8686 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229, 232, 240, and 249 

[Release No. 33–11013; 34–93782; File No. 

S7–20–21] 

RIN 3235–AM86 

Rule 10b5–1 and Insider Trading 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing amendments to its rules 

under the Securities Exchange Act of 

1934. The proposed amendments would 

add new conditions to the availability of 

an affirmative defense under an 

Exchange Act rule that are designed to 

address concerns about abuse of the rule 

to opportunistically trade securities on 

the basis of material nonpublic 

information in ways that harm investors 

and undermine the integrity of the 

securities markets. The Commission is 

also proposing new disclosure 

requirements regarding the insider 

trading policies of issuers, and the 

adoption and termination (including 

modification) of certain trading 

arrangements by directors, officers, and 

issuers. In addition, the Commission is 

proposing amendments to the disclosure 

requirements for executive and director 

compensation regarding the timing of 

equity compensation awards made in 

close proximity in time to the issuer’s 

disclosure of material nonpublic 

information. Finally, the Commission is 

proposing amendments to Forms 4 and 

5 to identify transactions made pursuant 

to certain trading arrangements, and to 

disclose all gifts of securities on Form 

4. 

DATES: Comments should be received on 

or before April 1, 2022. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use our internet comment form 

(https://www.sec.gov/regulatory-actions/ 

how-to-submit-comments); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

20–21 on the subject line. 

Paper Comments 

• Send paper comments to Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–20–21. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method of 

submission. We will post all comments 

on our website (https://www.sec.gov/ 

rules/proposed.shtml). Comments also 

are available for website viewing and 

printing in our Public Reference Room, 

100 F Street NE, Washington, DC 20549, 

on official business days between the 

hours of 10:00 a.m. and 3:00 p.m. 

Operating conditions may limit access 

to the Commission’s public reference 

room. All comments received will be 

posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

publicly available. 

We or the staff may add studies, 

memoranda, or other substantive items 

to the comment file during this 

rulemaking. A notification of the 

inclusion in the comment file of any 

such materials will be made available 

on our website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Sean Harrison, Special Counsel, or 

Felicia Kung, Office Chief, Office of 

Rulemaking, at (202) 551–3430, Division 

of Corporation Finance, 100 F Street NE, 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing amendments 

to: 

Commission reference CFR citation 

(17 CFR) 

Regulation S–K [17 CFR 229.10 through 229.1305]: 

Item 402 ................................................................................................................................................................. § 229.402. 

Item 408 ................................................................................................................................................................. § 229.408. 

Regulation S–T [17 CFR 232.11 through 232.903]: 

Item 405 ................................................................................................................................................................. § 232.405. 

Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78a et seq.]: 

Rule 10b5–1 .......................................................................................................................................................... § 240.10b5–1. 

Schedule 14A ........................................................................................................................................................ § 240.14a–101. 

Schedule 14C ........................................................................................................................................................ § 240.14c–101. 

Rule 16a–3 ............................................................................................................................................................ § 240.16a–3. 

Form 4 ................................................................................................................................................................... § 249.104. 

Form 5 ................................................................................................................................................................... § 249.105. 

Form 20–F ............................................................................................................................................................. § 249.220f. 

Form 10–Q ............................................................................................................................................................. § 249.308a. 

Form 10–K ............................................................................................................................................................. § 249.310. 

Table of Contents 

I. Introduction 

II. Discussion of the Proposed 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. Requiring That Trading Arrangements 

Be Operated in Good Faith 

B. Additional Disclosures Regarding Rule 

10b5–1 Trading Arrangements 

1. Quarterly Reporting of Rule 10b5–1(c) 

and Non-Rule 10b5–1(c) Trading 

Arrangements 

2. Disclosure of Insider Trading Policies 

and Procedures 

3. Structured Data Requirements 

4. Identification of Rule 10b5–1(c) and 

Non-Rule 10b5–1(c)(1) Transactions on 

Forms 4 and 5 

C. Disclosure Regarding the Timing of 

Option Grants and Similar Equity 

Instruments Shortly Before or After the 

Release of Material Nonpublic 

Information 

D. Reporting of Gifts on Form 4 

III. General Request for Comment 

IV. 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 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8687 

1Affiliated Ute Citizens of Utah v. United States, 

406 U.S. 128, 151 (1972); accord Lorenzo v. SEC, 

139 S. Ct. 1094, 1103 (2019). 

2The term ‘‘corporate insider’’ as used in this 

release, refers to officers and directors of an issuer. 

3See In re Cady, Roberts & Co., 40 SEC. 907, 1961 

WL 60638, at *4 n.15 (1961) (‘‘A significant purpose 

of the Exchange Act was to eliminate the idea that 

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.’’). 

4See 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. 

5 15 U.S.C. 78j(b). 

6Rule 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.’’ 

7See Salman v. United States, 137 S.Ct. 420, 425 

n.2 (2016) (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’’); O’Hagan, 521 U.S. at 651–53; 

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 (non-exclusive definition of 

circumstances in which a person has the requisite 

duty for purposes of the ‘‘misappropriation’’ theory 

of insider trading). Liability for insider trading 

under Section 10(b) 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, 689–95 (1980); see also Selective 

Disclosure and Insider Trading, Release No. 33– 

7881 (Aug. 15, 2000) [65 FR 51716 at 51727 (Aug. 

24, 2000)] (‘‘2000 Adopting Release’’). 

8See 2000 Adopting Release supra note 7. 

9A 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). Rule 10b5–1 and its awareness 

standard 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). The 

decision in Fried v. Stiefel Labs., Inc., 814 F.3d 

1288, 1295 (11th Cir. 2016), erroneously suggests 

that a person must ‘‘use’’ the inside information to 

purchase or sell securities, but the court did not 

address Rule 10b5–1 in that private action. The 

proposed rule would not alter the ‘‘awareness’’ 

standard. 

10Rule 10b5–1 does not modify or address any 

other aspect of insider trading law. Nor does Rule 

10b5–1 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). 

5. Reasonable Alternatives 

6. Request for Comment 

C. Disclosure of Trading Arrangements 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 

6. Request for Comment 

D. Additional Disclosure of the Timing of 

Option Grants and Related Company 

Policies and Practices (Amendments to 

Item 402 of Regulation S–K) 

1. Baseline and Affected Parties 

2. Benefits 

3. Costs 

4. Effects on Efficiency, Competition, and 

Capital Formation 

5. Reasonable Alternatives 

6. Request for Comment 

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 

6. Request for Comment 

V. Paperwork Reduction Act 

A. Summary of the Collections of 

Information 

B. Estimates of the Proposed Amendments’ 

Effects on the Collections of Information 

C. Incremental and Aggregate Burden and 

Cost Estimates 

VI. Initial Regulatory Flexibility Act Analysis 

A. Reasons for, and Objectives of, the 

Proposed Action 

B. Legal Basis 

C. Small Entities Subject to the Proposed 

Rules 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

E. Duplicative, Overlapping, or Conflicting 

Federal Rules 

F. Significant Alternatives 

G. Request for Comments 

VII. Small Business Regulatory Enforcement 

Fairness Act 

VIII. 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 provisions that proscribe 

insider trading play an essential role in 

maintaining the fairness and integrity of 

our markets. We have long recognized 

that insider trading and the fraudulent 

use of material nonpublic information 

by corporate insiders 2 not only harm 

individual investors but also undermine 

the foundations of our markets by 

eroding investor confidence.3 Congress 

has recognized the harmful impact of 

insider trading on multiple occasions 

and has authorized enhanced civil 

penalties specifically for insider 

trading.4

Section 10(b) of the Exchange Act is 

one of the securities laws’ primary 

antifraud provisions.5 Section 10(b) 

makes it unlawful to 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.’’ 6 The ‘‘manipulative or 

deceptive device[s] or contrivance[s]’’ 

prohibited by Section 10(b) and 17 CFR 

240.10b–5 (Rule 10b–5) (adopted 

thereunder) 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 or the shareholders of that 

issuer, or to any person who is the 

source of the material nonpublic 

information.7

The Commission adopted Rule 10b5– 

1 in August 2000 to provide more clarity 

on the meaning of ‘‘manipulative or 

deceptive device[s] or contrivance[s]’’ 

prohibited by Exchange Act Section 

10(b) and Rule 10b–5 with respect to 

trading on the basis of material 

nonpublic information.8 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 Rule 10b–5. Rule 10b5–1 

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) if the 

person making the purchase or sale was 

aware of material nonpublic 

information when the person made the 

purchase or sale.9 In addition, Rule 

10b5–1(c) established an affirmative 

defense to Rule 10b–5 liability for 

insider trading in circumstances where 

it is apparent that the trading was not 

made on the basis of material nonpublic 

information because the trade was 

pursuant to a binding contract, an 

instruction to another person to execute 

the trade for the instructing person’s 

account, or a written plan (collectively 

or individually a ‘‘trading 

arrangement’’) adopted when the trader 

was not aware of material nonpublic 

information.10 Rule 10b5–1 also 

provides a separate affirmative defense 


lotter on DSK11XQN23PROD with PROPOSALS2
8688 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

11See Rule 10b5–1(c)(2) [17 CFR 240.10b5– 

1(c)(2)]. This affirmative defense is available to 

entities that demonstrate that the individual making 

the investment decision on behalf of the entity was 

not aware of material nonpublic information; and 

the entity had implemented reasonable policies and 

procedures to prevent insider trading. 

12 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). 

13 In December 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. (dated Mar. 10, 2021) at https://www.sec.gov/ 

comments/s7-24-20/s72420-8488827-229970.pdf; 

letter from Council of Institutional Investors (‘‘CII’’) 

(dated Apr. 22, 2021) at https://www.sec.gov/

comments/s7-14-20/s71420-8709408-236962.pdf; 

letter from CII (dated Mar. 18, 2021) at https://

www.sec.gov/comments/s7-24-20/s72420-8519687-

230183.pdf. In response to the publication of its 

semiannual regulatory agenda, the Commission also 

received a letter requesting that a rulemaking 

project be initiated to address potential abuses of 

Rule 10b5–1. See letter from CII (dated Dec. 13, 

2018) at https://www.sec.gov/comments/s7-20-18/

s72018-4766666-176839.pdf. 

14See letter from Senator Elizabeth Warren et al. 

(Feb. 10, 2021) at https://www.warren.senate.gov/

imo/media/doc/02.10.2021%20Letter%20from

%20Senators%20Warren,%20Brown,%20and

%20Van%20Hollen%20to%20Acting%20Chair

%20Lee.pdf. 

15See, e.g., Alan D. Jagolinzer, SEC Rule 10b5–1 

and Insiders’ Strategic Trade, 55 Mgmt. Sci. 224 

(2009); M. Todd Henderson et al., Hiding in Plain 

Sight: Can Disclosure Enhance Insiders’ Trade 

Returns, 103 Geo. L.J. 1275 (2015); Taylan Mavruk 

et al., Do SEC’s 10b5–1 Safe Harbor Rules Need to 

be Rewritten?, 2016 Colum. Bus. L. Rev., 133 (2016); 

Artur Hugon and Yen-Jung Lee, SEC Rule 10b5–1 

Plans and Strategic Trade around Earnings 

Announcements (2016) at https://ssrn.com/

abstract=2880878 or http://dx.doi.org/10.2139/

ssrn.2880878. 

16See, 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 F. Larcker et al., Gaming the System: 

Three ‘‘Red Flags’’ of Potential 10b5–1 Abuse, 

Stanford Closer Look Series (Jan. 19, 2021) 

(‘‘Gaming the System’’) (noting from their analysis 

of a sample of sales transactions made pursuant to 

Rule 10b5–1 plans between January 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 112 and 

accompanying text. 

17See Jesse M. Fried, Testimony before the 

Investor Protection, Entrepreneurship, and Capital 

Markets Subcommittee, U.S. House Committee on 

Financial Services, (Oct. 17, 2019) at https://

ssrn.com/abstract=3474175 (‘‘Fried Testimony’’). 18The IAC was established in April 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, 

initiatives to protect investor interests and to 

promote investor confidence and the integrity of the 

securities marketplace. 

19See Recommendations of the Investor Advisory 

Committee Regarding Rule 10b5–1 Plans (Sept. 9, 

2021) (‘‘IAC Recommendations’’), at https://

www.sec.gov/spotlight/investor-advisorycommittee-2012/20210916-10b5-1-

recommendation.pdf. The IAC also held a panel 

discussion regarding Rule 10b5–1 plans at its June 

10, 2021 meeting, at https://www.sec.gov/video/

webcast-archive-player.shtml?document_

id=iac061021-2. 

20See, e.g., William Hughes, Stock Option Springloading: An Examination of Loaded Justifications 

and New SEC Disclosure Rules, 33 J. Corp. L. 777 

(2008); Howland v. Kumar, 2019 Del. Ch. LEXIS 

221. 

21See, e.g., S. Burcu Avci et al., Manipulative 

Games of Gifts by Corporate Executives, 18 U. Pa. 

J. Bus. L. 1131 (2016); David Yermack, Deductio ad 

absurdum: CEOs donating their own stock to their 

family foundations, 94 J. Fin. Econ. 107 (2009); S. 

Burcu Avci et al., Insider Giving, 71 Duke L.J. 

(Forthcoming 2021) electronic copy available at: 

https://ssrn.com/abstract=3795537. 

22See Share Repurchase Disclosure 

Modernization, Release No. 34–93783 (Dec. 15, 

2021). Item 703 of Regulation S–K requires 

disclosure about a registrant’s or affiliated 

purchaser’s purchases of any class of the registrant’s 

equity securities that are registered under Exchange 

Act Section 12. Many registrants use Rule 10b5–1 

trading arrangements in their repurchase programs. 

23A modification of a Rule 10b5–1(c) trading 

arrangement, including cancelling a trade, is 

equivalent to terminating the prior trading 

arrangement and adopting a new Rule 10b5–1 

trading arrangement. 

designed solely for non-natural persons 

that trade.11

Since the adoption of Rule 10b5–1, 

courts,12 commentators 13 and members 

of Congress 14 have expressed concern 

that the affirmative defense under Rule 

10b5–1(c)(1)(i) has allowed traders to 

take advantage of the liability 

protections provided by the rule to 

opportunistically trade securities on the 

basis of material nonpublic information. 

Furthermore, some academic studies of 

Rule 10b5–1 trading arrangements have 

shown that corporate insiders trading 

pursuant to Rule 10b5–1 consistently 

outperform trading of executives and 

directors not conducted under a Rule 

10b5–1 trading arrangement.15 Practices 

that have raised concern include 

corporate insiders using multiple 

overlapping plans to selectively cancel 

individual trades on the basis of 

material nonpublic information, or 

commencing trades soon after the 

adoption of a new plan or the 

modification of an existing plan.16 In 

addition, concerns have been raised 

about issuers abusing Rule 10b5–1(c)(1) 

plans to conduct share repurchases to 

boost the price of the issuer’s stock 

before sales by corporate insiders.17

Recently, the Commission’s Investor 

Advisory Committee (‘‘IAC’’) 18

recommended that we consider revising 

Rule 10b5–1 to address apparent 

loopholes in the rule that allow 

corporate insiders to unfairly exploit 

informational asymmetries.19

We share the concern about the 

prevalence of trading practices by 

corporate insiders and issuers that 

suggest the misuse of material 

nonpublic information. We also 

understand that some issuers have 

engaged in a practice of granting stock 

options and other equity awards with 

option-like features to executive officers 

and directors in coordination with the 

release of material nonpublic 

information.20 In addition, there is 

research indicating that some corporate 

insiders may be opportunistically 

timing gifts of securities while aware of 

material nonpublic information relating 

to such securities.21 These practices can 

undermine the public’s confidence and 

expectations of honest and fair capital 

markets by creating the appearance that 

some insiders, by virtue of their 

positions, do not play by the same rules 

as everyone else. 

We note that similar concerns about 

misuse of material nonpublic 

information have been raised in 

connection with an issuer’s stock 

repurchases. In a separate release, we 

are proposing amendments to update 

the disclosure requirements for 

purchases of equity securities by an 

issuer and affiliated purchasers under 

17 CFR 229.703 (Item 703 of Regulation 

S–K).22

In this release, we are proposing 

several rule and form amendments to 

address potentially abusive practices 

associated with Rule 10b5–1 trading 

arrangements, grants of options and 

other equity instruments with similar 

features and the gifting of securities. 

Specifically, our proposals would: 

• Require a Rule 10b5–1 trading 

arrangement entered into by officers or 

directors to include a 120-day 

mandatory cooling-off period before any 

trading can commence under the trading 

arrangement after its adoption 

(including adoption of a modified 

trading arrangement); 23

• Require a Rule 10b5–1 trading 

arrangement entered into by issuers to 

include a 30-day mandatory cooling-off 

period before any trading can 

commence under the trading 

arrangement after its adoption 

(including adoption of a modified 

trading arrangement); 

• Require officers and directors to 

personally certify that they are not 

aware of material nonpublic information 

about the issuer or the security when 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8689 

24 15 U.S.C. 7241. See infra notes 52 and 53 and 

accompanying text. 

25 In addition to the proposed revisions to Rule 

10b5–1 discussed in this release, due to current 

Federal Register formatting requirements, we are 

also proposing a technical change that, as indicated, 

incorporates the Preliminary Note to Rule 10b5–1 

into the body of the rule. 

26See, e.g., SEC v. Mozilo, 2010 WL 3656068, at 

*20 (C.D. Cal. Sept. 16, 2010) (‘‘Although [officer’s/ 

director’s] stock sales were made pursuant to Rule 

10b5–1 trading plans, the SEC has raised genuine 

issues of material fact that [he] was aware of 

material, nonpublic information at the time he 

adopted or amended these trading plans.’’). 

27Rule 10b5–1(c)(1)(i)(C). 

28Rule 10b5–1(c)(1)(ii). 

29According to one survey, directors and 

executives at more than half of S&P 500 companies 

used Rule 10b5–1 trading arrangements in 2015. 

See Morgan Stanley, ‘‘Defining the Fine Line: 

Mitigating Risk with 10b5–1 Plans’’ (2018) at 

https://advisor.morganstanley.com/austin.cornish/ 

documents/field/a/au/austin-cornish/ 

Mitigating%20Risk%20with%2010b5- 

1%20Plans.pdf. See also Bonaime ́ et al., Payout 

Policy Trade-Offs, infra note 159 and accompanying 

text; Skadden Insights: Share Repurchases 4–6 

(Mar. 16, 2020) (discussing the use of Rule 10b5– 

1 plans for issuer share repurchases) at https://

www.skadden.com/insights/publications/2020/03/ 

share-repurchases. 

30See, e.g., Alan D. Jagolinzer, SEC Rule 10b5–1 

and Insiders’ Strategic Trade, Mgmt. Sci. 224 

(2009); Gaming the System supra note 16 (noting 

that Rule 10b5–1 plans with a short cooling-off 

period, or adopted in a given quarter that begin 

trading before that quarter’s earnings announcement 

systematically avoid losses and foreshadow 

considerable stock declines over the subsequent six 

months); and Taylan Mavruk et al., Do SEC’s 10b5– 

1 Safe Harbor Rules Need to be Rewritten?, Colum. 

Bus. L. Rev., 133, 165 (2016) (observing from their 

study that the first trade pursuant to a Rule 10b5– 

1 plan showed abnormal profitability and 

suggesting that insiders set up Rule 10b5–1 plans 

when in possession of material nonpublic 

information). See also discussion at infra Section 

IV.A. 

they adopt a Rule 10b5–1 trading 

arrangement; 

• Enhance existing corporate 

disclosures and require new quarterly 

disclosure regarding the adoption and 

termination of Rule 10b5–1 trading 

arrangements and other trading 

arrangements of directors, officers, and 

issuers, and the terms of such trading 

arrangements, and require that the 

disclosure be reported using a 

structured data language (specifically, 

Inline eXtensible Business Reporting 

Language (‘‘Inline XBRL’’)); 

• Provide that the affirmative defense 

under Rule 10b5–1(c)(1) does not apply 

to multiple overlapping Rule 10b5–1 

trading arrangements for open market 

trades in the same class of securities; 

• Limit the availability of the 

affirmative defense under Rule 10b5– 

1(c)(1) for a single-trade plan to one 

single-trade plan during any 

consecutive 12-month period; 

• Require an issuer to disclose in its 

Form 10–K or Form 20–F whether or not 

(and if not, why not) the issuer has 

adopted insider trading policies and 

procedures that govern the purchase, 

sale, or other disposition of the 

registrant’s securities by directors, 

officers, and employees that are 

reasonably designed to promote 

compliance with insider trading laws, 

rules, and regulations. If the issuer has 

adopted such policies and procedures, 

the issuer would be required to disclose 

such policies. Such disclosures would 

be subject to the principal executive and 

principal financial officer certifications 

required by Section 302 of the SarbanesOxley Act,24 and required to be tagged 

using Inline XBRL; 

• Require new disclosure regarding 

grants of equity compensation awards 

such as stock options and stock 

appreciation rights (‘‘SARs’’) close in 

time to the issuer’s disclosure of 

material nonpublic information 

(including earnings releases and other 

major announcements) and require that 

the disclosure be reported using Inline 

XBRL; and 

• Require prompt disclosure of 

dispositions by gifts of securities by 

insiders on Form 4 within two business 

days after such a gift is made. 

We welcome feedback and encourage 

interested parties to submit comments 

on any or all aspects of the proposed 

amendments. When commenting, it 

would be most helpful if you include 

the reasoning behind your position or 

recommendation. 

II. Discussion of the Proposed 

Amendments 

A. Amendments to Rule 10b5–1 25

As noted above, Rule 10b5–1(c)(1) 

established an affirmative defense to 

Rule 10b–5 liability if 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. A person 

asserting a Rule 10b5–1(c)(1) defense 

must satisfy several conditions. First, 

the person must demonstrate that, 

before becoming aware of material 

nonpublic information, they had 

entered into a binding contract to 

purchase or sell the security, provided 

instructions 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 

applicable contract, instructions, or 

plan: 

• Specified the amount of securities 

to be purchased or sold, price, and date; 

• Provided a written formula or 

algorithm, or computer program, for 

determining amounts, prices, and dates; 

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 

exercised such influence was not aware 

of the material nonpublic information 

when doing so. 

Third, the person must demonstrate 

that the purchase or sale was pursuant 

to the prior contract, instruction, or 

plan. Rule 10b5–1(c)(1) states that a 

purchase or sale is not pursuant to a 

contract, instruction, or plan if, among 

other things, the person who entered 

into the arrangement altered or deviated 

from the contract, instruction, or plan, 

or entered into or altered a 

corresponding or hedging transaction or 

position with respect to the securities.27

Finally, the rule provides that the 

affirmative defense of a trading 

arrangement is only available if the 

trading arrangement was entered into 

‘‘in good faith and not as part of a plan 

or scheme to evade the prohibitions’’ of 

the rule.28

Since the adoption of Rule 10b5–1, 

the use of trading arrangements under 

Rule 10b5–1(c)(1) has become 

widespread.29 Over the years concerns 

have arisen that the design of Rule 

10b5–1(c)(1) has enabled corporate 

insiders to trade on material nonpublic 

information. Examples of potentially 

abusive practices include the use of 

multiple overlapping plans with 

selective cancellation of certain plans or 

trades on the basis of material 

nonpublic information, as well as 

initiation or resumption of trading close 

in time to plan adoption or 

modification. Furthermore, multiple 

studies examining Rule 10b5–1(c)(1) 

trading arrangements have identified 

potentially abusive activity where trades 

occur soon after the adoption of the 

arrangement (e.g., commencing trades 

within the same fiscal quarter as the 

adoption of the arrangement), and 

trading arrangements that are 

terminated shortly after adoption.30 The 

amendments that we are proposing to 

Rule 10b5–1(c)(1) are intended to 

reduce these potentially abusive 

practices associated with Rule 10b5– 

1(c)(1) trading arrangements. 

1. Cooling-Off Period 

Currently, Rule 10b5–1(c)(1) does not 

impose any waiting period between the 

date the trading arrangement is adopted 

and the date of the first transaction to 

be executed under the trading 

arrangement. Under the current rule, a 

trader can adopt a Rule 10b5–1(c)(1) 


lotter on DSK11XQN23PROD with PROPOSALS2
8690 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

31See 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, 

David F. Larcker, and Daniel J. Taylor, ‘‘How the 

SEC can and should fix insider trading rules’’ the 

Hill (Dec. 17, 2020) at https://thehill.com/opinion/ 

finance/530668-how-the-sec-can-and-should-fixinsider-trading-rules; IAC Recommendations, supra 

note 19. 

32See proposed note to Rule 10b5–1(c); and 2000 

Adopting Release, supra note 8, at 51718, n 111. 

33See the discussion at infra Section IV.B.1. 

34See IAC Recommendations, supra note 19 

(recommending a cooling off period of four 

months); Gaming the System, supra note 16, at 3 

(recommending a cooling off period of four to six 

months); SEC Targets 10b5–1 Plans, supra note 16 

(recommendation from a law firm for a cooling off 

period of one fiscal quarter); letter from Senator 

Elizabeth Warren et al., supra note 14 

(recommending a cooling off period of four to six 

months); Robert H. Friedman et al, Navigating 

Public Company Equity Buybacks, Insights: 

Corporate and Securities Law Advisor, (December 

2011) (recommending a 30 day waiting period for 

issuers after a Rule 10b5–1(c)(1) plan’s adoption or 

modification). 

35Exchange Act Rule 16a–1(f) [17 CFR 240.16a– 

1(f)] provides that the ‘‘officer’’ is 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 policymaking 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. 

36This would include anyone who performs a 

policy-making function for the issuer. Id. 

37See 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). 

38See Fried Testimony supra note 17. 

trading arrangement and execute a trade 

under the arrangement on the same day. 

Investors and other commentators have 

suggested that requiring a minimum 

waiting period of several months 

between the adoption of a trading 

arrangement and the date on which 

trading can commence would reduce 

the risk that an insider could benefit 

from any material nonpublic 

information of which they may have 

been aware at the time of adopting the 

trading arrangement.31 We propose to 

amend Rule 10b5–1(c)(1) to add as a 

condition to the availability of the 

affirmative defense (1) a minimum 120- 

day cooling-off period after the date of 

adoption of any Rule 10b5–1(c)(1) 

trading arrangement (including 

adoption of a modified trading 

arrangement) by a director or officer (as 

defined in 17 CFR 240.16a–1(f) (Rule 

16a–1(f))) 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(c)(1) 

trading arrangement by an issuer before 

any purchases or sales under the new or 

modified trading arrangement. Under 

the proposed amendments, for directors 

and officers subject to Exchange Act 

Section 16 reporting, and for issuers, the 

Rule 10b5–1(c)(1) affirmative defense 

would only be available for a trading 

arrangement that includes a cooling-off 

period that delays transactions under 

the trading arrangement for at least 120 

or 30 days (whichever is applicable) 

after the date of adoption of any new/ 

modified trading arrangement. The 

proposed amendments also include a 

note that clarifies that a ‘‘modification’’ 

of an existing Rule 10b5–1(c)(1) trading 

arrangement, including cancelling one 

or more trades, would be deemed 

equivalent to terminating the plan in its 

entirety, and the cooling-off period 

would therefore apply after a 

‘‘modification’’ before any new trades 

could commence.32

We are proposing these cooling off 

periods to address concerns that traders 

are able to misuse the rule to set up 

trading arrangements that use material 

nonpublic information about an issuer 

prior to the disclosure of such 

information. In particular, evidence 

suggests that Rule 10b5–1(c)(1) trading 

arrangements that commence trades 

prior to an earnings announcement are 

more likely to result in abnormal 

returns.33 In the case of officers and 

directors, a 120-day cooling off period 

would span an entire quarter, meaning 

that no trading could occur under a Rule 

10b5–1(c)(1) plan adopted during a 

particular quarter until after that 

quarter’s financial results are 

announced. The length of the proposed 

cooling-off period would deter insiders 

from seeking to capitalize on unreleased 

material nonpublic information for the 

upcoming quarter. In addition, a 120- 

day cooling off period and the 30-day 

cooling off period for issuers between 

adoption or modification of a Rule 

10b5–1(c)(1) trading arrangement and 

transactions made under the 

arrangement align with 

recommendations from a wide range of 

commentators about the appropriate 

length of time for such a cooling off 

period.34 We anticipate that, if adopted, 

the proposed cooling-off periods would 

deter officers, directors, and issuers 

from adopting or modifying their Rule 

10b5–1 plans on the basis of material 

nonpublic information. 

The proposed cooling-off periods 

would apply to directors and officers (as 

defined in Rule 16a–1(f)) of the issuer,35

as well as to an issuer that structures a 

share repurchase plan as a Rule 10b5– 

1(c)(1)(i) trading arrangement. This 

requirement would prevent directors, 

officers, and issuers who might be aware 

of material nonpublic information from 

adopting or modifying a Rule 10b5–1 

trading arrangement and trading 

immediately pursuant to the 

arrangement. The proposed cooling off 

period should also discourage 

registrants, directors, and officers from 

selectively terminating or cancelling a 

planned trade under a Rule 10b5–1 

trading arrangement because they would 

be subject to a cooling-off period with 

respect to the adoption of any new/ 

modified plan. 

Applying a cooling-off period to 

directors and ‘‘officers’’ as that term is 

defined in Exchange Act Rule 16a–1(f) 36

is 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.37 In addition, applying a 

cooling-off period to issuers addresses 

the concern that issuers may conduct 

stock buybacks while aware of material 

nonpublic information. For example, 

executives of an issuer who are aware of 

materially positive but undisclosed 

developments can cause the issuer to 

buy its stock from current shareholders 

who are unaware of those 

developments. Once the development is 

publicly disclosed, the issuer’s share 

price may increase. Further, once the 

issuer repurchase program is 

announced, executives who initiated the 

buyback can economically benefit 

because it may allow them to sell shares 

at prices strategically inflated by the 

company buyback, in addition to the 

disclosed developments.38 A cooling off 

period for issuers would reduce the 

likelihood of such scenarios and 

promote investor confidence. 

Request for Comment 

1. Is the proposed cooling-off period 

an appropriate condition to the Rule 

10b5–1(c)(1) affirmative defense for 

contracts, instructions and written 

plans? Would a cooling-off period 

effectively reduce the potential to abuse 

the rule, such as from selective 

termination of trades? 

2. Should the application of a coolingoff period be limited to directors, 

officers (as defined in Rule 16a–1(f)) and 

issuers, as proposed? Should the 

proposed cooling-off period instead 

apply to all traders who rely on the Rule 

10b5–1(c)(1) affirmative defense? 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8691 

39The proposed amendment would not require 

these personal certifications where a director or 

officer terminates an existing Rule 10b5–1 trading 

arrangement and does not adopt a new/modified 

trading arrangement for which the affirmative 

defense is sought. However, proposed Item 408 of 

Regulation S–K would require registrants to 

disclose whether any director or officer has 

terminated a Rule 10b5–1 trading arrangement (or 

any similar 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. 

40As we have said previously, we rely on existing 

definitions of the terms ‘‘material’’ and ‘‘nonpublic’’ 

established in the 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) 

(materiality with respect to contingent or 

speculative events will depend on a balancing of 

both the indicated probability that the event will 

occur and the anticipated magnitude of the event 

in light of the totality of company activity); see also 

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 

449 (1976); Securities Act Rule 405 [17 CFR 

230.405]; 17 CFR 240.12b–2 [Exchange Act Rule 

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); Texas Gulf Sulphur, 401 F.2d 

833, 854 (2d Cir. 1968), cert. denied, 394 U.S. 976 

(1969); 17 CFR 243.101(e) [Regulation FD]. 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). 

41See Proposed instruction to Rule 10b5– 

1(c)(1)(ii)(C). We have included a ten-year retention 

period in consideration of the statutes of limitations 

that govern the Commission’s ability to seek certain 

remedies for insider trading claims. See Exchange 

Act Section 21(d)(8) [15 U.S.C. 78u(d)(8)] (ten years 

for injunctions and disgorgement of fraud 

proceeds). 

42See, 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). 

3. Is the Rule 16a–1(f) definition the 

appropriate definition of ‘‘officer’’ for 

purposes of the proposed amendment? 

Are there other corporate insiders or 

employees who also should be subject 

to the cooling-off period? 

4. Is the proposed 120-day cooling-off 

period appropriate for directors and 

officers? Should we require a shorter or 

longer cooling-off period? For example, 

should we require a cooling-off period 

of sixty days after the adoption of a 

new/modified trading arrangement or a 

cooling-off period of 180 days? 

5. Is the proposed 30-day cooling off 

period appropriate for issuers? Would a 

different period be more appropriate? 

For example, would a 60-day, 90-day, or 

180-day cooling off period be more 

appropriate for issuers relying on the 

10b5–1(c)(1) affirmative defense? If 

issuers were subject to the proposed 

requirements, how would their use of 

Rule 10b5–1(c)(1) trading arrangements 

to conduct share repurchases be 

affected? Would the proposed coolingoff period affect existing practices 

regarding when a repurchase window is 

‘‘open’’ or ‘‘closed’’? 

6. Should we define ‘‘modify’’ or ‘‘a 

modification’’ for purposes of Rule 

10b5–1(c)? If so, how should we define 

these terms? 

7. Should there be an exception from 

the cooling-off period for de minimis 

changes to a Rule 10b5–1(c) trading 

arrangement? If so, what should be the 

parameters of such an exception? 

2. Director and Officer Certifications 

We also are proposing 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 Rule 10b5–1 

trading arrangement, as a condition to 

the availability of the affirmative 

defense, such director or officer would 

be required to promptly furnish to the 

issuer a written certification, described 

below, at the time of the adoption of a 

new/modified trading arrangement.39

The certification would require a 

director or officer to certify at the time 

of the adoption of the trading 

arrangement: 

• That they are not aware of material 

nonpublic information about the issuer 

or its securities; and 

• 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 Exchange Act 

Section 10(b) and Exchange Act Rule 

10b–5. 

For purposes of the proposed 

amendment, the term ‘‘officer’’ would 

have the same meaning as the definition 

for ‘‘officer’’ contained in Exchange Act 

Rule 16a–1(f). The definition in 

Exchange Act 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 proposed certification 

requirement is intended to reinforce 

directors’ and officers’ cognizance of 

their obligation not to trade or adopt a 

trading plan while aware of material 

nonpublic information, 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. 

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.’’ 40 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 this 

certification would reflect their personal 

determination that they do not have 

material nonpublic information. 

The proposed amendment also 

includes 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.41

The proposed amendments would not 

require a director, officer, or the issuer 

to file the certification with the 

Commission. The proposed certification 

would not be an independent basis of 

liability for directors or officers under 

Exchange Act Section 10(b) and Rule 

10b–5. Rather the proposed certification 

would underscore the certifiers’ 

awareness of their legal obligations 

under the Federal securities law related 

to the trading in the issuer’s securities.42

Request for Comment 

8. Is the proposed certification 

requirement an appropriate condition to 

the availability of the Rule 10b5– 

1(c)(1)(ii) affirmative defense for 

directors and officers? Are there other 

ways that an officer or director could 

demonstrate that they do not possess 

material nonpublic information when 

adopting a trading arrangement? 

9. Is the proposed language of the 

certification appropriate? If not, what 

alternative formulation, would be more 


lotter on DSK11XQN23PROD with PROPOSALS2
8692 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

43See Selective Disclosure and Insider Trading, 

Release No. 33–7787 (Dec. 20, 1999) [64 FR 72590 

(Dec. 28, 1999)]. 

44However, ‘‘fiduciaries’’ of employee stock 

ownership plans should consider the extent to 

which ‘‘refraining on the basis of inside information 

from making a planned trade . . . could conflict 

with the complex insider trading . . . requirement 

imposed by the federal securities laws or with the 

objectives of those laws.’’ See Fifth Third Bancorp 

v. Dudenhoeffer, 573 U.S. 409, 429 (2014). Officers 

and directors also need to follow Regulation 

Blackout Trading Restrictions, 17 CFR 245.100– 

245.104. 

45See Gaming the System, supra note 16. See also 

infra Section IV.B. 

appropriate? Should the certification 

contain different or additional 

conditions? 

10. Should the proposed certification 

requirement also apply to individuals 

who are not ‘‘officers’’ under Exchange 

Rule 16a–1(f)? 

11. The proposed instruction provides 

guidance that a director or officer 

should retain the certification for ten 

years consistent with the ten-year 

statutes of limitations that govern the 

Commission’s insider trading actions. 

Should we instead require the issuer to 

retain the certification, either instead of 

or in addition to the director or officer? 

If so, how long should the issuer be 

required to retain the certification? 

Should we allow the individuals and 

issuers to develop their own retention 

policies for the certification? 

12. Should we specifically provide in 

the proposed amendments to Rule 

10b5–1(c)(1)(ii) that the certification 

does not establish an independent basis 

of liability for directors or officers under 

Exchange Act Section 10(b) and Rule 

10b–5? 

3. Restricting Multiple Overlapping 

Rule 10b5–1 Trading Arrangements and 

Single-Trade Arrangements 

Currently, Rule 10b5–1(c)(1)(i)(C) 

provides that a person will not be 

entitled to the affirmative defense for a 

trade if they enter into or alter a 

‘‘corresponding or hedging transaction 

or position’’ with respect to the planned 

transactions. In the Rule 10b5–1 

proposing release, the Commission 

explained that this requirement was 

designed to prevent persons from 

devising schemes to exploit inside 

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.43

The use of multiple trading 

arrangements can be used to simulate 

this kind of impermissible hedging. 

As discussed above, currently, a 

person can adopt and employ multiple 

overlapping Rule 10b5–1(c)(1) trading 

arrangements and exploit inside 

information by setting up trades timed 

to occur around dates on which they 

expect the issuer will likely release 

material nonpublic information. We are 

also concerned that a person could 

circumvent the proposed cooling-off 

period by setting up multiple 

overlapping Rule 10b5–1(c)(1) trading 

arrangements, and deciding later which 

trades to execute and which to cancel 

after they become aware of material 

nonpublic information but before it is 

publicly released. We are proposing to 

amend Rule 10b5–1(c)(1) to eliminate 

the affirmative defense for any trades by 

a trader who has established multiple 

overlapping trading arrangements for 

open market purchases or sales of the 

same class of securities. Under the 

proposed amendment, the affirmative 

defense would not be available for 

trades under a trading arrangement 

when the trader maintains another 

trading arrangement, or subsequently 

enters into an additional overlapping 

trading arrangement, for open market 

purchases or sales of the same class of 

securities. The proposed restriction with 

respect to multiple overlapping Rule 

10b5–1(c)(1) trading arrangements is 

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 an affirmative 

defense for such trades. 

The proposed amendment would not 

apply to transactions where a person 

acquires (or sells) securities directly 

from the issuer, such as acquiring shares 

through participation in employee stock 

ownership plans (‘‘ESOPs’’) or dividend 

reinvestment plans (‘‘DRIPs’’), which 

are not executed by the director or 

officer on the open market. Participation 

in these programs is sometimes effected 

through Rule 10b5–1(c)(1) trading 

arrangements, and because the 

transactions are directly with the issuer, 

they are less likely to give rise to insider 

trading.44 This provision is intended to 

preserve the benefits of flexibility for 

plan participants with respect to such 

plans. 

In addition to restricting the use of 

multiple overlapping trading 

arrangements, we are also proposing 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, so 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, within a 12- 

month period, purchased or sold 

securities pursuant to another singletrade plan. Recent research indicates 

that single–trade plans are consistently 

loss avoiding and often precede stock 

price declines.45 This research suggests 

that insiders using single-trade plans 

may be executing trades based on 

material nonpublic information. At the 

same time, we recognize the legitimate 

use of single–trade plans to address onetime liquidity needs. The proposed 

limitation on single-trade plans is 

intended to balance this legitimate use 

against potential for abuse. 

Request for Comment 

13. Are there legitimate uses of 

multiple, overlapping Rule 10b5–1 trade 

arrangements? If so, what are they? Is it 

appropriate to exclude from the 

affirmative defense multiple concurrent 

trading arrangements for open market 

purchases or sales of the same class of 

securities as proposed? Would the 

proposal create incentives for corporate 

insiders to own different classes of 

stock? Are there alternative approaches 

to addressing the concerns with 

multiple trading arrangements 

discussed above? 

14. Is the proposed amendment 

sufficiently clear as to what types of 

overlapping trading arrangements a 

trader can maintain, while still 

preserving the availability of the Rule 

10b5–1(c)(1) affirmative defense? If not, 

how could additional clarity be 

provided? In particular, how would the 

proposed exclusion affect current 

practices with respect to tax qualified 

retirement savings plans, and tax 

withholding transactions with respect to 

equity compensation arrangements, 

such as stock options and restricted 

stock units? 

15. Is it appropriate to limit the 

availability of the Rule 10b5–1(c)(1) 

affirmative defense for single-trade 

plans as proposed? If not, are there 

alternative approaches to addressing 

concerns about the potential abuse of 

single-trade plans? Would the proposed 

cooling-off periods sufficiently mitigate 

the potential to misuse single-trade 

plans to execute trades based on 

material nonpublic information? 

Alternatively, would the limited 

availability of the Rule 10b5–1(c)(1) 

affirmative defense for single-trade 

plans as proposed still allow for 

potential abuse? Should we consider 

prohibiting the use of single-trade plans 

entirely? 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8693 

46See infra note 106 and accompanying text. 

47Form 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 17 CFR 230.144 (Securities 

Act Rule 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)]. 

48Public Law 107–204, 116 Stat. 745 (2002). 

49 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 

Continued 

4. Requiring That Trading Arrangements 

Be Operated in Good Faith 

As discussed above, the Rule 10b5–1 

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 ability to trade on the basis of 

material nonpublic information through 

a Rule 10b5–1(c)(1) trading arrangement 

may incentivize corporate insiders to 

improperly influence the timing of 

corporate disclosures to benefit their 

trades under the trading arrangement, 

for example, by delaying or accelerating 

the release of material nonpublic 

information.46 We are concerned that a 

trading arrangement may be canceled or 

modified in an attempt to evade the 

prohibitions of the rule without 

affecting the availability of the 

affirmative defense. 

We are also concerned that a 

corporate insider, after entering into a 

Rule 10b5–1(c)(1) trading arrangement, 

may improperly influence the timing of 

the announcement of material 

nonpublic information in a way that 

benefits a planned trade under their 

trading arrangement. To address these 

concerns, we are proposing to amend 

Rule 10b5–1(c)(1)(ii) to add the 

condition that a contract, instruction, or 

plan be ‘‘operated’’ in good faith. 

Amending the condition that a Rule 

10b5–1 trading arrangement be entered 

into in good faith to further require that 

the trading arrangement also be 

operated in good faith would help deter 

fraudulent and manipulative conduct 

and enhance investor protection 

throughout the duration of the trading 

arrangement. The proposed amendment 

is intended to make clear that the 

affirmative defense would not be 

available to a trader that cancels or 

modifies their plan in an effort to evade 

the prohibitions of the rule or uses their 

influence to affect the timing of a 

corporate disclosure to occur before or 

after a planned trade under a trading 

arrangement to make such trade more 

profitable or to avoid or reduce a loss. 

Request for Comment 

16. Would the addition of ‘‘and 

operated’’ to the good faith requirement 

in Rule 10b5–1(c)(1)(ii), as proposed, 

have a meaningful impact? If not, what 

are alternative approaches that would 

address the concern over the 

manipulation of the timing of corporate 

disclosures to benefit a trade under a 

Rule 10b5–1(c)(1) trading arrangement? 

17. Is there evidence to suggest that 

corporate insiders influence the timing 

of corporate disclosures to benefit their 

trades under a Rule 10b5–1 trading 

arrangement? Is there evidence to 

suggest that any efforts to time corporate 

disclosures would not be sufficiently 

mitigated by the 120-day cooling-off 

period? 

18. Is the term ‘‘operated’’ or the 

concept of ‘‘operated in good faith’’ 

sufficiently clear as to the conduct it is 

meant to describe? If not, should we 

provide additional guidance as to its 

meaning in this context? Should we 

define the phrase ‘‘entered into and 

operated in good faith’’? If so, how 

should it be defined? 

19. Is there another formulation that 

would better address the underlying 

policy concern of an insider improperly 

influencing the timing of the release of 

material nonpublic information to 

benefit a trade under a Rule 10b5–1 

trading arrangement? 

20. Does requiring the trading 

arrangements to be operated in good 

faith create incentives for corporate 

insiders to take into account their 

existing Rule 10b5–1 trading 

arrangements when making decisions 

with respect to the timing of corporate 

disclosures? 

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 companies or 

insiders.47 The lack of comprehensive 

public information about the use of 

these arrangements by officers, 

directors, and issuers—whether 

pursuant to Rule 10b5–1(c)(1) trading 

arrangement or otherwise—deprives 

investors of the ability to assess whether 

those parties may be misusing their 

access to material nonpublic 

information. This lack of transparency 

may be allowing improper trading to go 

undetected and undermining the 

deterrent impact of our insider trading 

laws. In addition, the lack of public 

information about the use of these 

arrangements by companies and 

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. 

Currently, issuers are not required to 

disclose their insider trading policies or 

procedures. We believe 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 codes of ethics may address 

insider trading issues, they often lack 

the detail necessary for investors to 

assess actual practices surrounding 

potential insider trading. Accordingly, 

we are proposing 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. We are 

also proposing new Item 16J to Form 

20–F to require annual disclosure of a 

foreign private issuer’s insider trading 

policies and procedures. In addition, we 

are proposing 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. 

The proposed disclosures that would 

be required in Forms 10–Q, 10–K, and 

Form 20–F would be subject to the 

certifications required by Section 302 of 

the Sarbanes-Oxley Act of 2002.48

Section 302 requires an issuers’ 

principal executive officer and principal 

financial officer to certify, among other 

things, that based on their knowledge, 

the Form 10–K, Form 10–Q, 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.49


lotter on DSK11XQN23PROD with PROPOSALS2
8694 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

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. 

50As discussed above, we have proposed 

clarifying that any modification or amendment of 

an existing Rule 10b5–1 trading arrangement is the 

equivalent of terminating the existing arrangement 

and adopting a new arrangement. See supra note 

23. Accordingly, the proposal would require a 

description of the modification. 

1. Quarterly Reporting of Rule 10b5–1(c) 

and Non-Rule 10b5–1(c) Trading 

Arrangements 

Currently, issuers are not required to 

disclose trading arrangements by 

directors, officers, or the issuer itself 

when conducting a share buyback. Nor 

are issuers required to disclose 

terminations of, including modifications 

to, trading arrangements previously 

adopted by directors, officers, or the 

issuer itself. The disclosure of such 

information would allow investors to 

assess the extent to which directors, 

officers, and the issuer are adopting or 

terminating such trading arrangements 

during periods when they may be aware 

of material nonpublic information. 

Proposed Item 408(a) of Regulation S–K 

would require registrants to disclose: 

• Whether, during the registrant’s last 

fiscal quarter (the registrant’s fourth 

fiscal quarter in the case of an annual 

report), the registrant has 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: 

Æ The date of adoption or 

termination; 50

Æ The duration of the contract, 

instruction or written plan; and 

Æ 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 has 

adopted or terminated any contract, 

instruction or written plan for the 

purchase or sale of equity 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: 

Æ The name and title of the director 

or officer; 

Æ The date on which the director or 

officer adopted or terminated the 

contract instruction or written plan; 

Æ The duration of the contract 

instruction or written plan; and 

Æ The aggregate number of securities 

to be sold or purchased pursuant to the 

contract, instruction or written plan. 

We are proposing to require these 

disclosures in Form 10–Q and Form 10– 

K. Under the proposal, a registrant 

would be required to provide this 

disclosure 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, adopted or terminated a 

Rule 10b5–1(c) trading arrangement. 

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. 

We recognize that as a result of the 

proposed amendments some issuers, 

directors or officers may seek to execute 

sales or purchases through trading 

arrangements that do not satisfy the 

conditions of Rule 10b5–1(c)(1). For this 

reason, we are also proposing to require 

similar disclosures with respect to the 

adoption or termination of other preplanned trading contracts, instructions, 

or plans (‘‘non-Rule 10b5–1 trading 

arrangements’’) through which the 

issuer, officer or directors seek to 

transact in issuer securities. 

Requiring quarterly disclosure of the 

adoption or termination of a trading 

arrangement by a director, officer or the 

issuer provides important information 

that would better allow investors, the 

Commission, and other market 

participants to observe how these 

trading arrangements are being used. 

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 if 

the termination coincides with 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(c)(1) trading arrangements 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. 

Request for Comment 

21. Would the disclosures in 

proposed Item 408(a) provide useful 

information to investors and the 

markets? Does the proposed disclosure 

requirement specify all of the 

information that should be disclosed as 

to registrants’ trading arrangements? 

Does the proposed disclosure 

requirement specify all of the 

information that should be disclosed as 

to trading arrangements of officers and 

directors? Are there other disclosures 

that we should require that would 

provide more transparency into the use 

of Rule 10b5–1 and non-Rule 10b5–1 

trading arrangements? Is there any 

information that we have proposed to 

require be disclosed that we should not 

require? We are proposing disclosure 

about trading arrangements both for 

registrants and for officers and directors. 

Should we instead require disclosure 

about only one of those categories of 

traders? Should we consider requiring 

disclosure of trading arrangements of 

insiders who are not officers or 

directors? If so, at what level of 

specificity? 

22. Would a description of the 

material terms of a trading arrangement 

encourage front-running of trades under 

the trading arrangement? Should the 

required disclosures be limited to 

particular terms of a trading 

arrangement? 

23. Do registrants currently have 

access to information about a director’s 

or officer’s adoption or termination of a 

non-Rule 10b5–1 trading arrangement 

that would allow them collect and 

prepare this information for disclosure 

in a Form 10–Q in a timely fashion? If 

not, what would they need to do to 

collect and prepare this information for 

disclosure? 

24. Is it appropriate to require 

disclosures regarding both Rule 10b5–1 

trading arrangements and non-Rule 

10b5–1 trading arrangements? Is the 

scope of the term ‘‘non-Rule 10b5–1’’ 

sufficiently clear? Should we define the 

term? 

25. Is the proposal to require 

disclosure in Forms 10–Q and 10–K 

appropriate? Should we instead require 

disclosure in a different form? Should 

we consider a different frequency of 

disclosure? 

26. The proposed Item 408(a) 

disclosure requirement would not apply 

to foreign private issuers that file annual 

reports using Form 20–F because such 

issuers are not required to file quarterly 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8695 

51 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. 

52See also Section 406 of the Sarbanes-Oxley Act 

of 2002 (‘‘SOX’’), 15 U.S.C. 7264. 

53See e.g., NYSE Listed Company Manual Section 

303A.10, which states in relevant part that every 

NYSE ‘‘listed company should proactively promote 

compliance with laws, rules and regulations, 

including insider trading laws. Insider trading is 

both unethical and illegal, and should be dealt with 

decisively.’’ See also NASDAQ Listing Rule 5610 

that requires every Nasdaq listed company to adopt 

a code of conduct that must comply with the 

definition of a ‘‘code of ethics’’ set out in SOX 

Section 406 (c) and that must apply to all directors, 

officers, and employees. 

54 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. 

55The 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.’’ 

Exchange Act Section 3(a)(14) [15 U.S.C. 78c(a)(14)] 

compare with Securities Act Section 2(a)(3) [15 

U.S.C. 77b(a)(3)] (‘‘the 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 Exchange 

Act 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. 

reports on Form 10–Q. Should the 

proposed amendments apply to foreign 

private issuers or would the information 

be less useful if reported annually on 

Form 20–F? 

2. Disclosure of Insider Trading Policies 

and Procedures 

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 shareholders from the misuse of 

material nonpublic information. We are 

thus proposing to add new Item 408(b) 

to 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.51 Foreign private issuers would 

also be required to provide analogous 

disclosure in their annual reports 

pursuant to a new Item 16J in that form. 

Currently, 17 CFR 232.406 (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.52 Many registrants are required to 

maintain codes of ethics or conduct 

under exchange listing standards.53

These codes may contain specific 

policies and restrictions that address 

insider trading.54 Apart from these 

codes of ethics or conduct, some 

registrants have other policies and 

procedures specifically addressing 

insider trading. The proposed 

amendments are designed to provide 

investors with meaningful information 

regarding a registrant’s insider trading 

policies and procedures to enable them 

to better assess the manner in which the 

registrant promotes compliance with 

insider trading laws and protects 

material nonpublic information from 

misuse. 

We recognize that insider trading 

policies and procedures may vary from 

company to company and that decisions 

as to specific provisions of the policies 

and procedures are best left to the 

company. Therefore, the proposed 

amendments do not specify all details 

that a registrant should address in its 

insider trading policies, nor do they 

prescribe any specific language that 

such policies must include (although 

this release does include some guidance 

as to the appropriate subject matter 

below). We also recognize that 

registrant’s existing code of ethics may 

contain insider trading policies. In this 

case, the registrant, could crossreference to the particular components 

of its code of ethics that constitute 

insider trading policies and procedures 

in response to proposed Item 408(b)(2). 

When making disclosure about their 

insider trading policies and procedures 

under proposed Item 408(b)(2), 

registrants should endeavor to provide 

detailed and meaningful information 

from which investors can assess the 

sufficiency of their insider trading 

policies and procedures. For example 

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; or how 

the issuer enforces compliance with any 

such policies and procedures it may 

have. Furthermore, the disclosure under 

proposed Item 408 could address not 

only policies and procedures that apply 

to the purchase and sale of the 

registrant’s securities, but also other 

dispositions of the issuer’s securities 

where material nonpublic information 

could be misused such as, for example, 

through gifts of such securities.55

Request for Comment 

27. Would the proposed disclosure 

requirements regarding a registrant’s 

insider trading policies and procedures 

or lack thereof provide useful 

information to investors? Is there other 

information that would be useful to 

include in Item 408(b)? 

28. Is the proposed scope of the term 

‘‘insider trading policies and 

procedures’’ sufficiently clear? Should 

we more specifically define the term? 

Are there other elements or objectives of 

an insider trading policy or procedure 

that should be included in the proposed 

Item? 

29. Should the Item 408(b) disclosure 

be required in Schedules 14A and 14C, 

as proposed? 

30. Should foreign private issuers be 

required to provide disclosure of their 

insider trading policies and procedures? 

Are any modifications to the proposed 

disclosure requirement appropriate to 

recognize the different legal regimes in 

which foreign private issuers may 

operate? 

3. Structured Data Requirements 

We are proposing to require 

registrants to tag the information 

specified by Item 408 in Inline XBRL in 

accordance with Rule 405 of Regulation 

S–T (17 CFR 232.405) and the EDGAR 


lotter on DSK11XQN23PROD with PROPOSALS2
8696 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

56This tagging requirement would be 

implemented by including a cross-references to 

Rule 405 of Regulation S–T in proposed Item 

408(a)(3) and Item 408(b)(3), and by revising Rule 

405(b) of Regulation S–T [17 CFR 232.405(b)] to 

include the Item 408 disclosure. In conjunction 

with the EDGAR Filer Manual, Regulation S–T 

governs the electronic submission of documents 

filed with the Commission. Rule 405 of Regulation 

S–T 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 to use 

for tagging the disclosures. 

57See 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 machinereadable for purposes of validation, aggregation, 

and analysis. Id. at 40851. 

58See Ownership Reports and Trading By 

Officers, Directors and Principal Security Holders, 

Release No. 34–28869 (Feb. 8, 1991) [56 FR 7242 

(Feb. 21, 1991)]. 

59 17 CFR 240.16a–3(g). 

60Form 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. 

61See 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’’). 

62See 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. 

63 Id. 

Filer Manual.56 The proposed 

requirements would include block text 

tagging of narrative disclosures, as well 

as detail tagging of quantitative amounts 

disclosed within the narrative 

disclosures. Inline XBRL is both 

machine-readable and human-readable, 

which improves the quality and 

usability of XBRL data for investors.57

Requiring Inline XBRL tagging of the 

disclosures provided pursuant to Item 

408 would 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 ASCII or HTML. This would 

enable automated extraction and 

analysis of the granular data required by 

the proposed rules, allowing investors 

and other market participants to more 

efficiently perform large-scale analysis 

and comparison of this information 

across issuers and time periods. For 

narrative disclosures, an Inline XBRL 

requirement would allow investors to 

extract and search for disclosures about 

a registrant’s insider trading policies 

and procedures (rather than having to 

manually run searches for these 

disclosures through entire documents), 

automatically compare/redline these 

disclosures against prior periods, and 

perform targeted AI/ML assessments of 

specific narrative disclosures rather 

than the entire unstructured document. 

At the same time, we do not expect the 

incremental compliance burden 

associated with tagging the additional 

information to be unduly burdensome, 

because issuers subject to the proposed 

tagging requirements are for the most 

part subject to similar Inline XBRL 

requirements in other Commission 

filings. 

Request for Comment 

31. Should we require issuers to tag 

the disclosures required by Item 408 of 

Regulation S–K in Inline XBRL, as 

proposed? Are there any changes we 

should make to ensure accurate and 

consistent tagging? If so, what changes 

should we make? 

32. Should we modify the scope of the 

disclosures required to be tagged? 

Should the narrative disclosure about a 

registrant’s insider policies and 

procedures be tagged using Inline XBRL, 

as proposed? 

33. Should we require issuers to use 

a different structured data language to 

tag these disclosures? If so, what 

structured data language should we 

require? 

34. Are there any issuers, such as 

smaller reporting companies, emerging 

growth companies or foreign private 

issuers that we should exempt from the 

tagging requirement? If so, how would 

investors in such issuers receive the 

information that they need to make 

informed decisions regarding these 

issuers? 

4. Identification of Rule 10b5–1(c) and 

Non-Rule 10b5–1(c)(1) Transactions on 

Forms 4 and 5 

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 of the 

Exchange Act 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.58

Persons subject to Section 16 

reporting must disclose changes in their 

beneficial ownership on Form 4 or 5. 

Exchange Act Rule 16a-3(g) 59 provides 

that a reporting person 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. In 

December 2020, the Commission 

proposed, among other things, 

amendments to Form 4 and Form 5 60 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).61 In the 

December 2020 Proposing Release, the 

Commission noted that many Form 4 

and Form 5 filers voluntarily provide 

additional disclosure in these forms 

stating that a reported transaction 

satisfied the affirmative defenses 

conditions of Rule 10b5–1(c). The 

Commission indicated that the 

checkbox option would provide filers 

with a more efficient method to disclose 

this information. 

In response to the December 2020 

Proposing Release, the Commission 

received feedback from several 

commenters who asserted, based on 

analyses of sales of securities executed 

under Rule 10b5–1 trading 

arrangements, that many of these 

transactions were likely made on the 

basis of material nonpublic 

information.62 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 trading arrangements are 

being used to engage in opportunistic 

trading on the basis of inside 

information.63

In consideration of this feedback, we 

are proposing to add a Rule 10b5–1(c) 

checkbox as a mandatory disclosure 

requirement on Forms 4 and 5. The 

checkbox would require a Form 4 or 5 

filer to indicate whether a sale or 

purchase reported on that form was 

made pursuant to a Rule 10b5–1(c) 

trading arrangement. Filers would also 

be required to provide the date of 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8697 

64See S. Rep. No. 1455, 73d Cong., 2d Sess. 55 

(1934). 65See, e.g., Executive Compensation and Related 

Person Disclosure, Release No. 33–8732A (Aug. 29, 

2006) [71 FR 53158 at 53160, n. 45 (Sept. 8, 2006)] 

(hereinafter ‘‘2006 Executive Compensation 

Release’’); Proxy Disclosure Enhancements, Release 

No. 33–9089 (Dec, 16, 2009) [74 FR 68334 (Dec. 24, 

2009)]. 

66The term ‘‘option’’ includes stock options, 

SARs and similar instruments with option-like 

features. See 17 CFR 229.402(a)(6). 

67When 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.’’ 

68 2006 Executive Compensation Release, supra 

note 65, at 53164. 

69See 17 CFR 229.402(b)(2)(iv) and 2006 

Executive Compensation Release, supra note 65, at 

53163–4. 

70See Lucian A. Bebchuk and 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 inthe-money option award as having been granted atthe-money). 

71See 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 ‘‘bulletdodging’’ 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). 

72 2006 Executive Compensation Release, supra 

note 65, at 53163. 

73Named executive officers include all 

individuals serving as the registrant’s Principal 

Executive Officer (‘‘PEO’’) or Principal Financial 

Continued 

adoption of the Rule 10b5–1 trading 

arrangement, 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 Exchange 

Act Section 16.64 It also would provide 

information that could be used by 

registrants to comply with their Item 

408 disclosure obligations. 

In addition, we are proposing 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 

that is not intended to satisfy the 

conditions of Rule 10b5–1(c). 

Request for Comment 

35. Should we add a mandatory 

checkbox on Forms 4 and 5 to indicate 

whether a sale or purchase was made 

pursuant to a Rule 10b5–1(c) plan? 

Should we require disclosure of the date 

of adoption of the Rule 10b5–1 plan? 

Would the Rule 10b5–1(c) checkbox and 

disclosure of the date of adoption of the 

plan help provide useful information 

about whether a Rule 10b5–1 plan was 

being used to engage in opportunistic 

trading based on material nonpublic 

information? Are there alternative 

methods of providing this information 

that we should consider? 

36. Should we add an optional 

checkbox on Forms 4 and 5 to indicate 

that a sale or purchase reported on these 

forms was made pursuant to a contract, 

instruction or written plan that did not 

satisfy the conditions of Rule 10b5–1(c), 

as proposed? Would such an affirmative 

indication provide useful information to 

investors and market participants? Are 

filers already sufficiently able to provide 

this information elsewhere if they 

choose to do so? If so, should we make 

the use of the checkbox mandatory? 

C. Disclosure Regarding the Timing of 

Option Grants and Similar Equity 

Instruments Shortly Before or After the 

Release of Material Nonpublic 

Information 

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.65 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.66 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 towards 

increasing company value, because the 

option holder would only benefit if the 

company’s stock price exceeds the 

exercise price at the time of exercise.67

In 2006, the Commission revised its 

executive compensation disclosure rules 

to, among other things, provide 

investors a more complete picture of 

compensation to principal executive 

officers, principal financial officers, and 

the other highest paid executive officers 

and directors.68 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 nonpublic 

information by the company.69 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 (‘‘springloading’’) can benefit executives with an 

option award that will likely be in-themoney as soon as the material 

nonpublic information is made public.70

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 (‘‘bullet-dodging’’).71

In the 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 would be material to 

investors and should be fully 

disclosed.72

We are concerned, however, 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. Under our 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. Consequently, investors 

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, we are proposing 

amendments that would require 

registrants to disclose in a new table any 

option awards to named executive 

officers 73 or directors that are made 


lotter on DSK11XQN23PROD with PROPOSALS2
8698 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

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. 

74 In Release No. 33–9861, the Commission 

proposed to add paragraph (w) to Item 402. The 

proposed Item 402(x) designation is consistent with 

the new designations proposed in that release, but 

could change depending on Commission action to 

adopt those proposals. See Listing Standards for 

Recovery of Erroneously Awarded Compensation, 

Release No. 33–9861 (July 1, 2015) [80 FR 41144 

(July 14, 2015)]. See also Reopening of Comment 

Period for Listing Standards for Recovery of 

Erroneously Awarded Compensation, Release No. 

33–10998 (Oct. 14, 2021) [86 FR 58232 (October 21, 

2021)]. 

75Under the proposed rule, disclosure would also 

be required of the grant date fair value of each 

equity award computed in accordance with 

Financial Accounting Standards Board (FASB) 

Accounting Standards Codification (ASC) Topic 

718. 

76Commission 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. 

77While 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. 

78The 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. 

79 17 CFR 240.14a-21 [Exchange Act Rule 14a-21] 

requires, among other things, companies soliciting 

proxies for an annual or other meeting of 

shareholders at which directors will be elected to 

include a separate resolution subject to a 

shareholder advisory vote to approve the 

compensation of named executive officers. 

80This tagging requirement would be 

implemented by including a cross-references to 

Rule 405 of Regulation S–T in proposed Item 

402(x), and by revising Rule 405(b) of Regulation 

S–T [17 CFR 232.405(b)] to include the 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 of Regulation S–T 

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 to use 

for tagging the disclosures. 

81 ‘‘Smaller reporting company’’ is defined in 

Securities Act Rule 405 and 17 CFR 240.12b–2 

[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: (1) Had a public float of less 

than $250 million; or (2) had annual revenues of 

less than $100 million and either: (a) No public 

float; or (b) a public float of less than $700 million. 

82An EGC is defined as a company that has total 

annual gross revenues of less than $1.07 billion 

during its most recently completed fiscal year and, 

as of December 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 $1.07 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 and Exchange Act Rule 12b–2. 

83See Item 402(l) of Regulation S–K. 

84See Item 402(m)(2) of Regulation S–K. 

within a certain time proximity of the 

release of material nonpublic 

information such as an earnings 

announcement. 

Under the proposal, to identify if any 

such timed options are granted, a new 

paragraph (x) would be added to Item 

402 of Regulation S–K 74 that would 

require tabular disclosure of each option 

award (including the number of 

securities underlying the award, the 

date of grant, the grant date fair value, 

and the option’s exercise price) 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 contains material nonpublic 

information; the market price of the 

underlying securities the trading day 

before disclosure of the material 

nonpublic information; and the market 

price of the underlying securities the 

trading day after disclosure of the 

material nonpublic information.75

Many companies required to file 

Exchange Act periodic reports 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.76 After completion of a fiscal 

quarter, a company’s board of directors 

will usually meet a week or two before 

announcing the earnings release.77

During this period, the board would 

likely be aware of material nonpublic 

information that could affect the stock 

price of the company. The proposed 

fourteen day window is designed to 

cover the period that a company would 

be aware of material nonpublic 

information at the time that its board of 

directors’ grants an option award. In 

addition, new Item 402(x) would require 

narrative disclosure about an issuer’s 

option grant policies and practices 

regarding the timing of option grants 

and the release of material nonpublic 

information, including how the board 

determines when to grant options 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. For companies that are 

subject to CD&A, the proposed narrative 

disclosure could be included in CD&A. 

The proposed amendments are 

intended to provide shareholders a full 

and complete picture of any springloaded or bullet-dodging option grants 

during the fiscal year. It is important for 

shareholders to understand company 

practices with respect to these types of 

options grants as they consider their 

say-on-pay votes, and when approving 

executive compensation and electing 

directors. Accordingly, we are 

proposing to require this disclosure in 

annual reports on Form 10–K,78 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.79

We are also proposing to require 

registrants to tag the information 

required by Item 402(x) in Inline XBRL 

in accordance with Rule 405 of 

Regulation S–T (17 CFR 232.405) and 

the EDGAR Filer Manual.80 We expect 

that the disclosure of this data in a 

structured data language would improve 

the usability of the data for investors, 

other market participants and the 

Commission, and facilitate the analysis 

of this information. 

We do not propose to exempt smaller 

reporting companies 81 or emerging 

growth companies (‘‘EGCs’’) 82 from the 

proposed Item 402(x) disclosures. 

Information about grants of options 

awards while a board of directors is 

aware of material nonpublic information 

is material to all investors, and no less 

relevant to shareholders of a smaller 

reporting company or an EGC. 

Accordingly, smaller reporting 

companies and EGCs would be subject 

to the new disclosure requirement. 

However, consistent with the scaled 

approach to their executive 

compensation disclosure,83 smaller 

reporting companies and EGCs 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.84

Request for Comment 

37. To what extent does the board of 

directors or compensation committee 

currently consider the impact of 

granting option awards made close in 

time to disclosure of material nonpublic 

information? What type of effect would 

the proposed disclosures have on the 

timing and granting of option awards if 

this requirement for Item 402(x) were 

adopted? 

38. Would the proposed table in Item 

402(x) provide meaningful information 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8699 

85A 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 

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)]. 

86 17 CFR 240.16a–3(f). 

87Rule 16b–5. 

88Reports 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. 

89See Daisy Maxey, ‘‘Improper ‘Insider Charitable 

Giving’ Is Widespread, Study Says’’, WALL ST. J., 

July 5, 2021, at https://www.wsj.com/articles/ 

insider-charitable-giving11625418315?mod=searchresults_pos1&page=1. 

See also supra note 55 above. 

90See S. Burcu Avci et al., Insider Giving, supra 

note 21 above (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). 

91 15 U.S.C. 77b(b). 

92 15 U.S.C. 78c(f). 

93 15 U.S.C. 80a–2(c). 

94 15 U.S.C. 78w(a)(2). 

to shareholders regarding option awards 

made close in time to the disclosure of 

material nonpublic information? What, 

if any, other information should be 

required? Should the proposed table 

include a column to specify the date on 

which the material nonpublic 

information was released? Should any 

of the proposed disclosure elements be 

eliminated? 

39. The proposed disclosure 

requirements under new Item 402(x) 

would apply to option awards made 

within a 14-day period before or after 

the filing of a Form 10–Q or the filing 

(or furnishing) of a Form 8–K containing 

material nonpublic information with the 

Commission. Is the proposed 14-day 

time period appropriate? Should the 

period be longer or shorter than 14 days, 

and if so, what time period would be 

appropriate? What percent of option 

grants would be included in this 

disclosure based on these reporting 

windows? 

40. Is a one-day period after the 

disclosure of material nonpublic 

information a sufficient period for the 

material nonpublic information to be 

reflected in the market price of the 

issuer’s securities? Is a one-day period 

prior to the disclosure too late to reflect 

the change in the share price to the 

extent that the material nonpublic 

information may have been previously 

disclosed to the market (e.g., leaked)? 

Should the window for measuring the 

change in market price based on the 

release of material nonpublic 

information be longer or shorter? 

41. Should smaller reporting 

companies and emerging growth 

companies be required to provide all of 

the proposed disclosure? 

42. Are there material tax 

implications that could result from the 

timing of stock option grants with the 

release of material nonpublic 

information that should be disclosed? 

D. Reporting of Gifts on Form 4 

Currently, Section 16 reporting 

persons are required to report any ‘‘bona 

fide’’ 85 gift of equity securities 

registered under Exchange Act Section 

12 on Form 5. Exchange Act Rule 16a3(f) provides that every person who at 

any time during an issuer’s fiscal year 

was subject to Section 16 of the 

Exchange Act must file a Form 5 within 

45 days after the issuer’s fiscal year end 

to disclose certain beneficial ownership 

transactions and holdings not reported 

previously on Forms 3, 4, or 5.86 As 

transactions that are exempted from 

Section 16(b) by 17 CFR 240.16b-5,87

including 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 insiders to report ‘‘bona fide’’ 

gifts more than one year after the date 

of the gift.88

We have become aware that the length 

of the filing period for Form 5 may 

allow insiders to engage in problematic 

practices involving gifts of securities, 

such as insiders making stock gifts 

while in possession of material 

nonpublic information,89 or backdating 

a stock gift in order to maximize a 

donor’s tax benefit.90 To address these 

concerns, we are proposing to amend 

Exchange Act Rule 16a-3 to require the 

reporting of dispositions of bona fide 

gifts of equity securities on Form 4. 

Under the proposed amendment, an 

officer, director, or a beneficial owner of 

more than 10 percent of the issuer’s 

registered equity securities making a gift 

of equity securities would be required to 

report the gift on Form 4 before the end 

of the second business day following the 

date of execution of the transaction. 

This would be significantly earlier than 

what is required under current reporting 

rules. This earlier reporting deadline 

would help investors, other market 

participants, and the Commission better 

evaluate the actions of these insiders 

and the context in which equity 

securities gifts are being made. 

Request for Comment 

43. Should we require dispositions by 

gifts of equity securities to be disclosed 

Form 4 instead of Form 5, as proposed? 

44. Should we require disclosure of 

other information about gifts on Form 4 

that are not already required by Form 4? 

If so, what information should we 

require? 

III. General Request for Comment 

We request and encourage any 

interested person to submit comments 

on any aspect of the proposed 

amendments, other matters that might 

have an impact on the proposed 

amendments, and any suggestions for 

additional changes. With respect to any 

comments, we note that they are of 

greatest assistance to our rulemaking 

initiative if accompanied by supporting 

data and analysis of the issues 

addressed in those comments and by 

alternatives to our proposals where 

appropriate. 

IV. Economic Analysis 

We are mindful of the costs imposed 

by, and the benefits obtained from, our 

rules. Section 2(b) of the Securities 

Act,91 Section 3(f) of the Exchange 

Act,92 and Section 2(c) of the 

Investment Company Act 93 require us, 

when engaging in rulemaking, to 

consider or determine whether an action 

is necessary or appropriate in (or, with 

respect to the Investment Company Act, 

consistent with) the public interest, and 

to 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 effects 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.94

We have considered the economic 

effects of the proposed 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 this proposal, much of the 

discussion remains qualitative in 

nature. Where we are unable to quantify 

the economic effects of the proposed 

amendments, we provide a qualitative 

assessment of the potential effects and 

encourage commenters to provide data 

and information that would help 

quantify the benefits, costs, and the 

potential impacts of the proposed 

amendments on efficiency, competition, 

and capital formation. 

We request comment from all 

interested parties. With regard to any 

comments, we note that such comments 


lotter on DSK11XQN23PROD with PROPOSALS2
8700 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

95The 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 IV.D and 

IV.E. 

96See infra note 187. 

97See supra Section I. 

98See generally Alexandre Padilla and 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’’). 

99See also Michael Manove, The Harm from 

Insider Trading and Informed Speculation, 104(4) 

Quarterly Journal of Economics, 823–845 (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?, Southern California Law Review (1981). 

100These arguments and those below apply to 

Rule 10b5–1 plans pertaining to trading in equity 

of other issuers as well as own company stock. 

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, as with 

trading in own company stock, 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 

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, The 

Supreme Court Review, 315–16, 323, 331–34; In re 

Melvin, SEC Release No. 3682, 2015 WL 5172974, 

at *4 & n.31 (Sept. 4, 2015). 

101See, e.g., Antonio E. Bernardo, Contractual 

Restrictions on Insider Trading: A Welfare Analysis, 

18(1) Economic Theory 7–35 (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 also 

Lucian A. Bebchuk and Chaim Fershtman, Insider 

Trading and the Managerial Choice among Risky 

Projects, 29(1) Journal of Financial and 

Quantitative Analysis, 1–14 (1994). However, 

Bebchuk and 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.’’ 

102See, e.g., Frank H. Easterbrook, Insider 

Trading, Secret Agents, Evidentiary Privileges, and 

the Production of Information, The Supreme Court 

Review, 309–366, 332 (1981) (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 Alexander P. Robbins, The Rule 10b5–1 

Loophole: An Empirical Study, 34 Review of 

Quantitative, Finance and Accounting, 199–224 

(2010) (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’’). 

are of greatest assistance to our 

rulemaking initiative if accompanied by 

supporting data and analysis of the 

issues addressed in those comments. 

A. Broad Economic Considerations 

The proposed 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 decisions about 

investment in the company. The 

proposed amendments are also expected 

to limit the opportunity for insider 

trading based on material nonpublic 

information (‘‘MNPI’’) (referred to as 

‘‘insider trading’’ throughout Section IV 

for brevity) under Rule 10b5–1 by 

amending the substantive conditions of 

the affirmative defense, resulting in 

benefits to investors and improvement 

in insiders’ incentives. 

Insider trading enables certain 

investors who have access to inside 

information or who control the timing 

or substance of corporate disclosures to 

profit at the expense of other investors. 

Due to their access to material 

nonpublic information, insiders can 

obtain profits through the strategic 

timing of trades in the issuer’s 

securities. These profits are gained at 

the expense of ordinary investors, and 

essentially transfer wealth from other 

investors to the insider. In addition, 

insider trading can distort the incentives 

of corporate insiders, which results in a 

loss of shareholder value, and erode 

investor confidence in the markets. To 

the extent insider trading by a 

company’s insiders imposes 

reputational costs for companies, by 

reducing insider trading, the proposed 

amendments also could offer 

reputational benefits to companies. 

1. Insider trading harms investors, 

distorts insiders’ incentives, and 

imposes economic costs on investors 

and capital markets. 

The proposed amendments are 

expected to decrease the incidence of 

unlawful insider trading based on 

MNPI.95 Insider trading represents a 

breach of fiduciary or other similar 

relation of trust and confidence.96

Congress, the Courts, and the 

Commission have concluded that such 

insider trading is illegal.97 Before 

analyzing each aspect of the proposed 

rule, in the interest of completeness, the 

Commission first reviews the economic 

literature on the insider trading 

prohibition.98

Insiders have information advantages 

that place them in a unique position to 

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.99 Thus, reducing the 

incidence of insider trading would 

benefit investors.100

Insider trading also imposes a cost on 

the investors in the company by 

distorting managerial incentives, which 

results in a loss of shareholder value. 

Thus, whether insiders are strategically 

timing stock sales and purchases based 

on MNPI is informative about insider 

incentives and the value of the 

company. 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. 

By protecting the insider from the full 

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). The incentive distortions are 

discussed in greater detail below. 

One incentive distortion is that an 

insider may prefer 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.101 To 

mitigate agency conflicts and better 

align insider incentives with those of 

shareholders, insiders are often 

compensated with equity. The ability to 

sell shares in advance of negative news 

(to the extent the compensation has 

vested) protects the insider’s equity 

position from the full effect of share 

price declines. This weakens incentive 

alignment and exacerbates the agency 

conflicts described above, increasing the 

likelihood that the insider would pursue 

negative-NPV projects. Downside 

protection also incentivizes the insider 

to choose riskier negative-NPV projects, 

due to the possibility of profiting on the 

upside.102 Relatedly, if short-term 

investment projects yield more 

profitable MNPI (while MNPI about 

long-term projects arrives less 

frequently or is less definitive), an 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8701 

103See M. Todd Henderson, Insider Trading and 

Executive Compensation: What We Can Learn from 

the Experience with Rule 10b5–1, Research 

Handbook on Executive 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, Campbell R. Harvey, and Shiva 

Rajgopal, The Economic Implications of Corporate 

Financial Reporting, 40(1–3) Journal of Accounting 

and Economics, 3–73 (2005); Alex Edmans, 

Blockholder Trading, Market Efficiency, and 

Managerial Myopia, 64(6) Journal of Finance, 2481– 

2513 (2009). 

104See, e.g., Konan Chan, David L. Ikenberry, 

Inmoo Lee, and Yanzhi Wang, Share Repurchases 

as a Potential Tool to Mislead Investors, 16 Journal 

of Corporate Finance 137 (2010) (finding in 1980– 

2000 data that a limited number of managers may 

have used repurchases in a misleading way as 

‘‘cheap talk’’); Alice A. Bonaime ́ and Michael D. 

Ryngaert, Insider Trading and Share Repurchases: 

Do Insiders and Firms Trade in the Same 

Direction?, 22 Journal of Corporate Finance, 35–53 

(2013) (finding that repurchases that coincide with 

net insider selling may be related to price support 

and/or reasons related to option exercises); Peter 

Cziraki, Evgeny Lyandres, and Roni Michaely, What 

do Insiders Know? Evidence from Insider Trading 

Around Share Repurchases and SEOs, 66 Journal of 

Corporate Finance 101544 (2021) (finding that, 

‘‘[h]igher insider net buying is associated with 

better post-event operating performance, a 

reduction in undervaluation, and, for repurchases, 

lower post-event cost of capital. Insider trading also 

predicts announcement returns and long-term 

abnormal returns following events.’’ Their results 

suggests that ‘‘insider trades before corporate events 

[repurchases and SEOs] contain information about 

changes both in fundamentals and in investor 

sentiment’’); Lenore Palladino, Do Corporate 

Insiders Use Stock Buybacks for Personal Gain?, 

34(2) International Review of Applied Economics, 

152–174 (2020) (finding increased insider selling in 

quarters where buybacks are occurring); Waqar 

Ahmed, Insider Trading Around Open Market 

Share Repurchase Announcements, University of 

Warwick Working Paper (2017) (finding that 

‘‘insiders take advantage of higher post-[repurchase] 

announcement price and sell more heavily’’, and 

that such selling is predictive of lower long-term 

returns). See also Rulemaking Petition 4–746, Jun. 

25, 2019, available at https://www.sec.gov/rules/ 

petitions/2019/petn4-746.pdf, at 5 and note 17 

(expressing concern and citing evidence of 

repurchases used to increase share prices at the 

time when insiders sell shares); Alex Edmans, 

Vivian Fang, and Allen Huang, The Long-Term 

Consequences of Short-Term Incentives, Journal of 

Accounting Research, forthcoming (2021) (finding 

that ‘‘[v]esting equity is positively associated with 

the probability of a firm repurchasing shares’’ but 

that ‘‘it is also associated with more negative longterm returns over the 2–3 years following 

repurchases’’ and that ‘‘CEOs sell their own stock 

shortly after using company money to buy the 

firm’s stock, also inconsistent with repurchases 

being motivated by undervaluation’’). But see, e.g., 

Harrison Liu and Edward Swanson, Is Price 

Support a Motive for Increasing Share 

Repurchases?, 38 Journal of Corporate Finance, 77 

(2016) (finding that ‘‘[c]orporate insiders do not sell 

from personal stock holdings during the price 

support quarter.’’); Pascal Busch and Stefan 

Obernberger, Actual Share Repurchases, Price 

Efficiency, and The Information Content Of Stock 

Prices, 30 Review of Financial Studies, 324 (2017) 

(concluding, with respect to actual share 

repurchases, that price support provided by 

repurchases improves price efficiency, even when 

manipulation concerns might be highest, such as 

those that occur prior to insider sales). 

105See, e.g., Robert J. Haft, The Effect of Insider 

Trading Rules on the Internal Efficiency of the 

Large Corporation, 80(5) Michigan Law Review, 

1051–1071, 1055 (1982). 

106See, e.g., Ranga Narayanan, Insider Trading 

and the Voluntary Disclosure of Information by 

Firms, 24(3) Journal of Banking and Finance, 395– 

425 (2000) (stating that ‘‘[s]tringent enforcement of 

insider trading regulations induces more disclosure 

by firms’’); Qiang Cheng and Kin Lo, Insider 

Trading and Voluntary Disclosures, 44(5) Journal of 

Accounting Research, 815–848 (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’’); Frank H. Easterbrook, Insider 

Trading, Secret Agents, Evidentiary Privileges, and 

the Production of Information, Supreme Court 

Review 1981, 309–366, 333 (1981) (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 

Jonathan L. Rogers, Disclosure Quality and 

Management Trading Incentives, 46(5) Journal of 

Accounting Research, 1265–1296 (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(2) American Business 

Law Journal, 313–360, at 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(1) U.C. Davis Business Law Journal, 65–82, at 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 and Stanley Veliotis, 

Meeting or Beating Earnings Expectations, 59(9) 

Management Science, 1988–2002 (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’’). 

107See, e.g., Lawrence M. Ausubel, Insider 

Trading in a Rational Expectations Economy, 80(5) 

American Economic Review 1022–1041 (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 Michael J. Fishman and Kathleen 

M. Hagerty, Insider Trading and the Efficiency of 

Stock Prices, 23(1) RAND Journal of Economics, 

106–122 (1992). 

insider may exhibit short-termism in 

investment decisions, at the expense of 

shareholder value.103

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, 

repurchases in cases where such a 

payout is not efficient, motivated by the 

attempt to boost the share price in 

advance of an insider’s sale of 

shares).104 As another 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.105

Another economic cost of insider 

trading is that it may incentivize 

insiders to adjust the timing or content 

of corporate disclosure (e.g., delay the 

release of MNPI).106 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 no 

disclosure distortions. 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 

identify specific corporate disclosures 

being manipulated or to obtain timely 

and accurate information elsewhere. 

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 a better 

informed inside seller, is likely to 

decrease investor confidence in the 

issuer and make investors less willing to 

buy or hold the issuer’s shares (trading 

against informed insiders generates 

what is known as ‘‘adverse 

selection’’).107 This in turn could have 

negative effects on capital formation and 

the ability to fund investments, due to 

challenges in raising the required 

amount of capital. 

Turning to the effects on the market 

as a whole, the risk of trading against 

informed insiders trading on MNPI 

negatively affects market integrity and 

erodes investor confidence in the 


lotter on DSK11XQN23PROD with PROPOSALS2
8702 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

108A number of studies demonstrate adverse 

effects of insider trading on market efficiency. See, 

e.g., Michael J. Fishman and Kathleen M. Hagerty, 

Insider Trading and the Efficiency of Stock Prices, 

23(1) RAND Journal of Economics, 106–122 (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 and 

Yuan Huang, Yuanto Kusnadi, and K.C. John Wei, 

The Real Effect of the Initial Enforcement of Insider 

Trading Laws, 45 Journal of Corporate Finance, 

687–709 (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, Joseph D. Piotroski, and Abbie 

J. Smith, Insider Trading Restrictions and Analysts’ 

Incentives to Follow Firms, 60(1) Journal of 

Finance, 35–66 (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 

and Miguel A. Ferreira, Insider Trading Laws and 

Stock Price Informativeness, 22(5) Review of 

Financial Studies 1845–1887 (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 

Review of Quantitative Finance and Accounting, 

199–224 (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(4) Journal of 

Political Economy, 859–887 (1992) (showing in a 

model that ‘‘stock prices better reflect information’’ 

when insider trading is permitted.); Utpal 

Bhattacharya, Hazem Daouk, Brian Jorgenson, and 

Carl-Heinrich Kehr, When an Event is Not an Event: 

The Curious Case of An Emerging Market, 55(1) 

Journal of Financial Economics, 69–101 (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 on insider trading on 

market efficiency may depend on whether the 

framework is static or dynamic. See David Easley, 

Soeren Hvidkjaer, and Maureen O’Hara, Is 

Information Risk a Determinant of Asset Returns? 

57(5) Journal of Finance, 2185–2221 (2002). 

109 Various studies show that insider trading 

negatively impacts liquidity. For example, see 

Raymond P.H. Fishe and Michel A. Robe, The 

Impact of Illegal Insider Trading in Dealer and 

Specialist Markets: Evidence From a Natural 

Experiment, 71(3) Journal of Financial Economics, 

461–488 (2004); Louis Cheng, Michael Firth, T.Y. 

Leung, and Oliver Rui, The Effects of Insider 

Trading on Liquidity, 14(5) Pacific-Basin Finance 

Journal 467–483 (2006); Hayne E. Leland, Insider 

Trading: Should It Be Prohibited? 100(4) Journal of 

Political Economy, 859–887 (1992) (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(1) American Law and 

Economics Review, 144–183 (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(2), Journal of Business 211–235 

(1989) (showing in a model that insider trading 

reduces liquidity). However, another study does not 

find a negative effect of insider trading on liquidity. 

See e.g., Charles Cao, Laura C. Field, and Gordon 

Hanka, Does Insider Trading Impair Market 

Liquidity? Evidence from IPO Lockup Expirations, 

39(1) Journal of Financial and Quantitative 

Analysis, 25–46 (2004). 

110For purposes of this economic analysis, the 

terms ‘‘Rule 10b5–1 trading arrangements’’ and 

‘‘Rule 10b5–1 plans’’ are used to refer to the trading 

arrangements reliant upon the affirmative defense 

of Rule 10b5–1(c)(1), in line with the use of these 

terms in the academic research on this topic. 

111See, e.g., See Recommendations of the Investor 

Advisory Committee Regarding Rule 10b5–1 Plans 

(Sept. 9, 2021), at https://www.sec.gov/spotlight/ 

investor-advisory-committee-2012/20210916-10b5- 

1-recommendation.pdf; Letter from David Larcker, 

March 10, 2021, available at https://www.sec.gov/ 

comments/s7-24-20/s72420-8488827-229970.pdf; 

Letter from Council of Institutional Investors (CII), 

April 22, 2021, available at https://www.sec.gov/ 

comments/s7-14-20/s71420-8709408-236962.pdf; 

Letter from CII, March 18, 2021, available at https:// 

www.sec.gov/comments/s7-24-20/s72420-8519687- 

230183.pdf; Letter from CII, September 25, 2020, 

available at https://www.sec.gov/comments/s7-06- 

20/s70620-7843308-223819.pdf; Letter from CII, 

December 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, February 12, 2018, available at 

https://www.sec.gov/comments/s7-07-17/s70717- 

3025708-161898.pdf; Letter from CII to The 

Honorable 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 The Honorable 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. 

112See, e.g., Jill E. Fisch, Testimony before the 

Investor Protection, Entrepreneurship, and Capital 

Markets Subcommittee, U.S. House Committee on 

Financial Services, Insider Trading and Stock 

Option Grants: An Examination of Corporate 

Integrity in the Covid–19 Pandemic, September 17, 

2020, available at https://docs.house.gov/meetings/ 

BA/BA16/20200917/111013/HHRG-116-BA16- 

Wstate-FischJ-20200917.pdf, at p. 5; Alan D. 

Jagolinzer, SEC rule 10b5–1 and Insiders’ Strategic 

Trade, 55(2) Management Science, 224–239 (2009) 

(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’’); Stanley Veliotis, Rule 

10b5–1 Trading Plans and Insiders’ Incentive to 

Misrepresent, 47(2) American Business Law 

Journal, 313–360, at 328–30 (2010) (discussing 

concerns related to selective cancellations); Taylan 

Mavruk and Nejat H. Seyhun, Do SEC’s 10B5–1 Safe 

Harbor Rules Need to Be Rewritten, Columbia 

Business Law Review, 133–183, at 165, 168–71 

(2016) (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(12) Review of Financial 

Studies, 4947–4996 (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.’’) 113For a discussion of the evidence of returns 

following insider trades occurring close to plan 

adoption, see infra notes 123–131 and 

accompanying and preceding text. But see infra 

notes 132–138 and accompanying and following 

text. Existing disclosure does not provide data on 

plan cancellations or plan modifications (including 

cancellations of planned trades). 

114Studies 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(2) Accounting 

Review, 395–427 (2013); Alice Adams Bonaime ́, 

Mandatory Disclosure and Firm Behavior: Evidence 

from Share Repurchases, 90(4) Accounting Review, 

1333–1362 (2015). 

secondary trading market, deterring 

traders that do not have the advantage 

of MNPI. Insider trading is also likely to 

adversely affect price efficiency 108 and 

liquidity.109

2. Certain Rule 10b5–1 plan 110

trading practices may raise concerns 

about potential insider trading. 

Over the years concerns have been 

raised that persons have engaged in 

securities trading based on MNPI while 

availing themselves of the Rule 10b5– 

1(c)(1) affirmative defense.111 Examples 

of practices that have raised concerns 

include the strategic cancellation of 

previously adopted plans or individual 

trades on the basis of MNPI,112 as well 

as initiation or resumption of trading 

close in time to plan adoption or 

modification.113

As discussed in detail in Section II 

above, the Commission is proposing 

several amendments to address these 

practices, including additional 

disclosure requirements for insider and 

issuer trading plans under Item 408 of 

Regulation S–K; additional disclosure of 

Rule 10b5–1 plan use in beneficial 

ownership forms; and modifications to 

the conditions of the affirmative defense 

under Rule 10b5–1(c)(1) (introducing 

cooling-off periods following the 

adoption of a new or modified plan; 

certification requirements; and 

restrictions on single-trade plans and 

multiple overlapping plans for open 

market trades in the same class of 

securities and single-trade plans). 

Disclosure requirements significantly 

affect the underlying behavior of 

insiders and issuers by drawing scrutiny 

of investors and other market 

participants to insider trading 

practices.114

Combined, the proposed amendments 

are expected to reduce the potential for 

insider trading through Rule 10b5–1 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8703 

115Form 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 https://

www.investor.gov/introduction-investing/investingbasics/glossary/form-144. 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 are 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. 

116The estimate is based on the data from filings 

on Forms 3, 4, and 5 for trades during calendar year 

2020 that reported Rule 10b5–1 plan use (obtained 

from Thomson Reuters/Refinitiv insiders dataset). 

The estimate only captures natural persons with 

Rule 10b5–1 plans that have Section 16 reporting 

obligations, and thus likely represents a lower 

bound on the number of affected plan participants. 

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 

2020 that reported Rule 10b5–1 plan use (also 

obtained from Thomson Reuters/Refinitiv insiders 

dataset) and the data from filings on Forms 3, 4, and 

5 cited above, we estimate that approximately 5,800 

natural persons at approximately 1,500 companies 

(which includes 5,000 officers and directors at 

1,400 companies; or when limited to officers only, 

approximately 4,100 officers at 1,300 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. 

117See David F. Larcker, Bradford Lynch, Philip 

Quinn, Brian Tayan, and Daniel J. Taylor, Gaming 

the System: Three Red Flags’’ of Potential 10b5–1 

Abuse, Stanford Closer Look Series, January 19, 

2021 (‘‘Larcker et al. (2021)’’) (2021). The study 

presents novel data ‘‘on all sales of restricted stock 

filed on Form 144 between January 2016 and May 

Continued 

plans and other trading arrangements by 

insiders and companies. As discussed 

above, deterring insider trading would 

result in benefits for investor protection, 

capital formation, and orderly and 

efficient markets. By deterring insider 

trading, the amendments would 

disincentivize insider behavior that is 

likely to harm the securities markets 

and undermine investor confidence. 

3. Current levels of disclosure about 

insider and issuer trading plans limit 

the ability of investors to identify the 

risk of insider trading and 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 and issuer trading plans, 

and the extent to which trading based 

on MNPI potentially distorts insider 

incentives with respect to corporate 

decisions (and thus shareholder value). 

Besides limiting the ability of investors 

to correctly value the company’s shares, 

and thus make informed investment 

decisions, such disclosure gaps limit the 

ability of the Commission staff to 

perform market surveillance with regard 

to Exchange Act Section 10(b) and Rule 

10b-5, with the associated adverse 

consequences for investor protection. 

The proposed disclosure amendments 

would provide greater transparency to 

investors and decrease information 

asymmetries between insiders and 

outside investors about insiders’ and 

companies’ trading arrangements and 

associated policies and procedures, 

enabling more informed decisions about 

whether to invest in the company’s 

shares and at what valuation. This 

might result in more efficient capital 

allocation and more informationally 

efficient pricing. The proposed 

additional disclosure requirements 

might also indirectly yield potential 

capital formation benefits if they 

increase investor confidence in the 

company’s governance. 

4. The economic effects of the 

proposed amendments are in some 

cases uncertain. 

The discussed economic effects of the 

proposed amendments may be uncertain 

or difficult to generalize. 

An important factor contributing to 

the uncertainty about the magnitude of 

the benefits of the proposed 

amendments to Rule 10b5–1 is the 

potential for substitution between Rule 

10b5–1 plans and other trading 

arrangements. The use of the Rule 10b5– 

1(c)(1) affirmative defense is voluntary. 

Insiders and companies may elect to 

pursue other trading arrangements if 

they perceive the costs of relying on that 

affirmative defense are too high. For 

example, companies may instead rely 

on the Rule 10b5–1(c)(2) affirmative 

defense. The application of the 

proposed disclosure requirements of 

new Item 408 of Regulation S–K to all 

officer, director, and company trading 

plans (including plans not under Rule 

10b5–1) is expected to partly mitigate 

this concern. 

The considerations presented above 

are generally applicable to the proposed 

amendments as a whole. In the sections 

that follow we provide a more detailed 

discussion of economic effects of the 

particular proposed amendments, 

including the expected costs and 

benefits relative to the market baseline, 

as well as reasonable alternatives. 

B. Amendments to Rule 10b5–1(c)(1) 

The Commission is proposing 

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 opportunities for officers, 

directors, and companies to profit from 

MNPI through such trading 

arrangements. 

The proposed amendments would 

narrow the conditions under which the 

Rule 10b5–1(c)(1) affirmative defense 

would be available. First, the proposed 

amendments would establish mandatory 

cooling-off periods before any trading 

could commence under a Rule 10b5–1 

trading arrangement by an officer, 

director, or issuer after the adoption of 

a new or modified trading arrangement. 

Second, the proposed amendments 

would eliminate the availability of the 

affirmative defense for multiple 

overlapping trading arrangements for 

open market transactions in the same 

class of securities, as well as limit 

single-trade plans to a maximum of one 

in a 12-month period. Third, the 

proposed amendments would impose a 

certification requirement as a condition 

of the Rule 10b5–1(c)(1) affirmative 

defense for trading arrangements of 

officers and directors. In addition, the 

proposed amendments would broaden 

the good faith provision, which is a 

condition of the 10b5–1(c)(1) affirmative 

defense. 

1. Baseline and Affected Parties 

We consider the economic effects of 

the proposed 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.115 Based 

on beneficial ownership filings (Forms 

3, 4, and 5) during the 2020 calendar 

year, approximately 4,900 natural 

persons at approximately 1,400 

companies reported trades under Rule 

10b5–1 trading arrangements. This 

figure includes approximately 4,800 

officers and directors at 1,400 

companies; narrowing it to officers 

yields an estimate of approximately 

3,900 officers at 1,200 companies.116

Due to the data limitations mentioned 

above, the actual number of affected 

parties is likely to be larger. 

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 during 

January 2016–May 2020.117 The study 


lotter on DSK11XQN23PROD with PROPOSALS2
8704 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

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 

and Seyhun (2016) 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 Taylan Mavruk and Nejat H. 

Seyhun, Do SEC’s 10B5–1 Safe Harbor Rules Need 

to Be Rewritten, Columbia Business Law Review, 

133–183 (2016). Relatedly, Hugon and 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 Artur 

Hugon and Yen-Jung Lee, SEC Rule 10b5–1 Plans 

and Strategic Trade around Earnings 

Announcements, Arizona State University and 

National Taiwan University (Working Paper) (2016). 

See also See Rik Sen, Are Insider Sales Under 

10b5–1 Plans Strategically Timed?, New York 

University (Working Paper) (2008); Eliezer M. Fich, 

Robert Parrino, and Anh L. Tran, When and How 

Are Rule 10b5–1 Plans Used for Insider Stock 

Sales?, Drexel University, University of Texas at 

Austin, and City University of London (Working 

Paper) (2021) (also utilizing Form 4 data). Data on 

Rule 10b5–1 trades by issuers is not available. 

118See Larcker et al. (2021). 

119 13.5 percent of trades occur within 0–30 days. 

27.2 percent of trades occur within 31–60 days, and 

22.6 percent within 61–90 days. In total, 63.3 

percent of trades occur within 90 days of the plan 

date and 83.7 percent of plans commence trading 

within six months. 

120See Defining the Fine Line: Mitigating Risk 

with 10b5–1 Plans, Morgan Stanley/Shearman & 

Sterling LLP, available at https://

advisor.morganstanley.com/capitol-wealthmanagement-group/documents/field/c/ca/capitolwealth-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 companies subject to the proposed 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. 

121 Id. 

122The 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. 

123As a caveat, the tests of statistical significance 

of the differences are not shown, so we cannot 

assess whether the economic differences discussed 

above have statistical significance. 

124See Alan D. Jagolinzer, SEC Rule 10b5–1 and 

Insiders’ Strategic Trade, 55(2) Management 

Science, 224–239 (2009). 

125See Stephen G. Ryan, Jennifer Wu Tucker, and 

Ying Zhou Securitization and Insider Trading, 91(2) 

Accounting Review, 649–675 (2016). 

documents ‘‘[t]he mean (median) 

cooling-off period is 117.9 (76) days. 

Approximately 14 percent of plans 

commence trading within the first 30 

days, and 39 percent within the first 60 

days. These represent very short 

cooling-off periods. 82 percent of plans 

commence trading within 6 months.’’ 118

As a caveat, the available data do not 

indicate whether the trading time 

frames are due to an issuer’s policies 

(i.e., whether there is a ‘‘cooling-off 

period’’ is not known—only the time 

between plan adoption and the first 

trade, which could be viewed as the 

‘‘effective cooling-off period’’, is 

calculated). 

Using Form 144 data provided by The 

Washington Service for a more recent 

period (January 2, 2018–October 19, 

2021), we find that the median (mean) 

cooling off period is 72 (105) days, with 

13.5 percent of first trades pursuant to 

a plan occurring within thirty days of 

the plan date and 40.7 percent occurring 

within 60 days of the plan date.119

Shorter cooling off periods are also 

associated with higher trade sizes as 

trades occurring within 90 days of plan 

adoption have a median size of 

$670,000 compared with a median size 

of $378,000 for those trades occurring 

more than six months after plan 

adoption. Further, single-trade plans 

constitute approximately 40% of plans 

during the time period examined. 

A 2016 industry survey also examined 

Rule 10b5–1 plan practices at public 

companies.120 In the survey (i) 77 

percent of the respondents had a 

mandatory cooling-off period of 60 days 

or less 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 insiders’ Rule 

10b5–1 plans to some degree; (iii) 55 

percent of the respondents allowed 

termination of plans and 40 percent of 

the respondents allowed modification of 

plans; and (iv) 18 percent of 

respondents allowed insiders to 

maintain multiple overlapping plans, 

while 82 percent disallowed multiple 

overlapping plans.121

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). Larcker et al. (2021) 

document abnormal profits following 

some Rule 10b5–1(c)(1) trades, which is 

indicative of potential informed trading 

by insiders under such plans. For 

example, the study shows abnormal 

industry-adjusted returns over a sixmonth period following the first sale to 

be ¥2.5 percent for plans with a 

cooling-off period of less than 30 days 

and ¥1.5 percent for plans with a 

cooling-off period of between 30 and 60 

days, but no evidence of such a postinsider sale price drop when the 

cooling-off period was longer than 60 

days. The study also finds that the 

abnormal return is between ¥2 percent 

and ¥3 percent for plans that execute 

a sale in the window between when the 

plan is adopted and that quarter’s 

earnings announcement, but no price 

drop is found following sales after the 

earnings announcement. Similarly, they 

find that insider sales under all singletrade plans are associated with a share 

price decrease after the sale.122 Negative 

abnormal returns after insider sales 

under Rule 10b5–1(c)(1) plans indicate 

potential informed trading by insiders 

ahead of negative news. A lack of such 

negative returns after insider sales 

under plans with longer cooling off 

periods is suggestive of inside 

information becoming stale during the 

cooling off period, though it could also 

indicate low statistical power. 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; while this result could also 

indicate low power, it is intuitive that 

information is more evenly shared 

following the earnings 

announcement.123

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 ‘‘[p]articipating 

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.’’ 124 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 securitizationrelated 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.’’ 125

A different 2016 study presents 

‘‘evidence consistent with insiders 

using 10b5–1 plans to sell stock in 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8705 

126See Artur Hugon and Yen-Jung Lee, SEC Rule 

10b5–1 Plans and Strategic Trade around Earnings 

Announcements, Arizona State University and 

National Taiwan University (Working Paper) (2016). 

127 Id. 

128 Id. 

129See Jonathan A. Milian, Insider Sales Based on 

Short-term Earnings Information, 47 Rev. Quant. 

Finan. Acc. (2016) 47, 109–128 (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.’’ 

130See Joshua Mitts, Insider Trading and Strategic 

Disclosure, Columbia University (Working Paper) 

(2020). 

131 Id. 

132See Rik Sen, Are Insider Sales Under 10b5– 

1 Plans Strategically Timed?, New York University 

(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. 

133 Id. 

134See Taylan Mavruk and Nejat H. Seyhun, Do 

SEC’s 10B5–1 Safe Harbor Rules Need to Be 

Rewritten, Columbia Business Law Review, 133–183 

(2016). 135 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. 136See Eliezer M. Fich, Robert Parrino, and Anh 

L. Tran, When and How Are Rule 10b5–1 Plans 

Used for Insider Stock Sales?, Drexel University, 

University of Texas at Austin, and City University 

of London (Working Paper) (2021). This study 

examines ‘‘11,250 stock sales by 1,514 CEOs at 

1,312 different public firms during the 2013 to 2018 

period. Of 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. 

137 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. 

138 Id. 

139See Alice Bonaime ́, Jarrad Harford, and David 

Moore, Payout Policy Trade-Offs and the Rise of 

10b5–1 Preset Repurchase Plans, 66(6) Management 

Science, 2762–2786 (2020). The study does not 

provide evidence of companies’ use of such plans 

for insider trading through issuer repurchases. The 

study 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.’’ 

140The estimate is based on a textual search of 

calendar year 2020 filings of Forms 10–K, 10–Q, 

8–K, as well as amendments and exhibits thereto in 

Intelligize, using keywords ‘‘10b5–1 repurchases’’ 

or a combination of keywords ‘‘repurchase plan’’ 

and ‘‘10b5–1’’. Due to a lack of standardized 

presentation and the unstructured (i.e., nonmachine-readable) nature of the disclosure, this 

estimate is approximate and may be over- or underinclusive. 

advance of disappointing earnings 

results.’’ 126 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.127 The study also finds that 

‘‘these insiders make the following 

types of trades: non-routine, infrequent, 

one-time, close to the plan initiation 

date, and during traditional blackout 

periods.’’ 128 Another 2016 study 

presents evidence of ‘‘insiders selling 

shares prior to imminent bad earnings 

news through their Rule 10b5–1 trading 

plans.’’ 129 A 2020 study finds 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.’’ 130 The study 

further shows 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.’’ 131

However, a 2008 study finds ‘‘no 

significant difference in stock price 

performance following plan sales and 

non-plan sales.’’ 132 The study shows 

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.’’ 133 A different 

2016 study finds negative abnormal 

returns after insider sales under Rule 

10b5–1(c)(1), as well as positive 

abnormal returns after insider purchases 

under Rule 10b5–1(c)(1) (over a onemonth holding period).134 However, the 

study does not find significant 

differences between the abnormal 

returns following insider trades under 

Rule 10b5–1(c)(1) and other insider 

trades.135 Finally, 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.’’ 136

Further, focusing on ‘‘the 25 percent of 

sales with the largest ratio of transaction 

value to the CEO’s most recent total 

annual compensation . . . 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 . . . the 

average CAR for the 40 trading days 

after the sale is –2.24 percent for nonplan sales and –2.41 percent for plan 

sales.’’ 137 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.’’ 138 The findings of these studies 

differ in part because of differences in 

the sample used for analysis (sample 

period and whether the data is based on 

beneficial ownership forms or Form 144 

filings) and methodology (including, 

among other assumptions, whether 

insider trading under Rule 10b5–1(c)(1) 

is examined in isolation or in 

comparison with other insider sales and 

purchases). As noted above, the lack of 

data on Rule10b5–1 plans can make it 

difficult to extrapolate from the 

available evidence to all trading under 

Rule 10b5–1(c)(1). However, overall, the 

evidence on the use of Rule 10b5–1 

plans in the discussed studies raises 

concerns about informed trading by 

insiders. 

Data on companies’ use of Rule 

10b5–1 plans are very limited. Some 

companies voluntarily disclose on Form 

8–K their use of Rule 10b5–1 plans to 

carry out stock repurchases. One study 

examining different repurchase methods 

documented ‘‘at least 200 

announcements of repurchases using 

Rule 10b5–1 per year from 2011 to 

2014. . . [In 2014] 29% [of repurchase 

announcements] included a 10b5–1 

plan.’’ 139 While the use of Rule 

10b5–1 plans by issuers can fluctuate 

year to year, the study suggests that 

approximately 200 companies could be 

affected by the proposed amendments. 

Based on a textual search of calendar 

year 2020 filings, we similarly estimate 

that approximately 220 companies 

disclosed share repurchase programs 

executed under a Rule 10b5–1 plan.140

Due to a lack of a trade reporting 

requirement similar to that for officers 

and directors, we are not aware of data 

or studies on companies’ actual trading 

under Rule 10b5–1 plans. 

Companies also may use Rule 

10b5–1 plans for sales of securities. Due 

to a lack of reporting, we cannot 

estimate the prevalence of such plans. 

2. Benefits 

The main benefit of the proposed 

amendments to Rule 10b5–1(c)(1) is a 

reduction in the potential for insider 

trading based on MNPI by officers, 

directors, and companies (discussed in 

greater detail in Section IV.A above). 

Below we discuss how each of the 

proposed amendments to Rule 10b5– 

1(c)(1) is expected to reduce such 

insider trading. Crucially, we expect the 


lotter on DSK11XQN23PROD with PROPOSALS2
8706 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

141But see infra note 157. 

142The cooling-off periods proposed for Rule 

10b5–1 trading arrangements of issuers are 

discussed in Sections IV.B.2.v and IV.B.3.v below. 

143See, e.g., Larcker et al. (2021); see also supra 

note 126 and accompanying text. 

144See, e.g., 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, 

December 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 and Karen Hsu Kelley, Simpson 

Thacher, Discusses Combating Securities Fraud 

Allegations With10b5–1 Trading Plans, August 10, 

2017, available at https://

clsbluesky.law.columbia.edu/2017/08/10/simpsonthatcher-discusses-combatting-securities-fraudallegations-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, Keir D. Gumbs, 

David L. Kornblau, Matthew C. Franker, and 

Stephanie W. Bignon, 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.’’). In a February 10, 2021 letter, 

Senators Warren, Brown and Van Hollen 

recommended the Commission consider a four to 

six-month cooling-off period between adoption, or 

modification of a plan and commencement or 

recommencement of trading under the plan. 

145See Larcker et al. (2021), at p. 2. 

146 Id, at p. 2. 

147 Id., at pp. 2–3. 

148See, e.g., Mavruk and Seyhun (2016), at p. 179. 

proposed provisions to work in tandem 

to substantially reduce or eliminate 

insider trading through Rule 10b5–1 

plans. In particular, the safeguards 

provided by the proposed certification 

requirement are expected to reinforce 

the effects of the proposed cooling-off 

periods and the restrictions on multiple 

overlapping and single-trade plans. The 

cooling-off period is expected to work in 

tandem with the exclusion of multiple 

overlapping plans from Rule 10b5– 

1(c)(1) in addressing opportunistic plan 

cancellations based on MNPI. Thus, 

while we separately discuss below the 

benefits of each individual provision for 

reducing insider trading, in combination 

the proposed amendments should also 

generate synergies. 

As discussed in Section IV.A above, 

because the Rule 10b5–1(c)(1) 

affirmative defense is elective, if 

officers, directors, or companies find the 

provisions as amended to be overly 

burdensome, they may elect not rely on 

it.141 To the extent the 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 

proposed amendments may be 

attenuated or offset. The magnitude of 

the described effect would depend on 

the extent to which other mechanisms 

(such as legal liability, enforcement 

actions, listing standards, reputational 

concerns, as well as corporate 

governance mechanisms) counteract 

insider trading incentives and any 

changes that companies implement to 

their insider trading policies. 

Companies may make changes in 

response to the proposed disclosure 

requirements of Item 408 of Regulation 

S–K, discussed in detail in Section IV.C 

below. 

In the subsections below we discuss 

the individual benefits of these 

proposed conditions. In Section IV.B.2.v 

below, we discuss the proposed 

amendments as they apply to 

companies’ plans. 

i. Cooling-Off Period for Officers and 

Directors 142

The Commission is proposing as a 

condition to the availability of the 

affirmative defenses under Rule 

10b5–1(c)(1) to officers and directors a 

120-day cooling-off period before any 

purchases or sales under the trading 

arrangement may commence after the 

date of adoption of a new or modified 

trading arrangement. The cooling-off 

period would prevent officers and 

directors aware of MNPI from being able 

to trade under the Rule 10b5–1 plan 

immediately after adopting or modifying 

such a plan. This would substantially 

weaken insider incentives to enter or 

modify Rule 10b5–1 plans based on any 

MNPI with a horizon that is shorter than 

the proposed cooling-off period. The 

120-day length of the proposed coolingoff period would largely prevent officers 

and directors from capitalizing on 

unreleased MNPI for the upcoming 

quarter.143 It also is consistent with, or 

exceeds, several recommendations 

regarding such cooling-off periods.144

To the extent that MNPI may be timesensitive, we expect such a cooling-off 

period to effectively discourage officers 

and directors from adopting new or 

modified plans on the basis of MNPI. 

Some evidence of the extent to which 

cooling-off periods could prevent 

insider trading is presented in Larcker et 

al. (2021). In that study, 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 6 

months.145 Shorter periods between 

plan adoption and first trade are 

associated with worse returns after the 

sale, which implies that more insider 

trading occurs in cases of trading 

commencing closer to plan adoption.146

The proposed 120-day cooling-off 

period for officer and director Rule 

10b5–1 trading arrangements would also 

help deter trades under a newly adopted 

or modified plan before the release of 

that quarter’s earnings announcement. 

Trades under Rule 10b5–1(c)(1) prior to 

an earnings announcement appear to be 

more likely to involve insider trading 

behavior. For example, Larcker et al. 

(2021) find 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]. . . Sales 

occurring between the adoption date 

and earnings announcement are about 

25 percent larger than sales occurring 

more than six months after the earnings 

announcement . . . 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.’’ 147

The proposed cooling-off periods 

would apply to directors and Rule 16a– 

1(f) officers but not to other natural 

persons. Directors and Rule 16a–1(f) 

officers (1) are generally more likely to 

be involved in making or overseeing 

corporate decisions about whether and 

when to disclose information; and (2) 

are generally more likely to be aware of 

MNPI.148 Given the significant loss of 

flexibility associated with a cooling-off 

period, the proposed approach of 

exempting natural person insiders that 

are not officers or directors from the 

proposed cooling-off period would 

tailor the application of the additional 

conditions of the affirmative defense in 

a way that better balances the additional 

costs to insiders with the investor 

protection benefits. 

ii. Restricting Multiple Overlapping and 

Single-Trade Rule 10b5–1 Trading 

Arrangements 

The Commission is proposing as a 

condition to the affirmative defense to 

disallow the use of multiple overlapping 

Rule 10b5–1 plans for open market 

trades in the same class of securities. 

This means that an insider or company 

would not be able to use the affirmative 

defense of Rule 10b5–1(c)(1) to maintain 

two or more Rule 10b5–1 plans for open 

market trades in the same security class. 

In combination with the proposed 

cooling-off period, this provision is 

expected to reduce the likelihood that 

insiders or companies would enter into 

multiple, overlapping plans and 

selectively cancel some of the plans at 

a later time based on MNPI, while 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8707 

149As a result, the benefit of strategically 

canceling an existing plan based on MNPI would 

be significantly reduced for many insiders or 

issuers, compared to a scenario in which an insider 

or issuer has multiple plans without cooling off 

periods, which is permitted today. Under the 

proposal, an insider or issuer that cancels a plan 

would be subject to disclosure obligations, as well 

as a cooling-off period with respect to any new 

plan, which makes a strategically planned 

cancellation significantly less attractive for an 

insider or issuer that plans to continue trading. As 

proposed, this cooling-off period could not be 

effectively shortened or eliminated by having 

multiple plans with similar or staggered adoption 

dates, because of the proposed restriction on 

multiple overlapping plans for open-market trades 

in the same class of securities. 

150A 2016 industry survey found that 82 percent 

of respondents do not allow multiple, overlapping 

Rule 10b5–1 plans. See Defining the Fine Line: 

Mitigating Risk with 10b5–1 Plans, Morgan Stanley/ 

Shearman & Sterling LLP, available at https://

advisor.morganstanley.com/capitol-wealthmanagement-group/documents/field/c/ca/capitolwealth-management-group/Defining_the_Fine_

LineLocked_Version.pdf, supra note 120. The data 

is based on the responses of the surveyed public 

company members of the Society of Corporate 

Secretaries and Governance Professionals and may 

not be representative of other companies. 

151But see infra note 157 and accompanying text. 

Also, trading under a plan not reliant on Rule 

10b5–1 could entail additional legal costs and 

limitations. 

152For instance, some suggestive evidence is 

presented in Larcker et al. (2021) (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 

129 (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, the Milian (2016) study 

does not specifically compare single-trade to multitrade plans. Further, the number of trades in the 

plan is highly correlated with the duration of the 

plan in the study, giving rise to potential 

confounding. 

153See supra note 106 and accompanying and 

following text. 

154See Jesse M. Fried, Insider Trading via the 

Corporation, 162(4) University of Pennsylvania Law 

Review, 801–840 (2014). 

availing themselves of Rule 10b5– 

1(c)(1)’s affirmative defense.149 The 

effects of this provision may be modest 

to the extent that companies already 

prohibit multiple Rule 10b5–1 plans,150

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).151

The proposed unavailability of the 

affirmative defense for multiple 

overlapping trading arrangements 

would not apply to transactions in 

which directors, officers, or employees 

acquired or sold for themselves 

securities as participants in ESOPs or 

DRIPs. This provision is expected to 

preserve the benefits of flexibility for 

participants in such plans. The 

proposed exclusion of multiple 

overlapping plans would not apply to 

trades in different classes of securities. 

For example, a plan for Class A common 

stock and an overlapping plan for Class 

B common stock or for preferred stock 

would still be eligible for the affirmative 

defense under the proposed 

amendments, provided that the other 

conditions are met. Because different 

classes of shares can have significantly 

different cash flow and voting rights, 

this provision is expected to preserve 

the benefits of flexibility for those plan 

participants that seek to implement 

independent purchase or disposition 

strategies for different share classes 

through separate, overlapping plans. 

The Commission is also proposing to 

limit the number of single-trade trading 

arrangements under the Rule 10b5– 

1(c)(1) affirmative defense to a 

maximum of one such trading 

arrangement in the prior 12-month 

period. This is expected to reduce the 

likelihood that plan participants would 

be able to repeatedly profit from ‘‘oneoff,’’ ad hoc trades based on previously 

undisclosed MNPI while availing 

themselves of the protections of the 

Rule 10b5–1(c)(1) affirmative 

defense.152 The incremental benefit of 

the proposed 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 the cooling-off period or 

certification and good faith provisions 

also being proposed. The benefit would 

also be attenuated to the extent that 

some multi-trade plans may combine a 

single trade based on MNPI with 

additional liquidity trades. 

Nevertheless, there could be some 

benefit to limiting the frequency of 

single-trade arrangements to the extent 

that some MNPI has a longer horizon 

than the cooling-off period. 

iii. Director and Officer Certifications 

The Commission is also proposing 

certification requirements as a condition 

of the amended Rule 10b5–1(c)(1) 

affirmative defense for trading 

arrangements of officers and directors. 

The proposed certification requirement 

would reinforce their awareness of their 

legal obligations under the Federal 

securities law related to the trading in 

the issuer’s securities. Thus, the 

proposed certification requirement is 

expected to act as a deterrent to insider 

trading based on MNPI by officers and 

directors through such plans. 

iv. Requiring That Trading 

Arrangements Be Operated in Good 

Faith 

The proposed amendments would 

expand the good faith provision to 

specify that all Rule 10b5–1 plans must 

be operated in good faith, as a condition 

to the availability of the affirmative 

defense. The amended good faith 

requirement is expected to further deter 

potential insider trading as part of 

operating such plans, and thus alleviate 

associated incentive distortions. For 

instance, by making clear that both the 

initial entry into the plan as well as the 

operation of the plan, including the 

circumstances surrounding any trading 

under the plan, must be conducted in 

good faith, the proposed amendment 

might discourage insiders from 

improperly influencing the timing and 

content of disclosure motivated by an 

attempt to profit from MNPI while a 

plan is ongoing (one of the economic 

costs of insider incentive distortions 

due to insider trading discussed in 

Section IV.A above).153 The proposed 

amendments are expected to benefit 

investor protection by helping deter 

fraudulent and manipulative conduct 

throughout the duration of the trading 

arrangement. 

v. Issuer Trading Arrangements Under 

Rule 10b5–1(c)(1) 

Issuers would be subject to the 

proposed 30-day cooling-off period; 

restrictions on single-trade and multiple 

overlapping Rule 10b5–1 trading 

arrangements; and the proposed 

requirement that trading arrangements 

be operated in good faith. These 

proposed conditions would apply to 

trading plans adopted by companies, 

including, for example, those designed 

to facilitate repurchasing equity to 

return cash to shareholders. 

Companies’ attempts to make use of 

MNPI through Rule 10b5–1 plans may 

have economic costs, and limiting such 

trading may benefit investors and 

markets.154 Companies’ efforts to use 

MNPI can incentivize delays and 

distortions in disclosure, which 

exacerbate information asymmetries 

between companies and outside 

investors. Discovery of a company’s 

insider trading based on MNPI may lead 

to reputational costs for companies and 

decreased confidence of investors in 

purchasing the shares offered by the 

issuer. The risk of adverse selection due 

to trading against an informed trader 

that is the company itself may 

discourage uninformed traders from 

secondary trading in the issuer’s shares. 

Thus, reducing the opportunity for 

insider trading by companies under 

Rule 10b5–1(c)(1) may result in benefits 

for investor protection and capital 


lotter on DSK11XQN23PROD with PROPOSALS2
8708 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

155 In addition, it is somewhat less clear if insider 

trading by the company will result in corporate 

investment distortions discussed in Section IV.A; 

the effect would depend, in large part, on whether 

the interests of insiders that make the actual 

corporate decisions are aligned with those of the 

company in conjunction with such trading (i.e., 

whether the insider has the same MNPI and either 

trades in the same direction as the company, or 

abstains from trading in the opposite direction of 

the trading by the company based on MNPI). For 

example, a 2014 article argues that insiders indeed 

profit from companies’ MNPI-based trading. See 

Jesse M. Fried, Insider Trading via the Corporation, 

162(4) University of Pennsylvania Law Review, 801– 

840 (2014). 

156See Lisa Meulbroek, The Efficiency of EquityLinked Compensation: Understanding the Full Cost 

of Awarding Executive Stock Options, 30 (2) 

Financial Management, 5–44 (2001). See also infra 

note 159 and accompanying and following 

discussion. 

157A 2016 industry survey found that 17 percent 

of surveyed companies required the use of Rule 

10b5–1 plans for trading. See Defining the Fine 

Line: Mitigating Risk with 10b5–1 Plans, Morgan 

Stanley/Shearman & Sterling LLP, available at 

https://advisor.morganstanley.com/capitol-wealthmanagement-group/documents/field/c/ca/capitolwealth-management-group/Defining_the_Fine_

LineLocked_Version.pdf, supra note 120. 

158See supra note 11. 

159Compensation committees may continue to 

award incentive pay even if insiders might prefer 

to reduce exposure to the company’s equity. See, 

e.g., Darren T. Roulstone, The Relation Between 

Insider-Trading Restrictions and Executive 

Compensation, 41(3) Journal of Accounting 

Research, 525–551 (2003) (showing that firms 

restricting insider trading ‘‘use more incentivebased 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, Qin 

Lian, and Qiming Wang, Stock Ownership 

Guidelines for CEOs: Do They (Not) Meet 

Expectations?, 69 Journal of Banking and Finance, 

52–71 (2016); see also, e.g., Equilar, Executive Stock 

Ownership Guidelines, March 9, 2016, available at 

https://www.equilar.com/reports/34-executivestock-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 and Don Kokoskie, Stock Ownership 

Guideline Administration, Harvard Law School 

Forum on Corporate Governance, June 11, 2020, 

available at https://corpgov.law.harvard.edu/2020/ 

06/11/stock-ownership-guideline-administration/; 

NASPP, 5 Trends in Stock Ownership Guidelines, 

December 15, 2020, available at https://

www.naspp.com/Blog/December-2020/5-Trends-inStock-Ownership-Guidelines (finding that ‘‘[e]ightyfive percent of respondents to the 2020 survey 

currently impose ownership guidelines on 

executives’’). 

160However, 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 Taylan Mavruk and Nejat H. Seyhun, Do SEC’s 

10B5–1 Safe Harbor Rules Need to Be Rewritten, 

Columbia Business Law Review, 133–183 (2016). 

161See Darren T. Roulstone, The Relation 

Between Insider-Trading Restrictions and Executive 

Compensation, 41(3) Journal of Accounting 

Research, 525–551 (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(2) 

Vanderbilt Law Review, 503–556 (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’’). 

formation and may promote fair, 

orderly, and efficient markets. 

Several factors make it more difficult 

to predict with certainty the overall 

extent of the investor protection benefits 

of the proposed amendments as they 

apply to issuers. As noted in Section 

IV.B.1 above, there are only limited data 

on trading by companies under Rule 

10b5–1 plans. Further, some of the 

economic effects of issuer trades differ 

from those of natural person insiders. In 

particular, insider trading by the issuer 

may benefit existing shareholders, albeit 

at the expense of other investors.155

3. Costs 

The proposed amendments will 

impose additional conditions on the use 

of the Rule 10b5–1(c)(1) affirmative 

defense by insiders and companies. All 

else equal, the proposed conditions on 

the use of Rule 10b5–1 plans would 

make it more complicated for insiders 

and companies to sell or buy shares 

under such plans. The proposed 

conditions that would impose 

additional barriers to sales of company 

stock under Rule 10b5–1(c)(1) could 

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 would impose 

illiquidity costs on insiders and 

potentially reduce the value of their 

compensation.156

In general, the economic costs of the 

proposed amendments to Rule 10b5– 

1(c)(1) might be partly mitigated by the 

voluntary nature of the Rule 10b5– 

1(c)(1) affirmative defense. However, 

although Rule 10b5–1(c)(1) is voluntary, 

some companies’ insider trading 

policies may require officers and 

directors to rely on Rule 10b5–1.157

Insiders and companies that find the 

proposed conditions to be too restrictive 

might elect not to rely on the affirmative 

defense for their trading. However, 

insiders and companies that choose not 

to rely on Rule 10b5–1(c)(1) in 

conducting their trading may incur 

other costs (e.g., additional cost of 

counsel or other experts 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 the Exchange Act and 

Commission regulations, and a potential 

increase in legal liability risk), as well 

as the loss of the ability to schedule 

execution of trades during blackout 

periods (whereas trades under Rule 

10b5–1 plans generally can be executed 

during blackout periods). The effect of 

the proposed conditions on the Rule 

10b5–1(c)(1) affirmative defense for 

companies may be less significant 

because companies may be able to rely 

on the Rule 10b5–1(c)(2) affirmative 

defense, which is not available to 

natural persons.158 To the extent 

insiders and companies are not aware of 

MNPI, they may also elect to trade 

without a plan outside of a blackout 

window. 

Faced with the additional conditions 

on the use of Rule 10b5–1 plans, some 

insiders may seek to reduce holdings of 

company shares in general (through 

buying fewer shares, 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.159 The proposed amendments 

also would make it more difficult for 

insiders to purchase company shares if 

they wish to do so under a Rule 10b5– 

1 plan.160 Reduced insider equity 

ownership would in turn tend to reduce 

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 IV.A above), 

potentially resulting in less efficient 

corporate decisions. In some cases, 

insiders facing illiquidity risk may seek 

higher total pay to compensate for the 

trading restrictions.161 The cost to 

issuers of potential shifts in executive 

compensation in response to the 

proposed conditions (whether in the 

form of additional compensation for 

insiders, or changes in compensation 

structure that weaken insider 

incentives) would be borne by existing 

shareholders, who are also the primary 

beneficiaries of the added protections 

afforded by these changes. 

In the subsections below we discuss 

the individual costs these conditions 

could impose on affected plan 

participants. In Section IV.B.3.v below, 

we discuss the proposed amendments as 

they would apply to companies’ plans. 

i. Cooling-Off Period for Officers and 

Directors 

The proposed 120-day cooling-off 

period condition for officers and 

directors would restrict their ability to 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8709 

162But see supra note 157. 

163See Larcker et al. (2021), supra note 118 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 120. 

164For example, see supra note 150 and 

accompanying text (discussing company 

restrictions on multiple overlapping plans). 

165See supra note 151 and accompanying text. 

166Single-trade plans appear to be common. 

Based on Washington Service data from January 

2016—May 2020, Larcker et al. (2021) 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 (January 2, 2018–October 

19, 2021), we estimate that single-trade plans 

constitute approximately 40 percent of plans during 

the time period examined. See supra note 119. The 

caveat about classification of plans as ‘‘single-trade’’ 

plans in the available data applies. See supra note 

179. 

167See supra note 159 and accompanying and 

following text. 

168We lack data on the length of cooling-off 

periods and other terms used in companies’ own 

Rule 10b5–1 plans. For a discussion of Rule 10b5– 

1 practices related to issuer repurchases, see, e.g., 

these law firm publications providing suggestions 

and recommendations of best practices to issuers 

that use Rule 10b5–1 for repurchases and other 

trading: Capital Market Alert: Share Repurchases, 

Skadden, Arps, Slate, Meagher & Flom LLP, March 

16, 2020, available at https://www.skadden.com/ 

en/insights/publications/2020/03/sharerepurchases (suggesting, among practice tips, that 

‘‘companies consider a ‘cooling-off’ period before 

any transactions under the Rule 10b5–1 plan will 

occur’’ and that ‘‘[r]egular transactions over an 

extended period are preferable to a small number 

of large transactions’’ and also noting that while a 

cooling-off period, for instance, 30 days, is 

recommended, some companies may begin their 

Continued 

purchase or sell shares pursuant to a 

Rule 10b5–1 plan for the duration of the 

cooling-off-period. As a result of that 

condition, some insiders may choose 

not to rely on a Rule 10b5–1 plan for 

future trading.162 Insiders that 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 IV.B.3 above. 

Because trading during the four 

months following adoption of a Rule 

10b5–1 plan appears to be common 

based on available data summarized in 

Section IV.B.1 above, the proposed 

amendments are likely to have an 

adverse impact on insiders, resulting in 

the economic costs associated with the 

decreased ability to trade and, 

especially, divest holdings, which were 

described in greater detail in Section 

IV.B.3 above.163

ii. Restricting Multiple Overlapping and 

Single-Trade Rule 10b5–1 Trading 

Arrangements 

The proposed exclusion from the Rule 

10b5–1(c)(1) affirmative defense of 

multiple overlapping plans for open 

market trades in the same class of 

securities would limit the flexibility of 

insiders in using Rule 10b5–1 plans to 

purchase or sell their shares. The 

multiple-plan exclusion might be less 

restrictive to the extent that insiders can 

anticipate and combine all planned 

open-market purchases and sales of 

securities of the same class into a single 

plan. The focus of the proposed 

exclusion on multiple plans for openmarket trades is expected to reduce the 

cost of the proposed requirement for 

insiders with purchases and sales as 

part of an ESOP or DRIP, in addition to 

open-market purchases or sales. The 

incremental costs of the proposed 

amendment could be limited to the 

extent that companies already disallow 

such plans,164 or may allow the 

existence of a trading plan under Rule 

10b5–1(c)(1) concurrently with a plan 

not reliant on Rule 10b5–1(c)(1).165

While insiders may seek to avoid the 

costs of the prohibition on multiple 

Rule 10b5–1 plans by terminating an 

existing plan and adopting a new plan, 

the proposed cooling off period would 

be applicable to the modified plan and 

thus may result in other costs to 

insiders. 

The proposed limitation on singletrade Rule 10b5–1 plans could make it 

costlier for insiders with repeated 

sporadic or ad hoc liquidity needs to 

divest equity holdings.166 At the same 

time, the proposed approach of limiting 

the number of single-trade Rule 10b5–1 

plans in a 12-month period, rather than 

restricting them entirely, would 

alleviate costs for insiders with 

occasional unexpected liquidity needs 

that seek to avail themselves of the 

affirmative defense for such a singletrade plan. 

iii. Officer and Director Certifications 

The Commission is proposing to 

require as a condition to the affirmative 

defense that directors and officers must 

personally certify that they were not 

aware of MNPI about the security or 

issuer when adopting a Rule 10b5–1 

trading arrangement, including a 

modified trading arrangement. 

The proposed certification condition 

would result in increased costs for 

insiders and companies, such as the cost 

of consulting with legal or other experts 

to help analyze whether they have 

material nonpublic information. 

Because officers and directors, but 

especially officers, may often be aware 

of some MNPI, to the extent that officers 

and directors perceive the certification 

requirement as increasing the legal cost 

of, and legal risk associated with, 

adopting or modifying a Rule 10b5–1 

plan, they may reduce their use of Rule 

10b5–1 plans (and, as discussed above, 

potentially seek other compensation 

terms with less equity exposure in light 

of the associated illiquidity costs, which 

may result in additional costs to the 

company and its shareholders).167

Relatedly, to the extent that companies 

view the proposed certification 

condition as increasing the legal costs 

and risks to the company of adoption or 

modification of Rule 10b5–1 plans by 

officers and directors, they may 

implement additional restrictions on 

insider trading under such plans, 

through insider trading policies and 

procedures. Both potential effects could 

result in reduced liquidity of insider 

holdings of company stock, the 

economic costs of which were discussed 

in greater detail in Section IV.B.3 above. 

iv. Requiring That Trading 

Arrangements Be Operated in Good 

Faith 

The proposed amendments specify 

that a trading plan must be operated in 

good faith as a condition to the 

continued availability of the affirmative 

defense may result in costs to obtain 

legal counsel and potential loss of the 

affirmative defense if a plan is not 

operated in good faith. The legal costs 

of the proposed amendments’ 

requirement that a Rule 10b5–1 plan be 

operated in good faith would be 

incremental to the legal costs that plan 

participants already incur as a result of 

the existing provision that requires that 

a Rule 10b5–1 plan be entered into in 

good faith. 

Because insiders, but especially 

officers, may often be aware of some 

MNPI, to the extent that they perceive 

the amended good faith provision as 

increasing the legal cost of, and legal 

risk associated with, adopting a new or 

modified Rule 10b5–1 plan, they may 

reduce their reliance on Rule 10b5–1 

plans. 

v. Issuer Trading Arrangements Under 

Rule 10b5–1(c)(1) 

As discussed above, issuers’ trading 

arrangements under Rule 10b5–1(c)(1) 

would be subject to some of the 

proposed additional conditions, 

including to the proposed restrictions 

on single-trade and multiple 

overlapping Rule 10b5–1 trading 

arrangements; the proposed requirement 

that trading arrangements be operated in 

good faith; and a 30-day cooling-off 

period. To the extent companies do not 

already follow such conditions as part 

of their existing best practices,168 these 


lotter on DSK11XQN23PROD with PROPOSALS2
8710 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

purchases within days of adopting a Rule 10b5–1 

plan); Robert H. Friedman, Jonathan H. Deblinger, 

and Kenneth S. Mantel, Navigating Public Company 

Equity Buybacks, 25(12) Insights: The Corporate & 

Securities Law Advisor (2011) (discussing, among 

others, buybacks under Rule 10b5–1 plans and 

recommending that issuers ‘‘[e]stablish a waiting 

period for some time after a plan’s adoption or 

modification or suspension during which trading 

under the plan is not permitted. While not cast in 

stone, a waiting period of 30 days or more is a 

reasonable timeframe’’ and that ‘‘issuer[s] should 

not maintain multiple Rule 10b5–1 plans’’ and 

cautioning against plans ‘‘that will only last a short 

period of time’’); Stuart Gelfond, Arielle L. 

Katzman, Frank Fried, Shriver Harris, & Jacobson 

LLP, A Guide to Rule 10b5–1 Plans, March 24, 

2016, available at https://corpgov.law.harvard.edu/ 

2016/03/24/a-guide-to-rule-10b5-1-plans/ 

(suggesting, as a ‘‘best practice’’, that issuers 

‘‘establish only one 10b5–1 plan’’ and ‘‘establish a 

waiting period’’ and also noting that ‘‘[b]rokers 

administering plans frequently impose a seasoning 

period as part of their own trading practices, but 

companies also adopt these policies. A fourteen day 

period is often used, but many companies have 

increased the waiting period to about one month.’’). 

169 In the case of repurchases under trading plans, 

costs incurred by companies would be borne by the 

subset of existing shareholders that are not selling 

their shares to the company during the repurchase. 

170See supra note 139 and accompanying text. In 

particular, one recent study found that ‘‘[i]n 2014 

[the latest year analyzed in the study], only 12% of 

repurchase announcements included an ASR 

[accelerated stock repurchase] whereas 29% 

included a 10b5–1 plan. These results are 

consistent with more firms preferring to maintain 

some level of flexibility in their repurchase 

programs.’’ See Alice Bonaime ́, Jarrad Harford, and 

David Moore, Payout Policy Trade-Offs and the Rise 

of 10b5–1 Preset Repurchase Plans, 66(6) 

Management Science, 2762–2786 (2020). See also 

supra note 140 and accompanying text (estimating 

that only approximately 220 companies disclosed 

share repurchase programs executed under a Rule 

10b5–1 plan during calendar year 2020, with the 

caveat that existing disclosure of such plans is 

voluntary and may therefore be a low bound). 

171See supra note 11. 

172See supra note 109. 

173With 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. 

amendments would result in additional 

costs to companies of conducting 

purchases and sales under such plans 

and could decrease some companies’ 

reliance on Rule 10b5–1 plans. For 

instance, for companies that rely on 

such plans to implement issuer 

repurchases, the costs of the proposed 

amendments could result in an 

inefficient decrease in repurchases. 

Costs incurred by companies could be 

borne by their existing shareholders.169

In particular, the proposed 30-day 

cooling-off period could decrease a 

company’s flexibility in implementing 

and modifying Rule 10b5–1 plans. 

The costs of the amendments to 

companies could be partly mitigated 

because companies are not required to 

rely on Rule 10b5–1 plans. Further, 

companies that value financial 

flexibility in executing their repurchase 

programs may be minimally affected by 

changes to the rule because they might 

already choose not to rely on such plans 

today.170 However, companies that 

would have otherwise relied on a Rule 

10b5–1 plan under current rules might 

see incrementally greater costs from a 

choice not to rely on such a plan under 

the proposed rules. The costs of the 

proposed amendments to companies 

may be further mitigated by the 

availability of the Rule 10b5–1(c)(2) 

affirmative defense.171

4. Effects on Efficiency, Competition, 

and Capital Formation 

We expect the proposed 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 IV.A above. 

The effects of the proposed rule on the 

efficiency of corporate investment and 

other decisions are not fully certain 

because the proposed 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.172

Further, a lower risk of trading against 

an informed insider or company is 

expected to increase investor confidence 

and the willingness of market 

participants to buy, and trade in, the 

company’s shares. This would 

indirectly make it easier for the 

company to raise capital from investors. 

Finally, the proposed amendments 

may affect competition. Decreasing the 

ability of insiders and companies to 

trade on MNPI would weaken their 

competitive edge in trading, promoting 

competition among other investors in 

the market for the company’s shares. A 

lower risk of an insider with a 

significant private information 

advantage trading the company’s shares 

may strengthen the incentive of other 

market participants to trade the 

company’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 

officers and directors may switch to 

trading under non-Rule 10b5–1 plans, or 

may trade in the absence of a plan. 

Whether the amendments prompt a 

large-scale shift of insider trading to 

non-Rule 10b5–1 plans would depend, 

in part, on how burdensome insiders 

find the proposed amendments and in 

part how company policies constrain 

insider use of MNPI in non-Rule 10b5– 

1 plans (including in response to the 

proposed Item 408 disclosure 

requirements). 

It is not clear if the proposed 

amendments would result in 

meaningful competitive effects on the 

labor market for executive talent. We are 

not exempting any categories of public 

companies from the amendments. While 

the proposed Rule 10b5–1(c)(1) 

amendments could reduce the liquidity 

of holding company stock and thereby 

make equity ownership less attractive 

for insiders of public companies (as 

discussed in greater detail in Section 

IV.B.3 above), even with these 

additional conditions in place, the use 

of Rule 10b5–1 plans would remain 

optional, and holdings of private 

company shares would remain 

significantly less liquid. 

5. Reasonable Alternatives 

In the case of Rule 10b5–1 trading 

arrangements of natural persons, the 

proposed cooling-off periods and 

certification requirements would apply 

to officers and directors, while the 

proposed amendments to the good faith 

provisions and the proposed exclusion 

of multiple overlapping trading 

arrangements would apply to all natural 

persons’ plans. As an alternative, with 

respect to natural persons, we could 

apply all of the proposed Rule 10b5– 

1(c)(1) amendments only to officers and 

directors, or only to officers.173

Compared to the proposal, these 

alternatives would eliminate the costs of 

the rule (discussed in greater detail in 

Section IV.B.3 above) for the exempted 

plan participants but increase the risk of 

insider trading by such participants, 

compared to the proposal. 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. As another alternative, with 

respect to natural persons, we could 

extend all of the proposed Rule 10b5– 

1(c)(1) amendments to all plan 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8711 

174See supra note 159 and accompanying and 

following text. 

175See supra note 144 (discussing suggestions for 

three-month and four- to six-month cooling-off 

periods); see also supra note 120 and following text 

(noting that at over three-quarters of surveyed 

respondents, the cooling-off period was 60 days or 

less). 

176See supra notes 118–120 and accompanying 

and preceding text and supra note 168. 

participants. Compared to the proposal, 

this alternative would subject additional 

natural persons to the costs of the rule 

(discussed in greater detail in Section 

IV.B.3 above) but also decrease the risk 

of insider trading by such participants. 

The latter effects may be smaller to the 

extent that natural persons other than 

officers and directors are less involved 

in making and overseeing corporate 

decisions, may lack control or 

knowledge about the timing and 

substance of the company’s disclosures, 

or are less likely to be aware of MNPI. 

The aggregate effects of all of the 

discussed alternatives, compared to the 

proposal, may also be smaller to the 

extent that Rule 10b5–1 plans tend to be 

most prevalent among officers. 

The proposed amendments to Rule 

10b5–1(c)(1) would subject Rule 10b5– 

1 trading arrangements of issuers to a 

30-day cooling-off period, amended 

good faith provisions, and restrictions 

on single-trade and multiple 

overlapping Rule 10b5–1 trading 

arrangements. As an alternative, we 

could exempt issuer plans from some or 

all of these proposed conditions, or 

modify some or all of these conditions 

for issuers (e.g., subjecting issuers to a 

shorter or longer cooling-off period). 

Compared to the proposal, a greater 

(smaller) number of companies might 

continue to find Rule 10b5–1 plans 

attractive for purchases and sales of 

securities under the alternative of less 

(more) stringent conditions of the 

affirmative defense. However, the 

alternative of imposing less (more) 

stringent conditions on issuer plans 

would result in a greater (lower) risk of 

companies adopting or modifying Rule 

10b5–1 plans based on MNPI, compared 

to the proposal. To the extent that 

issuers already avail themselves of the 

affirmative defense under Rule 10b5– 

1(c)(2), which does not contain such 

conditions, the incremental effects of 

such alternatives, compared to the 

proposal, may be smaller. (For a more 

detailed discussion of the potential 

benefits and costs of extending the 

proposed amendments to issuers, see 

Sections IV.B.2.v and IV.B.3.v above.) 

The Commission is proposing to 

amend Rule 10b5–1(c)(1) by adding new 

conditions to the affirmative defense. As 

an alternative, we could rescind the 

Rule 10b5–1(c)(1) affirmative defense 

altogether. Rescinding Rule 10b5–1(c)(1) 

would increase the costs for existing 

Rule 10b5–1 plan participants (such as 

in the form of the additional cost 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). 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.174 Rescinding the Rule 

10b5–1(c)(1) affirmative defense would 

also increase the legal liability risk for 

insiders that continue to trade due to 

greater uncertainty about whether they 

have complied with Rule 10b–5, as well 

as subject insiders to additional 

limitations on trading (such as 

restrictions on trading during blackout 

periods). 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 shift of trading from Rule 

10b5–1 plans, which contain conditions 

specifically tailored for investor 

protection, to other trading 

arrangements or trading outside of plans 

might lead to an increase in insider 

trading, and a negative impact on 

investor protection, compared to the 

proposal. From the companies’ 

standpoint, the continued existence of 

Rule 10b5–1(c)(1) may facilitate 

companies’ efforts to develop and 

implement corporate governance 

practices for issuer and insider trading 

arrangements that comply with 

securities laws and regulations. We 

expect the proposed Item 408 disclosure 

requirements, discussed in detail in 

Section IV.C below, to partly mitigate 

incentives to engage in insider trading 

under all plans, including plans that are 

not reliant on Rule 10b5–1(c)(1) under 

this alternative. 

As discussed above, the proposed 

amendments to Rule 10b5–1(c)(1) 

include several new conditions of the 

affirmative defense (cooling-off periods, 

amended good faith requirements, 

exclusion of multiple overlapping plans 

for open market trades in the same class 

of securities, and officer and director 

certifications). As an alternative, we 

could propose to impose some, but not 

all, of these additional conditions. This 

alternative could possibly lower the 

aggregate costs of the rule and preserve 

greater flexibility, compared to the 

proposal, decreasing the costs discussed 

in the case of each of the specific 

provisions. However, this alternative 

would make the combined set of 

proposed amendments less effective at 

curbing insider trading behavior under 

Rule 10b5–1. 

The Commission is proposing a 120- 

day cooling-off period for officers and 

directors, and a 30-day cooling-off 

period for issuers, after the adoption of 

a new or modified plan. As an 

alternative to the proposed cooling-off 

period for officers and directors, the 

Commission could propose a shorter 

cooling-off period (e.g., between one 

and three months), a longer cooling-off 

period (e.g., five or six months), or a 

variable time period until the next 

quarterly or annual report filing or 

earnings release).175 As an alternative to 

the proposed 30-day cooling-off period 

for issuers, the Commission could 

propose a shorter or longer cooling-off 

period. A shorter cooling-off period 

could reduce some of the costs of a 

cooling-off period and preserve greater 

flexibility for insiders and issuers, 

compared to the proposal, but would 

increase the risk of trading based on 

MNPI. Conversely, a longer cooling-off 

period could increase costs to insiders 

and issuers and limit flexibility, 

compared to the proposal, but would 

decrease the risk of trading based on 

MNPI. 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 IV.B.2.i, IV.B.2.v, 

IV.C.2.i, and IV.C.2.v. The discussed 

effects of the alternatives would also 

depend on whether they differ from the 

existing cooling-off period practices.176

The proposed amendments would 

make the affirmative defense 

unavailable for multiple overlapping 

Rule 10b5–1 trading arrangements for 

open market trades in the same class of 

securities. As an alternative, we could 

allow multiple 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 proposal, and lower costs for plan 

participants that have multiple accounts 

through which they trade in the 

company stock. However, these 

alternatives would present a greater risk 

of illegal insider trading, compared to 

the proposal (to the extent not mitigated 

by other proposed provisions, including 

certifications, amended good faith 

requirement, cooling-off periods, and 

amended disclosure requirements). In 

particular, the option to maintain 

multiple plans concurrently facilitates 


lotter on DSK11XQN23PROD with PROPOSALS2
8712 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

177See supra note 150 and accompanying text 

and supra note 168. 

178See supra note 151 and accompanying text. 

179See supra note 152. 

180See supra note 166. 

181The 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. 

the ability to selectively cancel one of 

the plans based on material nonpublic 

information, without being subject to a 

waiting period with respect to the 

remaining plans’ trades. This alternative 

may be less significant to the extent that 

companies already disallow, or avoid, 

multiple overlapping plans 

voluntarily,177 or to the extent that 

companies may allow, or have, 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).178

The proposed amendments would 

also limit the availability of the 

affirmative defense in the case of singletrade Rule 10b5–1 plans to a maximum 

of one such plan in a 12-month period. 

As another alternative, we could restrict 

the use of single-trade plans under Rule 

10b5–1(c)(1) entirely, or conversely, 

allow a greater number of single-trade 

plans in a 12-month period. The 

alternative of more (less) stringent 

restrictions on single-trade plans could 

reduce (increase) the risk of insider 

trading, compared to the proposal (to 

the extent not mitigated by the coolingoff period and other proposed 

provisions). Unlike in the case of a 

multi-trade plan, an insider who 

decides to initiate a single-trade Rule 

10b5–1 plan based on MNPI is more 

likely to be able to execute it with less 

price impact and not to have to disclose 

the trade on Form 4 (and, depending on 

the timing of plan adoption and Form 

10–Q/10–K filing, not to have to 

disclose the plan adoption) until after 

the plan is fully executed.179 In turn, the 

alternatives of more (less) stringent 

restrictions on single-trade plans could 

also limit (expand) the flexibility and 

impose additional costs on insiders with 

a one-time, ad hoc liquidity need, 

compared to the proposal.180

6. Request for Comment 

45. Would the proposed amendments 

to the conditions of Rule 10b5–1(c)(1) 

benefit investors? In what specific ways 

would the proposed amendments help 

protect investor interests? 

46. What would be the costs of the 

proposed amendments to Rule 10b5– 

1(c)(1) for insiders, companies, and 

investors? 

47. Would the proposed amendments 

affect the use of Rule 10b5–1 plans, and 

if so, how? 

48. How often are Rule 10b5–1 plans 

used today for purchases and sales of 

securities? How often are Rule 10b5–1 

plans used by natural persons other 

than officers (e.g., directors, beneficial 

owners, non-executive employees)? 

How prevalent are concerns about 

insider trading under Rule 10b5–1 

plans? Which traders raise the most 

significant concerns (e.g., officers, 

directors, others)? 

49. How often do companies impose 

cooling-off periods on Rule 10b5–1 

plans today? What cooling-off period 

length is most common today? Would 

the proposed 120-day minimum 

cooling-off period for Rule 10b5–1 plans 

of officers and directors benefit 

investors? What would be the costs of 

the proposed cooling-off periods? 

Should we consider alternative coolingoff period lengths or definitions, and 

what would be their costs and benefits? 

50. Are there other provisions we 

should consider instead of cooling-off 

periods, to more effectively address 

insider trading through Rule 10b5–1 

plans, and what would be the economic 

effects of such alternative provisions? 

51. What other practices and policies 

are used today to mitigate insider use of 

material nonpublic information for 

trading through trading plans? 

52. What would be the economic 

effects of the proposed restriction on 

multiple overlapping Rule 10b5–1 

plans? What would be the costs and 

benefits of the proposed limit on the 

number of single-trade Rule 10b5–1 

plans in a 12-month period? Would 

these provisions appropriately balance 

concerns about the use of multiple 

overlapping plans and insiders’ 

liquidity needs? Should we consider 

alternative restrictions, and what would 

be the benefits and cost of those 

alternatives? 

53. Would the proposed director and 

officer certification requirements with 

respect to Rule 10b5–1 plans serve to 

protect investors and deter insider 

trading under such plans? What would 

be the costs of the proposed certification 

requirements? What challenges might 

insiders face in complying with the 

proposed requirements? 

54. Would the amended good faith 

requirement of Rule 10b5–1(c)(1) serve 

to protect investors from insider trading 

through Rule 10b5–1 plans? What 

would be the costs of the amended good 

faith requirement? 

55. How often do companies 

themselves rely on Rule 10b5–1 plans 

today to purchase securities and to sell 

securities, respectively? How often do 

companies that rely on Rule 10b5–1 

plans disclose such plans? How 

prevalent are concerns about insider 

trading under Rule 10b5–1(c)(1) by 

companies? 

56. Would applying the proposed 30- 

day cooling-off period, the proposed 

amendments to the good faith provision, 

and the proposed exclusion of multiple 

trading plans to companies benefit 

investors? What would be the costs of 

the proposed amendments for 

companies that rely on Rule 10b5–1 

plans and their shareholders? What 

would be the economic effects of 

exempting companies from some of the 

proposed conditions, or modifying some 

of the proposed conditions in cases of 

companies’ Rule 10b5–1 plans? For 

example, what would be the costs and 

benefits of exempting companies from 

the cooling-off period requirement, or 

applying a shorter or longer cooling-off 

period to companies’ Rule 10b5–1 

plans? How would issuer ability to rely 

on Rule 10b5–1(c)(2) change these 

economic effects? 

C. Disclosure of Trading Arrangements 

in New Item 408 of Regulation S–K and 

Mandatory Rule 10b5–1 Checkbox in 

Amended Forms 4 and 5 

The proposed new Item 408 of 

Regulation S–K would require quarterly 

disclosure, on Form 10–Q and Form 10– 

K (with respect to a company’s fourth 

quarter), of the adoption or termination, 

and the terms of a Rule 10b5–1 trading 

arrangement or other preplanned 

trading arrangement by directors, Rule 

16a–1(f) officers, and the company 

itself. Proposed Item 408 would also 

require disclosure in Form 10–K and 

proxy or information statements of 

policies and procedures governing 

trading by directors, officers, and 

employees and the issuer itself (as 

discussed in greater detail in Section 

II.B above). A similar requirement with 

respect to disclosure of policies and 

procedures would extend to foreign 

private issuers that file annual reports 

on Form 20–F.181 The proposed 

disclosures would be tagged using a 

structured data language (specifically, 

Inline XBRL). In addition, the proposed 

amendments would add a Rule 10b5–1 

checkbox as a mandatory disclosure 

requirement on Forms 4 and 5 to 

indicate that a reported transaction was 

made pursuant to a Rule 10b5–1 trading 

arrangement, and disclosure of the date 

of adoption of the trading plan. We are 

also proposing to add an optional 

checkbox to Forms 4 and 5 that would 

allow a filer to indicate whether a 

transaction reported on the form was 

made pursuant to a contract, 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8713 

182The estimate excludes registered investment 

companies and asset-backed securities issuers, 

which would not be subject to the proposed 

disclosures. 

183 Id. 

184The estimate is based on filings of Forms 4 

and 5 during calendar year 2020 in Thomson 

Reuters/Refinitiv insiders dataset. 185See also Section IV.A. 186See 15 U.S.C. 7264(c). 

instruction, or written plan that did not 

satisfy the conditions of Rule 10b5–1(c). 

1. Baseline and Affected Parties 

The proposed Item 408(a) disclosure 

requirements regarding the adoption, 

modification, termination, and material 

terms of officer, director, and company 

trading plans would apply to annual 

and quarterly reports on Forms 10–K 

and 10–Q. During calendar year 2020, 

based on the analysis of EDGAR filings, 

we estimate that there were 

approximately 6,400 filers with annual 

reports on Form 10–K or quarterly 

reports on Form 10–Q or amendments to 

it.182 The proposed Item 408(b) 

disclosure requirements regarding 

insider trading policies and procedures 

would apply to annual reports on Forms 

10–K and proxy and information 

statements on Schedules 14A and 14C. 

Disclosure requirements similar to 

proposed Item 408(b) would also apply 

to foreign private issuers that file Form 

20–F. During calendar year 2020, based 

on the analysis of EDGAR filings, we 

estimate that there were approximately 

5,900 filers of annual reports on Form 

10–K or proxy or information 

statements, or amendments to them, 

and, in addition, approximately 700 

filers of annual reports on Form 20–F 

(or amendments to them).183

The proposed requirements regarding 

the disclosure of trading plans will 

affect all companies that have their own 

trading plans or whose officers or 

directors have trading plans, as well as, 

indirectly, all officers and directors with 

trading plans whose plans would now 

be subject to public disclosure by the 

company (see Section IV.B.1 above). 

The proposed requirements regarding 

disclosure of insider trading policies 

and procedures would affect companies 

subject to the requirements, as well as 

indirectly, companies and natural 

persons that engage in trading subject to 

the disclosed policies and procedures. 

The proposed Rule 10b5–1 checkbox 

requirement would apply to all filers of 

Forms 4 and 5 (not just officers and 

directors). During calendar year 2020, 

we estimate that there were 

approximately 44,000 such filers.184

2. Benefits 

The proposed Item 408 of Regulation 

S–K and related disclosure amendments 

would benefit investors through greater 

transparency about officer, director, and 

issuer trading arrangements, as well as 

governance practices with respect to 

insider trading.185 The timing of trading 

plan adoption and termination by 

officers, directors, or the company itself, 

as well as a description of the terms of 

the trading arrangement, would enhance 

the value of existing trade disclosures, 

potentially conveying valuable 

information about the insiders’ or the 

company’s views on the company’s 

future outlook, aiding investors in 

obtaining a more accurate valuation of 

the company’s shares and making more 

informed investment decisions. 

The proposed requirement that these 

data points be tagged in a structured 

data language (specifically, in Inline 

XBRL) would facilitate access and 

analysis of the disclosures by investors, 

potentially leading to more useful and 

timely insights. In particular, 

structuring the disclosures about trading 

plans that would be required under Item 

408(a) of Regulation S–K would enable 

automated extraction of granular data on 

such trading plans, which would allow 

investors to efficiently perform largescale analyses and comparisons of 

trading plans across issuers and time 

periods. Structured data on trading 

plans could 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 could 

also enable considerably faster analysis 

of the disclosed data by investors. For 

the narrative disclosure on policies and 

procedures that would be required 

under Item 408(b) of Regulation S–K, 

structuring the disclosures in Inline 

XBRL would allow investors to extract 

information from and search through 

the disclosures about trading plan 

policies and procedures (rather than 

having to manually run searches for 

these disclosures through entire 

documents), automatically compare 

these disclosures against prior periods, 

and perform targeted artificial 

intelligence and machine learning 

assessments (tonality, sentiment, risk 

words, etc.) of specific narrative 

disclosures about trading plan policies 

and procedures rather than the entire 

unstructured document. 

We expect these benefits to result 

from disclosure of plan terminations 

and changes in material plan terms, as 

well as from disclosure of plan 

adoptions, because a termination, or a 

change in material terms, of a prior 

trading plan may similarly convey 

information about the views of the 

officers, directors, or the issuer 

regarding the company’s future outlook 

and share price. Further, the timing of 

trading plan adoption or termination, 

relative to the issuance of other 

corporate disclosures, would provide 

investors with valuable insight into 

potential insider trading under such 

plans, and thus associated conflicts of 

interest that erode firm value. We expect 

such benefits to extend to all trading 

arrangements, including ones that are 

not reliant on Rule 10b5–1(c)(1), which 

also are within the scope of the 

proposed new Item 408 and related 

disclosure amendments. This would be 

particularly beneficial in instances 

where issuers, officers, or directors forgo 

reliance on Rule 10b5–1(c)(1) under the 

proposed amendments or fail to meet 

one of the proposed amended 

conditions of the affirmative defense. 

Moreover, by drawing market scrutiny 

to the adoption, termination, and 

changes in the terms of trading plans, 

enhanced trading plan disclosure is 

expected to deter insider abuses of 

trading arrangements based on MNPI. 

This would benefit investors by 

reducing insider trading, as well as 

reducing the economic costs and 

inefficiencies associated with insider 

trading, as discussed in Section IV.A 

above. The described benefits would be 

lowered or eliminated to the extent that 

trading plans are initiated due to 

liquidity needs or other reasons not 

related to the company’s or insider’s 

outlook on future share price. 

The proposed additional disclosure of 

insider trading policies and procedures 

is expected to provide investors with 

valuable information about governance 

practices with respect to insider trading 

of company stock. This requirement will 

allow investors to better understand the 

policies and procedures that guide 

companies in which they invest and the 

conduct of officers and directors of 

those companies, including whether 

and 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.186 The absence or 

presence, and the nature of, such 

policies and practices can inform 


lotter on DSK11XQN23PROD with PROPOSALS2
8714 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

187O’Hagan, 521 U.S. at 654 (recognizing that the 

undisclosed misappropriation of MNPI in breach of 

a duty of trust and confidence is ‘‘akin to 

embezzlement’’). 

188See 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) [85 FR 33290 at 33318 (Jun. 

1, 2020)]. 

investors about the likelihood of insider 

use of MNPI and thus, the likelihood of 

incurring the economic costs of insider 

trading discussed in Section IV.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 of use’’—as well as 

guard against the misappropriation of 

that information.187 The disclosure of 

insider trading policies and procedures 

could also aid shareholders’ voting 

decisions. Requiring the disclosure 

would also provide greater consistency 

in disclosures across companies. In 

addition, the anticipation of market 

scrutiny following mandatory disclosure 

may incentivize companies without 

specific insider trading policies to 

implement such policies and 

procedures. 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 IV.A above, 

particularly at companies with weaker 

governance practices with respect to 

insider trading. 

The proposed amendments adding a 

Rule 10b5–1 plan checkbox to Forms 4 

and 5 would benefit investors by 

providing transaction-specific 

disclosure of sales and purchases under 

Rule 10b5–1 plans. The proposed 

checkbox disclosure would allow 

investors easier and timelier access to 

information about trades under Rule 

10b5–1(c)(1). This information would 

enable investors to more 

comprehensively identify insider 

trading pursuant to Rule 10b5–1 plans, 

as well as provide greater consistency in 

the disclosure of Rule 10b5–1 plan 

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 trades. To the extent 

that trades under Rule 10b5–1(c)(1) are 

subject to a different regulatory 

framework and may have different 

motivations than other insider trades, 

the checkbox would allow investors to 

more readily interpret information in 

Forms 4 and 5. 

The proposed mandatory Rule 10b5– 

1 plan checkbox disclosures, in 

combination with the proposed 

quarterly disclosure of adoption, 

modification, termination, and material 

terms of trading plans, would provide 

greater transparency to investors 

regarding the use of Rule 10b5–1 plans 

for trading. Such information about 

insider trading would provide investors 

with valuable context for interpreting 

other corporate disclosures in valuing 

the companies’ shares and making 

informed investment decisions. Because 

Forms 4 and 5 would continue to use a 

structured data language, investors 

would be able to extract and analyze 

comprehensive information about 

insider trades under Rule 10b5–1 plans 

across multiple time periods, 

individuals, and companies. 

3. Costs 

First, we consider the direct 

(compliance-related) costs of the 

proposed disclosure requirements for 

insiders and companies. Such costs 

would include preparing the disclosure 

and gathering the information required 

to comply with the new disclosure 

requirements. Such costs would be 

lower for companies that already 

disclose some information about insider 

and issuer trading plans or insider 

trading policies today. Insiders are 

likely to have information about which 

of their trades were executed pursuant 

to a Rule 10b5–1 plan readily available, 

likely resulting only in small direct 

costs of providing a checkbox disclosure 

on Forms 4 and 5. The costs of 

complying with the new checkbox 

requirement would be lowest for officers 

and directors that already voluntarily 

disclose Rule 10b5–1 plan use in their 

filings of Forms 4 and 5. 

Officers and directors will have 

information about the adoption, 

modification, termination, and terms of 

their trading plans readily available. 

Similarly, companies will have 

information about the adoption, 

modification, termination, and material 

terms of their own trading plans readily 

available. However, companies might 

not currently be collecting such 

information from officers and directors 

as part of their existing disclosure 

obligations, especially with respect to 

plans that do not rely on Rule 10b5– 

1(c)(1). In those cases, companies and 

officers and directors may have to 

expend additional effort to collect this 

information about the trading plans of 

directors and officers and prepare it for 

disclosure under proposed Item 408(a). 

Companies will have information 

about their insider trading policies and 

procedures readily available. Identifying 

and preparing a disclosure of such 

policies (and for companies without a 

specific policy, the reasons for not 

having such a policy) is expected to 

result in some additional direct costs, 

however, such costs are likely to be 

relatively small. 

The proposed requirement to tag the 

proposed disclosures in Inline XBRL 

will impose incremental compliance 

costs on issuers. Such costs are expected 

to be modest, because issuers affected 

by the proposed Inline XBRL 

requirements (including small filers) are 

already required (or, in the case of 

business development companies, 

would be required no later than 

February 2023) to use Inline XBRL to 

comply with other disclosure 

obligations.188 Moreover, the scope of 

the disclosure proposed to be reported 

using a structured data language is 

limited and would thus 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 proposed tagging requirement. 

Next, we discuss the indirect costs 

that the proposed Item 408 and related 

disclosure amendments could impose 

on insiders and companies. Indirect 

costs could include potential 

reputational and investor relations costs 

associated with the disclosure. For 

example, companies that have not 

implemented specific insider trading 

policies and procedures, as well as 

companies at which the adoption, 

modification, or termination of trading 

plans appear 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. To the extent that the 

proposed amendments to Rule 10b5– 

1(c)(1) eliminate or deter insider trading 

based on MNPI under Rule 10b5–1 

trading arrangements, these legal and 

reputational costs of public disclosure 

should be minimal for such plans. 

Relatedly, officers and directors that 

adopt, modify, or terminate trading 

plans around the release of MNPI may 

also suffer reputational or legal costs 

from the public disclosure of this 

information. 

In the case of issuers conducting 

repurchases, the quarterly disclosure of 

trading plans could in some 

circumstances result in another type of 

indirect cost—the cost of potential 

partial revelation of the issuer’s future 

repurchase plans (including potential 

timing and scale of future trades) to 

other market participants, which may be 

further exacerbated if we were to adopt 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8715 

189See Share Repurchase Disclosure 

Modernization, Release No. 34–93783 (Dec. 15, 

2021). 

190This approach of less predictable issuer 

purchases (such as an algorithm-based plan or 

another plan other than a series of equally-spaced, 

similar-sized trades) may emerge organically in 

cases where the front-running costs are likely to be 

highest, for example, when an issuer’s management 

is repurchasing shares based on the belief that the 

company is undervalued. In other cases, for 

example, when issuer share purchases are intended 

to incrementally adjust capital structure or pay out 

excess cash, rather than reflect a belief about 

significant undervaluation, an issuer may opt for a 

mechanical rule with equally spaced, similar-sized 

trades. While such a trade pattern is more 

predictable to market participants, it may also be 

more likely to be chosen in instances of repurchases 

for which concerns about front-running the issuer’s 

information may be relatively less significant. 

191Foreign private issuers that file annual reports 

on Form 20–F would be subject to requirements 

similar to Item 408(b), as proposed. Further, foreign 

private issuers listed on U.S. exchanges would 

remain subject to insider trading laws and exchange 

listing standards. 

192We do not expect significant effects on the 

labor market competition for executive talent 

between public and private companies. While the 

proposed disclosures would 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). 

the daily disclosure requirement for 

share repurchases that we are proposing 

in a separate release.189 Issuers that 

continue to rely on Rule 10b5–1(c)(1) to 

conduct repurchases might be able to 

mitigate such costs by structuring their 

repurchases under a Rule 10b5–1 plan 

to have a less predictable pattern of 

trades.190

Finally, some companies may 

implement new insider trading policies, 

or update existing insider trading 

policies, in anticipation of the proposed 

disclosure requirement regarding 

policies and procedures and the ensuing 

public scrutiny of disclosed policies and 

procedures. Additional restrictions on 

insider trading arrangements adopted in 

anticipation of the public disclosure 

could result in economic costs for 

insiders and in some instances, 

offsetting changes in insider 

compensation and insider efforts to 

reduce their equity exposure in light of 

the trading restrictions (broadly in line 

with the discussion of the potential 

indirect costs of restrictions on insider 

use of trading arrangements in Section 

IV.B.3 above). Costs incurred by 

companies would be borne by their 

existing shareholders. 

4. Effects on Efficiency, Competition, 

and Capital Formation 

We expect the proposed amendments 

to reduce the information asymmetry 

between insiders and outside investors 

by providing more granular and timelier 

detail about officers’, directors’, and 

companies’ trading plans and associated 

policies. The reduction in information 

asymmetry as a result of the additional 

disclosure would result in more 

informationally efficient stock prices. 

Because disclosure of insider and issuer 

trading plans and insider trading 

policies can inform investors about 

insider incentives and governance 

practices, which could affect 

shareholder value as discussed in 

Section IV.A above, the proposed 

additional disclosure about insider and 

issuer trading arrangements and insider 

trading policies could also better inform 

investment decisions (enabling more 

efficient allocation of capital in investor 

portfolios) and shareholder voting 

decisions. 

Importantly, we expect the proposed 

amendments to draw market scrutiny to 

officers’, directors’, and companies’ use 

of Rule 10b5–1(c)(1) or other trading 

arrangements, decreasing the ability of 

insiders and companies to trade on 

MNPI through such trading 

arrangements. As discussed in Section 

IV.B.4 above, this 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 company’s shares. This would 

indirectly make it easier for the 

company to raise capital from investors. 

Companies that disclose robust insider 

trading policies in particular may elicit 

greater investor confidence, as well as 

interest from investors seeking 

companies with stronger corporate 

governance practices, resulting in 

capital formation benefits for such 

companies. 

Finally, in line with the discussion in 

Section IV.B.4 above, the proposed 

amendments may affect competition. 

Decreasing the ability of insiders and 

companies to trade on MNPI would 

weaken their competitive edge in 

trading, promoting competition among 

other investors in the market for the 

company’s shares. As discussed above, 

a lower risk of an insider with a 

significant private information 

advantage trading the company’s shares 

would strengthen the incentive of other 

market participants to trade the 

company’s shares and compete in 

gathering and processing information 

about the company. 

To the extent that the proposed 

disclosure requirements impose a fixed 

cost on companies, they would have a 

negative competitive effect on smaller 

issuers subject to the amendments, as 

well as on issuers that do not already 

disclose insider trading policies and 

trading arrangements. The proposed 

Item 408(a) disclosure requirements 

would not apply to foreign private 

issuers, potentially placing them at a 

relative competitive advantage to 

domestic filers.191 With that exception, 

because the proposed disclosure 

amendments would 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.192

All of the effects described above 

would be smaller to the extent that 

companies already disclose insider 

trading policies and trading 

arrangements today. 

5. Reasonable Alternatives 

The proposed amendments would 

require quarterly disclosure of adoption, 

modification, termination, and a 

description of the terms of the trading 

arrangement of directors, Rule 16a–1(f) 

officers, and companies, as well as 

disclosure of insider trading policies 

and procedures in annual reports and 

proxy and information statements. As 

an alternative, we could modify the 

scope and granularity of the proposed 

disclosure of trading plans and/or of 

insider trading policies and procedures. 

The alternatives of expanding or 

narrowing the scope of the proposed 

disclosures could potentially provide 

greater or lesser detail to investors, 

enabling better or less informed 

investment decisions and more or less 

accurate assessment of the risk of the 

use of MNPI for informed trading 

through trading plans, compared to the 

proposal. However, the alternative of 

expanding or narrowing the scope of the 

proposed disclosure could also increase 

or decrease disclosure costs (discussed 

in greater detail in Section IV.C.3 

above). 

As another alternative to the proposed 

quarterly disclosure of adoption, 

termination, and the terms of trading 

arrangements, we could require more or 

less frequent disclosure. Requiring more 

or less frequent disclosure under Item 

408(a) would provide timelier (or less 

timely) information to investors about 

trading arrangements but also impose 


lotter on DSK11XQN23PROD with PROPOSALS2
8716 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

higher (or lower) costs on companies 

and insiders. A more detailed 

discussion of the benefits and costs of 

the Item 408(a) disclosure is included in 

Sections IV.C.2 and IV.C.3 above. 

As another alternative to the proposed 

quarterly disclosure, we could narrow 

its scope to Rule 10b5–1 plans. Under 

this alternative, issuers and officers and 

directors with trading arrangements not 

reliant on Rule 10b5–1(c)(1) would not 

incur costs of the amendments. 

However, investors would receive less 

information about insider trading 

arrangements, compared to the 

proposal. This effect on investors would 

be more pronounced if some issuers or 

insiders switch from Rule 10b5–1 plans 

to other trading arrangements. 

The proposed amendments would 

require the quarterly disclosures 

regarding trading arrangements and the 

annual disclosures regarding policies 

and procedures to be tagged using a 

structured data language (specifically, 

Inline XBRL). Alternatively, we could 

change the scope of the tagging 

requirement, such as by narrowing the 

requirement to cover only quarterly 

disclosures required under proposed 

Item 408(a). This alternative would 

provide incremental compliance cost 

savings for filers, who would not be 

required to select, apply, and review 

Inline XBRL tags for the annual report 

and proxy and information statement 

disclosures regarding insider trading 

policies and procedures, although such 

cost savings would likely be low given 

the limited number of Inline XBRL tags 

that are expected to be needed to tag the 

proposed disclosures. This alternative 

would also remove the informational 

benefits to investors that would accrue 

from facilitating retrieval of issuers’ 

policies and procedures disclosures and 

comparing such disclosures across 

issuers and time periods, compared to 

the proposal. 

As proposed, the disclosure 

requirement regarding trading 

arrangements would only apply to 

domestic filers. The disclosure 

requirement regarding insider trading 

policies and procedures would apply to 

domestic filers and to Form 20–F filers. 

As an alternative, we could exempt 

Form 20–F filers from the policies and 

procedures disclosure requirement. As 

another alternative, we could extend the 

disclosure requirement regarding 

trading arrangements to Form 20–F 

filers. Generally speaking, exempting 

Form 20–F filers from the scope of the 

proposed disclosure requirements 

would prevent such foreign private 

issuers from incurring the direct and 

indirect costs of the rule (as described 

in detail in Section IV.C.3 above). 

Exempting Form 20–F filers also would 

decrease the amount of information 

available to investors about the insider 

trading incentives and policies at such 

issuers, potentially limiting investor 

ability to make informed decisions with 

respect to such issuers. Exempting Form 

20–F filers also could lead to 

incrementally greater competitive 

disparities due to the higher compliance 

burden of domestic issuers with respect 

to this requirement. Because foreign 

private issuers that file annual reports 

on Form 20–F do not have a quarterly 

reporting obligation equivalent to a 

Form 10–Q, the incremental benefit of 

the alternative of extending 

requirements similar to Item 408(a) to 

Form 20–F filers 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). 

The proposed amendments to Forms 

4 and 5 (a mandatory Rule 10b5–1 

checkbox and the date of plan adoption) 

would require disclosure only with 

respect to Rule 10b5–1 trading 

arrangements. The date of trading plan 

adoption and the fact that the trade is 

conducted under a trading plan would 

not be required to be disclosed for plans 

that do not rely on Rule 10b5–1(c)(1) but 

could be disclosed voluntarily at the 

option of the filer. As an alternative, we 

could require disclosure of reliance on 

a non-Rule 10b5–1 plan and the date of 

adoption of such a plan. This alternative 

could provide investors with more 

comprehensive information about 

insider trades under trading 

arrangements. Combined with the 

proposed Item 408 disclosures about 

officer and director trading 

arrangements (including ones not reliant 

on Rule 10b5–1), it also could enable 

greater transparency into whether 

insider trading is occurring under other 

trading plans, and potentially deter such 

trading. To the extent that trading 

arrangements that do not use Rule 

10b5–1 can take a wide variety of forms, 

requiring trades under such trading 

arrangements to be identified on Forms 

4 and 5 separately from other insider 

trades conducted without a trading 

arrangement would likely be less 

meaningful to investors. 

6. Request for Comment 

57. What are the economic effects of 

the proposed Item 408 disclosures? 

Would the proposed disclosures benefit 

investors, such as by providing 

additional information to investors or by 

limiting potential use of MNPI for 

trading through trading plans? 

58. What would be the costs of the 

proposed Item 408 disclosures? 

59. What are the economic effects of 

applying the proposed Item 408 

disclosure requirements regarding plan 

adoption, modification, termination, 

and material terms to all trading plans 

(including both ones that rely and ones 

that do not rely on Rule 10b–1), as 

proposed? 

60. What are the benefits and costs of 

the proposed quarterly disclosure 

regarding plan adoption, modification, 

termination, and material terms? What 

are the benefits and costs of alternative 

reporting requirements or frequencies? 

61. What are the economic effects of 

the proposed Item 408 requirement to 

disclose the issuer’s insider trading 

policies and procedures governing the 

purchase, sale, and other dispositions of 

the registrant’s securities on Form 10–K 

or proxy or information statement? 

What are the economic effects of 

extending similar requirements to filers 

of annual reports on Form 20–F, as 

proposed? 

62. Would the proposed requirement 

to structure Item 408 disclosures in 

Inline XBRL benefit investors? What 

would be the costs of such a 

requirement for filers? How would the 

costs and benefits vary if we were to 

narrow the scope of structured data 

requirements, for example to include 

only the quarterly disclosures that 

would be required under proposed Item 

408(a) of Regulation S–K? 

63. How often do officers and 

directors rely on Rule 10b5–1 plans 

today but elect not to disclose such 

reliance on beneficial ownership forms 

(Forms 4 and 5)? 

64. Would investors benefit from the 

proposed requirement to disclose the 

use of a Rule 10b5–1 plan on Forms 4 

and 5? 

65. What would be the costs of the 

proposed requirement to disclose the 

use of a Rule 10b5–1 plan on Forms 4 

and 5? 

66. What alternative disclosure 

requirements related to insider trading 

arrangements should we consider, and 

what would be the benefits and costs of 

such alternatives? 

D. Additional Disclosure of the Timing 

of Option Grants and Related Company 

Policies and Practices (Amendments to 

Item 402 of Regulation S–K) 

The Commission is proposing to 

amend Item 402 of Regulation S–K to 

enhance the transparency regarding 

companies’ grants of stock options, 

SARs, or similar 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. 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8717 

193Current 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 78. These estimates 

exclude registered investment companies and assetbacked securities issuers, which would not be 

subject to the proposed requirements. 

194See Executive Compensation and Related 

Person Disclosure, supra note 65. 

195 Id. 

196Randall Heron and Erik Lie, What Fraction of 

Stock Option Grants to Top Executives Have Been 

Backdated or Manipulated?, 55(4) Management 

Science 513–525 (2009); M.P. Narayanan and H. 

Nejat Seyhun, The Dating Game: Do Managers 

Designate Option Grant Dates to Increase Their 

Compensation? 21(5) Review of Financial Studies, 

1907–1945 (2008); Lucian Bebchuk, Yaniv 

Grinstein, and Urs Peyer, Lucky CEOs and Lucky 

Directors, 65(6) Journal of Finance, 2363–2401 

(2010); Linxiao Liu, Harrison Liu, and Jennifer Yin, 

Stock Option Schedules and Managerial 

Opportunism, 41(5–6) Journal of Business Finance 

and Accounting, 652–684 (2014); Rik Sen, The 

Returns to Spring-Loading, New York University 

(Working Paper) (2008). 

197See also ‘‘Insider Trading and Stock Option 

Grants: An Examination of Corporate Integrity in 

the Covid-19 Pandemic,’’ Memorandum from FSC 

Majority Staff to Members, Committee on Financial 

Services, September 17, 2020, available at https:// 

financialservices.house.gov/uploadedfiles/hhrg116-ba16-20200917-sd002.pdf, at pp. 2–5. 

198See Robert M. Daines, Grant R. McQueen, and 

Robert J. Schonlau, Right on Schedule: CEO Option 

Grants and Opportunism, 53(3) Journal of Financial 

and Quantitative Analysis, 1025–1058 (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[s] several 

mechanisms used to lower stock price, including 

changing the substance and timing of disclosures;’’ 

and further contends that such opportunism 

‘‘distorts stock prices, leading to capital 

misallocation, and may dissipate firm value if 

executives postpone valuable projects.’’ See also 

David Aboody and Ron Kasznik, CEO Stock Option 

Awards and the Timing of Corporate Voluntary 

Disclosures, 29(1) Journal of Accounting and 

Economics, 73–100 (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, and 

Catherine Shenoy, Stock Price Decreases Prior to 

Executive Stock Option Grants, 7(1) Journal of 

Corporate Finance, 53–76 (2001) (finding, in a May 

1991 to February 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’’). 199See Giulian Bianchi, Stock Options: From 

Backdating to Spring Loading, 59 Quarterly Review 

of Economics and Finance, 215–221 (2016) 

(examining data through 2011). 

200See Erik Devos, William Elliott, and Richard 

Warr, CEO Opportunism? Option Grants and Stock 

Trades around Stock Splits, 60(1) Journal of 

Accounting and Economics, 18–35 (2015). 

201Past 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. 

202See David Yermack, Good Timing: CEO Stock 

Option Awards and Company News 

Announcements, 52(2) Journal of Finance, 449–476 

(1997). See also Iman Anabtwai, Secret 

Compensation, 82(3) North Carolina Law Review, 

835–890 (2004). 

204Spring-loading can cause a call to be in-themoney when it would have otherwise been at-themoney, assuming favorable MNPI is about to be 

released. Everything else equal, the value of an inthe-money call would have a higher sensitivity to 

the share price than the value of an at-the-money 

call. Bullet-dodging can cause a call to be at-themoney when it would have otherwise been out-ofthe-money, assuming negative MNPI is about to be 

released. Generally speaking, the value of an at-themoney call would have a higher sensitivity to the 

share price than the value of an out-of-the-money 

call. The effects of such changes would 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. 

205See, e.g., Erik Devos, William Elliott, and 

Richard Warr, CEO Opportunism? Option Grants 

and Stock Trades around Stock Splits, 60(1) Journal 

of Accounting and Economics, 18–35 (2015) (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 

Continued 

1. Baseline and Affected Parties 

The proposed amendments to Item 

402 disclosure requirements would 

apply to filers of annual reports on Form 

10–K and proxy and information 

statements.193 During calendar year 

2020, we estimate that there were 

approximately 5,900 affected filers. 

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 disclosure 

release.194 In considering the timing of 

option grants in coordination with the 

release of MNPI, the Commission 

explained in the release that if the 

company has such a program, plan, or 

practice, the company should disclose 

that the board of directors or 

compensation committee may grant 

options at times when the board or 

committee is aware of MNPI.195 To the 

extent that the existing disclosures of 

companies 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 

around MNPI would be relatively 

smaller. 

Some studies have noted that the 

regulatory reforms of the early and mid2000s have led to the decline, if not 

disappearance, of questionable option 

timing practices.196 However, there is 

some evidence that option springloading and bullet-dodging persists.197

For example, one study, which 

examined 4,852 scheduled CEO stock 

option grants from 2007 through 2011, 

finds that ‘‘managers accelerate bad 

news before a grant (bullet dodging) and 

delay good news until after a grant 

(spring loading) . . . 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. Executives also appear to move 

earnings from the pre-grant period to the 

post-grant period, for example, by 

changing a firm’s accounting choices 

(e.g., accruals management) and perhaps 

even by timing investments (e.g., real 

earnings management).’’ 198 Another 

study finds that spring-loading partly 

replaced the disappearing practice of 

option backdating.199 A different study 

documents spring-loading around stock 

splits but does not disaggregate the 

1992–2012 period into pre- and post2006 sub-periods.200

2. Benefits 

As discussed in Section II above, 

certain practices related to the timing of 

executive compensation option grants 

raise concerns about the use of MNPI. 

Improved disclosure would potentially 

mitigate the economic costs of the 

associated incentive distortions as these 

practices would have greater visibility 

to investors and inform their investment 

and voting decisions. 

Spring-loading and bullet-dodging 

potentially increase the value of the 

options granted to the executive, upon 

MNPI becoming public.201 Holding the 

number of the granted options and the 

policy to grant options with the strike 

price equal to the current observable 

market price (‘‘at-the-money’’) constant, 

this leads to the executive effectively 

receiving a higher compensation award 

than if the timing of option grants were 

completely independent of MNPI 

releases.202 Regardless of any potential 

impact of the expected public release of 

MNPI on compensation cost recognized 

for the option awards, strategic timing of 

option awards around MNPI releases 

increases the value of the compensation 

award.203 Further, lowering an option’s 

strike price through timing of an option 

award around MNPI release affects the 

sensitivity of the awarded options to 

changes in the company’s share 

price.204 Some have argued that these 

practices may be the result of an optimal 

compensation policy.205 Whether such 


lotter on DSK11XQN23PROD with PROPOSALS2
8718 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

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. 

206See, e.g., 2020 Proxy Paper Guidelines: An 

Overview of the Glass Lewis Approach to Proxy 

Advice—United States, available at https://

www.glasslewis.com/wp-content/uploads/2016/11/ 

Guidelines_US.pdf, at 12–13, 41–42 (stating that 

‘‘that ‘‘[w]hen a company has engaged in springloading or bullet-dodging, Glass Lewis will consider 

recommending voting against the compensation 

committee members where there has been a pattern 

of granting options at or near historic lows.’’ 

Furthermore, ‘‘it will also recommend voting 

against executives serving on the board who 

benefited from the spring-loading or bulletdodging.’’ Spring-loading has also been the subject 

of shareholder suits alleging breach of fiduciary 

duty. See, e.g., Howland v. Kumar, C.A. No. 2018– 

0804, 2019 WL 2479738, at 1 (Del. Ch. June 13, 

2019), available at https://courts.delaware.gov/ 

Opinions/Download.aspx?id=290950; Verified 

Stockholder Derivative Complaint 3–5, Knight v. 

Miller, C.A. No.2021–0581, 2021 WL 3018402 (Del. 

Ch. filed July 9, 2021). See also, e.g., Iman 

Anabtwai, Secret Compensation, 82(3) North 

Carolina Law Review 835–890 (2004) (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(2) Saint Louis University Law Journal 629–662 

(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 Washington University 

Journal of Law and Policy, 413–458 (2008). 

207One 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 Iman Anabtwai, Secret 

Compensation, 82(3) North Carolina Law Review, 

835–890 (2004). See also, e.g., Giuliano Bianchi, 

Stock Options: From Backdating to Spring Loading, 

59 Quarterly Review of Economics and Finance, 

215–221 (2016) (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.’’). 

208See, e.g., Jonathan J. Tompkins, Opportunity 

Knocks, but the SEC Answers: Examining the 

Manipulation of Stock Options through the SpringLoading of Grants and Rule 10b-5, 26 Washington 

University Journal of Law and Policy, 413–458, 

444–445, 447 (2008). 

209See supra note 198 and accompanying and 

following text. 

210The 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 

practices constitute an optimal 

compensation policy or not, a lack of 

transparency about such compensation 

awards may limit investor ability to 

fully gauge the key terms of 

compensation arrangements and their 

implications for executives’ incentives, 

and thus, firm value. 

The Commission is proposing to 

amend Item 402 of Regulation S–K to 

require additional disclosure of option 

granting practices that would provide a 

more comprehensive picture of whether 

the company uses MNPI to time option 

awards. The proposed disclosure would 

present in a more readily available way 

information about option grants around 

MNPI releases, if any, as well as provide 

new disclosure of policies and 

procedures related to option grant 

timing with respect to MNPI. The 

proposed amendments would reduce 

information asymmetries between 

companies and investors with respect to 

the timing of compensation awards and 

applicable corporate policies and better 

inform investors about executives’ 

incentives to maximize shareholder 

value and the company’s executive 

compensation policies (the information 

that can then be compared with the 

executive’s on-the-job performance in 

assessing the optimality of executive 

compensation). Besides contributing to 

better informed investment decisions, 

the proposed disclosure may inform 

shareholder say-on-pay votes and votes 

in director elections.206

Another potential benefit of the 

proposed disclosure is that, to the extent 

option grants around MNPI releases 

were not the result of a valuemaximizing 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),207 and 

to the extent companies forgo such 

grants in anticipation of the proposed 

additional disclosure, the proposed 

disclosure requirement would improve 

shareholder value. The benefit would be 

lower if the extra compensation is 

currently optimally awarded.208

Further, to the extent that the practice 

of option grants around MNPI in some 

instances contributed to incentives of 

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,209 the proposed 

amendments could partly mitigate such 

incentives if they contribute to a 

decrease in such option grant practices. 

In those instances, the indirect effect of 

the proposed amendments could result 

in an improvement in the information 

content, timeliness, and quality of 

disclosures, and more efficient share 

prices and better informed investment 

decisions. 

The described benefits of the 

proposed tabular disclosure would be 

limited by the fact that investors today 

can research and assess, based on 

historical option grant dates required to 

be disclosed under Item 402, how grant 

timing relates to EDGAR filings 

containing MNPI and share price 

changes around such filings 

(information that is publicly accessible, 

albeit not in one location). However, the 

proposed disclosure would aggregate 

this information in a more readily 

available and more salient tabular 

format in one location, potentially 

incrementally lowering investor search 

costs and increasing investor awareness 

of option grant timing around MNPI. 

These benefits could also be modest if 

investors find the proposed disclosure 

to be of limited use (for example, if the 

tabular disclosure is too extensive and/ 

or difficult to parse for companies with 

multiple MNPI filings and option grants 

for different executives, or because other 

factors may affect the share price 

notwithstanding the disclosure of 

MNPI). 

The proposed amendments would 

require the additional quantitative 

disclosure to be submitted in Inline 

XBRL. This proposed requirement is 

expected to benefit investors by 

facilitating automated extraction of the 

disclosure information for purposes of 

aggregation, analysis, and comparison 

(across time periods and filers), 

potentially enabling more informed 

investment and voting decisions. 

The proposed annual disclosure of 

policies and practices related to option 

grant timing around MNPI would offer 

new information that is not presently 

available to investors. The disclosure of 

the presence or absence of such policies 

and practices could inform investment 

and shareholder voting decisions, with 

the caveat that such disclosure may be 

of lower utility if it uses a ‘‘boilerplate’’ 

format. The anticipation of public 

disclosure may also lead companies to 

adopt policies and practices disallowing 

option grants around MNPI, leading to 

the benefits discussed above. 

In general, the discussed benefits of 

the proposed amendments would be 

modest at companies that rely less on 

stock options and primarily or 

exclusively grant restricted stock, or do 

not grant equity-linked 

compensation.210 At companies that use 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8719 

Performance, August 23, 2018, Equilar, available at 

https://www.equilar.com/press-releases/103- 

prevalence-of-options-decreases-as-companies-tieawards-to-performance; Aubrey Bout, Brian Wilby, 

and Perla Cruz, S&P 500 CEO Compensation 

Increase Trends, Harvard Law School Forum on 

Corporate Governance, (February 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 2020 (retrieved on September 14, 2021), 

approximately 32 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. 

Registrants other than small business issuers and 

small business issuers, respectively, were required 

to comply with FAS 123R beginning with the first 

reporting period of the first fiscal year beginning on 

or after June 15, 2005 and December 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)]. 

211See supra note 208. 

212Companies could lower the strike 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. 213See supra note 192. 

stock options extensively as part of 

executive compensation, the effects of 

the proposed amendments might be 

more modest if other factors serve to 

deter spring-loading and bullet-dodging 

(for example, best practices 

implemented by the compensation 

committee or generally robust internal 

corporate governance mechanisms). The 

effects of the proposed amendments on 

executives might be smaller if 

companies adjust compensation to offset 

the decline in spring-loading and bulletdodging 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). 

3. Costs 

The proposed amendments to Item 

402 requiring additional disclosure of 

the timing of option awards and related 

corporate policies would 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 

statement. Because companies either 

already provide such information for 

other disclosures (option grant 

information and dates) or can readily 

obtain the information (daily share 

prices and dates of EDGAR filings), the 

direct costs are expected to be modest. 

Companies also would incur minor 

costs of aggregating such existing 

information into the proposed tabular 

format. Further, companies would incur 

some compliance-related costs to assess 

which of the filings from the reporting 

period contained MNPI and thus would 

be subject to the scope of the proposed 

tabular disclosure. Finally, while 

companies are likely to have 

information readily available about 

policies and practices related to option 

grant timing, they would likely incur 

some compliance-related costs to 

prepare that information for public 

disclosure. 

Companies would incur compliance 

costs of structuring the proposed 

quantitative tabular disclosure in Inline 

XBRL. Such costs would be higher for 

filers with more option grants subject to 

the new disclosure. However, because 

the vast majority of filers subject to the 

proposed amendments already are 

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 proposed 

compensation disclosure in a structured 

data language would likely be relatively 

modest. 

The proposed amendments are also 

expected to result in indirect costs for 

companies and executives. Disclosure of 

spring-loading or bullet-dodging 

practices could result in reputational 

harms for companies or individual 

executives, including unfavorable sayon-pay votes. Outside scrutiny in 

response to the proposed disclosure 

could cause companies to forgo springloading and bullet-dodging. For 

companies at which such practices 

arose from efforts to implement an 

economically optimal compensation 

policy,211 deviating from such a policy 

could result in less optimal 

compensation. However, companies 

may be able to use other, readily 

available means to adjust compensation 

terms to achieve a similar outcome.212

At companies that forgo spring-loading 

and bullet-dodging but do not change 

other compensation terms to offset it, 

executives could experience effectively 

smaller, riskier compensation awards. 

As discussed in Section IV.D.2 above, 

the indirect costs of the proposed 

tabular disclosure are likely to be 

modest relative to the baseline of 

existing option disclosures. 

The proposed disclosure of policies 

and practices related to option grant 

timing around MNPI would offer new 

public disclosure not presently available 

to investors. Companies that lack such 

policies and practices may incur 

reputational costs of such disclosure. 

The anticipation of public disclosure 

may lead such companies to adopt 

policies and practices disallowing 

option grants around MNPI. This may 

impose costs on executives, to the 

extent other compensation terms are not 

adjusted in an offsetting manner, as 

described above. 

As discussed in Section IV.D.2 above, 

the effects of the proposed amendments 

would be modest at companies without, 

or with limited, option compensation. 

4. Effects on Efficiency, Competition, 

and Capital Formation 

We expect the proposed amendments 

to Item 402 to incrementally decrease 

the information asymmetry between 

insiders and investors about the 

company’s option compensation awards 

and associated policies, resulting in 

better information about the insiders’ 

incentives related to such option 

awards. This would result in more 

informationally efficient prices and 

more efficient allocation of capital in 

investor portfolios. Greater availability 

of information about option 

compensation awards would also 

reduce shareholders’ information 

gathering costs and enable them to make 

more efficient voting decisions in sayon-pay and director election votes. 

Importantly, we expect the proposed 

amendments to draw market scrutiny to 

companies’ use of MNPI in option 

awards, potentially decreasing the 

incidence of option award timing 

around MNPI. This would tend to 

reduce insiders’ incentives to game 

corporate disclosures, which may result 

in 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 proposed Item 

402 requirements impose a fixed cost on 

companies, they would 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 option 

award timing. The proposed disclosure 

requirements would not apply to foreign 

private issuers, placing them at a 

relative competitive advantage to 

domestic filers. 

Because the proposed disclosure 

amendments would apply broadly 

across public companies, generally, we 

do not anticipate them to result in 

meaningful competitive disparities in 

the labor market for executive talent.213

The described effects would be 

attenuated to the extent investors 

already can infer whether companies 

time option awards around MNPI based 

on existing disclosures of option grant 

dates and other public information. The 

described effects would also be 

attenuated to the extent companies that 


lotter on DSK11XQN23PROD with PROPOSALS2
8720 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

214 During calendar year 2020, the average 

(median) filer filed Forms 10–K, 10–Q, 8–K, or 

amendments to them, on 18 (16) different days, 

resulting in a potential average (median) disclosure 

coverage period (14 days before and after such 

filings) of approximately 207 (221) days. 

award options around MNPI already 

disclose such policies and practices as 

a result of the 2006 interpretive 

guidance. 

5. Reasonable Alternatives 

The proposed amendments to Item 

402 involve both a new table with 

information on individual option grants 

and the requirement to disclose policies 

and practices regarding the timing of 

option awards around the disclosure of 

MNPI. As an alternative, we could 

propose only one of those requirements, 

which could reduce the costs of 

disclosure for filers discussed in Section 

IV.D.3 above. However, omitting one of 

the proposed 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 a 

company discloses that it does not have 

policies restricting option awards 

around MNPI releases. In turn, omitting 

the requirement to disclose the 

company’s practices and policies 

regarding the timing of option awards 

would reduce the amount of 

information about potential future 

compensation practices, compared to 

the proposal. Nevertheless, there is 

likely to be some substitution between 

the information benefits of the two 

proposed requirements, particularly in 

combination with the existing 

requirements to disclose grant dates. 

The proposed amendments to Item 

402 would require tabular disclosure of 

awards made within 14 days before or 

after the filing of a periodic report, or 

the filing or furnishing of Form 8–K that 

discloses MNPI. A typical company 

issues multiple filings with MNPI in a 

given year. Thus, it is likely that a 

typical company would include 

multiple option and SAR awards in the 

new tabular disclosure.214 As an 

alternative, we could use a shorter or 

longer time period around filings with 

MNPI during which option awards 

would be subject to the additional 

tabular disclosure (for example, one 

day, one week, or thirty days). A shorter 

(longer) time period could result in less 

(more) disclosure and thus 

incrementally lower (higher) disclosure 

costs for filers, compared to the 

proposal. Because prices may change for 

reasons other than the release of MNPI 

when a longer time period is used, preand 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. 

Consistent with other provisions of 

Item 402, the proposed amendments 

would apply to option awards to named 

executive officers. This, would provide 

for greater consistency with other 

existing compensation disclosures. It 

also would provide information about 

the effects of option award timing on the 

amount of compensation and structure 

of compensation incentives for the 

executives that are likely to have the 

most influence on the company’s 

business decisions. As an alternative, 

we could limit the proposed disclosure 

to the CEO or expand it to all 

executives. The alternative of narrowing 

(or expanding) the set of executives 

whose option awards would be subject 

to the new disclosure requirement 

would result in lower (or higher) 

disclosure costs, compared to the 

proposal but also would result in less 

(or more) information about the timing 

of option awards, and executive 

incentives, compared to the proposal. 

These alternatives would also result in 

less consistency with other existing 

compensation disclosures compared 

with the proposal. 

The proposed amendments would 

require the additional disclosure to be 

submitted using a structured (i.e., 

machine-readable) data language. As an 

alternative, we could require the 

disclosure as proposed, but not require 

the use of a structured data language. 

Compared to the proposal, 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 

proposal. 

6. Request for Comment 

67. How common is option springloading and bullet-dodging? What are 

the principal costs and benefits of such 

practices? Would such practices be 

likely to decline under the proposal? Do 

companies typically have policies to 

avoid granting options around releases 

of material nonpublic information? Why 

or why not? 

68. What would be the main benefits 

of the proposed amendments? Would 

the proposed additional Item 402 

disclosure requirements related to 

option granting practices benefit 

investors? Would the proposed 

amendments inform voting decisions? 

What would be the main costs of the 

proposed amendments? 

69. Would the proposed new 

compensation table in Item 402 be 

useful for investors? What are the 

benefits and costs of the proposed new 

table? 

70. Should we require a different 

scope of tabular disclosure as part of 

amended Item 402? Should we require 

the proposed tabular disclosure to cover 

a different time frame around filings 

containing MNPI (such as one day, one 

week, or thirty days before and after a 

filing containing MNPI)? Should we 

require the proposed tabular disclosure 

to cover only some filings containing 

MNPI (such as Form 10–K, or Form 10– 

K and Form 10–Q)? If so, what would 

be the benefits and costs of such 

alternative requirements? 

71. What alternative disclosure 

requirements related to the timing of 

option compensation grants should we 

consider, and what would be the 

benefits and costs of such alternatives? 

72. Would the proposed requirement 

to structure the additional quantitative 

disclosure in Inline XBRL benefit 

investors? What would be the costs of 

such a requirement for filers? How 

would the costs and benefits vary if we 

were to expand or narrow the scope of 

structured data requirements, for 

example to include the narrative 

disclosures that would be added under 

the proposed requirements? 

E. Additional Disclosure of Insider Gifts 

of Stock 

The Commission is proposing 

amendments that would require the 

disclosure of insiders’ gifts of stock 

within two business days on Form 4. 

This would be 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. This proposed amendment 

would result in timelier disclosure of 

such transactions across all affected 

insiders. 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8721 

215The estimate is based on Form 5 data in 

Thomson Reuters/Refinitiv insiders dataset. Gifts of 

stock are identified based on transaction code ‘‘G’’ 

(‘‘bona fide gift’’). 

216One recent study finds evidence of informed 

timing of gifts of stock by the subset of insiders that 

are beneficial owners. See Sureyya Burcu Avci, 

Cindy A. Schipani, H. Nejat Seyhun, and Andrew 

Verstein, Insider Giving, Duke Law Journal, 71 

(2021) (forthcoming). The study also points to gift 

backdating as a potential consequence of delayed 

reporting of stock gifts. The accelerated disclosure 

would likely reduce the potential for backdating of 

insider gifts. Backdating of reported insider 

disposition of stock on the beneficial ownership 

disclosure could provide insufficient information to 

investors about the changes to an insider’s 

ownership incentives and the incentive alignment 

with shareholder interests (limiting investors’ 

ability to retrospectively evaluate an insider’s 

corporate decisions in conjunction with the 

insider’s ownership incentives and potentially 

gauge the extent of agency conflicts). 

1. Baseline and Affected Parties 

The proposed amendments would 

affect insiders that make gifts of stock 

and report them on Form 5 today. We 

estimate that approximately 700 

insiders reported gifts of stock on Form 

5 during calendar year 2020 (including 

a little over 100 insiders that reported 

gifts both on Form 4 and Form 5).215

The majority of insiders already report 

gifts of stock on Form 4. During 

calendar year 2020, we estimate that 

approximately 2,700 insiders reported 

stock gifts on Form 4 (including a little 

over 100 insiders that made both Form 

4 and Form 5 filings reporting stock 

gifts). 

2. Benefits 

The proposed amendments to Form 4 

to require disclosure of insider gifts of 

stock would result in timelier 

availability of information about 

beneficial ownership by the company’s 

insiders, to the extent that some insiders 

are not already reporting such gifts of 

stock on Form 4. Disposition of an 

insider’s shares through a gift reduces 

that insider’s economic exposure to the 

company and 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 

shares the trading profits with the 

recipient. 

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 

company’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) would allow the insider 

to reduce the effective cost of the gift. 

In light of this, disclosure of timely 

information about the stock gift could be 

informative for investors evaluating the 

company’s share price and making 

investment or sale decisions.216

However, these information benefits 

would be lower if the officer or director 

does not consider the cost of a gift (e.g., 

because the motive for the gift is solely 

altruistic or the amount of the gift is 

inconsequential in the context of the 

insider’s overall net worth). 

Finally, the proposed requirement to 

disclose insiders’ stock gifts on Form 4 

would facilitate market scrutiny and 

discourage stock gifts based on MNPI, 

thereby reducing the associated 

incentive distortions. While an insider’s 

benefit from using MNPI to time stock 

gifts is likely 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 IV.A above). 

These benefits of the proposed Form 

4 requirements would be reduced to the 

extent that many insider gifts of stock 

already are reported on Form 4, as noted 

in Section IV.E.1 above. 

3. Costs 

Amended Form 4 disclosure with 

regard to gifts of stock would result in 

additional costs for insiders. Direct costs 

would include additional compliancerelated costs. Indirect costs could 

include reputational and investor 

relations costs stemming from increased 

market scrutiny of gifts of stock. 

4. Effects on Efficiency, Competition, 

and Capital Formation 

We expect the proposed 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 company 

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 

company’s share prices. Both factors 

would tend to result in more 

informationally efficient prices and 

more efficient allocation of capital in 

investor portfolios. 

Importantly, we expect the proposed 

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 Section IV.E.2. and IV.A 

above. 

Because the proposed disclosure 

amendments would apply broadly 

across all insiders’ stock gifts, generally, 

we do not anticipate them to result in 

meaningful competitive disparities 

among insiders. 

5. Reasonable Alternatives 

We are proposing to require 

additional disclosure of insider gifts of 

stock. As an alternative, we could 

narrow the scope of the proposed 

disclosure to apply only to officers and 

directors, or only to a certain type of 

gifts of stock (e.g., charitable gifts to 

charities affiliated with the insider). 

Compared to the proposal, narrowing 

the scope of gifts subject to the 

disclosure could provide less 

information to market participants 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 proposed requirement 

would provide consistency in the 

timeliness of reporting of stock gifts 

across insiders. 

6. Request for Comment 

73. Would the proposed additional 

Form 4 disclosure requirements related 

to insider gifts of stock benefit 

investors? What would be the main 

benefits of the proposed Form 4 

amendments for investors? 

74. What would be the costs of the 

proposed Form 4 amendments for filers? 

75. How prevalent is the timing of 

insider gifts of stock around material 

nonpublic information? 

76. Do companies have policies or 

practices to prevent insider gifts of stock 

in connection with material nonpublic 

information? 

77. What alternative disclosure 

requirements related to insider gifts of 

stock should we consider, and what 

would be the benefits and costs of such 

alternatives? 


lotter on DSK11XQN23PROD with PROPOSALS2
8722 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

217 44 U.S.C. 3501 et seq. 218 44 U.S.C. 3507(d) and 5 CFR 1320.11. 219The paperwork burdens for Regulation S–K 

and Regulation S–T are imposed through the forms, 

schedules and reports that are subject to the 

requirements in these regulations and are reflected 

in the analysis of those documents. To avoid a PRA 

inventory reflecting duplicative burdens and for 

administrative convenience, we assign a one-hour 

burden to Regulations S–K and S–T. 

220The OMB PRA filing inventories represent a 

three-year average. These averages may not align 

with the actual number of filings in any given year. 

V. 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’’).217 The Commission is 

submitting the proposed amendments to 

the Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

the PRA.218 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: 

• Form 10–K (OMB Control No. 

3235–0063); 

• Form 10–Q (OMB Control No. 

3235–0070); 

• Schedule 14A (OMB Control No. 

3235–0059); 

• Schedule 14C (OMB Control No. 

3235–0057); 

• Form 4 (OMB Control Number 

3235–0287); 

• Form 20–F (OMB Control Number 

3235–0288); 

• Form 5 (OMB Control Number 

3235–0362); 

• Regulation S–K (OMB Control No. 

3235–0071); 

• Regulation S–T (OMB Control No. 

3235–0424); 219 and 

• Rule 10b5–1 (a proposed 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. 

The Commission is also proposing 

amendments to Rule 10b5–1(c)(1)(ii) 

that would impose a certification 

requirement as a condition to the Rule 

10b5–1(c)(1) 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 Rule 

10b5–1(c)(1) trading arrangement, as a 

condition to the availability of the 

affirmative defense, such director or 

officer would be required to furnish to 

the issuer a written certification. The 

use of the Rule 10b5–1(c)(1) affirmative 

defense is voluntary, and compliance 

with this proposed information 

collection would be mandatory only if 

a respondent chooses to rely on the 

affirmative defense. Responses to this 

information collection would not be 

confidential and there is no mandatory 

retention period for the collection of 

information. 

A description of the proposed 

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 

proposed amendments can be found in 

Section IV above. 

B. Estimates of the Proposed 

Amendments’ Effects on the Collections 

of Information 

The following table summarizes the 

estimated effects of the proposed 

amendments on the paperwork burdens 

associated with the affected forms.220

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS

Proposed amendments Affected forms Estimated burden increase 

Item 402(x): 

• Require disclosure of a registrant’s policies and practices on 

the timing of awards of stock options, SARs or similar 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.

Forms 10–K * and Schedules 14A, 

and 14C.

9 hour increase in compliance burden per form. 

• Require tabular disclosure of each option 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 contains material nonpublic information.

• Require information to be reported using a structured data language.

Item 408(a): 

• Require disclosure of the adoption or termination of any contract, instruction or written plan for the purchase or sale of securities whether or not intended to satisfy the affirmative defense conditions of Rule 10b5–1(c), by the issuer, 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.

Forms 10–K and 10–Q .................. 15 hour increase in compliance 

burden per form. 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8723 

221See supra note 116 and accompanying text. 

222We 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 $400 per hour. This estimate 

is based on consultations with several registrants, 

law firms, and other persons who regularly assist 

registrants in preparing and filing reports with the 

Commission. 

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS—Continued 

Proposed amendments Affected forms Estimated burden increase 

• Require information to be reported using a structured data language.

Item 16J/Item 408(b): 

• Require 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 registrant.

Forms 20–F and 10–K * and 

Schedules 14A, and 14C.

4 hour increase in compliance burden per form. 

• Require information to be reported using a structured data language.

Form 4: 

• Require reporting of gifts of securities ......................................... Form 4 ........................................... 0.5 hour increase in compliance 

burden per form. 

• Require new checkbox to indicate that a sale or purchase reported on the form was made pursuant to a Rule 10b5–1(c), 

and disclosure of the date of adoption of the plan.

• New optional checkbox that would permit a filer to indicate 

whether a sale or purchase reported on the form was made 

pursuant to a contract, instruction or written plan to purchase or 

sell securities not intended to satisfy the affirmative defense 

conditions of Rule 10b5–1(c).

Form 5: 

• Require new checkbox to indicate that a sale or purchase reported on the form was made pursuant to a Rule 10b5–1(c) 

plan, and disclosure of the date of adoption of the plan.

Form 5 ........................................... 0.25 hour increase in compliance 

burden per form. 

• New optional checkbox that would permit a filer to indicate 

whether a sale or purchase reported on the form was made 

pursuant to a contract, instruction or written plan to purchase or 

sell securities not intended to satisfy the affirmative defense 

conditions of Rule 10b5–1(c).

Rule 10b5–1(c)(1)(ii): 

• Require directors and officers (as defined in Exchange Act Rule 

16a–1(f)), as a condition to the affirmative defense, to promptly 

furnish to the issuer a written certification.

........................................................ 1.5 hour compliance burden per 

certification. 

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 proposed Item 402(w) 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. Our PRA estimates include an estimated one 

hour burden for Form 10–K to account for the incorporation of the information. 

C. Incremental and Aggregate Burden 

and Cost Estimates 

Below we estimate the incremental 

and aggregate increase in paperwork 

burden as a result of the proposed 

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 proposed 

amendments would 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 7,200 responses based on the 

staff’s analysis, discussed in Section 

IV.B.1, of beneficial ownership filings 

on Forms 3, 4, and 5 made in the 2020 

calendar year.221 Based on the data from 

these filings, approximately 4,800 

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. 

The burden estimates were calculated 

by multiplying the estimated number of 

responses by the estimated average 

amount of time it would take a 

respondent to prepare and review 

disclosure required under the proposed 

amendments. For purposes of the PRA, 

the burden is to be 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. 

We also estimate that the average cost of 

retaining outside professionals is $400 

per hour.222


lotter on DSK11XQN23PROD with PROPOSALS2
8724 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

223The 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 threeyear average. 

224Figures in this table have been rounded to the 

nearest whole number. 

PRA TABLE 2—STANDARD ESTIMATED BURDEN ALLOCATION FOR SPECIFIED FORMS AND SCHEDULES

Form/schedule type Internal 

(%) 

Outside 

professionals 

(%) 

Forms 10–K, 10–Q, 20–F and Schedules 14A and 14C ........................................................................................ 75 25 

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 proposed amendments. 

PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES

RESULTING FROM THE PROPOSED AMENDMENTS

Form/schedule 

Number of 

estimated 

affected 

responses 

Estimated burden 

hour increase/ 

affected response 

Total incremental 

increase in burden 

hours 

Estimated 

increase in 

internal burden 

hours 

Estimated 

increase in 

outside 

professional 

hours 

Total increase 

in outside 

professional costs 

($) 

(A) 223 (B) (C) = (A) × (B) (D) = (C) × 

(allocation %) 

(E) = (C) × 

(allocation %) 

(F) = (E) × $400 

10–K ...................................................... 8,292 16 132,672 99,504 33,168 13,267,200 

10–Q ...................................................... 22,925 15 343,875 257,906.25 85,968.75 34,387,500 

20–F ...................................................... 729 4 2,916 2,187 729 291,600 

14A ........................................................ 6,369 13 82,797 62,097.75 20,699.25 8,279,700 

14C ........................................................ 569 13 7,397 5,547.75 1,849.25 739,700 

4 ............................................................ 338,207 0.5 169,103.5 169,103.5 0 0 

5 ............................................................ 5,939 0.25 1,484.75 1,484.75 0 0 

Total ............................................... .............................. .............................. 740,245.25 597,831 142,414.25 56,965,700 

The following tables summarizes the 

requested paperwork burden changes to 

existing information collections, 

including the estimated total reporting 

burdens and costs, under the proposed 

amendments. 

PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS 224

Form/sch. 

Current burden Program change Requested change in burden 

Current 

annual 

responses 

Current 

burden 

hours 

Current cost 

burden 

Number of 

affected 

responses 

Increase in 

internal 

hours 

Increase 

in outside 

professional 

costs 

Annual 

responses Burden hours Cost burden 

(A) (B) (C) (D) (E) (F) (G) = (A) (H) = (B) + (E) (I) = (C) + (F) 

10–K .......................... 8,292 14,188,040 $1,893,793,119 8,292 99,504 33,168 8,292 14,287,544 $1,893,826,287 

10–Q .......................... 22,925 3,182,333 421,490,754 22,925 257,906 85,969 22,925 3,440,239 421,576,723 

20–F .......................... 729 479,261 576,824,025 729 2,187 $291,600 729 481,448 577,115,625 

14A ............................ 6,369 777,590 103,678,712 6,369 62,098 20,699 6,369 839,688 103,699,411 

14C ............................ 569 56,356 7,514,944 569 5,548 1,849 569 61,904 7,516,793 

4 ................................ 338,207 169,104 0 338,207 169,104 0 338,207 338,208 0 

5 ................................ 5,939 5,939 0 5,939 1,485 0 5,939 7,424 0 

Total ................... .................... .................... .......................... .................... .................... .................... .................... 19,456,455 3,003,734,839 

PRA Table 5 summarizes the 

requested paperwork burden for the 

proposed new collection of 

information—namely, the proposed new 

Rule 10b5–1(c)(1)(ii) certification, 

including the estimated total reporting 

burdens and costs. For purposes of the 

PRA, we estimate that the Rule 10b5– 

1(c)(1)(ii) certification would entail a 

one hour compliance burden per 

response with 7,200 annual responses. 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8725 

225 5 U.S.C. 601 et seq. 

226 5 U.S.C. 601(6). 227See Exchange Act Rule 0–10(a) [17 CFR 240.0– 

10(a)]. 228Business 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]. 229 17 CFR 270.0–10(a). 230This estimate is based on staff analysis of 

Form 10–K filings on EDGAR, or amendments 

thereto, filed during the calendar year of January 1, 

2020 to December 31, 2020, or filed by September 

1, 2021, and on data from XBRL filings, Compustat, 

and Ives Group Audit Analytics. 

231These estimates are based on staff analysis of 

Morningstar data and data submitted by investment 

company registrants in forms filed on EDGAR as of 

June 30, 2021. 

PRA TABLE 5—REQUESTED PAPERWORK BURDEN FOR THE NEW COLLECTION OF INFORMATION

Collection of information 

Proposed paperwork burden 

Annual 

responses Burden hours 

(A) (A) × 1 

Rule 10b5–1(c)(1)(ii) Certification ............................................................................................................ 7,200 7,200 

Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

we request comment in order to: 

• Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; 

• Evaluate whether the Commission’s 

estimates of the burden of the proposed 

collection of information are accurate; 

• Determine whether there are ways 

to enhance the quality, utility, and 

clarity of the information to be 

collected; 

• Evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology; and 

• Evaluate whether the proposed 

amendments would have any effects on 

any other collection of information not 

previously identified in this section. 

Any member of the public may direct 

to us any comments concerning the 

accuracy of these burden estimates and 

any suggestions for reducing these 

burdens. Persons submitting comments 

on the collection of information 

requirements should direct their 

comments to the Office of Management 

and Budget, Attention: Desk Officer for 

the U.S. Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, and send a copy to, Vanessa A. 

Countryman, Secretary, U.S. Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090, with 

reference to File No. S7–20–21. 

Requests for materials submitted to 

OMB by the Commission with regard to 

the collection of information should be 

in writing, refer to File No. S7–20–21 

and be submitted to the U.S. Securities 

and Exchange Commission, Office of 

FOIA Services, 100 F Street NE, 

Washington DC 20549–2736. OMB is 

required to make a decision concerning 

the collection of information between 30 

and 60 days after publication of this 

proposed rule. Consequently, a 

comment to OMB is best assured of 

having its full effect if the OMB receives 

it within 30 days of publication. 

VI. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’) has been prepared in 

accordance with the Regulatory 

Flexibility Act (‘‘RFA’’).225 It relates to 

proposed amendments to Rule 10b5– 

1(c)(1); Regulation S–K, Forms 10–K, 

10–Q, 20–F, 4, and 5; and Schedules 

14A and 14C. 

A. Reasons for, and Objectives of, the 

Proposed Action 

The purpose of the proposed 

amendments is to address potentially 

abusive practices associated with Rule 

10b5–1 trading arrangements, grants of 

options and other equity instruments 

with similar features and the gifting of 

securities. The proposed 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 

proposed amendments are discussed in 

more detail in Section II above. We 

discuss the economic impact and 

potential alternatives to the 

amendments in Section IV, and the 

estimated compliance costs and burdens 

of the amendments under the PRA in 

Section V above. 

B. Legal Basis 

We are proposing the amendments 

under Sections 3(b), 6, 7, 10, 17, 19(a), 

and 28 of the Securities Act; Sections 3, 

9, 10, 12, 13, 14, 15(d), 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. 

C. Small Entities Subject to the 

Proposed Rules 

The proposed amendments would 

apply to registrants that are small 

entities. The Regulatory Flexibility Act 

defines ‘‘small entity’’ to mean ‘‘small 

business,’’ ‘‘small organization,’’ or 

‘‘small governmental jurisdiction.’’ 226

For purposes of the Regulatory 

Flexibility Act, 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.227 Under 17 CFR 

270.0–10, an investment company, 

including a business development 

company, is considered to be a small 

entity 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. 

An investment company, including a 

business development company,228 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.229 Commission 

staff estimates that, as of June 2021, 

there were 660 issuers,230 and 9 

business development companies that 

may be considered small entities that 

would be subject to the proposed 

amendments.231

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The proposed amendments to Rule 

10b5–1(c)(1) would apply to small 

entities to the same extent as other 

entities, irrespective of size. The 

proposed amendments to Rule 10b5– 

1(c)(1) would not directly impose any 


lotter on DSK11XQN23PROD with PROPOSALS2
8726 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

232See supra Section IV. 

recordkeeping or compliance 

requirements on any small entities. We 

anticipate that the nature of any benefits 

and costs associated with the proposed 

amendments to Rule 10b5–1(c)(1) would 

be similar for large and small entities. 

Accordingly, we refer to the discussion 

of the proposed amendments’ economic 

effects on all affected parties, including 

small entities, in Section IV.B. above. 

Consistent with that discussion, we 

anticipate that the economic benefits 

and costs likely would vary widely 

among small entities based on a number 

of factors, including the nature and 

conduct of their businesses, which 

makes it difficult to project the 

economic impact on small entities with 

precision. However, we request 

comment on how the proposed 

amendments to Rule 10b5–1(c)(1) would 

affect small entities. 

The proposed disclosure amendments 

to Regulation S–K, Forms 10–K, 10–Q, 

and Schedules 14A and 14C are 

designed to provide greater 

transparency about officer, director, and 

issuer trading arrangements; policies 

and procedures with respect to insider 

trading; and the timing of executive 

compensation option awards in relation 

to the release of material nonpublic 

information. If adopted, these 

amendments generally would: 

• Disclosure regarding the adoption 

and termination of Rule 10b5–1(c) and 

non-Rule 10b5–1(c) trading 

arrangements of directors, officers, and 

the issuer, as well as the material terms 

of such trading arrangements; 

• Disclosure of whether the issuer has 

adopted (and if not, why) insider 

trading policies and procedures 

governing the purchase, sale, and other 

dispositions of the issuer’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; 

• Narrative disclosure of an issuer’s 

policies and practices on the timing of 

awards of stock options, SARs or similar 

instruments; and 

• Tabular disclosure of each option 

award granted to a named executive 

officer 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 contains material nonpublic 

information. 

In addition, the proposed 

amendments to Forms 4 and 5 would: 

• Add a Rule 10b5–1 checkbox to 

these that would require a Form 4 or 5 

filer to indicate whether a sale or 

purchase reported on that form was 

made pursuant to a Rule 10b5–1 trading 

arrangement. Filers would also be 

required to provide the date of adoption 

of the Rule 10b5–1 trading arrangement; 

• Add a second, optional checkbox to 

both of Forms 4 and 5 that would allow 

a filer to indicate whether a transaction 

reported on the form was made 

pursuant to a contract, instruction, or 

written plan that is not intended to 

satisfy the conditions of Rule 10b5– 

1(c)(1); and 

• Require the reporting of 

dispositions of bona fide gifts of equity 

securities on Form 4. 

We anticipate that the direct costs of 

preparing disclosure in response to the 

proposed amendments will likely be 

relatively small as such information will 

be readily available to companies. To 

the extent that the proposed disclosure 

requirements has 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 the proposed 

amendments may require the use of 

professional skills, including legal 

skills. We request comment on how the 

proposed disclosure amendments would 

affect small entities. 

E. Duplicative, Overlapping, or 

Conflicting Federal Rules 

Proposed Item 408(b) may partially 

duplicate and overlap with an existing 

disclosure requirement under Item 406 

of Regulation S–K, which requires an 

issuer 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. An issuer’s existing code of ethics 

may contain insider trading policies. In 

such instances, an issuer could crossreference to the particular components 

of its code of ethics that constitute 

insider trading policies and procedures 

in response to proposed Item 408(b)(2). 

Other than Item 408(b), the proposed 

amendments would not duplicate, 

overlap, or conflict with other Federal 

rules. 

We additionally note that in a 

separate release, we are, among other 

things, proposing rule and form 

amendments that would require an 

issuer to provide timely disclosure 

regarding repurchases of its equity 

securities, and disclosure of whether the 

repurchases was pursuant to a Rule 

10b5–1 plan. In connection with the 

potential adoption of these rules, we 

would plan to coordinate these 

rulemakings to avoid any duplication, 

overlap or conflict between the rules. 

F. Significant Alternatives 

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.232 The 

proposed disclosure amendments and 

the amendments to Rule 10b5–1(c)(1) 

are intended to provide greater 

transparency to investors and decrease 

information asymmetries between 

corporate insiders and outside investors 

and to deter potentially abusive and 

problematic practices associated with 

the use of Rule 10b5–1(c)(1) trading 

arrangements, grants of option awards, 

and the gifting of securities. 

Importantly, we anticipate the proposed 

amendments will work in tandem to 

significantly reduce improper insider 

trading through Rule 10b5–1(c)(1) 

trading arrangements. As discussed in 

above in Section IV, deterring insider 

trading will result in benefits for 

investor protection, capital formation, 

and orderly and efficient markets. By 

deterring insider trading, the 

amendments would disincentivize 

insider behavior that undermines 

investor confidence and harms the 

securities markets. For these reasons, we 

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 

proposed amendments. 

With respect to using performance 

rather than design standards, the 

proposed amendments use a 

combination of design and performance 

standards in order to promote uniform 

compliance requirements for all 

registrants. We believe the proposed 

amendments would be more beneficial 

to investors and small entities if there 

are uniform requirements that must be 

satisfied for a trading arrangement to be 

eligible for the Rule 10b5–1(c)(1) 

affirmative defense and specific 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8727 

233Public Law 104–121, Title II, 110 Stat. 857 

(1996). 

disclosure requirements that apply to all 

registrants. In addition, the proposed 

disclosure amendments should result in 

more comprehensive and clear 

disclosure. 

G. Request for Comments 

We encourage the submission of 

comments with respect to any aspect of 

this Initial Regulatory Flexibility 

Analysis. In particular, we request 

comments regarding: 

• The number of small entity issuers 

that may be affected by the proposed 

amendments; 

• The existence or nature of the 

potential impact of the proposed 

amendments on small entity issuers 

discussed in the analysis; 

• How the proposed amendments 

could further lower the burden on small 

entities; and 

• How to quantify the impact of the 

proposed amendments. 

Please describe the nature of any 

impact and provide empirical data 

supporting the extent of the impact. 

Such comments will be considered in 

the preparation of the Final Regulatory 

Flexibility Analysis, if the proposed 

amendments are adopted, and will be 

placed in the same public file as 

comments on the proposed amendments 

themselves. 

VII. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (‘‘SBREFA’’),233 the Commission 

must advise OMB as to whether the 

proposed amendments constitute a 

‘‘major’’ rule. Under SBREFA, a rule is 

considered ‘‘major’’ where, if adopted, it 

results, or is likely to result, in: 

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment or innovation. 

We request comment on whether the 

proposed amendments would be a 

‘‘major rule’’ for purposes of SBREFA. 

We solicit comment and empirical data 

on: (a) the potential effect on the U.S. 

economy on an annual basis; (b) any 

potential increase in costs or prices for 

consumers or individual industries; and 

(c) any potential effect on competition, 

investment or innovation. Commenters 

are requested to provide empirical data 

and other factual support for their views 

to the extent possible. 

VIII. Statutory Authority 

The amendments contained in this 

release are being proposed 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), 

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. 

For the reasons set out in the 

preamble, the Commission proposes to 

amend 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 

■ 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). 

■ 2. Further amend § 229.402, as 

proposed to be amended at 80 FR 26330 

(May 7, 2015) and 80 FR 41144 (July 14, 

2015), by adding paragraph (x) to read 

as follows: 

§ 229.402 (Item 402) Executive 

compensation. 

* * * * * 

(x) Narrative disclosure of the 

registrant’s policies and practices 

related to the grant of equity awards in 

coordination with the release of 

material nonpublic information. (1) 

Discuss the registrant’s policies and 

practices on the timing of awards of 

stock options, SARs or similar 

instruments in relation to the disclosure 

of material nonpublic information by 

the registrant, including how the board 

determines when to grant options (for 

example, whether 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 an award, 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. 

(2)(i) If during the last completed 

fiscal year, a grant of stock options, 

SARs or similar instruments was 

awarded to a named executive officer 

within a 14-day period before or after 

the filing of a periodic report on Form 

10–Q or Form 10–K, an issuer share 

repurchase, or the filing or furnishing of 

a current report Form 8–K that discloses 

material nonpublic information 

(including earnings information), 

provide the information specified in 

paragraph (x)(2)(ii) of this section, 

concerning each such award for each of 

the named executive officers on an 

aggregated basis in the following tabular 

format: 

Name Grant date 

Number of 

securities 

underlying the 

option award 

Exercise or strike 

price of option 

award 

($/Sh) 

Grant date fair 

value of stock 

and option award 

Market value of the securities underlying award 

one trading day before 

disclosure of material 

nonpublic information 

Market value of the securities underlying award 

one trading day after disclosure of material 

nonpublic information 

(a) (b) (c) (d) (e) (f) (g) 

PEO 

PFO 

A 

B 

C 


lotter on DSK11XQN23PROD with PROPOSALS2
8728 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

(ii) The Table shall include: 

(A) The name of the executive officer 

(column (a)); 

(B) On an award-by-award basis, the 

grant date for option awards reported in 

the table (column (b)); 

(C) On an award-by-award basis, the 

number of securities underlying the 

options (column (c)); 

(D) The per-share exercise or strike 

price of the option award (column (d)); 

(E) On an award-by-award basis, the 

grant date fair value of each equity 

award computed in accordance with 

Financial Accounting Standards Board 

(FASB) Accounting Standards 

Codification (ASC) Topic 718 (column 

(e)); 

(F) If the award was made within 14 

calendar days before the filing of a 

periodic report on Form 10–Q or Form 

10–K, 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), disclose for each 

instrument reported in column (c), the 

market value of the securities 

underlying the award the trading day 

before disclosure of material nonpublic 

information (column (f)); and 

(G) If the award was made within 14 

calendar days after the filing of a 

periodic report on Form 10–Q or Form 

10–K, an issuer share repurchase, or the 

filing or furnishing of a current Form 8– 

K that discloses material nonpublic 

information, disclose for each 

instrument reported in column (c), the 

market value securities underlying the 

award the trading day after disclosure of 

material nonpublic information (column 

(g)). 

Instruction 1 to Item 402(x)(2). 1. A 

registrant that is a smaller reporting 

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 executive officers at the end 

of the last completed fiscal year. 

2. Compute the market value of stock 

reported in column (f) by multiplying 

the closing market price of the 

registrant’s stock at the end of the 

trading day before the disclosure of 

material nonpublic information by the 

number of shares or units of stock or the 

amount of equity incentive plan awards, 

respectively. Compute the market value 

of stock reported in column (g) by 

multiplying the closing market price of 

the registrant’s stock at the end of the 

trading day after the disclosure of 

material nonpublic information by the 

number of shares or units of stock or the 

amount of equity incentive plan awards, 

respectively. 

(3) Provide the disclosure required by 

this paragraph (x) 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. 

* * * * * 

■ 3. Add § 229.408 to read as follows: 

§ 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), the registrant 

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 § 240.10b5–1(c) of this 

chapter (Rule 10b5–1(c)), and provide a 

description of the material terms of the 

contract, instruction or written plan, 

including: 

(i) The date of adoption or 

termination; 

(ii) The duration of the contract, 

instruction or written plan; and 

(iii) The aggregate amount of 

securities to be sold or purchased 

pursuant to the contract, instruction or 

written plan. 

(2) 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 § 240.16a–1(f) of 

this chapter) 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 the contract, instruction or 

written plan including: 

(i) The name and title of the director 

or officer; 

(ii) The date on which the director or 

officer adopted or terminated the 

contract, instruction or written plan; 

(iii) The duration of the contract, 

instruction or written plan; and 

(iv) The aggregate number of 

securities to be sold or purchased 

pursuant to the contract, instruction or 

written plan. 

(3) Provide the disclosure required by 

this paragraph (a) 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. 

Note 1 to paragraph (a). As specified 

in 17 CFR 240.10b5–1, any modification 

or amendment to a prior contract, 

instruction, or written plan is deemed to 

be the termination of such prior 

contract, instruction, or written plan, 

and the adoption of a new contract, 

instruction, or written plan. 

(b)(1) 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 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, 

disclose such policies and procedures. 

(3) Provide the disclosure required by 

this paragraph (b) in an Interactive Data 

File as required by Rule 405 of 

Regulation S–T in accordance with the 

EDGAR Filer Manual. 

PART 232—REGULATION S–T — 

GENERAL RULES AND REGULATIONS 

FOR ELECTRONIC FILINGS 

■ 4. 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, 7201 et seq.; and 18 U.S.C. 

1350, unless otherwise noted. 

* * * * * 

■ 5. Amend § 232.405 by: 

■ a. Removing the word ‘‘and’’ at the 

end of paragraph (b)(1)(i); 

■ b. In paragraph (b)(1)(ii), removing 

‘‘Article 12 of Regulation S–X 

(§§ 210.12–01–210.12–29)’’ and the 

period at the end of the paragrpah and 

adding ‘‘§§ 210.12–01 through 210.12– 

29 of this chapter (Article 12 of 

Regulation S–X)’’ and ‘‘; and’’ in their 

places, respectively; 

■ c. Adding paragraph (b)(1)(iii); 

■ d. Removing the word ‘‘and’’ at the 

end of paragraph (b)(3)(i)(A); 

■ e. Adding the word ‘‘and’’ at the end 

of paragraph (b)(3)(i)(B); and 

■ f. Adding paragraphs (b)(3)(i)(C) and 

(b)(4). 

The additions read as follows: 

§ 232.405 Interactive Data File 

submissions. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) The disclosure set forth in 

paragraph (b)(4) of this section. 

* * * * * 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8729 

(3) * * * 

(i) * * * 

(C) The disclosure set forth in 

paragraph (b)(4) of this section; 

* * * * * 

(4) An Interactive Data File must 

consist of the disclosures provided 

under 17 CFR part 229 (Regulation S– 

K) and related provisions that are 

required to be tagged, including, as 

applicable: 

(i) Section 229.402(x)(2) of this 

chapter (Item 402(x)(b) of Regulation S– 

K); 

(ii) Section 229.408(a)(3) of this 

chapter (Item 408(a)(3) of Regulation S– 

K); and 

(iii) Section 229.408(b)(3) of this 

chapter (Item 408(b)(3) of Regulation S– 

K). 

* * * * * 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 6. 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. 

* * * * * 

■ 7. Amend § 240.10b5–1 by: 

■ a. Removing the Preliminary Note; 

and 

■ b. Revising paragraphs (a), (b), and 

(c)(1). 

The revisions read as follows: 

§ 240.10b5–1 Trading ‘‘on the basis of’’ 

material nonpublic information in insider 

trading cases. 

(a) Manipulative or deceptive devices. 

The ‘‘manipulative or deceptive devices 

or contrivances’’ prohibited by Section 

10(b) of the Act (15 U.S.C. 78j) and 

§ 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 this 

section does not modify the scope of 

insider trading law in any other respect. 

(c) Affirmative defenses. (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 and operated in good 

faith and not as part of a plan or scheme 

to evade the prohibitions of this section; 

(B) If the person who entered into the 

contract, instruction, or plan is a 

director or officer (as defined in 

§ 240.16a–1(f) (Rule 16a–1(f)) of the 

issuer, no purchases or sales occur until 

expiration of a cooling-off period of at 

least 120 days after the date of the 

adoption of the contract, instruction, or 

plan; if the person who entered into the 

contract, instruction, or plan is the 

issuer of the securities, no purchases or 

sales occur until expiration of a coolingoff period of at least 30 days after the 

date of the adoption of the contract, 

instruction, or plan; 

(C) If the person who entered into the 

contract, instruction, or plan is a 

director or officer (as defined in Rule 

16a–1(f) of the issuer (or a subsidiary of 

such issuer) of the securities, such 

director or officer on the date of 

adoption of the contract, instruction, or 

plan has promptly furnished to the 

issuer a written certification that they 

are not aware of any material nonpublic 

information about the security or issuer 

or any subsidiary of the issuer; and 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; 

Instruction 1 to paragraph (c)(1)(ii)(C). 

Officers and directors seeking to rely on 

the affirmative defense should retain a 

copy of the certification provided to the 

issuer for a period of ten years after 

providing such certification. 

(D) The person who entered into the 

contract, instruction, or plan, has no 

outstanding (and does not subsequently 

enter into an additional) contract, 

instruction, or plan for open market 

purchases or sales of the same class of 

securities; and 

(E) If the contract, instruction, or plan 

is designed to effect the 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 executed a contract, instruction, 

or plan that effected the purchase or sale 

of the total amount of securities in a 

single transaction. 

Note 1 to paragraph (c)(1). For the 

purpose of this section, any 

modification or amendment to a prior 

contract, instruction, or written plan is 

deemed to be the termination of such 

prior contract, instruction, or written 

plan, and the adoption of a new 

contract, instruction, or written plan. 

* * * * * 


lotter on DSK11XQN23PROD with PROPOSALS2
8730 Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 

■ 8. Amend § 240.14a–101 by revising 

paragraph (b) introductory text of Item 

7 to read as follows: 

§ 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 (§§ 229.401, 

229.404(a) and (b), 229.405, 229.407, 

and 229.408(b) of this chapter), other 

than the information required by: 

* * * * * 

■ 9. Amend § 240.16a–3 by revising 

paragraphs (f)(1)(i)(A) and (g)(1) to read 

as follows: 

§ 240.16a–3 Reporting transactions and 

holdings. 

* * * * * 

(f) * * * 

(1) * * * 

(i) * * * 

(A) Exercises and conversions of 

derivative securities exempt under 

either § 240.16b–3 or § 240.16b–6(b), 

dispositions by bona fide gifts exempt 

under § 240.16b–5, and any transaction 

exempt under § 240.16b–3(d), (e), or (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 § 240.16b–3(d), (e), or (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 

■ 10. The general authority citation for 

part 249 continues to read 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. 

* * * * * 

■ 11. Amend Form 4 (referenced in 

§ 249.104) by: 

■ a. Adding new General Instruction 10; 

and 

■ b. Adding text and two check boxes 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. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 4 

* * * * * 

General Instructions 

* * * * * 

Rule 10b5–1(c) and Non-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 satisfies the conditions 

of Rule 10b5–1(c) under the Exchange 

Act [§ 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. 

If a transaction was made pursuant to 

a contract, instruction or written plan 

for the purchase or sale of equity 

securities of the issuer that did not 

satisfy the conditions of Rule 10b5–1(c), 

a reporting person may elect to check 

the optional non-Rule 10b5–1(c) box 

appearing on this Form. 

* * * * * 

b Check this box to indicate that a 

transaction was made pursuant to Rule 

10b5–1(c). See Instruction 10. 

b A reporting person may elect to 

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 did not satisfy the 

conditions of Rule 10b5–1(c) under the 

Exchange Act. See Instruction 10. 

* * * * * 

■ 12. Amend Form 5 (referenced in 

§ 249.105) by: 

■ a. Adding new General Instruction 10; 

and 

■ b. Adding text and two check boxes 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. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 5 

* * * * * 

General Instructions 

* * * * * 

Rule 10b5–1(c) and Non-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 satisfies the conditions 

of Rule 10b5–1(c) under the Exchange 

Act [§ 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. 

If a transaction was made pursuant to 

a 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), 

a reporting person may elect to check 

the optional non-Rule 10b5–1(c) box 

appearing on this Form. 

* * * * * 

b Check this box to indicate that a 

transaction was made pursuant to Rule 

10b5–1(c). See Instruction 10. 

b A reporting person may elect to 

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 did not satisfy the 

conditions of Rule 10b5–1(c) under the 

Exchange Act. See Instruction 10. 

* * * * * 

■ 13. Amend Form 20–F (referenced in 

§ 249.220f) by adding new Item 16J to 

read as follows: 

Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

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 

listing standards. If the registrant has 

not adopted such policies and 


lotter on DSK11XQN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 31 / Tuesday, February 15, 2022 / Proposed Rules 8731 

procedures, explain why it has not done 

so. 

(b) If the registrant has adopted 

insider trading policies and procedures, 

disclose such policies and procedures. 

(c) Provide the disclosure required by 

Item 16J 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. 

* * * * * 

■ 14. Amend Form 10–Q (referenced in 

§ 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. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

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)). 

* * * * * 

■ 15. Amend Form 10–K (referenced in 

§ 249.310) by revising 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. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

Form 10–K 

* * * * * 

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 of Regulation S–K 

(§ 229.401, § 229.405, § 229.406, 

§ 229.407(c)(3), (d)(4), (d)(5), and 

§ 229.408 of this chapter). 

* * * * * 

By the Commission. 

Dated: January 13, 2022. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2022–01140 Filed 2–14–22; 8:45 am] 

BILLING CODE 8011–01–P 


lotter on DSK11XQN23PROD with PROPOSALS2