[Federal Register Volume 87, Number 31 (Tuesday, February 15, 2022)]
[Proposed Rules]
[Pages 8686-8731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01140]



[[Page 8685]]

Vol. 87

Tuesday,

No. 31

February 15, 2022

Part III





 Securities and Exchange Commission





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17 CFR Parts 229, 232 240, et al.





Rule 10b5-1 and Insider Trading; Proposed Rule

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

[[Page 8686]]


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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.

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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 [email protected]. 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:

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

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    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\
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    \1\ Affiliated Ute Citizens of Utah v. United States, 406 U.S. 
128, 151 (1972); accord Lorenzo v. SEC, 139 S. Ct. 1094, 1103 
(2019).
    \2\ The term ``corporate insider'' as used in this release, 
refers to officers and directors of an issuer.
    \3\ See 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.'').
    \4\ See Insider Trading Sanctions Act of 1984, Public Law 98-
376, 98 Stat. 1264; Insider Trading and Securities Fraud Enforcement 
Act of 1988, Public Law 100-704, 102 Stat. 4677, codified at Section 
21A of the Exchange Act, 15 U.S.C. 78u-1. Congress has enacted other 
laws that build on the insider trading prohibition. See, e.g., 
Section 20(d) of the Exchange Act [15 U.S.C. 78t(d)]; Section 20A of 
the Exchange Act [15 U.S.C. 78t-1]; STOCK Act, Public Law 112-105, 
126 Stat. 291.
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    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\
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    \5\ 15 U.S.C. 78j(b).
    \6\ Rule 10b-5, adopted pursuant to Section 10(b), prohibits the 
use of ``any device, scheme, or artifice to defraud''; the making of 
``any untrue statement of a material fact'' or the ``omi[ssion]'' of 
``a material fact necessary in order to make the statements made, in 
the light of the circumstances under which they were made, not 
misleading''; or ``any act, practice, or course of business which 
operates or would operate as a fraud or deceit upon any person.''
    \7\ See 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'').
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    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

[[Page 8688]]

designed solely for non-natural persons that trade.\11\
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    \8\ See 2000 Adopting Release supra note 7.
    \9\ A person is aware of material nonpublic information if they 
know, consciously avoid knowing, or are reckless in not knowing that 
the information is material and nonpublic. See SEC v. Obus, 693 F.3d 
276, 286-88, 293 (2d Cir. 2012); United States v. Gansman, 657 F.3d 
85, 91 n.7, 94 (2d Cir. 2011). 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.
    \10\ Rule 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).
    \11\ See 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.
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    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\
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    \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.
    \14\ See 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.
    \15\ See, 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.
    \16\ See, e.g., John P. Anderson, Anticipating a Sea Change for 
Insider Trading Law: From Trading Plan Crisis to Rational Reform, 
2015 Utah L. Rev. 339 (2015).; David 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.
    \17\ See 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'').
    \18\ The 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.
    \19\ See Recommendations of the Investor Advisory Committee 
Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (``IAC 
Recommendations''), at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf. The IAC 
also held a panel discussion regarding Rule 10b5-1 plans at its June 
10, 2021 meeting, at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=iac061021-2.
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    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.
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    \20\ See, e.g., William Hughes, Stock Option Spring-loading: An 
Examination of Loaded Justifications and New SEC Disclosure Rules, 
33 J. Corp. L. 777 (2008); Howland v. Kumar, 2019 Del. Ch. LEXIS 
221.
    \21\ See, 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.
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    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\
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    \22\ See 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.
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    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\
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    \23\ A 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.
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     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

[[Page 8689]]

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 Sarbanes-Oxley Act,\24\ 
and required to be tagged using Inline XBRL;
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    \24\ 15 U.S.C. 7241. See infra notes 52 and 53 and accompanying 
text.
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     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\
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    \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.
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    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:
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    \26\ See, 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.'').
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     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\
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    \27\ Rule 10b5-1(c)(1)(i)(C).
    \28\ Rule 10b5-1(c)(1)(ii).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \29\ According 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 Bonaim[eacute] 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.
    \30\ See, 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.
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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)

[[Page 8690]]

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\
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    \31\ See Rulemaking petition regarding Rule 10b5-1 Trading 
Plans, File No. 4-658 (Jan. 2, 2013) (``CII Rulemaking Petition'') 
at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf; Alan D. 
Jagolinzer, 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-fix-insider-trading-rules; IAC Recommendations, supra note 
19.
    \32\ See proposed note to Rule 10b5-1(c); and 2000 Adopting 
Release, supra note 8, at 51718, n 111.
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    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.
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    \33\ See the discussion at infra Section IV.B.1.
    \34\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \35\ Exchange 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 policy-making function, or any other person who performs 
similar policy-making functions for the issuer. Officers of the 
issuer's parent(s) or subsidiaries shall be deemed officers of the 
issuer if they perform such policy-making functions for the issuer.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \36\ This would include anyone who performs a policy-making 
function for the issuer. Id.
    \37\ See O'Hagan, 521, U.S. at 651-52; Chiarella, 445 U.S. at 
227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d Cir. 
2014). See also, Colby v. Klune, 178 F.2d 872 (2d Cir. 1949).
    \38\ See Fried Testimony supra note 17.
---------------------------------------------------------------------------

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 cooling-off 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?

[[Page 8691]]

    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 cooling-off 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\
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    \39\ The 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.
---------------------------------------------------------------------------

    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.
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    \40\ As 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \41\ See 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).
    \42\ See, e.g., O'Hagan, 521, U.S. at 651-52; Chiarella, 445 
U.S. at 227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d 
Cir. 2014).
---------------------------------------------------------------------------

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

[[Page 8692]]

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.
---------------------------------------------------------------------------

    \43\ See Selective Disclosure and Insider Trading, Release No. 
33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)].
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \44\ However, ``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.
---------------------------------------------------------------------------

    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 single-trade 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 one-time liquidity needs. The proposed limitation on single-
trade plans is intended to balance this legitimate use against 
potential for abuse.
---------------------------------------------------------------------------

    \45\ See Gaming the System, supra note 16. See also infra 
Section IV.B.
---------------------------------------------------------------------------

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?

[[Page 8693]]

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.
---------------------------------------------------------------------------

    \46\ See infra note 106 and accompanying text.
---------------------------------------------------------------------------

    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.
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    \47\ Form 144 (17 CFR 239.144) under the Securities Act contains 
a representation that is used by a filer of the form to indicate 
whether such person has adopted a written trading plan or given 
trading instructions to satisfy Rule 10b5-1. Form 144 is a notice 
form that must be filed with the Commission by an affiliate of an 
issuer who intends to resell restricted or ``control'' securities of 
that issuer in reliance upon 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)].
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    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\
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    \48\ Public 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 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.

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[[Page 8694]]

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:
    [cir] The date of adoption or termination; \50\
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    \50\ As 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.
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    [cir] The duration of the contract, instruction or written plan; 
and
    [cir] The aggregate amount of securities to be sold or purchased 
pursuant to the contract, instruction or written plan.
     Whether, during the registrant's last fiscal quarter, any 
director or officer 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:
    [cir] The name and title of the director or officer;
    [cir] The date on which the director or officer adopted or 
terminated the contract instruction or written plan;
    [cir] The duration of the contract instruction or written plan; and
    [cir] The aggregate number of securities to be sold or purchased 
pursuant to the contract, instruction or written plan.
    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 pre-
planned 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

[[Page 8695]]

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.
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    \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.
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    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.
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    \52\ See also Section 406 of the Sarbanes-Oxley Act of 2002 
(``SOX''), 15 U.S.C. 7264.
    \53\ See 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.
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    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 
cross-reference 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\
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    \55\ The Exchange Act does not require that a ``sale'' of 
securities be for value, and instead provides that the ``terms 
`sale' or `sell' each include any contract to sell or otherwise 
dispose of.'' 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.
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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

[[Page 8696]]

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\
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    \56\ This 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.
    \57\ See Inline XBRL Filing of Tagged Data, Securities Act 
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. 
Inline XBRL allows filers to embed XBRL data directly into an HTML 
document, eliminating the need to tag a copy of the information in a 
separate XBRL exhibit. Inline XBRL is both human-readable and 
machine-readable for purposes of validation, aggregation, and 
analysis. Id. at 40851.
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    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\
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    \58\ See Ownership Reports and Trading By Officers, Directors 
and Principal Security Holders, Release No. 34-28869 (Feb. 8, 1991) 
[56 FR 7242 (Feb. 21, 1991)].
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    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.
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    \59\ 17 CFR 240.16a-3(g).
    \60\ Form 5 is a year-end report to be used by any person who 
was an officer, director or a 10% beneficial owner during any 
portion of the issuer's fiscal year to disclose transactions and 
holdings that are exempt from Section 16(b) or that were required to 
be reported during the fiscal year, but were not.
    \61\ See Rule 144 Holding Period and Form 144 Filings, Release 
No. 33-10911 (Dec. 22, 2020) [86 FR 5063 (Jan. 19, 2021)] 
(``December 2020 Proposing Release'').
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    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\
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    \62\ See letters from Council of Institutional Investors (dated 
Mar. 18, 2021), Alan Jagolinzer (dated Mar. 10, 2021), and David 
Larcker et al. (dated Mar. 10, 2021), available at https://www.sec.gov/comments/s7-24-20/s72420.htm.
    \63\ Id.
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    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

[[Page 8697]]

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.
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    \64\ See S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934).
---------------------------------------------------------------------------

    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\
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    \65\ See, 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)].
    \66\ The term ``option'' includes stock options, SARs and 
similar instruments with option-like features. See 17 CFR 
229.402(a)(6).
    \67\ When the exercise price for an option is less than the fair 
market value of the underlying security, the option is ``in the 
money.'' If the exercise price and fair market value are the same, 
the option is ``at the money.'' If the exercise price is greater 
than the fair market value, the option is ``out of the money.''
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    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 
(``spring-loading'') can benefit executives with an option award that 
will likely be in-the-money as soon as the material nonpublic 
information is made public.\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\
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    \68\ 2006 Executive Compensation Release, supra note 65, at 
53164.
    \69\ See 17 CFR 229.402(b)(2)(iv) and 2006 Executive 
Compensation Release, supra note 65, at 53163-4.
    \70\ See 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 in-
the-money option award as having been granted at-the-money).
    \71\ See Allan Horwich, The Legality of Opportunistically Timing 
Public Company Disclosures in the Context of SEC Rule 10b5-1, 71 
Bus. Law. 1113, 1143 (2016) (noting that ``bullet-dodging'' occurs 
when a board delays the grant of an option until adverse material 
nonpublic information known to the board is disclosed, which reduces 
the market price and the option exercise price that is set at the 
time of the grant).
---------------------------------------------------------------------------

    In 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\
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    \72\ 2006 Executive Compensation Release, supra note 65, at 
53163.
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    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

[[Page 8698]]

within a certain time proximity of the release of material nonpublic 
information such as an earnings announcement.
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    \73\ Named executive officers include all individuals serving as 
the registrant's Principal Executive Officer (``PEO'') or Principal 
Financial Officer (``PFO'') during the last completed fiscal year, 
the registrant's three most highly compensated officers other than 
the PEO and PFO who were serving as executive officers at the end of 
the last completed fiscal year, and up to two additional individuals 
for whom disclosure would have been provided but for the fact that 
the individual was not serving as an executive officer at fiscal 
year-end. See Item 402(a)(3) of Regulation S-K.
---------------------------------------------------------------------------

    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\
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    \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)].
    \75\ Under 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \76\ Commission 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.
    \77\ While some companies provide earnings releases in advance 
of the corresponding Form 10-Q filings, many companies also issue 
earnings releases concurrently with their Form 10-Q filings.
---------------------------------------------------------------------------

    The proposed amendments are intended to provide shareholders a full 
and complete picture of any spring-loaded 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\
---------------------------------------------------------------------------

    \78\ The executive compensation disclosure requirements in Part 
III of Form 10-K may be incorporated by reference from a proxy or 
information statement involving the election of directors, if filed 
within 120 days of the end of the fiscal year. See Note 3 to General 
Instruction G(3) to Form 10-K.
    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \80\ This 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.
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    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\
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    \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.
    \82\ An 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.
    \83\ See Item 402(l) of Regulation S-K.
    \84\ See Item 402(m)(2) of Regulation S-K.
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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

[[Page 8699]]

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 16a-3(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\
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    \85\ A bona fide gift is a gift that is not required or inspired 
by any legal duty or that is in any sense a payment to settle a debt 
or other obligation, and 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).
    \87\ Rule 16b-5.
    \88\ Reports on Form 5 are due within 45 days after the issuer's 
fiscal year end, which potentially allows a delay of up to 410 days 
between a reportable transaction and the filing of the Form 5.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \89\ See Daisy Maxey, ``Improper `Insider Charitable Giving' Is 
Widespread, Study Says'', WALL ST. J., July 5, 2021, at https://www.wsj.com/articles/insider-charitable-giving-11625418315?mod=searchresults_pos1&page=1. See also supra note 55 
above.
    \90\ See 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).
---------------------------------------------------------------------------

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\
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    \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).
---------------------------------------------------------------------------

    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

[[Page 8700]]

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\
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    \95\ The discussion of broad economic considerations generally 
focuses on insider trading in stock, except where specified 
otherwise. To the extent that insiders benefit from the timing of 
option awards and gifts of stock around MNPI, some of the economic 
effects associated with insider trading also may be manifested in 
those contexts. For a detailed discussion of the economic 
considerations applicable to option award timing and insider gift 
timing, see infra Sections IV.D and IV.E.
    \96\ See infra note 187.
    \97\ See supra Section I.
    \98\ See 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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \99\ See 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).
    \100\ These 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).
---------------------------------------------------------------------------

    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

[[Page 8701]]

insider may exhibit short-termism in investment decisions, at the 
expense of shareholder value.\103\
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    \101\ See, 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.''
    \102\ See, 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'').
    \103\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \104\ See, 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. 
Bonaim[eacute] 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 long-term 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).
    \105\ See, 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \106\ See, 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \107\ See, 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).
---------------------------------------------------------------------------

    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

[[Page 8702]]

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\
---------------------------------------------------------------------------

    \108\ A 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).
---------------------------------------------------------------------------

    2. Certain Rule 10b5-1 plan \110\ trading practices may raise 
concerns about potential insider trading.
---------------------------------------------------------------------------

    \110\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \111\ See, 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.
    \112\ See, 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.'')
    \113\ For 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \114\ Studies have found evidence that changes in mandatory 
disclosure affect behavior. See, e.g., Elizabeth C. Chuk, Economic 
Consequences of Mandated Accounting Disclosures: Evidence from 
Pension Accounting Standards, 88(2) Accounting Review, 395-427 
(2013); Alice Adams Bonaim[eacute], Mandatory Disclosure and Firm 
Behavior: Evidence from Share Repurchases, 90(4) Accounting Review, 
1333-1362 (2015).
---------------------------------------------------------------------------

    Combined, the proposed amendments are expected to reduce the 
potential for insider trading through Rule 10b5-1

[[Page 8703]]

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.
---------------------------------------------------------------------------

    \115\ Form 144 must be filed with the Commission by an affiliate 
as a notice of the proposed sale of (restricted) securities when the 
amount to be sold under Rule 144 during any three-month period 
exceeds 5,000 shares or units or has an aggregate sales price in 
excess of $50,000. See https://www.investor.gov/introduction-investing/investing-basics/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.
    \116\ The 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.
---------------------------------------------------------------------------

    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

[[Page 8704]]

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).
---------------------------------------------------------------------------

    \117\ See 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 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.
    \118\ See Larcker et al. (2021).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \120\ See Defining the Fine Line: Mitigating Risk with 10b5-1 
Plans, Morgan Stanley/Shearman & Sterling LLP, available at https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf. The survey included public 
company members of the Society of Corporate Secretaries & Governance 
Professionals. The respondents and their practices related to Rule 
10b5-1 plans are not necessarily representative of all 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.
---------------------------------------------------------------------------

    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 six-month 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 post-insider 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 single-trade 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\
---------------------------------------------------------------------------

    \122\ 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.
    \123\ As 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.
---------------------------------------------------------------------------

    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 securitization-related assets during the 2007Q3-2008Q4 crisis 
period'' and, crucially for this analysis, that ``insiders avoid larger 
stock price losses through 10b5-1 plan sales than through non-plan 
sales.'' \125\ A different 2016 study presents ``evidence consistent 
with insiders using 10b5-1 plans to sell stock in

[[Page 8705]]

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\
---------------------------------------------------------------------------

    \124\ See Alan D. Jagolinzer, SEC Rule 10b5-1 and Insiders' 
Strategic Trade, 55(2) Management Science, 224-239 (2009).
    \125\ See Stephen G. Ryan, Jennifer Wu Tucker, and Ying Zhou 
Securitization and Insider Trading, 91(2) Accounting Review, 649-675 
(2016).
    \126\ 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).
    \127\ Id.
    \128\ Id.
    \129\ See 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.''
    \130\ See Joshua Mitts, Insider Trading and Strategic 
Disclosure, Columbia University (Working Paper) (2020).
    \131\ Id.
---------------------------------------------------------------------------

    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 one-month 
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 non-plan 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.
---------------------------------------------------------------------------

    \132\ See 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.
    \134\ 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).
    \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.
    \136\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \139\ See Alice Bonaim[eacute], 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.''
    \140\ The 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., non-machine-readable) nature of the disclosure, 
this estimate is approximate and may be over- or under-inclusive.
---------------------------------------------------------------------------

    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

[[Page 8706]]

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.
---------------------------------------------------------------------------

    \141\ But see infra note 157.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \142\ The 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.
---------------------------------------------------------------------------

    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 cooling-off 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 time-sensitive, we expect such a cooling-off period to 
effectively discourage officers and directors from adopting new or 
modified plans on the basis of MNPI.
---------------------------------------------------------------------------

    \143\ See, e.g., Larcker et al. (2021); see also supra note 126 
and accompanying text.
    \144\ See, 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/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/ (recommending that ``insiders wait 30 to 
90 days before selling stock under the trading plan for the first 
time''); David B.H. Martin, 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \145\ See Larcker et al. (2021), at p. 2.
    \146\ Id, at p. 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \147\ Id., at pp. 2-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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

[[Page 8707]]

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\
---------------------------------------------------------------------------

    \149\ As 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.
    \150\ A 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-wealth-management-group/documents/field/c/ca/capitol-wealth-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.
    \151\ But 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.
---------------------------------------------------------------------------

    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 ``one-off,'' 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.
---------------------------------------------------------------------------

    \152\ For 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 multi-trade 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \153\ See supra note 106 and accompanying and following text.
---------------------------------------------------------------------------

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

[[Page 8708]]

formation and may promote fair, orderly, and efficient markets.
---------------------------------------------------------------------------

    \154\ See Jesse M. Fried, Insider Trading via the Corporation, 
162(4) University of Pennsylvania Law Review, 801-840 (2014).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \156\ See Lisa Meulbroek, The Efficiency of Equity-Linked 
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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \157\ A 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-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf, supra note 120.
    \158\ See supra note 11.
---------------------------------------------------------------------------

    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.
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    \159\ Compensation 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 incentive-based 
compensation and their insiders hold larger equity incentives 
relative to firms that do not restrict insider trading''). Companies 
may also impose share ownership guidelines and holding requirements. 
See, e.g., Bradley W. Benson, 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-executive-stock-ownership-guidelines.html (finding that the percentage of Fortune 
100 companies that disclose ownership guidelines or holding 
requirements in any form was 87.6 percent in 2014); John R. Sinkular 
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-in-Stock-Ownership-Guidelines (finding 
that ``[e]ighty-five percent of respondents to the 2020 survey 
currently impose ownership guidelines on executives'').
    \160\ However, the likelihood of choosing a Rule 10b5-1 plan for 
a purchase is much lower than the likelihood of electing to use Rule 
10b5-1(c)(1) for a sale (with the caveats about data availability). 
One study noted that approximately 2.3 percent of purchases versus 
22.4 percent of sales were reported to be undertaken using Rule 
10b5-1 plans. See 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).
    \161\ See 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'').
---------------------------------------------------------------------------

    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

[[Page 8709]]

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.
---------------------------------------------------------------------------

    \162\ But see supra note 157.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \163\ See 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.
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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 open-market 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.
---------------------------------------------------------------------------

    \164\ For example, see supra note 150 and accompanying text 
(discussing company restrictions on multiple overlapping plans).
    \165\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    The proposed limitation on single-trade 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 single-trade plan.
---------------------------------------------------------------------------

    \166\ Single-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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \167\ See supra note 159 and accompanying and following text.
---------------------------------------------------------------------------

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

[[Page 8710]]

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.
---------------------------------------------------------------------------

    \168\ We 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/share-repurchases (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 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \170\ See 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 
Bonaim[eacute], 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).
    \171\ See supra note 11.
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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.
---------------------------------------------------------------------------

    \172\ See supra note 109.
---------------------------------------------------------------------------

    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

[[Page 8711]]

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.
---------------------------------------------------------------------------

    \173\ With the caveat about data availability, where Rule 10b5-
1(c)(1) use is reported, officers are far more likely to report 
trading under Rule 10b5-1 plans than directors.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \174\ See supra note 159 and accompanying and following text.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \175\ See 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).
    \176\ See supra notes 118-120 and accompanying and preceding 
text and supra note 168.
---------------------------------------------------------------------------

    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

[[Page 8712]]

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\
---------------------------------------------------------------------------

    \177\ See supra note 150 and accompanying text and supra note 
168.
    \178\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    The proposed amendments would also limit the availability of the 
affirmative defense in the case of single-trade 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 cooling-off 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\
---------------------------------------------------------------------------

    \179\ See supra note 152.
    \180\ See supra note 166.
---------------------------------------------------------------------------

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 cooling-off 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,

[[Page 8713]]

instruction, or written plan that did not satisfy the conditions of 
Rule 10b5-1(c).
---------------------------------------------------------------------------

    \181\ The discussion in this section referring to Item 408(b) 
also extends to the economic effects of related amendments to Form 
20-F that apply similar requirements to Form 20-F filers.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \182\ The estimate excludes registered investment companies and 
asset-backed securities issuers, which would not be subject to the 
proposed disclosures.
    \183\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \184\ The estimate is based on filings of Forms 4 and 5 during 
calendar year 2020 in Thomson Reuters/Refinitiv insiders dataset.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \185\ See also Section IV.A.
---------------------------------------------------------------------------

    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 large-scale 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

[[Page 8714]]

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.
---------------------------------------------------------------------------

    \186\ See 15 U.S.C. 7264(c).
    \187\ O'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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \188\ See Inline XBRL Filing of Tagged Data, Release No. 33-
10514 (June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]; 
Securities Offering Reform for Closed-End Investment Companies, 
Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 at 33318 (Jun. 1, 
2020)].
---------------------------------------------------------------------------

    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

[[Page 8715]]

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\
---------------------------------------------------------------------------

    \189\ See Share Repurchase Disclosure Modernization, Release No. 
34-93783 (Dec. 15, 2021).
    \190\ This 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \191\ Foreign 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.
    \192\ We 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).
---------------------------------------------------------------------------

    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

[[Page 8716]]

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.

[[Page 8717]]

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.
---------------------------------------------------------------------------

    \193\ Current filing requirements of Form 10-K permit filers to 
incorporate by reference executive compensation disclosures from a 
proxy or information statement involving the election of directors. 
See supra note 78. These estimates exclude registered investment 
companies and asset-backed securities issuers, which would not be 
subject to the proposed requirements.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \194\ See Executive Compensation and Related Person Disclosure, 
supra note 65.
    \195\ Id.
---------------------------------------------------------------------------

    Some studies have noted that the regulatory reforms of the early 
and mid-2000s have led to the decline, if not disappearance, of 
questionable option timing practices.\196\ However, there is some 
evidence that option spring-loading 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 post-2006 sub-periods.\200\
---------------------------------------------------------------------------

    \196\ Randall 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).
    \197\ See 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/hhrg-116-ba16-20200917-sd002.pdf, at pp. 2-5.
    \198\ See 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'').
    \199\ See Giulian Bianchi, Stock Options: From Backdating to 
Spring Loading, 59 Quarterly Review of Economics and Finance, 215-
221 (2016) (examining data through 2011).
    \200\ See 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).
---------------------------------------------------------------------------

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

[[Page 8718]]

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.
---------------------------------------------------------------------------

    \201\ Past studies have focused primarily on options. In this 
context, the same economic effects can be expected in the case of 
awards of SARs and similar instruments. For purposes of this 
analysis, the term ``option'' includes stock options, SARs and 
similar instruments with option-like features.
    \202\ See 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).
    \204\ Spring-loading can cause a call to be in-the-money when it 
would have otherwise been at-the-money, assuming favorable MNPI is 
about to be released. Everything else equal, the value of an in-the-
money call 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-the-money when it would have otherwise been out-of-the-
money, assuming negative MNPI is about to be released. Generally 
speaking, the value of an at-the-money call 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.
    \205\ See, 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 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \206\ See, 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 spring-loading 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 bullet-dodging.'' 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).
---------------------------------------------------------------------------

    Another potential benefit of the proposed disclosure is that, to 
the extent option grants around MNPI releases were not the result of a 
value-maximizing compensation policy but rather an outcome of agency 
conflicts (such as executives' attempts to extract additional 
compensation without drawing investor scrutiny to the full amount of 
such compensation),\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\
---------------------------------------------------------------------------

    \207\ One article notes that ``[t]here are, of course, 
constraints that check the extent to which the level and structure 
of executive compensation can deviate from what would be optimal for 
shareholders. . . To circumvent such pressures, managers will want 
to enhance their compensation as discreetly as possible. By 
`camouflaging' elements of their pay, managers can maximize their 
compensation while minimizing adverse reaction. Timing option grants 
is an especially attractive way to enhance executive compensation 
both because it is difficult to detect and because it has generally 
eluded attention.'' See 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.'').
    \208\ See, e.g., Jonathan J. 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, 444-445, 447 (2008).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \209\ See supra note 198 and accompanying and following text.
---------------------------------------------------------------------------

    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

[[Page 8719]]

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 bullet-dodging 
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).
---------------------------------------------------------------------------

    \210\ The proportion of companies that grant options to 
executives has declined substantially after the introduction of FAS 
123R in 2004 (now codified in Accounting Standards Codification 
Topic 718). See, e.g., Prevalence of Options Decreases as Companies 
Tie Awards to Performance, August 23, 2018, Equilar, available at 
https://www.equilar.com/press-releases/103-prevalence-of-options-decreases-as-companies-tie-awards-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)].
---------------------------------------------------------------------------

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 say-on-pay 
votes. Outside scrutiny in response to the proposed disclosure could 
cause companies to forgo spring-loading 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.
---------------------------------------------------------------------------

    \211\ See supra note 208.
    \212\ Companies 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.
---------------------------------------------------------------------------

    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 say-on-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\
---------------------------------------------------------------------------

    \213\ See supra note 192.
---------------------------------------------------------------------------

    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

[[Page 8720]]

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, pre- and post-filing prices might be more informative for 
assessing the effects of the MNPI release on the valuation of option 
awards made during a shorter window around the filing. Shortening 
(lengthening) the window under these alternatives would reduce 
(increase) the amount of information aggregated in one location about 
options granted in proximity to MNPI releases, potentially resulting in 
marginally less (more) informed investment and voting decisions.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 spring-loading 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.

[[Page 8721]]

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).
---------------------------------------------------------------------------

    \215\ The 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'').
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \216\ One 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).
---------------------------------------------------------------------------

    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 compliance-related 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?

[[Page 8722]]

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:
---------------------------------------------------------------------------

    \217\ 44 U.S.C. 3501 et seq.
    \218\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     Form 10-K (OMB Control No. 3235-0063);
     Form 10-Q (OMB Control No. 3235-0070);
     Schedule 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
---------------------------------------------------------------------------

    \219\ The 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \220\ The OMB PRA filing inventories represent a three-year 
average. These averages may not align with the actual number of 
filings in any given year.

     PRA Table 1--Estimated Paperwork Burden Effects of the Proposed
                               Amendments
------------------------------------------------------------------------
                                                       Estimated burden
       Proposed amendments          Affected forms         increase
------------------------------------------------------------------------
Item 402(x):
     Require disclosure   Forms 10-K * and    9 hour increase in
     of a registrant's policies    Schedules 14A,      compliance burden
     and practices on the timing   and 14C.            per form.
     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.
     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   Forms 10-K and 10-  15 hour increase
     of the adoption or            Q.                  in compliance
     termination of any                                burden per form.
     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.

[[Page 8723]]

 
     Require information
     to be reported using a
     structured data language.
Item 16J/Item 408(b):
     Require disclosure   Forms 20-F and 10-  4 hour increase in
     of whether the registrant     K * and Schedules   compliance burden
     has adopted (and if not,      14A, and 14C.       per form.
     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.
     Require information
     to be reported using a
     structured data language.
Form 4:
     Require reporting    Form 4............  0.5 hour increase
     of gifts of securities.                           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          Form 5............  0.25 hour increase
     checkbox to indicate that a                       in compliance
     sale or purchase reported                         burden per form.
     on the form was made
     pursuant to a Rule 10b5-
     1(c) plan, 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).
Rule 10b5-1(c)(1)(ii):
     Require directors    ..................  1.5 hour
     and officers (as defined in                       compliance burden
     Exchange Act Rule 16a-                            per
     1(f)), as a condition to                          certification.
     the affirmative defense, to
     promptly furnish to the
     issuer a written
     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.
---------------------------------------------------------------------------

    \221\ See supra note 116 and accompanying text.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \222\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $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.

[[Page 8724]]



  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                              Outside
           Form/schedule type              Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Forms 10-K, 10-Q, 20-F and Schedules 14A              75              25
 and 14C................................
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Estimated
                                            Number of       Estimated burden  Total incremental      Estimated         increase in       Total increase
             Form/schedule                  estimated        hour increase/      increase in        increase in          outside           in outside
                                             affected      affected response     burden hours     internal burden      professional       professional
                                            responses                                                  hours              hours            costs ($)
                                                (A) \223\                (B)    (C) = (A) x (B)        (D) = (C) x        (E) = (C) x   (F) = (E) x $400
                                                                                                    (allocation %)     (allocation %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------

    \223\ The number of estimated affected responses is based on the 
number of responses in the Commission's current OMB PRA filing 
inventory. The OMB PRA filing inventory represents a three-year 
average.

                                                           PRA Table 4--Requested Paperwork Burden Under the Proposed Amendments \224\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Current burden                           Program change                       Requested change in burden
                                                                --------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Increase  in
                           Form/sch.                               Current      Current      Current cost    Number of   Increase in     outside       Annual
                                                                    annual       burden         burden        affected     internal   professional   responses    Burden hours     Cost burden
                                                                  responses      hours                       responses      hours         costs
                                                                         (A)          (B)              (C)          (D)          (E)           (F)    (G) = (A)     (H) = (B) +  (I) = (C) + (F)
                                                                                                                                                                            (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------

    \224\ Figures in this table have been rounded to the nearest 
whole number.

[[Page 8725]]



    PRA Table 5--Requested Paperwork Burden for the New Collection of
                               Information
------------------------------------------------------------------------
                                         Proposed paperwork burden
    Collection of information    ---------------------------------------
                                   Annual  responses     Burden hours
                                                 (A)             (A) x 1
------------------------------------------------------------------------
Rule 10b5-1(c)(1)(ii)                          7,200               7,200
 Certification..................
------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \226\ 5 U.S.C. 601(6).
    \227\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
    \228\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
    \229\ 17 CFR 270.0-10(a).
    \230\ This 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.
    \231\ These 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.
---------------------------------------------------------------------------

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

[[Page 8726]]

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 cross-reference 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.
---------------------------------------------------------------------------

    \232\ See supra Section IV.
---------------------------------------------------------------------------

    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

[[Page 8727]]

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:
---------------------------------------------------------------------------

    \233\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     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

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

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
0
2. Further amend Sec.  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:


Sec.  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:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Market value of the         Market value of the
                                           Number of                                                 securities underlying       securities underlying
                                          securities      Exercise or strike    Grant date fair      award one trading day       award one trading day
      Name            Grant date        underlying the      price of option   value of stock and     before disclosure of         after disclosure of
                                         option award        award ($/Sh)        option award         material nonpublic          material  nonpublic
                                                                                                          information                 information
(a)               (b)                 (c)                 (d)                 (e)                 (f)                         (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PEO
PFO
A
B
C
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 8728]]

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


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

    (a)(1) Disclose whether, during the registrant's last fiscal 
quarter (the registrant's fourth fiscal quarter in the case of an 
annual report), 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 Sec.  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 Sec.  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

0
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.
* * * * *
0
5. Amend Sec.  232.405 by:
0
a. Removing the word ``and'' at the end of paragraph (b)(1)(i);
0
b. In paragraph (b)(1)(ii), removing ``Article 12 of Regulation S-X 
(Sec. Sec.  210.12-01-210.12-29)'' and the period at the end of the 
paragrpah and adding ``Sec. Sec.  210.12-01 through 210.12-29 of this 
chapter (Article 12 of Regulation S-X)'' and ``; and'' in their places, 
respectively;
0
c. Adding paragraph (b)(1)(iii);
0
d. Removing the word ``and'' at the end of paragraph (b)(3)(i)(A);
0
e. Adding the word ``and'' at the end of paragraph (b)(3)(i)(B); and
0
f. Adding paragraphs (b)(3)(i)(C) and (b)(4).
    The additions read as follows:


Sec.  232.405   Interactive Data File submissions.

* * * * *
    (b) * * *
    (1) * * *
    (iii) The disclosure set forth in paragraph (b)(4) of this section.
* * * * *

[[Page 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

0
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.
* * * * *
0
7. Amend Sec.  240.10b5-1 by:
0
a. Removing the Preliminary Note; and
0
b. Revising paragraphs (a), (b), and (c)(1).
    The revisions read as follows:


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

    (a) Manipulative or deceptive devices. The ``manipulative or 
deceptive devices or contrivances'' prohibited by Section 10(b) of the 
Act (15 U.S.C. 78j) and Sec.  240.10b-5 (Rule 10b-5) thereunder 
include, among other things, the purchase or sale of a security of any 
issuer, on the basis of material nonpublic information about that 
security or issuer, in breach of a duty of trust or confidence that is 
owed directly, indirectly, or derivatively, to the issuer of that 
security or the shareholders of that issuer, or to any other person who 
is the source of the material nonpublic information.
    (b) Awareness of material nonpublic information. Subject to the 
affirmative defenses in paragraph (c) of this section, a purchase or 
sale of a security of an issuer is on the basis of material nonpublic 
information for purposes of Section 10(b) and Rule 10b-5 if the person 
making the purchase or sale was aware of the material nonpublic 
information when the person made the purchase or sale. The law of 
insider trading is otherwise defined by judicial opinions construing 
Rule 10b-5 and 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 Sec.  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 cooling-
off 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.
* * * * *

[[Page 8730]]

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


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

* * * * *
    Item 7. * * *
    (b) The information required by Items 401, 404(a) and (b), 405, 407 
and 408(b) of Regulation S-K (Sec. Sec.  229.401, 229.404(a) and (b), 
229.405, 229.407, and 229.408(b) of this chapter), other than the 
information required by:
* * * * *
0
9. Amend Sec.  240.16a-3 by revising paragraphs (f)(1)(i)(A) and (g)(1) 
to read as follows:


Sec.  240.16a-3  Reporting transactions and holdings.

* * * * *
    (f) * * *
    (1) * * *
    (i) * * *
    (A) Exercises and conversions of derivative securities exempt under 
either Sec.  240.16b-3 or Sec.  240.16b-6(b), dispositions by bona fide 
gifts exempt under Sec.  240.16b-5, and any transaction exempt under 
Sec.  240.16b-3(d), (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 Sec.  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

0
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.
* * * * *
0
11. Amend Form 4 (referenced in Sec.  249.104) by:
0
a. Adding new General Instruction 10; and
0
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 [Sec.  240.10b5-1(c) of this chapter]. 
Provide the date of adoption of the Rule 10b5-1(c) plan in the 
``Explanation of Responses'' portion of the Form.
    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.
* * * * *
    [squ] Check this box to indicate that a transaction was made 
pursuant to Rule 10b5-1(c). See Instruction 10.
    [squ] 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.
* * * * *
0
12. Amend Form 5 (referenced in Sec.  249.105) by:
0
a. Adding new General Instruction 10; and
0
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

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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 [Sec.  240.10b5-1(c) of this chapter]. 
Provide the date of adoption of the Rule 10b5-1(c) plan in the 
``Explanation of Responses'' portion of the Form.
    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.
* * * * *
    [squ] Check this box to indicate that a transaction was made 
pursuant to Rule 10b5-1(c). See Instruction 10.
    [squ] 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.
* * * * *
0
13. Amend Form 20-F (referenced in Sec.  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

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

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

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)).
* * * * *
0
15. Amend Form 10-K (referenced in Sec.  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 (Sec.  229.401, Sec.  
229.405, Sec.  229.406, Sec.  229.407(c)(3), (d)(4), (d)(5), and Sec.  
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


