 2 and NAM.
    \92\ See letter from Davis Polk.
---------------------------------------------------------------------------

c. Final Amendment
    After consideration of the comments, we are adopting a modified 
cooling-off period that will apply to all persons other than the 
issuer, with directors and ``officers'' (as defined in Rule 16a-1(f)) 
\93\ of the issuer subject to a longer cooling-off period than applies 
to other persons (other than the issuer) who rely on the Rule 10b5-
1(c)(1) affirmative defense.
---------------------------------------------------------------------------

    \93\ We are declining the request from one commenter to adopt a 
definition of ``officer or director'' that would expressly exclude 
certain venture capital funds whose partners may serve as a director 
on the board of an issuer. As we have noted, Rule 10b5-1 does not 
alter the law of insider trading and any potential liability under 
the circumstances described by the commenter would be determined 
according to established principles. We also are not convinced that 
the business circumstances of such a director are unique and thus 
warrant a distinctive set of affirmative defense requirements. We 
further note that Rule 10b5-1(c)(2) can provide an alternative 
affirmative defense for persons other than natural persons.
---------------------------------------------------------------------------

    Under the final rule, a director or ``officer'' (as defined in Rule 
16a-1(f)) who adopts (including a modification of) a Rule 10b5-1 plan 
would not be able to rely on the Rule 10b5-1 affirmative defense unless 
the plan provides that trading under the plan will not begin until the 
later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2) 
two business days following the disclosure of the issuer's financial 
results in a Form 10-Q or Form 10-K for the fiscal quarter in which the 
plan was adopted or, for foreign private issuers, in a Form 20-F or 
Form 6-K that discloses the issuer's financial results (but in any 
event, the required cooling-off period is subject to a maximum of 120 
days after adoption of the plan).\94\
---------------------------------------------------------------------------

    \94\ The good faith requirement in Rule 10b5-1(c)(1)(ii) will 
continue to apply as a condition of the affirmative defense.
---------------------------------------------------------------------------

    This cooling-off period is intended to deter opportunistic trading 
that may be occurring under the current rule and, by extension, as 
noted by commenters, it may increase investor confidence that directors 
and officers are not using Rule 10b5-1 plans for such purposes.\95\ The 
purpose of a cooling-off period is to provide a separation in time 
between the adoption of the plan and the commencement of trading under 
the plan so as to minimize the ability of an insider to benefit from 
any material nonpublic information. In addition, academic studies 
documenting abnormal trading results indicate that opportunistic 
trading may be occurring notwithstanding current Rule 10b5-1(c)(1) and 
that certain corporate insiders are earning profits unavailable to 
others.\96\ For example, directors, officers, and other corporate 
insiders commonly have access to preliminary quarterly financial data 
before it is released to the public. As academic commentary has 
observed, ``[q]uarterly earnings announcements . . . offer the most 
important and frequent dates of material information disclosure by 
firms.'' \97\ A cooling-off period could serve to avoid a situation in 
which, for example, an insider adopts a Rule 10b5-1 plan while aware of 
likely directional trends in quarterly results and trades under the 
plan before the disclosure of such information.
---------------------------------------------------------------------------

    \95\ See, e.g., letters from AFL-CIO, CII, and Manulife.
    \96\ See supra note 35 and accompanying text.
    \97\ See U. Ali & D. Hirshleifer, Opportunism as a Firm and 
Managerial Trait: Predicting Insider Trading Profits and Misconduct, 
126 J. Fin. Econ. 490, 491 (2017).
---------------------------------------------------------------------------

    In addition, as the Proposing Release indicated, we are concerned 
that this type of opportunistic trading could occur in contexts other 
than in connection with quarterly results. For example, as a commenter 
noted, corporate insiders may be aware of material nonpublic 
information related to other types of upcoming events, such as a 
potential merger, acquisition, or departure of a named executive 
officer, and, with such information, adopt a Rule 10b5-1 plan and trade 
under it before that information is made public.\98\
---------------------------------------------------------------------------

    \98\ See letter from ICGN; see also Henderson et al., supra note 
19, at 1301 (noting that 25% of the price changes observed in their 
data are the results of corporate news events other than earnings).
---------------------------------------------------------------------------

    Accordingly, the cooling-off period for officers and directors that 
we are adopting includes both a fixed (90-day) and a variable (two 
business days after the disclosure of the issuer's financial results) 
component. This cooling-off period is targeted at reducing information 
asymmetries in general as well as providing separation in time between 
adoption of the plan and trading under the plan so as to reduce the 
ability of corporate insiders to trade on material nonpublic 
information.
    The approach we are adopting takes into account considerations 
raised by commenters. Some commenters observed that we could accomplish 
our goals by linking the end of the cooling-off period to the release 
of earnings results for the current quarter instead of a fixed period 
of days, and suggested that we adopt a variable cooling-off period that 
ends one or two business days following the issuer's next reporting of 
quarterly results.\99\ Others suggested that we adopt a cooling-off 
period that would be the earlier of this date or some other fixed 
period, such as

[[Page 80370]]

60 days.\100\ In addition, while several commenters supported a 120-day 
cooling-off period,\101\ other commenters expressed concerns that this 
duration would discourage the use of Rule 10b5-1 plans.\102\ We agree 
that, in some cases, a full 120-day cooling-off period would be longer 
than needed to prevent the opportunistic trading with which we are 
concerned. Therefore, we have shortened the cooling off period for 
officers and directors from 120 days to the later of 90 days or the 
second business day following disclosure of the issuer's financial 
results for the fiscal quarter in which the plan was adopted.\103\ This 
will result in a shortened cooling-off period, relative to what was 
proposed, when such results are disclosed sooner than 120 days 
following adoption of the plan.
---------------------------------------------------------------------------

    \99\ See supra note 63.
    \100\ See supra note 59.
    \101\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, 
Public Citizen, O'Reilly, and NASAA.
    \102\ See, e.g., letters from Chamber of Commerce 2, Davis Polk, 
DLA, Fenwick, SIFMA 3, Simpson, and Sullivan.
    \103\ If financial results are disclosed more than 120 days 
after adoption of the plan, 120 days would be the maximum duration 
of the required cooling-off period. In those circumstances, we agree 
with commenters who asserted that a 120-day cooling-off period would 
be an appropriate duration to better ensure that a corporate insider 
would not benefit from material nonpublic information related to 
earnings. See, e.g., letters from AFL-CIO, and CII. The final rule 
would not foreclose issuers that may choose to impose a longer 
cooling-off period.
---------------------------------------------------------------------------

    In addition, to enhance clarity, the final rule provides that an 
issuer will be considered to have disclosed its financial results at 
the time it files a Form 10-Q or Form 10-K, or, in the case of foreign 
private issuers, files a Form 20-F or furnishes a Form 6-K that 
discloses the financial results. We disagree with commenters who 
suggested that there cannot be material nonpublic information contained 
in a Form 10-Q or similar filing when the issuer has already announced 
its earnings results.\104\ For example, some academic researchers have 
found that information in periodic filings affects stock prices for 
issuers that also made an earlier earnings announcement for the same 
quarter.\105\
---------------------------------------------------------------------------

    \104\ See letters from DLA and Quest.
    \105\ See Erik R. Holzman et al., Is All Disaggregation Bad for 
Investors? Evidence from Earnings Announcements, 26 Rev. Acctg. 
Studies 520, 540-41 (2021); Yifan Li et al., Opportunity Knocks But 
Once: Delayed Disclosure of Financial Items in Earnings 
Announcements and Neglect of Earnings News, 25 Rev. Acctg. Studies 
159 (2020); Bin Miao et al., Limited Attention, Statement of Cash 
Flow Disclosure, and the Valuation of Accruals, 21 Rev. Acctg. 
Studies 473 (2016). Some earlier work finds that there are 
incremental market responses to Form 10-K filings but not to Form 
10-Q filings. Edward Xuejun Li & K. Ramesh, Market Reaction 
Surrounding the Filing of Periodic SEC Reports, 84 Acctg. Rev. 1171 
(2009).
---------------------------------------------------------------------------

    Further, the cooling-off period for officers and directors includes 
a two-business day period following the disclosure of the issuer's 
financial results, which provides a short interval for investors and 
other market participants to analyze those results.\106\ Although some 
commenters suggested that the next business day after results are 
released would be adequate to ensure that market participants have 
access to the same information as the corporate insider, we have 
adopted a cooling-off period that extends to the second business day 
after results are released, as other commenters suggested.\107\ We 
disagree with those commenters who suggested that a next-day approach 
would provide all market participants with the same access as the 
corporate insider, as it may be challenging to obtain and analyze the 
full details of an issuer's quarterly results within one day. In some 
cases, allowing trading such a short period after release would 
effectively authorize the director or officer to trade in the first 
minutes after that information's availability to the market.
---------------------------------------------------------------------------

    \106\ See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 & 
n.18 (2d Cir. 1968) (noting that the ``permissible timing of insider 
transactions after disclosures of various sorts is one of the many 
areas of expertise for appropriate exercise of the SEC's rule-making 
power'').
    \107\ See supra note 63.
---------------------------------------------------------------------------

    While some commenters suggested that the cooling-off period need 
only take into account the publication of an issuer's quarterly 
results, we find that including a minimum duration of 90 days for the 
cooling-off period is necessary to deter the full scope of 
opportunistic trading that we intend to address and appropriately 
balances the comments, academic studies, and the purpose of an 
affirmative defense. This minimum period is a reduction from the 
proposed 120-day cooling-off period, in response to comments received 
stating that the length of the proposed cooling-off period could 
discourage corporate insiders from using Rule 10b5-1 plans, although we 
acknowledge that some of these commenters requested a shorter period 
than we are adopting.\108\ Given that directors and officers may be 
aware of material nonpublic information related to upcoming events 
other than quarterly results, a cooling-off period based solely on the 
timing of the publication of quarterly results would be too narrow to 
accomplish the objective of assuring that trading under these plans is 
not on the basis of material nonpublic information.\109\ For example, 
as noted above, directors and officers may be aware of material 
nonpublic information about a potential merger, acquisition, or 
departure of a named executive officer.\110\
---------------------------------------------------------------------------

    \108\ See, e.g., letters from Fenwick, Simpson, and Sullivan.
    \109\ See letter from ICGN.
    \110\ See Jagolinzer, supra note 18, at 234 (finding that 10b5-1 
plan adoption is associated with adverse news events occurring an 
average of 72.2 days after adoption).
---------------------------------------------------------------------------

    Further, a cooling-off period that is linked only to the release of 
the next quarterly results (plus two business days) would in some cases 
cause the time between plan adoption and initial trading to be very 
short, such as two to three days, raising the risk that directors and 
officers could easily adopt and trade under a Rule 10b5-1 plan while 
aware of material nonpublic information that is unrelated to the 
earnings information that has been released. For all of these reasons, 
we are requiring a minimum cooling-off period of 90 days for officers 
and directors regardless of the date of the release of the subsequent 
quarter's results.\111\
---------------------------------------------------------------------------

    \111\ We also note that, consistent with this view, many 
commenters stated that a cooling-off period for a fixed period of 
days (i.e., one which in some cases would necessarily extend beyond 
release of the next quarter's results) is a common industry 
practice.
---------------------------------------------------------------------------

    We acknowledge that the cooling-off period that we are adopting for 
directors and officers is longer than many of the cooling-off periods 
recommended by several commenters and that academic studies do not 
provide a precise estimate of the length of time a cooling-off period 
should be to prevent insiders from realizing abnormal returns on their 
trades.\112\ However, we have tailored the cooling-off period to 
provide a greater separation in time between plan adoption and 
commencement of trading

[[Page 80371]]

under the plan to better ensure that the affirmative defense is 
available only in situations in which material nonpublic information, 
including information other than earnings information, did not factor 
into the trading decision. Finally, although a commenter recommended 
increasing the length of the cooling-off period,\113\ we decline to do 
so to minimize the risk of excessively long cooling-off periods, which, 
as commenters stated, may discourage the use of Rule 10b5-1 plans.
---------------------------------------------------------------------------

    \112\ One study found that abnormal returns persist on average 
among all observed Rule 10b5-1 plans for up to 60 days after plan 
adoption, but that abnormal returns for single-trade plans, which 
represent about half of the observed Rule 10b5-1 plans, persist for 
120 days or more. See Gaming the System, supra note 20, at 2-3. The 
authors conclude that a cooling-off period of four to six months 
would be ``supported by our data,'' id. at 3, although the study did 
not consider whether this would still be the case if there were also 
limits on single-trade plans. A second study consistently found 
abnormal returns for the 60-day period after a Rule 10b5-1 plan is 
adopted, and found such returns under two of the three statistical 
methods employed for the 90-day period after plan adoption. See 
McGinty & Maremont supra note 32. Another study reported evidence 
that insiders trade on information that on average has value for 
between three and six months, and the authors suggest that a 
cooling-off period of that length would curtail these trades. See 
Mavruk & Seyhun, supra note 19 at 136, 163, 179. And another study 
found that insiders continue to earn abnormal returns after the 
fifth planned trade over a 350-day period, suggesting that Rule 
10b5-1 plans do not on average involve very short-run information. 
See Jagolinzer, supra note 19, at 234-35. It also found that Rule 
10b5-1 plans are statistically associated with negative news items 
occurring an average of 72.2 days after a plan is established.
    \113\ See supra note 65.
---------------------------------------------------------------------------

    Moreover, while we recognize that some issuers impose their own 
cooling-off periods, those cooling-off periods are voluntary and vary 
in duration. Including a cooling-off period as a condition of the 
affirmative defense will provide greater consistency for Rule 10b5-1 
plans and thereby help address the investor protection concerns that 
motivated the adoption of Rule 10b5-1.
    In choosing an appropriate cooling-off period for officers and 
directors, we are mindful of some commenters' concerns that a cooling-
off period might reduce the appeal of Rule 10b5-1 plans, which could 
have undesirable effects on investor confidence.\114\ We expect, 
however, that the period we are adopting will not have a significant 
impact on directors' and officers' desire to satisfy the requirements 
of the affirmative defense. Directors and officers have strong 
incentives to rely on a Rule 10b5-1 plan, due to the potential effects 
of the affirmative defense on the likelihood and outcome of any 
litigation. In addition, many issuers maintain trading windows that may 
restrict the trading activity of corporate insiders during an issuer's 
``closed window'' period except through the use of a Rule 10b5-1 plan, 
and such periods may cover significant portions of the year. Similarly, 
Section 306 of the Sarbanes-Oxley Act,\115\ and our implementing 
regulations,\116\ prohibit most trades during issuer pension blackout 
periods other than through the use of a plan that satisfies the 
affirmative defense conditions of Rule 10b5-1(c).\117\ Accordingly, for 
these reasons, we have selected a cooling-off period for officers and 
directors that we conclude strikes the proper balance in deterring 
insider trading without unduly discouraging the adoption of Rule 10b5-1 
plans.
---------------------------------------------------------------------------

    \114\ See, e.g., letters from Chamber of Commerce 2, NAM and 
SIFMA.
    \115\ 15 U.S.C. 7244.
    \116\ See 17 CFR 245.100 et seq.
    \117\ See 17 CFR 245.101(c)(2). Our rules also provide trades 
made pursuant to a Rule 10b5-1 plan more flexibility with respect to 
when an insider must report the trade on Form 4. See 17 CFR 240.16a-
3(g)(2); 17 CFR 240.16a-3(g)(4).
---------------------------------------------------------------------------

    We are not imposing the same cooling-off period required for 
directors and officers to other persons, as some commenters 
suggested,\118\ Instead, we are requiring a cooling-off period of 30 
days for persons other than directors, officers or the issuer. We 
generally agree that persons other than directors and officers often 
have access to material nonpublic information. At the same time, we 
recognize that each of the proposed requirements of the affirmative 
defense may impose costs on such persons, whose needs for 
diversification and liquidity may differ from those of officers and 
directors, as some commenters noted.\119\ In particular, we recognize 
that some persons will experience meaningful delays in their ability to 
liquidate a stock position, which may cause some financial strain 
particularly for employees who may lack the resources and access to 
alternative liquidity sources available to directors and officers. 
Therefore, we disagree with commenters who urged us to impose the same 
cooling-off period required for directors and officers to all other 
traders.
---------------------------------------------------------------------------

    \118\ See letters from Better Markets, NASAA, and Senator Warren 
et al.
    \119\ See letters from Chamber of Commerce 2 and NAM.
---------------------------------------------------------------------------

    The 30-day cooling-off period we are adopting for persons other 
than directors, officers, or the issuer reflects a balancing of the 
considerations we have outlined above. We believe that when any insider 
enters into a Rule 10b5-1 plan, a period of time should elapse before 
trading under the plan can commence to help ensure that a trade is not 
on the basis of material nonpublic information. At the same time, we 
recognize the heightened burdens a cooling-off period may impose on 
insiders who are not directors or officers, and who may have more 
limited financial resources. In light of these considerations, we have 
adopted a shorter cooling-off period for persons other than officers 
and directors that is still long enough to reduce the potential for 
some opportunistic trades.\120\
---------------------------------------------------------------------------

    \120\ We recognize that we have previously observed that the 
affirmative defense would be available to an employee who acquires 
company stock through an employee stock purchase plan or a Section 
401(k) plan. See 2000 Adopting Release, supra note8, at 51728. We do 
not believe that a 30-day cooling-off period will significantly 
affect non-officer employees' use of such plans, as we think that 
employees employ these plans primarily to make relatively regular 
purchases over long periods of time, such that a waiting period of 
two biweekly pay periods before planned trades can begin will not 
appreciably affect the employees' preferences.
---------------------------------------------------------------------------

    We are not implementing commenters' suggestions to adopt a 
financial hardship exception from the cooling-off period due to the 
practical difficulties of administering this type of exception.\121\ 
Assessing financial hardship would require careful scrutiny and 
balancing of each insider's assets, liabilities, and obligations, and 
this fact-intensive inquiry would undermine the predictability that the 
affirmative defense is intended to provide.
---------------------------------------------------------------------------

    \121\ See supra note 69.
---------------------------------------------------------------------------

    In addition, we agree with commenters that only certain types of 
modifications of an existing Rule 10b5-1 plan should trigger a new 
cooling-off period. We therefore are adopting a new paragraph to Rule 
10b5-1(c)(1) that specifically provides that a modification or change 
to the amount, price, or timing of the purchase or sale of the 
securities (or a modification or change to a written formula or 
algorithm, or computer program that affects the amount, price, or 
timing of the purchase or sale of the securities) underlying a 
contract, instruction, or written plan as described in Rule 10b5-
1(c)(1)(i)(A) is a termination of such contract, instruction, or 
written plan, and the adoption of a new contract, instruction, or 
written plan, and such new adoption will trigger a new cooling-off 
period. The final amendment codifies prior Commission guidance on 
existing Rule 10b5-1(c)(1)(i)(C) about the effect of 
modifications.\122\ Under the final amendment, modifications that do 
not change the sales or purchase prices or price ranges, the amount of 
securities to be sold or purchased, or the timing of transactions under 
a Rule 10b5-1 plan (such as an adjustment for stock splits or a change 
in account information) will not trigger a new cooling-off period. We 
disagree with the commenter that urged us to not trigger a new cooling-
off period upon a modification, because a corporate insider could 
easily change the key terms of an existing plan at a time when they are 
aware of material nonpublic information, such as by increasing the 
sales price to take advantage of favorable news, allowing the insider 
to profit from such information.\123\
---------------------------------------------------------------------------

    \122\ See 2000 Adopting Release, supra note 8, at 51718 n 111.
    \123\ See letter from NAM.
---------------------------------------------------------------------------

    Finally, we are not adopting a cooling-off period for the issuer at 
this time. In light of the comments we received on this aspect of the 
proposed rules, we believe that further consideration of potential 
application of a cooling-off period to the issuer is

[[Page 80372]]

warranted.\124\ Although we are aware that many issuers currently use 
cooling-off periods in connection with their securities transactions 
and that such cooling-off periods may significantly mitigate the risk 
of investor harm, we are also mindful that the use and length of such 
cooling off periods is not uniform and that the misuse of material 
nonpublic information by issuers when trading in their own securities 
can result in significant investor harm because transactions by issuers 
often involve substantial quantities of securities. We are continuing 
to consider whether regulatory action is needed to mitigate any risk of 
investor harm from the misuse of Rule 10b5-1 plans by the issuer, such 
as in the share repurchase context. We note that, in general, a 
corporation is considered an insider with regard to its duty to either 
disclose or abstain when purchasing its own shares on the basis of 
material, nonpublic information.\125\
---------------------------------------------------------------------------

    \124\ See supra note 71 and accompanying text.
    \125\ See, e.g., McCormick v. Fund Am. Cos., 26 F.3d 896 (9th 
Cir. 1994) (``Numerous authorities have held or otherwise stated 
that the corporate issuer in possession of material nonpublic 
information must, like other insiders in the same situation, 
disclose that information to its shareholders or refrain from 
trading with them.'') (citations omitted); Shaw v. Digital Equip. 
Corp., 82 F.3d 1194, 1203-04 (1st Cir. 1996) (``Courts . . . have 
treated a corporation trading in its own securities as an `insider' 
for purposes of the `disclose or abstain' rule.'') (citations 
omitted); Rogen v. Ilikon Corp., 361 F.2d 260, 266-68 (1st Cir. 
1966); Levinson v. Basic Inc., 786 F.2d 741, 746 (6th Cir. 1986), 
vacated on other grounds, 485 U.S. 224, 108 S. Ct. 978 (1988) 
(``[c]ourts have held that a duty to disclose [merger] negotiations 
arises in situations, such as where the corporation is trading in 
its own stock''); Kohler v. Kohler Co., 319 F.2d 634, 638 (7th Cir. 
1963) (the ``underlying principles'' regarding trading on inside 
information ``apply not only to majority stockholders of 
corporations and corporate insiders, but equally to corporations 
themselves''). Other rules promulgated pursuant to Section 10(b) 
demonstrate that issuers trading in their own stock have a duty to 
disclose or abstain. For example, Exchange Act Rule 10b-18 provides 
an issuer with a ```safe harbor' from liability'' under Rule 10b-5 
under certain circumstances when the issuer is repurchasing its own 
stock. [17 CFR 240.10b-18]. But, as the Commission has explained, 
Rule 10b-18 ``confers no immunity from possible Rule 10b-5 liability 
where the issuer engages in repurchases while in possession of 
favorable, material non-public information concerning its 
securities.'' Purchases of Certain Equity Securities by the Issuer 
and Others, Release No. 33-6434, 1982 WL 33916 at *2, *16 n.5 (Nov. 
17, 1982).
---------------------------------------------------------------------------

2. Director and Officer Certifications
a. Proposed Amendments
    The Commission proposed to amend Rule 10b5-1(c)(1)(ii) to impose a 
certification requirement as a condition to the affirmative defense. 
Under the proposed amendment, if a director or officer (as defined in 
Rule 16a-1(f)) of the issuer of the securities adopts a new written 
Rule 10b5-1 plan, such director or officer would be required, as a 
condition to the affirmative defense, to promptly furnish to the issuer 
a separate written certification, certifying that at the time of the 
adoption of the plan:
     They are not aware of material nonpublic information about 
the issuer or its securities; and
     They are adopting the plan in good faith and not as part 
of a plan or scheme to evade the prohibitions of Exchange Act Section 
10(b) and Exchange Act Rule 10b-5.
    In doing so, the Commission indicated that the use of the term 
``officer'' as defined in Rule 16a-1(f) is appropriate for the reasons 
discussed above with respect to the cooling-off period (i.e., these 
individuals are more likely to be aware of material nonpublic 
information regarding the issuer and its securities, as well as more 
likely to be involved in making or overseeing corporate decisions about 
whether and when to disclose information).
    The Commission intended the proposed certification requirement to 
reinforce directors' and officers' cognizance of their obligation not 
to trade or adopt a trading plan while aware of material nonpublic 
information, their responsibility to determine whether they are aware 
of material non-public information when adopting Rule 10b5-1 plans, and 
the fact that the affirmative defense under Rule 10b5-1 requires them 
to act in good faith and not to adopt such plans as part of a plan or 
scheme to evade the insider trading laws. The Commission noted in the 
Proposing Release that the proposed certification involves important 
considerations, especially because directors and officers are often 
aware of material nonpublic information.
    In addition, the Commission clarified that, subject to their 
confidentiality obligations, directors and officers can consult with 
experts to determine whether they can make this representation 
truthfully. Legal counsel can assist directors and officers in 
understanding the meaning of the terms ``material'' and ``nonpublic 
information.'' \126\ The Commission stated, however, that the issue of 
whether a director or officer has material nonpublic information is an 
inherently fact-specific analysis. Thus, a director's or officer's 
completion of the proposed certification would reflect their personal 
determination that they do not have material nonpublic information at 
the time of adoption of a Rule 10b5-1 plan.
---------------------------------------------------------------------------

    \126\ As the Commission has stated previously, we rely on 
existing definitions of the terms ``material'' and ``nonpublic'' 
established in case law. Information is material if ``there is a 
substantial likelihood'' that its disclosure ``would have been 
viewed by the reasonable investor as having significantly altered 
the `total mix' of information made available.'' See Basic v. 
Levinson, 485 U.S. 224, 231 (1988) (quoting and applying TSC 
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) to the 
Section 10(b) and Rule 10b-5 context); Rule 405 [17 CFR 230.405] of 
the Securities Act of 1933 (the ``Securities Act'') [15 U.S.C. 77a 
et seq.]; Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. Information is 
nonpublic until the information is broadly disseminated in a manner 
sufficient to ensure its availability to the investing public 
generally, without favoring any special person or group. See Dirks 
v. SEC, 463 U.S. 646, 653-54 & n.12 (1983); SEC v. Texas Gulf 
Sulphur Co., 401 F.2d 833, 854 (2d Cir. 1968), cert. denied, 394 
U.S. 976 (1969); Regulation FD [17 CFR 243.101(e)]. For purposes of 
insider trading law, insiders must wait a ``reasonable'' time after 
disclosure before trading. What constitutes a reasonable time 
depends on the circumstances of the dissemination. In re Faberge, 
Inc., 45 SEC. 249, 255 (1973) (citing Texas Gulf Sulphur, 401 F.2d 
at 854). Under the misappropriation doctrine, a recipient of inside 
information must make a ``full disclosure'' to the sources of the 
information that they plan to trade on or tip the information within 
a reasonable time before doing so. O'Hagan, 521 U.S. at 655, 659 
n.9; see also SEC v. Rocklage, 470 F.3d 1, 11-12 (1st Cir. 2006).
---------------------------------------------------------------------------

    The proposed amendment also included an instruction that a director 
or officer seeking to rely on the affirmative defense should retain a 
copy of the certification for a period of ten years. The proposed 
amendments would not require a director, officer, or the issuer to file 
the certification with the Commission, and the proposed certification 
would not be an independent basis of liability for directors or 
officers under Section 10(b) and Rule 10b-5. Rather, the Commission 
intended the proposed certification to underscore the certifiers' 
awareness of their legal obligations under the Federal securities law 
related to trading in the issuer's securities.\127\
---------------------------------------------------------------------------

    \127\ See, e.g., O'Hagan, 521, U.S. at 651-52; Chiarella, 445 
U.S. at 227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d 
Cir. 2014).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Commenters were divided on the certification requirement. Several 
commenters generally supported the proposed certification requirement 
for directors and officers.\128\ Some of these commenters agreed that 
the proposed certification could reinforce directors' or officers' 
awareness of their legal obligations under the Federal securities 
law.\129\ Another commenter noted that the certification should 
increase investor confidence.\130\
---------------------------------------------------------------------------

    \128\ See, e.g., letters from CII, CO PERA, ICGN, NYSE, and 
O'Reilly.
    \129\ See letters from CII and O'Reilly.
    \130\ See letter from ICGN.

---------------------------------------------------------------------------

[[Page 80373]]

    A number of commenters, however, did not support the proposed 
certification requirement.\131\ Many of these commenters contended that 
the certification was unnecessary because broker-dealers who execute 
Rule 10b5-1 plans usually require the director or officer to make 
similar representations.\132\ Several commenters stated that any final 
rules should clearly provide that the certification does not establish 
an independent basis of liability for directors or officers under 
Section 10(b) and Rule 10b-5.\133\ Another commenter expressed concern 
that the language included in the proposed certification indicating 
that the director or officer is ``not aware of material nonpublic 
information about the issuer or its securities'' at the time of 
adoption of a Rule 10b5-1 plan is inconsistent with Rule 10b-5 and 
insider trading jurisprudence.\134\ This commenter asserted that, for 
trading activity to be unlawful under Exchange Act Section 10(b)(5), 
the person trading must not have been aware of material nonpublic 
information at the time that they made the purchase or sale. This 
commenter claimed that the affirmative defense should be available if 
either: (1) the person trading was not aware of any material nonpublic 
information about the issuer or the security when they entered into the 
Rule 10b5-1 trading arrangement; or (2) any such material nonpublic 
information is either public or no longer material at the time of the 
trade.
---------------------------------------------------------------------------

    \131\ See, e.g., letters from ACCO, Cravath, Davis Polk, DLA, 
Kirkland, MD Bar, NAM, Quinn, SGC, Shearman, Sullivan, and Wilson 
Sonsini.
    \132\ See, e.g., letters from ACCO, Cravath, DLA, Kirkland, 
Shearman, and Sullivan.
    \133\ See, e.g., letters from Cravath, DLA, Kirkland, Shearman, 
and Sullivan.
    \134\ See letter from MD Bar.
---------------------------------------------------------------------------

    Several commenters suggested alternatives to requiring a separate 
certification. A few commenters suggested that the proposed amendment 
should provide that the certification should instead be included in the 
documentation for the Rule 10b5-1 plan.\135\ Another commenter 
recommended that the Commission rely on the representations that 
traders make to the broker executing the Rule 10b5-1 plan.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., letters from Cravath and SIFMA 3.
    \136\ See letter from ACCO.
---------------------------------------------------------------------------

c. Final Amendment
    We are adopting Rule 10b5-1(c)(1)(ii)(C) largely as proposed, but 
with certain modifications. Under the final rule, if a director or 
``officer'' (as defined in Rule 16a-1(f)) of the issuer of the 
securities adopts a Rule 10b5-1 plan, as a condition to the 
availability of the affirmative defense, such director or officer will 
be required to include a representation in the plan certifying that at 
the time of the adoption of a new or modified Rule 10b5-1 plan: (1) 
they are not aware of material nonpublic information about the issuer 
or its securities; and (2) they are adopting the contract, instruction, 
or plan in good faith and not as part of a plan or scheme to evade the 
prohibitions of Rule 10b-5.\137\
---------------------------------------------------------------------------

    \137\ The rule will not require these personal certifications 
where a director or officer terminates an existing Rule 10b5-1 plan 
and does not adopt a new/modified trading arrangement for which the 
affirmative defense is sought. However, new Item 408 of Regulation 
S-K will require registrants to disclose whether any director or 
officer has terminated a Rule 10b5-1 plan or non-Rule 10b5-1 trading 
arrangement. See infra Section II.B.1. An issuer's insider trading 
policies and procedures may otherwise govern such plan terminations. 
See infra at Section II.B.2. Finally, whether an inference can be 
drawn that an individual unlawfully traded on the basis of inside 
information may be informed by the manner in which they trade (see, 
e.g., SEC v. Warde, 151 F.3d, 42, 47 (2d Cir.1998), including where 
termination of a Rule 10b5-1 trading arrangement is soon followed by 
non-Rule 10b5-1 trades in the same security or issuer.
---------------------------------------------------------------------------

    Since its adoption, Rule 10b5-1(c)(1) has required, as a condition 
of the affirmative defense, that a person ``demonstrate[]'' that they 
adopted their trading plan before becoming aware of material nonpublic 
information. The rule has also provided that the affirmative defense 
only applies when the trading arrangement was entered into in good 
faith. As discussed above, we are concerned that, notwithstanding these 
requirements, corporate insiders may be using Rule 10b5-1 plans in ways 
that are not consistent with the affirmative defense and that harm 
investors and undermine the integrity of the securities markets.\138\
---------------------------------------------------------------------------

    \138\ See supra Section II.A.
---------------------------------------------------------------------------

    The certification condition is intended to reinforce directors' and 
officers' cognizance of their obligation not to trade or enter into a 
trading plan while aware of material nonpublic information about the 
issuer or its securities, that it is their responsibility to determine 
whether they are aware of material non-public information when adopting 
Rule 10b5-1 plans, and that the affirmative defense under Rule 10b5-1 
requires them to act in good faith and not to adopt such plans as part 
of a plan or scheme to evade the insider trading laws. As noted in the 
Proposing Release, we recognize that this certification involves 
important considerations, especially because directors and officers are 
often aware of material nonpublic information. Subject to their 
confidentiality obligations, directors and officers can consult with 
experts to determine whether they can make this representation 
truthfully. Legal counsel can assist directors and officers in 
understanding the meaning of the terms ``material'' and ``nonpublic 
information.'' \139\ However, the issue of whether a director or 
officer has material nonpublic information is an inherently fact-
specific analysis. Thus, a director or officer's completion of the 
proposed certification would reflect their personal determination that 
they do not have material nonpublic information at the time of adoption 
of a Rule 10b5-1 plan.
---------------------------------------------------------------------------

    \139\ See supra note 126.
---------------------------------------------------------------------------

    As suggested by some commenters,\140\ however, we have modified the 
final amendment to require that the certification be included in the 
Rule 10b5-1 plan as representations, rather than prepared as a separate 
document to be presented to the issuer. Consistent with the intent 
behind the proposal, this approach will reinforce directors' and 
officers' cognizance of their obligations discussed above, but will 
eliminate any additional burden that separate documentation may create.
---------------------------------------------------------------------------

    \140\ See, e.g., letters from Cravath and SIFMA 3.
---------------------------------------------------------------------------

    We are not persuaded, however, that any representations that 
corporate insiders may already make to broker-dealers obviate the need 
for a certification. While we note that broker-dealers may require 
similar representations from directors and officers before executing a 
Rule 10b5-1 plan, given that there is no requirement that they do so, 
such practices may not be universal, and the requirement may differ 
among the various broker-dealers that do require such representations. 
This rule therefore will better ensure that corporate insiders provide 
these representations. Further, because issuers must provide disclosure 
regarding the material terms (other than price) of their directors' and 
officers' Rule 10b5-1 plans under new Item 408(a) of Regulation S-K as 
described below, any representation made as part of such plans will 
also likely be requested by and made available to the issuer to 
facilitate its compliance with the disclosure requirement. To the 
extent that directors and officers provide issuers with these 
representations, they would likely have a greater effect on investor 
confidence that the officer or director in fact was not aware of 
material nonpublic information when making the representation due to 
the issuer's close relationship to its officers and directors.
    In addition, we are not adopting the proposed instruction that a 
director or

[[Page 80374]]

officer seeking to rely on the affirmative defense should retain a copy 
of the certification for a period of ten years. The burden of 
establishing that the requirements of the affirmative defense have been 
met will fall on the corporate insider who wishes to rely on it. As a 
result, we find that the proposed instruction is unnecessary as 
directors and officers already have reason to keep accurate records, 
including the representations, to establish that they have satisfied 
the conditions of the affirmative defense.
    Finally, we disagree with the commenter who argued that requiring 
directors or officers to certify that they lack material nonpublic 
information at the time of adopting a Rule 10b5-1 plan would be 
inconsistent with insider trading jurisprudence.\141\ Specifically, the 
commenter argued that the certification should instead allow a trader 
to certify that any material nonpublic information the trader holds at 
the time the plan is entered into will be either public or no longer 
material at the time of the trade.\142\ We concur with this commenter 
that, in general, liability under Rule 10b-5 and Section 10(b) requires 
a showing that a covered individual was aware of material nonpublic 
information at the time that a trade was executed. Rule 10b5-1, 
however, is intended to provide an affirmative defense against 
liability under circumstances where it is relatively unlikely that a 
trader will be able to trade on material nonpublic information. As 
noted earlier, this defense is designed to cover situations where a 
person can demonstrate that a trade was not based on material nonpublic 
information. Requiring a representation that a director or officer was 
not aware of material nonpublic information when adopting a Rule 10b5-1 
plan as a condition of the affirmative defense better ensures that the 
defense is available only in those circumstances. Moreover, by its 
nature, an affirmative defense does not affect the substance of the 
underlying prohibition. Individuals who cannot satisfy this condition 
because they are aware of material nonpublic information at the time 
that they enter into a Rule 10b5-1 plan may still be able to trade 
without liability if they lack material nonpublic information at the 
time that their trade is actually executed. In such circumstances, 
however, they would not be able to benefit from the affirmative defense 
provided by Rule 10b5-1(c)(1). We also disagree with the commenter's 
suggestion that the representation condition we are adopting is a 
substantive change in what knowledge an individual may possess when 
adopting a plan that satisfies the conditions of Rule 10b5-
1(c)(1).\143\ The representation condition rather adds a requirement 
about how that knowledge is documented for purposes of the affirmative 
defense.
---------------------------------------------------------------------------

    \141\ See letter from MD Bar.
    \142\ The Commission is not adopting this alternative because of 
the difficulties a trader would face in assessing at the time of 
certification whether the information will become nonpublic or no 
longer material at the time of their future trading. For example, a 
trader may not be able to make a determination about whether and 
when other persons will disclose nonpublic information on behalf of 
an issuer by a certain time in the future. See 2000 Adopting 
Release, supra note 8 above (noting that public companies frequently 
``designat[e] a limited number of persons who are authorized to make 
disclosures'' that can be considered as made ``on behalf of an 
issuer'' to comply with the securities laws); see also 17 CFR 
243.100, 101(c). The certification condition that the Commission is 
adopting permits traders to make the relatively more straightforward 
determination whether they are aware of material nonpublic 
information at a given point in time.
    \143\ The 2000 adopting release made clear that a person could 
adopt a plan ``while the person was not aware of any inside 
information.'' 2000 Adopting Release at 51737 (emphasis added); 
accord Selective Disclosure and Insider Trading, Release No. 33-7787 
(Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)] at 72601 (``If the 
insider provides the instructions without awareness of any material 
nonpublic information, the Rule would permit him or her to complete 
the previously instructed sales plan even if he or she later became 
aware of inside information.'') (emphasis added).
---------------------------------------------------------------------------

    Finally, the Commission also proposed a technical change to 
incorporate the Preliminary Note to Rule 10b5-1 into Rule 10b5-
1(b).\144\ The Preliminary Note to Rule 10b5-1 states that the rule 
defines when a purchase or sale constitutes trading ``on the basis of'' 
material nonpublic information in insider trading cases brought under 
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, that the 
law of insider trading is otherwise defined by judicial opinions 
construing Rule 10b-5, and that Rule 10b5-1 does not modify the scope 
of insider trading law in any other respect.\145\ We are adopting this 
change as proposed.
---------------------------------------------------------------------------

    \144\ See Proposing Release at 8689.
    \145\ See 2000 Adopting Release supra note 8 at 51727. The 
Commission adopted an ``awareness'' standard in 2000 that provides 
that a purchase or sale of a security of an issuer is on the basis 
of material nonpublic information about that security or issuer ``if 
the person making the purchase or sale was aware of the material 
nonpublic information when the person made the purchase or sale.'' 
17 CFR 240.10b5-1(b) (2000). The Commission explained at that time 
that one view was that a trader may be liable for trading while in 
``knowing possession of information,'' while a contrary view was 
that a trader is not liable unless it is shown that the trader 
``used'' the information for trading. Selective Disclosure and 
Insider Trading, 65 FR 51716-01, 51726-27 (Aug. 24, 2000). The 
Commission ultimately adopted the ``awareness'' standard that 
balanced considerations of both views while being ``closer'' to the 
``knowing possession'' standard than to the ``use'' standard. Id. 
One commenter suggested that the Commission lacked authority ``in 
the year 2000'' to adopt Rule 10b5-1(b)'s awareness standard. See 
letter from Pacific Legal Foundation. However, none of the 
modifications the Commission is adopting in this Release would alter 
the ``awareness'' standard that the Commission adopted in 2000. See 
supra at p.8 n. 9. In any event, by prohibiting any manipulative or 
deceptive device or contrivance ``in contravention of such rules and 
regulations as the Commission may prescribe as necessary or 
appropriate in the public interest or the protection of investors'' 
(Exchange Act Section 10(b)), Congress thereby authorized the 
Commission to ``prescribe legislative rules'' like Rule 10b5-1, and 
courts must accord Rule 10b5-1 ``controlling weight.'' O'Hagan, 521 
U.S. at 673 (quoting Chevron, 467 U.S. at 844). Since its adoption 
in 2000, courts have appropriately deferred to the Commission's 
``awareness'' standard, holding that the Commission's determination 
is ``entitled to deference.'' Royer, 549 F.3d at 899 (applying 
Chevron); see also United States v. Rajaratnam, 719 F.3d 139, 157-61 
(2d Cir. 2013), cert. denied, 134 S. Ct. 2820 (2014). Furthermore, 
Congress has expressly authorized the Commission to seek and 
district courts to impose civil monetary penalties where a person 
has violated the securities laws by purchasing or selling a security 
``while in possession of'' material nonpublic information. Exchange 
Act Section 21A(a)(1) [15 U.S.C. 78u-1(a)(1)]; see also Exchange Act 
Section 20(d) (liability for trading ``while in possession of'' 
material nonpublic information) [15 U.S.C. 78t(d)].
---------------------------------------------------------------------------

    The existing law of insider trading provides an established legal 
framework that makes directors and officers liable if they fraudulently 
purchase or sell securities on the basis of material nonpublic 
information in breach of a duty of trust or confidence. Rule 10b5-1 
provides that a purchase or sale of a security of an issuer is on the 
basis of material nonpublic information for purposes of Section 10(b) 
and Rule 10b-5 if the person making the purchase or sale was aware of 
the material nonpublic information when the person made the purchase or 
sale. Rule 10b5-1 expressly ``does not modify the scope of insider 
trading law in any other respect.'' We think it is sufficiently clear 
that the certification would not create an independent basis of 
liability for insider trading and do not believe it is necessary to 
amend the rule in this regard, as suggested by several commenters.\146\
---------------------------------------------------------------------------

    \146\ See, e.g., letters from Cravath, DLA, Kirkland, Shearman, 
and Sullivan.
---------------------------------------------------------------------------

3. Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements 
and Single-Trade Arrangements
a. Proposed Amendments
    Currently, a person is not entitled to the Rule 10b5-1(c)(1) 
affirmative defense for a trade if they enter into or alter a 
``corresponding or hedging transaction or position'' with respect to 
the planned transactions.\147\ In proposing this requirement, the 
Commission explained that it was

[[Page 80375]]

designed to prevent persons from devising schemes to exploit material 
nonpublic information by setting up pre-existing hedged trading 
programs, and then canceling execution of the unfavorable side of the 
hedge, while permitting execution of the favorable transaction.\148\
---------------------------------------------------------------------------

    \147\ See Rule 10b5-1(c)(1).
    \148\ See Selective Disclosure and Insider Trading, Release No. 
33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)].
---------------------------------------------------------------------------

    In the Proposing Release, the Commission recognized that multiple 
overlapping plans can be used for these hedging purposes and in other 
ways that might allow material nonpublic information to ``factor into 
the trading decision'' of an insider who had complied with the other 
provisions of Rule 10b5-1. In particular, currently, a person can adopt 
and employ multiple overlapping Rule 10b5-1 trading arrangements and 
exploit material nonpublic information by setting up trades timed to 
occur around dates on which they expect that the issuer will likely 
release material nonpublic information (such as earnings releases) and 
then selectively cancel trades or terminate plans on the basis of 
material nonpublic information before the information is publicly 
disclosed. In this same vein, the Commission noted its concern that a 
person could circumvent 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 its release.
    To address these concerns, the Commission proposed to amend Rule 
10b5-1(c)(1) to provide as a condition of the affirmative defense that 
the person who has entered the plan has no outstanding (and does not 
subsequently enter into another) Rule 10b5-1 plan for open market 
purchases or sales of the same class of securities. The Commission also 
requested comment on whether it was appropriate to exclude multiple 
trading arrangements for open market purchases or sales of the same 
class of securities, and specifically asked commenters to weigh in on 
whether allowing a concurrent trading arrangement for each class of 
securities would ``create incentives for corporate insiders to own 
different classes of stock.'' \149\
---------------------------------------------------------------------------

    \149\ Proposing Release, supra note 23, at 8692 (request for 
comment number 13).
---------------------------------------------------------------------------

    This proposed limitation was designed to eliminate the ability of 
traders to use multiple plans to strategically execute trades based on 
material nonpublic information and still claim the protection of the 
affirmative defense for such trades.
    The proposed amendment would not apply to transactions where a 
person acquires (or sells) securities through participation in employee 
stock ownership plans (``ESOPs'') or dividend reinvestment plans 
(``DRIPs''), which are not executed by the person on the open market. 
Participation in these programs is sometimes effected through Rule 
10b5-1 plans, and because these transactions are directly with the 
issuer, the Commission concluded they were less likely to give rise to 
insider trading concerns.\150\ Thus, the Commission proposed this 
exception to preserve the benefits of flexibility for plan participants 
with respect to such plans.
---------------------------------------------------------------------------

    \150\ However, the Supreme Court has explained that lower courts 
``should consider the extent to which an ERISa-based obligation 
either to refrain on the basis of inside information from making a 
planned trade or to disclose inside information to the public could 
conflict with the complex insider trading and corporate disclosure 
requirements imposed by the federal securities laws or with the 
objectives of those laws.'' Fifth Third Bancorp v. Dudenhoeffer, 573 
U.S. 409, 429 (2014). Officers and directors also need to follow 
Regulation Blackout Trading Restrictions, see 17 CFR 245.100 through 
245.104.
---------------------------------------------------------------------------

    In addition to restricting the use of multiple overlapping trading 
arrangements, the Commission proposed to amend Rule 10b5-1(c)(1)(ii) to 
limit the availability of the affirmative defense for a trading 
arrangement designed to cover a single trade, by providing that the 
affirmative defense would only be available for one single-trade plan 
during any 12-month period. Under the proposed amendment, the 
affirmative defense would not be available for a single-trade plan if 
the trader had purchased or sold securities pursuant to another single-
trade plan within the preceding 12-month period. In proposing this 
amendment, the Commission noted that some recent research indicated 
that single-trade plans are consistently loss-avoiding and their 
adoption often precedes stock price declines.\151\ At the same time, 
the Commission recognized the use of single-trade plans to address one-
time liquidity needs. The proposed limitation on single-trade plans was 
intended to balance accommodating the use of single-trade plans for 
one-time liquidity needs against the potential for abuse of such plans.
---------------------------------------------------------------------------

    \151\ See Gaming the System, supra note 20; see also infra 
Section V.B.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters generally supported both the proposed 
restriction on multiple overlapping trading arrangements, and the 
limitation on single-trade plans.\152\ One commenter expressed support 
for the prohibition on multiple overlapping trading arrangements, but 
did not address single-trade plans.\153\ A few commenters supported the 
proposed prohibition on multiple overlapping trading arrangements but 
asked the Commission to limit the prohibition to directors and 
officers, noting that individuals have many legitimate reasons to have 
overlapping plans, such as gifts and estate-planning transactions, and 
that directors and officers are the group most likely to have material 
nonpublic information.\154\
---------------------------------------------------------------------------

    \152\ See, e.g., letters from AFL-CIO, Better Markets, CO PERA, 
MD Bar, NYCC, NASAA, and Public Citizen.
    \153\ See letter from Kirkland.
    \154\ See, e.g., letters from SIFMA 3 and Sullivan.
---------------------------------------------------------------------------

    With respect to single-trade plans specifically, commenters had 
mixed responses. One commenter expressed support for the limitation on 
single-trade plans,\155\ while another commenter recommended that the 
Commission eliminate the availability of the Rule 10b5-1 affirmative 
defense for all single-trade plans.\156\ On the other hand, some 
commenters noted that single-trade plans often have legitimate 
uses.\157\ For example, one commenter maintained that, if adopted, the 
Commission should provide exceptions for derivative transactions, 
gifts, estate-planning transactions, and employee benefit plan 
transactions.\158\ Other commenters indicated that the proposed 
restriction could be evaded by splitting one trade that would be 
authorized under such a plan into two trades.\159\
---------------------------------------------------------------------------

    \155\ See letter from NYSE.
    \156\ See letter from Sen. Warren et al.
    \157\ See, e.g., letters from Monday.com Ltd (``Monday.com''), 
BioNJ, SCG, SIFMA 3, Davis Polk, Fenwick, Jones Day, Shearman, and 
Wilson Sonsini
    \158\ See letter from Sullivan.
    \159\ See letter from Cravath and Davis Polk.
---------------------------------------------------------------------------

    In addition, several commenters expressed concern that the proposed 
restrictions on multiple overlapping and single-trade Rule 10b5-1 plans 
would negatively impact certain employee compensation plan transactions 
that are structured as Rule 10b5-1 plans, such as sales of securities 
used to generate funds to cover the withholding taxes associated with 
equity vesting and elections under 401(k) plans or employee stock 
purchase plans that may be structured as Rule 10b5-1 plans (``sell-to-
cover transactions'').\160\ Some of these commenters asserted that 
these transactions do not implicate the concerns that the proposed 
amendment is intended to address because a

[[Page 80376]]

corporate insider has limited discretion as to the timing or the number 
of shares sold to cover the tax liability.\161\ Other commenters 
generally stated that under the proposed limitations, insiders could 
not maintain both a traditional Rule 10b5-1 plan and a plan designed to 
execute sell-to-cover transactions.\162\
---------------------------------------------------------------------------

    \160\ See, e.g., letters from Fenwick, HP, Monday.com, SCG, 
Sullivan, and Wilson Sonsini.
    \161\ See, e.g., letters from BioNJ, Monday.com, and Simpson 
Thatcher.
    \162\ See, e.g., Sullivan and Wilson Sonsini.
---------------------------------------------------------------------------

    With respect to the aspect of the proposed definition of ``multiple 
concurrent trading arrangements'' under which an insider could 
establish a separate arrangement for each ``class of securities,'' 
several commenters generally supported the limitation on multiple 
overlapping plans as proposed.\163\ One commenter, however, argued that 
the proposed definition would encourage insiders to establish parallel 
trading arrangements for common stock, preferred stock, and 
options.\164\ Because the values of these instruments are all highly 
correlated, the commenter stated, the proposed rule would still allow 
insiders to opportunistically use material nonpublic information by 
establishing such parallel arrangements and then cancelling one or more 
of them.
---------------------------------------------------------------------------

    \163\ See letters from Better Markets, CII, and CO PERA.
    \164\ See letter from NASAA.
---------------------------------------------------------------------------

    Many commenters did not support the proposed restriction on 
multiple overlapping Rule 10b5-1 plans.\165\ Some commenters asserted 
that this limitation was unnecessary, because, given that the 
affirmative defense already does not permit adoption of hedged plans in 
which a person takes offsetting financial positions, there is no 
additional abusive conduct to address.\166\
---------------------------------------------------------------------------

    \165\ See, e.g., letters from ABA, ACCO, BioNJ, Chamber of 
Commerce 2, Chevron, Coalition Letter, Cravath, Davis Polk, DLA, 
Dow, FedEx, Fenwick, HP, HRPA, HudsonWest, Jones Day, K&L Gates, 
Kirkland, Manulife, Monday.com, NAM, NVCA, NYC Bar, Paul Weiss, PNC, 
Quest, Quinn, SCG, Shearman, Simpson, and Wilson Sonsini.
    \166\ See, e.g., letters from Davis Polk and Shearman.
---------------------------------------------------------------------------

    As with single-trade plans, a number of commenters indicated that 
there are legitimate, common uses of multiple, overlapping Rule 10b5-1 
plans.\167\ Some commenters noted, for example, that issuers often use 
multiple concurrent Rule 10b5-1 plans with different brokers to execute 
share repurchase transactions.\168\ Other commenters indicated that 
directors and officers often employ multiple Rule 10b5-1 plans because 
they hold shares in different accounts with multiple financial 
institutions.\169\ They noted, for example, that a corporate insider 
may hold shares received upon the exercise of stock options in an 
account with the financial institution that is the administrator of the 
issuer's incentive equity plan, and hold shares acquired through open 
market transactions or other means in a separate account with a 
different financial institution.
---------------------------------------------------------------------------

    \167\ See, e.g., letters from Chamber of Commerce 2, Cravath, 
Davis Polk, Dow, FedEx, HP, Jones Day, Manulife, Monday.com, NVCA, 
NYC Bar, Quest, Shearman, Sullivan, and Wilson Sonsini.
    \168\ See, e.g., letters from Cravath, Davis Polk, Dow, FedEx, 
Quest, Shearman, and Sullivan.
    \169\ See, e.g., letters from Quest, and Wilson Sonsini.
---------------------------------------------------------------------------

    A number of commenters expressed concern that the wording of the 
proposed amendment regarding multiple overlapping plans was overly 
broad as it could encompass every open market transaction, including 
transactions that are not executed under a Rule 10b5-1 plan.\170\ 
Several commenters urged the Commission to clarify that this provision 
would not prohibit the adoption of a new Rule 10b5-1 plan while an 
existing plan is in effect as long as no trades could commence under 
the new plan until the existing plan has expired.\171\
---------------------------------------------------------------------------

    \170\ See, e.g., letters from Dow, SCG, ABA, Cleary, Paul Weiss, 
Shearman, Sullivan, and Wilson Sonsini.
    \171\ See, e.g., letters from Jones Day, Kirkland, Paul Weiss, 
Simpson, Shearman, and Wilson Sonsini.
---------------------------------------------------------------------------

    Finally, several commenters contended that the proposed cooling-off 
period for Rule 10b5-1 plans was a more effective method to address the 
concerns over potential abusive uses of multiple overlapping and 
single-trade Rule 10b5-1 plans.\172\
---------------------------------------------------------------------------

    \172\ See, e.g., letters from Manulife, Cravath, NAM, and 
Cleary.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments, we are adopting the proposed 
amendment addressing multiple overlapping Rule 10b5-1 plans with 
certain modifications. With respect to multiple overlapping Rule 10b5-1 
contracts, instructions or plans, the final amendment will add a 
condition to the Rule 10b5-1(c)(1) affirmative defense that persons, 
other than issuers, may not have another outstanding (and may not 
subsequently enter into any additional) contract, instruction or plan 
that would qualify for the affirmative defense under the amended Rule 
10b5-1 for purchases or sales of any class of securities of the issuer 
on the open market during the same period. We disagree with commenters 
who urged us to limit these provisions only to directors and 
officers.\173\ While it is true, as commenters note and as we observed 
in the Proposing Release, that officers and directors are most likely 
to have access to material nonpublic information,\174\ other traders 
may at times also have such access. Trading by these other persons can 
impact investors and investor confidence in much the same ways as 
trading by officers and directors. For example, we think it could 
undermine investor confidence to learn that insiders who are not 
Section 16 officers were able to opportunistically manipulate their 
trading after receiving material nonpublic information, so that the 
insider could profit at the expense of uninformed investors. As we 
explain below, we think that any financial impact on insiders other 
than officers and directors resulting from these limitations will be 
more limited than in the case of the cooling-off period.
---------------------------------------------------------------------------

    \173\ See letters from Sullivan and SIFMA 3.
    \174\ See Proposing Release at 23; letters from CII, Cravath, 
and SIFMA.
---------------------------------------------------------------------------

    Accordingly, we disagree with those commenters who suggested that 
trades by individuals other than officers and directors would not 
affect the integrity of securities markets.\175\ While other traders 
may not necessarily control corporate trading or disclosure decisions, 
they still may stand to profit substantially from trading on any 
material nonpublic information to which they have access. Further, 
because Form 4 may reveal potentially opportunistic trades to the 
public, we think the fact that most persons, other than Section 16 
officers, do not file Form 4 is a reason for more safeguards with 
respect to their trading, not fewer.
---------------------------------------------------------------------------

    \175\ See letters from Cravath and Davis Polk.
---------------------------------------------------------------------------

    In reaching our determination, we are mindful that some traders, 
such as rank-and-file employees, may have liquidity and diversification 
needs that are greater than those of more highly compensated officers, 
as commenters noted.\176\ In recognition of these needs, we are 
adopting a modification to the proposed limitations, described in more 
detail below, under which traders may employ multiple plans to satisfy 
certain tax obligations incident to equity compensation. For insiders 
who are already trading under an existing plan when such liquidity 
needs arise, meeting those needs will typically require the insider to 
modify the existing plan, as our limitation on multiple plans will 
prevent the insider from adopting an additional plan to cover the newly 
planned transactions. This modification will in turn likely require the 
insider to pause trading under the preexisting plan for the duration of 
the insider's cooling-off

[[Page 80377]]

period. Because the cooling-off period for insiders other than officers 
and directors is 30 days, however, we believe that any resulting impact 
on the insider should be limited. While we agree that it is possible 
this cost, or other barriers, may reduce the appeal of requiring non-
officers to make use of a Rule 10b5-1 plan, as one commenter 
noted,\177\ we think on balance that it is better to ensure that any 
Rule 10b5-1 plans that are adopted in fact impose meaningful limits on 
opportunistic trading. More widespread adoption of Rule 10b5-1 plans is 
unlikely to be helpful to investors or markets if such plans do not 
constrain many opportunistic trades.
---------------------------------------------------------------------------

    \176\ See letters from Chamber of Commerce 2 and NAM.
    \177\ See letter from Davis Polk.
---------------------------------------------------------------------------

    We are modifying the original proposal by removing the reference to 
``same class of securities,'' so that the multiple overlapping plans 
restriction will apply to contracts, instructions or plans for any 
class of securities of the issuer. We agree with the commenter who 
argued that, given the strong likelihood that the values of different 
classes of securities of a given issuer are highly correlated, allowing 
the use of multiple plans for trading in the securities of one issuer 
would allow for significant possibility of opportunistic behavior.\178\ 
As a result, persons (other than the issuer) may only have one such 
contract, instruction or plan, rather than one contract, instruction or 
plan for each class of securities.
---------------------------------------------------------------------------

    \178\ See letter from NASAA.
---------------------------------------------------------------------------

    This condition is intended to address the concerns discussed above 
about an insider's use of multiple overlapping plans in ways that could 
allow material nonpublic information to factor into the trading 
decision. Because these concerns are not limited to hedged plans where 
a trader takes offsetting financial positions, we disagree with those 
commenters who asserted that the existing hedging restriction of the 
Rule 10b5-1 affirmative defense renders this limitation unnecessary. 
With a sufficient number of different plans, an insider could achieve a 
desired trading outcome. For example, an insider could adopt several 
plans to sell their company stock at varying prices in excess of the 
current share price, and then cancel the plans authorizing trades at 
the lowest of these prices upon learning nonpublic information that the 
insider expects to substantially increase the share price. For similar 
reasons, we disagree with commenters that the cooling-off period 
sufficiently addresses our concerns given that an insider could 
maintain multiple overlapping plans that satisfy the cooling-off period 
and then cancel plans based on later-obtained material nonpublic 
information.
    In light of comments received, we are making three further 
modifications to this condition. The first addresses an insider's use 
of multiple brokers to execute trades pursuant to a single Rule 10b5-1 
plan that covers securities held in different accounts. Specifically, a 
series of separate contracts with different broker-dealers or other 
agents acting on behalf of the person (other than the issuer) to 
execute trades thereunder may be treated as a single ``plan,'' provided 
that the contracts with each broker-dealer or other agent, when taken 
together as a whole, meet all of the applicable conditions of and 
remain collectively subject to the provisions of Rule 10b5-1(c)(1). A 
modification of any such contract will be a modification of each other 
contract or instruction such single plan. We agree with commenters that 
in circumstances where a corporate insider holds securities in separate 
accounts with different financial institutions, the execution of trades 
by multiple brokers under a Rule 10b5-1 plan is less likely to raise 
the concerns underlying this condition of the rule. We recognize that a 
trader will typically enter into a formally distinct contract or 
agreement with each agent authorized to conduct trades. Thus, for 
purposes of the multiple overlapping plans restriction, a series of 
formally distinct such contracts may be treated as a single ``plan'' 
where taken together the contracts otherwise satisfy the conditions of 
the rule. As we have described, the overlapping-plans condition is 
intended to prevent selective alteration or cancellation of Rule 10b5-1 
plans to achieve a particular trading outcome when an insider is aware 
of material nonpublic information, and for that reason, we are 
providing that modification (as defined in the Rule) of a contract with 
any given agent will also be treated as a modification of the other 
contracts making up the plan.
    In addition, the final amendment provides that a broker-dealer or 
other agent executing trades on behalf of the insider pursuant to the 
Rule 10b5-1 plan may be substituted by a different broker-dealer or 
other agent as long as the purchase or sales instructions applicable to 
the substituted broker and the substitute are identical, including with 
respect to the prices of securities to be purchased or sold, dates of 
the purchases or sales to be executed, and amount of securities to be 
purchased or sold. Under this provision, an insider will not lose the 
benefit of the affirmative defense where the insider closes a 
securities account with a financial institution and transfers the 
securities to a different financial institution. If an insider provides 
instructions to the new broker-dealer in accordance with this 
provision, there is more limited possibility for selective cancellation 
because substituting a broker authorized to trade under a Rule 10b5-1 
plan would not change the remaining trades in ways that likely would 
allow the insider to profit on material nonpublic information. We note, 
however, that a plan modification, such as the substitution or removal 
of a broker that is executing trades pursuant to a Rule 10b5-1 
arrangement on behalf of the insider that changes the purchase or sale 
amount, price or date on which purchases or sales are to be executed is 
a termination of such plan and the adoption of a new plan. This will 
further limit opportunities for opportunistic manipulation of broker-
dealers executing trades on behalf of the insider.
    The second change permits persons (other than the issuer) to 
maintain two separate Rule 10b5-1 plans at the same time so long as 
trading under the later-commencing plan is not authorized to begin 
until after all trades under the earlier-commencing plan are completed 
or expire without execution.\179\ This provision would not be available 
for the later-commencing plan, however, if the first trade under the 
later-commencing plan is scheduled to begin during the ``effective 
cooling-off period''--namely, the cooling-off period that would be 
applicable under paragraph (c)(1)(ii)(B) to the later-commencing plan 
if the date of adoption of the later-commencing plan were deemed to be 
the date of termination of the earlier-commencing plan.\180\ Absent 
this qualification, an

[[Page 80378]]

insider might cancel the earlier-commencing plan before its scheduled 
completion but still trade under the later-commencing plan in fewer 
than the minimum 90 days (or 30 days) that would otherwise be required 
for a new plan that is established after a plan termination. Both plans 
must meet all other conditions of the affirmative defense, including 
the cooling-off period. Under these circumstances, we agree with 
commenters that there would be a much lower risk of a corporate insider 
who is aware of material nonpublic information profiting by 
opportunistically canceling a trading plan as the Rule 10b5-1 plans 
would not authorize trading during the same period of time.
---------------------------------------------------------------------------

    \179\ See Rule 10b5-1(c)(1)(ii)(D) which provides that a 
contract, instruction, or plan that would meet the other 
requirements of Rule 10b5-1(c)(1)(i) may still qualify for the 
affirmative defense where the director or officer has one other 
contract, instruction, or plan that would qualify for the 
affirmative defense for purchases or sales of the same class of 
securities on the open market and trading under one contract, 
instruction, or plan (``later-commencing plan'') is not authorized 
to begin until after all trades under the other contract, 
instruction, or plan (``earlier-commencing plan'') are completed.
    \180\ For example, an insider who is not an officer or director 
has in place an existing Rule 10b5-1 plan with a scheduled date for 
the latest authorized trade of May 31, 2023. On May 1, 2023, that 
insider adopts a later-commencing plan, intended to qualify for the 
affirmative defense under Rule 10b5-1, with a scheduled date for the 
first authorized trade of June 1, 2023. If the insider terminates 
the earlier-commencing plan on May 15, the later-commencing plan 
will not receive the benefit of the affirmative defense, because 
June 1 is within 30 days of May 15, the date of termination of the 
earlier-commencing plan, and thus June 1 is during the ``effective 
cooling-off period.'' However, if the later-commencing plan were 
scheduled to begin trading on July 1, 2023, it could still receive 
the benefit of the affirmative defense because July 1, 2023 is more 
than 30 days after May 15 and thus is outside the ``effective 
cooling-off period.''
---------------------------------------------------------------------------

    Third, we are adopting a modification for plans authorizing certain 
``sell-to-cover'' transactions in which an insider instructs their 
agent to sell securities in order to satisfy tax withholding 
obligations at the time an award vests. Under this modification, an 
insider will not lose the benefit of the affirmative defense with 
respect to an otherwise eligible Rule 10b5-1 plan if the insider has in 
place another plan that would qualify for the affirmative defense, so 
long as the additional plan or plans only authorize qualified sell-to-
cover transactions. Such plans that authorize only such qualified sell-
to-cover transactions are eligible for the affirmative defense 
notwithstanding the fact that the insider may have another plan 
eligible for the affirmative defense in place. A plan authorizing sell-
to-cover transactions is qualified for this provision where the plan 
authorizes an agent to sell only such securities as are necessary to 
satisfy tax withholding obligations incident to the vesting of a 
compensatory award, such as restricted stock or stock appreciation 
rights, and the insider does not otherwise exercise control over the 
timing of such sales.\181\
---------------------------------------------------------------------------

    \181\ In our view, a plan that authorizes an agent to sell only 
such securities as are necessary to satisfy tax withholding 
obligations incident to the vesting of a compensatory award meets 
the requirement that the plan does ``not permit the person to 
exercise any subsequent influence over how, when, or whether to 
effect . . . sales,'' Rule 10b5-1(c)(1)(B)(3) [17 CFR 240.10b5-
1(c)(1)(B)(3)].
---------------------------------------------------------------------------

    We are providing this modification because we agree with commenters 
who contended that under these limited circumstances, there is little 
danger of opportunistic trading. Because vesting schedules are 
generally set in advance by the issuer, the amount of securities to be 
sold would be determined by the value of the award and the taxes due on 
that value. We are further stipulating that eligible plans cannot 
provide the insider with control over the timing of any sales. For 
these reasons, we think it is highly unlikely that insiders would be 
able to make opportunistic use of such additional plans.
    We are not extending this modification to include sales incident to 
the exercise of option awards because it could create a risk of 
opportunistic trading. Option exercises occur at the discretion of the 
insider, and such decisions could occur when the insider later obtains 
material nonpublic information. To the extent that commenters have 
suggested that an insider with a sell-to-cover plan tied to an option 
exercise could not use the revised Rule 10b5-1 affirmative defense, we 
disagree.\182\ The revised affirmative defense would not prevent a 
corporate insider from entering into a Rule 10b5-1 plan that includes 
instructions directing a broker to sell securities sufficient to meet 
the tax withholding obligations incident to an option or similar award 
exercise. For example, the insider might provide that a designated 
agent is authorized to sell sufficient securities to cover any tax 
withholding obligations incident to an option exercise. Such 
instructions can be included in a single Rule 10b5-1 plan along with 
instructions to sell based on other financial variables. Accordingly, 
an officer or director may take advantage of the affirmative defense 
both for sell-to-cover transactions and other planned trades, provided 
that the conditions of the affirmative defense are met, including the 
cooling-off period.
---------------------------------------------------------------------------

    \182\ See supra note 161.
---------------------------------------------------------------------------

    In addition, we are not adopting the proposed limitation on 
multiple plans and single-trade plans for the issuer at this time. As 
with the cooling-off period, we believe that further consideration of 
potential application to the issuer is warranted.
    Finally, we are adopting the proposed limitation on single-trade 
plans with modifications. Consistent with the approach to multiple 
overlapping plans, the limitation will apply to the Rule 10b5-1 plans 
of all persons, other than the issuer. As a result, the final rule 
provides that if the contract, instruction, or plan is designed to 
effect the open-market purchase or sale of the total amount of 
securities as a single transaction, the contract, instruction or plan 
will not receive the benefit of the affirmative defense unless: (1) the 
person who entered into the contract, instruction, or plan has not, 
during the prior 12-month period, adopted another contract, 
instruction, or plan that was designed to effect the open-market 
purchase or sale of the total amount of securities subject to that plan 
in a single transaction; and (2) such other contract, instruction, or 
plan in fact was eligible to receive the affirmative defense. A person 
(other than the issuer) will be able to rely on the Rule 10b5-
1(c)(1)(ii) affirmative defense for only one single-trade plan during 
any 12-month period. The defense will only be available for a single-
trade plan if the person had not, during the preceding 12-month period, 
adopted another single-trade plan, where the other plan qualified for 
the affirmative defense under Rule 10b5-1.\183\ We disagree with the 
commenter who argued that, due to the possibility that an insider might 
divide their planned single trade into multiple trades, any limit on 
single-trade plans would be ineffective.\184\ For example, certain 
insiders who divide a planned trade over several days are likely to 
realize reduced profits from trading after a Form 4 is filed, which at 
least in part, will reduce an insider's incentives to engage in trading 
while aware of material nonpublic information.
---------------------------------------------------------------------------

    \183\ We have added this qualification because we do not intend 
for a plan that is ineligible for the affirmative defense to 
preclude the affirmative defense for another plan, even if both 
trades are single-trade plans.
    \184\ See letter from Davis Polk.
---------------------------------------------------------------------------

    For this purpose, a plan is ``designed to effect'' the purchase or 
sale of securities as a single transaction when the contract, 
instruction, or plan has the practical effect of requiring such a 
result. In contrast, a plan is not designed to effect a single 
transaction where the plan leaves the person's agent discretion over 
whether to execute the contract, instruction, or plan as a single 
transaction. Similarly, a plan is also not designed to effect the 
purchase or sale of securities as a single transaction when (1) the 
contract, instruction, or plan does not leave discretion to the agent, 
but instead provides that the agent's future acts will depend on events 
or data not known at the time the plan is entered into, such as a plan 
providing for the agent to conduct a certain volume of sales or 
purchases at each of several given future stock prices; and (2) it is 
reasonably foreseeable at the time the plan is entered into that the 
contract, plan, or instruction might result in multiple transactions.
    We are adopting the limitation on single-trade plans because we are 
concerned that trades under such plans may provide particularly 
profitable opportunities for insiders who are trading while aware of 
material

[[Page 80379]]

nonpublic information. As we described in the Proposing Release, a 
recent study found that trades under a single-trade plan avoid losses 
that appear statistically unlikely to be avoided by uninformed 
traders.\185\ This pattern persisted even when the first such trade 
occurred more than 120 days after adoption of the plan, suggesting that 
a cooling-off period alone may not be sufficient to prevent 
opportunistic single-trade plans.\186\ For these reasons, we disagree 
with the commenters who suggested that the cooling-off period would be 
sufficient to address the problem addressed by the single-trade 
limitation.\187\
---------------------------------------------------------------------------

    \185\ See Gaming the System, supra note 20 at 2, 14 (observing 
that ``trades of single-trade plans are consistently loss-avoiding 
regardless of cooling-off period''). But see infra note 400.
    \186\ See id.
    \187\ See letters from Manulife, Cravath, NAM, and Cleary.
---------------------------------------------------------------------------

    Several commenters expressed concern about potential ambiguity or 
uncertainty around the concept of a single-trade plan and asked us to 
clarify the scope of this provision, such as its potential application 
to block trades of venture capital funds.\188\ We agree with those 
commenters who indicated that an insider should not be at risk of 
losing the benefit of the affirmative defense due to decisions outside 
the insider's control when the insider did not design the Rule 10b5-1 
plan to effect the authorized purchases or sales in a single 
transaction, such as in the case where the insider's agent exercises 
their own discretion to complete all authorized trading in a single 
transaction. For that reason, we have added the ``designed to effect'' 
provision discussed above. We are concerned, however, that further 
delineating what constitutes a single transaction for purposes of this 
rule could create incentives to design Rule 10b5-1 plans that avoid 
application of the single-trade plan limitation.
---------------------------------------------------------------------------

    \188\ See letters from Sullivan, SIFMA 3 and NVCA.
---------------------------------------------------------------------------

    For reasons similar to those we have explained with respect to 
multiple overlapping trades, in response to comments, we are modifying 
the proposed single-trade limitation with respect to qualified sell-to-
cover transactions. This modification applies to the same plans 
eligible for the sell-to-cover provision of the overlapping trade 
limitation. Again, we think that such plans present little, if any 
risk, of opportunistic trading.
    Also for reasons similar to those we have explained with respect to 
multiple overlapping trades, we are applying the single-trade 
limitation to all persons other than the issuer. The single-trade 
limitation helps to ensure that the affirmative defense provides 
meaningful constraints on the extent to which material nonpublic 
information affects an insider's decision to trade. While we recognize 
that the limitation also may impose some moderate limitations on 
insiders' ability to obtain liquidity and diversification, as noted, we 
think that there are alternative means for such insiders to achieve 
these goals.
    Because single-trade plans may have legitimate uses to address one-
time liquidity needs, we also disagree with the commenter who suggested 
that the affirmative defense should not be available for any single-
trade plan.\189\ Overall, the limitation we are adopting is intended to 
balance legitimate uses of single-trade plans against the potential for 
abuse.
---------------------------------------------------------------------------

    \189\ See letter from NASAA.
---------------------------------------------------------------------------

4. The Amended Good Faith Condition
a. Proposed Amendments
    The Rule 10b5-1(c)(1) affirmative defense is only available if a 
trading arrangement was entered into in good faith and not as part of a 
plan or scheme to evade the prohibitions of the rule. The Commission 
proposed to amend this condition to require that the contract, 
instruction, or plan also be ``operated'' in good faith.
    In proposing this amendment, the Commission noted its concern that 
some corporate insiders may try to improperly influence the timing of 
corporate disclosures to benefit their trades under a Rule 10b5-1 
trading arrangement, such as by delaying or accelerating the release of 
material nonpublic information.\190\ The Commission also noted its 
concern that a Rule 10b5-1 plan may be canceled or modified in an 
attempt to evade the prohibitions of the rule without affecting the 
availability of the affirmative defense. Moreover, the Commission 
stated that requiring that a trader both enter into and operate a Rule 
10b5-1 plan in good faith would help deter fraudulent and manipulative 
conduct and enhance investor protection throughout the duration of the 
trading arrangement. Thus the Commission intended the proposed 
amendment to make clear that the affirmative defense would not be 
available to a trader who, for example, modifies their plan in an 
effort to evade the prohibitions of the rule or uses their influence to 
affect the timing of corporate disclosure to occur before or after a 
planned trade to make it more profitable or to avoid or reduce a loss.
---------------------------------------------------------------------------

    \190\ See Proposing Release, supra note 23, at 8693.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters generally supported the proposed amendment.\191\ 
Some of these commenters indicated that the proposed amendment would 
deter opportunistic trading in connection with Rule 10b5-1 plans and 
increase investor confidence.\192\ One of these commenters also 
expressed the view that, among other things, this requirement would 
ensure that there is liability where persons attempt to manipulate the 
timing of corporate announcements to benefit trades made pursuant to a 
Rule 10b5-1 plan.\193\ Another commenter asserted that adding the 
``operate in good faith'' requirement would be helpful in improving the 
insider trading compliance programs of issuers.\194\
---------------------------------------------------------------------------

    \191\ See, e.g., letters from CII, AFL-CIO, Better Markets, CO 
PERA, NYCC, NASAA, NYSE, and O'Reilly.
    \192\ See, e.g., letters from AFL-CIO, Better Markets, CII, and 
NASAA.
    \193\ See letter from Better Markets.
    \194\ See letter from O'Reilly.
---------------------------------------------------------------------------

    A number of commenters, however, opposed adding the condition that 
a Rule 10b5-1 plan be ``operated'' in good faith.\195\ Many of these 
commenters indicated that the concept of ``operated in good faith'' was 
not sufficiently clear and would lead to uncertainty surrounding the 
availability of the affirmative defense.\196\ Similarly, another 
commenter asked the Commission to clarify the extent to which a failure 
to operate a Rule 10b5-1 plan in good faith would invalidate the 
affirmative defense for transactions that were executed under the 
plan.\197\ Some commenters contended that, given that the scope of 
conduct or activity covered by the phrase was potentially extensive, 
this condition could inhibit the use of Rule 10b5-1 plans.\198\ 
Finally, another commenter suggested requiring that a Rule 10b5-1 plan 
be ``modified in good faith'' as an alternative.\199\ This commenter 
contended that ``modified'' is a clearer term and would cover 
circumstances where a trader amends or terminates a Rule 10b5-1 plan 
based on material nonpublic information.
---------------------------------------------------------------------------

    \195\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath, 
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2, 
and SIFMA 3.
    \196\ See, e.g., letters from Quest, Cleary, Cravath, Davis 
Polk, DLA, Fenwick, Shearman, Wilson Sonsini, and PNC, SIFMA 2, 
SIFMA 3 and Chamber of Commerce 2.
    \197\ See letter from PNC.
    \198\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath, 
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2, 
and SIFMA 3.
    \199\ See letter from Fenwick.

---------------------------------------------------------------------------

[[Page 80380]]

c. Final Amendment
    Having considered the comments received, we are adopting the 
amendment to Rule 10b5-1(c)(1)(ii) with a modification in response to 
comments concerning the term ``operated in good faith.'' The final 
rules add the condition that the person who entered into the Rule 10b5-
1 contract, instruction, or plan ``has acted in good faith with respect 
to'' the contract, instruction, or plan. As discussed above, since the 
time that Rule 10b5-1 was adopted, we have become concerned that 
corporate insiders may take actions after adopting a Rule 10b5-1 plan 
to benefit from material nonpublic information the insider acquires 
after establishment of the plan. We therefore agree with commenters 
that this requirement will help ensure that traders do not engage in 
opportunistic trading in connection with Rule 10b5-1 plans, and will 
help deter corporate insiders from improperly influencing the timing of 
corporate disclosures to benefit their trades under such a plan.\200\
---------------------------------------------------------------------------

    \200\ See, e.g., letters from AFL-CIO, Better Markets, CII, and 
NASAA.
---------------------------------------------------------------------------

    Many commenters appeared to understand that the proposed ``operated 
in good faith'' language was intended to govern the behavior of the 
trader.\201\ Some commenters, however, expressed concern that the term 
``operated'' could be ambiguous or cause confusion because it could be 
read to apply, or might apply only, to the insider's agents, such as 
brokers who executed the trades authorized by the insider.\202\ To make 
clear that the good faith obligation applies to the activities of the 
insider (including the insider's efforts to direct the activities of 
others), we have modified this language to state that the trader must 
``act[ ] in good faith with respect to the contract, instruction, or 
plan.''
---------------------------------------------------------------------------

    \201\ See letters from Davis Polk, DLA Piper, Dow, Home Depot, 
and Shearman & Sterling.
    \202\ See letters from Cravath, Fenwick, and PNC.
---------------------------------------------------------------------------

    In adopting this amendment, we disagree with commenters that the 
expanded good faith requirement is not sufficiently clear. The concept 
of ``good faith'' should be familiar to corporate insiders as it has 
been a component of Rule 10b5-1 since its adoption two decades 
ago.\203\ This amendment extends this familiar concept from the time of 
adoption through the duration of the Rule 10b5-1 plan to better ensure 
that material nonpublic information does not factor into the decision 
to trade under such plans, as it would when, for example, a corporate 
insider materially modifies a planned trade at their own direction and 
to their own benefit,\204\ based on material nonpublic information 
acquired after the plan was entered into. Indeed, a corporate insider 
would not be operating a Rule 10b5-1 plan in good faith if the 
corporate insider, while aware of material nonpublic information, 
directly or indirectly induces the issuer to publicly disclose that 
information in a manner that makes their trades under a Rule 10b5-1 
plan more profitable (or less unprofitable). In such a scenario, 
notwithstanding that the Rule 10b5-1 plan may have been adopted or 
entered into in good faith, the corporate insider would not be entitled 
to the affirmative defense. Moreover, we disagree with commenters who 
argue that this requirement will deter adoption of Rule 10b5-1 plans by 
individuals who do not intend to misuse material nonpublic information.
---------------------------------------------------------------------------

    \203\ See 2000 Adopting Release, supra note 8.
    \204\ A modification of a Rule 10b5-1 plan in an effort to allow 
the individual to trade on the basis of material nonpublic 
information would not constitute acting in good faith. In light of 
our adoption of a limitation on multiple plans, however, we 
anticipate that an individual will generally not be able to engage 
in any trade under a Rule 10b5-1 plan following a cancellation of 
such a plan, and therefore the applicability of the affirmative 
defense will not be at issue in that situation.
---------------------------------------------------------------------------

    Commenters also asked us to clarify whether the obligation to act 
in good faith would not be met in other factual settings, such as in 
the event an issuer halts any trading by insiders under Rule 10b5-1 
plans due to a possible merger, or where it similarly blocks sales 
transactions after learning of material nonpublic information that it 
expects will lead to a decline in the market price of its 
securities.\205\ As we have stated, this amendment relates to 
activities within the control of the insider. Accordingly, we agree 
with the commenter that cancellations directed by the issuer where such 
cancellations are outside the control or influence of the insider may 
not, by themselves, implicate the good faith condition.
---------------------------------------------------------------------------

    \205\ See, e.g., letters from Davis Polk, Shearman (requesting 
that we clarify that cancellations for legitimate reasons are not 
bad faith); and Wilson Sonsini (requesting we clarify that 
cancellations are not per se bad faith).
---------------------------------------------------------------------------

    Finally, we disagree with the commenter who recommended that we 
instead require good faith ``modification'' of a plan as this narrower 
condition would not address all of our concerns. For example, as we 
have noted, efforts to manipulate the timing of releases of corporate 
information to benefit an officer's or a director's planned trades may 
not involve a modification of a plan but would be inconsistent with 
established notions of good faith. While the condition that we are 
adopting would cover such efforts, the commenter's alternative might 
not do so.

B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

    Currently, there are no mandatory disclosure requirements 
concerning the use of Rule 10b5-1 trading arrangements or other trading 
arrangements by issuers or corporate insiders.\206\ The lack of 
comprehensive public information about the use of these arrangements--
whether pursuant to a Rule 10b5-1 plan or otherwise--creates an 
environment in which it is more difficult for investors to assess 
whether those parties may be misusing their access to material 
nonpublic information. This lack of transparency may allow improper 
trading to go undetected and thereby undermine the deterrent impact of 
our insider trading laws. In addition, the lack of public information 
about the use of these arrangements by corporate insiders limits 
investors' ability to assess potential incentive conflicts and 
information asymmetries when making investment and voting decisions. 
Requiring more robust disclosure of particular trading arrangements 
should reduce potential abuse of the rule, and inform investors and the 
Commission regarding potential violations of Rule 10b-5.
---------------------------------------------------------------------------

    \206\ Form 144 (17 CFR 239.144) under the Securities Act 
contains a representation that is used by a filer of the form to 
indicate whether such person has adopted a written trading plan or 
given trading instructions to satisfy Rule 10b5-1. Form 144 is a 
notice form that must be filed with the Commission by an affiliate 
of an issuer who intends to resell restricted or ``control'' 
securities of that issuer in reliance upon Securities Act Rule 144 
(17 CFR 230.144). In 2002, the Commission proposed amendments to 
Form 8-K that, among other things, would have required registrants 
to report on the form any adoption, modification or termination of a 
Rule 10b5-1 trading arrangement by any director and certain officers 
of the registrant. See Form 8-K Disclosure of Certain Management 
Transactions, Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914 (Apr. 
23, 2002)]. The Commission did not adopt this proposal.
---------------------------------------------------------------------------

    In addition, issuers are currently not required to disclose their 
insider trading policies or procedures. In the Proposing Release, the 
Commission stated that information about insider trading policies and 
procedures is important, and would help investors to understand and 
assess how the registrant protects material nonpublic information from 
misuse. While the codes of ethics that registrants are required to 
disclose pursuant to Item 406 of Regulation S-K may address insider 
trading issues, they may lack the detail necessary for investors to 
assess actual practices

[[Page 80381]]

surrounding potential insider trading. General statements such as that 
an issuer ``has a policy regarding insider trading'' or ``prohibits 
insider trading'' do not meaningfully assist investors in their 
assessments of whether an issuer's efforts to prevent insider trading 
are likely to be effective. While not every individual component of an 
insider trading policy is necessarily material on its own, together, a 
comprehensive description of an insider trading policy can help 
investors to assess the thoroughness and seriousness with which the 
issuer addresses the prohibition of trading on the basis of material 
nonpublic information by its officers, directors and employees. More 
detailed disclosure about these policies and procedures could therefore 
improve investor confidence, and in turn, potentially contribute to 
market liquidity and capital formation.
    To address these information gaps, the Commission proposed new Item 
408 under Regulation S-K and corresponding amendments to Forms 10-Q and 
10-K to require: (1) quarterly disclosure of the use of Rule 10b5-1 and 
other trading arrangements by a registrant, and its directors and 
officers for the trading of the issuer's securities; and (2) annual 
disclosure of a registrant's insider trading policies and procedures. 
The Commission also proposed new Item 16J to Form 20-F to require 
similar annual disclosure of a foreign private issuer's insider trading 
policies and procedures. In addition, the Commission proposed 
amendments to Forms 4 and 5 to require insiders to identify whether a 
reported transaction was executed pursuant to a Rule 10b5-1(c) trading 
arrangement.
1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 Trading 
Arrangements
a. Proposed Amendments
    Proposed new Item 408(a) of Regulation S-K would require 
registrants to disclose:
     Whether, during the registrant's most recently completed 
fiscal quarter (the registrant's fourth fiscal quarter in the case of 
an annual report), the registrant adopted or terminated any contract, 
instruction or written plan to purchase or sell securities of the 
registrant, whether or not intended to satisfy the affirmative defense 
conditions of Rule 10b5-1(c), and provide a description of the material 
terms of the contract, instruction or written plan, including:
    [cir] The date of adoption or termination; \207\
---------------------------------------------------------------------------

    \207\ As discussed above, the Commission also proposed to state 
explicitly in the rule that any modification or amendment of an 
existing Rule 10b5-1 trading arrangement would be the equivalent of 
terminating the existing arrangement and adopting a new arrangement. 
See supra note 46.
---------------------------------------------------------------------------

    [cir] The duration of the contract, instruction or written plan; 
and
    [cir] The aggregate amount of securities to be sold or purchased 
pursuant to the contract, instruction or written plan.
     Whether, during the registrant's last fiscal quarter, any 
director or ``officer'' (as defined in Rule 16a-1(f)) has adopted or 
terminated any contract, instruction or written plan for the purchase 
or sale of securities of the registrant, whether or not intended to 
satisfy the affirmative defense conditions of Rule 10b5-1(c), and 
provide a description of the material terms of the contract, 
instruction or written plan, including:
    [cir] The name and title of the director or officer;
    [cir] The date on which the director or officer adopted or 
terminated the contract, instruction or written plan;
    [cir] The duration of the contract, instruction or written plan; 
and
    [cir] The aggregate number of securities to be sold or purchased 
pursuant to the contract, instruction or written plan.
    Under the proposed rule, the disclosures would be required in Forms 
10-Q and 10-K, as applicable. Registrants would be required to provide 
this information if, during the quarterly period covered by the report, 
the registrant, or any director or officer who is required to file 
reports under Section 16 of the Exchange Act,\208\ adopted or 
terminated a Rule 10b5-1 plan. Such disclosures would allow investors 
to assess whether, and if so, how, issuers monitor trading by their 
directors and officers for compliance with insider trading laws and 
whether their compliance programs are effective at preventing the 
misuse of material nonpublic information.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 78p.
---------------------------------------------------------------------------

    The Commission stated that the proposed rule would provide material 
information that would better allow investors, the Commission, and 
other market participants to observe how directors, officers and 
issuers use Rule 10b5-1 plans. For example, disclosure of the 
termination (including a modification) of a trading arrangement by an 
officer, even in the absence of subsequent trading by the officer, 
could provide investors or the Commission with important information 
about the potential misuse of inside information such as, for example, 
if the termination occurs close in time to the release of material 
nonpublic information by the issuer. Making information about these 
arrangements public may also serve as a deterrent against potential 
abuses of Rule 10b5-1 plans or other trading arrangements by making 
those who use these arrangements more likely to focus on following the 
requirements applicable to such arrangements and compliance with Rule 
10b-5. In addition, requiring disclosure of these events on a quarterly 
basis would present this disclosure to investors in a consolidated 
manner in a single document. The Commission also proposed to require 
similar disclosure with respect to the adoption or termination of other 
pre-planned trading contracts, instructions, or plans (``non-Rule 10b5-
1 trading arrangements'') through which the issuer, officer or director 
seeks to transact in the issuer's securities.
b. Comments on the Proposed Amendments
    Many commenters generally supported the proposed reporting 
requirements.\209\ For example, one of these commenters stated that the 
proposed disclosures would provide important information regarding 
insider stock trades and useful information to investors to inform 
their own investment decisions.\210\ Another commenter asserted that 
the proposed disclosures would provide long-term shareholders with 
information about insider trades that complete the partial picture 
provided by Form 144 and Section 16 reports.\211\ A few commenters 
supported the proposed requirements, but asked that issuers also report 
plans with respect not only to officers and directors, but also more 
generally any employee of the issuer.\212\
---------------------------------------------------------------------------

    \209\ See, e.g., letters from AFL-CIO, Better Markets, CII, CO 
PERA, DLA, ICGN, NASAA, O'Reilly, and Simpson.
    \210\ See letter from AFL-CIO.
    \211\ See letter from CII.
    \212\ See, e.g., letters from BrilLiquid and NASAA.
---------------------------------------------------------------------------

    Several commenters, however, did not support the proposed reporting 
requirements.\213\ Some of these commenters contended that the proposed 
disclosures are unnecessary because they would be duplicative of the 
disclosures that would be required under the proposed amendments to 
Forms 4 and 5.\214\ One of these commenters also asserted that it would 
be a significant burden on issuers to

[[Page 80382]]

provide the proposed disclosures concerning all of the trading actions 
of their directors and officers.\215\
---------------------------------------------------------------------------

    \213\ See, e.g., letters from ACCO, IBC, MD Bar, NVCA, NAM, SCG, 
Sullivan and Wilson Sonsini.
    \214\ See, e.g., letters from Sullivan and Wilson Sonsini.
    \215\ See letter from Sullivan.
---------------------------------------------------------------------------

    A number of commenters expressed concern regarding the requirement 
for registrants to provide a description of the ``material terms'' of 
the Rule 10b5-1 trading arrangement.\216\ Several commenters indicated 
that the proposal could be interpreted as requiring registrants to 
disclose specific details of a trading arrangement, such as pricing 
information.\217\ Many commenters stated that the disclosure of pricing 
information and other details of a Rule 10b5-1 plan could facilitate 
the front-running of transactions under the plan by other traders.\218\
---------------------------------------------------------------------------

    \216\ See, e.g., letters from ABA, Davis Polk, Cleary, DLA, 
FedEx, Fenwick, Kirkland, NVCA, NAM, Quest, SCG, SIFMA 2, Sullivan 
and Wilson Sonsini.
    \217\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA, 
Fenwick, Quest, SCG, SIFMA 2, and Wilson Sonsini.
    \218\ See, e.g., letters from Davis Polk, DLA, Fenwick, NVCA, 
SCG, SIFMA 2, and Wilson Sonsini.
---------------------------------------------------------------------------

    Due to these concerns, commenters were divided in their 
recommendations of what information about trading arrangements should 
be disclosed. Some commenters stated that the final rule should not 
require disclosure of the number of shares covered by a trading 
arrangement or the duration of the arrangement.\219\ Other commenters 
recommended that the Commission limit disclosures to the name of the 
person adopting the plan, the date of adoption or termination of the 
plan, and the plan's duration.\220\ In contrast, other commenters 
opposed requiring disclosure of the termination of a plan, contending 
that this information could signal to the market that there has been a 
material development concerning the issuer, such as an impending merger 
agreement.\221\
---------------------------------------------------------------------------

    \219\ See, e.g., letters from Quest and Simpson.
    \220\ See, e.g., letters from Fenwick and Shearman.
    \221\ See letters from Sullivan and SIFMA 3.
---------------------------------------------------------------------------

    In addition, a number of commenters recommended that the Commission 
should not require disclosure regarding non-Rule 10b5-1 trading 
arrangements.\222\ Several commenters asserted that this term was 
confusing and overly broad.\223\ One commenter indicated that this term 
would raise a number of interpretive issues as it potentially 
encompasses a wide range of transactions, such as transactions related 
to open market purchases, derivative securities and employee benefit 
plans.\224\ Other commenters claimed that this disclosure would not 
provide valuable information to investors, the Commission, or other 
market participants.\225\ For example, some of these commenters stated 
that the details of trades executed under a non-Rule 10b5-1 trading 
arrangement are already required to be disclosed in Section 16 
filings.\226\
---------------------------------------------------------------------------

    \222\ See, e.g., letters from Cleary, Cravath, Davis Polk, 
Shearman, Sullivan, and Simpson.
    \223\ See, e.g., letters from Cleary, Cravath, SIFMA 3, and 
Sullivan.
    \224\ See letter from Sullivan.
    \225\ See, e.g., letters from Cleary, Cravath, Shearman, and 
Simpson.
    \226\ See, e.g., letters from Cravath and Shearman.
---------------------------------------------------------------------------

    A few commenters recommended that the disclosure requirements 
regarding registrant trading arrangements should be removed from 
proposed Item 408(a) and included with the pending proposed rulemaking 
\227\ to update the disclosure requirements for purchases of equity 
securities by an issuer and affiliated purchasers under Item 703 of 
Regulation S-K.\228\
---------------------------------------------------------------------------

    \227\ See Share Repurchase Disclosure Modernization, Release No. 
34-93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)].
    \228\ See, e.g., letters from Cravath and Simpson.
---------------------------------------------------------------------------

    Another commenter suggested the Commission exempt smaller reporting 
companies (``SRCs'') \229\ from the proposed disclosure 
requirement.\230\ This commenter claimed SRCs and their insiders are 
less likely to engage in the kinds of trading in the securities of 
their companies that would cause concern, but that the reporting burden 
could disproportionately impact these issuers.
---------------------------------------------------------------------------

    \229\ ``Smaller reporting company'' is defined in Securities Act 
Rule 405 and Exchange Act Rule 12b-2 as an issuer that is not an 
investment company, an asset-backed issuer (as defined in 17 CFR 
229.1101), or a majority-owned subsidiary of a parent that is not a 
smaller reporting company and that had: (1) a public float of less 
than $250 million; or (2) annual revenues of less than $100 million 
and either: (a) no public float; or (b) a public float of less than 
$700 million.
    \230\ See letter from MD Bar.
---------------------------------------------------------------------------

    Finally, one commenter suggested that it would be more appropriate 
to include proposed Item 408(a) disclosure in Part II, Item 9(B) of 
Form 10-K, and Item 408(b) disclosure in Part III, Item 10 of Form 10-
K.\231\ This commenter claimed that requiring Item 408(a) disclosure in 
Item 9(B) rather than Item 10 of Form 10-K would align with the 
Commission's proposal to require Item 408(a) disclosure in Item 5 of 
Form 10-Q because both Items cover similar types of information. 
Further, this commenter posited that this approach would ensure that 
Item 408(a) disclosure, which relates to the last fiscal quarter, 
appears in each periodic report.
---------------------------------------------------------------------------

    \231\ See letter from ABA.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting new Item 408(a) with several modifications in 
response to comments. Specifically, we are not adopting the proposed 
requirement regarding contracts, instructions, or plans of registrants; 
we are providing that the description of material terms need not 
address pricing terms; and we are adding a definition of ``non-Rule 
10b5-1 trading arrangement.'' As proposed, these disclosures will be 
required in Forms 10-Q and 10-K.\232\
---------------------------------------------------------------------------

    \232\ In a slight modification, we are adopting the approach 
suggested by a commenter to include new Item 408(a) in Part II, Item 
9(B) of Form 10-K. See letter from ABA.
---------------------------------------------------------------------------

    The final rule will require registrants to (1) disclose whether, 
during the registrant's last fiscal quarter (the registrant's fourth 
fiscal quarter in the case of an annual report), any director or 
``officer'' (as defined in Rule 16a-1(f)) has adopted or terminated (i) 
any contract, instruction or written plan for the purchase or sale of 
securities of the registrant that is intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c) (a ``Rule 10b5-1(c) 
trading arrangement''), and/or (ii) any written trading arrangement for 
the purchase or sale of securities of the registrant that meets the 
requirements of a non-Rule 10b5-1 trading arrangement as defined in 
Item 408(c) (a ``non-Rule 10b5-1 trading arrangement''); and (2) 
provide a description of the material terms of the Rule 10b5-1 trading 
arrangement or non-Rule 10b5-1 trading arrangement other than terms 
with respect to the price at which the individual executing the 
respective trading arrangement is authorized to trade, such as:
     The name and title of the director or officer;
     The date of adoption or termination of the trading 
arrangement;
     The duration of the trading arrangement; and
     The aggregate number of securities to be sold or purchased 
under the trading arrangement.
    With respect to any given trading arrangement subject to disclosure 
under Item 408(a), the registrant must indicate whether such trading 
arrangement is a Rule 10b5-1 trading arrangement or is a non-Rule 10b5-
1 trading arrangement.
    In addition, any modification or change to a Rule 10b5-1 plan by a 
director or officer that falls within the meaning of new Rule 10b5-
1(c)(1)(iv) would also be required to be disclosed under Item 408(a) as 
it constitutes the termination of an existing plan and the adoption of 
a new contract, instruction, or written plan.

[[Page 80383]]

    Having considered comments received, we view this information as 
necessary to better allow investors, the Commission, and other market 
participants to observe how directors and officers use Rule 10b5-1 
plans and other non-Rule 10b5-1 trading arrangements. The information 
also will add important context to other disclosures of trades by 
directors and officers, such as in Forms 4 and 5, and may aid investors 
in obtaining a more accurate valuation of the issuer's shares and 
making more informed investment decisions.\233\ Furthermore, this 
information will provide investors with valuable information about the 
specific uses of such arrangements, which could bring focus to the 
particular arrangements and deter potential abuses. While it is true, 
as commenters observed, that Forms 4 and 5 may already include some of 
this information, we expect it will be more useful and time-saving for 
investors to have information regarding all of the trading arrangements 
for directors and officers of a given issuer in a single location. We 
are also requiring disclosure of details about the content of such 
arrangements that is not mandated on Form 4 or Form 5, which, pursuant 
to the amendments that we are adopting as described below, will require 
only the date of adoption of the Rule 10b5-1 plan.
---------------------------------------------------------------------------

    \233\ See infra Section V.C.2. The mandatory Rule 10b5-1 plan 
checkbox disclosures on Forms 4 and 5, in combination with this 
disclosure will provide greater transparency to investors regarding 
the use of Rule 10b5-1 plans for trading. All of this information 
will provide investors with valuable context for interpreting other 
corporate disclosure, which should help them value the companies' 
shares and make informed voting and investment decisions.
---------------------------------------------------------------------------

    In response to the concerns expressed by some commenters that the 
proposal could require the disclosure of pricing information,\234\ 
however, we have revised the final rules to clarify that new Item 
408(a) does not require disclosure of the price at which the individual 
executing the trading arrangement is authorized to trade. We agree with 
these commenters that disclosing this information could allow other 
persons to trade strategically in anticipation of an officer's or a 
director's planned trades, increasing the costs or reducing the 
profitability of that officer's or director's trading. Although we 
recognize that some commenters urged us to not require disclosure of 
the trading arrangement's duration or the aggregate number of 
securities that could be purchased and sold under it, we view this 
information as necessary context for a trading arrangement that does 
not raise similar concerns because, in most cases, general information 
about the volume and duration of an officer's or director's Rule 10b5-1 
plan or non-Rule 10b5-1 trading arrangement will not be sufficient to 
permit strategic trades by other market participants. We also disagree 
with commenters that we should not require disclosure related to 
terminations because, first, Rule 10b5-1 plans or non-Rule 10b5-1 
trading arrangements may be terminated for many reasons, making it 
unlikely that a termination would be interpreted as an indication of a 
pending material event (such as a merger announcement), and second, 
because the interval between a termination and the filing of the Form 
10-Q or Form 10-K disclosing the termination should mitigate any such 
potential strategic trading.
---------------------------------------------------------------------------

    \234\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA, 
Fenwick, Quest, SIFMA 2, SCG, and Wilson Sonsini.
---------------------------------------------------------------------------

    In addition, the final rule will also require disclosure regarding 
the adoption or termination of non-Rule 10b5-1 trading arrangements. In 
response to the concerns expressed by some commenters that the term 
``non-Rule 10b5-1 trading arrangements'' was confusing and overly 
broad,\235\ we are adopting a definition of this term to clarify the 
types of pre-planned trading arrangements that should be disclosed 
under Item 408(a). To ensure that market participants are familiar with 
how to apply this concept, the definition we adopt accords with the 
requirements of the Rule 10b5-1 affirmative defense that the Commission 
adopted in 2000. Under the final rule, a trading arrangement with 
respect to a director or ``officer'' (as defined in Rule 16a-1(f)) 
would be a ``non-Rule 10b5-1 trading arrangement'' where the director 
or officer asserts that, at a time when they were not aware of material 
nonpublic information about the security or the issuer of the security, 
they
---------------------------------------------------------------------------

    \235\ See, e.g., letter from Sullivan.
---------------------------------------------------------------------------

     adopted a written arrangement for trading the securities; 
and
     The trading arrangement:
    [cir] Specified the amount of securities to be purchased or sold 
and the price at which and the date on which the securities were to be 
subsequently purchased or sold;
    [cir] Included a written formula or algorithm, or computer program, 
for determining the amount of securities to be purchased or sold and 
the price at which the securities were to be purchased or sold; or
    [cir] Did not permit the covered person to exercise any subsequent 
influence over how, when, or whether to effect purchases or sales; 
provided, in addition, that any other person who, pursuant to the 
trading arrangement did exercise such influence must not have been 
aware of material nonpublic information when doing so.
    In adopting this requirement, we recognize that Rule 10b5-1 
provides affirmative defenses, but that corporate insiders may assert 
other defenses to liability under Section 10(b). Absent this disclosure 
requirement, directors and officers may be more likely to choose to 
trade in reliance on alternative defenses to liability other than this 
affirmative defense in order to avoid the disclosure requirements for 
Rule 10b5-1 plans, as well as avoiding the other requirements of the 
affirmative defense. Further, we believe these disclosures would be 
useful to investors for largely the same reasons that disclosure of 
plans that fully satisfy Rule 10b5-1 is useful: they provide important 
context about how insiders use their trading plans, such as in the case 
where an insider cancels a plan close in time to the release of 
material nonpublic information. We therefore disagree with commenters 
who assert this information would not be useful to investors.
    At this time, we are not adopting the proposal to require 
corresponding disclosure regarding the use of trading arrangements by 
the issuer. In light of the various comments we received on this 
proposal,\236\ we believe that further consideration of potential 
application of the disclosure requirement for purchases of equity 
securities by an issuer is warranted. We are also declining to extend 
disclosure obligations to plans adopted by insiders other than officers 
and directors, as suggested by some commenters, because we have 
concluded that collecting such information could be significantly 
burdensome for issuers, and because we think that granular disclosure 
about the adoption, termination, modification, and material terms of 
such plans is likely to be less important to investors than plans 
adopted by directors and officers.
---------------------------------------------------------------------------

    \236\ See, e.g., letters from Cravath and Simpson.
---------------------------------------------------------------------------

    Finally, we are not exempting SRCs from the disclosure 
requirements, as recommended by a commenter.\237\ While we are aware of 
the potential for a disproportionate impact on SRCs, we disagree that 
corporate insiders at SRCs are less likely to engage in the types of 
trading with which we are concerned. In our view, stock ownership by 
corporate insiders is common at SRCs, and exempting SRCs from this 
disclosure

[[Page 80384]]

requirement would deprive investors in those issuers of material 
information about the use, and potential abuse, of Rule 10b5-1 plans 
and non-Rule 10b5-1 trading arrangements by an SRC's officers or 
directors.
---------------------------------------------------------------------------

    \237\ See supra note 230.
---------------------------------------------------------------------------

2. Disclosure of Insider Trading Policies and Procedures
a. Proposed Amendments
    The Commission proposed new Item 408(b) of Regulation S-K, which 
would require registrants to:
     Disclose whether the registrant has adopted insider 
trading policies and procedures governing the purchase, sale, and other 
dispositions of the registrant's securities by directors, officers, and 
employees or the registrant itself that are reasonably designed to 
promote compliance with insider trading laws, rules, and regulations, 
and any listing standards applicable to the registrant. If the 
registrant has not adopted such insider trading policies and 
procedures, explain why it has not done so; and
     If the registrant has adopted insider trading policies and 
procedures, disclose such policies and procedures.
    These disclosures would be required in a registrant's annual 
reports on Form 10-K and proxy and information statements on Schedules 
14A and 14C.\238\ Foreign private issuers (``FPIs'') would also be 
required to provide analogous disclosure in their annual reports 
pursuant to a new Item 16J in Form 20-F.
---------------------------------------------------------------------------

    \238\ Item 1 of Schedule 14C requires that a registrant furnish 
the information called for by all of the items of Schedule 14A 
(other than Items 1(c), 2, 4 and 5) which would be applicable to any 
matter to be acted upon at the meeting if proxies were to be 
solicited in connection with the meeting.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that well-designed 
policies and procedures that address the potential misuse of material 
nonpublic information can play an important role in deterring and 
preventing trading on the basis of material nonpublic information. 
Specific disclosures concerning registrants' insider trading policies 
and procedures would benefit investors by enabling them to assess 
registrants' corporate governance practices and to evaluate the extent 
to which those policies and procedures protect investors from the 
misuse of material nonpublic information.
    Item 406 of Regulation S-K requires a registrant to disclose 
whether it has adopted a code of ethics that applies to its principal 
executive officer, chief financial officer, and other appropriate 
executives and, if it has not adopted such a code, to state why it has 
not done so.\239\ Many registrants also are required to maintain codes 
of ethics or conduct under exchange listing standards.\240\ These codes 
may contain specific policies and restrictions that address insider 
trading.\241\ Apart from these codes of ethics or conduct, some 
registrants have other policies and procedures specifically addressing 
insider trading. The Commission structured the proposed amendments to 
provide investors with comprehensive information regarding a 
registrant's insider trading policies and procedures to enable 
investors to better assess the manner in which the registrant promotes 
compliance with insider trading laws and protects material nonpublic 
information from misuse.
---------------------------------------------------------------------------

    \239\ 17 CFR 229.406; see also Section 406 of the Sarbanes-Oxley 
Act of 2002 (``SOX'') [15 U.S.C. 7264].
    \240\ See, e.g., NYSE Listed Company Manual Section 303A.10 
(stating in relevant part that every NYSE ``listed company should 
proactively promote compliance with laws, rules and regulations, 
including insider trading laws'' and that ``[i]nsider trading is 
both unethical and illegal, and should be dealt with decisively''); 
see also NASDAQ Listing Rule 5610 (requiring every Nasdaq listed 
company to adopt a code of conduct that complies with the definition 
of a ``code of ethics'' set out in SOX Section 406 (c) and that 
applies to all directors, officers, and employees).
    \241\ Insider trading policies and procedures may be part of the 
standards that are reasonably necessary to promote: honest and 
ethical conduct, including the ethical handling of actual or 
apparent conflicts of interest between personal and professional 
relationships; full, fair, accurate, timely, and understandable 
disclosure in the periodic reports required to be filed by the 
issuer; and compliance with applicable governmental rules and 
regulations. See 15 U.S.C. 7264(c); see also supra Section I.
---------------------------------------------------------------------------

    The Commission recognized that insider trading policies and 
procedures may vary from issuer to issuer and that decisions as to 
specific provisions of the policies and procedures are best left to the 
issuer. Therefore, the proposed amendments did not specify the 
information that a registrant would be required to provide regarding 
its insider trading policies and procedures.
b. Comments on the Proposed Amendments
    Commenters were divided over disclosure of a registrant's insider 
trading policies and procedures. Several commenters generally supported 
the proposed disclosure.\242\ One of these commenters asserted that 
this disclosure would improve transparency for investors and 
potentially create incentives for corporate boards and management teams 
to scrutinize the issuer's ``corporate hygiene'' regarding material 
nonpublic information and insider trading.\243\ Other commenters, 
however, asserted that the proposed disclosures would not meaningfully 
benefit investors, or that they would not be material.\244\ Another 
commenter expressed concern that requiring this disclosure in both 
annual reports and proxy statements would create administrative burdens 
on issuers by requiring them to craft additional disclosure for two 
separate compliance documents.\245\
---------------------------------------------------------------------------

    \242\ See, e.g., letters from Better Markets, BrilLiquid, CO 
PERA, CII, ICGN, NASAA, O'Reilly, and Sullivan.
    \243\ See letter from NASAA.
    \244\ See, e.g., letters from Davis Polk, Home Depot, NAM, and 
Simpson.
    \245\ See letter from Dow.
---------------------------------------------------------------------------

    Several commenters recommended modifications to the proposal. For 
example, several commenters recommended that the Commission should 
provide flexibility and allow issuers to post their insider trading 
policies and procedures on their website and direct readers to the 
posting in their annual report on Form 10-K rather than disclosing such 
policies in the Form 10-K, similar to the existing disclosure 
requirements for an issuer's code of ethics under Item 406(c)(2) of 
Regulation S-K.\246\ Another commenter similarly recommended that the 
final rules should allow issuers to post their insider trading policies 
and procedures on their website or file their insider trading policy as 
an exhibit to the annual report to satisfy this disclosure 
requirement.\247\ A few commenters suggested that the final rule should 
use the word ``describe'' rather than ``disclose'' to elicit disclosure 
that is consistent in tone and detail with the other Regulation S-K 
disclosure requirements of the proxy statement or the annual 
report.\248\
---------------------------------------------------------------------------

    \246\ See, e.g., letters from Cravath, Fenwick, Home Depot, and 
Shearman.
    \247\ See letter from Dow.
    \248\ See, e.g., letters from Davis Polk, and SIFMA 2.
---------------------------------------------------------------------------

    Finally, several commenters recommended that the Commission exempt 
FPIs from these disclosure requirements.\249\ These commenters 
contended that FPIs are already subject to home country corporate 
governance disclosure requirements, and that the disclosure requirement 
could function as an implicit requirement that FPIs adopt insider 
trading policies.
---------------------------------------------------------------------------

    \249\ See, e.g., letters from Cravath, Jones Day, SIFMA 2, and 
Sullivan.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting new Item 408(b) and new Item 16J with certain 
modifications in response to comments. Under the final rule,\250\ 
registrants will be required

[[Page 80385]]

to disclose whether they have adopted insider trading policies and 
procedures governing the purchase, sale, and other dispositions of 
their securities by directors, officers, and employees, or the 
registrant itself that are reasonably designed to promote compliance 
with insider trading laws, rules, and regulations, and any listing 
standards applicable to the registrant. If a registrant has not adopted 
such insider trading policies and procedures, it must explain why it 
has not done so. These disclosures will be required in annual reports 
on Form 10-K and proxy and information statements on Schedules 14A and 
14C. Pursuant to new Item 16J in Form 20-F, FPIs will be required to 
provide analogous disclosure in their annual reports on that form. We 
disagree that requiring this disclosure in both annual reports and 
proxy or information statements would impose an unreasonable burden on 
registrants by requiring them to prepare additional disclosures for two 
documents as suggested by a commenter.\251\ In this regard, we note 
that under General Instruction G to Form 10-K, a registrant can 
incorporate by reference the information required by Item 408(b) from a 
definitive proxy or information statement involving the election of 
directors, if the proxy or information statement is filed within 120 
days of the end of the fiscal year.\252\ In a modification of the 
proposal and in response to comments,\253\ the final rules do not 
require disclosure of the registrant's policies and procedures within 
the body of the annual report or proxy/information statement. Instead, 
we are adopting amendments to Item 601 of Regulation S-K and Form 20-F 
to require issuers to file a copy of their insider trading policies and 
procedures as an exhibit to Forms 10-K and 20-F, respectively. We 
considered permitting registrants to post their policies and procedures 
on their website in lieu of providing disclosure in the filing, as 
suggested by some commenters,\254\ similar to Item 406(c)(2), which 
allows a registrant to post its codes of ethics on its website and 
disclose the internet address in its annual report to satisfy the code 
of ethics disclosure requirement. Requiring registrants to file their 
insider trading policies and procedures as an exhibit would make the 
document available online through our Electronic Data Gathering, 
Analysis, and Retrieval (``EDGAR'') system. Documents that are filed as 
exhibits to registration statements and periodic reports must be 
hyperlinked from the exhibit index of the document,\255\ which 
facilitates investor access to the exhibit.
---------------------------------------------------------------------------

    \250\ While the Proposing Release stated that proposed Item 
408(b)(1) would include insider trading policies and procedures 
governing the purchase, sale, and/or other dispositions of the 
registrant's securities by directors, officers and employees or the 
registrant itself, the language ``or the registrant itself'' was 
inadvertently omitted from the proposed regulatory text. See 
Proposing Release, supra note 22, at 8695, 8712, and 8728. We have 
corrected this omission in the final rules, which now include the 
language ``or the registrant itself.'' See Item 408(b)(1).
    \251\ See supra note 245.
    \252\ See Note 2 to General Instruction G(2) to Form 10-K.
    \253\ See, e.g., letters from Davis Polk, Dow, and SIFMA 2 (all 
recommending that the final rule not require full disclosure of the 
policies and procedures within the body of the filing).
    \254\ See supra note 246.
    \255\ See 17 CFR 229.601(a)(2) and 17 CFR 232.102(d).
---------------------------------------------------------------------------

    EDGAR allows active hyperlinks to documents that are filed on EDGAR 
but does not allow hyperlinks to non-EDGAR documents.\256\ We therefore 
believe that the approach of hyperlinking to an exhibit filed on EDGAR 
would facilitate better access for investors as compared to permitting 
registrants to post their insider trading policies and procedures on 
their website and provide a web address (without a hyperlink) in their 
annual report. If all of the registrant's insider trading policies and 
procedures are included in its code of ethics (as defined in Item 
406(b)) and the code of ethics is filed as an exhibit pursuant to Item 
406(c)(1), a hyperlink to that exhibit accompanying the registrant's 
disclosure as to whether it has insider trading policies and procedures 
would satisfy this component of the disclosure requirement.
---------------------------------------------------------------------------

    \256\ See 17 CFR 232.105(b).
---------------------------------------------------------------------------

    We disagree with commenters who suggested that the disclosure 
regarding these policies and procedures would not be material and 
useful information to investors. The thoroughness and precision of such 
policies and procedures may help investors to understand whether they 
will be successfully implemented, even if any single detail taken on 
its own may not otherwise be material. An investor might reasonably 
conclude that an issuer adopting a policy generally prohibiting insider 
trading, but without disclosing how it prevents the unlawful 
communication of and trading on material nonpublic information, 
provides fewer such assurances to investors than an issuer that has 
developed and disclosed more particular and thorough policies and 
procedures. As noted in the Proposing Release, investors may find 
useful, to the extent it is included in the issuer's relevant policies 
and procedures, information on the issuer's process for analyzing 
whether directors, officers, employees, or the issuer itself when 
conducting an open-market share repurchase have material nonpublic 
information; the issuer's process for documenting such analyses and 
approving requests to purchase or sell its securities whether through 
Rule 10b5-1 plans or otherwise; and/or how the issuer enforces 
compliance with any such policies and procedures it may have. Investors 
may also use this information to assess the strengths and weaknesses of 
particular elements of these policies and procedures, which would help 
show how well the issuer protects its material nonpublic information 
from being misused in unlawful communications and securities trading, 
and how its protections compare with its competitors. Furthermore, the 
disclosure under Item 408 and Item 16J would address not only policies 
and procedures that apply to the purchase and sale of the registrant's 
securities, but also other dispositions of the registrant's securities 
where material nonpublic information could be misused, such as through 
gifts of such securities.\257\
---------------------------------------------------------------------------

    \257\ The Exchange Act does not require that a ``sale'' of 
securities be for value, and instead provides that the ``terms 
`sale' or `sell' each include any contract to sell or otherwise 
dispose of.'' Compare Exchange Act Section 3(a)(14) [15 U.S.C. 
78c(a)(14)], with Securities Act Section 2(a)(3) [15 U.S.C. 
77b(a)(3)] (``[T]he terms `sale' or `sell' shall include every 
contract of sale or disposition of a security or interest in a 
security, for value.''). For example, a donor of securities violates 
Section 10(b) if the donor gifts a security of an issuer in 
fraudulent breach of a duty of trust and confidence when the donor 
was aware of material nonpublic information about the security or 
issuer, and knew or was reckless in not knowing that the donee would 
sell the securities prior to the disclosure of such information. The 
affirmative defense under Rule 10b5-1(c)(1) is available for planned 
securities gifts.
---------------------------------------------------------------------------

    In extending this disclosure requirement to FPIs, we are cognizant 
of the concerns raised by commenters, such as the concern that some 
issuers may already be subject to home-country governance disclosure 
and that additional disclosure may pressure an FPI to adopt additional 
measures not required by its home jurisdiction. To the extent that an 
FPI already discloses similar information under its home country rules, 
the additional burden imposed by the final rule may be minimal. As we 
have discussed, information about the efforts an issuer undertakes to 
prevent misuse of its material nonpublic information is likely to be 
important to investors, regardless of whether it is a domestic issuer 
or an FPI. Indeed, we are aware that one reason FPIs register in the 
United States is to provide greater transparency and

[[Page 80386]]

assurances of the reliability of their disclosures to investors.
    Finally, the disclosures that are required in Forms 10-K and 20-F 
discussed in this section as well as those discussed in Section II.B.1 
will be subject to the certifications required by Section 302 of the 
Sarbanes-Oxley Act of 2002.\258\ Section 302 requires an issuer's 
principal executive officer and principal financial officer to certify, 
among other things, that based on their knowledge, the Form 10-K or 
Form 20-F that they have signed does not contain untrue statements of 
material facts or omit to state material facts necessary to make the 
statements made, in light of the circumstances under which such 
statements were made, not misleading with respect to the periods 
covered by the reports.\259\ In making these certifications, principal 
executive and principal financial officers attest to the accuracy of 
the statements in their Form 10-K or Form 20-F.\260\ Thus, principal 
executive and principal financial officers may be liable under Rule 
13a-14 if they certify as to a fact ``about which [they are] ignorant 
or which [they] know[ ] is false.'' \261\
---------------------------------------------------------------------------

    \258\ Public Law 107-204, 116 Stat. 745 (2002).
    \259\ In effectuating this statutory responsibility, the 
principal executive and financial officers of an issuer may be aided 
by a written representation (such as a sub-certification) from the 
issuer's principal legal or compliance officer (or person performing 
similar functions) that, based on a reasonable review, they have 
determined the issuer's insider trading practices and procedures 
comport with what the issuer is disclosing about them in its 
periodic reports. However, it would not be reasonable for a 
principal executive or financial officer to rely on such a 
representation if they are aware of information that is inconsistent 
with, or raises doubts about the reliability of, the representation.
    \260\ See, e.g., SEC v. Jensen, 835 F.3d 1100, 1112-13 (9th Cir. 
2016); see also GAF Corp. v. Milstein, 453 F.2d 709, 720 (2d Cir. 
1971) (``the obligation to file truthful statements implicit in the 
obligation to file'') ((emphasis in original)).
    \261\ Id. at 1113.
---------------------------------------------------------------------------

3. Identification of Rule 10b5-1 and Non-Rule 10b5-1 Transactions on 
Forms 4 and 5
a. Proposed Amendments
    Section 16(a) of the Exchange Act provides that every person who 
beneficially owns, directly or indirectly, more than 10 percent of any 
class of equity security (other than an exempted security) registered 
pursuant to Exchange Act Section 12, or who is an officer or director 
of the issuer of such security, shall file with the Commission an 
initial report disclosing the amount of all equity securities of such 
issuer of which the insider is the beneficial owner, and a subsequent 
transaction report to disclose any changes in beneficial ownership. 
Section 16 was designed to provide the public with information on 
securities transactions and holdings of corporate officers, directors, 
and principal shareholders, and to deter those individuals from seeking 
to profit from short-term trading in the securities of their 
corporations while in possession of material nonpublic 
information.\262\
---------------------------------------------------------------------------

    \262\ See Ownership Reports and Trading By Officers, Directors 
and Principal Security Holders, Release No. 34-28869 (Feb. 8, 1991) 
[56 FR 7242 (Feb. 21, 1991)].
---------------------------------------------------------------------------

    Persons subject to Section 16 reporting must disclose changes in 
their beneficial ownership on Form 4 \263\ or 5,\264\ which are 
publicly available on EDGAR. In December 2020, the Commission proposed, 
among other things, amendments to Form 4 and Form 5 \265\ to add a 
checkbox to these forms that would permit filers, at their option, to 
indicate whether a transaction reported on the form was made pursuant 
to a contract, instruction, or written trading plan for the purchase or 
sale of equity securities of the issuer that satisfies the conditions 
of Rule 10b5-1(c).\266\ In response to this proposal, the Commission 
received feedback from several commenters who asserted, based on 
analyses of sales of securities executed under Rule 10b5-1 plans, that 
many of the surveyed transactions may have been made on the basis of 
material nonpublic information.\267\ These commenters recommended that 
the proposed Rule 10b5-1 checkbox disclosure be mandatory on Forms 4 
and 5 because such disclosure would help investors and the public 
better discern whether Rule 10b5-1 plans are being used to engage in 
opportunistic trading on the basis of material nonpublic 
information.\268\
---------------------------------------------------------------------------

    \263\ A person subject to Section 16 must report specified 
changes in beneficial ownership on Form 4 before the end of the 
second business day following the date of execution of the 
transaction. See 17 CFR 240.16a-3(g).
    \264\ Form 5 is a year-end report to be used by a person subject 
to Section 16 to disclose certain transactions that were exempt from 
Section 16(b), and transactions and holdings that were required to 
be reported during the fiscal year, but were not. See 17 CFR 
240.16a-3(f).
    \265\ Form 5 is a year-end report to be used by any person who 
was an officer, director or a 10% beneficial owner during any 
portion of the issuer's fiscal year to disclose transactions and 
holdings that are exempt from Section 16(b) or that were required to 
be reported during the fiscal year, but were not.
    \266\ See Rule 144 Holding Period and Form 144 Filings, Release 
No. 33-10911 (Dec. 22, 2020) [86 FR 5063 (Jan. 19, 2021)] 
(``December 2020 Proposing Release'').
    \267\ See letters from Council of Institutional Investors (dated 
Mar. 18, 2021), Alan Jagolinzer (dated Mar. 10, 2021), and David 
Larcker et al. (dated Mar. 10, 2021), available at https://www.sec.gov/comments/s7-24-20/s72420.htm.
    \268\ Id.
---------------------------------------------------------------------------

    In consideration of this feedback, the Commission proposed to add a 
Rule 10b5-1(c) checkbox as a mandatory disclosure requirement on Forms 
4 and 5. A Form 4 or 5 filer would be required to indicate via the 
checkbox whether a transaction reported on that form was made pursuant 
to Rule 10b5-1(c). Filers would also be required to provide the date of 
adoption of the Rule 10b5-1 plan, and would have the option to provide 
additional relevant information about the reported transaction. 
Requiring this disclosure on Forms 4 and 5 would provide greater 
transparency around the use of Rule 10b5-1 plans and would be 
consistent with the primary purpose of Section 16.\269\ It also would 
provide information that could be used by registrants to comply with 
their Item 408 disclosure obligations.
---------------------------------------------------------------------------

    \269\ See S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934).
---------------------------------------------------------------------------

    In addition, the Commission proposed to add a second, optional 
checkbox to both of Forms 4 and 5. This optional checkbox would allow a 
filer to indicate whether a transaction reported on the form was made 
pursuant to a pre-planned contract, instruction, or written plan for 
the purchase or sale of equity securities of the issuer that does not 
satisfy the conditions of Rule 10b5-1(c).
b. Comments on the Proposed Amendments
    Most of the commenters who discussed this matter generally 
supported the proposal to add a mandatory checkbox on Forms 4 and 5 for 
the disclosure of trades under a Rule 10b5-1 trading arrangement.\270\ 
For example, some of these commenters indicated that these checkboxes 
would provide useful information to investors and other market 
participants and may help prevent misuse of Rule 10b5-1 plans.\271\ 
Another commenter, however, expressed the view that these checkboxes 
likely would not provide useful information if the Commission adopted 
the proposed cooling-off period.\272\
---------------------------------------------------------------------------

    \270\ See, e.g., letters from ACCO, CII, Cravath, and Quinn.
    \271\ See letters from CII and Quinn.
    \272\ See letter from Cravath.
---------------------------------------------------------------------------

    In addition, one of the commenters that generally supported the 
proposal did so subject to a recommended change. This commenter urged 
the Commission to amend the Rule 10b5-1 checkbox to state ``whether a 
transaction was intended to satisfy'' the Rule 10b5-1 affirmative 
defense rather than

[[Page 80387]]

whether a transaction ``was made'' pursuant to the affirmative 
defense.\273\ This commenter was concerned that, for a number of 
reasons, it could be difficult for a reporting person to definitively 
affirm whether a transaction was in fact made pursuant to the Rule 
10b5-1 affirmative defense. This commenter also stated that using 
``intended to satisfy'' would be consistent with the Commission's 
approach in other proposed rules, such as proposed Item 703(c)(2)(iii) 
of Regulation S-K.\274\
---------------------------------------------------------------------------

    \273\ See letter from Sullivan.
    \274\ In a separate release, the Commission proposed amendments 
to Item 703(c)(2)(iii) of Regulation S-K to require disclosure of a 
plan that ``is intended to satisfy'' the conditions of Rule 10b5-
1(c). See Share Repurchase Disclosure Modernization, Release No 34-
93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 1, 2022)] (proposing 
amendments to modernize and improve disclosures about repurchases of 
an issuer's equity securities that are registered under the Exchange 
Act).
---------------------------------------------------------------------------

    A few commenters opposed the optional non-Rule 10b5-1 checkbox on 
Forms 4 and 5.\275\ These commenters indicated that this checkbox would 
not provide any valuable information to investors, the Commission or 
other market participants because the details of such transactions are 
already provided in Forms 4 and 5.
---------------------------------------------------------------------------

    \275\ See, e.g., letters from Cravath and Cleary.
---------------------------------------------------------------------------

c. Final Amendment
    After considering these comments, we are adopting the mandatory 
Rule 10b5-1 checkboxes to Forms 4 and 5 as proposed with one 
modification. In response to the concerns expressed by a commenter that 
the proposed checkbox language would have required a filer to 
definitively state that the reported transaction was in fact made 
pursuant to the Rule 10b5-1 affirmative defense,\276\ we have revised 
the text accompanying the checkboxes to state that a reported 
transaction is pursuant to a plan that is ``intended to satisfy the 
affirmative defense conditions'' of Rule 10b5-1(c).
---------------------------------------------------------------------------

    \276\ See letter from Sullivan.
---------------------------------------------------------------------------

    This checkbox will help investors and the public better understand 
how trading plans that rely on the revised Rule 10b5-1(c) affirmative 
defense are being used by corporate insiders, including whether they 
are being used to engage in opportunistic trading. We disagree with the 
commenter who indicated that the checkbox would not provide useful 
information to investors in light of the cooling-off period that we are 
adopting for officers and directors. The checkbox provides transparency 
into the use of Rule 10b5-1 plans to help deter potential misuse of 
those plans, which would complement the cooling-off period. For 
example, the checkbox might be useful to investors in combination with 
disclosures regarding the adoption and termination of Rule 10b5-1 plans 
as it may help them to identify instances in which an officer or 
director may have opportunistically cancelled a trade or terminated a 
plan. Moreover, the potential effects of such a disclosure could 
discourage such opportunistic cancellations.
    Finally, we are not adopting the optional checkbox that would allow 
a filer to indicate whether a transaction reported on the form was made 
pursuant to a non-Rule 10b5-1 trading arrangement. We are persuaded by 
commenters who stated that this checkbox would not provide investors 
and other market participants with useful information because the 
details of the transaction will already be disclosed in the form.

C. Disclosure Regarding Option Grants and Similar Equity Instruments 
Made Close in Time to the Release of Material Nonpublic Information

1. Proposed Amendments
    Since the enactment of the Securities Act and the Exchange Act, the 
Commission has sought to enhance its rules regarding the disclosure of 
executive and director compensation and to improve the presentation of 
this information to investors.\277\ One area of focus for the 
Commission has been disclosure related to equity-based compensation. 
Many companies use stock options as a form of compensation for their 
employees and executives.\278\ In a simple stock option award, a 
company may grant an employee the right to purchase a specified number 
of shares of the company's stock at a specified price, called the 
exercise price, which is typically set as the fair market value of the 
company's stock on the grant date. Stock options with exercise prices 
at or above the fair market value of the underlying stock are designed 
to motivate the recipient to work to increase company value, because 
the option holder would only benefit if the company's stock price 
exceeds the exercise price at the time of exercise.\279\ Alternatively, 
if a company is aware of material nonpublic information that is likely 
to decrease its stock price, it may decide to delay a planned option 
award until after the release of such information (a practice commonly 
referred to as ``bullet-dodging'').\280\
---------------------------------------------------------------------------

    \277\ See, e.g., Executive Compensation and Related Person 
Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 
8, 2006)] (hereinafter ``2006 Executive Compensation Release'') at 
53160 at n. 45; Proxy Disclosure Enhancements, Release No. 33-9089 
(Dec. 16, 2009) [74 FR 68334 (Dec. 24, 2009)].
    \278\ The term ``option'' includes stock options, SARs and 
similar instruments with option-like features. See 17 CFR 
229.402(a)(6).
    \279\ When the exercise price for an option is less than the 
fair market value of the underlying security, the option is ``in the 
money.'' If the exercise price and fair market value are the same, 
the option is ``at the money.'' If the exercise price is greater 
than the fair market value, the option is ``out of the money.''
    \280\ See Allan Horwich, The Legality of Opportunistically 
Timing Public Company Disclosures in the Context of SEC Rule 10b5-1, 
71 Bus. Law. 1113, 1143 (2016) (noting that ``bullet-dodging'' 
occurs when a board delays the grant of an option until adverse 
material nonpublic information known to the board is disclosed, 
which reduces the market price and the option exercise price that is 
set at the time of the grant).
---------------------------------------------------------------------------

    In 2006, the Commission revised its executive compensation 
disclosure rules to, among other things, provide investors with a more 
complete picture of compensation paid to principal executive officers, 
principal financial officers, and the other highest paid executive 
officers and directors.\281\ In the 2006 Executive Compensation 
Release, the Commission stated that under the principles-based 
compensation disclosure requirements of Item 402 of Regulation S-K, 
registrants may be required to disclose in their Compensation 
Discussion and Analysis (``CD&A'') information about the timing of 
option grants in close proximity to the release of material nonpublic 
information by the company.\282\ Such disclosure should include, for 
example, whether a company is aware of material nonpublic information 
that is likely to result in an increase of its stock price, such as a 
product development announcement or positive earnings, and grants stock 
options immediately before the release of this information. Timing 
option grants to occur immediately before the release of positive 
material nonpublic information (a practice commonly referred to as 
``spring-loading'') can benefit executives with an option award that 
will likely be in-the-money as soon as the material nonpublic 
information is made public.\283\
---------------------------------------------------------------------------

    \281\ 2006 Executive Compensation Release, supra note 277.
    \282\ See 17 CFR 229.402(b)(2)(iv) and 2006 Executive 
Compensation Release, supra note 277, at 53163-4.
    \283\ See Lucian A. Bebchuk & Jesse M. Fried, Paying for Long-
Term Performance, 158 U. Pa. L. Rev. 1915, 1937-39 & n. 63 (2010) 
(noting that the practice of spring-loading may also disguise an in-
the-money option award as having been granted at-the-money).
---------------------------------------------------------------------------

    In the 2006 Executive Compensation Release, the Commission noted 
that the existence of a program, plan, or practice to select option 
grant dates for executive officers in coordination with the release of 
material nonpublic information

[[Page 80388]]

would be material to investors and should be fully disclosed.\284\
---------------------------------------------------------------------------

    \284\ 2006 Executive Compensation Release, supra note 277, at 
53163.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission expressed concern that our 
existing disclosure requirements do not provide investors with adequate 
information regarding an issuer's policies and practices on stock 
option awards timed to precede or follow the release of material 
nonpublic information. The Commission noted that, under the current 
executive compensation disclosure rules, compensation-related equity 
interests (including options, restricted stock, and similar grants) are 
required to be presented in a tabular format and accompanied by 
appropriate narrative disclosure necessary for an understanding of the 
information presented in a table. Option grants that are spring-loaded 
or bullet-dodging are not required to be separately identified in these 
tables. Investors therefore may not have a clear picture of the effect 
of an option award that is made close in time to the release of 
material nonpublic information on the executives' or directors' 
compensation and on the company's financial statements. Understanding 
that issuers may have reasons for granting these types of options, but 
that increased transparency may be warranted, the Commission proposed 
amendments that would require registrants to disclose in a new table 
any option awards to a ``named executive officer'' \285\ (``NEO'') or 
director that is made close in time to the release of material 
nonpublic information such as an earnings announcement.
---------------------------------------------------------------------------

    \285\ Named executive officers include all individuals serving 
as the registrant's Principal Executive Officer (``PEO'') or 
Principal Financial Officer (``PFO'') during the last completed 
fiscal year, the registrant's three most highly compensated officers 
other than the PEO and PFO who were serving as executive officers at 
the end of the last completed fiscal year, and up to two additional 
individuals for whom disclosure would have been provided but for the 
fact that the individual was not serving as an executive officer at 
fiscal year-end. See Item 402(a)(3) of Regulation S-K.
---------------------------------------------------------------------------

    Specifically, to identify if any such timed options are granted, 
the Commission proposed adding a new paragraph to Item 402 of 
Regulation S-K that would require: (1) tabular disclosure of each award 
of stock options, SARs, or similar option-like instruments (i.e. the 
grant date, number of securities underlying the award, the exercise 
price of the award, and the grant date fair value of the award) granted 
within 14 calendar days before or after the filing of a periodic 
report, an issuer share repurchase, or the filing or furnishing of a 
current report on Form 8-K that discloses material nonpublic 
information (including earnings information); (2) the market value of 
the underlying securities the trading day before disclosure of the 
material nonpublic information; and (3) the market value of the 
underlying securities one trading day after disclosure of material 
nonpublic information.
    The proposed 14-day window was designed to cover the period that an 
issuer would be aware of material nonpublic information at the time 
that its board of directors grants these awards. The Commission noted 
that many issuers also voluntarily communicate material nonpublic 
information regarding their results of operations or financial 
condition for a completed fiscal quarter or annual period through an 
earnings release.\286\ After completion of a fiscal quarter, a 
company's board of directors will usually meet a week or two before the 
earnings release.\287\ During this period, the board would likely be 
aware of material nonpublic information that could affect the price of 
the company's stock.
---------------------------------------------------------------------------

    \286\ The staff estimates that approximately 63% of the Form 10-
Qs filed with the Commission in calendar year 2017 were accompanied 
by a prior or concurrent earnings release by the issuer.
    \287\ While some companies provide earnings releases in advance 
of the corresponding Form 10-Q filings, many companies also issue 
earnings releases concurrently with their Form 10-Q filings.
---------------------------------------------------------------------------

    To further address these concerns, the Commission also proposed to 
require narrative disclosure about an issuer's policies and practices 
regarding the timing of grants of these awards in relation to the 
disclosure of material nonpublic information by the issuer, including 
how the board determines when to grant such awards and whether, and if 
so, how, the board or compensation committee takes material nonpublic 
information into account when determining the timing and terms of an 
award; and whether the issuer has timed the disclosure of material 
nonpublic information for the purpose of affecting the value of 
executive compensation. For issuers that are subject to the CD&A, the 
proposed narrative disclosure could be included in the CD&A.
    Overall, the Commission intended the proposed amendments to provide 
shareholders with a full and complete picture of any spring-loaded or 
bullet-dodging option grants during the fiscal year. The Commission 
found it important for shareholders to understand company practices 
with respect to these types of grants as they consider their say-on-pay 
votes, and director elections. Accordingly, the Commission proposed to 
require this disclosure in annual reports on Form 10-K,\288\ as well as 
in proxy statements and information statements related to the election 
of directors, shareholder approval of new compensation plans, and 
solicitations of advisory votes to approve executive compensation.\289\
---------------------------------------------------------------------------

    \288\ The executive compensation disclosure requirements in Part 
III of Form 10-K may be incorporated by reference from a proxy or 
information statement involving the election of directors, if filed 
within 120 days of the end of the fiscal year. See Note 3 to General 
Instruction G(3) to Form 10-K.
    \289\ Exchange Act Rule 14a-21 [17 CFR 240.14a-21] requires, 
among other things, that companies soliciting proxies for an annual 
or other meeting of shareholders at which directors will be elected 
include a separate resolution subject to a shareholder advisory vote 
to approve the compensation of named executive officers.
---------------------------------------------------------------------------

    Under the proposal, SRCs and emerging growth companies (``EGCs'') 
\290\ would be subject to the new disclosure requirement. However, 
consistent with the scaled approach to their executive compensation 
disclosure,\291\ they would be permitted to limit their disclosures 
about specific option awards to the PEO, the two most highly 
compensated executive officers other than the PEO at fiscal year-end, 
and up to two additional individuals who would have been the most 
highly compensated but for not serving as executive officers at fiscal 
year-end.\292\
---------------------------------------------------------------------------

    \290\ An EGC is defined as a company that has total annual gross 
revenues of less than $1.235 billion during its most recently 
completed fiscal year and, as of Dec. 8, 2011, had not sold common 
equity securities under a registration statement. A company 
continues to be an EGC for the first five fiscal years after it 
completes an IPO, unless one of the following occurs: Its total 
annual gross revenues are $1.235 billion or more; it has issued more 
than $1 billion in non-convertible debt in the past three years; or 
it becomes a ``large accelerated filer,'' as defined in Exchange Act 
Rule 12b-2. See Securities Act Rule 405; Exchange Act Rule 12b-2.
    \291\ See Item 402(l) of Regulation S-K.
    \292\ See Item 402(m)(2) of Regulation S-K.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Many commenters supported the proposed tabular and narrative 
disclosures.\293\ Some of these commenters generally indicated that the 
proposed disclosures would increase investor confidence and might deter 
or discourage the use of spring-loaded and bullet-dodging option 
grants.\294\ For example, they agreed that these disclosures would help 
investors make informed choices when voting on director elections and 
on executive pay and other compensation matters.

[[Page 80389]]

Commenters also expressed the view that the proposed disclosures would 
improve investor confidence by indicating that such awards are 
appropriately tied to long-term performance targets \295\ and, 
similarly, giving insight into practices that could appear similar to 
insider trading, which would undermine the perceived fairness and 
integrity of the markets.\296\
---------------------------------------------------------------------------

    \293\ See, e.g., letters from ACCO, AFL-CIO, ICGN, NASAA, 
O'Reilly, and Public Citizen.
    \294\ See, e.g., letters from ICGN and NASAA.
    \295\ See letter from ICGN.
    \296\ See letter from NASAA.
---------------------------------------------------------------------------

    A number of commenters, however, did not support this 
proposal.\297\ Many of these commenters contended that the proposed 
disclosure requirements were unnecessary because the information is 
already available to the public through current executive compensation 
disclosure requirements and Section 16 reports, such as Form 4.\298\ 
Several commenters contended that the proposed disclosures could be 
misleading as they could suggest a causal link between these awards and 
the release of material nonpublic information where none exists.\299\
---------------------------------------------------------------------------

    \297\ See, e.g., letters from ABA, Chevron, Cleary, Cravath, 
Davis Polk, DLA, Dow, Home Depot, FedEx, Fenwick, Jones Day, MD Bar, 
NAM, Paul Weiss, Quest, SCG, Shearman, Sullivan, and Wilson Sonsini.
    \298\ See, e.g., letters from Cleary, Cravath, Dow, Fenwick, 
Home Depot, SCG, Shearman, and Wilson Sonsini.
    \299\ See, e.g., letters from Dow, FedEx, Home Depot, PNC.
---------------------------------------------------------------------------

    In particular, many commenters were opposed to the proposed tabular 
disclosure of each option award granted within 14-calendar days before 
or after a triggering event.\300\ Several commenters contended that the 
proposed disclosure would capture a large number of ordinary-course 
equity award grants and would not help investors distinguish spring-
loaded or bullet-dodging grants from routine option grants.\301\ Some 
of these commenters asserted that the timing of equity award grants is 
typically based on a meeting schedule for directors that is established 
several months in advance without consideration of disclosure of 
material information.\302\
---------------------------------------------------------------------------

    \300\ See, e.g., letters from ABA, Davis Polk Cleary, Cravath, 
Dow, Fenwick, Home Depot, SCG, and Shearman.
    \301\ See, e.g., letters from Cleary, Cravath, Dow, Fenwick, 
Home Depot, SCG, Shearman, and Wilson Sonsini.
    \302\ See, e.g., letters from Cleary, Cravath, Dow, FedEx, Home 
Depot, and SCG.
---------------------------------------------------------------------------

    A few commenters that opposed the tabular disclosure suggested 
modifying the requirements if adopted, to better ensure that the 
disclosure does not unduly encompass routine awards. A few commenters 
suggested shortening the disclosure window from 14 days,\303\ to a 
shorter period, such as to three or five days.\304\ Other commenters 
recommended that the Commission narrow the triggering events for this 
disclosure. Some of these commenters suggested that the Commission 
remove the Form 8-K disclosure trigger or limit it to Forms 8-K 
reporting an event under Item 1.01 \305\ or Item 2.02 \306\ of the form 
rather than using a materiality standard.\307\ These commenters argued, 
among other things, that these reports are more likely to impact the 
price or trading in an issuer's securities \308\ and that a more 
bright-line approach would benefit investors by providing them with 
more consistent and material information while removing the potential 
burden on issuers that making a materiality assessment for each Form 8-
K may impose.\309\ One of these commenters also urged the Commission to 
remove the share repurchase trigger or change it to trigger disclosure 
upon the adoption or announcement of a new share repurchase program, 
rather than any share repurchase transaction.\310\ This commenter 
asserted that the proposed requirement could pose a substantial burden 
on issuers without any potential benefit to investors as many issuers 
engage in share repurchases activity regularly and, in some instances, 
daily.
---------------------------------------------------------------------------

    \303\ See, e.g., letters from Cravath and Davis Polk.
    \304\ See letter from Cravath.
    \305\ Item 1.01 requires disclosure of the entry into a material 
definitive agreement by the registrant.
    \306\ Item 2.02 requires disclosure of, among other things, a 
public announcement or release (including any update of an earlier 
announcement or release) disclosing material nonpublic information 
regarding the registrant's results of operations or financial 
condition for a completed quarterly or annual fiscal period.
    \307\ See, e.g., letters from Fenwick and Sullivan.
    \308\ See letter from Fenwick.
    \309\ See letter from Sullivan.
    \310\ Id.
---------------------------------------------------------------------------

    In addition, another commenter asserted that the proposed narrative 
disclosure sufficiently addressed the Commission's concerns regarding 
spring-loading and bullet-dodging.\311\ This commenter expressed the 
view that disclosure regarding the compensation committee's 
consideration of whether the issuer has material nonpublic information 
at the time of the grant and how the compensation committee considers 
the impact of timing and nature of corporate disclosures, share buyback 
announcements, and similar events would sufficiently address the 
concerns.
---------------------------------------------------------------------------

    \311\ See letter from Dow.
---------------------------------------------------------------------------

    Finally, a few commenters contended that these rules are 
unnecessary because the staff guidance of Staff Accounting Bulletin 120 
\312\ mitigates disclosure concerns regarding spring-loaded 
options.\313\
---------------------------------------------------------------------------

    \312\ See Staff Accounting Bulletin No. 120, Release No. SAB 120 
(Nov. 24, 2021) [86 FR 68111 (Dec. 1, 2021)] (``SAB 120''). In SAB 
120, among other topics, the staff provided interpretative guidance 
for public companies to consider regarding the accounting treatment 
of option awards made when the company possessed material nonpublic 
information. All staff statements, including SAB 120 and any other 
staff statement cited in this release, represent the views of the 
staff. They are not a rule, regulation, or statement of the 
Commission. The Commission has neither approved nor disapproved 
their content. These staff statements, like all staff statements, 
have no legal force or effect: they do not alter or amend applicable 
law, and they create no new or additional obligations for any 
person.
    \313\ See, e.g., letters from SCG, Cravath, and Jones Day.
---------------------------------------------------------------------------

3. Final Amendments
    Having considered the comments received, we are adopting Item 
402(x) as proposed with respect to the narrative disclosure and with 
several modifications to the tabular disclosure.
    With respect to the narrative disclosure, as proposed, the final 
rule will require registrants to discuss the registrant's policies and 
practices on the timing of awards of stock options, SARs and/or similar 
option-like instruments in relation to the disclosure of material 
nonpublic information by the registrant, including how the board 
determines when to grant such awards (for example, whether such awards 
are granted on a predetermined schedule); whether, and if so, how, the 
board or compensation committee takes material nonpublic information 
into account when determining the timing and terms of an award, and 
whether the registrant has timed the disclosure of material nonpublic 
information for the purpose of affecting the value of executive 
compensation.\314\
---------------------------------------------------------------------------

    \314\ Item 402(x)(1) does not require a registrant to adopt 
policies and practices on the timing of awards of stock options, 
SARs and/or similar option-like instruments if it has not already 
done so, or to modify any such existing policies.
---------------------------------------------------------------------------

    We disagree with commenters who suggested this narrative disclosure 
would not provide useful information to investors. While it is true 
that investors can with some effort identify the timing both of awards 
and earnings announcements, this information would not reveal the 
extent to which a board considered the effects of such timing on its 
executive compensation practices, and may have modified other aspects 
of the executive's total compensation to reflect any impact that the 
timing of the award may have had. For similar reasons, we do not agree 
that the staff guidance in SAB 120 sufficiently mitigates disclosure 
concerns regarding

[[Page 80390]]

the timing of options and similar awards as contended by some 
commenters. To the contrary, the narrative disclosures required by the 
final rule will increase the mix of information available to investors 
and better inform them of the appropriateness of any adjustments made 
by the board.
    In addition, we are adopting the tabular disclosure requirement 
with several modifications in light of comments received. To address 
concerns that this disclosure may be misleading or otherwise overly 
broad, we have narrowed the disclosure window, with the result that 
disclosure would be required for awards made in the four business days 
before the filing of a periodic report or the filing or furnishing of a 
current report on Form 8-K that discloses material nonpublic 
information (including earnings information) and ending one business 
day after a triggering event. We have also removed the share repurchase 
disclosure trigger. In addition, the final rule provides that a Form 8-
K reporting only the grant of a material new option award under Item 
5.02(e) does not trigger this disclosure. We also combined the last two 
columns of the proposed table that would have required disclosure of 
the market value of the securities underlying the award one trading day 
before and one trading day after disclosure of material nonpublic 
information into a single column that discloses the percentage change 
in the market value of the securities underlying the award between 
those dates.
    The final rules provide that, if, during the last completed fiscal 
year, stock options, SARs, and/or similar option-like instruments were 
awarded to an NEO within a period starting four business days before 
the filing of a periodic report on Form 10-Q or Form 10-K, or the 
filing or furnishing of a current report on Form 8-K that discloses 
material nonpublic information (including earnings information), other 
than a current report on Form 8-K disclosing a material new option 
award grant under Item 5.02(e), and ending one business day after a 
triggering event, the issuer must provide the following information 
concerning each such award for the NEO on an aggregated basis in the 
tabular format set forth in the rule:
     The name of the NEO;
     The grant date of the award;
     The number of securities underlying the award;
     The per-share exercise price;
     The grant date fair value of each award computed using the 
same methodology as used for the registrant's financial statements 
under generally accepted accounting principles; and
     The percentage change in the market price of the 
underlying securities between the closing market price of the security 
one trading day prior to and one trading day following the disclosure 
of material nonpublic information.
    The purpose of the new table is to highlight for investors options 
award grants that may be more likely than most to have been made at a 
time that the board of directors was aware of material nonpublic 
information affecting the value of the award.
    In a modification from the proposing release, we are requiring that 
the table include only option awards granted in the period beginning 
four business days preceding a triggering event and ending one business 
day after a triggering event. We agree with commenters that the 
proposed 14-day disclosure window may result in disclosure of many 
routine awards that are less likely to have been affected by material 
nonpublic information. To address these concerns, similar to the 
recommendation of one of those commenters to shorten the timeframe to 
three or five days,\315\ we selected a four-business day period 
preceding a triggering event because a registrant must generally file a 
Form 8-K within that period of time upon becoming aware of a triggering 
event. It therefore is less likely that the registrant would be able to 
grant an award based upon the board's awareness of a triggering event 
more than four business days before the filing of a corresponding Form 
8-K. We are adopting the same time period for awards preceding 
disclosures on Forms 10-Q and 10-K to make such disclosures readily 
comparable to those triggered by an 8-K filing. In addition, we are 
requiring disclosure of options awards in the one-business day period 
after the filing or furnishing of Forms 8-K, 10-Q, or 10-K because in 
some circumstances the issuer's share price will not fully reflect the 
information disclosed immediately after disclosure.\316\ Including 
post-filing option awards beyond that period might reduce the value of 
the information in the table by including awards that may be less 
likely to be affected by material nonpublic information.
---------------------------------------------------------------------------

    \315\ See letter from Cravath.
    \316\ See infra Section V.D.
---------------------------------------------------------------------------

    In addition, to further ensure that this disclosure covers the 
types of grants that we are concerned with, we have removed the share 
repurchase triggering event and provided a limited exception from the 
tabular disclosure of option awards based on the filing or furnishing 
of a Form 8-K. We are persuaded by commenters that including awards 
close in time to any issuer share repurchases could result in 
disclosure of virtually every award, greatly reducing the information 
value of the table. With respect to the Form 8-K trigger, we have 
created an exception for Item 5.02(e) Forms 8-K that only disclose a 
material new option award grant because we believe including this 
particular information in the new table would be redundant and not 
informative to investors. We disagree, however, with the commenters 
that recommended removing the Form 8-K trigger or limiting it to Item 
1.01 or Item 2.02 Forms 8-K because a broad range of Forms 8-K could 
disclose material information that raises spring-loading concerns, not 
just these types of Forms 8-K. For example, the disclosure of an event 
under Item 8.01 of Form 8-K, such as the status of a patent 
application, may constitute material information that could affect the 
value of an option award.
    Lastly, we combined the final two columns of the proposed table 
into a single column that requires disclosure of the percentage change 
in the market value of the securities underlying the award between the 
closing market price of the securities one trading prior to the 
disclosure of material nonpublic information and one trading day 
following the disclosure of material nonpublic information. This change 
is intended to make it easier for investors to understand the impact 
that spring-loading may have on the potential value realizable by the 
NEO.

D. Structured Data Requirements

1. Proposed Amendments
    The Commission proposed to require registrants to tag the 
information specified by proposed Items 408 and 402(x) of Regulation S-
K, and Item 16J of Form 20-F in Inline XBRL in accordance with Rule 405 
of Regulation S-T and the EDGAR Filer Manual.\317\ The proposed 
requirements would include block text tagging of narrative disclosures, 
as well as detail tagging of quantitative amounts disclosed within

[[Page 80391]]

the narrative disclosures. Inline XBRL is both machine-readable and 
human-readable, which improves the quality and usability of XBRL data 
for investors.\318\
---------------------------------------------------------------------------

    \317\ This tagging requirement would be implemented by including 
cross-references to Rule 405 in proposed Item 408(a)(3), Item 
408(b)(3) and Item 402(x), and Item 16J of Form 20-F, and by 
revising Rule 405(b) to include the Item 408(a), 408(b)(1), and Item 
402(x) disclosure. In conjunction with the EDGAR Filer Manual, 
Regulation S-T governs the electronic submission of documents filed 
with the Commission. Rule 405 specifically governs the scope and 
manner of disclosure tagging requirements for operating companies 
and investment companies, including the requirement in Rule 
405(a)(3) to use Inline XBRL as the specific structured data 
language for tagging the disclosures.
    \318\ See Inline XBRL Filing of Tagged Data, Securities Act 
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. 
Inline XBRL allows filers to embed XBRL data directly into an HTML 
document, eliminating the need to tag a copy of the information in a 
separate XBRL exhibit. Inline XBRL is both human-readable and 
machine-readable for purposes of validation, aggregation, and 
analysis. Id. at 40851.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Most of the commenters who addressed this proposal supported 
requiring the tagging of the disclosures.\319\ One commenter, however, 
opposed this proposal and urged the Commission not to adopt it.\320\ 
This commenter asserted that XBRL tagging was not well adapted to the 
disclosure of trading policies and procedures that would be required 
under proposed Item 408 and proposed Item 16J of Form 20-F, and that 
the full impact of this requirement would depend on what tagging would 
be required, which was not included with the Proposing Release.
---------------------------------------------------------------------------

    \319\ See, e.g., letters from CII, AFL-CIO, ICGN, and XBRL US, 
Inc. (``XBRL-US'').
    \320\ See letter from Cleary.
---------------------------------------------------------------------------

3. Final Amendments
    After considering these comments, we are adopting the amendments as 
proposed. The final amendments will require registrants to tag the 
information specified by new Items 402(x), 408(a), and 408(b)(1) of 
Regulation S-K, and new Item 16J(a) of Form 20-F, in Inline XBRL in 
accordance with Rule 405 and the EDGAR Filer Manual. We do not agree 
with a commenter's contention that XBRL tagging is not well adapted to 
these disclosures.\321\ Rather, XBRL tagging is well adapted to 
narrative disclosures such as those specified by new Items 408(a), 
408(b)(1), and 402(x)(1) of Regulation S-K and new Item 16J(a) of Form 
20-F. In that regard, we note that the Commission has required XBRL 
tagging for narrative disclosures, such as descriptions of significant 
accounting policies in footnotes to financial statements since the 
initial implementation of XBRL requirements in 2009.\322\ Requiring 
Inline XBRL tagging of these disclosures will benefit investors by 
making the disclosures more readily available and easily accessible to 
investors, market participants, and others for aggregation, comparison, 
filtering, and other analysis, as compared to requiring a non-machine 
readable data language such as HTML. Registrants must comply with the 
Inline XBRL tagging requirements in Forms 10-Q, 10-K and 20-F, and any 
proxy or information statements that are required to include the Item 
408 and/or Item 402(x) disclosures, beginning with the first such 
filing that covers the first full fiscal period beginning on or after 
April 1, 2023, for companies other than SRCs. SRCs will be required to 
provide and tag the disclosures after an additional six-month 
transition period. This compliance date is intended to provide 
sufficient time for filers, filing agents, and software vendors to 
transition to the new requirements, as well as to provide time for any 
necessary taxonomy or EDGAR changes.
---------------------------------------------------------------------------

    \321\ Id.
    \322\ See 17 CFR 232.405(d).
---------------------------------------------------------------------------

    This Inline XBRL tagging will enable automated extraction and 
analysis of the granular data required by the final rules, allowing 
investors and other market participants to more efficiently perform 
large-scale analysis and comparison of this information across 
registrants and time periods. For example, an Inline XBRL requirement 
will allow investors to extract and search for disclosures about the 
use of Rule 10b5-1 plans by directors and officers reported in a 
registrant's periodic reports rather than having to manually run 
searches for these disclosures through entire documents. The Inline 
XBRL requirement would also enable automatic comparison of tagged 
disclosures against prior periods. At the same time, we do not expect 
the incremental compliance burden associated with tagging the 
information specified by new Items 402(x), 408(a), 408(b)(1), or new 
Item 16J(a) will be unduly burdensome because registrants subject to 
the tagging requirements are for the most part subject to similar 
Inline XBRL requirements in other Commission filings.

E. Reporting of Gifts on Form 4

1. Proposed Amendments
    Currently, Section 16 reporting persons may report any ``bona fide 
gift'' \323\ of equity securities registered under Exchange Act Section 
12 on Form 5. Exchange Act Rule 16a-3(f) permits officers, directors 
and ten percent holders to report on Form 5 within 45 days after the 
issuer's fiscal year end certain transactions during the most recent 
fiscal year that were exempt from Section 16(b).\324\ As transactions 
that are exempted from Section 16(b) by Rule 16b-5,\325\ both the 
acquisition and disposition of bona fide gifts are eligible for delayed 
reporting on Form 5 pursuant to Rule 16a-3(f)(1). This filing schedule, 
under the current rules, can permit Section 16 reporting persons to 
report ``bona fide'' gifts more than one year after the date of the 
gift.\326\
---------------------------------------------------------------------------

    \323\ A bona fide gift is a gift that is not required or 
inspired by any legal duty or that is in any sense a payment to 
settle a debt or other obligation, and is not made with the thought 
of reward for past services or hope for future consideration. See 
Ownership Reports and Trading by Officers, Directors and Principal 
Stockholders, Release No. 34-26333 (Dec. 2, 1988) [53 FR 49997 (Dec. 
13, 1988)].
    \324\ 17 CFR 240.16a-3(f).
    \325\ 17 CFR 240.16b-5.
    \326\ Reports on Form 5 are due within 45 days after the 
issuer's fiscal year end, which potentially allows a delay of up to 
410 days between a reportable transaction and the filing of the Form 
5.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted that the delayed 
reporting of gifts on Form 5 may allow Section 16 reporting persons to 
engage in problematic practices involving gifts of equity securities, 
such as making stock gifts while in possession of material nonpublic 
information,\327\ or backdating stock gifts in order to maximize the 
tax benefits associated with such gifts.\328\ To address these 
concerns, the Commission proposed to amend Exchange Act Rule 16a-3 to 
require the reporting of dispositions by bona fide gifts of equity 
securities on Form 4. Under the proposal, an officer, director, or a 
beneficial owner of more than 10 percent of the issuer's registered 
equity securities who makes a gift of equity securities would be 
required to report the gift on Form 4, which has a deadline of the end 
of the second business day following the date of execution of the 
transaction. This deadline would be significantly earlier than what is 
required under Form 5. The earlier reporting deadline is intended to 
help investors, other market participants, and the Commission better 
evaluate the actions of these Section 16 reporting persons and the 
context in which equity securities gifts are being made.
---------------------------------------------------------------------------

    \327\ See Daisy Maxey, Improper `Insider Charitable Giving' Is 
Widespread, Study Says, Wall St. J. (July 5, 2021) (retrieved from 
Factiva database).
    \328\ See S. Burcu Avci et al., Insider Giving, 71 Duke L.J. 
619-700 (2021) (finding that insiders' charitable gifts of 
securities are unusually well timed suggesting that such results are 
likely due to the possession of material nonpublic information and 
from the backdating of the stock gift). See also David Yermack, 
Deductio ad Absurdum: CEOs Donating Their Own Stock to Their Family 
Foundations, 94 J. Fin. Econ. 107 (2009).
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Several commenters generally supported the proposal to require 
Section 16 reporting persons to report dispositions of equity 
securities by bona

[[Page 80392]]

fide gifts on Form 4.\329\ One of these commenters agreed with the 
reasons cited in the Proposing Release that the earlier reporting 
deadline would help investors, other market participants, and the 
Commission better evaluate the actions of these Section 16 reporting 
persons and the context in which these gifts are made.\330\
---------------------------------------------------------------------------

    \329\ See, e.g., letters from AFL-CIO, Cravath, and ICGN.
    \330\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of commenters, however, expressed concern over the 
reporting of dispositions by bona fide gifts of equity securities on 
Form 4, and in particular expressed concern about the proposed 
reporting two-day deadline, including the resulting compliance and 
administrative burdens.\331\ Some of these commenters contended that 
certain estate planning transactions involving gifts of equity 
securities are complex and that Section 16 reporting persons will spend 
substantial time analyzing these transactions to ensure proper 
reporting under Section 16.\332\ One commenter contended that the 
proposed amendment could discourage Section 16 reporting persons from 
making gifts of equity securities and, as a result, urged the 
Commission to not adopt this proposal, or, at a minimum, limit it to 
bona fide gifts of securities made to charities affiliated with the 
insider and to extend the reporting deadline for bona fide gifts of 
securities, such as to 45 days.\333\ Another commenter suggested that a 
donor should be able to avoid insider trading liability by obtaining a 
commitment from the charitable donee not to sell the donated stock 
until after any material nonpublic information known by the donor at 
the time of the donation has become public or stale.\334\ This 
commenter also argued that the proposed amendment was overbroad in that 
it applied to some gifts, such as in case of transfers to a trust 
controlled by the donor, that the commenter asserted were not 
``problematic.'' \335\
---------------------------------------------------------------------------

    \331\ See, e.g., letters from HRPA, Davis Polk, and NAM.
    \332\ See, e.g., letters from HRPA and Davis Polk.
    \333\ See letter from HRPA; see also letter from NAM (expressing 
concern that the ``tight timeframe'' in the proposal will be 
``functionally unworkable'' and urging that the Commission consider 
a reporting deadline longer than two days).
    \334\ See letter from Davis Polk.
    \335\ See id; see also letter from HRPA (asserting that the 
proposed amendment could ``unnecessarily complicate estate planning 
activities that have a very low likelihood of abuse'').
---------------------------------------------------------------------------

    Finally, this same commenter also expressed concern that language 
in the proposing release purporting to illustrate the application of 
Section 10(b) to gifts of securities appeared to represent an extension 
or modification of insider trading law.\336\ In footnote 55 of the 
Proposing Release, the Commission stated that ``a donor of securities 
violates Section 10(b) if the donor gifts a security of an issuer in 
fraudulent breach of a duty of trust and confidence when the donor was 
aware of material nonpublic information about the security or issuer, 
and knew or was reckless in not knowing that the donee would sell the 
securities prior to the disclosure of such information.'' \337\ This 
commenter noted that shareholders often make charitable donations of 
stock at the end of the year to obtain an income-tax deduction for the 
current year, and that the charitable organization that receives the 
stock often sells the securities upon receipt. This commenter asserted 
the Commission should clearly explain the basis for its conclusion and 
provide guidance as to how a Section 16 reporting person could make a 
charitable donation of securities without running afoul of Section 
10(b) and Rule 10b-5. The commenter expressed concern that the 
Commission's position would criminalize this type of gifting.
---------------------------------------------------------------------------

    \336\ See letter from Davis Polk (citing footnote 55 of the 
Proposing Release).
    \337\ See Proposing Release at 8695.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the comments, we are adopting the amendments to 
Rule 16a-3 as proposed. Under the final amendments, Section 16 
reporting persons will be required to report dispositions of bona fide 
gifts of equity securities on Form 4 (rather than Form 5) in accordance 
with Form 4's filing deadline (that is, before the end of the second 
business day following the date of execution of the transaction). To 
address our concerns that the lengthy reporting deadline may allow 
Section 16 reporting persons to engage in the problematic practices 
noted above, we intend for this reporting deadline to help investors, 
other market participants, and the Commission better evaluate the 
actions of Section 16 filers and the context in which they make gifts 
of equity securities. In that regard, we agree with the academic 
authors, cited in the Proposing Release,\338\ who observe that a gift 
followed closely by a sale, under conditions where the value at the 
time of donation and sale affects the tax or other benefits obtained by 
the donor, may raise the same policy concerns as more common forms of 
insider trading.\339\ As these academic authors have found, because the 
donor is in a position to benefit from the asset's value at the time of 
donation and sale, the donor may be motivated to give at a time when 
donor is aware of material nonpublic information and may expect the 
donee to sell prior to the disclosure of such information.\340\ 
Investors cognizant of this dynamic may be more reluctant to trade. We 
also agree with the academic authors that a gift made with the 
knowledge that the donee will soon sell can be seen as in effect a sale 
for cash followed by gift of the cash.\341\
---------------------------------------------------------------------------

    \338\ See Section II.D. of the Proposing Release.
    \339\ See supra note 328.
    \340\ We disagree with the commenter who argued that donors are 
not motivated by financial advantage and that tax considerations do 
not warrant treating gifts ``as if they were market transactions.'' 
See letter from HRPA. Although we agree that many gifts are likely 
driven by other than pecuniary motives, the tax treatment of any 
particular gift can substantially affect the net cost of that 
donation. Extensive academic literature documents that such 
differences affect the amount and timing of gifts. See, e.g., James 
A. Andreoni & A. Abigail Payne, Charitable Giving, in 5 Handbook of 
Public Economics 1 (Alan J. Auerbach et al. eds., 2013). To be 
clear, we understand that in the common case of charitable donations 
of stock to a public charity, the value of the donor's tax benefit 
is (subject to some limitations) the value of the asset on the date 
of donation, not the value obtained by the recipient upon sale. See 
26 U.S.C. 170(e); 26 CFR 1.170A-1(c)(1). But, when a sale occurs 
close in time to the time of donation, these two may be the same. In 
addition, we note that non-pecuniary motives can also lead donors to 
consider the value a donee realizes upon sale, as in the case where 
the donor wishes to maximize the amount of cash available to the 
gift recipient.
    \341\ See Avci et al supra note 328, at 650-52.
---------------------------------------------------------------------------

    We are clarifying here, however, that the affirmative defense of 
Rule 10b5-1(c)(1) is available for any bona fide gift of securities, 
including a gift that might otherwise cause the donor to be subject to 
liability under Section 10(b), because when making the gift the donor 
was aware of material nonpublic information about the security or 
issuer and knew or was reckless in not knowing that the donee would 
sell the securities prior to the disclosure of such information.\342\ 
In our view, the terms ``trade'' and ``sale'' in Rule 10b5-1(c)(1) 
include bona fide gifts of securities.\343\ For example, a covered 
individual may enter into a binding arrangement instructing their 
attorney or tax advisor to gift shares to a charitable organization, 
with the amount of shares gifted determined according to a traditional 
algorithm or formula, or instead according to some tax objective, such 
as the amount of shares that would maximize the

[[Page 80393]]

individual's annual charitable contribution deduction.
---------------------------------------------------------------------------

    \342\ We are aware that some covered individuals currently make 
bona fide gifts under a Rule 10b5-1 plan. See letter from Sullivan. 
In clarifying that the affirmative defense of Rule 10b5-1(c)(1) is 
available for bona fide gifts of securities, we do not intend to 
suggest that this defense was previously unavailable for such 
transactions.
    \343\ See supra note 257.
---------------------------------------------------------------------------

    We are not persuaded by the concerns of commenters who suggested 
that we not adopt this proposal, or that we adopt a separate reporting 
deadline for bona fide gifts of securities that is much longer than the 
existing Form 4 deadline. As noted in Section V below, we recognize 
that this amendment may increase compliance costs and may do so to a 
greater extent for estate planning transactions given their 
complexity.\344\ Any such increases, however, should be limited as the 
majority of insiders already report these gifts on Form 4. Further, 
while we acknowledge that the amendment may make year-end tax planning 
incrementally more difficult as filers must delegate analysis of or 
anticipate their year-end tax needs three or four months earlier, our 
clarification that bona fide gifts are eligible for the Rule 10b5-
1(c)(1) affirmative defense should mitigate any adverse consequences 
that commenters suggested, such as discouraging bona fide gifts. We 
also are not convinced that a shorter reporting period will 
substantially affect estate planning transactions, which generally are 
carefully planned and analyzed in advance and adopted under the advice 
of tax counsel who may assist in any needed analysis.
---------------------------------------------------------------------------

    \344\ See infra Sections V.E.1. and V.E.3.
---------------------------------------------------------------------------

    Further, we disagree with the commenter who suggested that we 
narrow the scope of the gift limitations, such as by applying it only 
to gifts made to charities affiliated with the Section 16 reporting 
person or exempting donors who obtain a commitment from the charitable 
donee not to sell the donated stock until after any material nonpublic 
information known by the donor at the time of the donation has become 
public or stale.\345\ While, in some cases, a close affiliation between 
the donor and donee can make an abusive transaction easier to carry 
out, none of the potential concerns we have identified are limited to 
transfers to entities controlled by or affiliated with the donor. In 
addition, the commenter argued that donated stock would not implicate 
any insider trading concerns if the donor obtained commitments that the 
stock would not be sold until any material nonpublic information became 
public or stale. We doubt any such approach would be effective in 
maintaining investor confidence because it may be difficult or 
impossible to verify whether the donor had obtained a binding 
commitment to refrain from such a sale. Moreover, this commenter 
appears to urge us to adopt an exception for gifts to estate planning 
vehicles controlled by the donor, because the commenter believes that 
such transfers would not permit the practices described in the 
Proposing Release. There may be circumstances, however, under which it 
would be advantageous for the donor if the donee entity obtains a high 
sales price shortly after the donation, such as where the entity allows 
the donor to take advantage of tax-favorable diversification 
opportunities. As we see no practical way to identify which gifts pose 
this risk and which do not, we are not adopting such an exception.\346\
---------------------------------------------------------------------------

    \345\ See letter from Davis Polk.
    \346\ With respect to estate planning vehicles controlled by the 
donor, we further note that transactions that ``effect only a change 
in the form of beneficial interest without changing a person's 
pecuniary interest in the subject equity securities'' are exempt 
from Section 16 reporting. See Rule 16a-13a [17 CFR 240.16a-13].
---------------------------------------------------------------------------

III. Transition Matters

    A number of commenters recommended that the Commission provide 
transition guidance or a phase-in period, such as a 12-month phase-in, 
for the proposed disclosure amendments. In response, we are providing 
the following compliance dates for the final amendments:
     Section 16 reporting persons will be required to comply 
with the amendments to Forms 4 and 5 for beneficial ownership reports 
filed on or after April 1, 2023; and
     Issuers that are SRCs will be required to comply with the 
new disclosure and tagging requirements in Exchange Act periodic 
reports on Forms 10-Q, 10-K and 20-F and in any proxy or information 
statements that are required to include the Item 408, Item 402(x), and/
or Item 16J disclosures in the first filing that covers the first full 
fiscal period that begins on or after October 1, 2023.
     All other issuers will be required to comply with the new 
disclosure and tagging requirements in Exchange Act periodic reports on 
Forms 10-Q, 10-K and 20-F and in any proxy or information statements 
that are required to include the Item 408, Item 402(x), and/or Item 16J 
disclosures in the first filing that covers the first full fiscal 
period that begins on or after April 1, 2023.
    While we acknowledge that several commenters requested a longer 
phase-in period for these amendments, we believe that these compliance 
dates strike an appropriate balance between affording issuers and 
Section 16 reporting persons time to prepare to comply with the new 
rules and ensuring that this information becomes available to investors 
in a timely manner. For example, Section 16 reporting persons should 
have the information needed to comply with the amendments to Forms 4 
and 5 readily available.
    In addition, some commenters requested that we clarify the 
application of the amendments to Rule 10b5-1(c)(1) to existing Rule 
10b5-1 plans and/or provide transitional relief for existing 
plans.\347\ The amendments to Rule 10b5-1(c)(1) would not affect the 
affirmative defense available under an existing Rule 10b5-1 plan that 
was entered into prior to the revised rule's effective date, except to 
the extent that such a plan is modified or changed in the manner 
described in Rule 10b5-1(c)(iv) \348\ after the effective date of the 
final rules. In that case, the modification or change would be 
equivalent to adopting a new trading arrangement, and, thus, amended 
Rule 10b5-1(c)(1) would be the applicable regulatory affirmative 
defense that would be available for that modified arrangement.
---------------------------------------------------------------------------

    \347\ See letters from BioNJ, Chevron, Cleary, Cravath, Davis 
Polk, Jones Day, SIFMA 2 and 3, Sullivan, and Wilson Sonsini.
    \348\ See Rule 10b5-1(c)(iv) (``Any modification or change to 
the amount, price, or timing of the purchase or sale of the 
securities underlying a contract, instruction, or written plan as 
described in paragraph (c)(1)(i)(A) of this section is a termination 
of such contract, instruction, or written plan, and the adoption of 
a new contract, instruction, or written plan'').
---------------------------------------------------------------------------

IV. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\349\ the Office of 
Information and Regulatory Affairs has designated these rules a ``major 
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \349\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

V. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained 
from, our rules. Under Section 2(b) of the Securities Act,\350\ Section 
3(f) of the Exchange Act,\351\ and Section 2(c) of the Investment 
Company Act,\352\ whenever the Commission is engaged in rulemaking and 
required to consider or determine whether an action is necessary or 
appropriate in (or, with

[[Page 80394]]

respect to the Investment Company Act, consistent with) the public 
interest, it shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation. In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission to consider the impact on competition of any 
rules the Commission adopts under the Exchange Act and prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\353\
---------------------------------------------------------------------------

    \350\ 15 U.S.C. 77b(b).
    \351\ 15 U.S.C. 78c(f).
    \352\ 15 U.S.C. 80a-2(c).
    \353\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We have considered the economic effects of the amendments, 
including their effects on competition, efficiency, and capital 
formation. Many of the effects discussed below cannot be quantified. 
Consequently, while we have, wherever possible, attempted to quantify 
the economic effects expected from the amendments, much of the 
discussion remains qualitative in nature. Where we are unable to 
quantify the economic effects of the amendments, we provide a 
qualitative assessment of the potential benefits, costs, and impacts of 
the amendments on efficiency, competition, and capital formation.

A. Broad Economic Considerations

    The amendments are expected to provide greater transparency to 
investors (i.e., decrease information asymmetries between insiders and 
outside investors) about issuer and insider trading arrangements and 
restrictions, as well as insider compensation and incentives, enabling 
more informed investment and voting decisions. The amendments are also 
expected to limit the opportunity for insider trading based on material 
nonpublic information (``MNPI'') \354\ by adding new conditions to the 
Rule 10b5-1(c) affirmative defense, resulting in benefits to investors 
and improvement in insiders' incentives.
---------------------------------------------------------------------------

    \354\ See supra note 3.
---------------------------------------------------------------------------

    Insider trading enables certain investors who have access to inside 
information or who have the ability to influence the timing or 
substance of corporate disclosures to profit at the expense of other 
investors. Due to their access to MNPI, insiders can obtain 
illegitimate profits through the strategic timing of trades in the 
issuer's securities. These profits essentially unlawfully transfer 
wealth from other investors to the insider.\355\ In addition, insider 
trading can distort the incentives of corporate insiders, which results 
in a loss of shareholder value and erodes investor confidence in the 
markets. Insider trading can also lead to reputational costs for 
companies.
---------------------------------------------------------------------------

    \355\ See, e.g., Michael D. Guttentag, Avoiding Wasteful 
Competition: Why Trading on Inside Information Should Be Illegal, 86 
Brook. L. Rev. 895 (2021).
---------------------------------------------------------------------------

1. Insider Trading Harms Investors, Distorts Insiders' Incentives, and 
Imposes Economic Costs on Investors and Capital Markets
    The amendments are expected to decrease the incidence of unlawful 
insider trading.\356\ Insider trading represents a breach of fiduciary 
or other similar obligation of trust and confidence.\357\ Congress, the 
Courts, and the Commission have concluded that such insider trading is 
illegal.\358\ Before analyzing each aspect of the final rule, in the 
interest of completeness, the Commission first reviews the economic 
literature on the insider trading prohibition.\359\
---------------------------------------------------------------------------

    \356\ The discussion of broad economic considerations generally 
focuses on insider trading in stock except where specified 
otherwise. To the extent that insiders benefit from the timing of 
option awards and gifts of stock around MNPI, some of the economic 
effects associated with insider trading also may be manifested in 
those contexts. For a detailed discussion of the economic 
considerations applicable to option award timing and insider gift 
timing, see infra Sections V.D and V.E.
    \357\ See infra note 490.
    \358\ See supra Section I.
    \359\ See, generally, Alexandre Padilla & Brian Gardiner, 
Insider Trading: Is There an Economist in the Room?, 24 J. Private 
Enterprise 113, 123 (2009) (noting ``economists have progressively 
reached the same conclusion: that insider trading is harmful to 
investors, corporations, and stock exchanges, and, therefore, ought 
to be prohibited'').
---------------------------------------------------------------------------

    Insiders have information advantages that place them in a unique 
position to improperly obtain profits for themselves through strategic 
timing of trades. When an insider profits by trading on MNPI, those 
profits are obtained at other investors' expense.\360\ Thus, reducing 
the incidence of insider trading is expected to benefit investors.\361\
---------------------------------------------------------------------------

    \360\ See Michael Manove, The Harm from Insider Trading and 
Informed Speculation, 104 Q. J. Econ. 823 (1989); William K.S. Wang, 
Trading on Material Non-Public Information on Impersonal Stock 
Markets: Who Is Harmed and Who Can Sue Whom Under SEC Rule 10b-5? 54 
S. Cal. L. Rev. 1217 (1981).
    \361\ Misappropriation of information may have many economic 
effects, including but not limited to, revealing information to the 
market in a manner suboptimal to the issuer (and thus discouraging 
investment in information and increasing costs of keeping 
information private). Further, increased trading by insiders reduces 
incentives for liquidity provision through adverse selection, 
imposing economic costs on investors broadly. Finally, 
misappropriation has associated agency costs as it represents an 
undisclosed form of compensation and may lead to further divergence 
of interests between the manager and the shareholders. See Frank H. 
Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, 
and the Production of Information, 1981 Sup. Ct. Rev. 309, 315, 323, 
331 (1981); In re Melvin, SEC Release No. 3682, 2015 WL 5172974, at 
*4 & n.31 (Sept. 4, 2015).
---------------------------------------------------------------------------

    When investors anticipate that they are dealing with better 
informed insiders that can profit at the investors' expense (i.e., they 
anticipate the adverse selection problem due to the insiders' ability 
to trade on MNPI), investors can become reluctant to trade the issuer's 
shares. For this same reason, insider trading is likely to adversely 
affect price efficiency (i.e., the extent to which stock prices reflect 
an issuer's fundamental value) \362\ and liquidity.\363\
---------------------------------------------------------------------------

    \362\ A number of studies demonstrate adverse effects of insider 
trading on market efficiency. See, e.g., Michael J. Fishman & 
Kathleen M. Hagerty, Insider Trading and the Efficiency of Stock 
Prices, 23 RAND J. Econ. 106 (1992) (showing that ``under certain 
circumstances, insider trading leads to less efficient stock prices. 
This is because insider trading has two adverse effects on the 
competitiveness of the market: it deters other traders from 
acquiring information and trading, and it skews the distribution of 
information held by traders toward one trader.''); Zhihong Chen et 
al., The Real Effect of the Initial Enforcement of Insider Trading 
Laws, 45 J. Corp. Fin. 687 (2017) (finding evidence that the initial 
enforcement of insider trading laws ``improves capital allocation 
efficiency by increasing price informativeness and reducing market 
frictions''); Robert M. Bushman et al., Insider Trading Restrictions 
and Analysts' Incentives to Follow Firms, 60 J. Fin. 35 (2005) 
(arguing that ``insider trading crowds out private information 
acquisition by outsiders'' and showing that ``analyst following 
increases after initial enforcement of insider trading laws'' in a 
cross-country sample); Nuno Fernandes & Miguel A. Ferreira, Insider 
Trading Laws and Stock Price Informativeness, 22 Rev. Fin. Stud. 
1845 (2009) (finding that price informativeness increases with the 
enforcement of insider trading laws, but only in countries with a 
strong ``efficiency of the judicial system, investor protection, and 
financial reporting''); see also Alexander P. Robbins, The Rule 
10b5-1 Loophole: An Empirical Study, 34 Rev. Quant. Fin. Acct. 199 
(2010) (finding, in a sample of 10b5-1 plans of 81 NASDAQ-listed 
companies from 2004 to 2006 that ``10b5-1 plans have a significant 
negative effect on the liquidity of a firm's shares, and therefore 
the firm's cost of capital''). Some studies argue that insider 
trading improves price efficiency. See, e.g., Hayne E. Leland, 
Insider Trading: Should It Be Prohibited?, 100 J. Pol. Econ. 859 
(1992) (showing in a model that ``stock prices better reflect 
information'' when insider trading is permitted.); Utpal 
Bhattacharya et al., When an Event Is Not an Event: The Curious Case 
of An Emerging Market, 55 J. Fin. Econ. 69 (2000) (suggesting ``that 
unrestricted insider trading causes prices to fully incorporate the 
information before its public release''). See generally Henry G. 
Manne, Insider Trading and the Stock Market (1966). A reduction in 
insider trading can have nuanced effects on market efficiency. For 
example, the conclusions about the effect of insider trading on 
market efficiency may depend on whether the framework is static or 
dynamic. See David Easley et al., Is Information Risk a Determinant 
of Asset Returns?, 57 J. Fin. 2185 (2002).
    \363\ Various studies show that insider trading negatively 
impacts liquidity. See, e.g., Raymond P.H. Fishe & Michel A. Robe, 
The Impact of Illegal Insider Trading in Dealer and Specialist 
Markets: Evidence From a Natural Experiment, 71 J. Fin. Econ. 461 
(2004); Louis Cheng et al., The Effects of Insider Trading on 
Liquidity, 14 Pacific-Basin Fin. J. 467 (2006); Leland, supra note 
362 (showing in a model that ``markets are less liquid'' and 
``outside investors and liquidity traders will be hurt'' when 
insider trading is permitted); Laura N. Beny, Do Insider Trading 
Laws Matter? Some Preliminary Comparative Evidence, 7 Am. L. & Econ. 
Rev. 144 (2005) (finding that ``countries with more prohibitive 
insider trading laws have more diffuse equity ownership, more 
accurate stock prices, and more liquid stock markets''); Lawrence R. 
Glosten, Insider Trading, Liquidity, and the Role of the Monopolist 
Specialist, 62 J. Bus. 211 (1989) (showing in a model that insider 
trading reduces liquidity). But cf. Charles Cao et al., Does Insider 
Trading Impair Market Liquidity? Evidence from IPO Lockup 
Expirations, 39 J. Fin. Quant. Anal. 25 (2004) (not finding a 
negative effect of insider trading on liquidity).

---------------------------------------------------------------------------

[[Page 80395]]

    Insider trading also imposes a cost on the investors in the company 
by distorting managerial incentives, as discussed below, which results 
in a loss of shareholder value. Thus, whether insiders are 
strategically timing stock sales and purchases based on MNPI can 
provide information to investors about insider incentives. In 
particular, the ability of officers and directors (who are either 
involved in making corporate decisions or play a crucial role in the 
oversight of such decisions) to profit from MNPI exacerbates conflicts 
of interest between officers/directors and other shareholders, 
resulting in inefficient, value-decreasing corporate decisions. For 
example, by protecting the insider from the brunt of the effects of 
poor corporate performance on the value of the insider's equity 
position through the ability to sell ahead of negative news, insider 
trading weakens incentive alignment and exacerbates agency conflicts 
(and, in turn, increases the cost of monitoring insiders).
    One incentive distortion is that an insider may steer the company 
towards projects that require less effort or that yield higher private 
benefits even if such projects have a negative net present value (NPV) 
and thus decrease shareholder value.\364\ To mitigate agency conflicts 
and better align insider incentives with those of shareholders, 
insiders are often compensated with equity. Because of insiders' 
ability to sell shares in advance of negative news, as described above, 
insiders may be less motivated to avoid negative NPV projects. Downside 
protection also incentivizes the insider to choose riskier negative-NPV 
projects due to the possibility of profiting on the upside.\365\ 
Relatedly, if short-term investment projects yield more profitable MNPI 
(due, in part, to the reality that MNPI about long-term projects 
arrives less frequently or is less definitive), an insider may exhibit 
short-termism in making decisions at the company level at the expense 
of shareholder value.\366\
---------------------------------------------------------------------------

    \364\ See, e.g., Antonio E. Bernardo, Contractual Restrictions 
on Insider Trading: A Welfare Analysis, 18 Econ. Theory 7 (2001) 
(showing in a model that ``[f]or many reasonable parameter values, 
however . . . that managers may be too willing to take risky 
projects. In fact, managers will often choose the risky investment 
project when it has a lower expected return than the riskless 
investment project.''). In some circumstances, insider trading may 
remedy a manager's excess conservatism due to under-diversification. 
See Lucian A. Bebchuk & Chaim Fershtman, Insider Trading and the 
Managerial Choice Among Risky Projects, 29 J. Fin. Quant. Analysis 1 
(1994). However, Bebchuk & Fershtman (1994) similarly acknowledge 
that ``[t]he desire to increase trading profits might lead the 
managers to prefer a very risky project even if it offers a lower 
expected return than a safer alternative.''
    \365\ See, e.g., Easterbrook, supra note 361 (stating that 
``[t]he opportunity to gain from insider trading also may induce 
managers to increase the volatility of the firm's stock prices. . . 
They may select riskier projects than the shareholders would prefer, 
because if the risk pays off they can capture a portion of the gains 
in insider trading and, if the project flops, the shareholders bear 
the loss.''). But see Robbins, supra note 362 (finding, in a sample 
of 10b5-1 plans of 81 NASDAQ-listed companies from 2004 to 2006 that 
``insiders do not appear to increase the volatility of their own 
firms' shares in order to profit by trading on the basis of material 
nonpublic information under the protection of the 10b5-1 affirmative 
defense'').
    \366\ See M. Todd Henderson, Insider Trading and Executive 
Compensation: What We Can Learn from the Experience with Rule 10b5-
1, Res. Handbook on Exec. Pay 299 (2012) (stating that short-termism 
is a cost of insider trading and that ``[e]xecutives looking to 
maximize the value of their shares may engage in conduct that 
increases the stock price in the short run at the expense of the 
long term so that they can profit from trading in firm stock''). 
Such managerial short-termism/myopia reduces shareholder value. See, 
generally, John R. Graham et al., The Economic Implications of 
Corporate Financial Reporting, 40 J. Acct. Econ. 3 (2005); Alex 
Edmans, Blockholder Trading, Market Efficiency, and Managerial 
Myopia, 64 J. Fin. 2481 (2009).
---------------------------------------------------------------------------

    Being able to profit from MNPI also can distort insider incentives 
with respect to other corporate decisions that can affect the share 
price. For example, officers and directors engaged in insider trading 
may be disincentivized from sharing information efficiently within the 
firm if they can profit from withholding it and personally trading on 
it, which leads to inefficient corporate decisions and thus decreased 
shareholder value.\367\
---------------------------------------------------------------------------

    \367\ See, e.g., Robert J. Haft, The Effect of Insider Trading 
Rules on the Internal Efficiency of the Large Corporation, 80 Mich. 
L. Rev. 1051, (1982).
---------------------------------------------------------------------------

    Another economic cost of insider trading is that it may incentivize 
insiders to adjust the timing or content of corporate disclosure (e.g., 
delaying the release, or increasing the frequency, of disclosing 
MNPI).\368\ Manipulation of corporate disclosure causes price 
distortions and impairs the ability of investors to make informed 
investment decisions. Less informed investment decisions result in less 
efficient allocation of capital in investor portfolios, compared to a 
setting with more timely disclosures. To the extent that investors 
anticipate such disclosure gaming, they may commensurately increase 
their information gathering effort, resulting in higher information 
gathering costs for investors. Investors, however, have a limited 
ability to obtain timely and accurate information elsewhere.
---------------------------------------------------------------------------

    \368\ See, e.g., Ranga Narayanan, Insider Trading and the 
Voluntary Disclosure of Information by Firms, 24 J. Banking Fin. 395 
(2000) (stating that ``[s]tringent enforcement of insider trading 
regulations induces more disclosure by firms''); Qiang Cheng & Kin 
Lo, Insider Trading and Voluntary Disclosures, 44 J. Acct. Rsch. 815 
(2006) (finding that when ``managers plan to purchase shares, they 
increase the number of bad news forecasts to reduce the purchase 
price . . . insiders do exploit voluntary disclosure opportunities 
for personal gain, but only selectively, when litigation risk is 
sufficiently low''); Easterbrook, supra note 361 (stating that 
``[t]he prospect of insiders' gains may lead the firm to delay the 
release of information''). Some studies also note that an opposite 
effect is possible--managers concerned about litigation may provide 
higher-quality disclosure before selling shares. See, e.g., Jonathan 
L. Rogers, Disclosure Quality and Management Trading Incentives, 46 
J. Acct. Rsch. 1265 (2008) (finding that ``[c]onsistent with a 
desire to reduce the probability of litigation . . . managers 
provide higher quality disclosures before selling shares than they 
provide in the absence of trading'' but also finding that 
``[c]onsistent with a desire to maintain their information 
advantage, . . . some, albeit weaker, evidence that managers provide 
lower quality disclosures prior to purchasing shares than they 
provide in the absence of trading.''). In the context of Rule 10b5-1 
plans, see, e.g., Stanley Veliotis, Rule 10b5-1 Trading Plans and 
Insiders' Incentive to Misrepresent, 47 Am. Bus. L. J. 313, 330 & 
nn. 77-78 (2010) (stating that ``Rule 10b5-1 plans give insiders an 
incentive to accelerate the release of good news ahead of planned 
stock sales and to delay the release of bad news until after the 
sales are completed . . . As a practical matter, manipulation of the 
announcement's timing would be extremely difficult to prove because 
insiders are not required to disclose their 10b5-1 plans and firms 
seldom disclose a schedule for corporate announcements in advance . 
. .''); Karl T. Muth, With Avarice Aforethought: Insider Trading and 
10b5-1 Plans, 10 U.C. Davis Bus. Law J. 65, 71 & nn. 32-33 (2009) 
(stating that ``executives can participate in the timing of news . . 
. about the company. Withholding or `timing' news allows the 
executive to (imperfectly) time market response to news . . .''); 
John Shon & Stanley Veliotis, Meeting or Beating Earnings 
Expectations, 59 Mgmt. Sci. 1988 (2013) (finding that ``firms with 
insider sales executed under Rule 10b5-1 plans exhibit a higher 
likelihood of meeting or beating analysts' earnings expectations 
(MBE) . . . [that] this relation between MBE and plan sales is more 
pronounced for the plan sales of chief executive officers (CEOs) and 
chief financial officers (CFOs) and is nonexistent for other key 
insiders,'' and concluding that ``[o]ne interpretation of [their] 
results is that CEOs and CFOs who sell under these plans may be more 
likely to engage in strategic behavior to meet or beat expectations 
in an effort to maximize their proceeds from plan sales'').
---------------------------------------------------------------------------

    Investor recognition of the potential incentive distortions and the 
risk of lower-quality corporate disclosures resulting from insider 
trading, as well as the risk of buying shares from or selling shares to 
a better informed insider, is likely to decrease investor confidence in 
the issuer and make investors less willing to buy or hold the issuer's

[[Page 80396]]

shares.\369\ The resulting reluctance to invest could have negative 
effects on capital formation and the ability to fund investments due to 
challenges in raising the required amount of capital.
---------------------------------------------------------------------------

    \369\ See, e.g., Lawrence M. Ausubel, Insider Trading in a 
Rational Expectations Economy, 80 Am. Econ. Rev., 1022 (1990) 
(showing in a rational expectations model that ``[i]f `outsiders' 
expect `insiders' to take advantage of them in trading, outsiders 
will reduce their investment. The insiders' loss from this 
diminished investor confidence may more than offset their trading 
gains. Consequently, a prohibition on insider trading may effect a 
Pareto improvement.''). Further, informed trading by insiders can 
reduce the incentive for outside investors to acquire information. 
See, e.g., Fishman & Hagerty, supra note 362.
---------------------------------------------------------------------------

2. Certain Rule 10b5-1 Plan Trading Practices May Raise Concerns About 
Potential Insider Trading
    Over the years, various parties have raised concerns that certain 
persons have engaged in securities trading based on MNPI while availing 
themselves of the Rule 10b5-1(c)(1) affirmative defense.\370\ Examples 
of practices that have raised such concerns include the strategic 
cancellation of previously adopted plans or individual trades on the 
basis of MNPI,\371\ as well as the initiation or resumption of trading 
close in time to plan adoption or modification.\372\
---------------------------------------------------------------------------

    \370\ See IAC Recommendations, supra note 22; letter from David 
Larcker et al. (Mar. 10, 2021), available at https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf; letter from CII (Apr. 
22, 2021), available at https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf; letter from CII (Mar. 18, 2021), 
available at https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf; letter from CII (Sept. 25, 2020), available at https://www.sec.gov/comments/s7-06-20/s70620-7843308-223819.pdf; letter from 
CII (Dec. 13, 2018), available at https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf; letter from CII (July 11, 2018), 
available at https://www.cii.org/files/July%2011%202018%20SEC%20Reg%20Flex%20Letter%20Final.pdf; letter 
from CII (Feb. 12, 2018, available at https://www.sec.gov/comments/s7-07-17/s70717-3025708-161898.pdf; letter from CII to Former 
Chairman Jay Clayton (January 18, 2018), available at http://www.cii.org/files/issues_and_advocacy/correspondence/2018/January%2018%202018%20Rule%2010b5-1%20(finalI).pdf; letter from CII 
(July 8, 2016), available at https://www.sec.gov/comments/s7-06-16/s70616-49.pdf; letter from CII to Former Chair Mary Jo White (May 9, 
2013), available at http://www.cii.org/files/issues_and_advocacy/correspondence/2013/05_09_13_cii_letter_to_sec_rule_10b5-1_trading_plans.pdf; CII Rulemaking Petition.
    \371\ See, e.g., Insider Trading and Stock Option Grants: An 
Examination of Corporate Integrity in the Covid-19 Pandemic Before 
the H. Subcomm. On Investor Protection, Entrepreneurship, and 
Capital Markets, H. Comm. on Fin. Servs., 116th Cong. 5 (2020) 
(statement of Jill E. Fisch), available at https://docs.house.gov/meetings/BA/BA16/20200917/111013/HHRG-116-BA16-Wstate-FischJ-20200917.pdf,; Jagolinzer, supra note 19 (finding ``for a sample of 
54 firms for which there is public disclosure of early sales plan 
terminations'' that ``early sales plan terminations are associated 
with pending positive performance shifts, reducing the likelihood 
that insiders' sales execute at low prices'' and noting that the 
sample size is small because there is no requirement to disclose 
sales plan terminations); Veliotis, supra note 368, at 328-30 
(discussing concerns related to selective cancellations); Mavruk & 
Seyhun, supra note 19 (discussing selective cancellation concerns, 
providing indirect evidence, and concluding that its findings are 
``consistent with the hypothesis that insiders intervene in their 
planned transactions to increase profitability''); see also Stephen 
L. Lenkey, Cancellable Insider Trading Plans: An Analysis of SEC 
Rule 10b5-1, 32 Rev. Fin. Stud. 4947 (2019) (concluding, in a 
theoretical framework, that ``[b]ecause the conditions under which 
the insider elects to adopt a plan often coincide with the 
conditions under which the termination option reduces welfare, an 
alternative regulatory framework wherein the insider could adopt a 
non-cancellable plan (and, thereby, credibly commit to execute his 
planned trade) would improve the investors' welfare under a wide set 
of circumstances.'').
    \372\ For a discussion of the evidence of returns following 
insider trades occurring close to plan adoption, see infra notes 387 
through 397 and accompanying and preceding text. But see infra notes 
398 through 406 and accompanying and following text. Existing 
disclosure requirements do not allow investors to obtain systematic 
or comprehensive data on plan cancellations or plan modifications 
(including cancellations of planned trades).
---------------------------------------------------------------------------

    As discussed in detail in Section II above, the Commission is 
adopting several amendments to address these practices, including 
modifications to the conditions of the affirmative defense under Rule 
10b5-1(c)(1), additional disclosure requirements under new Item 408 of 
Regulation S-K, and additional disclosure of Rule 10b5-1 plan use in 
beneficial ownership forms. The new disclosure requirements are 
expected to affect the behavior of insiders by drawing scrutiny of 
investors and other market participants to trading practices of 
insiders.\373\
---------------------------------------------------------------------------

    \373\ Studies have found evidence that changes in mandatory 
disclosure affect behavior. See, e.g., Elizabeth C. Chuk, Economic 
Consequences of Mandated Accounting Disclosures: Evidence from 
Pension Accounting Standards, 88 Acct. Rev. 395 (2013); Alice Adams 
Bonaim[eacute], Mandatory Disclosure and Firm Behavior: Evidence 
from Share Repurchases, 90 Acct. Rev. 1333 (2015).
---------------------------------------------------------------------------

    Combined, the amendments are expected to reduce the potential for 
insider trading through both Rule 10b5-1 plans and certain other 
trading arrangements not reliant on Rule 10b5-1. Deterring insider 
trading is expected to result in benefits for investor protection, 
capital formation, and orderly and efficient markets. By deterring 
insider trading, the amendments are expected to disincentivize insider 
behavior that is likely to harm the securities markets and the issuer, 
and undermine investor confidence.
3. Current Levels of Disclosure About Insider Trading Plans Limit the 
Ability of Investors To Identify the Risk of Insider Trading and To 
Consider the Associated Incentive Conflicts and Information Asymmetries 
in Their Investment Decisions
    Existing gaps in the disclosure framework limit the information 
currently available to investors and other market participants 
regarding the use of insider trading plans and the extent to which 
trading based on MNPI potentially distorts insider incentives with 
respect to corporate decisions (and thus shareholder value). These gaps 
therefore limit the ability of investors to correctly value the 
issuer's shares, and thus make informed investment decisions.
    The disclosure amendments will provide greater transparency to 
investors and decrease information asymmetries between insiders and 
outside investors about insider trading arrangements and insider 
trading policies and procedures, enabling more informed decisions about 
whether to invest in the issuer's shares and at what valuation. This 
added transparency may result in more efficient capital allocation and 
more informationally efficient pricing. The additional disclosure 
requirements may also indirectly yield potential capital formation 
benefits if they increase investor confidence in the issuer's 
governance.
4. The Economic Effects of the Amendments Are Uncertain or Difficult To 
Generalize
    An important factor contributing to the uncertainty about the 
magnitude of the benefits of the amendments to Rule 10b5-1 is the 
potential for substitution of Rule 10b5-1 plans by other trading 
arrangements. The use of the Rule 10b5-1(c)(1) affirmative defense is 
voluntary. Insiders and companies may elect not to rely on the Rule 
10b5-1(c)(1) affirmative defense if they perceive the costs of doing so 
to be too high. For example, insiders may instead adopt trading 
arrangements that do not rely on the amended Rule 10b5-1(c)(1) 
affirmative defense or trade without trading plans. However, doing so 
may entail its own costs and limitations for insiders.\374\ The 
application of the disclosure requirements of new Item 408(a) of 
Regulation S-K to all officer and director Rule 10b5-1 and non-Rule 
10b5-1 trading arrangements is expected to partly mitigate concerns 
that trading under non-Rule 10b5-1

[[Page 80397]]

trading arrangements may adversely impact investors.
---------------------------------------------------------------------------

    \374\ See infra notes 439 through 440 and preceding and 
accompanying text.
---------------------------------------------------------------------------

    The considerations presented above are generally applicable to all 
of the amendments discussed in this release. In the sections that 
follow, we provide a more detailed discussion of economic effects of 
the individual amendments, including the expected costs and benefits 
relative to the market baseline as well as reasonable alternatives. We 
separately discuss economic considerations related to the timing of 
option grants and insider gifts of stock in Sections V.D and V.E, 
respectively.
    As discussed in Section III above, in response to commenters' 
concerns,\375\ we are providing a six-month transition period for SRCs 
for compliance with the disclosure amendments. The transition period is 
expected to defer the costs and benefits of the amendments. By giving 
insiders and companies time to adjust their trading plans and 
recordkeeping processes, this transition period is expected to 
partially mitigate some of the SRCs' initial costs of preparing to 
comply with the amendments. In addition, it will enable these smaller 
companies to benefit from observing the compliance and disclosure 
practices of larger companies.
---------------------------------------------------------------------------

    \375\ See, e.g., letters from Cleary, Cravath, BioNJ, SIFMA 2, 
and Sullivan.
---------------------------------------------------------------------------

B. Amendments to Rule 10b5-1(c)(1)

    The Commission is adopting additional conditions that must be 
satisfied for a trading arrangement to be eligible for the Rule 10b5-
1(c)(1) affirmative defense. These amendments are intended to protect 
investors by decreasing the likelihood of, and the opportunities to, 
profit from MNPI through such trading arrangements.
    The amendments narrow the conditions under which the Rule 10b5-
1(c)(1) affirmative defense is available. First, the amendments 
establish mandatory cooling-off periods before any trading can commence 
under a Rule 10b5-1 trading arrangement after the adoption of a new or 
modified trading arrangement by persons other than the issuer. Second, 
the amendments impose a certification requirement as a condition of the 
Rule 10b5-1(c)(1) affirmative defense for trading arrangements of 
officers and directors. Third, the amendments restrict the availability 
of the affirmative defense for multiple overlapping trading 
arrangements involving open-market transactions under some conditions, 
as well as limit open-market single-trade trading arrangements to one 
such arrangement in any twelve-month period. Finally, the amendments 
expand the existing requirement that a Rule 10b5-1 trading arrangement 
must be ``given or entered into'' in good faith to add the condition 
that the trader ``act in good faith'' with respect to the trading 
arrangement. In a change from the proposal, we are not, at present 
time, adopting cooling-off periods or restrictions on multiple 
overlapping Rule 10b5-1 trading arrangements or single-trade trading 
arrangements with respect to the issuer. In response to public 
comments, we are making several changes from the proposal, including 
providing for a cooling-off period for officers and directors that is 
tied to both a specific number of days and to the date of disclosure of 
fiscal period results; imposing a shorter (30-day) cooling-off period 
for persons other than the issuer that are not officers or directors; 
clarifying the treatment of plan modifications; requiring the proposed 
officer and director certifications to be included in the plan itself 
and eliminating the requirement to maintain the certification for ten 
years; and making certain changes to the restrictions on multiple plans 
and single-trade plans.
1. Baseline and Affected Parties
    We consider the economic effects of the amendments in the context 
of the regulatory and market baseline. A lack of comprehensive 
disclosure of Rule 10b5-1 trading arrangements makes it more difficult 
to provide complete data on existing Rule 10b5-1 practices and affected 
plan participants. Our estimates are limited by the voluntary nature of 
the Rule 10b5-1 disclosure in beneficial ownership filings, where 
insider trades are reported, as well as the limited scope of Rule 10b5-
1 trades for which Form 144 reporting is required.\376\ Based on 
beneficial ownership filings (Forms 3, 4, and 5) during calendar year 
2021, we estimate that approximately 5,900 natural persons at 
approximately 1,700 companies reported trades under Rule 10b5-1 trading 
arrangements. This figure includes approximately 5,800 officers and 
directors at 1,600 companies; narrowing the sample to officers yields 
an estimate of approximately 4,700 officers at approximately 1,500 
companies.\377\ Due to the data limitations mentioned above, the actual 
number of affected parties likely is significantly larger.
---------------------------------------------------------------------------

    \376\ Form 144 must be filed with the Commission by an affiliate 
as a notice of the proposed sale of restricted securities when the 
amount to be sold under Rule 144 during any three-month period 
exceeds 5,000 shares or units or has an aggregate sales price in 
excess of $50,000. See Rule 144(h) [17 CFR 230.144(h)]. Thus, Rule 
10b5-1 plan trades below that threshold are not required to be 
reported on Form 144 and thus may not be in our data. Further, 
because the vast majority of Form 144 filings were made in paper 
form during the considered period, we rely on information from such 
paper filings extracted and processed by the vendor for the Thomson 
Reuters/Refinitiv insiders dataset (version retrieved June 27, 
2022).
    \377\ The estimate is based on the data from filings on Forms 3, 
4, and 5 for trades during calendar year 2021 that reported Rule 
10b5-1 plan use (obtained from Thomson Reuters/Refinitiv insiders 
dataset (version retrieved June 27, 2022)). The estimate only 
captures natural persons with Rule 10b5-1 plans that have Section 16 
reporting obligations, and thus represents a lower bound on the 
number of affected plan participants (for instance, it excludes 
employees that are not Rule 16a-1(f) officers as well as any other 
persons with a Rule 10b5-1 trading plan that do not have a Section 
16 reporting obligation). Officers and directors are identified 
based on the role code (beneficial owners and affiliates are not 
included in the count). Combining data from Form 144 filings with 
planned sale dates in calendar year 2021 that reported Rule 10b5-1 
plan use (also obtained from Thomson Reuters/Refinitiv insiders 
dataset (version retrieved June 27, 2022)) and the data from filings 
on Forms 3, 4, and 5 cited above, we estimate that approximately 
7,000 natural persons at approximately 1,800 companies (which 
includes approximately 6,000 officers and directors at approximately 
1,700 companies; or when limited to officers only, approximately 
4,900 officers at approximately 1,500 companies) reported trades 
under Rule 10b5-1. Due to gaps in the reporting regime, we cannot be 
certain whether the higher prevalence of plans reported for officers 
is due to their higher prevalence in general or due to greater 
disclosure of such plans.
---------------------------------------------------------------------------

    Below, we discuss the available evidence on Rule 10b5-1 plans of 
officers, directors, and other natural persons. A recent academic study 
analyzed Form 144 data on insider trades under Rule 10b5-1 plans from 
January 2016 through May 2020.\378\ The study documented that ``[t]he 
mean (median) cooling-off period is 117.9 (76)

[[Page 80398]]

days,'' ``[a]pproximately 14 percent of plans commence trading within 
the first 30 days, and 39 percent within the first 60 days,'' and 
``[a]pproximately 82 percent of plans commence trading within 6 
months.'' \379\ A set of subsequent analyses by the Wall Street Journal 
(collectively, the ``WSJ Analysis'') examined Washington Service \380\ 
data on ``169,000 forms from company insiders submitted from 2016 
through 2021'' and found that ``about a fifth of the [prearranged stock 
sales] occurred within 60 trading days of a plan's adoption.'' \381\ As 
a caveat, this data did not indicate whether the trading time frames 
were due to an issuer's policies, the insider's own timing or 
scheduling, or execution of trades under a plan (i.e., whether there is 
a ``cooling-off period'' is not known--only the time between plan 
adoption and the first trade is calculated).
---------------------------------------------------------------------------

    \378\ See Gaming the System, supra note 20. The study presents 
data ``on all sales of restricted stock filed on Form 144 between 
January 2016 and May 2020 and the adoption date of any corresponding 
10b5-1 plans . . . In total, we have data on 20,595 plans, which 
covers the trading activity by 10,123 executives at 2,140 unique 
firms. These plans are responsible for a total of 55,287 sales 
transactions totaling $105.3 billion during our sample period. 
Average (median) trade size is $1.9 million ($0.4 million) . . . .'' 
The analysis based on Form 144 data has the advantage of not being 
subject to voluntary reporting bias. However, as a caveat, planned 
resales reported on Form 144 represent a subset of all trades and 
may not be representative of all Rule 10b5-1 trades by insiders 
(e.g., of purchases, or of sales of unrestricted stock). By 
comparison, Mavruk & Seyhun examine a larger sample of plan trades 
identified by a voluntary Rule 10b5-1 checkbox on beneficial 
ownership forms. They examine transactions for ``an average of 
14,211 insiders in 3875 firms for each year between 2003 and 2013.'' 
See Mavruk & Seyhun, supra note 19. Relatedly, Hugon & Lee (2016) 
utilize a sample of ``voluntary disclosures of 10b5-1 plan 
participation in SEC Form 4 filed between October 2000 and December 
2010.'' See supra note 19. See also, e.g., Lee (2020), supra note 
35; See Rik Sen, Are Insider Sales Under 10b5-1 Plans Strategically 
Timed?, 2008 N. Y. U. (Working Paper) (2008); Eliezer M. Fich et 
al., When and How Are Rule 10b5-1 Plans Used for Insider Stock 
Sales?, 2021 Drexel U., U.T. Austin & C.U.L. (Working Paper) (2021) 
(also utilizing Form 4 data). Data on Rule 10b5-1 trades by issuers 
is not available.
    \379\ Gaming the System, supra note 20.
    \380\ The Washington Service is a research firm that provides 
data about trades by insiders.
    \381\ See McGinty & Maremont, supra note 32; see also Tom 
McGinty, Methodology: How the Journal Analyzed the Data on Insider 
Stock Sales, Wall St. J. (June 29, 2022 (retrieved from Factiva 
database).
---------------------------------------------------------------------------

    Using Form 144 data provided by the Washington Service for a more 
recent period (January 2, 2018-September 13, 2022), we find that the 
mean (median) Rule 10b5-1 plan has the first trade 102 (71) days after 
adoption, with 13.2 percent of first trades pursuant to a plan 
occurring within thirty days of the plan date and 41.5 percent 
occurring within 60 days of the plan date.\382\ A shorter period of 
time between plan adoption and the first trade under the plan is also 
associated with a larger trade size: trades occurring within 90 days of 
plan adoption have a median size of $748,000 compared with a median 
size of $403,000 for those trades occurring more than six months after 
plan adoption. Further, single-trade plans constitute approximately 44 
percent of plans during the time period examined.\383\
---------------------------------------------------------------------------

    \382\ We estimate that 13.2 percent of trades occur within 0-30 
days. 28.3 percent of trades occur within 31-60 days, and 22.3 
percent within 61-90 days. In total, 63.8 percent of trades occur 
within 90 days of the date of plan adoption and 86.9 percent of 
plans commence trading within six months.
    \383\ As a caveat, the data does not show the dates of all 
scheduled trades, only the dates of executed trades. Thus, some 
``single-trade'' plans may be multi-trade plans in progress, or 
multi-trade plans with all but one trade cancelled.
---------------------------------------------------------------------------

    A 2016 industry survey of public companies also examined their Rule 
10b5-1 plan practices.\384\ The survey found, among other things, that: 
(i) 77 percent of the respondents had a mandatory cooling-off period of 
60 days or fewer and a cooling-off period of 30 days was the most 
common cooling-off period among respondents (41 percent); (ii) 98 
percent of the respondents reviewed and approved their insiders' Rule 
10b5-1 plans to some degree; (iii) 55 percent of the respondents 
allowed early termination of plans, and 40 percent of the respondents 
allowed modification of plans (the survey does not report the extent of 
overlap between these two subsets of respondents); and (iv) 18 percent 
of respondents allowed insiders to maintain multiple overlapping plans 
while 82 percent disallowed multiple overlapping plans.\385\ A 2021 
industry survey of public companies (cited by one commenter) provided 
more recent information about Rule 10b5-1 plan practices.\386\ The 
survey found, among other things, that: (i) at 39 percent of 
respondents the aggregate number of 10b5-1 plans by their C Suite had 
increased over the prior two years, and at 74 percent of respondents at 
least one insider adopted a Rule 10b5-1 plan in the prior fiscal year; 
(ii) 13 percent of respondents required the C Suite to use Rule 10b5-1 
plans, 6 percent required directors to use Rule 10b5-1 plans, and three 
percent required other insiders to use Rule 10b5-1 plans, with 
companies with higher market capitalization being more likely to 
require insiders to sell through Rule 10b5-1 plans; (iii) a significant 
majority of respondents reported reviewing and approving the Rule 10b5-
1 plans entered into by their C Suite and directors; (iv) the most 
common cooling-off period was 30 days--9 percent of respondents 
reported not imposing a cooling-off period, 10 percent--a cooling-off 
period of less than 30 days, 51 percent--30 days, 13 percent--longer 
than 30 days, and 8 percent--a cooling-off period until the opening of 
trading window in the next quarter (with ``other'' cooling-off periods 
comprising the remainder); (v) the majority of respondents allowed 
insiders to terminate or modify their Rule 10b5-1 plans (with many of 
those imposing restrictions in conjunction with terminations or 
modifications) and permitted insiders with an existing Rule 10b5-1 plan 
to sell shares outside of the plan; (vi) 48 percent of respondents 
allowed while 52 percent of respondents prohibited multiple, 
overlapping Rule 10b5-1 plans; and (vii) 23 percent of respondents 
required disclosures of Rule 10b5-1 plan adoptions by the C Suite.
---------------------------------------------------------------------------

    \384\ See Morgan Stanley & Shearman & Sterling LLP, Defining the 
Fine Line: Mitigating Risk with 10b5-1 Plans (2016), available at 
https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf. The survey included public 
company members of the Society of Corporate Secretaries & Governance 
Professionals. The respondents and their practices related to Rule 
10b5-1 plans are not necessarily representative of all issuers 
subject to the amendments and their Rule 10b5-1 plan policies and 
practices. Separately, the survey stated that that 51 percent of S&P 
500 companies had Rule 10b5-1 plans in 2015.
    \385\ Id.
    \386\ See letter from SCG; Soc'y for Corp. Governance et al., 
10b5-1 Plan Practices 2021 Survey (2021), available at https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/Final_10b5-1_Plan_Report_CS_Survey_2021_V6_-10-19-21_W_o_Comments.pdf (``SCG 
2021 Survey''). The survey included 145 respondents (with fewer 
respondents providing answers to some questions) among public 
company members of the Society for Corporate Governance (which need 
not be the same respondents as the respondents to the 2015 survey). 
The respondents and their practices related to Rule 10b5-1 plans are 
not necessarily representative of all issuers subject to the 
amendments and their Rule 10b5-1 plan policies and practices. For 
example, 92 percent of respondents to the 2021 survey had their IPO 
more than five years ago and 58 percent had market capitalization of 
at least $10 billion, which may indicate a greater representation of 
larger, more established companies.
---------------------------------------------------------------------------

    Various studies have sought to examine the potential use of MNPI 
for trading under Rule 10b5-1 by looking at the returns around trades 
under such plans (with the caveats about data availability). The WSJ 
Analysis concluded that, on average, Rule 10b5-1 sales occurring closer 
in time to plan adoptions were more likely to precede declines in share 
prices than sales conducted later after plan adoptions.\387\ For 
insiders that sold shares within 0-30 days, 31-60 days, and 61-90 days 
following plan adoptions, average two-month post-sale excess returns 
(calculated net of sector returns) were negative: -1.7 percent, -1.4 
percent, and -0.7 percent, respectively. For insiders that sold shares 
within 91-120, 121-150, 151-180, and 181+ days following plan 
adoptions, average two-month post-sale excess returns were positive: 
0.3 percent, 1.5 percent, 1.4 percent, and 0.6 percent, 
respectively.\388\ The Gaming the System study documented abnormal 
trends and returns following some insider sales under Rule 10b5-1 (as 
compared to both standard open-market trades and different kinds of 
Rule 10b5-1 trades), which suggests potential insider trading under 
such plans. For example, the study shows abnormal industry-adjusted 
returns over a six-month period following the first sale to be -2.5 
percent for plans with the first trade occurring less than 30 days 
after plan adoption and -1.5 percent for plans with the first trade 
occurring between 30 and 60 days after plan adoption, but no evidence 
of such

[[Page 80399]]

abnormal returns after the insider sale when the first trade occurs 
more than 60 days after plan adoption. However, the study also finds 
that the trades of single-trade plans (which comprise 49 percent of the 
10b5-1 plans in the study) are consistently loss-avoiding regardless of 
cooling-off period, with single-trade plans with short cooling-off 
periods exhibiting the highest average loss avoidance (avoiding an 
industry-adjusted price decline of -4 percent).\389\ In contrast, the 
study finds that the trades under multiple-trade plans are only loss-
avoiding within 30 days of plan adoption (industry-adjusted price 
decline of -1 percent). The study also finds abnormal returns of 
between -2 percent and -3 percent for plans that execute sales in the 
window between when the plans are adopted and quarterly earnings 
announcements, but no price drop is found following sales after the 
earnings announcements.
---------------------------------------------------------------------------

    \387\ See McGinty & Maremont, supra note 381.
    \388\ Id.
    \389\ See supra note 383 and infra notes 400 and 435.
---------------------------------------------------------------------------

    Negative abnormal returns after insider sales under Rule 10b5-1 
plans indicate potential insider trading ahead of negative news. A lack 
of such negative returns after insider sales under plans with more time 
between plan adoption and first trade could be indicative of inside 
information becoming stale with the passage of time. Similarly, a lack 
of negative returns when insider sales occur after the quarter's 
earnings announcement may suggest less potential for informed selling 
once the earnings information has been made public. As a caveat, the 
tests of statistical significance of the differences are not shown in 
the study, so we cannot assess whether the economic differences 
discussed above have statistical significance.
    Several other studies document abnormal returns following trading 
by insiders who use Rule 10b5-1 plans. For example, a 2009 study of the 
use of Rule 10b5-1 plans finds that ``insiders' sales systematically 
follow positive and precede negative firm performance, generating 
abnormal forward-looking returns larger than those earned by 
nonparticipating colleagues,'' that ``a substantive proportion of 
randomly drawn plan initiations are associated with pending adverse 
news disclosures,'' and that ``early sales plan terminations are 
associated with pending positive performance shifts.'' \390\ A 2016 
study examined insider sales at financial institutions prior to the 
2008 financial crisis and found that ``net insider sales in the 2001Q2-
2007Q2 pre-financial crisis quarters predict not-yet-reported non-
performing securitized loans and securitization income for those 
quarters, and that net insider sales during 2006Q4 predict write-downs 
of securitization-related assets during the 2007Q3-2008Q4 crisis 
period'' and, crucially for this analysis, that ``insiders avoid larger 
stock price losses through 10b5-1 plan sales than through non-plan 
sales.'' \391\ A different 2016 study presented evidence of ``insiders 
selling shares prior to imminent bad earnings news through their Rule 
10b5-1 trading plans.'' \392\ A 2020 study presents evidence consistent 
with insiders using 10b5-1 plans to sell stock in advance of 
disappointing earnings results.\393\ The study further finds that some 
of the more aggressive insider trading on earnings information shifted 
into Rule 10b5-1 plans after adoption of the rule.\394\ The study also 
found that these insiders make the following types of trades: 
infrequent, irregularly timed, close to the plan initiation date, and 
executed during traditional blackout periods.\395\ Finally, a different 
2020 study found that ``public companies disproportionately disclose 
positive news on days when corporate executives sell shares under 
predetermined Rule 10b5-1 plans,'' with such disclosure of good news on 
Rule 10b5-1 selling days being most prevalent ``in the health care 
sector and among mid-cap firms.'' \396\ The study further observed that 
``stock prices reverse after high levels of Rule 10b5-1 selling on 
positive news days, and that the price reversal increases with the 
share volume of Rule 10b5-1 selling.'' \397\
---------------------------------------------------------------------------

    \390\ See, e.g., Jagolinzer, supra note 19, at 224.
    \391\ See Stephen G. Ryan, et al., Securitization and Insider 
Trading, 91 Acct. Rev. 649 (2016).
    \392\ See Jonathan A. Milian, Insider Sales Based on Short-Term 
Earnings Information, 47 Rev. Quant. Fin. Acct. 109 (2016) 
(examining data on insider sales under Rule 10b5-1 based on 
beneficial ownership filings from August 2004 through May 2010). As 
a caveat, the study specifies that the plan identification may be 
imprecise: it ``use[s] the timing of insiders' Rule 10b5-1 trades 
relative to each other in order to infer a sales plan,'' ``[g]iven 
the lack of disclosure requirements in SEC Rule 10b5-1 and the 
nature of the data.''
    \393\ See Lee (2020), supra note 35.
    \394\ Id.
    \395\ Id.
    \396\ See Joshua Mitts, Insider Trading and Strategic 
Disclosure, 2020 Colum. U. (Working Paper) (2020).
    \397\ Id.
---------------------------------------------------------------------------

    However, a 2008 study found ``no significant difference in stock 
price performance following plan sales and non-plan sales.'' \398\ The 
study also reports that ``price contingent orders (e.g., limit orders), 
a common feature in trading plans, give rise to empirical patterns that 
have been taken as evidence of strategic timing of sales.'' \399\ 
Insiders may incorporate limit orders into trading plans because such 
plans may involve trading over months and even years and therefore 
expose the insider to potentially significant market fluctuations. The 
limitations of the data about insiders' trades prevent us from 
estimating the prevalence of limit orders in such plans and comparing 
it to trades outside such plans, or assessing the magnitude of the 
potential bias in the profitability of trades executed under Rule 10b5-
1 plans due to limit order use.\400\ Nevertheless, some evidence 
suggests that limit orders cannot account for the entirety of the 
abnormal returns documented in other studies.\401\ Thus, we remain 
concerned about abnormally profitable insider trading under Rule 10b5-
1.
---------------------------------------------------------------------------

    \398\ See Rik Sen, Are Insider Sales Under 10b5-1 Plans 
Strategically Timed?, 2008 N.Y.U. (Working Paper) (2008). The study 
uses Form 4 data from January 2003-June 2006. As an important 
caveat, reporting of 10b5-1 trades on Form 4 is voluntary. Thus, 
trades classified as ``non-10b5-1'' trades in the study may include 
10b5-1 plan trades.
    \399\ Id; see also letter from Anonymous.
    \400\ Data biases due to the potential use of limit orders may 
potentially interact with data biases due to incomplete 
identification of Rule 10b5-1 trades in existing data based on 
beneficial ownership reporting requirements. Thus, the true 
magnitude of the abnormal profits from insider trading in Rule 10b5-
1 plans may differ from those observed in the data from available 
reporting.
    \401\ See, e.g., Jagolinzer, supra note 19 (comparing Rule 10b5-
1 plan and non-Rule 10b5-1 trading arrangement subsamples with a 
similar one-month price run-up and concluding that ``predictable'' 
mean reversion following sustained price increases that may have 
triggered limit sell orders is unlikely to explain the abnormal 
returns following 10b5-1 sales); see also Shon & Veliotis, supra 
note 368 (advising ``caution in making inferences, because the 
potential presence of limit order transactions makes it difficult to 
unambiguously determine the direction of causality'' but also 
performing several tests to attempt to rule out the effects of limit 
orders--including, for instance, the finding that, with the caveat 
that such disclosure is voluntary, only approximately 1.07 percent 
of the 10b5-1 sample included keywords related to limit orders in 
the footnotes to Form 4; the finding that either controlling for the 
indicator for disclosed limit order use or excluding such 
observations from the analysis does not change any of the results; 
the finding that excluding the categories of firms found more likely 
to be associated with disclosed limit order use does not affect the 
results; and the finding that abnormal returns are driven by CEOs 
and CFOs, who are more likely to have discretion over meeting or 
beating earnings expectations). Further, ``[t]here is evidence, 
however, that a substantive proportion of randomly drawn plan 
initiations are associated with pending adverse news disclosures. 
There is also evidence that early sales plan terminations are 
associated with pending positive performance shifts, reducing the 
likelihood that insiders' sales execute at low prices.'' See 
Jagolinzer, supra note 19.
---------------------------------------------------------------------------

    Two other studies find evidence that insiders can profit when 
trading under 10b5-1 plans, although these profits may be the same as 
or smaller than trades that do not qualify for the

[[Page 80400]]

affirmative defense. A 2016 study finds negative abnormal returns after 
insider sales under Rule 10b5-1 as well as positive abnormal returns 
after insider purchases under Rule 10b5-1 (over a one-month holding 
period).\402\ However, the study does not find significant differences 
between the abnormal returns following insider trades under Rule 10b5-1 
and other insider trades.\403\ A 2021 study finds that ``non-plan sales 
are, on average, preceded by a larger price run-up (3.0 percent versus 
1.4 percent) and followed by a larger price decline (-1.6 percent 
versus -1.0 percent) than plan sales . . . consistent with greater 
opportunistic behavior by CEOs who trade outside of Rule 10b5-1 
plans.'' \404\ Further, focusing on ``the 25 percent of sales with the 
largest ratio of transaction value to the CEO's most recent total 
annual compensation,'' this study found that ``the average cumulative 
abnormal return (``CAR'') during the 40 trading days before the sale is 
3.68 percent for non-plan sales and 1.77 percent for plan sales'' and 
``the average CAR for the 40 trading days after the sale is -2.24 
percent for non-plan sales and -2.41 percent for plan sales.'' \405\ 
The study concludes that ``the overall level of opportunistic behavior 
is smaller for sales within Rule 10b5-1 plans than for sales outside of 
such plans'' but that ``CEOs who have a lot of money at stake are able 
to trade opportunistically even if the transaction is executed under a 
Rule 10b5-1 plan.'' \406\ The findings of these studies differ, in 
part, due to differences in the samples used for analysis (i.e., the 
sample periods and data source, which were beneficial ownership forms 
or Form 144 filings) and their methodologies (including, among other 
assumptions, whether insider trading under Rule 10b5-1 is examined in 
isolation or in comparison with other insider sales and purchases). As 
noted above, the lack of data on Rule 10b5-1 plans can make it 
difficult to extrapolate from the available evidence to all trading 
under Rule 10b5-1. However, overall, the evidence on the use of Rule 
10b5-1 plans in the above studies raises concerns about insider 
trading.
---------------------------------------------------------------------------

    \402\ See Mavruk & Seyhun, supra note 19.
    \403\ Id. As noted above, due to voluntary reporting of the Rule 
10b5-1 flag on beneficial ownership forms, trades classified as 
``non-10b5-1'' trades in the study may include Rule 10b5-1 plan 
trades.
    \404\ See Eliezer M. Fich et al., supra note 378. This study 
examined ``11,250 stock sales by 1,514 CEOs at 1,312 different 
public firms during the 2013 to 2018 period'' and found that, ``[o]f 
these stock sales, 6,953 are identified in SEC Form 4 filings as 
executed through Rule 10b5-1 plans.'' As noted above, due to 
voluntary reporting of the Rule 10b5-1 flag on beneficial ownership 
forms, trades classified as ``non-10b5-1'' trades in the study may 
include Rule 10b5-1 plan trades.
    \405\ Id. Cumulative abnormal returns are returns in excess of 
returns that would be expected given the security's systematic risk 
over the period of time in question.
    \406\ Id.
---------------------------------------------------------------------------

    Data on companies' use of Rule 10b5-1 plans are very limited. Most 
of the commenters discussing issuer Rule 10b5-1 plans referred to 
issuer repurchases.\407\ However, one commenter expressed concern that 
the Proposing Release underestimated the number of issuers that conduct 
repurchases under Rule 10b5-1.\408\ Some companies voluntarily disclose 
their use of Rule 10b5-1 plans to carry out stock repurchases on Form 
8-K or in periodic reports. Such voluntary reporting is likely to 
underestimate the number of affected companies. Nevertheless, in the 
current disclosure regime, it is the main direct source of information 
on the prevalence of Rule 10b5-1 repurchases. One study examining 
different repurchase methods identified ``at least 200 announcements of 
repurchases using Rule 10b5-1 per year from 2011 to 2014'' and found 
that ``[In 2014] 29% [of repurchase announcements] included a 10b5-1 
plan.'' \409\ Based on a textual search of calendar year 2021 filings, 
we estimate that approximately 210 companies disclosed share repurchase 
programs executed under a Rule 10b5-1 plan.\410\ Another, indirect 
approach to estimating the number of affected issuers involves 
extrapolating the number of companies conducting repurchases under Rule 
10b5-1 in a given year from a combination of the incidence of Rule 
10b5-1 plan use among voluntarily announced repurchases (estimated at 
29 percent as previously noted \411\) and the overall number of 
companies conducting repurchases based on their financial 
statements.\412\ Based on data from Compustat and EDGAR filings for 
fiscal years ending between January 1, 2021 and December 31, 2021, we 
estimate that approximately 3,600 operating companies conducted 
repurchases, yielding an estimate of approximately 1,000 companies 
affected by the Rule 10b5-1 amendments.\413\ Due to a lack of an issuer 
trade reporting requirement similar to that for officers and directors, 
we are not aware of data or studies specific to companies' actual 
trading under Rule 10b5-1 plans.
---------------------------------------------------------------------------

    \407\ See supra note 71.
    \408\ See letter from Cravath.
    \409\ See Alice Bonaim[eacute] et al., Payout Policy Trade-Offs 
and the Rise of 10b5-1 Preset Repurchase Plans, 66 Mgmt. Sci. 2762 
(2020). The study does not provide evidence of issuers' use of such 
plans for insider trading through issuer repurchases. It focuses on 
such plans being less flexible and representing a stronger pre-
commitment than open market repurchases. The study finds that, 
``[c]onsistent with [such] plans signaling commitment, Rule 10b5-1 
repurchase announcements are associated with greater and faster 
completion rates, with more positive market reactions, and with more 
dividend substitution than open market repurchases.''
    \410\ The estimate is based on a textual search of calendar year 
2021 filings of Forms 10-K, 10-Q, 8-K, as well as amendments and 
exhibits thereto in Intelligize. The estimate is based on a textual 
search using keywords ``10b5-1 repurchases'' or a combination of 
keywords ``repurchase plan'' and ``10b5-1'' (the approach used in 
the Proposing Release estimate). Due to a lack of standardized 
presentation and the unstructured (i.e., non-machine-readable) 
nature of the disclosure, these estimates are approximate and may be 
over- or under-inclusive.
    \411\ See supra note 409.
    \412\ Using the number of issuers that announce repurchases in a 
given year would underestimate the number significantly because 
issuers may continue to implement a previously announced repurchase 
program over multiple years.
    \413\ As a caveat, a complete estimate of the number of affected 
filers is limited by data coverage. A source of data commonly used 
in existing studies, Standard & Poor's Compustat, has limited 
coverage of small and unlisted registrants and foreign private 
issuers. Therefore, we supplemented Standard & Poor's Compustat 
Fundamentals Annual data (version retrieved June 27, 2022) with 
structured data from financial statement disclosures in EDGAR 
filings (retrieved June 27, 2022), with the caveat that variation in 
filer use of tags to characterize their repurchases may result in 
some data noise. 29 percent x 3,600 = 1,044 ~ 1,000.
---------------------------------------------------------------------------

2. Benefits
    The main benefit of the amendments to Rule 10b5-1(c)(1) is the 
anticipated reduction in insider trading based on MNPI through such 
plans (the benefits of which are discussed in greater detail in Section 
V.A above). Below, we discuss how each of the amendments to Rule 10b5-
1(c)(1) individually is expected to reduce such insider trading. In 
addition, we expect the provisions to work in tandem to substantially 
reduce insider trading through Rule 10b5-1 plans. In particular, for 
officers and directors, the certification requirement is expected to 
complement the effects of the cooling-off period. Cooling-off periods 
are expected to work together with the restrictions on the use of 
multiple overlapping plans under Rule 10b5-1(c)(1) to possibly prevent 
a portion of potentially opportunistic plan cancellations based on 
MNPI. Thus, while we separately discuss below the benefits of each 
individual provision for reducing insider trading through such plans, 
the combined application of the various amendments discussed here may 
also generate synergies.
    As discussed in Section V.A above, because the Rule 10b5-1(c)(1) 
affirmative defense is voluntary, if insiders find the conditions of 
this defense to be overly burdensome, they

[[Page 80401]]

may elect not to rely on it.\414\ If migration of trading outside of 
Rule 10b5-1 plans results, in some instances, in an increase or no 
change in the incidence of insider trading, the benefits of the 
amendments may be attenuated or offset.\415\ Whether any shift to 
trading outside of Rule 10b5-1 plans results in a change to the amount 
of insider trading will depend on the extent to which other mechanisms 
(such as legal liability, enforcement actions, listing standards, 
reputational concerns, and corporate governance mechanisms) and any 
changes that companies implement to their insider trading policies 
after the amendments deter insider trading incentives.
---------------------------------------------------------------------------

    \414\ But see infra note 441.
    \415\ But see infra notes 439 through 440 and preceding and 
accompanying text.
---------------------------------------------------------------------------

    In the subsections below we discuss the individual benefits of 
these amendments to Rule 10b5-1(c)(1).
i. Cooling-Off Periods
    With respect to Rule 10b5-1 plans of officers and directors, the 
final rules add, as a condition to the availability of the affirmative 
defense under Rule 10b5-1(c)(1) a cooling-off period before any 
purchases or sales under the trading arrangement may commence. In a 
change from the 120-day cooling-off period proposed for officers and 
directors, the cooling-off period for officers and directors in the 
final rules is the later of (1) 90 days following plan adoption or 
modification or (2) two business days following disclosure of the 
financial results for the reporting period in which the plan was 
adopted (which need not exceed 120 days following plan adoption or 
modification). The cooling-off period for officers and directors is 
expected to reduce incentives to enter or modify plans based on MNPI by 
ensuring that trades under the plan are executed at prices that fully 
reflect the material information that was previously non-public. This 
is expected to substantially weaken officers' and directors' incentives 
to enter or modify Rule 10b5-1 plans based on MNPI, in line with the 
suggestions of commenters.\416\ The length of the cooling-off period 
will largely prevent officers and directors from profiting on 
unreleased earnings results for the quarter in which the Rule 10b5-1 
plan was adopted as well as other types of MNPI (such as a potential 
merger or regulatory action).\417\ It also is consistent with several 
recommendations regarding cooling-off periods for officers and 
directors.\418\ To the extent that MNPI may be time-sensitive, we 
expect the cooling-off period to effectively discourage officers and 
directors from adopting new or modified plans on the basis of 
MNPI.\419\
---------------------------------------------------------------------------

    \416\ See supra notes 47 through 51 and accompanying text; see 
also supra Section II.A.1.c for a discussion of the rationale for 
the cooling-off period we are adopting.
    \417\ See, e.g., Gaming the System, supra note 20; see also 
supra note 393 and accompanying text.
    \418\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, 
Public Citizen O'Reilly, NASAA; see also Council of Institutional 
Investors, Request for rulemaking concerning amending Rule 10b5-1 or 
further interpretive guidance regarding the circumstances under 
which Rule 10b5-1 trading plans may be adopted, modified, or 
cancelled, Dec. 28, 2012, at p. 3, available at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf (recommending a minimum three-
month waiting period); Yafit Cohn & Karen Hsu Kelley, Simpson 
Thacher Discusses Combating Securities Fraud Allegations with 10b5-1 
Trading Plans (Aug. 10, 2017), available at https://clsbluesky.law.columbia.edu/2017/08/10/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/ 
(recommending that ``insiders wait 30 to 90 days before selling 
stock under the trading plan for the first time''); David B.H. 
Martin et al., Rule 10b5-1 Trading Plans: Avoiding the Heat, 
Bloomberg BNA Securities Regulation & Law Report, 45 SRLR 438, 2013 
(referring to the three-month cooling-off period recommended by the 
Council of Institutional Investors and stating that ``[w]aiting 
periods of this duration, or those which restrict trading until 
after issuance of the next regular earnings release, may assist 
insiders in demonstrating good faith and that trades under a Rule 
10b5-1 plan were not designed to take advantage of material 
nonpublic information.''); IAC Recommendations, supra note 22 
(recommending a cooling-off period of at least four months).
    \419\ The cooling-off period condition for officers and 
directors that involves the disclosure of financial results 
references the disclosure on Form 10-K or 10-Q (or for a foreign 
private issuer, on Form 20-F or 6-K). Earnings results are typically 
announced prior to the periodic report filing. This provision is 
expected to benefit investors by ensuring that officers and 
directors trading under a Rule 10b5-1 plan cannot profit from MNPI 
contained in a periodic report that was not incorporated in a 
current report or press release. Form 10-Q and 10-K filings are 
associated with an announcement return, consistent with such 
disclosures conveying new information to the market. See Paul A. 
Griffin, Got Information? Investor Response to Form 10-K and Form 
10-Q EDGAR Filings, 8 Rev. Acc. Stud. 433 (2003). Periodic reports 
have been shown to have incremental information content compared to 
earnings releases. See, e.g., Yifan Li, Alexander Nekrasov, & Siew 
Hong Teoh, Opportunity Knocks But Once: Delayed Disclosure of 
Financial Items in Earnings Announcements and Neglect of Earnings 
News, 25 Rev. Acc. Stud. 159 (2020); Angela K. Davis & Isho Tama-
Sweet, Managers' Use of Language Across Alternative Disclosure 
Outlets: Earnings Press Releases versus MD&A, 29 Contemp. Acc. Res. 
804 (2012); Steven Huddart, Bin Ke, & Charles Shi, Jeopardy, Non-
public Information, and Insider Trading around SEC 10-K and 10-Q 
Filings, 43 J. Acc. Econ. 3 (2007).
---------------------------------------------------------------------------

    Some evidence of the extent to which requiring a longer period of 
time between Rule 10b5-1 plan adoption and the first trade under the 
plan could prevent insider trading is presented in the WSJ analysis. It 
shows that shorter periods between plan adoption and the first sale 
were associated with more negative stock returns after the sale, which 
implies that more insider trading occurs in cases of trading commencing 
closer to plan adoption.\420\
---------------------------------------------------------------------------

    \420\ See supra note 381; see also Gaming the System, supra note 
20 (similarly finding that shorter periods between plan adoption and 
first sale are associated with more negative returns following the 
sale, and also noting that approximately 14 percent of insider Rule 
10b5-1 plans have the first trade within 30 days of plan adoption, 
39 percent within the first 60 days, and 82 percent within six 
months). More negative returns following an insider sale indicate 
greater loss avoidance by the selling insider. As Gaming the System 
notes, such plans ``avoid significant losses and foreshadow 
considerable stock price declines that are well in excess of 
industry peers.''
---------------------------------------------------------------------------

    The cooling-off period for officer and director Rule 10b5-1 trading 
arrangements will also help deter trades under a newly adopted or 
modified plan before the disclosure of that quarter's earnings. Trades 
under a Rule 10b5-1 trading arrangement prior to an earnings 
announcement appear to be more likely to involve insider trading. For 
example, the Gaming the System study found that ``38 percent of plans 
adopted in a given quarter also execute trades before that quarter's 
earnings announcement (i.e., in the 1 to 90 days prior to earnings 
[sic]),'' that ``[s]ales occurring between the adoption date and 
earnings announcement are about 25 percent larger than sales occurring 
more than six months after the earnings announcement,'' and that 
``plans that execute a trade in the window between when the plan is 
adopted and that quarter's earnings announcement anticipate large 
losses and foreshadow considerable stock price declines.'' \421\
---------------------------------------------------------------------------

    \421\ Id., at pp. 2-3.
---------------------------------------------------------------------------

    With respect to persons other than the issuer that are not officers 
or directors, in a change from the proposal, in line with the 
suggestions of several commenters,\422\ the final amendments impose a 
shorter (30-day) cooling-off period (discussed in greater detail in 
Section II.A.1.c above). Similar to the cooling-off period for officers 
and directors, the cooling-off period for persons other than officers, 
directors, or the issuer is expected to benefit investors by reducing 
the potential for the use of Rule 10b5-1 plans for insider trading 
based on MNPI. Although persons other than officers, directors, or the 
issuer may be less likely to have MNPI about company-wide financial 
results or influence key corporate decisions, such persons may 
nevertheless come into possession of MNPI. For example, large 
shareholders other than officers and directors may exert control rights 
or have informational advantages enabling

[[Page 80402]]

access to MNPI before it is released. As another example, non-executive 
employees may obtain MNPI in the course of their employment.\423\ To 
the extent that persons other than officers and directors are less 
likely to rely on Rule 10b5-1 for their trading, the discussed benefits 
would be attenuated.\424\
---------------------------------------------------------------------------

    \422\ See letters from Better Markets, NASAA, and Senator Warren 
et al.
    \423\ See, e.g., letter from NASAA (stating that ``other 
corporate insiders and lower-level employees can also have access to 
such [material nonpublic] information''). Separately, prior research 
provides some evidence of information advantages of rank-and-file 
employees. See, e.g., Ilona Babenko & Rik Sen, Do Nonexecutive 
Employees Have Valuable Information? Evidence from Employee Stock 
Purchase Plans, 62 Mgmt. Sci. 1843 (2016); Steven Huddart & Mark 
Lang, Information Distribution within Firms: Evidence from Stock 
Option Exercises, 34 J. Acc. Econ. 3 (2003); Kenneth Ahern, 
Information Networks: Evidence from Illegal Insider Trading Tips, 
125 J. Fin. Econ. 26, Table 4 (noting insider trading by some lower-
level employees). As an important caveat, these studies focus on 
data outside of Rule 10b5-1 plans. See also infra note 424.
    \424\ The current reporting regime impairs our ability to obtain 
comprehensive data on the use of Rule 10b5-1 plans by other 
insiders, including non-executive employees. According to a 2021 
industry survey, only three percent of respondents required the use 
of Rule 10b5-1 plans for ``other insiders'' (insiders besides the C 
Suite and the board of directors) while an additional seven percent 
strongly encouraged it and 85 percent of respondents permitted it. 
By comparison, 13 percent of respondents required Rule 10b5-1 use 
and 28 percent strongly encouraged it for trading by the C Suite 
while six percent required Rule 10b5-1 plan use and 23 percent 
strongly encouraged it for trading by the board of directors. The 
survey also found that 77 percent of respondents that allowed other 
insiders to enter Rule 10b5-1 plans did not impose limitations on 
the ability of ``other insiders'' to enter Rule 10b5-1 plans, while 
the remainder imposed some limitations (e.g., allowing only 
employees at a certain level or from certain departments to enter 
such plans or imposing another limitation). The survey also found 
that at close to a third of respondents, the usage of Rule 10b5-1 
plans by ``other insiders'' had increased in the prior two years. 
See SCG 2021 Survey. As a caveat, the survey contained a relatively 
small number of responses and had a high representation of large, 
more established public companies and thus the survey findings 
discussed above need not be representative of Rule 10b5-1 plan 
practices at all affected companies.
---------------------------------------------------------------------------

    The application of the shorter cooling-off period to Rule 10b5-1 
trading plans of persons other than officers and directors is intended 
to tailor the application of the most restrictive of the additional 
conditions of the affirmative defense in a way that balances the 
additional costs to insiders with the investor protection benefits. 
Directors and Rule 16a-1(f) officers, who will be subject to the longer 
cooling-off periods under the final amendments, are generally more 
likely than other insiders (1) to be involved in making or overseeing 
corporate decisions about whether and when to disclose information; and 
(2) to be aware of MNPI.\425\ In addition to these risk considerations, 
the shorter cooling-off period for non-officer-and-director insiders 
recognizes that a longer cooling-off period might impose 
disproportionate costs on those insiders, who may be less highly 
compensated or face greater liquidity needs.
---------------------------------------------------------------------------

    \425\ See, e.g., Mavruk & Seyhun, supra note 19, at 179; see 
also letters from CII and Cravath.
---------------------------------------------------------------------------

ii. Officer and Director Certifications
    The amendments require that, as a condition of the amended Rule 
10b5-1(c)(1) affirmative defense, officers and directors include 
certain representations in their trading plan. In a change from the 
proposal, to eliminate any additional burden that separate 
documentation may create,\426\ the final amendments require the 
certification to be included in the plan documents as a representation. 
This approach would continue to reinforce directors' and officers' 
cognizance of their obligations with regard to MNPI.
---------------------------------------------------------------------------

    \426\ See supra note 132.
---------------------------------------------------------------------------

    The certification requirement is expected to incrementally benefit 
investors by reinforcing officers' and directors' cognizance of their 
legal obligation not to trade or adopt a trading plan while aware of 
material nonpublic information about the issuer or its securities. As a 
result, we expect the certification will reinforce investors' 
confidence that the officers and directors who make such certifications 
are not trading on the basis of information derived from their 
position, and also generally improve investor confidence in the 
securities markets.\427\ This requirement, on the margin, is expected 
to act as an additional deterrent to officer and director trading based 
on MNPI through Rule 10b5-1 plans. Because the application of cooling-
off periods to officer and director Rule 10b5-1 plans increases the 
likelihood that any MNPI becomes stale by the time trading commences, 
the benefits of the certification provision are expected to be greatest 
in instances where officers and directors have MNPI with a longer time 
horizon than the cooling-off period (for example, MNPI related to 
future corporate transactions or longer-term earnings forecasts). The 
benefits of this provision may be smaller if officers and directors 
already abstain from adopting Rule 10b5-1 plans while aware of MNPI 
(for example, as a result of robust insider trading policies and 
procedures or strong internal corporate governance controls). The 
incremental benefits of this provision may also be smaller in cases 
where officers and directors already make similar representations to 
broker-dealers that administer Rule 10b5-1 plans as part of existing 
industry practices.\428\ Nevertheless, because such practices may not 
be universal, and the requirement may differ among the various broker-
dealers that do require such representations, requiring these 
representations in the Rule 10b5-1 plan documents will likely have 
incremental benefits for investor confidence that the officer or 
director in fact is not aware of MNPI at the time of the 
representations.
---------------------------------------------------------------------------

    \427\ See United States v. O'Hagan, 521 U.S. 642, 658-59, 117 S. 
Ct. 2199, 2210, 138 L. Ed. 2d 724 (1997).
    \428\ See supra note 132.
---------------------------------------------------------------------------

iii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1 
Trading Arrangements
    A new condition to the affirmative defense will restrict the use of 
multiple overlapping Rule 10b5-1 plans for the open-market trades of 
persons other than the issuer. The restriction on multiple overlapping 
plans, which was supported by several commenters,\429\ is expected to 
reduce the likelihood that insiders enter into multiple, overlapping 
plans and selectively cancel some of the plans at a later time based on 
MNPI, while availing themselves of Rule 10b5-1(c)(1)'s affirmative 
defense.\430\ The effects of this provision may be modest to the extent 
that companies may already prohibit multiple Rule 10b5-1 plans,\431\ or 
to the extent that companies may allow a trading plan not reliant on 
Rule 10b5-1(c)(1) to exist in conjunction with a trading plan reliant 
on Rule 10b5-1(c)(1).\432\
---------------------------------------------------------------------------

    \429\ See supra notes 153 and 154 and accompanying text. But see 
supra note 166.
    \430\ As a result, the benefit of strategically canceling an 
existing plan based on MNPI will be significantly reduced for many 
insiders. An insider that cancels a plan will be subject to 
disclosure obligations. This provision is expected to work in tandem 
with cooling-off periods, which will apply to any new plan and a 
modified plan that falls within the meaning of new Rule 10b5-
1(c)(1)(iv), making a strategically planned cancellation 
significantly less attractive for insiders that plan to continue 
trading. Therefore, insiders will not be able to effectively shorten 
or circumvent the applicable cooling-off period by setting up 
multiple plans covering a similar period.
    \431\ A 2016 industry survey found that 82 percent of 
respondents do not allow multiple, overlapping Rule 10b5-1 plans. 
See Morgan Stanley & Shearman & Sterling LLP, supra note 384. A 2021 
industry survey found that 52 percent of respondents do not allow 
multiple, overlapping Rule 10b5-1 plans. See SCG 2021 Survey. The 
data is based on the responses of the surveyed public company 
members of the Society of Corporate Secretaries and Governance 
Professionals in the respective survey years and may not be 
representative of other companies.
    \432\ But see infra note 441 and accompanying text. Also, 
trading under a plan not reliant on Rule 10b5-1 could entail 
additional legal costs and limitations.
---------------------------------------------------------------------------

    The restriction on the availability of the affirmative defense for 
multiple

[[Page 80403]]

overlapping trading arrangements will not apply to plans not involving 
open-market transactions, such as, for example, employee benefit plans, 
ESOPs, or DRIPs. This is expected to preserve the benefits of 
flexibility for participants in such plans, which may be less likely to 
be associated with MNPI-based trading but impractical or costly to 
consolidate with an open-market Rule 10b5-1 plan.
    In a modification from the proposal, trades in different classes of 
securities will not be excepted from the restriction on multiple 
overlapping Rule 10b5-1 plans. While different classes of securities 
may differ in the specific voting and cash flow rights they confer to 
the insider, as noted by a commenter,\433\ MNPI is likely to have the 
same directional effects on potential insider trading profits. 
Therefore, applying the multiple overlapping plan restriction across 
all classes of securities is expected to result in greater investor 
protection benefits.
---------------------------------------------------------------------------

    \433\ See letter from NASAA. See also Roger M. White, Insider 
Trading: What Really Protects U.S. Investors? 55 J. Fin. Quant. 
Anal. 1305 (2020).
---------------------------------------------------------------------------

    In a modification from the proposal, the restriction on multiple 
overlapping plans will not apply in certain circumstances involving 
plans with more than one broker dealer or other agent, as discussed in 
Section II.A.3.c above. This change is expected to preserve flexibility 
for insiders to rely on multiple financial intermediaries, with whom 
they may have previously established relationships or from whom they 
may obtain better financial terms. The final amendments also contain a 
modification to the multiple-plan restriction that permits an insider 
to maintain two separate Rule 10b5-1 plans at the same time so long as 
trading under the later-commencing plan is not authorized to begin 
until after all trades under the earlier-commencing plan are completed 
or expire without execution. This provision will preserve the ability 
of insiders to set up two successive plans for open-market trading, 
which may better address their trading needs compared to the proposal. 
This provision would not be available for the later-commencing plan, 
however, if the first trade under the later-commencing plan is 
scheduled to begin during the ``effective cooling-off period'', which 
is expected to strengthen investor protection. Finally, in a 
modification from the proposal, the restriction on multiple overlapping 
plans will not apply to sell-to-cover transactions, which will preserve 
the flexibility for insiders to meet tax withholding obligations 
related to the vesting of equity compensation.
    The amendments limit the availability of the affirmative defense in 
the case of single-trade Rule 10b5-1 trading arrangements to one such 
trading arrangement in the prior twelve-month period, which was 
generally supported by several commenters.\434\ The limitation on 
single-trade Rule 10b5-1 trading arrangements is expected to reduce the 
likelihood that plan participants would be able to repeatedly profit 
from ``one-off,'' ad hoc trading arrangements based on previously 
undisclosed MNPI while availing themselves of the protections of the 
Rule 10b5-1(c)(1) affirmative defense.\435\ The incremental benefit of 
this limitation may be somewhat attenuated if insiders relying on 
single-trade plans are largely driven by one-time liquidity needs, or 
if they are effectively deterred from using MNPI by other provisions 
also being adopted. Nevertheless, there could be a benefit to limiting 
the frequency of single-trade arrangements to the extent that some MNPI 
may remain undisclosed for periods longer than the cooling-off period. 
In a modification from the proposal, the limitation on single-trade 
Rule 10b5-1 trading arrangements will only apply to plans involving 
open-market transactions. Similar to the application of the restriction 
on multiple overlapping trading arrangements to plans involving open-
market transactions, this provision is expected to preserve the 
benefits of flexibility for participants in such plans, which may be 
less likely to be associated with MNPI-based trading. In a further 
modification from the proposal, the limitation on single-trade Rule 
10b5-1 trading arrangements will not apply to sell-to-cover 
transactions, which will preserve the flexibility for insiders to meet 
tax withholding obligations related to the vesting of equity 
compensation.
---------------------------------------------------------------------------

    \434\ See supra notes 152 and 155 and accompanying text; see 
also supra note 156.
    \435\ For instance, some suggestive evidence is presented in 
Gaming the System, supra note 20 (finding that, for single-trade 
plans, share prices decreased following insider sales under Rule 
10b5-1). As a caveat, the data does not show the dates of all 
scheduled trades, only the dates of executed trades. Thus, some 
``single-trade'' plans may be multi-trade plans in progress, or 
multi-trade plans with all but one trade cancelled. See also Milian 
(2016), supra note 392 (finding that sales under Rule 10b5-1 plans 
with few trades are associated with more negative subsequent returns 
than sales under plans with more trades). As a caveat, Milian (2016) 
does not specifically compare single-trade to multi-trade plans. 
Further, the number of trades in the plan is highly correlated with 
the duration of the plan in the study, which can make it difficult 
to isolate the effect of the number of trades in the plan. But see 
supra note 399 and accompanying text (citing letter from Anonymous, 
which asserts that some of the observed profitability of single-
trade plans may be due to the greater reliance on limit orders). 
However, see, generally, supra note 401 (indicating that abnormal 
insider trading profits may still be present after consideration of 
the effect of limit orders on the data).
---------------------------------------------------------------------------

iv. The Amended Good Faith Condition
    The amendments expand the good faith provision to specify that all 
traders must act in good faith with respect to a Rule 10b5-1 plan (and 
not just enter into such plans in good faith), as a condition to the 
availability of the affirmative defense. The expansion of the good 
faith condition was generally supported by various commenters and is 
expected to further deter potential insider trading as part of such 
plans.\436\ As discussed in Section V.A above, a decrease in insider 
trading is expected to alleviate associated incentive distortions and 
generate benefits for investors. By making clear that insiders must act 
in good faith with respect to the plan, including with respect to any 
trading under the plan, the amendments may discourage insiders from 
attempting to evade the prohibitions of the rule by, for example, using 
their influence to affect the timing of a corporate disclosure to occur 
before or after a planned trade under a trading arrangement (one of the 
economic costs of insider incentive distortions due to insider trading 
discussed in Section V.A above).\437\ The amendments are expected to 
strengthen investor protection by helping deter fraudulent and 
manipulative conduct throughout the duration of the trading 
arrangement.
---------------------------------------------------------------------------

    \436\ See supra note 191.
    \437\ See supra note 368 and accompanying and following text.
---------------------------------------------------------------------------

3. Costs
    The amendments will impose additional conditions on the use of the 
Rule 10b5-1(c)(1) affirmative defense. All else being equal, the 
conditions on the use of Rule 10b5-1 plans will make it more 
complicated for insiders to sell or buy shares under such plans. The 
conditions that impose additional barriers to sales of company stock 
under Rule 10b5-1(c)(1) are expected to result in decreased liquidity 
of the insider's holdings, including reduced ability to meet 
unanticipated liquidity needs (such as emergency or unplanned 
expenses), as well as potential constraints on portfolio rebalancing 
and achieving optimal portfolio diversification and tax treatment. 
Greater difficulty of selling shares under Rule 10b5-1 plans will 
impose illiquidity costs on insiders and may reduce the value of their

[[Page 80404]]

compensation.\438\ The final amendments may have relatively greater 
impacts on some insiders, for example, those with a lower net worth and 
limited means, who may suffer greater adverse effects from the trading 
restrictions in the event of liquidity needs. The tailored nature of 
the final amendments (including the application of shorter cooling-off 
periods to Rule 10b5-1 trading plans of persons other than officers, 
directors, or the issuer; the limitation of certification requirements 
to officers and directors; and the exceptions to the multiple-plan and 
single-trade plan restrictions) is expected to mitigate some of these 
costs. Shortening the cooling-off period for officers and directors 
relative to the proposal is expected to decrease some of the costs of 
the rule for officers and directors.
---------------------------------------------------------------------------

    \438\ See Lisa Meulbroek, The Efficiency of Equity-Linked 
Compensation: Understanding the Full Cost of Awarding Executive 
Stock Options, 30 Fin. L. Mgmt. 5 (2001); see also infra note 442 
and accompanying and following discussion.
---------------------------------------------------------------------------

    In general, the economic costs of the amendments to Rule 10b5-
1(c)(1) may be partly mitigated by the voluntary nature of the Rule 
10b5-1(c)(1) affirmative defense. Insiders who find the amended 
conditions to be too restrictive may elect not to rely on Rule 10b5-
1(c)(1). For example, some insiders may elect to make more 
discretionary trades during open trading windows when they presumably 
do not possess MNPI, while others may adopt trading arrangements not 
reliant on amended Rule 10b5-1(c)(1). However, insiders that elect not 
to rely on Rule 10b5-1(c)(1) may incur additional costs, such as a 
potential increase in liability risk or cost of counsel to evaluate 
whether trades conducted pursuant to a plan not reliant on Rule 10b5-
1(c)(1) or conducted without a trading plan are compliant with 
securities laws and regulations \439\ and a potential decrease in 
flexibility to execute trades during pension blackout periods and any 
``closed window'' periods that issuers may choose to impose.\440\ As an 
important caveat, although the use of Rule 10b5-1(c)(1) is voluntary 
under Commission regulations, some companies' insider trading policies 
may require insiders to rely on Rule 10b5-1(c)(1).\441\
---------------------------------------------------------------------------

    \439\ In addition, Form 4 must be filed before the end of the 
second business day following the day on which the transaction was 
executed. Rule 16a-3(g)(2)(i) indicates that for transactions that 
satisfy Rule 10b5-1(c), the date of execution is deemed to be the 
date on which the executing broker notifies the reporting person of 
the execution of the transaction.
    \440\ For example, trading under a Rule 10b5-1 plan is one of 
the exceptions from the blackout periods imposed in Section 306 of 
SOX. Section 306(a)(1) of SOX makes it unlawful for a director or 
officer of an issuer of any equity security, directly or indirectly, 
to purchase, sell or otherwise acquire or transfer any equity 
security of the issuer during a pension plan blackout period with 
respect to the equity security, if the director or executive officer 
``acquires such equity security in connection with his or her 
service or employment as a director or executive officer.'' Section 
306(a)(2) permits an issuer, or a security holder of the issuer on 
its behalf, to bring an action to recover any profits realized by a 
director or executive from a transaction made in violation of 
Section 306(a)(1). Rule 101(c)(2) of Regulation BTR [17 CFR 
245.101(c)(2)] provides an exemption from Section 306(a)(1) for 
transactions made pursuant to a trading arrangement that satisfies 
the affirmative defense conditions of Rule 10b5-1(c). Officers and 
directors trading other than under a Rule 10b5-1 plan would not get 
this benefit.
    \441\ As noted above, a 2016 industry survey found that 17 
percent of surveyed companies required the use of Rule 10b5-1 plans 
for trading. See Morgan Stanley & Shearman & Sterling LLP, supra 
note 384. A 2021 industry survey found that 13 percent of 
respondents required the C Suite, while six percent required 
directors to use Rule 10b5-1 plans for trading. See SCG 2021 Survey. 
We recognize that the number of companies with such policies in 
place may decrease after the rules become effective.
---------------------------------------------------------------------------

    Faced with the additional conditions on the use of Rule 10b5-1 
plans, some insiders may seek to reduce their holdings of company 
shares in general, such as by buying fewer shares (including 
potentially greater reluctance to take advantage of DRIPs), selling 
shares more quickly when eligible, and negotiating for cash pay in lieu 
of equity pay, to the extent feasible given companies' share ownership 
guidelines and compensation policies.\442\ The amendments also will 
make it more difficult for insiders to purchase company shares if they 
wish to do so under a Rule 10b5-1 plan.\443\ Reduced insider equity 
ownership may in turn affect incentive alignment between insiders and 
shareholders (to the extent such incentive alignment existed in the 
first place and was not undermined by existing agency conflicts 
discussed in greater detail in Section V.A above). In some cases, if 
insiders have sufficient bargaining power, insiders facing illiquidity 
risk may seek higher total pay to compensate for the trading 
restrictions.\444\ Existing shareholders are expected to bear any costs 
incurred by issuers due to potential shifts in executive compensation 
in response to the new conditions of Rule 10b5-1(c)(1) (whether in the 
form of additional compensation for insiders, or changes in 
compensation structure that weaken insider incentives).
---------------------------------------------------------------------------

    \442\ Compensation committees may continue to award incentive 
pay even if insiders may prefer to reduce exposure to the issuer's 
equity. See, e.g., Darren T. Roulstone, The Relation Between 
Insider-Trading Restrictions and Executive Compensation, 41 J. Acct. 
Rsch. 525 (2003) (showing that firms restricting insider trading 
``use more incentive-based compensation and their insiders hold 
larger equity incentives relative to firms that do not restrict 
insider trading''). Companies may also impose share ownership 
guidelines and holding requirements. See, e.g., Bradley W. Benson et 
al., Stock Ownership Guidelines for CEOs: Do They (Not) Meet 
Expectations?, 69 J. Banking Fin. 52 (2016); see also Executive 
Stock Ownership Guidelines, Equilar (Mar. 9, 2016), available at 
https://www.equilar.com/reports/34-executive-stock-ownership-guidelines.html (finding that the percentage of Fortune 100 
companies that disclose ownership guidelines or holding requirements 
in any form was 87.6 percent in 2014); John R. Sinkular & Don 
Kokoskie, Stock Ownership Guideline Administration, 2020 Harv. L. 
School Forum Corp. Gov. (June 11, 2020), available at https://corpgov.law.harvard.edu/2020/06/11/stock-ownership-guideline-administration/; NASPP, 5 Trends in Stock Ownership Guidelines, 
(Dec. 15, 2020), available at https://www.naspp.com/blog/5-Trends-in-Stock-Ownership-Guidelines (finding that ``[e]ighty-five percent 
of respondents to the 2020 survey currently impose ownership 
guidelines on executives'').
    \443\ However, the likelihood of choosing a Rule 10b5-1 plan for 
a purchase is much lower than the likelihood of electing to use Rule 
10b5-1(c)(1) for a sale (with the caveats about data availability). 
One study noted that approximately 2.3 percent of purchases versus 
22.4 percent of sales were reported to be undertaken using Rule 
10b5-1 plans. See Mavruk & Seyhun, supra note 19.
    \444\ See Darren T. Roulstone, The Relation Between Insider-
Trading Restrictions and Executive Compensation, 41 J. Acct. Rsch. 
525 (2003) (finding that ``firms that restrict insider trading pay a 
premium in total compensation relative to firms not restricting 
insider trading, after controlling for economic determinants of 
pay.''); see also M. Todd Henderson, Insider Trading and CEO Pay, 64 
Vand. L. Rev. 503 (2011) (finding that ``executives whose trading 
freedom increased using Rule 10b5-1 trading plans experienced 
reductions in other forms of pay to offset the potential gains from 
trading'').
---------------------------------------------------------------------------

    In the subsections below we discuss the individual costs these 
conditions could impose on affected plan participants. However, we also 
recognize that these provisions may interact with each other and 
further reduce the attractiveness of Rule 10b5-1 plans to prospective 
traders.
i. Cooling-Off Periods
    We recognize that the cooling-off period condition for officers and 
directors will restrict their ability to purchase or sell shares 
pursuant to a Rule 10b5-1 plan for the duration of the cooling-off-
period, imposing potentially significant costs on officers and 
directors who seek to utilize the Rule 10b5-1(c)(1) affirmative 
defense, as indicated by various commenters.\445\ As a result, some 
insiders may choose not to rely on a Rule 10b5-1 plan for future 
trading.\446\ A long cooling-off period may discourage insiders from 
adopting Rule 10b5-1 plans and therefore result in larger, more 
concentrated volumes of insider-directed trades taking place during 
open-window periods rather than being spread out over the duration of 
the Rule 10b5-1 plan, which could lead to increased market volatility, 
as

[[Page 80405]]

indicated by various commenters.\447\ Insiders who sell shares without 
relying on a Rule 10b5-1 plan are likely to incur additional costs and 
limitations. The economic costs of decreased liquidity due to Rule 
10b5-1 plan restrictions were discussed in detail in Section V.B.3 
above.
---------------------------------------------------------------------------

    \445\ See supra note 52.
    \446\ But see supra note 441.
    \447\ See supra note 54.
---------------------------------------------------------------------------

    In a change from the proposal, the cooling-off period for the Rule 
10b5-1 plans of officers and directors was revised from 120 days to the 
later of (1) 90 days after the adoption of the Rule 10b5-1 trading plan 
or (2) two business days following the disclosure of the issuer's 
financial results for the completed fiscal period in which the plan was 
adopted (which need not exceed 120 days after adoption or modification 
of the plan). However, because trading during the three months 
following adoption of a Rule 10b5-1 plan, or around earnings 
announcements, is common based on available data summarized in Section 
V.B.1 above, the amendments are likely to reduce officers' and 
directors' ability to trade under Rule 10b5-1 plans compared to their 
trading today, resulting in potential costs to insiders.\448\
---------------------------------------------------------------------------

    \448\ See Gaming the System, supra note 20; see also supra notes 
379 through 381 and accompanying text. A 2016 industry survey 
examining Rule 10b5-1 plan practices at public companies found that 
30 days was the most popular cooling-off period among their 
respondents (41 percent) and that for 77 percent of the respondents, 
the cooling-off period was 60 days or less. See supra note 384. A 
2021 industry survey examining Rule 10b5-1 plan practices found that 
51 percent of survey respondents had a cooling-off period of 30 days 
and 67 percent of respondents reported cooling-offs of 60 days or 
less. See SCG 2021 survey. Separately, because many issuers release 
financial results prior to the filing of a Form 10-Q or 10-K, the 
use of the filing of Form 10-Q or 10-K for purposes of identifying 
the date of the disclosure of a domestic issuer's financial results 
is expected to result in a longer minimum cooling-off period for the 
officers and directors of the typical issuer, compared to using the 
date of the issuance of a press release announcing earnings results, 
resulting in less flexibility for the affected officers and 
directors.
---------------------------------------------------------------------------

    In another change from the proposal, in response to suggestions of 
several commenters,\449\ the final amendments include 30-day cooling-
off period as a condition of the affirmative defense for persons other 
than the issuer that are not officers or directors. We recognize that 
this change will result in additional costs for the affected persons, 
particularly those rank-and-file employees and other individuals that 
have a lower net worth and undiversified stockholdings and lack the 
resources and access to alternative liquidity sources to absorb 
unanticipated liquidity needs in the presence of the trading 
restrictions in the final amendments. Such costs are expected to be 
mitigated to a considerable extent by the shorter duration of the 
cooling-off period for persons other than officers, directors, or the 
issuer. Further, the costs relative to the baseline are expected to be 
potentially more modest to the extent that the 30-day duration of the 
cooling-off period is generally aligned with existing industry 
practices.\450\ In the aggregate, such costs may be further alleviated 
to the extent that persons other than officers, directors, or the 
issuer may hold less stock or may be less likely to trade under Rule 
10b5-1 plans.\451\
---------------------------------------------------------------------------

    \449\ See supra note 422.
    \450\ A 2016 industry survey found that 41 percent of 
respondents had a 30-day cooling-off period and an additional eight 
percent reported a cooling-off period exceeding 30 days. See supra 
note 384. A 2021 industry survey found that 51 percent of 
respondents had a 30-day cooling-off period and an additional 13 
percent reported a cooling-off period exceeding 30 days. See SCG 
2021 Survey. As a caveat, neither survey specifies whether the 
cooling-off periods varied depending on the type of insider. As a 
further caveat, survey respondents need not be representative of all 
affected companies. Several commenters identified 30 days as a 
common duration of the cooling-off period (similarly not noting 
whether prevailing industry practices with regard to cooling-off 
periods vary depending on the type of insider). See supra note 57 
and accompanying text.
    \451\ But see supra note 424.
---------------------------------------------------------------------------

    The final amendments are also adding new paragraph (c)(1)(iv) that 
states that a modification or change to the amount, price, or timing of 
the purchase or sale of the securities underlying a Rule 10b5-1 plan is 
treated as a termination of the plan and the adoption of a new plan, 
and to the extent that insiders seek to continue to rely on the 
affirmative defense, they would incur the costs associated with a new 
cooling-off period. Other types of changes to Rule 10b5-1 plans would 
not be treated as the adoption of a new plan and would not result in 
those potential costs generally in line with the comments 
received.\452\
---------------------------------------------------------------------------

    \452\ See supra note 80.
---------------------------------------------------------------------------

ii. Officer and Director Certifications
    The amendments introduce as a condition to the Rule 10b5-1(c)(1) 
affirmative defense a new requirement that directors and officers 
provide representation in the plan documents that, at the time of 
adopting a new or modified Rule 10b5-1 plan: (1) they are not aware of 
material nonpublic information about the issuer or its securities; and 
(2) they are adopting the contract, instruction, or plan in good faith 
and not as part of a plan or scheme to evade the prohibitions of 
Section 10(b) and Rule 10b-5. In a change from the proposal to 
eliminate any additional burden that separate documentation may 
create,\453\ officers and directors will be required to include the 
certification in the plan documents as representations, rather than 
provide a separate certification to the issuer. The final rules also do 
not provide that officers and directors should retain the certification 
for ten years, as was originally proposed. These changes are expected 
to incrementally decrease the costs of compliance with the amendments 
and avoid any potential costs that issuers might have chosen to incur 
to develop systems or procedures to accept officer and director 
certifications.
---------------------------------------------------------------------------

    \453\ See supra note 132.
---------------------------------------------------------------------------

    The incremental costs of this provision may be small to the extent 
that officers and directors already avoid adopting Rule 10b5-1 plans 
while aware of MNPI (for example, due to robust policies and procedures 
related to officer and director trading or robust corporate governance 
controls). Further, insiders may already make representations to that 
effect to broker-dealers that administer the plans, as part of existing 
industry practices.\454\ Nevertheless, we recognize that such 
representations to broker-dealers may not be universal in practice or 
uniform in substance today. We further recognize, consistent with the 
concerns of commenters, that the certification condition may result in 
increased costs for officers and directors, such as the cost of 
consulting with legal counsel to help them analyze whether they have 
MNPI and to comply with the certification requirement, which may in 
some instances deter officers and directors from relying on Rule 10b5-
1(c)(1).\455\ To the extent that officers and directors forgo Rule 
10b5-1 plans due to the certification requirement, they may incur 
additional costs of trading outside of such plans (see V.B.3 above for 
a more detailed discussion). The associated costs could also lead 
officers and directors to potentially seek other compensation terms 
with less equity exposure, which may result in additional costs to the 
company and its shareholders.\456\
---------------------------------------------------------------------------

    \454\ See supra note 132.
    \455\ See supra note 131.
    \456\ See supra note 442 and accompanying and following text.
---------------------------------------------------------------------------

iii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1 
Trading Arrangements
    We are adopting the restriction on multiple overlapping Rule 10b5-1 
trading arrangements for open-market

[[Page 80406]]

trades, with certain modifications. This restriction is expected to 
limit the affected plan participants' flexibility to use Rule 10b5-1 
plans to purchase or sell their shares. In a change from the proposal, 
we are adopting modifications to this condition that address the use of 
multiple brokers in a Rule 10b5-1 plan and that permit an insider to 
maintain two Rule 10b5-1 plans at the same time in certain 
circumstances. These changes should decrease the incremental costs of 
the amendments by preserving some flexibility for insiders that plan to 
use a successive Rule 10b5-1 plan after the current Rule 10b5-1 plan 
expires but wish to set it up before the first plan concludes as well 
as for insiders that have established relationships with, or otherwise 
prefer to utilize, multiple brokers. In another change from the 
proposal which should further reduce the incremental costs for affected 
insiders, the restriction will not apply to sell-to-cover transactions. 
The effects of the multiple-plan restriction will be smaller for 
insiders that can anticipate and consolidate most upcoming open-market 
purchases and sales of securities into a single plan (e.g., utilizing 
an algorithm-based strategy). As proposed, the restriction on multiple 
overlapping plans will apply only to plans involving open-market 
trades, which will enable insiders with purchases and sales planned, 
for example, as part of employee benefit plans, ESOPs, or DRIPs, and 
not involving open-market purchases or sales to avoid the cost of the 
requirement. In a modification from the proposal, trades in different 
classes of securities will not be excepted from the restriction on 
multiple overlapping Rule 10b5-1 plans, consistent with a commenter's 
suggestion.\457\ Compared to the proposal, this modification is 
expected to limit flexibility for those plan participants that seek to 
implement independent purchase or disposition strategies for different 
share classes through separate, overlapping plans.
---------------------------------------------------------------------------

    \457\ See letter from NASAA. See also Roger M. White, Insider 
Trading: What Really Protects U.S. Investors? 55 J. Fin. Quant. 
Anal. 1305 (2020).
---------------------------------------------------------------------------

    We recognize that the multiple-plan restriction will impose costs 
on affected insiders, as suggested by various commenters.\458\ While 
some insiders may be able to meet different trading needs involving 
open-market purchases or sales with a single plan, or through the 
exceptions provided above for one successive plan, a plan executed by 
multiple brokers, and sell-to-cover transactions, other insiders will 
incur costs due to this restriction.\459\ For example, insiders may 
have immediate liquidity or other trading needs involving open-market 
transactions at different points in time that are difficult to 
incorporate into a single plan, resulting in greater costs. Modifying a 
single existing plan based on updated trading needs will initiate a new 
cooling-off period, imposing costs on insiders in such cases. 
Nevertheless, the incremental costs of the multiple-plan restriction 
are expected to be limited for the affected insiders of companies that 
already disallow such plans today.\460\ The incremental costs of the 
multiple-plan restriction are also expected to be smaller for the 
affected insiders of companies that allow trading arrangements that do 
not rely on Rule 10b5-1(c)(1) and do not require the use of Rule 10b5-1 
for insider trades.\461\ Nevertheless, as noted above, insiders that 
maintain trading arrangements not reliant on Rule 10b5-1(c)(1) may 
incur other costs.
---------------------------------------------------------------------------

    \458\ See supra note 167.
    \459\ See letter from SIFMA 3.
    \460\ See, e.g., supra note 431 and accompanying text 
(discussing restrictions on multiple overlapping plans). According 
to a 2016 industry survey, more than 80 percent of respondents do 
not allow multiple, overlapping Rule 10b5-1 plans. According to a 
2021 industry survey, 52 percent of respondents do not allow such 
plans. See SCG 2021 Survey.
    \461\ See supra note 432 and accompanying text.
---------------------------------------------------------------------------

    The final amendments limit the number of single-trade Rule 10b5-1 
trading arrangements to one such arrangement in any twelve-month 
period. As noted by several commenters, this limitation is expected to 
impose costs on the affected insiders.\462\ This limitation will make 
it costlier for insiders with repeated sporadic or ad hoc liquidity 
needs to divest issuer equity holdings.\463\ At the same time, the 
approach of limiting the number of single-trade Rule 10b5-1 plans in a 
12-month period, rather than restricting them entirely, alleviates 
costs for insiders with occasional unexpected liquidity needs that seek 
to avail themselves of the affirmative defense for such a single-trade 
plan. This approach has the benefit of protecting investors from trades 
that run a higher risk of being opportunistically driven by MNPI, while 
still accommodating the liquidity needs of certain insiders. While it 
is possible that the same insider would experience multiple instances 
of repeated, ad hoc liquidity needs in a 12-month period that can only 
be met through a new single-trade Rule 10b5-1 plan and such an insider 
would lose flexibility under the final amendments, the likelihood of 
such successive unanticipated liquidity needs occurring within the same 
12-month period is lower than that of a single occurrence of an ad hoc 
liquidity need, for which the final rule provides an exception. In a 
modification from the proposal, the limitation on single-trade Rule 
10b5-1 trading arrangements will only apply to plans involving open-
market transactions. Similar to the focus of the multiple-plan 
restriction on plans for open-market trades, tailoring the limitation 
on single-trade Rule 10b5-1 trading arrangements in this manner is 
expected to eliminate the cost of the requirement for insiders with 
plans not involving open-market purchases or sales. In a further 
modification from the proposal, the limitation on single-trade Rule 
10b5-1 trading arrangements will not apply to sell-to-cover 
transactions, which will also help to mitigate costs of this provision 
by allowing insiders to sell shares to cover tax withholding 
obligations related to the vesting of equity compensation.
---------------------------------------------------------------------------

    \462\ See supra notes 157 through 162 and accompanying text.
    \463\ Single-trade plans appear to be common. Based on 
Washington Service data from Jan. 2016 through May 2020, Gaming the 
System, supra note 20, note that 49 percent of the 10b5-1 plans in 
their sample cover only a single trade. Using Washington Service 
data for a more recent period (Jan. 2, 2018 through Sept. 13, 2022), 
we estimate that single-trade plans constitute approximately 44 
percent of plans during the time period examined. See supra Section 
V.B.1. The caveat about classification of plans as ``single-trade'' 
plans in the available data applies. See supra note 435.
---------------------------------------------------------------------------

iv. The Amended Good Faith Condition
    The amendments specify that a trader must act in good faith with 
respect to the plan as a condition to the continued availability of the 
affirmative defense. Consistent with the views of various commenters, 
this provision is expected to result in additional legal costs (such as 
the cost of legal counsel to aid in compliance with the requirement), 
ambiguity,\464\ and risks for plan participants (namely, the risk of 
loss of the Rule 10b5-1(c)(1) affirmative defense if a trader is found 
not to have acted in good faith).\465\ Some commenters also expressed 
the concern that the amended good faith provision may create an 
``unintended incentive for directors or officers to consider their Rule 
10b5-1 plans in connection with corporate actions long after 
establishing their plans.'' \466\ If plan participants perceive the 
amended good faith provision as increasing the legal cost and risk 
associated with the use of Rule 10b5-1 plans, they may reduce their 
reliance on Rule 10b5-1 plans.\467\
---------------------------------------------------------------------------

    \464\ See supra note 196 and accompanying text.
    \465\ See supra notes 195 and 198.
    \466\ See letter from Chamber of Commerce 2; see also letter 
from Wilson Sonsini.
    \467\ See supra note 198.

---------------------------------------------------------------------------

[[Page 80407]]

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the amendments to reduce the improper use of Rule 10b5-1 
plans by insiders with MNPI. This decrease in insider trading should 
also limit insiders' incentives to engage in inefficient corporate 
decisions associated with insider trading, which were discussed in 
Section V.A above. The effects of the rule on the efficiency of 
corporate investment and other decisions are not fully certain because 
the rule may induce insiders to adjust their holdings in response to 
the reduced liquidity and potentially lead companies to adjust 
incentive and compensation structure or other policies and practices in 
response to the rule.
    Further, limiting insiders' ability to trade on MNPI would decrease 
the insiders' incentives to influence the timing and content of 
corporate disclosures. Timelier and higher-quality corporate 
disclosures would provide more information to investors, resulting in 
more informationally efficient share prices in the secondary market and 
more efficient allocation of investor capital across investment 
opportunities in their portfolio.
    A reduction in insider trading may also benefit market 
efficiency.\468\ For example, a lower risk of trading against an 
informed insider is expected to increase investor confidence and the 
willingness of market participants to buy, and trade in, the issuer's 
shares. This effect would indirectly make it easier for the company to 
raise capital from investors.
---------------------------------------------------------------------------

    \468\ See supra note 362.
---------------------------------------------------------------------------

    Finally, the amendments may affect competition. Decreasing the 
ability of insiders to trade on MNPI should weaken their competitive 
edge in trading, promoting competition among other investors in the 
market for the issuer's shares. A lower risk of an insider with a 
significant private information advantage trading the issuer's shares 
may strengthen the incentive of other market participants to trade the 
issuer's shares and compete in gathering and processing information 
about the company.
    All of the effects described above would be weaker to the extent 
that some insiders may trade under non-Rule 10b5-1 trading arrangements 
or may trade without a plan. Whether the amendments prompt a large 
increase in insider trading under non-Rule 10b5-1 trading arrangements 
would depend, in part, on how burdensome insiders find the amendments 
and how company policies constrain insider use of MNPI in non-Rule 
10b5-1 trading arrangements (including in response to the Item 408 
disclosure requirements).
    It is not clear if the amendments will result in meaningful 
competitive effects on the labor market. We are not exempting any 
categories of public companies from the amendments, which should reduce 
potential effects on competition for talent among public companies. We 
do not anticipate significant effects of the amendments on the 
competition for talent between public and private companies. While Rule 
10b5-1(c)(1) amendments may make insider holdings of public company 
stock less liquid (as discussed in greater detail in Section V.B.3 
above), holdings of public company shares will remain significantly 
more liquid than holdings of private company stock.
5. Reasonable Alternatives
    The certification requirements will apply to officers and directors 
only, as proposed. Cooling-off periods (with the duration dependent on 
the type of insider) and restrictions on multiple overlapping plans and 
single-trade plans will apply to persons other than the issuer. The 
expanded good faith provision will apply to all persons who seek to 
rely on the Rule 10b5-1(c)(1) affirmative defense.
    As an alternative, we could limit each of the provisions to 
officers only.\469\ Compared to the amendments, this alternative would 
eliminate the costs of the rule (discussed in greater detail in Section 
V.B.3 above) for the exempted plan participants but increase the risk 
of insider trading by such plan participants. The latter effects may be 
smaller to the extent the exempted persons are less involved in making 
and overseeing corporate decisions or are less likely to be aware of 
MNPI, but that likely is not the case for directors. As another 
alternative, we could extend all of the Rule 10b5-1(c)(1) amendments, 
including the certification requirements and the longer cooling-off 
periods applicable to officers and directors, to all persons other than 
the issuer. Compared to the amendments, this alternative would subject 
additional persons other than the issuer, including employees, to the 
costs of all of the provisions of the rule (discussed in greater detail 
in Section V.B.3 above) but also decrease the risk of insider trading 
by such plan participants. The latter benefits may be smaller to the 
extent that persons other than the issuer that are not officers or 
directors are less involved in making and overseeing corporate 
decisions, may lack control or knowledge about the timing and substance 
of the issuer's disclosures, or are less likely to be aware of MNPI. 
The aggregate effects of all of the discussed alternatives, compared to 
the amendments, may also be smaller to the extent that Rule 10b5-1 
plans may be most prevalent among officers (with the caveat about data 
availability).
---------------------------------------------------------------------------

    \469\ With the caveat about data availability, where Rule 10b5-
1(c)(1) use is reported, officers are far more likely to report 
trading under Rule 10b5-1 plans than directors.
---------------------------------------------------------------------------

    Alternatively, rather than adding new conditions to the affirmative 
defense, we could rescind the Rule 10b5-1(c)(1) affirmative defense 
altogether.\470\ Rescinding Rule 10b5-1(c)(1) would increase the costs 
for existing Rule 10b5-1 plan participants (such as the additional 
costs of legal counsel to determine whether trading arrangements, or 
trades not reliant on a trading arrangement, are compliant with the 
Exchange Act in the absence of the Rule 10b5-1(c)(1) affirmative 
defense). Rescinding the Rule 10b5-1(c)(1) affirmative defense would 
also increase the liability risk for insiders that continue to trade 
due to greater uncertainty about whether they have complied with Rule 
10b-5 and subject insiders to additional limitations on trading (such 
as restrictions on trading during blackout periods). The associated 
costs of divesting stock in the absence of the affirmative defense 
would make insiders' holdings of stock less liquid and could further 
induce insiders to negotiate non-stock-based compensation.\471\ 
Further, while rescinding Rule 10b5-1(c)(1) would eliminate Rule 10b5-1 
plans, it would not affect the use of other trading arrangements by 
officers, directors, and companies. The potential for trading under 
non-Rule 10b5-1 trading arrangements or outside of plans may lead to an 
increase in insider trading, compared to the amendments. It also may 
increase investor effort to perform due diligence on non-Rule 10b5-1 
trading arrangements and trades outside of plans to assess the risk of 
trading against an informed insider. Moreover, rescinding Rule 10b5-
1(c)(1) may hinder issuers' efforts to develop and implement corporate 
governance practices for trading arrangements that comply with 
securities laws and regulations. We expect that the new Item 408 
disclosure requirements, discussed in detail in Section V.C below, will 
partly mitigate incentives to engage in insider trading under all 
trading arrangements, including trading

[[Page 80408]]

arrangements that are not reliant on Rule 10b5-1(c)(1) under this 
alternative.
---------------------------------------------------------------------------

    \470\ See, e.g., letter from Better Markets.
    \471\ See supra note 442 and accompanying and following text.
---------------------------------------------------------------------------

    As another alternative, we could impose some, but not all, of the 
new conditions to the affirmative defense. This alternative would lower 
the aggregate costs of the rule and preserve greater flexibility than 
the amendments, decreasing the costs discussed in the case of each of 
the specific provisions. However, due in part to their expected 
synergy, this alternative would make the combined set of amendments 
less effective at curbing insider trading behavior under Rule 10b5-
1.\472\
---------------------------------------------------------------------------

    \472\ As discussed in Section V.B.2 above, in particular, for 
officers and directors, the certification condition is expected to 
complement the effects of the cooling-off period, which, in turn, is 
expected to work in tandem with the exclusion of multiple 
overlapping plans from Rule 10b5-1(c)(1) to possibly prevent a 
portion of potentially opportunistic plan cancellations based on 
MNPI.
---------------------------------------------------------------------------

    With respect to the cooling-off period for officers and directors, 
the Commission could adopt a shorter or longer cooling-off period.\473\ 
A shorter cooling-off period for officers and directors (such as the 
30-day minimum cooling-off period that the final amendments apply to 
persons other than the issuer that are not officers or directors) could 
reduce some of the costs of a cooling-off period and preserve greater 
flexibility for officers and directors, compared to the amendments, but 
it would increase the risk of officers' and directors' trading based on 
MNPI. Conversely, a longer cooling-off period for officers and 
directors (such as the 120-day minimum cooling-off period proposed for 
officers and directors) could increase costs to officers and directors 
and limit flexibility, compared to the amendments, but it may further 
decrease the risk of officers' and directors' trading based on MNPI. As 
another alternative, we could specify a minimum cooling-off period for 
officers and directors that extends one trading day past the filing or 
furnishing of the issuer's next earnings announcement covering at least 
one fiscal quarter (and not include a minimum 90-day cooling-off period 
for officers and directors).\474\ Such a variable-length cooling-off 
period would, in most cases, be shorter than the cooling-off period for 
officers and directors under the final amendments. This alternative 
also would introduce much greater variability in the permissible 
duration of the minimum cooling-off period for officers and directors, 
which may require incrementally greater effort from investors seeking 
to evaluate the timing of officer and director trades. Compared to the 
final amendments, it would also not be as effective as the adopted 
approach in discouraging trading on MNPI that is not tied to quarterly 
results.\475\ A more detailed discussion of the costs and benefits of a 
cooling-off period that would be magnified or reduced, respectively, 
under these alternatives is included in Sections V.B.2.i and V.B.3.i. 
The discussed effects of the alternatives would also depend on whether 
they differ from existing, voluntary cooling-off period practices of 
issuers.\476\
---------------------------------------------------------------------------

    \473\ See supra note 418 (discussing suggestions for three-month 
and four- to six-month cooling-off periods); see also supra note 384 
and following text (noting that at over three-quarters of surveyed 
respondents, the cooling-off period was 60 days or less); supra note 
56 (suggesting a 30-day cooling-off period); letter from Cravath 
(suggesting a cooling-off period of the later of (1) 45-days after 
the adoption of the Rule 10b5-1 trading plan and (2) the second 
trading day following the next publication of the issuer's financial 
results for a completed fiscal period); supra note 58 (suggesting a 
cooling-off period not exceeding 90 days); supra note 48 (supporting 
the proposed 120-day cooling-off period); letter from CII 
(recommending a cooling-off period of four to six months).
    \474\ See letter from Davis Polk.
    \475\ For example, one study finds that ``specific disclosures 
are associated with subsequent negative news events that may not be 
impounded in short-term earnings . . . approximately 25% of the 
specific-disclosure sample exhibits a single news event, not related 
to earnings, for which the three-day market-adjusted return falls 
between 10% and 75%, within an average 140 calendar days of 
disclosure. These news events include exchange-imposed stock trade 
suspension, drug trial failure, and announcement of the intent to 
acquire another firm.'' See M. Todd Henderson et al., supra note 19.
    \476\ See supra notes 379 through 384 and accompanying and 
preceding text.
---------------------------------------------------------------------------

    The final amendments include a 30-day cooling-off period for 
persons other than the issuer that are not officers or directors. As an 
alternative, the Commission could lengthen the cooling-off period or 
shorten the cooling-off period applicable to such persons. As another 
alternative, the Commission could eliminate the cooling-off period for 
persons other than the issuer that are not officers or directors (for 
instance, only applying cooling-off periods to officers and directors, 
as proposed). Including a longer cooling-off period for persons other 
than the issuer that are not officers or directors (such as the longer 
cooling-off period applicable to officers and directors) would increase 
the costs to the affected plan participants and limit their flexibility 
(as discussed in greater detail in Section V.B.3.i above), compared to 
the amendments, but it may further decrease the risk of the affected 
plan participants' trading based on MNPI. Conversely, shortening or 
eliminating the cooling-off period applicable to persons other than the 
issuer that are not officers or directors could reduce costs (discussed 
in greater detail in Section V.B.3.i above) and preserve greater 
flexibility for the affected plan participants, compared to the 
amendments, but it would increase the risk of the affected plan 
participants' trading based on MNPI. The effects of this alternative 
would be smaller than discussed to the extent that persons other than 
officers and directors may be less likely to trade under Rule 10b5-
1.\477\
---------------------------------------------------------------------------

    \477\ But see supra note 424.
---------------------------------------------------------------------------

    As an alternative to including the certifications of officers and 
directors in Rule 10b5-1 plan documents, we could provide for the 
certification to be made to the issuer in a separate document and 
retained for ten years, as proposed. Compared to the amendments, this 
alternative could result in incrementally greater costs for officers 
and directors, to the extent that they do not presently make 
representations separately to the issuer. This alternative also could 
result in additional costs for issuers to the extent that they decide 
to establish new processes and systems to accept officer and director 
certifications. In turn, due to the employer relationship between the 
issuer and its officers and the fiduciary relationship between the 
issuer and its directors, a condition that would require officers and 
directors to make a certification to the issuer under this alternative 
could be marginally more effective in reminding them of their existing 
obligations with respect to MNPI, compared to the amendments. The 
potential benefit of the alternative compared to the amendments would 
be decreased if officers and directors already comply with their MNPI 
obligations under the existing rule and market practices.
    The amendments restrict the availability of the affirmative defense 
for multiple overlapping Rule 10b5-1 trading arrangements for open-
market trades. As an alternative, we could allow multiple overlapping 
plans but limit their number (e.g., to two or three), limit the 
provisions to no more than one plan pertaining to purchases and one 
plan pertaining to sales, or provide other exceptions. These 
alternatives could preserve greater flexibility, compared to the 
amendments, and lower costs for plan participants that have multiple 
accounts or trading arrangements through which they trade in the 
company stock. However, these alternatives could introduce greater 
complexity in companies' oversight of insiders' multiple overlapping 
plans and potentially present a greater risk of insider trading, 
compared to the amendments (to the extent not mitigated by the other 
provisions that we are

[[Page 80409]]

adopting, including certifications, the amended good faith condition, 
cooling-off periods, and the disclosure requirements). In particular, 
the option to maintain multiple, overlapping plans concurrently 
facilitates the ability to selectively cancel one of the plans based on 
MNPI, without being subject to a cooling-off period with respect to the 
remaining plans' trades. The economic effects of this alternative may 
be less significant to the extent that companies already may disallow 
the use of multiple overlapping plans,\478\ or allow these insiders to 
maintain both trading arrangements not reliant on Rule 10b5-1(c)(1) and 
Rule 105b-1 trading arrangements.
---------------------------------------------------------------------------

    \478\ See supra note 431 and accompanying text.
---------------------------------------------------------------------------

    The amendments limit the availability of the affirmative defense in 
the case of single-trade Rule 10b5-1 plans of persons other than the 
issuer to one such trading arrangement in any twelve-month period. As 
an alternative, we could disallow single-trade trading arrangements 
under Rule 10b5-1(c)(1) altogether. Compared to the final rule, this 
alternative could marginally reduce the likelihood that plan 
participants would be able to profit from a ``one-off,'' ad hoc trade 
based on previously undisclosed MNPI while availing themselves of the 
protections of the Rule 10b5-1(c)(1) affirmative defense. However, the 
incremental benefit of this alternative, compared to the final rule, 
may be attenuated if insiders relying on single-trade plans once in a 
twelve-month period are largely driven by a one-time liquidity need or 
financial hardship, or if they are effectively deterred from using MNPI 
by other Rule 10b5-1 provisions. In turn, this alternative would also 
significantly limit the flexibility and impose additional costs on 
insiders with a legitimate one-time, ad hoc liquidity need, compared to 
the final rule.

C. Disclosure of Trading Arrangements and Policies and Procedures in 
New Item 408 of Regulation S-K and Mandatory Rule 10b5-1 Checkbox in 
Amended Forms 4 and 5

    The new Item 408(a) of Regulation S-K will require quarterly 
disclosures, in Form 10-Q and Form 10-K, of the adoption or 
termination,\479\ and the material terms of Rule 10b5-1 and non-Rule 
10b5-1 trading arrangements by directors and Rule 16a-1(f) officers. In 
a change from the proposal, price terms are excluded from the scope of 
material terms required to be disclosed under Item 408(a). New Item 
408(b) will require an issuer to file its insider trading policies and 
procedures as an exhibit to its annual report on Form 10-K, which will 
be linked in the exhibit index (as discussed in greater detail in 
Section II.B above). Similar requirements will apply to FPIs that file 
annual reports on Form 20-F via new Item 16J.\480\ The new Item 408(a), 
408(b)(1), and analogous Form 20-F disclosures are required to be 
tagged using a structured data language (specifically, Inline XBRL). As 
discussed in Section II.B.1.c above, in response to a recommendation by 
some commenters, at this time, we are not adopting the proposed rule to 
require corresponding disclosure regarding trading arrangements of the 
issuer.
---------------------------------------------------------------------------

    \479\ New paragraph (c)(1)(iv) states that any modification or 
change to the amount, price, or timing of the purchase or sale of 
the securities underlying a Rule 10b5-1 plan is a termination of 
such plan and the adoption of a new plan.
    \480\ The discussion in this section referring to Item 408(b) 
also extends to the economic effects of related amendments to Form 
20-F that apply similar requirements to Form 20-F filers.
---------------------------------------------------------------------------

    In addition, we are amending Forms 4 and 5 to add a checkbox to 
indicate that a reported transaction was intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c)(1) and require 
disclosure of the date of adoption of the trading plan. In a change 
from the proposal, we are not adopting the optional checkbox for non-
Rule 10b5-1 plans.
1. Baseline and Affected Parties
    The new Item 408(a) disclosure requirements regarding the adoption, 
modification, termination, and material terms of officer and director 
trading arrangements apply to annual and quarterly reports on Forms 10-
K and 10-Q. During calendar year 2021, based on the analysis of EDGAR 
filings, we estimate that there were approximately 7,200 filers with 
annual reports on Form 10-K and/or quarterly reports on Form 10-Q or 
amendments to them.\481\ The new Item 408(b) disclosure requirements 
regarding insider trading policies and procedures will apply to annual 
reports on Forms 10-K and proxy and information statements on Schedules 
14A and 14C. Disclosure requirements similar to Item 408(b) will also 
apply to FPIs that file Form 20-F. During calendar year 2021, based on 
the analysis of EDGAR filings, we estimate that there were 
approximately 6,300 \482\ filers of annual reports on Form 10-K, proxy 
or information statements, or amendments to them, and, in addition, 
approximately 800 filers of annual reports on Form 20-F (or amendments 
to them).\483\
---------------------------------------------------------------------------

    \481\ The estimate excludes registered investment companies and 
asset-backed securities issuers, which will not be subject to the 
Item 408 disclosures.
    \482\ The difference between this number of filers of annual 
reports on Form 10-K, proxy or information statements, or amendments 
to them, and the above number of filers of annual reports on Form 
10-K and/or Form 10-Q, or amendments to them, is largely 
attributable to the fact that, given that calendar year 2021 was an 
active year for initial public offerings, a number of new reporting 
issuers may have filed a Form 10-Q during 2021 but not a Form 10-K 
as it was not due until 2022.
    \483\ See supra note 481.
---------------------------------------------------------------------------

    Item 408(a) requirements will affect all issuers whose officers or 
directors have Rule 10b5-1 or non-Rule 10b5-1 trading arrangements as 
well as all officers and directors whose trading arrangements will now 
be subject to public disclosure by the issuer.\484\
---------------------------------------------------------------------------

    \484\ See supra Section V.B.1.
---------------------------------------------------------------------------

    Item 408(b) requirements will affect all issuers subject to the 
requirements, as well as issuers, directors, officers, and employees 
that engage in trading subject to the disclosed policies and 
procedures.
    The Rule 10b5-1 checkbox requirement will apply to all filers of 
Forms 4 and 5 (including officers and directors as well as other 
filers). During calendar year 2021, we estimate that there were 
approximately 54,000 such filers.\485\
---------------------------------------------------------------------------

    \485\ The estimate is based on filings of Forms 4 and 5 during 
calendar year 2021 in Thomson Reuters/Refinitiv insiders dataset 
(version retrieved June 27, 2022).
---------------------------------------------------------------------------

2. Benefits
    New Item 408 and Item 16J will benefit investors by providing 
greater transparency about officer and director Rule 10b5-1 and non-
Rule 10b5-1 trading arrangements, as well as governance practices with 
respect to insider trading.\486\ This enhanced transparency may enable 
better informed voting and investment decisions and more efficient 
allocation of investor capital. The timing of trading arrangement 
adoptions and terminations by officers and directors, as well as a 
description of the material terms of the trading arrangements, is 
expected to enhance the value of existing trade disclosures, aiding 
investors in obtaining a more accurate valuation of the issuer's shares 
and making more informed voting and investment decisions, as supported 
by various commenters.\487\ These informational benefits should be 
considered in the context of the existing baseline (which includes 
partial revelation of information contained in officer and director 
trades as part of Section 16

[[Page 80410]]

reporting).\488\ Further, informational benefits of the Item 408(a) 
disclosure may be low to the extent that plan trades are motivated by 
liquidity needs and similar considerations rather than by MNPI 
(especially after the amendments to Rule 10b5-1, such as the cooling-
off period condition, aimed to reduce potential for MNPI-based trading 
under such trading arrangements). Finally, in a change from the 
proposal, price terms will be outside the scope of the required Item 
408(a) disclosure of the terms of trading arrangements. This change 
will reduce the informational benefits of Item 408(a) to investors, 
compared to the proposed amendments.
---------------------------------------------------------------------------

    \486\ See supra Section V.A.
    \487\ See supra note 209.
    \488\ See, e.g., letters from Sullivan and Wilson Sonsini 
(indicating that the proposed disclosures would be duplicative of 
the disclosures that would be required under the proposed disclosure 
amendments to Forms 4 and 5); see also letters from Cravath and 
Shearman (indicating that details of non-Rule 10b5-1 trades already 
are disclosed on beneficial ownership forms). While beneficial 
ownership forms contain information about individual trades, some of 
which pertain to Rule 10b5-1 transactions, the information required 
in new Item 408(a) is significantly more detailed and comprehensive, 
which is expected to provide information benefits to investors above 
and beyond those that could be obtained today from the analysis of 
Section 16 reports.
---------------------------------------------------------------------------

    The requirement that these data points be tagged in a structured 
data language (specifically, in Inline XBRL) is expected to facilitate 
access to, and analysis of, the disclosures by investors, potentially 
leading to more useful and timely insights, consistent with the 
suggestions of several commenters.\489\ In particular, structuring the 
disclosures about trading arrangements under Item 408(a) will enable 
automated extraction of granular data on such trading arrangements, 
allowing investors to efficiently perform large-scale analyses and 
comparisons of trading arrangements across issuers and time periods. 
Structured data on trading arrangements may also be efficiently 
combined with other information that is available in a structured data 
language in corporate filings (e.g., information on insider sales and 
purchases of securities) and with market data contained in external 
machine-readable databases (e.g., information on daily share prices and 
trading volume). The use of a structured data language is also expected 
to enable considerably faster analysis of the disclosed data by 
investors. Structuring the narrative disclosure on insider trading 
policies and procedures required under Item 408(b)(1) of Regulation S-K 
in Inline XBRL is expected to make it easier for investors to extract 
information from the disclosures about insider trading policies and 
procedures, compare these disclosures against prior periods, and 
perform targeted artificial intelligence and machine learning 
assessments of specific narrative disclosures about insider trading 
policies and procedures.
---------------------------------------------------------------------------

    \489\ See supra note 319.
---------------------------------------------------------------------------

    We expect these benefits to result from disclosure of terminations, 
changes in material plan terms, and adoptions of trading arrangements. 
A termination or a change in material terms of a prior trading 
arrangement may similarly convey information about the views of the 
officers or directors regarding the issuer's future outlook and share 
price. Further, the timing of trading arrangement adoptions or 
terminations, relative to the issuance of other corporate disclosures, 
may provide investors with valuable insight into potential insider 
trading under such trading arrangements, and thus associated conflicts 
of interest that may erode firm value. We expect such benefits from the 
disclosure of both Rule 10b5-1 and non-Rule 10b5-1 trading 
arrangements. Moreover, by drawing market scrutiny to the adoption and 
termination of trading arrangements, enhanced disclosure is expected to 
deter insider abuses of trading arrangements based on MNPI. This 
scrutiny is expected to reduce insider trading, benefiting investors 
and decreasing the economic costs and inefficiencies associated with 
insider trading, as discussed in Section V.A above. The described 
benefits may be low or not realized in cases of trading arrangements 
initiated to meet officers' and directors' liquidity needs or for other 
reasons unrelated to MNPI.
    The requirement to provide disclosure regarding insider trading 
policies and procedures is expected to provide investors with valuable 
information about governance practices with respect to insider trading 
of issuer stock. It will allow investors to better understand the 
policies and procedures, if any, that guide issuers in which they 
invest and the conduct of officers, directors, and employees of those 
issuers and the issuers themselves, including whether, and if so, how, 
issuers adopt standards that are reasonably necessary to promote (i) 
honest and ethical conduct, including the handling of conflicts of 
interest, (ii) full, fair, and accurate disclosure in periodic reports, 
including the potential mitigation of pricing distortions from insider 
trading, and (iii) compliance with applicable government rules and 
regulations, including the prohibition on insider trading. The absence 
or presence, and the nature of, such policies and procedures can inform 
investors about the likelihood of use of MNPI by these parties and, 
thus, the likelihood of incurring the economic costs of insider trading 
discussed in Section V.A above. It will help investors better 
understand how issuers protect their confidential information--which 
``qualifies as property to which the company has a right of exclusive 
use''--as well as guard against the misappropriation of that 
information.\490\ Disclosure regarding insider trading policies and 
procedures could also aid shareholders' voting and investment 
decisions. Moreover, requiring this disclosure would provide greater 
consistency in disclosures across issuers to the extent that they 
already disclose this type of information. In addition, the 
anticipation of market scrutiny following mandatory disclosure may 
incentivize issuers without specific insider trading policies to 
implement such policies and procedures (with some issuers possibly 
converging to a standardized insider trading policy). Such revisions to 
insider trading policies are, in turn, expected to reduce the 
likelihood of insider trading and the associated economic costs 
discussed in Section V.A above, particularly at issuers with weaker 
governance practices with respect to insider trading.
---------------------------------------------------------------------------

    \490\ See United States v. O'Hagan, 521 U.S. 642, 654 (1997) 
(recognizing that the undisclosed misappropriation of MNPI in breach 
of a duty of trust and confidence is ``fraud akin to 
embezzlement'').
---------------------------------------------------------------------------

    The amendments adding a Rule 10b5-1 plan checkbox to Forms 4 and 5 
will benefit investors by providing transaction-specific disclosures of 
sales and purchases under Rule 10b5-1 trading arrangements. The 
checkbox disclosure will allow investors easier and timelier access to 
information about trades under Rule 10b5-1. This information will 
enable investors to more comprehensively identify insider trading 
pursuant to Rule 10b5-1 trading arrangements, as well as provide 
greater consistency in the disclosure of Rule 10b5-1 trades. Today, the 
disclosure of a purchase or sale under a Rule 10b5-1 trading 
arrangement in Forms 4 and 5 is voluntary, resulting in a lack of 
consistent and comprehensive information about such trades. Making this 
checkbox mandatory will allow investors to more readily interpret 
information in Forms 4 and 5.
    The mandatory Rule 10b5-1 checkbox disclosures, in combination with 
the quarterly disclosure regarding adoptions and terminations of 
officers' and directors' Rule 10b5-1 trading arrangements, will provide 
greater transparency to investors regarding the use of Rule 10b5-1 
trading arrangements for trading, in line with the suggestions of 
several

[[Page 80411]]

commenters.\491\ Such information will provide investors with valuable 
context for interpreting other corporate disclosures in valuing the 
companies' shares and making informed voting and investment decisions. 
Because Forms 4 and 5 would continue to use a structured data language, 
investors could extract and analyze comprehensive information about 
trades under Rule 10b5-1 trading arrangements across multiple time 
periods, individuals, and issuers.
---------------------------------------------------------------------------

    \491\ See, e.g., letters from ACCO, CII, Quinn, and Cravath.
---------------------------------------------------------------------------

3. Costs
    First, we consider the direct (compliance-related) costs of the 
disclosure requirements for insiders and companies. Such costs include 
preparing the disclosure and gathering the information required to 
comply with the new disclosure requirements. Such costs are expected to 
be lower for companies that already disclose some information about 
Rule 10b5-1 trading arrangements and insider trading policies and 
procedures. Officers and directors are likely to have information about 
the adoption, modification, termination, duration, and number of 
securities to be sold through their trading arrangements readily 
available and/or accessible. However, issuers may not be systematically 
collecting such information from officers and directors today.\492\ In 
those cases, issuers will incur additional cost to establish processes 
and systems to collect information about officers' and directors' 
trading arrangements required to comply with the new Item 408(a) 
disclosure requirement.\493\ Officers and directors will incur an 
incremental cost to follow internal processes their companies 
establish, if any, to gather information about officer and director 
trading arrangements for the Item 408(a) disclosure. Issuers are likely 
to have information about their insider trading policies and procedures 
required to comply with Item 408(b) readily available. The tasks of 
identifying, and preparing a disclosure of, such policies and 
procedures (and, for issuers without such policies and procedures, the 
reasons for not having them) are expected to result in some additional 
direct costs; \494\ however, such costs are likely to be relatively 
small.\495\
---------------------------------------------------------------------------

    \492\ See, e.g., letter from Sullivan (expressing concern that 
requiring disclosure of this information would impose a significant 
burden on issuers).
    \493\ Id.
    \494\ See, e.g., letter from Dow (expressing concern about the 
administrative burden of the Item 408(b) disclosure requirement).
    \495\ The final amendments may impose higher additional costs on 
FPIs. Such additional costs would be relatively small to the extent 
an FPI already discloses similar information under its home country 
rules.
---------------------------------------------------------------------------

    In a modification from the proposal, the final rules do not require 
disclosure of the issuer's policies and procedures in the body of the 
annual report, proxy statement, or information statement. Instead, they 
require registrants to disclose whether they have adopted insider 
trading policies and procedures governing the purchase, sale, and other 
dispositions of their securities by directors, officers, and non-
executive employees or the registrant itself that are reasonably 
designed to promote compliance with insider trading laws, rules, and 
regulations, and any listing standards applicable to the registrant. If 
a registrant has not adopted such insider trading policies and 
procedures, it will be required to explain why it has not done so. 
These disclosures will be required in annual reports on Form 10-K and 
proxy and information statements on Schedules 14A and 14C. FPIs will be 
required to provide analogous disclosure in their annual reports on 
Form 20-F. Registrants will also be required to file a copy of their 
insider trading policies and procedures as an exhibit to their annual 
reports on Form 10-K or 20-F. If all of the registrant's insider 
trading policies and procedures are included in its code of ethics (as 
defined in Item 406(b)) and the code of ethics is filed as an exhibit 
pursuant to Item 406(c)(1), a hyperlink to that exhibit, accompanying 
the issuer's disclosure as to whether it has insider trading policies 
and procedures, would satisfy this component of the exhibit filing 
requirement. Requiring registrants to file their insider trading 
policies and procedures as an exhibit would facilitate investor access 
to the document as it would be available online through EDGAR and 
hyperlinked in the exhibit index. These modifications also may result 
in improved readability of the disclosure in the main body of the 
filing and incrementally facilitate compliance, compared to the 
proposed requirement to disclose the policies and procedures in the 
body of the filing.
    The requirement to tag the new Item 408(a) and Item 408(b)(1) 
disclosures in Inline XBRL will impose incremental compliance costs on 
issuers. Such costs are expected to be modest, because issuers affected 
by the Inline XBRL requirements (including SRCs) are already required 
(or, in the case of certain business development companies, will be 
required no later than February 2023) to use Inline XBRL to comply with 
other disclosure obligations.\496\ Moreover, the limited scope of the 
disclosure will likely require a relatively narrow-in-scope taxonomy of 
additional tags (compared to the significantly more extensive 
taxonomies used for financial statement disclosure tagging 
requirements), thus limiting the initial and ongoing costs of complying 
with the tagging requirement.
---------------------------------------------------------------------------

    \496\ See Inline XBRL Filing of Tagged Data, Release No. 33-
10514 (June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]; 
Securities Offering Reform for Closed-End Investment Companies, 
Release No. 33-10771 (Apr. 8, 2020) at 33318 [85 FR 33290 (Jun. 1, 
2020)].
---------------------------------------------------------------------------

    Next, we discuss the indirect costs of Item 408 and Item 16J. 
Indirect costs include potential reputational and investor relations 
costs associated with the disclosure. For example, issuers that have 
not implemented specific insider trading policies and procedures, as 
well as issuers at which the adoption, modification, or termination of 
officer and director Rule 10b5-1 and non-Rule 10b5-1 trading 
arrangements appears to correlate to the release of MNPI, may 
experience reputational and legal costs and a weakening of investor 
confidence in their corporate governance after public disclosure of 
this information. Relatedly, officers and directors that adopt, modify, 
or terminate a Rule 10b5-1 or non-Rule10b5-1 trading arrangement around 
the release of MNPI may also suffer reputational or legal costs from 
the public disclosure of this information. To the extent that the 
amendments to Rule 10b5-1(c)(1), such as the cooling-off period, 
eliminate or deter insider trading based on MNPI under Rule 10b5-1 
trading arrangements, these legal and reputational costs of public 
disclosure may be minimal in cases of such trading arrangements.
    The information in the domestic issuers' quarterly Item 408(a) 
disclosure of the material terms of officers' and directors' Rule 10b5-
1 and non-Rule 10b5-1 trading arrangements, which may benefit investors 
and other market participants, may cause the affected officers and 
directors to incur costs to the extent that it reveals their future 
trading plans to other market participants--a concern expressed by 
various commenters.\497\ The application of a cooling-off period may 
enable other market participants to obtain some

[[Page 80412]]

information \498\ about the timing and terms of the officer's or 
director's Rule 10b5-1 trading arrangement before trading begins, 
potentially enabling other market participants to incorporate this 
information in their own trading strategy before the officer's or 
director's trading arrangement may be executed. For Rule 10b5-1 trading 
arrangements relying on a simple trading strategy (e.g., equally-sized, 
equally-spaced periodic transactions), the combination of the Item 
408(a) disclosure and the Rule 10b5-1 checkbox on Form 4 may enable 
investors to gauge some information about the officer's or director's 
trading strategy. This could lead to a potentially less favorable price 
than the officer or director might otherwise have obtained because 
other market participants are reacting to the officer's or director's 
trading strategy.\499\ Officers and directors may continue to use limit 
orders to partly insure against an unfavorable price impact of the Item 
408(a) disclosure, if any. For planned trades motivated by liquidity 
needs and other considerations that do not involve MNPI (especially 
after the amendments to Rule 10b5-1 aimed to reduce potential for MNPI-
based trading under such plans), the costs to officers and directors 
from the revelation of Item 408(a) information to market participants 
will likely be low. Moreover, such costs of Item 408(a) should be 
considered in the context of the baseline, under which officers' and 
directors' Form 4 filings already reveal some information about their 
trades to the market. Importantly, in a change from the proposal, the 
amendments exclude price terms of the trading arrangement from the 
scope of Item 408(a), which should significantly alleviate the 
potential costs to officers and directors.\500\
---------------------------------------------------------------------------

    \497\ See supra note 216.
    \498\ The Item 408(a) disclosure is limited to whether any 
director or officer adopted or terminated a Rule 10b5-1 plan or non-
Rule 10b5-1 trading arrangement and a description of its material 
terms, including the name of the officer or director, the adoption 
or termination date, plan duration, and the number of shares to be 
traded. Price terms are not required to be disclosed.
    \499\ However, the described effects may be modest due to the 
generally small size of individual officer and director trades. 
Further, even the revelation of large predictable planned trades may 
not result in front-running. See Hendrik Bessembinder et al., 
Liquidity, Resiliency and Market Quality Around Predictable Trades: 
Theory and Evidence, 121 J. Fin. Econ. 142 (2016) (showing, in a 
setting with large and predictable exchange-traded fund trades, that 
``traders supply liquidity to rather than exploit predictable trades 
in resilient markets'' and not finding ``evidence of the systematic 
use of predatory strategies'').
    \500\ See supra note 218 (noting that various commenters 
expressed concerns that disclosure of pricing information and other 
details of a Rule 10b5-1 trading arrangement could impose costs on 
issuers and their insiders). But see letter from Quest (stating that 
the final rule should not require disclosure of the number of shares 
covered by a trading arrangement and the duration of the 
arrangement) and letters from Fenwick and Shearman (recommending 
that the required disclosures should be limited to the person 
adopting the plan, the date of adoption or termination, and 
duration). While we recognize that the volume and duration 
information may potentially be informative to other market 
participants, we expect the potential costs to officers and 
directors from the disclosure of such information to be modest in 
the absence of pricing information.
---------------------------------------------------------------------------

    Finally, some issuers may implement new insider trading policies 
and procedures or update existing insider trading policies and 
procedures in anticipation of the Item 408(b) disclosure requirement 
and the potential public scrutiny of their policies and procedures, if 
any. Additional restrictions on insider trading arrangements adopted in 
anticipation of the public disclosure could result in economic costs 
for insiders and, in some instances, changes in insider compensation 
and insider equity holdings that reduce their exposure to issuer stock 
(broadly in line with the discussion of the potential indirect costs of 
restrictions on insider use of trading arrangements in Section V.B.3 
above). Costs incurred by issuers would be borne by their existing 
shareholders.
    Insiders are likely to have information about which of their trades 
were executed pursuant to a Rule 10b5-1 trading arrangement readily 
available, likely resulting only in small direct costs of providing 
checkbox disclosure and the date of adoption of the trading arrangement 
on Forms 4 and 5. Systematic identification of trades under Rule 10b5-1 
trading arrangements on Form 4 under the amendments, combined with 
existing time frames for Form 4 reporting (and for officers and 
directors, the new disclosures in Item 408(a)), may enable some market 
participants to infer the likely trading strategy employed by the 
insider under a Rule 10b5-1 trading arrangement. While this information 
may benefit investors and other market participants, it may result in 
the indirect cost of information spillovers to market participants, 
which may contribute to an unfavorable price movement prior to the 
execution of all trades under the plan.\501\ Such indirect costs will 
be lowest for insiders other than officers and directors given that 
they are not subject to Item 408(a) and for insiders who use Rule 10b5-
1 trading arrangements largely for liquidity rather than due to 
information considerations (especially in conjunction with the 
amendments to Rule 10b5-1(c)(1) that reduce the potential for MNPI-
based trades). Insiders that already voluntarily disclose Rule 10b5-1 
use in their filings of Forms 4 and 5 will not incur these direct and 
indirect costs.
---------------------------------------------------------------------------

    \501\ But see supra note 499.
---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the amendments to reduce the information asymmetry 
between insiders and outside investors by providing more granular and 
timelier detail about officers' and directors' trading arrangements and 
issuers' insider trading policies and procedures. The reduction in 
information asymmetry as a result of the additional disclosure would 
result in more informationally efficient stock prices. Because 
disclosure of directors' and officers' trading arrangements and insider 
trading policies and procedures can inform investors about insider 
incentives and governance practices, which could affect shareholder 
value as discussed in Section V.A above, the additional disclosure 
about trading arrangements and insider trading policies and procedures 
could also better inform investment decisions (enabling more efficient 
allocation of capital in investor portfolios) and shareholder voting 
decisions.
    Importantly, we expect the amendments to draw market scrutiny to 
officers' and directors' Rule 10b5-1 and non-Rule 10b5-1 trading 
arrangements, decreasing the ability of insiders to trade on MNPI 
through such trading arrangements. As discussed in Section V.B.4 above, 
this potential scrutiny should reduce insiders' incentive conflicts 
associated with insider trading. In particular, it would decrease 
incentives for inefficient corporate investment decisions and other 
corporate decisions. Further, it would decrease insiders' incentives to 
influence corporate disclosures, resulting in timelier and higher-
quality disclosures that enable more informationally efficient share 
prices and more efficient allocation of capital in investor portfolios.
    A lower risk of trading against an informed insider is expected to 
increase investor confidence and the willingness of market participants 
to buy and trade in the issuer's shares. These effects would indirectly 
make it easier for the issuer to raise capital from investors. Issuers 
that disclose robust insider trading policies and procedures in 
particular may elicit greater investor confidence, as well as interest 
from investors seeking issuers with stronger corporate governance 
practices,

[[Page 80413]]

resulting in capital formation benefits for such issuers.
    Finally, in line with the discussion in Section V.B.4 above, the 
amendments may affect competition. Decreasing the ability of insiders 
and issuers to trade on MNPI will weaken their competitive edge in 
trading, promoting competition among other investors in the market for 
the issuer's shares. A lower risk of an insider with a significant 
private information advantage trading the issuer's shares will 
strengthen the incentive of other market participants to trade those 
shares and compete in gathering and processing information about the 
issuer. Disclosure of insider trading policies and procedures will also 
enable investors to access and compare insider trading policies and 
procedures across issuers, potentially enhancing issuers' incentives to 
compete in, and establish a reputation for, having strong governance 
practices in the area of insider trading.
    To the extent that the disclosure requirements impose a fixed cost 
on issuers, they would have a negative competitive effect on smaller 
issuers subject to the amendments and issuers that do not already 
provide disclosure regarding insider trading policies and procedures as 
well as Rule 10b5-1 and non-Rule 10b5-1 trading arrangements of their 
officers and directors. The final amendments defer by six months the 
date of compliance with the additional disclosure requirements for 
SRCs,\502\ potentially mitigating some of the adverse competitive 
effects of the amendments. The Item 408(a) disclosure requirements will 
not apply to FPIs, potentially placing them at a relative competitive 
advantage to domestic filers.\503\ With that exception, because the 
disclosure amendments will apply broadly across domestic public 
companies, generally, we do not anticipate it to result in meaningful 
competitive disparities in the labor market for executive talent.\504\
---------------------------------------------------------------------------

    \502\ Based on staff review of EDGAR filings for calendar year 
2021, approximately 3,900 of the filers subject to the Item 408(a) 
amendments and 3,200 of the filers subject to Item 408(b) amendments 
are SRCs and thus will be eligible for the extended compliance date 
under the amendments.
    \503\ FPIs that file annual reports on Form 20-F will be subject 
to requirements similar to Item 408(b). Further, FPIs listed on U.S. 
exchanges will remain subject to insider trading laws and exchange 
listing standards.
    \504\ We do not expect significant effects on the labor market 
competition for executive talent between public and private 
companies. While the new disclosures will increase costs for public 
companies and, indirectly, their officers and directors, these 
amendments are likely to have only a marginal effect on the overall 
tradeoff of being an officer or director at a public company 
(including the liability risk and costs of public scrutiny of the 
insider's holdings, trades, and other actions).
---------------------------------------------------------------------------

    All of the effects described above will be smaller to the extent 
that some issuers already provide disclosure regarding their insider 
trading policies and procedures and the trading arrangements of their 
officers and directors today.
5. Reasonable Alternatives
    The amendments require quarterly disclosure related to trading 
arrangements of officers and directors and disclosure of issuers' 
insider trading policies and procedures, if any, as an exhibit to their 
annual reports, proxy statements, and information statements. As an 
alternative, we could modify the scope and granularity of the required 
disclosure of officer and director trading arrangements or insider 
trading policies and procedures. The alternatives of expanding 
(narrowing) the scope of the disclosures required by new Item 408 could 
potentially provide greater (lesser) detail to investors, enabling 
better (less) informed investment decisions and more (less) accurate 
assessment of the risk of the use of MNPI for informed trading through 
trading plans compared to the amendments. However, the alternative of 
expanding (narrowing) the scope of the disclosure could also increase 
(decrease) disclosure costs (discussed in greater detail in Section 
V.C.3 above) compared to the amendments. As another alternative, we 
could permit the Item 408(b) requirement to be satisfied by posting the 
insider trading policies and procedures on the issuer's website, as 
suggested by some commenters.\505\ Compared to the proposal, this 
approach could marginally ease compliance for issuers that prefer to 
post the material on their website rather than file it as an exhibit. 
However, compared to the proposal, this alternative would marginally 
increase investor effort required to access this information as the 
disclosure (including historical versions of the policies and 
procedures) would no longer be available online through EDGAR, and 
investors would not be able to follow a hyperlink directly to the EDGAR 
filing exhibit.
---------------------------------------------------------------------------

    \505\ See supra notes 246 and 247.
---------------------------------------------------------------------------

    As another alternative to the quarterly disclosure related to 
trading arrangements, we could require a different frequency of 
disclosure. Requiring more (less) frequent disclosure under Item 408(a) 
would provide timelier (less timely) information to investors about 
trading arrangements but also impose higher (lower) costs on issuers 
and insiders. A more detailed discussion of the benefits and costs of 
the Item 408(a) disclosure is included in Sections V.C.2 and V.C.3 
above.
    As another alternative to the quarterly disclosure requirement, we 
could narrow its scope to include only Rule 10b5-1 trading 
arrangements, consistent with the suggestions of some commenters.\506\ 
Under this alternative, officers and directors with non-Rule 10b5-1 
trading arrangements would not incur the costs of the amendments 
(discussed in detail in Section V.C.3 above). However, investors would 
receive less information about their non-Rule 10b5-1 trading 
arrangements compared to the amendments. This effect on investors would 
be more pronounced in cases where officers and directors forgo Rule 
10b5-1 trading arrangements in favor of non-Rule 10b5-1 trading 
arrangements as a result of the potential increased costs and 
complexity of Rule 10b5-1 trading arrangements under the 
amendments.\507\
---------------------------------------------------------------------------

    \506\ See supra note 222.
    \507\ Some commenters indicated, however, that Item 408(a) 
disclosure of non-Rule 10b5-1 trading arrangements would not be 
informative to investors. See, e.g., letters from Cleary, Cravath, 
Shearman, and Simpson. While we agree that trades under such plans 
are subject to Section 16 reporting, Item 408(a) would require 
information about key material terms of such plans that cannot be 
obtained from examining Section 16 reports alone. Further, although 
non-Rule 10b5-1 officer and director trading arrangements by 
definition do not meet the conditions of the Rule 10b5-1(c)(1) 
affirmative defense, Item 408(a) disclosure of such plans can 
provide valuable additional insight to investors about the future 
trading plans of officers and directors (which, similar to Rule 
10b5-1 plans can also be informative about officers' and directors' 
outlook on the issuer) and potentially inform investment decisions.
---------------------------------------------------------------------------

    As another alternative to the quarterly disclosure requirement, we 
could narrow or expand the scope of information required to be 
disclosed about trading arrangements as suggested by some 
commenters.\508\ For instance, we could only require the disclosure of 
the dates of adoption or termination of the trading arrangement (and 
not require disclosure of the plan duration or the number of shares to 
be traded under the plan) or only require disclosure of the date of 
trading arrangement adoption. Alternatively, we could expand the scope 
of information required to be disclosed to include price terms of the 
trading arrangement, in line with the proposal. Under the alternative 
of narrowing (expanding) the scope of the information required to be 
disclosed, issuers that prepare the Item 408(a) disclosure, as well as 
officers and directors with trading arrangements subject to Item 
408(a), would also incur

[[Page 80414]]

lower (higher) costs (discussed in detail in Section V.C.3 above), 
compared to the amendments. Specifically, narrowing (expanding) the 
scope of the disclosure under Item 408(a) could decrease (increase) 
information spillovers to investors and other market participants and 
potentially decrease (increase) the likelihood of unfavorable price 
movement based on such disclosure prior to the officer's or director's 
own trades, compared to the amendments. In turn, narrowing (expanding) 
the scope of the Item 408(a) disclosure could decrease (increase) the 
information benefits of the disclosure to investors, compared to the 
amendments. The described effects may be attenuated if officers or 
director trades under the trading arrangements subject to the Item 
408(a) disclosure are driven mainly by liquidity rather than 
information considerations.
---------------------------------------------------------------------------

    \508\ See supra notes 219 through 221.
---------------------------------------------------------------------------

    Item 408(a) and Item 408(b)(1) disclosures will be required to be 
tagged using a structured data language (specifically, Inline XBRL). 
Alternatively, we could forgo the tagging requirement (consistent with 
the suggestion of one commenter \509\) or narrow its scope, such as to 
cover only quarterly Item 408(a) disclosures. This alternative would 
provide incremental compliance cost savings for issuers, who would not 
be required to select, apply, and review Inline XBRL tags for the 
disclosure of whether they have insider trading policies and procedures 
in annual reports and proxy and information statements. Such cost 
savings, however, would likely be low given the very limited number of 
Inline XBRL tags that are expected to be needed to tag the new 
disclosures. This alternative would also remove the informational 
benefits to investors that would accrue from facilitating retrieval of 
such disclosures across issuers and time periods, compared to the 
amendments.
---------------------------------------------------------------------------

    \509\ See supra note 320.
---------------------------------------------------------------------------

    Item 408(a) disclosure requirements will only apply to domestic 
filers. Disclosure requirements regarding insider trading policies and 
procedures, however, will apply to both domestic filers (through Item 
408(b)) and FPIs that file Form 20-F.\510\ As an alternative, we could 
exempt Form 20-F filers from this disclosure requirement, as suggested 
by some commenters.\511\ Generally speaking, such an exemption would 
eliminate the direct and indirect costs of the rule (as described in 
detail in Section V.C.3 above) for FPIs. Exempting Form 20-F filers 
also would decrease the amount of information available to investors 
about the insider trading incentives and policies and procedures at 
such issuers, potentially limiting investors' ability to make informed 
decisions with respect to such issuers. This exemption also could lead 
to incrementally greater competitive disparities due to the higher 
compliance burden of domestic issuers with respect to this requirement.
---------------------------------------------------------------------------

    \510\ FPIs will be required to provide analogous disclosure in 
their annual reports pursuant to new Item 16J to Form 20-F.
    \511\ See supra note 249.
---------------------------------------------------------------------------

    As another alternative, we could extend requirements similar to 
Item 408(a) requirements to FPIs that file annual reports on Form 20-F. 
Because such FPIs do not have a quarterly reporting obligation 
equivalent to a Form 10-Q, the incremental benefit of this alternative 
could be relatively more modest due to the less timely disclosure of 
information on trading arrangements, if it were required to be 
disclosed in annual reports.
    In addition, as another alternative, we could exempt SRCs from the 
Item 408(a) requirement, as suggested by one commenter,\512\ rather 
than defer the compliance date for SRCs. Compared to the amendments, 
this alternative would reduce the costs for SRCs, which may be 
disproportionately affected by the fixed component of the compliance 
costs (assuming any of the officers or directors have a trading plan 
reportable under this Item). However, this alternative also could 
prevent investors in such issuers from being able to evaluate trading 
plans and their material terms and potentially result in less informed 
voting and investment decisions, compared to the amendments.
---------------------------------------------------------------------------

    \512\ See letter from MD Bar. Based on staff analysis of EDGAR 
filings for calendar year 2021, we estimate there are approximately 
3,900 unique filers with annual reports on Form 10-K and/or 
quarterly reports on Form 10-Q or amendments thereto (excluding 
asset-backed securities issuers and registered investment companies, 
which will not be subject to the amendments).
---------------------------------------------------------------------------

    The amendments to Forms 4 and 5 add a mandatory Rule 10b5-1 
checkbox and require the disclosure of the date of Rule 10b5-1 plan 
adoption. As an alternative, we also could require this type of 
disclosure on Forms 4 and 5 for trades made under non-Rule 10b5-1 
trading arrangements. This alternative could provide investors with 
more comprehensive information and greater transparency about trades 
under a broader range of trading arrangements. However, to the extent 
that non-Rule 10b5-1 trading arrangements can take various forms, 
requiring trades under such trading arrangements to be identified on 
Forms 4 and 5 separately from trades conducted without a trading 
arrangement under this alternative may provide less meaningful 
information to investors.\513\
---------------------------------------------------------------------------

    \513\ See letters from Cravath and Cleary (noting that the non-
Rule 10b5-1 trading arrangement checkbox would not be informative to 
investors).
---------------------------------------------------------------------------

D. Additional Disclosure of the Timing of Option Grants and Related 
Company Policies and Practices

    The Commission is adopting new Item 402(x) of Regulation S-K to 
enhance the accessibility of information and transparency regarding 
issuers' grants of stock options, SARs, or similar option-like 
instruments before or after the filing of a periodic report, or the 
filing or furnishing of a current report on Form 8-K that contains 
MNPI. As proposed, the amendments would have applied to grants made 
during a period beginning 14 calendar days before and ending 14 
calendar days after the MNPI filing (to include periodic reports on 
Forms 10-K or 10-Q, issuer share repurchases, or current reports on 
Form 8-K that contain MNPI). We are adopting the narrative disclosure 
requirement as proposed and the tabular disclosure requirement with 
several modifications. In a change from the proposal, partly in 
response to commenter feedback,\514\ the amendments sharpen the focus 
of the new table on the data that can help investors evaluate the 
potential presence of spring-loading as well as tailor the trigger 
requirements and shorten the coverage window. The new table will apply 
only to grants made within a period starting four business days before 
and ending one business day after a triggering event. Further, the 
final rules remove from the scope of triggering events the share 
repurchase triggering event and provide that Forms 8-K disclosing the 
grant of a material new option award under Item 5.02(e) do not trigger 
this disclosure.\515\ These changes are consistent with the suggestions 
of commenters to shorten the reporting window for the tabular 
disclosure and remove share repurchase as a triggering event.\516\
---------------------------------------------------------------------------

    \514\ See supra note 297.
    \515\ In a change from the proposal, issuer share repurchases 
will not trigger this disclosure, consistent with the suggestion of 
one commenter. See letter from Sullivan (noting that many issuers 
engage in repurchase activity regularly and, in some instances, 
daily, and that this requirement could pose a substantial burden on 
issuers without any potential benefit to investors). This change is 
expected to decrease the costs of the amendments relative to the 
proposal.
    \516\ See, e.g., letters from Davis Polk and Cravath.
---------------------------------------------------------------------------

    We believe that the modified coverage window will make the tabular 
disclosure more useful to investors

[[Page 80415]]

compared to the proposal, as discussed in Section II.C.3 above. By 
eliminating almost all of the post-filing period from the coverage 
window included in the proposal, the final amendments significantly 
reduce the potential noise in the tabular disclosure due to awards made 
after the release of MNPI intended as an effort to avoid spring-
loading, rather than a strategic attempt at bullet-dodging.\517\ 
Nevertheless, by extending the coverage window to one business day 
after the filing date, the final amendments account for potential 
spring-loading in cases where it may take the market an additional 
trading day to incorporate information in the triggering filing into 
share prices (e.g., in the presence of MNPI filings made after trading 
hours \518\ or by companies with a less liquid market for their 
shares). The asymmetry in the modified coverage window is intended to 
balance the costs to companies against the different likelihood of a 
grant being strategic (as opposed to a result of a general attempt to 
avoid grants while in possession of MNPI) if a grant is made before 
versus after the MNPI release. Overall, the modified coverage window 
will give investors easier access to data about option grants in the 
days leading up to and immediately following the MNPI filing. While we 
recognize that it may capture some grants made on the date following 
the triggering filing in an attempt to avoid spring-loading, such 
grants should generally be discernible by investors from the provided 
disclosure \519\ and, on balance, this coverage window is more 
appropriately tailored, relative to the proposal. Overall, tailoring 
the tabular disclosure requirement in these ways is expected to enhance 
the benefits of the resulting disclosure to investors by improving its 
usability and including fewer details that could offer little 
information value for investors. These changes also should decrease the 
costs of the disclosure for issuers and affected NEOs compared to the 
proposal.
---------------------------------------------------------------------------

    \517\ See infra note 564.
    \518\ See, e.g., Henk Berkman & Cameron Truong, Event Day 0? 
After-Hours Earnings Announcements, 2009 J. Acc. Res. 71.
    \519\ For example, an investor reviewing the disclosure is 
unlikely to be concerned about grants made immediately after the 
triggering filing representing bullet dodging if the information in 
the triggering filing was not negative in nature or was not followed 
by much stock price movement or was instead followed by a share 
price increase.
---------------------------------------------------------------------------

    Finally, we are combining the two columns that would have reported 
the market value of the underlying securities on the trading days 
before and after the MNPI filing, respectively, into a single column 
with the percentage change in the market value of the underlying 
securities between the trading day before and after the MNPI filing. 
Compared to the proposal, this column is expected to incrementally make 
it easier for investors to understand the impact that spring-loading 
may have on the value realized by the NEOs, and somewhat condense the 
size of the new tabular disclosure without a meaningful effect on the 
cost to companies as the percentage change can be readily calculated 
from the market values in dollar terms for the two days.
1. Baseline and Affected Parties
    New Item 402(x) will apply to filers of annual reports on Form 10-K 
and proxy and information statements.\520\ During calendar year 2021, 
we estimate that there were approximately 6,300 affected filers.
---------------------------------------------------------------------------

    \520\ Current filing requirements of Form 10-K permit filers to 
incorporate by reference executive compensation disclosures from a 
proxy or information statement involving the election of directors. 
See supra note 252. These estimates exclude registered investment 
companies and asset-backed securities issuers, which are not subject 
to the amendments.
---------------------------------------------------------------------------

    Existing Item 402 requires disclosure of option grant dates, thus 
potentially enabling investors today to compare the timing of grant 
dates and historical filings of a periodic report or another EDGAR 
filing that contains MNPI. The Commission provided interpretive 
guidance regarding option grants in the 2006 Executive Compensation 
Release.\521\ In considering the timing of option grants close in time 
to the release of MNPI, the Commission explained in the release that, 
if the issuer has such a program, plan, or practice, the issuer should 
disclose that the board of directors or compensation committee may 
grant options at times when the board or committee is aware of 
MNPI.\522\ To the extent that the existing disclosures of issuers that 
allow the timing of option grants around MNPI reflect such guidance, 
the incremental effects of a mandate to disclose policies and 
procedures related to option grants close in time to MNPI may be small.
---------------------------------------------------------------------------

    \521\ See 2006 Executive Compensation Release, supra note 277.
    \522\ Id.
---------------------------------------------------------------------------

    Some studies have noted that the regulatory reforms of the early 
and mid-2000s have led to the decline, if not disappearance, of 
questionable option timing practices.\523\ However, there is evidence 
that strategic option grant timing persists.\524\ For example, one 
study, which examined 4,852 scheduled CEO stock option grants from 2007 
through 2011, found that managers accelerate bad news before a grant 
and delay good news until after a grant, consistent with self-
interested attempts at strategic option grant timing that maximizes 
their value to the CEO, and that ``market reactions to SEC Form 8-K 
filings (which report material corporate events) tend to be negative in 
the months immediately before a scheduled CEO option grant and positive 
in the months after the grant.'' \525\ Executives also appear to move 
earnings from the pre-grant period to the post-grant period, such as by 
changing a firm's accounting choices (e.g., accruals management) and 
perhaps even by timing investments (e.g., real earnings 
management).\526\ Another study concluded that spring-loading partly 
replaced the disappearing practice of option backdating.\527\ A 
different study documented spring-loading around stock splits but does 
not

[[Page 80416]]

disaggregate the 1992-2012 period into pre- and post-2006 sub-
periods.\528\
---------------------------------------------------------------------------

    \523\ See Randall Heron & Erik Lie, What Fraction of Stock 
Option Grants to Top Executives Have Been Backdated or Manipulated?, 
55 Mgmt. Sci. 513 (2009); M. P. Narayanan & H. Nejat Seyhun, The 
Dating Game: Do Managers Designate Option Grant Dates to Increase 
Their Compensation?, 21 Rev. Fin. Stud. 1907 (2008); Lucian Bebchuk 
et al., Lucky CEOs & Lucky Directors, 65 J. Fin. 2363 (2010); 
Linxiao Liu et al., Stock Option Schedules and Managerial 
Opportunism, 41 J. Bus. Fin. Acct 652 (2014); Rik Sen, The Returns 
to Spring-Loading, 2008 N.Y.U. (Working Paper) (2008).
    \524\ See Insider Trading and Stock Option Grants: An 
Examination of Corporate Integrity in the Covid-19 Pandemic, Memo 
from FSC Majority Staff to Members, Committee on Financial Services, 
Sept. 17, 2020, available at https://financialservices.house.gov/uploadedfiles/hhrg-116-ba16-20200917-sd002.pdf, at pp. 2-5.
    \525\ See Robert M. Daines et al., Right on Schedule: CEO Option 
Grants and Opportunism, 53 J. Fin. Quant. Anal. 1025 (2018) (finding 
that: ``some CEOs have manipulated stock prices to increase option 
compensation, documenting negative abnormal returns before scheduled 
option grants and positive abnormal returns afterward;'' 
``document[ing] several mechanisms used to lower stock price, 
including changing the substance and timing of disclosures;'' and 
further contend[ing] that such opportunism ``distorts stock prices, 
leading to capital misallocation, and may dissipate firm value if 
executives postpone valuable projects.'').
    \526\ Id.; see also David Aboody & Ron Kasznik, CEO Stock Option 
Awards and the Timing of Corporate Voluntary Disclosures, 29 J. 
Acct. Econ. 73 (2000) (focusing on CEO option awards with fixed 
award schedules and showing that ``CEOs make opportunistic voluntary 
disclosure decisions that maximize their stock option 
compensation,'' based on changes in share prices, analyst earnings 
forecasts, and management earnings forecasts); Keith W. Chauvin & 
Catherine Shenoy, Stock Price Decreases Prior to Executive Stock 
Option Grants, 7 J. Corp. Fin. 53 (2001) (finding, in a May 1991 to 
Feb. 1994 sample covering 313 CEOs, ``a statistically significant 
abnormal decrease in stock prices during the 10-day period 
immediately preceding the grant date'' and concluding that 
``[e]xecutives who expect to be granted stock options have the 
incentive, opportunity and ability to affect the exercise price with 
their inside information'').
    \527\ See Giulian Bianchi, Stock Options: From Backdating to 
Spring Loading, 59 Q. Rev. Econ. Fin. 215 (2016) (examining data 
through 2011).
    \528\ See Erik Devos et al., CEO Opportunism? Option Grants and 
Stock Trades around Stock Splits, 60 J. Acct. Econ. 18 (2015). 
However, companies may adjust exercise prices to account for the 
effect of stock splits.
---------------------------------------------------------------------------

2. Benefits
    As discussed in Section II.C above, certain practices related to 
the timing of executive compensation option grants may raise investor 
concerns about the use of MNPI. Improved disclosure may potentially 
enhance the transparency of such compensation awards (informing 
investment and voting decisions) and potentially mitigate the economic 
costs of the associated incentive distortions, consistent with the 
suggestions of commenters that supported the proposed amendments.\529\
---------------------------------------------------------------------------

    \529\ See supra note 293.
---------------------------------------------------------------------------

    The amendments will make information that investors may seek to 
help them identify the occurrence and effects of potential spring-
loading more salient and readily accessible. Spring-loading increases 
the effective economic value of the options granted to the executive 
upon MNPI becoming public.\530\ Holding the number of the granted 
options and the policy to grant options with the exercise price equal 
to the current observable market price (i.e., ``at-the-money'') 
constant, the executive would effectively receive a higher compensation 
award than if the timing of option grants were completely independent 
of MNPI releases.\531\ Further, lowering an option's exercise price 
through timing of an option award around an MNPI release affects the 
sensitivity of the awarded options to changes in the issuer's share 
price.\532\
---------------------------------------------------------------------------

    \530\ Past studies have focused primarily on options. In this 
context, the same economic effects can be expected in the case of 
awards of SARs and similar instruments. For purposes of this 
analysis, the term ``option'' includes stock options, SARs and 
similar instruments with option-like features.
    \531\ See David Yermack, Good Timing: CEO Stock Option Awards 
and Company News Announcements, 52 J. Fin. 449 (1997); see also Iman 
Anabtawi, Secret Compensation, 82 N.C.L. Rev. 835 (2004); Alex 
Edmans et al., Chapter 7--Executive Compensation: A Survey of Theory 
and Evidence, Handbook of the Econ. of Corporate Governance 383-539 
(2017). They note that the use of ``stealth compensation'' is a 
``challenge for the shareholder value view'' and that, in most 
cases, ``[i]f executive pay were efficiently designed and 
competitive, there would be no need to disguise it from 
shareholders... hiding these compensation elements from shareholders 
is suggestive of rent extraction.'' They further note that ``[s]tock 
options can be a means of camouflaging pay if directors or 
shareholders do not fully understand their cost'' and that 
opportunistic option timing practices ``are correlated with weak 
corporate governance.''
    \532\ Spring-loading can cause a call option to be in-the-money 
when it would have otherwise been at-the-money, assuming favorable 
MNPI is about to be released. Everything else equal, the value of an 
in-the-money call option has a higher sensitivity to the share price 
than the value of an at-the-money call. The effects of such changes 
depend on the objectives of the overall compensation package with 
respect to inducing optimal executive incentives and the role of 
option and SAR awards in this package.
---------------------------------------------------------------------------

    Some have argued that these practices may be the result of an 
optimal compensation policy.\533\ Whether such practices constitute an 
optimal compensation policy or not, a lack of transparency about such 
compensation awards may limit investors' ability to fully gauge the key 
terms of compensation arrangements and their implications for 
executives' incentives and thus, potentially, firm value, and may limit 
shareholders' ability to make informed voting decisions. The amendments 
incrementally improve the accessibility of information about option 
grant timing practices. Item 402(x) will require additional disclosure 
regarding practices related to the awards of stock options, SARs, and 
similar option-like instruments to provide a more comprehensive picture 
of the timing of these awards relative to MNPI releases. New Item 
402(x)(1) will require issuers to provide disclosure of their policies 
and procedures related to timing of these awards in relation to the 
disclosure of MNPI, which is not currently required. The tabular 
disclosure requirement of new Item 402(x)(2) will make information 
about such awards that are made shortly before MNPI releases more 
readily available to investors.
---------------------------------------------------------------------------

    \533\ See, e.g., Erik Devos et al., supra note 528 (stating that 
``it is not clear whether shareholders are necessarily harmed by 
this apparent option grant timing, as it is possible that this is 
just another way by which the [board of directors] attempts to 
reward and retain a high performing CEO''); see also Speech by SEC 
Commissioner: Remarks Before the International Corporate Governance 
Network 11th Annual Conference by Commissioner Paul S. Atkins, U.S. 
Securities and Exchange Commission, July 6, 2006, available at 
https://www.sec.gov/news/speech/2006/spch070606psa.htm. But see 
supra note 531.
---------------------------------------------------------------------------

    New Item 402(x)(3) will require issuers to submit this disclosure 
in Inline XBRL. This requirement is expected to offer incremental 
benefits to investors by facilitating automated extraction of the 
information for purposes of aggregation, analysis, and comparison 
(across time periods and filers), potentially enabling more informed 
investment and voting decisions. Even though investors can fairly 
readily extract the dates of MNPI disclosures and share prices around 
such MNPI disclosures respectively from EDGAR and third-party sources 
today, because option grant information in proxy statement disclosures 
does not use a structured data language, extracting such information 
from HTML filings for a large set of issuers requires additional cost 
and effort.\534\
---------------------------------------------------------------------------

    \534\ Daily market prices can be obtained from a wide variety of 
sources, including commercial databases that provide such data for a 
subscription fee. Some commercial databases extract option grant 
information from proxy statements and provide it for a subscription 
fee, but they tend to focus their coverage on large companies. To 
obtain comprehensive option grant information for all NEOs of mid-
size and small companies, investors would presently need to analyze 
or ``scrape'' (apply a computer algorithm to extract information 
from) a large number of proxy statement filings in the HTML format.
---------------------------------------------------------------------------

    We recognize that there may be various reasons, besides strategic 
spring-loading, for option grants within the specified number of days 
before disclosure of MNPI. Nevertheless, we believe that making this 
data more accessible to investors will help them analyze whether 
spring-loading is a concern as part of a comprehensive review of the 
various elements of compensation practices. Investors can then compare 
this information with the executive's on-the-job performance in 
assessing the optimality of executive compensation, which, will, on the 
margin, benefit investors by equipping them to make better informed 
voting and investment decisions. Combined with the narrative disclosure 
of the applicable policies, the tabular disclosure also may 
incrementally help to alleviate information asymmetries between issuers 
and investors with respect to this aspect of executive compensation 
practices and better inform investors about executives' incentives. 
Besides contributing to better informed voting and investment 
decisions, the disclosure may facilitate more informed shareholder say-
on-pay votes and votes in director elections.\535\
---------------------------------------------------------------------------

    \535\ See, e.g., Glass Lewis, 2020 Proxy Paper Guidelines: An 
Overview of the Glass Lewis Approach to Proxy Advice--United States, 
12-13, 41-42 (2020), available at https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf. See also, e.g., Anabtawi, 
supra note 531 (stating that ``under state law fiduciary duty 
principles, a manager who receives stock options while in possession 
of inside information that will raise the stock price when it is 
later released discharges her fiduciary duty of loyalty through full 
disclosure to and ratification by a disinterested board. It is then 
the board's responsibility, pursuant to its fiduciary duty of 
disclosure, to inform the corporation's shareholders of the 
favorable timing of the grant, if it disseminates to them 
information about the company's executive compensation 
arrangements''); Matthew E. Orso, `Spring-Loading' Executive Stock 
Options: An Abuse in Need of a Federal Remedy, 53 St. Louis U. L. J. 
629 (2009); Jonathan Tompkins, Opportunity Knocks, But the SEC 
Answers: Examining the Manipulation of Stock Options Through the 
Spring-Loading of Grants and Rule 10b-5, 26 Wash. U. J. L. & Pol'y 
413 (2008).
---------------------------------------------------------------------------

    Another potential benefit of the disclosure is that, to the extent 
that strategically timed option grants were

[[Page 80417]]

not the result of a value-maximizing compensation policy but rather an 
outcome of agency conflicts (such as executives' attempts to extract 
additional compensation without drawing investor scrutiny to the full 
amount of such compensation),\536\ and to the extent that companies 
forgo such grants in anticipation of the additional disclosure, the 
disclosure requirement may improve shareholder value. However, if the 
extra compensation is currently optimally awarded, forgoing such 
compensation could negatively impact shareholder value.\537\
---------------------------------------------------------------------------

    \536\ One article notes that ``[t]here are, of course, 
constraints that check the extent to which the level and structure 
of executive compensation can deviate from what would be optimal for 
shareholders. . . To circumvent such pressures, managers will want 
to enhance their compensation as discreetly as possible. By 
`camouflaging' elements of their pay, managers can maximize their 
compensation while minimizing adverse reaction. Timing option grants 
is an especially attractive way to enhance executive compensation 
both because it is difficult to detect and because it has generally 
eluded attention.'' See, e.g., Anabtawi, supra note 531; see also, 
e.g., Bianchi, supra note 527 (stating that ``[o]pportunistic option 
timing is found to be associated with weaker corporate governance. 
Indeed, practices such as backdating and spring loading raise 
governance concerns. . . Eventually, the opportunistic option timing 
casts doubt on the efficacy of incentives to address the principal 
agent models.''); see supra note 294.
    \537\ See, e.g., Tompkins, supra note 535; see also supra note 
533. But see supra note 531.
---------------------------------------------------------------------------

    Further, to the extent that the practice of strategically timed 
option grants in some instances created incentives for executives to 
change the timing and content of MNPI disclosures around option grant 
dates in an attempt to increase the economic value of compensation 
awards,\538\ the amendments may partly mitigate such incentives. In 
those instances, the indirect effect of the amendments may improve the 
information content, timeliness, and quality of disclosures and result 
in more efficient share prices and better informed voting and 
investment decisions.
---------------------------------------------------------------------------

    \538\ See supra note 526 and accompanying and following text.
---------------------------------------------------------------------------

    We recognize that several factors may potentially limit the 
magnitude of these economic benefits. First, the economic benefits of 
the amendments are likely to be modest because the information required 
by the new tabular disclosure can be obtained from other sources today. 
In particular, the benefits of the new tabular disclosure will be 
limited by the fact that investors today can research and assess, based 
on historical option grant dates already required to be disclosed under 
Item 402, how grant timing relates to EDGAR filings containing MNPI and 
to share price changes around such filings (information that is 
publicly accessible but not all found in one location), as indicated by 
various commenters.\539\ The new disclosure will aggregate this 
information in a more readily accessible tabular format in one 
location, potentially incrementally lowering investor search costs and 
increasing investor awareness of option grant timing around MNPI. The 
Inline XBRL tagging requirement also is expected to further facilitate 
automated extraction of the information for purposes of aggregation, 
analysis, and comparison across time periods and filers.
---------------------------------------------------------------------------

    \539\ See supra note 298.
---------------------------------------------------------------------------

    Second, the discussed benefits may also be limited to the extent 
that issuers are already disclosing similar information today.
    Third, the discussed benefits may be attenuated if some investors 
find the new tabular disclosure to be of limited use. For example, some 
investors may find the tabular disclosure difficult to parse for 
issuers with multiple filings containing MNPI and option awards. As 
another example, investors may find that the information value of the 
disclosure is diminished due to confounding events that occur between 
the option grant date and the dates of MNPI filings within the 
reporting window; however, the considerable narrowing of the reporting 
window from the proposal should partly alleviate this potential 
limitation. Investors in issuers with thinly traded securities may find 
that the percentage change in the market value of the underlying 
securities on the trading day following the MNPI disclosure, relative 
to the trading day before the MNPI disclosure, may not fully capture 
the effects of the MNPI disclosure. Some other investors may find that 
the information value of the disclosure is diminished due to market- or 
sector-wide events that may affect the issuer's share price on some 
MNPI filing dates, notwithstanding the substance of the MNPI that was 
disclosed. Further, some issuers may issue these awards shortly prior 
to MNPI filings due to pure coincidence rather than strategic reasons, 
as noted by some commenters.\540\ For instance, several commenters 
noted that the timing of equity awards may be based on a meeting 
schedule established several months in advance without consideration of 
disclosure of MNPI.\541\ Further, issuers that routinely award options 
on a specified schedule (e.g., monthly or quarterly) may have grants 
within the reporting window of the new disclosure simply due to their 
obligations to file quarterly reports or to report current events on 
Form 8-K.\542\
---------------------------------------------------------------------------

    \540\ See supra note 299.
    \541\ See supra note 300. Nevertheless, even if the grant 
schedule dates are set in advance, to the extent that some investors 
may be concerned about strategic management of MNPI disclosures 
around such pre-scheduled grants, the tabular disclosure may help 
investors more readily access information as they evaluate such 
occurrences. See Daines et al. (2018), supra note 525.
    \542\ See supra note 301.
---------------------------------------------------------------------------

    New Item 402(x)(1) will require annual disclosure of policies and 
practices related to option grant timing close in time to the release 
of MNPI and will offer new information that is not presently available 
to investors. The disclosure of the presence or absence of such 
policies and practices may inform investment and voting decisions. The 
anticipation of public disclosure may also lead issuers to adopt 
policies and practices disallowing option grants around MNPI, leading 
to the benefits discussed above. To the extent such disclosures already 
are provided by issuers in light of the 2006 Executive Compensation 
Release,\543\ such indirect benefits incremental to the amendments 
would be diminished.
---------------------------------------------------------------------------

    \543\ See 2006 Executive Compensation Release, supra note 277.
---------------------------------------------------------------------------

    A few other potential considerations may limit the economic 
benefits of the new disclosures (both in Items 402(x)(1) and 
402(x)(2)). First, shareholders of some issuers may view the described 
option granting practices as an optimal compensation policy set by the 
board.\544\ Second, the discussed benefits of the amendments are 
expected to be modest at issuers that rely less on stock options and 
primarily or exclusively grant restricted stock or do not grant equity-
linked compensation.\545\ Third,

[[Page 80418]]

the effects of the amendments may be modest to the extent that other 
factors already deter spring-loading (for example, best practices 
implemented by the compensation committee or generally robust internal 
corporate governance mechanisms). Finally, the effects of the 
amendments on executives may be small if issuers adjust compensation to 
offset the decline in spring-loading under the amendments (e.g., by 
changing option terms, the allocation of compensation between cash, 
options, and restricted stock, or the overall amount of compensation).
---------------------------------------------------------------------------

    \544\ See supra notes 533 and 537 and accompanying and following 
text. But see supra note 531.
    \545\ The proportion of companies that grant options to 
executives has declined substantially after the introduction of FAS 
123R in 2004 (now codified in Accounting Standards Codification 
Topic 718). See, e.g., Prevalence of Options Decreases as Companies 
Tie Awards to Performance, Equilar (Aug. 23, 2018), available at 
https://www.equilar.com/press-releases/103-prevalence-of-options-decreases-as-companies-tie-awards-to-performance; Aubrey Bout et 
al., S&P 500 CEO Compensation Increase Trends, 2020 Harv. L. School 
Forum Corp. Gov. (Feb. 11, 2020), available at https://corpgov.law.harvard.edu/2020/02/11/sp-500-ceo-compensation-increase-trends-3/. Based on the analysis of Execucomp data for fiscal year 
2021 (version retrieved on June 27, 2022), approximately 34 percent 
of companies reported option grants. Execucomp data covers S&P 1500 
companies and thus may not be representative of option compensation 
at smaller companies. Small business issuers and registrants other 
than small business issuers were required to comply with FAS 123R 
beginning with the first reporting period of the first fiscal year 
beginning on or after Dec. 15, 2005 and June 15, 2005, respectively. 
See Amendment to Rule 4-01(a) of Regulation S-X Regarding the 
Compliance Date for Statement of Financial Accounting Standards No. 
123 (Revised 2004), Share-Based Payment, Release No. 33-8568 (Apr. 
15, 2005) [70 FR 20717 (Apr. 21, 2005)].
---------------------------------------------------------------------------

3. Costs
    We recognize that the amendments to Item 402 requiring additional 
disclosure of the timing of option awards and related corporate 
policies will impose certain costs on issuers, as suggested by various 
commenters.\546\ The amendments will result in direct compliance-
related costs for affected filers of compiling the information required 
in amended Item 402 for inclusion in the annual report or proxy or 
information statement. Because issuers either already provide such 
information (option grant information and dates) for other disclosures 
or can readily obtain the information (daily share prices and dates of 
EDGAR filings), the direct costs are expected to be modest. We 
acknowledge that issuers will incur some direct costs of aggregating 
such existing information into the tabular format. Further, issuers 
will incur compliance-related costs to assess which of the filings from 
the reporting period contained MNPI and thus should be a part of the 
tabular disclosure. These direct costs of complying with the new 
tabular disclosure may be potentially mitigated to the extent that 
issuers can leverage existing systems and recordkeeping practices used 
to prepare the plan-based table disclosure required today, as well as 
internal records on the dates of other disclosures filed on EDGAR with 
the Commission.
---------------------------------------------------------------------------

    \546\ See supra note 297.
---------------------------------------------------------------------------

    Issuers will incur compliance costs of structuring the Item 402(x) 
disclosure in Inline XBRL. Such costs will be higher for filers with 
more option grants subject to the new disclosure. However, because 
filers subject to the amendments already are or will soon be subject to 
other structured disclosure requirements (e.g., Inline XBRL 
requirements for financial statement information and cover page 
information in certain filings), the incremental cost of submitting the 
compensation disclosure using a structured data language will likely be 
relatively modest.\547\ We expect that the direct costs of Inline XBRL 
tagging of the new disclosure may be potentially mitigated to the 
extent that issuers subject to the amendments, which already utilize 
Inline XBRL tagging to comply with other filing obligations, may 
leverage existing systems or only incur an incremental cost when 
utilizing outside service providers to tag the new disclosures in proxy 
statements.
---------------------------------------------------------------------------

    \547\ See supra note 496.
---------------------------------------------------------------------------

    The amendments also may result in indirect costs for issuers and 
executives. Disclosure of option grant timing practices could result in 
reputational harms for some issuers or individual executives, such as 
unfavorable say-on-pay votes, if investors perceive such practices as 
inconsistent with shareholder value maximization and optimal 
compensation policies. Outside scrutiny of this disclosure may cause 
issuers to forgo such option grant timing practices. For issuers at 
which such practices arose from efforts to implement an economically 
optimal compensation policy for issuers and executives,\548\ deviating 
from such a policy could result in less optimal compensation. Some 
commenters also indicated that these disclosures may mislead investors 
by causing them to infer a causal link between option awards and the 
release of MNPI where none exists.\549\ The shorter reporting window 
for the tabular disclosure in the final amendments and removal of the 
share repurchase triggering event are expected to substantially 
alleviate this concern. At issuers that forgo option grant timing but 
do not change other compensation terms to offset it, executives could 
experience smaller, more volatile compensation awards. However, it is 
important to note that the final rules do not require a particular 
option grant timing policy. Rather, the amendments aim to incrementally 
improve transparency about such compensation awards, enabling investors 
to more fully gauge the key terms of compensation arrangements and 
their implications for executives' incentives and thus, ultimately, 
firm value.
---------------------------------------------------------------------------

    \548\ See supra notes 533 and 537. But see supra note 531.
    \549\ See supra note 540.
---------------------------------------------------------------------------

    Several considerations would mitigate the potential indirect costs 
of the disclosure requirement to issuers. Given that this disclosure 
would incrementally improve access to information about option grant 
timing practices, in cases where such practices are optimal from the 
standpoint of shareholder value, issuers likely would not make 
inefficient changes to those compensation practices as a result of the 
improved investor access to such information under the new rules 
(however, the direct costs of compliance with the rule, discussed 
above, may potentially result in inefficient compensation changes). 
Issuers for which compensation awards timed in this manner are 
consistent with shareholder value maximization should be able to 
readily preserve the economic effects of such compensation for 
executives, either by continuing their existing compensation practices 
or by altering the size or other terms of the award to ensure a similar 
value of compensation. Moreover, issuers may be able to use other, 
readily available means to adjust compensation terms to achieve a 
similar outcome.\550\
---------------------------------------------------------------------------

    \550\ Issuers could lower the exercise price, increase the 
number of options granted, decrease the proportion of options in 
overall pay, increase overall pay, modify performance-based or other 
compensation terms, or some combination of those.
---------------------------------------------------------------------------

    As discussed in Section V.D.2 above, several factors are expected 
to potentially limit the incremental impact of the new tabular 
disclosure and thus the magnitude of the discussed indirect economic 
costs. First, the indirect costs of the amendments likely will be 
modest due to the availability of the information subject to the new 
disclosure requirement in other sources today, as indicated by various 
commenters.\551\ Second, the discussed indirect costs may also be 
reduced to the extent that the newly required information is already 
contained in compensation disclosures. Third, the discussed indirect 
costs may be partly attenuated to the extent that some investors may 
find the tabular disclosure to be too extensive or difficult to parse 
for issuers with multiple MNPI filings and option grants for different 
NEOs.
---------------------------------------------------------------------------

    \551\ See supra note 539.
---------------------------------------------------------------------------

    Further, as discussed in Section V.D.2 above, some investors may 
incorrectly interpret information in the disclosure as evidence of 
spring-loading, which may in turn increase indirect costs for issuers 
and insiders. Such incorrect interpretations may happen due to 
confounding events between the option grant date and MNPI disclosure 
dates within the reporting window (with less potential for confounding 
with a shorter window); market prices being slow to adjust to the MNPI 
disclosure (e.g., at some issuers with thinly traded securities); 
market- or sector-wide

[[Page 80419]]

events affecting market prices on MNPI disclosure dates; or 
coincidental nature of option grants close in time with MNPI 
disclosures (e.g., with frequent or routine grants).\552\
---------------------------------------------------------------------------

    \552\ See supra note 540.
---------------------------------------------------------------------------

    The above discussion has focused on the tabular disclosure of new 
Item 402(x)(2). In addition, new Item 402(x)(1) mandates disclosure of 
policies and practices related to option grant timing around MNPI, 
which is not presently required. While issuers are likely to have 
information readily available about policies and practices related to 
option grant timing, they will likely incur some direct compliance 
costs to compile and prepare that information for public disclosure. 
Issuers may also incur indirect costs of this disclosure. Specifically, 
issuers with policies and practices that allow strategic option grant 
timing may incur reputational costs of such disclosure. Further, the 
anticipation of public disclosure may lead such issuers to adopt 
policies and practices disallowing option grants around MNPI, which, in 
some cases may result in a deviation from optimal compensation 
policies.\553\ Such changes may also impose costs on executives, to the 
extent other compensation terms are not adjusted in an offsetting 
manner, as described above. To the extent that issuers already provide 
disclosures of policies and procedures related to option grant timing 
following the 2006 Executive Compensation Release,\554\ the costs 
incremental to the amendments will be lower.
---------------------------------------------------------------------------

    \553\ See supra notes 533 and 537.
    \554\ See 2006 Executive Compensation Release, supra note 277.
---------------------------------------------------------------------------

    Finally, as discussed in Section V.D.2 above, the overall economic 
costs of the new disclosures required by Items 402(x)(1) and 402(x)(2) 
are expected to be more modest to the extent that fewer issuers rely on 
stock option compensation.\555\ Further, the cost to executives of the 
decline in strategic option grant timing may be lower if other factors 
already deter such option grant timing (e.g., compensation committee 
policies or other corporate governance mechanisms) or if issuers make 
offsetting adjustments to executive compensation (e.g., by changing 
option terms, the mix of cash, options, and restricted stock, or the 
amount of compensation).
---------------------------------------------------------------------------

    \555\ See supra note 545.
---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the disclosures required in new Item 402(x) to 
incrementally decrease the information asymmetry between insiders and 
investors about the issuer's option compensation awards and associated 
policies, resulting in better information about the insiders' 
incentives that may derive from such option awards. This effect may 
result in more informationally efficient prices and more efficient 
allocation of capital in investor portfolios. Greater accessibility to 
investors of information about the timing of option compensation awards 
may marginally reduce shareholders' information gathering costs and 
enable them to make more efficient voting decisions in say-on-pay and 
director election votes.
    To the extent that option spring-loading is inconsistent with 
shareholder value maximization and the amendments draw market scrutiny 
to issuers engaged in spring-loading, the amendments may result in a 
decrease in option spring-loading. In turn, a decrease in spring-
loading may weaken insiders' incentives to game corporate disclosures, 
which may result in potentially timelier and higher-quality disclosures 
(that enable more informationally efficient share prices and more 
efficient allocation of capital in investor portfolios).
    To the extent that the Item 402 requirements impose a fixed cost on 
issuers, they will have a negative competitive effect on smaller 
issuers subject to the amendments, as well as on issuers that do not 
already disclose policies and practices related to the timing of awards 
of stock options close in time to the release of MNPI. The final 
amendments defer by six months the date of compliance with the 
additional disclosure requirements for SRCs,\556\ potentially 
mitigating some of the adverse competitive effects of the amendments. 
The disclosure requirements will not apply to FPIs, placing them at a 
relative competitive advantage to domestic filers.
---------------------------------------------------------------------------

    \556\ Based on staff review of EDGAR filings for calendar year 
2021, approximately 3,200 of the filers subject to the new Item 
402(x) requirements are SRCs and thus will be eligible for the 
extended compliance date under the amendments.
---------------------------------------------------------------------------

    Because the disclosure amendments will apply broadly across 
domestic public issuers, generally, we do not anticipate them to result 
in meaningful competitive disparities in the labor market for executive 
talent.\557\
---------------------------------------------------------------------------

    \557\ The amendments will not apply to FPIs.
---------------------------------------------------------------------------

    The described effects are expected to be attenuated to the extent 
investors already can infer whether issuers time option awards prior to 
releases of MNPI based on existing disclosures of option grant dates 
and other public information. The described effects may also be 
attenuated to the extent that issuers engaged in option spring-loading 
already disclose such policies and practices as a result of the 2006 
Executive Compensation Release.\558\
---------------------------------------------------------------------------

    \558\ See 2006 Executive Compensation Release, supra note 277.
---------------------------------------------------------------------------

5. Reasonable Alternatives
    New Item 402(x) includes both a new table with information on 
individual option grants and a requirement to disclose policies and 
practices regarding the timing of option awards in relation to the 
disclosure of MNPI. As an alternative, we could adopt only one of those 
requirements, which could reduce the costs of disclosure for filers 
discussed in Section V.D.3 above.\559\ However, omitting one of the 
disclosure requirements would provide investors with less information 
about option compensation practices, resulting in potentially less 
informed investment and voting decisions. For example, omitting the 
tabular disclosure requirement could marginally reduce the salience of 
information about the actual timing of option grants around MNPI 
releases and the effects of such timing on the value of granted options 
in cases where an issuer discloses that it does not have policies 
restricting option awards around MNPI releases. In turn, omitting the 
requirement to disclose the issuer's practices and policies regarding 
the timing of option awards would reduce the amount of information 
about potential future compensation practices, compared to the 
amendments. Nevertheless, there is likely to be some substitution 
between the information benefits of the two requirements, particularly 
in combination with the existing requirements to disclose grant dates.
---------------------------------------------------------------------------

    \559\ See letter from Dow (suggesting that the Commission's 
concerns are sufficiently addressed by the narrative disclosure 
requirements of proposed Item 402(x)).
---------------------------------------------------------------------------

    New Item 402(x)(2) will require tabular disclosure of awards made 
during a period starting four business days before and ending one 
business day after the filing of a periodic report on Form 10-Q or Form 
10-K or the filing or furnishing of a current report on Form 8-K that 
discloses MNPI other than a current report on Form 8-K disclosing a 
material new option award grant under Item 5.02(e). A typical issuer 
files or furnishes multiple such reports in a given year and may 
include multiple option and SAR awards in the new tabular 
disclosure.\560\ As an

[[Page 80420]]

alternative, we could use a shorter or longer time period around 
reports with MNPI during which awards would be subject to the tabular 
disclosure. A shorter (longer) time period could result in less (more) 
disclosure and thus incrementally lower (higher) disclosure costs for 
issuers, compared to the amendments. Because prices may change for 
reasons other than the release of MNPI when a longer time period is 
used, pre- and post-filing prices might be more informative for 
assessing the effects of the MNPI release on the valuation of option 
awards made during a shorter window around the filing. Shortening 
(lengthening) the window under these alternatives would reduce 
(increase) the amount of information aggregated in one location about 
options granted in proximity to MNPI releases, potentially resulting in 
marginally less (more) informed investment and voting decisions.
---------------------------------------------------------------------------

    \560\ During calendar year 2021, the average annual report/proxy 
statement filer (excluding asset-backed securities issuers and 
registered investment companies) filed Forms 10-K, 10-Q, 8-K, or 
amendments to them, on 15 different days. The use of a window 
starting four business days before and ending one business day after 
the date of a filing on Form 10-K, 10-Q, or 8-K results in a 
potential average disclosure coverage period of approximately 91 
calendar days out of 365 (compared to the average disclosure 
coverage period of 220 calendar days based on the proposed +/-14 
calendar day window). Because option grants, unlike EDGAR filings, 
are sometimes made on non-business days, the estimate reports the 
number of potentially affected calendar days. As issuers typically 
grant options only a few times a year, rather than on every one of 
those potentially affected days, we also evaluate the number of 
actual option grants that fall in the disclosure coverage period 
under the amendments. Based on staff analysis of Institutional 
Shareholder Services' (ISS) Incentive Lab data on plan-based option 
and SAR awards made during calendar year 2021 (retrieved Aug. 10, 
2022), the use of this window results in 2.9 grants (out of 5.4 
grants) subject to the disclosure for the average affected filer 
(compared to the 4.6 grants subject to the disclosure for the 
average affected filer based on the proposed +/-14 calendar day 
window). To account for potential lags in proxy data ingestion, 
which may make the data for 2021 underinclusive of some affected 
filers with plan-based awards made in 2021, we also consider the ISS 
Incentive Lab estimate for calendar year 2020 (also based on data 
retrieved August 10, 2022): this results in 2.9 grants (out of 5.6 
grants) subject to the disclosure for the average affected filer 
(compared to 4.8 grants subject to the disclosure for the average 
affected filer based on the proposed +/-14 calendar day window). As 
a caveat, ISS Incentive Lab data is constructed from proxy statement 
information for a subset of the affected filer universe, dominated 
by larger companies (371 issuers with option or SAR grant data for 
year 2021 and 461 for year 2020), and thus may not be representative 
of all affected filers, such as smaller filers that may make fewer 
awards or file fewer current reports. The above estimates exclude 
from the list of MNPI filings those Forms 8-K that are classified as 
reporting compensation arrangements (Item 5.02(e)) to avoid 
mechanical effects (such filings are identified as Form 8-K filings 
that only report Item 5.02, based on EDGAR data, and that also 
mention either Item 5.02(e) or related keywords (``stock option'', 
``option'' and ``grant'', ``named executive officer'') in the body 
of the filing, based on the analysis of Intelligize data). The 
definition of ``business days'' excludes weekends and Federal 
holidays.
---------------------------------------------------------------------------

    As another alternative, we could further modify the scope of 
reports that trigger the tabular disclosure, such as by omitting Forms 
8-K or limiting it to Forms 8-K that contain Items 1.01 or 2.02, as 
suggested by some commenters.\561\ Narrowing the set of triggers in 
this manner would reduce the amount of information aggregated in one 
location about options granted in proximity to MNPI releases,\562\ 
potentially resulting in marginally less informed investment and voting 
decisions. At the same time, it would reduce the costs incurred by 
issuers, discussed in Section V.D.3 above.
---------------------------------------------------------------------------

    \561\ See supra note 307.
    \562\ For example, requiring disclosure of option grants made 
during a window starting four business days before and ending one 
business day after the filing of Form 10-K or 10-Q (omitting the 
Form 8-K trigger) would shorten the disclosure coverage period to 
approximately 33 calendar days out of 365 for the average affected 
filer during calendar year 2021, based on EDGAR filings data, and 
decrease the number of affected grants to approximately 1.4 out of 
5.4 for calendar year 2021 (1.4 out of 5.6 for calendar year 2020) 
for the average issuer, based on Incentive Lab data. See supra note 
560 for a description of how these estimates were obtained.
---------------------------------------------------------------------------

    As another alternative, we could require tabular disclosure of 
awards made within four business days before and four business after 
the filing of a periodic report or the filing or furnishing of any Form 
8-K that discloses MNPI.\563\ Compared to the amendments, this 
alternative would potentially improve the accessibility to investors of 
data that can be used to gauge the presence of bullet-dodging as well 
as spring-loading, rather than primarily focusing on spring-
loading.\564\ This could incrementally improve the information benefits 
of the disclosure to investors. However, the improvement in information 
benefits under this alternative may be small if the additional 
disclosure introduces considerable noise. For example, if issuers 
schedule option grants shortly after the disclosure of MNPI in a 
periodic or current report, specifically because they are least likely 
to be in possession of MNPI during that time frame, the tabular 
disclosure would include a considerable number of options that are not 
granted strategically. In turn, this alternative could increase costs 
(discussed in detail in Section V.D.3 above), compared to the 
amendments.
---------------------------------------------------------------------------

    \563\ The use of a window starting four business days before and 
ending four business days after filings of Form 10-K, 10-Q, or 8-K 
would result in a potential average disclosure coverage period of 
approximately 126 calendar days out of 365, based on EDGAR filings 
data for calendar year 2021, and approximately 3.7 grants (out of 
5.4 grants) subject to the disclosure for the average issuer, based 
on ISS Incentive Lab data for calendar year 2021 (and approximately 
3.8 affected grants out of 5.6 grants for the average filer, based 
on ISS Incentive Lab data for calendar year 2020). See supra note 
560 for a description of how these estimates were obtained.
    \564\ Bullet-dodging can cause a call option to be at-the-money 
when it would have otherwise been out-of-the-money, assuming 
negative MNPI is about to be released. Generally speaking, the value 
of an at-the-money call option has a higher sensitivity to the share 
price than the value of an out-of-the-money call.
---------------------------------------------------------------------------

    Consistent with other provisions of Item 402, the amendments apply 
to awards to NEOs. This approach ensures consistency with other 
existing compensation disclosures and provides information about awards 
to the subset of executives likely to have MNPI as well as the most 
influence on the issuer's business decisions. As alternatives, we could 
limit the disclosure to the CEO or expand it to all executives. The 
alternative of narrowing (expanding) the set of executives whose awards 
are subject to the new disclosure requirement would result in lower 
(higher) disclosure costs but also would result in less (more) 
information about the timing of option awards and executive incentives, 
compared to the amendments. These alternatives would also decrease 
consistency across compensation disclosures.
    The amendments require the additional disclosure to be submitted 
using a structured (i.e., machine-readable) data language. As an 
alternative, we could require the disclosure but not require the use of 
a structured data language. Compared to the amendments, this 
alternative could make it harder for investors to extract the 
disclosure information, potentially increasing the costs they incur in 
making investment and voting decisions. However, this alternative also 
would decrease costs for affected filers (particularly for filers with 
more option grants subject to the new disclosure), compared to the 
amendments.

E. Additional Disclosure of Insider Gifts of Stock

    The amendments will require the disclosure of insiders' gifts of 
stock within two business days on Form 4. This amendment is a change 
from the existing rules that allow a stock gift to be disclosed on Form 
5, which is required to be filed within 45 days of the end of the year 
during which the gift was made. It will result in timelier disclosure 
of such transactions across all affected insiders.
1. Baseline and Affected Parties
    The amendments will affect insiders that make gifts of stock and 
report them on Form 5 today, although the majority of insiders already 
report gifts of stock

[[Page 80421]]

on Form 4. We estimate that approximately 800 insiders reported gifts 
of stock on Form 5 during calendar year 2021 (including approximately 
200 insiders that reported gifts both on Form 4 and Form 5).\565\ The 
majority of insiders reporting gifts of stock already report gifts of 
stock on Form 4: during calendar year 2021 approximately 3,000 insiders 
reported stock gifts on Form 4 (including approximately 200 insiders 
that made both Form 4 and Form 5 filings reporting stock gifts).
---------------------------------------------------------------------------

    \565\ The estimate is based on Form 5 data in Thomson Reuters/
Refinitiv insiders dataset (version retrieved June 27, 2022). Gifts 
of stock are identified based on transaction code ``G'' (``bona fide 
gift'').
---------------------------------------------------------------------------

2. Benefits
    To the extent that not all insiders presently report gifts of stock 
on Form 4, the amendments to Form 4 to require disclosure of such gifts 
of stock will result in timelier availability of information about 
beneficial ownership by the issuer's insiders, which was supported by 
various commenters.\566\ Disposition of an insider's shares through a 
gift in many cases reduces that insider's economic exposure to the 
issuer, which potentially weakens the alignment of incentives with the 
shareholder value maximization objective. A scenario in which an 
insider gifts stock while aware of MNPI and the recipient sells the 
gifted securities while the information remains nonpublic and material 
is economically equivalent to a scenario in which the insider trades on 
the basis of MNPI and gifts the trading proceeds to the recipient (see 
Section II.E for more details).
---------------------------------------------------------------------------

    \566\ See supra notes 329 and 330 and accompanying text.
---------------------------------------------------------------------------

    While non-pecuniary motives may be more important in a gift than in 
an open-market sale, the timing of a gift can reveal the insider's 
beliefs about the issuer's future share price. For an insider that has 
decided to make a gift, finding the time when the shares are priced 
higher (e.g., before the release of negative MNPI) will allow the 
insider to reduce the effective cost of the gift.\567\ In light of 
this, disclosure of timely information about the stock gift could be 
informative for investors evaluating the issuer's share price and 
making investment or sale decisions.\568\ However, these information 
benefits will be lower if the officer or director does not consider the 
cost of a gift (e.g., because the amount of the gift is small or 
relatively inconsequential in the context of the insider's overall net 
worth).
---------------------------------------------------------------------------

    \567\ In addition to any tax benefit from charitable stock 
gifts, an altruistic insider-donor may internalize the benefit to 
the donee. See, e.g., Louis Kaplow, A Note on Subsidizing Gifts, 58 
J. Public Econ. 469 (1995); Louis Kaplow, Tax Policy and Gifts, 88 
Am. Econ. Rev. 283 (1998).
    \568\ See letter from Mittendorf (citing Anil Arya et al., Tax-
favored Stock Donations by Corporate Insiders and Consequences for 
Equity Markets, 2022 Mgmt. Sci. (forthcoming) (2022) (developing a 
``model of informed stock trading when disposal of stock by insiders 
takes the form of tax-favored charitable donations rather than 
direct trading'' and demonstrating ``that charitable gifts by 
insiders can reflect nonpublic information about firm value'') 
(``Arya et al. (2022)'') and concluding that ``evidence suggests 
both prevalence of insiders making gifts strategically and potential 
consequences of accelerating public disclosure of such gifts as 
proposed in the amendment to Exchange Act Rule 16a-3.''); see also 
Sureyya Burcu Avci et al., Insider Giving, 2021 Duke L. J. 71 (2021) 
(finding evidence of informed timing of gifts of stock by the subset 
of insiders that are beneficial owners and also pointing to gift 
backdating as a potential consequence of delayed reporting of stock 
gifts with the latter providing inaccurate information to investors 
about changes to an insider's ownership incentives and incentive 
alignment with shareholder interests); Yermack (2009), supra note 
328 (demonstrating that these effects of strategic giving behavior 
are even more pronounced when gifts are to (nonoperating) private 
foundations).
---------------------------------------------------------------------------

    Finally, the requirement to disclose insiders' stock gifts on Form 
4 will facilitate market scrutiny and may reduce an insider's marginal 
incentive to donate stock based on MNPI, thereby reducing the 
associated incentive distortions.\569\ While an insider's benefit from 
using MNPI to time stock gifts may be smaller than in the case of 
timing trades, the ability to profit from such stock gift timing is 
expected to have a similar direction of the effect on insider 
incentives (such as incentives to pursue inefficient corporate 
decisions or to distort disclosure, in line with the discussion in 
Section V.A above).
---------------------------------------------------------------------------

    \569\ But see letter from Mittendorf citing Arya et al. (2022) 
(demonstrating, in a ``model of informed stock trading when disposal 
of stock by insiders takes the form of tax-favored charitable 
donations,'' ``that charitable gifts by insiders can reflect 
nonpublic information about firm value, and that they do so in a 
manner that promotes greater market efficiency'' and that ``relative 
to informed trading, insider donations yield greater market 
liquidity, more efficient equity prices, and superior investor 
protection.'') As an important caveat, the paper is based on a 
theoretical model rather than an empirical analysis of insider 
giving.
---------------------------------------------------------------------------

    We recognize that these benefits of the amended Form 4 requirements 
will be substantially reduced to the extent that most insider gifts of 
stock already are reported on Form 4, as noted in Section V.E.1 above.
3. Costs
    As several commenters noted, amended Form 4 disclosure with regard 
to gifts of stock will result in additional costs for insiders.\570\ 
Direct costs of accelerated gift reporting will include additional 
compliance-related costs, which may be higher for more complex 
transactions involving gifts, such as estate planning 
transactions.\571\ Indirect costs may include reputational and investor 
relations costs stemming from increased market scrutiny of gifts of 
stock, as well as potential changes to gifting behavior in anticipation 
of such scrutiny.\572\ We note that these costs of the amended Form 4 
requirements will be substantially reduced to the extent that most 
insider gifts of stock already are reported on Form 4, as noted in 
Section V.E.1 above.
---------------------------------------------------------------------------

    \570\ See supra notes 331 and 332 and accompanying text.
    \571\ See, e.g., letters from Davis Polk and HRPA.
    \572\ See supra note 333. In effect, then, allowing insiders to 
donate based on MNPI without Form 4 reporting would transfer value 
to donees at the expense of other traders and of market liquidity.
---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the amendments to incrementally decrease the information 
asymmetry between insiders and investors. Recent disposition of shares 
through gifts of stock informs investors about changes to officers' and 
directors' incentives derived from holdings of issuer stock. Timely 
information about the disposition of shares through stock gifts could 
in some circumstances inform investors about officers' and directors' 
outlook on future changes to the issuer's share prices. Both factors 
may result in more informationally efficient prices and more efficient 
allocation of capital in investor portfolios.
    Importantly, we expect the amendments to draw market scrutiny to 
insiders' use of MNPI in the timing of stock gifts, potentially 
decreasing the incidence of such stock gift timing. This reduces 
insiders' incentives to manipulate corporate disclosures around stock 
gifts, which could in turn yield more informationally efficient share 
prices and more efficient allocation of capital in investor portfolios. 
The amendments also could marginally reduce insider incentives to 
pursue inefficient corporate investment decisions driven by personal 
gain from gifts based on MNPI, in line with the discussion in Sections 
V.A and V.E.2 above.
    Because this amendment will apply broadly across all insiders' 
stock gifts, generally, we do not anticipate it to result in meaningful 
competitive disparities among insiders.
5. Reasonable Alternatives
    The amendments require timelier disclosure of insider gifts of 
stock. As an alternative, we could narrow the scope of the amended gift 
disclosure to apply only to officers and directors, or only to

[[Page 80422]]

a certain type of gift of stock (e.g., charitable gifts to charities 
affiliated with the insider). Compared to the amendments, narrowing the 
scope of gifts subject to the disclosure could provide less information 
to market participants \573\ but also result in lower aggregate costs. 
Further, because the majority of insiders already disclose gifts on 
Form 4, the economic significance of potential exemptions under this 
alternative may be modest. The requirement will provide consistency in 
the timeliness of reporting of stock gifts across insiders.
---------------------------------------------------------------------------

    \573\ See supra note 568 (discussing a recent study that 
documents widespread informed gift timing not limited to insider-
affiliated charities).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules, schedules, and forms that would be 
affected by the rule amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\574\ The Commission published a notice requesting comment on 
revisions to these collections of information requirements in the 
Proposing Release and has submitted these requirements to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\575\ The hours and costs associated with preparing, filing, and 
sending the schedules and forms constitute reporting and cost burdens 
imposed by each collection of information. An agency may not conduct or 
sponsor, and a person is not required to comply with, a collection of 
information unless it displays a currently valid OMB control number. 
The titles for the collections of information are:
---------------------------------------------------------------------------

    \574\ 44 U.S.C. 3501 et seq.
    \575\ See 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     Form 10-K (OMB Control No. 3235-0063);
     Form 10-Q (OMB Control No. 3235-0070);
     Schedule 14C (OMB Control No. 3235-0057);
     Schedule 14A (OMB Control No. 3235-0059);
     Form 4 (OMB Control Number 3235-0287);
     Form 20-F (OMB Control Number 3235-0288);
     Form 5 (OMB Control Number 3235-0362); and
     Rule 10b5-1 (a new collection of information).
    The forms, schedules, and regulations listed above were adopted 
under the Securities Act and/or the Exchange Act. These regulations, 
schedules, and forms set forth the disclosure requirements for 
registration statements, periodic and current reports, distribution 
reports, and proxy and information statements filed by registrants to 
help investors make informed investment and voting decisions. 
Compliance with these information collections is mandatory. Responses 
to these information collections are not kept confidential, and there 
is no mandatory retention period for the information disclosed. Rule 
10b5-1 sets forth the conditions to the affirmative defenses under the 
rule. The use of the affirmative defenses is voluntary, and compliance 
with this information collection would be mandatory only if a 
respondent chooses to rely on the affirmative defenses. Responses to 
this information collection will not be confidential and there is no 
mandatory retention period for the collection of information.
    A description of the amendments, including the need for the 
information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
economic effects of the amendments can be found in Section V above.

B. Summary of Comment Letters

    In the Proposing Release, the Commission requested comment on the 
PRA burden hour and cost estimates and the analysis used to derive such 
estimates. We did not receive any comments that directly addressed the 
PRA analysis of the proposed amendments. Several commenters, however, 
did provide responses to certain requests for comment that have 
informed some of our PRA estimates. As discussed, above, we have made 
some changes to the proposed amendments as a result of comments 
received in response to the Proposing Release. We have revised our 
estimates from the Proposing Release accordingly, taking into account 
the changes and the comments received.

C. Summary of Collections of Information Requirements

    As discussed in more detail in the Proposing Release,\576\ we 
derived the burden hour estimates by estimating change in paperwork 
burden as a result of the amendments. As discussed in Section II, we 
have made several changes to the proposed amendments as a result of 
comments received. Some of these changes impact our estimates.\577\
---------------------------------------------------------------------------

    \576\ See Section V of the Proposing Release.
    \577\ The changes to new Item 408(b) and Item 16J, the 
amendments to Forms 4 and 5, and the new certification condition of 
Rule 10b5-1(c)(1)(ii)(C) did not impact our estimates. Item 408(b) 
and Item 16J of Form 20-F will require that an issuer file its 
insider trading policies and procedures as an exhibit to the 
applicable filing rather than in its body, and that exhibit will not 
be tagged. Because this change only moves the location of this 
disclosure and eliminates one tagging requirement, we believe a four 
hour burden estimate remains appropriate. Finally, the certification 
will be included in the Rule 10b5-1 plan as a representation rather 
than prepared as a separate document to be furnished to the issuer. 
We do not expect this change in disclosure location to change the 
PRA burden on the director or officer. The removal of the retention 
instruction for the certification similarly does not affect our PRA 
burden estimates as that retention instruction was not included in 
the PRA estimate in the Proposing Release.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the average 
incremental burden for an issuer to prepare the Item 408(a) disclosure 
would be 15 hours. The proposed estimate included the time and cost of 
preparing the disclosure, as well as tagging the data in XBRL format. 
We have revised new Item 408(a) to (1) clarify that Item 408(a) does 
not require disclosure of pricing terms, and (2) not require quarterly 
disclosure regarding the adoption and termination of Rule 10b5-1 plans 
and non-Rule 10b5-1 trading arrangements by an issuer. To reflect the 
impact of this change on our estimate, we first estimate the burden of 
each of the two proposed components we are not adopting and deduct this 
amount from the proposed 15 hours. We estimate that the burden of 
disclosing the proposed disclosure of pricing terms of Rule 10b5-1 
plans would have been two hours and that burden of preparing proposed 
disclosure regarding the adoption and termination of Rule 10b5-1 and 
non-Rule 10b5-1 trading arrangements by a registrant would have been 
three hours for a combined burden of five hours. Therefore, we are 
reducing the estimated the burden of Item 408(a) from 15 hours to 10 
hours.
    We also are not adopting the proposed optional checkboxes on Forms 
4 and 5 that would allow a filer to indicate whether a reported 
transaction was made pursuant to a pre-planned contract, instruction, 
or written plan for the purchase or sale of equity securities of the 
issuer that did not satisfy the affirmative conditions of Rule 10b5-
1(c). We do not believe this change would substantively modify the 
collection of information requirements or otherwise affect the overall 
burden estimates associated with these forms. We are, however, 
adjusting the burden estimate for Form 5 to reflect the impact of 
requiring the disclosure of dispositions of equity securities by bona 
fide gifts on Form 4, rather than on Form 5. We believe this change 
would

[[Page 80423]]

result in a decrease in 0.25 hours in the information collection burden 
for Form 5.
    In addition, the table required by new Item 402(x) will cover stock 
options, SARs, and/or similar option-like instruments awarded to a 
named executive officer within a four business day period before and a 
one day period after certain triggering events. This is a change from 
the proposal, in which the time window for disclosure would have been 
the 14 day period before and after the event. We also narrowed the 
events that trigger this disclosure by removing the issuer share 
repurchase disclosure trigger and carving out Item 5.02(e) Forms 8-K 
that report the grant of a material new option award. As a result, we 
expect fewer awards will be disclosed. Accordingly, we have adjusted 
our PRA estimate for this disclosure from nine hours to six hours per 
form.
    The following table summarizes the estimated effects of the final 
amendments on the paperwork burdens associated with the affected forms.

                     PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
----------------------------------------------------------------------------------------------------------------
                                                                                      Estimated burden increase
                   Final amendments                     Affected forms or schedules        and/or decrease
----------------------------------------------------------------------------------------------------------------
Item 402(x):
     Require disclosure of a registrant's      Form 10-K * and Schedules     6 hour increase in
     policies and practices on the timing of awards     14A, and 14C.                 compliance burden per
     of stock options, SARs or similar option-like                                    form.
     instruments in relation to the disclosure of
     material nonpublic information by the
     registrant, including how the board determines
     when to grant options, whether the board or
     compensation committee takes material nonpublic
     information into account when determining the
     timing and terms of an award; and whether the
     registrant has timed the disclosure of material
     nonpublic information for the purpose of
     affecting the value of executive compensation..
     Require tabular disclosure of each
     option award granted within four business days
     before and one business day after the filing of
     a periodic report or the filing or furnishing of
     a current report on Form 8-K that contains
     material nonpublic information (other than
     disclosure of a material new option award grant
     under Item 5.02(e) of Form 8-K).
     Require information to be reported using
     a structured data language..
Item 408(a):
     Require disclosure of the adoption or     Forms 10-K and 10-Q.........  10 hour increase in
     termination of any contract, instruction or                                      compliance burden per
     written plan for the purchase or sale of                                         form.
     securities intended to satisfy the affirmative
     defense conditions of Rule 10b5-1(c) and non-
     Rule 10b5-1 trading arrangements, by directors
     and officers (as defined in Exchange Act Rule
     16a-1(f)), including the name and title of the
     director or officer; and a description of the
     material terms of the contract, instruction or
     written plan (other than pricing terms).
     Require information to be reported using
     a structured data language.
Item 408(b) and Item 16J:
     Require disclosure of whether the         Forms 10-K,* 20-F, and        4 hour increase in
     registrant has adopted (and if not, why) insider   Schedules 14A, and 14C.       compliance burden per
     trading policies and procedures governing the                                    form.
     purchase, sale, and other dispositions of the
     registrant's securities and require filing of a
     copy of its insider trading policies and
     procedures as an exhibit to Form 10-K..
     Require information to be reported using
     a structured data language..
Form 4:
     Require reporting of dispositions of      Form 4......................  0.5 hour increase in
     equity securities by bona fide gifts..                                           compliance burden per
                                                                                      form.
     Require new checkbox disclosure to
     indicate that a sale or purchase reported on the
     form was made pursuant to a contract,
     instruction, or written plan that is intended to
     satisfy the Rule 10b5-1(c)(1) affirmative
     defense, and require disclosure of the date of
     adoption of the plan..
Form 5:
     Require new checkbox disclosure to        Form 5......................  0.25 hour increase in
     indicate that a sale or purchase reported on the                                 compliance burden per
     form was made pursuant to a contract,                                            form.
     instruction, or written plan that is intended to
     satisfy the Rule 10b5-1(c)(1) affirmative
     defense, and require disclosure of the date of
     adoption of the plan..
 
     Require reporting of dispositions of      ............................  0.25 hour decrease in
     equity securities by bona fide gifts on Form 4,                                  compliance burden per
     rather than on Form 5..                                                          form.
Rule 10b5-1(c)(1)(ii):
     Require directors and ``officers'' (as    ............................  1.5 hour compliance burden
     defined in Exchange Act Rule 16a-1(f)) as a                                      per written Rule 10b5-1
     condition to the affirmative defense, to provide                                 plan.
     representations in written Rule 10b5-1 plans
     that, on the date of adoption of the plan, (i)
     they are not aware of any material nonpublic
     information about the security or issuer or any
     subsidiary of the issuer; and (ii) that they are
     adopting the contract, instruction, or plan in
     good faith and not as part of a plan or scheme
     to evade the prohibitions of this section..
----------------------------------------------------------------------------------------------------------------
Notes:
* The burden estimate for Form 10-K assumes that Schedules 14A and 14C would be the primary disclosure documents
  for the information provided in response to Item 402(x) and Item 408(b) of Regulation S-K and the disclosure
  requirement under Form 10-K would be satisfied by incorporating the information by reference from the proxy or
  information statement.

D. Burden and Cost Estimates Related to the Amendments

    Below we estimate the incremental and aggregate increase in 
paperwork burden as a result of the final amendments. These estimates 
represent the average burden for all respondents, both large and small. 
In deriving our estimates, we recognize that the burdens will likely 
vary among individual respondents based on a number of factors.
    We do not believe that the final amendments will change the 
frequency of responses to the existing collections of information; 
rather, we estimate that the proposed amendments would change only the 
burden per response. For the new collection of information, we estimate 
that there would be 8,700 responses based on the staff's analysis, 
discussed in Section V.B.1, of beneficial ownership filings on Forms 3, 
4, and 5 made in the 2021 calendar year.\578\ Based on the data from 
these filings, approximately 5,800 officers and directors reported a 
transaction pursuant to a Rule 10b5-1 trading arrangement. As noted 
above, the number of officers and directors using a Rule 10b5-1 trading 
arrangement is likely larger. Accordingly, we adjusted the estimate 
upward by 50 percent.
---------------------------------------------------------------------------

    \578\ See supra note 377 and accompanying text.
---------------------------------------------------------------------------

    The burden estimates were calculated by multiplying the estimated 
number of responses by the estimated average

[[Page 80424]]

amount of time it would take a respondent to prepare and review the 
disclosures that will be required under the final amendments. For 
purposes of the PRA, the information collection burden is allocated 
between internal burden hours and outside professional costs.
    The table below sets forth the percentage estimates we typically 
use for the burden allocation for each form.\579\ We also estimate that 
the average cost of retaining outside professionals is $600 per 
hour.\580\
---------------------------------------------------------------------------

    \579\ In the Proposing Release, we used a 75% company and 25% 
outside professional allocation for Form 20-F, but upon further 
consideration we believe that a 25% company and 75% outside 
professional allocation for Form 20-F better reflects current 
practice for this form because FPIs rely more heavily on outside 
counsel for their preparation.
    \580\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $600 per hour. At the proposing 
stage, we used an estimated cost of $400 per hour. We are increasing 
this cost estimate to $600 per hour to adjust the estimate for 
inflation from August 2006 to the present. The inflation-adjusted 
hourly amount is $583.88, which we have rounded up to $600.

  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                              Outside
           Form/schedule type                Internal      professionals
                                             (percent)       (percent)
------------------------------------------------------------------------
Forms 10-K, 10-Q, and Schedules 14A and               75              25
 14C....................................
Form 20-F...............................              25              75
Forms 4 and 5...........................             100
Rule 10b5-1.............................             100
------------------------------------------------------------------------

    The table below illustrates the incremental change to the total 
annual compliance burden of affected forms and schedules, in hours and 
in costs, as a result of the final amendments.\581\
---------------------------------------------------------------------------

    \581\ The number of estimated affected responses is based on the 
number of responses in the Commission's current OMB PRA filing 
inventory. The OMB PRA filing inventory represents a three-year 
average. These averages may not align with the actual number of 
filings in any given year.

             PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Estimated                                       Estimated
                                                             Number of      burden hour        Total         Estimated      increase in   Total increase
                    Form or schedule                         estimated      increase /      incremental     increase in       outside       in outside
                                                             affected        affected       increase in      internal      professional    professional
                                                             responses       response      burden hours    burden hours        hours           costs
                                                                     (A)             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x     (F) = (E) x
                                                                                                     (B)  (allocation %)  (allocation %)            $600
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K....................................................           8,292              11          91,212          68,409          22,803     $13,681,800
10-Q....................................................          22,925              10         229,250       171,937.5        57,312.5      34,387,500
20-F....................................................             729               4           2,916             729           2,187       1,312,200
14A.....................................................           6,369              10          63,690        47,767.5        15,922.5       9,553,500
14C.....................................................             569              10           5,690         4,267.5         1,422.5         853,500
4.......................................................         338,207             0.5       169,103.5       169,103.5               0               0
5.......................................................           5,939               0  ..............  ..............               0               0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............  ..............  ..............         461,485  ..............      59,788,500
--------------------------------------------------------------------------------------------------------------------------------------------------------

    PRA Table 4 illustrates the change to the annual cost burden of the 
affected forms as a result of the adjustment to the average cost of 
retaining outside professionals from $400 to $600 per hour.\582\
---------------------------------------------------------------------------

    \582\ See supra note 580. The table adjusts the average cost of 
retaining outside professionals from $400 to $600 per hour for the 
affected Exchange Act forms.

   PRA Table 4--Calculation of the Change in Costs of Current Responses Resulting from the Average Hourly Cost
                                                   Adjustment
----------------------------------------------------------------------------------------------------------------
                                                               Number of       Current cost      Adjusted cost
                     Form or schedule                          affected       burden at $400     burden at $600
                                                               responses         per hour           per hour
----------------------------------------------------------------------------------------------------------------
10-K......................................................           8,292     $1,840,481,319     $2,805,092,400
10-Q......................................................          22,925        414,613,154        626,150,400
20-F......................................................             729        576,927,825        862,826,400
14A.......................................................           6,369        101,958,512        152,989,800
14C.......................................................             569          7,350,144         11,023,600
----------------------------------------------------------------------------------------------------------------



[[Page 80425]]

    The following tables summarizes the requested paperwork burden 
changes to existing information collections, including the estimated 
total reporting burdens and costs, under the final amendments.\583\
---------------------------------------------------------------------------

    \583\ Figures in this table have been rounded to the nearest 
whole number. Figures in column (I) are the sum of column (F) and 
the adjusted cost burdens for each affected form calculated in PRA 
Table 4 above.

                                                               PRA Table 5--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Current burden                            Program change                       Requested change in burden
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         Increase in
                          Form or Sch.                              Current      Current      Current cost    Number of   Increase in      outside        Annual       Burden
                                                                     annual       burden         burden        affected     internal    professional    responses      hours       Cost burden
                                                                   responses      hours                       responses      hours          costs
                                                                          (A)          (B)              (C)          (D)          (E)             (F)      (G) = A    (H) = B +              (I)
                                                                                                                                                                            (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K............................................................        8,292   14,025,462   $1,840,481,319        8,292       68,409     $13,681,800        8,292   14,093,871   $2,818,774,200
10-Q............................................................       22,925    3,130,752     $414,613,154       22,925      171,938     $34,387,500       22,925    3,302,690     $660,537,900
20-F............................................................          729      479,348     $576,927,825          729          729      $1,312,200          729      480,077     $864,138,600
14A.............................................................        6,369      764,949     $101,958,512        6,369       47,768      $9,553,500        6,369      812,717     $162,543,300
14C.............................................................          569       55,118       $7,350,144          569        4,268        $853,500          569       59,386      $11,877,100
4...............................................................      338,207      169,104                0      338,207      169,104               0      338,207      338,208                0
5...............................................................        5,939        5,939                0        5,939            0               0        5,939            0                0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    PRA Table 6 summarizes the requested paperwork burden for the 
collection of information for the representations that will be required 
under Rule 10b5-1(c)(1)(ii), including the estimated total reporting 
burdens and costs. For purposes of the PRA, we estimate that the Rule 
10b5-1(c)(1)(ii) representation would entail a 1.5 compliance burden 
per response with 8,700 annual responses.

    PRA Table 6--Requested Paperwork Burden for the New Collection of
                               Information
------------------------------------------------------------------------
                                                 Paperwork burden
                                         -------------------------------
        Collection of information             Annual
                                             responses     Burden hours
                                                     (A)       (A) x 1.5
------------------------------------------------------------------------
Rule 10b5-1(c)(1)(ii) Representation....           8,700          13,050
------------------------------------------------------------------------

VII. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\584\ It relates to amendments to Rule 10b5-1(c)(1); 
Regulation S-K, Forms 10-K, 20-F, 10-Q, 4, and 5; and Schedules 14A and 
14C.
---------------------------------------------------------------------------

    \584\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Amendments

    The purpose of the final amendments is to address potentially 
abusive practices associated with Rule 10b5-1 trading arrangements, 
grants of options and other equity instruments with similar option-like 
features and the gifting of securities. The final amendments are also 
intended to provide greater transparency to investors about issuer and 
insider trading arrangements and restrictions, as well as insider 
compensation and incentives, enabling more informed voting and 
investment and decisions about an issuer. The need for, and objectives 
of, the final rules are described in greater detail in Sections I and 
II above. We discuss the economic impact and potential alternatives to 
the amendments in Section V, and the estimated compliance costs and 
burdens of the amendments under the PRA in Section VI above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, the Commission requested comment on any 
aspect of the Initial Regulatory Flexibility Analysis (``IRFA''), 
including how the proposed amendments could achieve their objective 
while lowering the burden on small entities, the number of small 
entities that would be affected by the proposed rule and form 
amendments, the existence or nature of the potential effects of the 
proposed amendments on small entities discussed in the analysis, and 
how to quantify the effects of the proposed amendments. We did not 
receive any comments that specifically addressed the IRFA. However, 
some commentators addressed aspects of the proposals that could 
potentially affect small entities.\585\ In particular, one commenter 
supported exempting SRCs from proposed Item 408(a),\586\ while other 
commenters expressed support for requiring SRCs to provide the proposed 
disclosures.\587\ For the reasons discussed above, we have not adopted 
such an exception.\588\
---------------------------------------------------------------------------

    \585\ See Section II above.
    \586\ See letter from MD Bar.
    \587\ See, e.g., letters from ICGN, and Cravath.
    \588\ See supra Section II.B.2.c.
---------------------------------------------------------------------------

C. Small Entities Subject to the Amendments

    The final amendments would apply to registrants that are small 
entities. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \589\ 
For purposes of the RFA, under our rules, a registrant, other than an 
investment company, is a ``small business'' or ``small organization'' 
if it had total assets of $5 million or less on the last day of its 
most recent fiscal year and is engaged or proposing to engage in an 
offering of securities that does not exceed $5 million.\590\ Under 17 
CFR 270.0-10, an investment company, including a business development 
company, is considered to be a small entity if it,

[[Page 80426]]

together with other investment companies in the same group of related 
investment companies, has net assets of $50 million or less as of the 
end of its most recent fiscal year. An investment company, including a 
business development company,\591\ is considered to be a ``small 
business'' if it, together with other investment companies in the same 
group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.\592\ The Commission 
staff estimates that, as of January 2022, there were approximately 
1,380 issuers and two business development companies that may be 
considered small entities that would be subject to the proposed 
amendments.\593\
---------------------------------------------------------------------------

    \589\ 5 U.S.C. 601(6).
    \590\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
    \591\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
    \592\ 17 CFR 270.0-10(a).
    \593\ This estimate is based on staff analysis of Form 10-K 
filings on EDGAR, or amendments thereto, filed during the calendar 
year of Jan. 1, 2021 to Dec. 31, 2021, and on data from XBRL 
filings, Compustat, and Ives Group Audit Analytics. The staff noted 
that the estimated number of small entities includes approximately 
344 entities that are special purpose acquisition companies 
(``SPACs''). A SPAC is typically a shell company that is organized 
for the purpose of merging with or acquiring one or more 
unidentified private operating companies within a certain time 
frame. Some of these small entities that are SPACs are unlikely to 
remain small entities once the SPAC has completed its initial 
business combination and becomes an operating company.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The final amendments to Rule 10b5-1(c) will apply to small entities 
to the same extent as other entities, irrespective of size. They also 
do not directly impose any recordkeeping or compliance requirements on 
small entities.
    The amendments to Regulation S-K, Forms 10-K, 20-F, 10-Q, and 
Schedules 14A and 14C are designed to provide greater transparency 
about officer and director trading arrangements; policies and 
procedures with respect to insider trading; and the timing of certain 
equity compensation awards to NEOs close in time to the release of 
material nonpublic information. These amendments generally will 
require:
     Disclosure regarding the adoption and termination of Rule 
10b5-1 plans and non-Rule 10b5-1 trading arrangements of officers (as 
defined in Rule 16a-1(f)) and directors, as well as the material terms 
of such trading arrangements (other than pricing terms);
     Disclosure of whether the registrant has adopted (and if 
not, why) insider trading policies and procedures governing the 
purchase, sale, and other dispositions of the registrant's securities 
by directors, officers and employees that are reasonably designed to 
promote compliance with insider trading laws, rules and regulations, 
and any listing standards applicable to the issuer, and filing such 
policies and procedures as an exhibit to the registrant's annual 
report;
     Narrative disclosure of a registrant's policies and 
practices on the timing of awards of stock options, SARs, and/or 
similar option-like instruments; and
     Tabular disclosure of each such award granted to an NEO 
within four business days before and one business day after the filing 
of a periodic report or the filing or furnishing of a current report on 
Form 8-K that contains material nonpublic information (other than a 
current report on Form 8-K disclosing a material new option award grant 
under Item 5.02(e)).
    In addition, the amendments to Forms 4 and 5 will:
     Add a Rule 10b5-1 checkbox to these forms that will 
require a Form 4 or 5 filer to indicate whether a sale or purchase 
reported on that form was made pursuant to a contract, instruction or 
written plan that is intended to satisfy the affirmative defense 
conditions of Rule 10b5-1(c). Filers would also be required to provide 
the date of adoption of such trading arrangement; and
     Require the reporting of dispositions of bona fide gifts 
of equity securities on Form 4.
    We anticipate that the direct costs of preparing disclosures in 
response to the amendments will likely be relatively small as such 
information will be readily available to issuers. To the extent that 
the disclosure requirements have a greater effect on small filers 
relative to large filers, they could result in adverse effects on 
competition. The fixed component of the legal costs of preparing the 
disclosure could be one contributing factor. Compliance with certain 
provisions of the final amendments may require the use of professional 
skills, including accounting, legal, and technical skills. The final 
amendments are discussed in detail in Sections I and II above. We 
discuss the economic impact, including the estimated compliance costs 
and burdens of the final rules on all issuers, including small 
entities, in Sections V and VI above.

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. In connection with the amendments, we considered the 
following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    Insider trading imposes costs on the investors in a company.\594\ 
The disclosure amendments and the amendments to Rule 10b5-1(c)(1) are 
intended to provide greater transparency to investors; decrease 
information asymmetries between corporate insiders and outside 
investors; and to deter abusive and problematic practices associated 
with the use of Rule 10b5-1 plans, grants of option awards, and the 
gifting of securities. Importantly, we anticipate the final amendments 
will work in tandem to significantly reduce improper insider trading 
through Rule 10b5-1 plans. As discussed in above in Section V, 
deterring insider trading will result in benefits for investor 
protection, capital formation, and orderly and efficient markets. In 
addition, the amendments will disincentivize insider behavior that 
undermines investor confidence and harms the securities markets. For 
these reasons, we generally do not believe it would be appropriate to 
provide simplified or consolidated reporting requirements, a differing 
compliance timetable, or an exemption for small entities from all or 
part of the final amendments, although the final amendments provide for 
scaled disclosure for SRCs under new Item 402(x), consistent with our 
scaled approach to executive compensation disclosure. However, to 
minimize the initial compliance burden on SRCs we are providing a six 
month transition period for compliance with the new issuer disclosure 
requirements to mitigate the compliance burdens that SRCs may 
experience.\595\
---------------------------------------------------------------------------

    \594\ See supra Section V.
    \595\ See supra Section III.
---------------------------------------------------------------------------

    With respect to using performance rather than design standards, the 
final amendments use design standards to promote uniform compliance 
requirements for all registrants and to address the concerns underlying 
the amendments, which apply to entities of all sizes. For example, the 
amendments set forth specific requirements that a

[[Page 80427]]

trader must satisfy to rely on the Rule 10b5-1(c)(1) affirmative 
defense. These design standards will better ensure that our concerns 
related to the misuse of Rule 10b5-1 plans are addressed and that 
traders understand how they can plan securities transactions in advance 
and satisfy the conditions of this defense.
    Finally, we generally have not exempted small entities from all of 
part of the requirements, as some commenters requested, as the concerns 
related to insider trading that underlie these amendments apply to 
entities of all sizes. For example, as discussed in more detail above, 
\596\ while we are sensitive to the potential that Item 408(a) could 
have a disproportionate impact on SRCs, we have not exempted SRCs from 
providing this disclosure as doing so would deprive investors in those 
issuers of material information about the use and potential abuse of 
Rule 10b5-1 plans and non-Rule 10b5-1 trading arrangements by an SRC's 
officers or directors. We note, however, that, to remain consistent 
with the scaled approach to SRCs' executive compensation disclosure, 
SRCs may limit the new tabular disclosure of option awards to the PEO, 
the two most highly compensated executive officers other than the PEO 
at fiscal year-end, and up to two additional individuals who would have 
been the most highly compensated but for not serving as executive 
officers at fiscal year-end.
---------------------------------------------------------------------------

    \596\ See supra Section II.B.2.c.
---------------------------------------------------------------------------

Statutory Authority

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 3(b), 6, 7, 10, 17, 19(a), and 28 
of the Securities Act; Sections 3, 9, 10, 12, 13, 14, 15(d), 16, 20A, 
21A, 23(a), and 36 of the Exchange Act; and Sections 8, 20(a), 24(a), 
30 and 38 of the Investment Company Act; and 15 U.S.C. 7264.

List of Subjects in 17 CFR Parts 229, 232, 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    For the reasons set out in the preamble, the Commission- amends 
title 17, chapter II of the Code of Federal Regulations as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K


0
1. The authority citation for part 229 continues to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).


0
2. Section 229.402 is amended by adding paragraph (x) to read as 
follows:


Sec.  229.402  (Item 402) Executive compensation.

* * * * *
    (x) Disclosure of the registrant's policies and practices related 
to the grant of certain equity awards close in time to the release of 
material nonpublic information. (1) Discuss the registrant's policies 
and practices on the timing of awards of options in relation to the 
disclosure of material nonpublic information by the registrant, 
including how the board determines when to grant such awards (for 
example, whether such awards are granted on a predetermined schedule); 
whether the board or compensation committee takes material nonpublic 
information into account when determining the timing and terms of such 
an award, and, if so, how the board or compensation committee takes 
material nonpublic information into account when determining the timing 
and terms of such an award; and whether the registrant has timed the 
disclosure of material nonpublic information for the purpose of 
affecting the value of executive compensation.
    (2)(i) If, during the last completed fiscal year, the registrant 
awarded options to a named executive officer in the period beginning 
four business days before the filing of a periodic report on Form 10-Q 
(Sec.  249.308a of this chapter) or Form 10-K (Sec.  249.310 of this 
chapter), or the filing or furnishing of a current report on Form 8-K 
(Sec.  249.308 of this chapter) that discloses material nonpublic 
information (other than a current report on Form 8-K disclosing a 
material new option award grant under Item 5.02(e) of that form), and 
ending one business day after the filing or furnishing of such report 
provide the information specified in paragraph (x)(2)(ii) of this 
section, concerning each such award for each of the named executive 
officers in the following tabular format:

                                         Table 13 to paragraph (x)(2)(i)
----------------------------------------------------------------------------------------------------------------
                                                                                               Percentage change
                                                                                                 in the closing
                                                                                                market price of
                                                                                                 the securities
                                                                                                 underlying the
                                                                                               award between the
                                                                                                  trading day
                                                                                                     ending
                                                                                               immediately prior
                                          Number of                          Grant date fair   to the disclosure
      Name           Grant date          securities      Exercise price of     value of the       of material
                                       underlying the     the award ($/Sh)        award            nonpublic
                                            award                                               information and
                                                                                                the trading day
                                                                                                   beginning
                                                                                                  immediately
                                                                                                 following the
                                                                                                 disclosure of
                                                                                                    material
                                                                                                   nonpublic
                                                                                                  information
----------------------------------------------------------------------------------------------------------------
(a)              (b)...............  (c)...............  (d)..............  (e)..............  (f)
PEO
PFO
A
B
C
----------------------------------------------------------------------------------------------------------------


[[Page 80428]]

    (ii) The Table shall include:
    (A) The name of the named executive officer (column (a));
    (B) On an award-by-award basis, the grant date of the option award 
reported in the table (column (b));
    (C) On an award-by-award basis, the number of securities underlying 
the options, (column (c));
    (D) On an award-by-award basis, the per-share exercise price of the 
options (column (d));
    (E) On an award-by-award basis, the grant date fair value of each 
award computed using the same methodology as used for the registrant's 
financial statements under generally accepted accounting principles 
(column (e)).
    (F) For each instrument reported in column (b), disclose the 
percentage change in the market price of the underlying securities 
between the closing market price of the security one trading day prior 
to and the trading day beginning immediately following the disclosure 
of material nonpublic information (column (f)).
    Instruction to paragraph (x)(2). A registrant that is a smaller 
reporting company or emerging growth company may limit the disclosures 
in the table to its PEO, the two most highly compensated executive 
officers other than the PEO who were serving as executive officers at 
the end of the last completed fiscal year, and up to two additional 
individuals who would have been the most highly compensated but for the 
fact that the individual was not serving as an executive officer at the 
end of the last completed fiscal year.
    (3) The disclosure provided pursuant to this paragraph (x) must be 
provided in an Interactive Data File as required by 17 CFR 232.405 
(Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

0
3. Add Sec.  229.408 to read as follows:


Sec.  229.408  (Item 408) Insider trading arrangements and policies.

    (a)(1) Disclose whether, during the registrant's last fiscal 
quarter (the registrant's fourth fiscal quarter in the case of an 
annual report), any director or officer (as defined in Sec.  240.16a-
1(f) of this chapter) adopted or terminated:
    (i) Any contract, instruction or written plan for the purchase or 
sale of securities of the registrant intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c) (Sec.  240.10b5-1(c) 
of this chapter) (a ``Rule 10b5-1 trading arrangement''); and/or
    (ii) Any ``non-Rule 10b5-1 trading arrangement'' as defined in 
paragraph (c) of this section.
    (2) Identify whether the trading arrangement is intended to satisfy 
the affirmative defense of Rule 10b5-1(c), and provide a description of 
the material terms, other than terms with respect to the price at which 
the individual executing the Rule 10b5-1 trading arrangement or non-
Rule 10b5-1 trading arrangement is authorized to trade, such as:
    (A) The name and title of the director or officer;
    (B) The date on which the director or officer adopted or terminated 
the trading arrangement;
    (C) The duration of the trading arrangement; and
    (D) The aggregate number of securities to be purchased or sold 
pursuant to the trading arrangement.
    (3) The disclosure provided pursuant to paragraphs (a)(1) and (2) 
of this section must be provided in an Interactive Data File as 
required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance 
with the EDGAR Filer Manual.
    (b)(1) Disclose whether the registrant has adopted insider trading 
policies and procedures governing the purchase, sale, and/or other 
dispositions of the registrant's securities by directors, officers and 
employees, or the registrant itself, that are reasonably designed to 
promote compliance with insider trading laws, rules and regulations, 
and any listing standards applicable to the registrant. If the 
registrant has not adopted such policies and procedures, explain why it 
has not done so.
    (2) If the registrant has adopted insider trading policies and 
procedures, the registrant must file such policies and procedures as an 
exhibit. If all of the registrant's insider trading policies and 
procedures are included in its code of ethics (as defined in 17 CFR 
229.406(b)) and the code of ethics is filed as an exhibit pursuant to 
17 CFR 229.406(c)(1), that would satisfy the exhibit requirement of 
this paragraph.
    (3) The disclosure provided pursuant to paragraph (b)(1) of this 
section must be provided in an Interactive Data File as required by 17 
CFR 232.405 in accordance with the EDGAR Filer Manual.
    (c) For purposes of this Item 408, a director or officer (as 
defined in Sec.  240.16a-1(f) of this chapter) (each a ``covered 
person'') has entered into a non-Rule 10b5-1 trading arrangement where:
    (1) The covered person asserts that at a time when they were not 
aware of material nonpublic information about the security or the 
issuer of the security they had adopted a written arrangement for 
trading the securities; and
    (2) The trading arrangement:
    (i) Specified the amount of securities to be purchased or sold and 
the price at which and the date on which the securities were to be 
purchased or sold;
    (ii) Included a written formula or algorithm, or computer program, 
for determining the amount of securities to be purchased or sold and 
the price at which and the date on which the securities were to be 
purchased or sold; or
    (iii) Did not permit the covered person to exercise any subsequent 
influence over how, when, or whether to effect purchases or sales; 
provided, in addition, that any other person who, pursuant to the 
trading arrangement, did exercise such influence must not have been 
aware of material nonpublic information when doing so.

0
4. Amend Sec.  229.601 by:
0
a. In the exhibit table in paragraph (a), revising entry 19; and
0
b. Adding paragraph (b)(19).
    The revisions read as follows:


Sec.  229.601  (Item 601) Exhibits.

    (a) * * *

                                                                                          Exhibit Table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Securities act forms                                              Exchange act forms
                                                                --------------------------------------------------------------------------------------------------------------------------------
                                                                   S-1     S-3    SF-1    SF-3   S-4\1\    S-8    S-11     F-1     F-3   F-4\1\    10    8-K\2\   10-D    10-Q    10-K    ABS-EE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                                          * * * * * * *
(19) Insider trading policies and procedures...................      x1      x1      x1      x1      x1      x1      x1      x1      x1      x1      x1      x1      x1      x1       X
 

[[Page 80429]]

 
                                                                                          * * * * * * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S-4 or F-4 to provide information about such company at a level
  prescribed by Form S-3 or F-3; and (2) the form, the level of which has been elected under Form S-4 or F-4, would not require such company to provide such exhibit if it were registering a
  primary offering.
\2\ A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the departure of a director, only the
  exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing.

* * * * *
    (b) * * *
    (19) Insider trading policies and procedures. Any insider trading 
policies and procedures, or amendments thereto, that are the subject of 
the disclosure required by Sec.  229.408(b) (Item 408(b) of Regulation 
S-K).
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
5. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-10, 80b-11,7201 et seq.; 
and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
6. Amend Sec.  232.405 by adding paragraph (b)(4)(iii) to read as 
follows:


Sec.  232.405  Interactive Data File Submissions.

* * * * *
    (b) * * *
    (4) * * *
    (iii) Any disclosure provided in response to: Sec.  229.402(x) of 
this chapter (Item 402(x) of Regulation S-K); Sec.  229.408(a)(1) and 
(2) of this chapter (Item 408(a)(1) and (2) of Regulation S-K); Sec.  
229.408(b)(1) of this chapter (Item 408(b)(1) of Regulation S-K); and 
Item 16J(a) of Sec.  249.220f of this chapter (Item 16J(a) of Form 20-
F).
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
7. The general authority citation for part 240 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
8. Amend Sec.  240.10b5-1 by:
0
a. Removing the Preliminary Note;
0
b. Revising paragraphs (a), (b), (c)(1)(i), and (c)(1)(ii); and
0
c. Adding paragraph (c)(1)(iv).
    The revisions and additions read as follows:


Sec.  240.10b5-1  Trading on the basis of material nonpublic 
information in insider trading cases.

    (a) Manipulative or deceptive devices. The ``manipulative or 
deceptive device[s] or contrivance[s]'' prohibited by Section 10(b) of 
the Act (15 U.S.C. 78j) and Sec.  240.10b-5 (Rule 10b-5) thereunder 
include, among other things, the purchase or sale of a security of any 
issuer, on the basis of material nonpublic information about that 
security or issuer, in breach of a duty of trust or confidence that is 
owed directly, indirectly, or derivatively, to the issuer of that 
security or the shareholders of that issuer, or to any other person who 
is the source of the material nonpublic information.
    (b) Awareness of material nonpublic information. Subject to the 
affirmative defenses in paragraph (c) of this section, a purchase or 
sale of a security of an issuer is on the basis of material nonpublic 
information for purposes of Section 10(b) and Rule 10b-5 if the person 
making the purchase or sale was aware of the material nonpublic 
information when the person made the purchase or sale. The law of 
insider trading is otherwise defined by judicial opinions construing 
Rule 10b-5, and Rule 10b5-1 does not modify the scope of insider 
trading law in any other respect.
    (c) *** (1)(i) Subject to paragraph (c)(1)(ii) of this section, a 
person's purchase or sale is not on the basis of material nonpublic 
information if the person making the purchase or sale demonstrates 
that:
    (A) Before becoming aware of the information, the person had:
    (1) Entered into a binding contract to purchase or sell the 
security,
    (2) Instructed another person to purchase or sell the security for 
the instructing person's account, or
    (3) Adopted a written plan for trading securities;
    (B) The contract, instruction, or plan described in paragraph 
(c)(1)(i)(A) of this section:
    (1) Specified the amount of securities to be purchased or sold and 
the price at which and the date on which the securities were to be 
purchased or sold;
    (2) Included a written formula or algorithm, or computer program, 
for determining the amount of securities to be purchased or sold and 
the price at which and the date on which the securities were to be 
purchased or sold; or
    (3) Did not permit the person to exercise any subsequent influence 
over how, when, or whether to effect purchases or sales; provided, in 
addition, that any other person who, pursuant to the contract, 
instruction, or plan, did exercise such influence must not have been 
aware of the material nonpublic information when doing so; and
    (C) The purchase or sale that occurred was pursuant to the 
contract, instruction, or plan. A purchase or sale is not ``pursuant to 
a contract, instruction, or plan'' if, among other things, the person 
who entered into the contract, instruction, or plan altered or deviated 
from the contract, instruction, or plan to purchase or sell securities 
(whether by changing the amount, price, or timing of the purchase or 
sale), or entered into or altered a corresponding or hedging 
transaction or position with respect to those securities.
    (ii) Paragraph (c)(1)(i) of this section is applicable only when:
    (A) The contract, instruction, or plan to purchase or sell 
securities was given or entered into in good faith and not as part of a 
plan or scheme to evade the prohibitions of this section, and the 
person who entered into the contract, instruction, or plan has acted in 
good faith with respect to the contract, instruction or plan;

[[Page 80430]]

    (B) If the person who entered into the contract, instruction, or 
plan is:
    (1) A director or officer (as defined in Sec.  240.16a-1(f) (Rule 
16a-1(f)) of the issuer, no purchases or sales occur until expiration 
of a cooling-off period consisting of the later of:
    (i) Ninety days after the adoption of the contract, instruction, or 
plan or
    (ii) Two business days following the disclosure of the issuer's 
financial results in a Form 10-Q (Sec.  249.308a of this chapter) or 
Form 10-K (Sec.  249.310 of this chapter) for the completed fiscal 
quarter in which the plan was adopted or, for foreign private issuers, 
in a Form 20-F (Sec.  249.220f of this chapter) or Form 6-K (Sec.  
249.306 of this chapter) that discloses the issuer's financial results 
(but, in any event, this required cooling-off period is subject to a 
maximum of 120 days after adoption of the contract, instruction, or 
plan); or
    (2) Not the issuer and not a director or officer (as defined in 
Sec.  240.16a-1(f) (Rule 16a-1(f)) of the issuer, no purchases or sales 
occur until the expiration of a cooling-off period that is 30 days 
after the adoption of the contract, instruction or plan;
    (C) If the person who entered into a plan as described in paragraph 
(c)(1)(i)(A)(3) of this section is a director or officer (as defined in 
Rule 16a-1(f) (Sec.  240.16a-1(f)) of the issuer of the securities, 
such director or officer included a representation in the plan 
certifying that, on the date of adoption of the plan:
    (1) The individual director or officer is not aware of any material 
nonpublic information about the security or issuer; and
    (2) The individual director or officer is adopting the plan in good 
faith and not as part of a plan or scheme to evade the prohibitions of 
this section;
    (D) The person (other than the issuer) who entered into the 
contract, instruction, or plan has no outstanding (and does not 
subsequently enter into any additional) contract, instruction, or plan 
that would qualify for the affirmative defense under paragraph (c)(1) 
of this section for purchases or sales of the issuer's securities on 
the open market; except that:
    (1) For purposes of this paragraph (c)(1)(ii)(D), a series of 
separate contracts with different broker-dealers or other agents acting 
on behalf of the person (other than the issuer) to execute trades 
thereunder may be treated as a single ``plan,'' provided that the 
individual constituent contracts with each broker-dealer or other 
agent, when taken together as a whole, meet all of the applicable 
conditions of and remain collectively subject to the provisions of this 
rule, including that a modification of any individual contract acts as 
modification of the whole contract, instruction of plan, as defined in 
paragraph (c)(1)(iv) of this section. The substitution of a broker-
dealer or other agent acting on behalf of the person (other than the 
issuer) for another broker-dealer that is executing trades pursuant to 
a contract, instruction or plan shall not be a modification of the 
contract, instruction, or plan (as defined in paragraph (c)(1)(iv) of 
this section) as long as the purchase or sales instructions applicable 
to the substitute and substituted broker are identical with respect to 
the prices of securities to be purchased or sold, dates of the 
purchases or sales to be executed, and amount of securities to be 
purchased or sold; and
    (2) The person (other than the issuer) may have one later-
commencing contract, instruction, or plan for purchases or sales of any 
securities of the issuer on the open market under which trading is not 
authorized to begin until after all trades under the earlier-commencing 
contract, instruction, or plan are completed or expired without 
execution; provided, however, that if the first trade under the later-
commencing contract, instruction, or plan is scheduled during the 
Effective Cooling-Off Period, the later-commencing contract, 
instruction, or plan may not rely on this paragraph (c)(1)(ii)(D)(2). 
For purposes of this paragraph (c)(1)(ii)(D)(2), ``Effective Cooling-
Off Period'' means the cooling-off period that would be applicable 
under paragraph (c)(1)(ii)(B) of this section with respect to the 
later-commencing contract, instruction, or plan if the date of adoption 
of the later-commencing contract, instruction, or plan were deemed to 
be the date of termination of the earlier-commencing contract, 
instruction, or plan; and
    (3) A contract, instruction, or plan providing for an eligible 
sell-to-cover transaction shall not be considered an outstanding or 
additional contract, instruction, or plan under paragraph (c)(1)(ii)(D) 
of this section, and such eligible sell-to-cover transaction shall not 
be subject to the limitation under paragraph (c)(1)(ii)(D) of this 
section. A contract, instruction, or plan provides for an eligible 
sell-to-cover transaction where the contract, instruction, or plan 
authorizes an agent to sell only such securities as are necessary to 
satisfy tax withholding obligations arising exclusively from the 
vesting of a compensatory award, such as restricted stock or stock 
appreciation rights, and the insider does not otherwise exercise 
control over the timing of such sales; and
    (E) With respect to persons (other than the issuer), if the 
contract, instruction, or plan does not provide for an eligible sell-
to-cover transaction as described in paragraph (c)(1)(ii)(D)(3) of this 
section and is designed to effect the open-market purchase or sale of 
the total amount of securities as a single transaction, the person who 
entered into the contract, instruction, or plan has not during the 
prior 12-month period adopted a contract, instruction, or plan that:
    (1) was designed to effect the open-market purchase or sale of all 
of the securities covered by such prior contract, instruction or plan, 
in a single transaction; and
    (2) Would otherwise qualify for the affirmative defense under 
paragraph (c)(1) of this section.
* * * * *
    (iv) Any modification or change to the amount, price, or timing of 
the purchase or sale of the securities underlying a contract, 
instruction, or written plan as described in paragraph (c)(1)(i)(A) of 
this section is a termination of such contract, instruction, or written 
plan, and the adoption of a new contract, instruction, or written plan. 
A plan modification, such as the substitution or removal of a broker 
that is executing trades pursuant to a Rule 10b5-1 arrangement on 
behalf of the person, that changes the price or date on which purchases 
or sales are to be executed, is a termination of such plan and the 
adoption of a new plan.
* * * * *

0
9. Amend Sec.  240.14a-101 by revising paragraph (b) introductory text 
of Item 7 to read as follows:


Sec.  240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 7. * * *
* * * * *
    (b) The information required by Items 401, 404(a) and (b), 405, 407 
and 408(b) of Regulation S-K (Sec. Sec.  229.401, 229.404(a) and (b), 
229.405, 229.407, and 229.408(b) of this chapter), other than the 
information required by:
* * * * *

0
10. Amend Sec.  240.16a-3 by revising paragraphs (f)(1)(i)(A) and 
(g)(1) to read as follows:


Sec.  240.16a-3  Reporting transactions and holdings.

* * * * *
    (f) * * *
    (1) * * *
    (i) * * *

[[Page 80431]]

    (A) Exercises and conversions of derivative securities exempt under 
either Sec.  240.16b-3 or Sec.  240.16b-6(b), dispositions by bona fide 
gifts exempt under Sec.  240.16b-5, and any transaction exempt under 
Sec.  240.16b-3(d), Sec.  240.16b-3(e), or Sec.  240.16b-3(f), (these 
are required to be reported on Form 4);
* * * * *
    (g)(1) A Form 4 must be filed to report: All transactions not 
exempt from section 16(b) of the Act; all transactions exempt from 
section 16(b) of the Act pursuant to Sec.  240.16b-3(d), Sec.  240.16b-
3(e), or Sec.  240.16b-3(f); and dispositions by bona fide gifts and 
all exercises and conversions of derivative securities, regardless of 
whether exempt from section 16(b) of the Act. Form 4 must be filed 
before the end of the second business day following the day on which 
the subject transaction has been executed.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
11. The authority citation for part 249 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107 
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94, 
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat. 
1063 (2020), unless otherwise noted.
* * * * *
    Section 249.220f is also issued under secs. 3(a), 202, 208, 302, 
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745, 
and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
* * * * *
    Section 249.308a is also issued under secs. 3(a) and 302, Pub. 
L. 107-204, 116 Stat. 745.
* * * * *
    Section 249.310 is also issued under secs. 3(a), 202, 208, 302, 
406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *

0
12. Amend Form 4 (referenced in Sec.  249.104) by:
0
a. Adding new General Instruction 10; and
0
b. Adding text and one check box at the top of the first page 
immediately below the text ``Check this box if no longer subject to 
Section 16. Form 4 or Form 5 obligations may continue. See Instruction 
1(b).''
    The additions read as follows:

    Note:  The text of Form 4 does not, and this amendment will not, 
appear in the Code of Federal Regulations.

FORM 4

* * * * *
General Instructions
* * * * *

10. Rule 10b5-1(c) Transaction Indication

    Indicate by check mark whether a transaction was made pursuant to a 
contract, instruction or written plan for the purchase or sale of 
equity securities of the issuer that is intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act 
[Sec.  240.10b5-1(c) of this chapter]. Provide the date of adoption of 
the Rule 10b5-1(c) plan in the ``Explanation of Responses'' portion of 
the Form.
* * * * *
    [square] Check this box to indicate that a transaction was made 
pursuant to a contract, instruction or written plan that is intended to 
satisfy the affirmative defense conditions of Rule 10b5-1(c). See 
Instruction 10.
* * * * *

0
13. Amend Form 5 (referenced in Sec.  249.105) by:
0
a. Adding new General Instruction 10; and
0
b. Adding text and one check box at the top of the first page 
immediately below the text ``Form 4 Transactions Reported''.
    The additions read as follows:

    Note:  The text of Form 5 does not, and this amendment will not, 
appear in the Code of Federal Regulations.

FORM 5

* * * * *
General Instructions
* * * * *

10. Rule 10b5-1(c) Transaction Indication

    Indicate by check mark whether a transaction was made pursuant to a 
contract, instruction or written plan for the purchase or sale of 
equity securities of the issuer that is intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act 
[Sec.  240.10b5-1(c) of this chapter]. Provide the date of adoption of 
the Rule 10b5-1(c) plan in the ``Explanation of Responses'' portion of 
the Form.
* * * * *
    [square] Check this box to indicate that a transaction was made 
pursuant to a contract, instruction or written plan for the purchase or 
sale of equity securities of the issuer that is intended to satisfy the 
affirmative defense conditions of Rule 10b5-1(c). See Instruction 10.
* * * * *

0
14. Amend Form 20-F (referenced in Sec.  249.220f) by:
0
a. Adding new Item 16J; and
0
b. Revising exhibit 11.
    The additions read as follows:

    Note:  The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM 20-F

* * * * *

Item 16J. Insider trading policies

    (a) Disclose whether the registrant has adopted insider trading 
policies and procedures governing the purchase, sale, and other 
dispositions of the registrant's securities by directors, senior 
management, and employees that are reasonably designed to promote 
compliance with applicable insider trading laws, rules and regulations, 
and any listing standards applicable to the registrant. If the 
registrant has not adopted such policies and procedures, explain why it 
has not done so.
    (b) If the registrant has adopted insider trading policies and 
procedures, the registrant must file such policies and procedures as an 
exhibit. If all of the registrant's insider trading policies and 
procedures are included in its code of ethics (as defined in Item 
16B(b)) and the code of ethics is filed as an exhibit pursuant to Item 
16B(c)(1), the registrant may satisfy the exhibit requirement of this 
paragraph by filing the code of ethics that would satisfy the exhibit 
requirement of Item 16B(c)(1).
    (c) The disclosure provided pursuant to Item 16J(a) must be 
provided in an Interactive Data File as required by Rule 405 of 
Regulation S-T (17 CFR 232.405) in accordance with the EDGAR Filer 
Manual.
    Instruction to Item 16J: Item 16J applies only to annual reports, 
and does not apply to registration statements, on Form 20-F.
* * * * *
Instructions as to Exhibits
* * * * *
    11. (a) Any code of ethics, or amendment thereto, that is the 
subject of the disclosure required by Item 16B of Form 20-F, to the 
extent that the registrant intends to satisfy the Item 16B requirements 
through filing of an exhibit
    (b) Any insider trading policies and procedures that is the subject 
of the disclosure required by Item 16J. If all of the registrant's 
insider trading policies and procedures are included in its code of 
ethics and the code of ethics is filed as an exhibit, that exhibit 
filing would

[[Page 80432]]

satisfy the exhibit requirement of this paragraph (b).
* * * * *

0
15. Amend Form 10-Q (referenced in Sec.  249.308a) by adding paragraph 
(c) to Item 5 in Part II to read as follows:

    Note:  The text of Form 10-Q does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM 10-Q

* * * * *

Part II--Other Information

* * * * *

Item 5. Other Information.

* * * * *
    (c) Furnish the information required by Item 408(a) of Regulation 
S-K (17 CFR 229.408(a)).
* * * * *

0
16. Amend Form 10-K (referenced in Sec.  249.310) by revising Item 9B 
in Part II and Item 10 in Part III to read as follows:

    Note:  The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM 10-K

* * * * *

Part II

Item 9B. Other Information.

* * * * *
    Furnish the information required by Item 408(a) of Regulation S-K 
(Sec.  229.408(a) of this chapter).
* * * * *

Part III

* * * * *

Item 10. Directors, Executive Officers and Corporate Governance.

    Furnish the information required by Items 401, 405, 406, 407(c)(3), 
(d)(4), (d)(5), and 408(b) of Regulation S-K (Sec.  229.401, Sec.  
229.405, Sec.  229.406, Sec.  229.407(c)(3), (d)(4), (d)(5), and Sec.  
229.408(b) of this chapter).
* * * * *

    By the Commission.

    Dated: December 14, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-27675 Filed 12-28-22; 8:45 am]
BILLING CODE 8011-01-P