Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has issued proposed rules on disclosure of cybersecurity incidents.  Specifically, the SEC is proposing to:

  • Amend Form 8-K to add Item 1.05 to require registrants to disclose information about a cybersecurity incident within four business days after the registrant determines that it has experienced a material cybersecurity incident;
  • Amend Forms 10-Q and 10-K to require registrants to provide updated disclosure relating to previously disclosed cybersecurity incidents, as specified in proposed Item 106(d) of Regulation S-K. We also propose to amend these forms to require disclosure, to the extent known to management, when a series of previously undisclosed individually immaterial cybersecurity incidents has become material in the aggregate;
  • Amend Form 10-K to require disclosure specified in proposed Item 106 regarding:
    • A registrant’s policies and procedures, if any, for identifying and managing cybersecurity risks;
    • A registrant’s cybersecurity governance, including the board of directors’ oversight role regarding cybersecurity risks; and
    • Management’s role, and relevant expertise, in assessing and managing cybersecurity related risks and implementing related policies, procedures, and strategies.
  • Amend Item 407 of Regulation S-K to require disclosure about if any member of the registrant’s board of directors has cybersecurity expertise.
  • Amend Item 407 of Regulation S-K to require disclosure about if any member of the registrant’s board of directors has cybersecurity expertise.
  • Require that the proposed disclosures be provided in Inline XBRL.

Form 8-K Reporting

New Item 1.05 of Form 8-K will require a registrant to disclose the following information about a material cybersecurity incident, to the extent the information is known at the time of the Form 8-K filing:

  • When the incident was discovered and whether it is ongoing;
  • A brief description of the nature and scope of the incident;
  • Whether any data was stolen, altered, accessed, or used for any other unauthorized purpose;
  • The effect of the incident on the registrant’s operations; and
  • Whether the registrant has remediated or is currently remediating the incident.

The SEC is proposing to amend General Instruction I.A.3.(b) of Form S-3 and General Instruction I.A.2 of Form SF-3 to provide that an untimely filing on Form 8-K regarding new Item 1.05 would not result in loss of Form S-3 or Form SF-3 eligibility.

The SEC is also proposing to amend Rules 13a-11(c) and 15d-11(c) under the Exchange Act to include new Item 1.05 in the list of Form 8-K items eligible for a limited safe harbor from liability under Section 10(b) or Rule 10b-5 under the Exchange Act. In 2004, when the Commission adopted the limited safe harbor, the Commission noted its view that the safe harbor is appropriate if the triggering event for the Form 8-K requires management to make a rapid materiality determination.

Disclosure about Cybersecurity Incidents in Periodic Reports

Proposed Item 106(d)(1) of Regulation S-K would require registrants to disclose any material changes, additions, or updates to information required to be disclosed pursuant to Item 1.05 of Form 8-K in the registrant’s quarterly report filed with the Commission on Form 10-Q or annual report filed with the Commission on Form 10-K for the period (the registrant’s fourth fiscal quarter in the case of an annual report) in which the material change, addition, or update occurred.

In order to assist registrants in developing updated incident disclosure in its periodic reports, proposed Item 106(d)(1) provides the following non-exclusive examples of the type of disclosure that should be provided, if applicable:

  • Any material impact of the incident on the registrant’s operations and financial condition;
  • Any potential material future impacts on the registrant’s operations and financial condition;
  • Whether the registrant has remediated or is currently remediating the incident; and
  • Any changes in the registrant’s policies and procedures as a result of the cybersecurity incident, and how the incident may have informed such changes.

Disclosure of a Registrant’s Risk Management, Strategy and Governance Regarding Cybersecurity Risks

Risk Management and Strategy

Proposed Item 106(b) would require registrants to disclose its policies and procedures, if it has any, to identify and manage cybersecurity risks and threats, including: operational risk; intellectual property theft; fraud; extortion; harm to employees or customers; violation of privacy laws and other litigation and legal risk; and reputational risk.

Specifically, proposed Item 106(b) of Regulation S-K would require disclosure, as applicable, of whether:

  • The registrant has a cybersecurity risk assessment program and if so, provide a description of such program;
  • The registrant engages assessors, consultants, auditors, or other third parties in connection with any cybersecurity risk assessment program;
  • The registrant has policies and procedures to oversee and identify the cybersecurity risks associated with its use of any third party service provider (including, but not limited to, those providers that have access to the registrant’s customer and employee data), including whether and how cybersecurity considerations affect the selection and oversight of these providers and contractual and other mechanisms the company uses to mitigate cybersecurity risks related to these providers;
  • The registrant undertakes activities to prevent, detect, and minimize effects of cybersecurity incidents;
  • The registrant has business continuity, contingency, and recovery plans in the event of a cybersecurity incident;
  • Previous cybersecurity incidents have informed changes in the registrant’s governance, policies and procedures, or technologies;
  • Cybersecurity related risk and incidents have affected or are reasonably likely to affect the registrant’s results of operations or financial condition and if so, how; and
  • Cybersecurity risks are considered as part of the registrant’s business strategy, financial planning, and capital allocation and if so, how.

Governance

Proposed Item 106(c) would require disclosure of a registrant’s cybersecurity governance, including the board’s oversight of cybersecurity risk and a description of management’s role in assessing and managing cybersecurity risks, the relevant expertise of such management, and its role in implementing the registrant’s cybersecurity policies, procedures, and strategies.

Specifically, as it pertains to the board’s oversight of cybersecurity risk, disclosure required by proposed Item 106(c)(1) would include a discussion, as applicable, of the following:

  • Whether the entire board, specific board members or a board committee is responsible for the oversight of cybersecurity risks;
  • The processes by which the board is informed about cybersecurity risks, and the frequency of its discussions on this topic; and
  • Whether and how the board or board committee considers cybersecurity risks as part of its business strategy, risk management, and financial oversight.

Proposed Item 106(c)(2) would require a description of management’s role in assessing and managing cybersecurity-related risks and in implementing the registrant’s cybersecurity policies, procedures, and strategies. This description would include, but not be limited to, the following information:

  • Whether certain management positions or committees are responsible for measuring and managing cybersecurity risk, specifically the prevention, mitigation, detection, and remediation of cybersecurity incidents, and the relevant expertise of such persons or members;
  • Whether the registrant has a designated a chief information security officer, or someone in a comparable position, and if so, to whom that individual reports within the registrant’s organizational chart, and the relevant expertise of any such persons;
  • The processes by which such persons or committees are informed about and monitor the prevention, mitigation, detection, and remediation of cybersecurity incidents; and
  • Whether and how frequently such persons or committees report to the board of directors or a committee of the board of directors on cybersecurity risk.

Disclosure Regarding the Board of Directors’ Cybersecurity Expertise

The SEC proposes to amend Item 407 of Regulation S-K by adding paragraph (j) to require disclosure about the cybersecurity expertise of members of the board of directors of the registrant, if any. If any member of the board has cybersecurity expertise, the registrant would have to disclose the name(s) of any such director(s), and provide such detail as necessary to fully describe the nature of the expertise. The proposed Item 407(j) disclosure would be required in a registrant’s proxy or information statement when action is to be taken with respect to the election of directors, and in its Form 10-K.

Proposed Item 407(j) would not define what constitutes “cybersecurity expertise,” given that such expertise may cover different experiences, skills, and tasks. Proposed Item 407(j)(1)(ii) does, however, include the following non-exclusive list of criteria that a registrant should consider in reaching a determination on whether a director has expertise in cybersecurity:

  • Whether the director has prior work experience in cybersecurity, including, for example, prior experience as an information security officer, security policy analyst, security auditor, security architect or engineer, security operations or incident response manager, or business continuity planner;
  • Whether the director has obtained a certification or degree in cybersecurity; and
  • Whether the director has knowledge, skills, or other background in cybersecurity, including, for example, in the areas of security policy and governance, risk management, security assessment, control evaluation, security architecture and engineering, security operations, incident handling, or business continuity planning.

Proposed Item 407(j)(2) would state that a person who is determined to have expertise in cybersecurity will not be deemed an expert for any purpose, including, without limitation, for purposes of Section 11 of the Securities Act, as a result of being designated or identified as a director with expertise in cybersecurity pursuant to proposed Item 407(j). This proposed safe harbor is intended to clarify that Item 407(j) would not impose on such person any duties, obligations, or liability that are greater than the duties, obligations, and liability imposed on such person as a member of the board of directors in the absence of such designation or identification.

 

The SEC has issued a rule proposal to reduce risks in the clearance and settlement of securities. Specifically, the proposed changes would:

  • Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1);
  • Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;
  • Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations; and
  • Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

Reducing time between the execution of a securities transaction and its settlement reduces risk. The standard settlement cycle for securities transactions was shortened from T+5 to T+3 in 1993, and from T+3 to T+2 in 2017. In each past instance, shortening the settlement cycle promoted investor protection, risk reduction, and increases in operational efficiency.

According to the SEC, two recent episodes of increased market volatility – in March 2020 following the outbreak of the COVID-19 pandemic, and in January 2021 following heightened interest in certain “meme” stocks – highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate.

The SEC has proposed comprehensive changes to Regulation 13D-G and Regulation S-T to modernize the beneficial ownership reporting requirements and improve their operation and efficacy. Specifically, the SEC has proposed to:

  • revise the current deadlines for Schedule 13D and Schedule 13G filings;
  • amend Rule 13d-3 to deem holders of certain cash-settled derivative securities as beneficial owners of the reference covered class;
  • align the text of Rule 13d-5, as applicable to two or more persons who act as a group, with the statutory language in Sections 13(d)(3) and (g)(3) of the Exchange Act;
  • set forth the circumstances under which two or more persons may communicate and consult with one another and engage with an issuer without concern that they will be subject to regulation as a group with respect to the issuer’s equity securities; and
  • require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

To address concerns that the current deadlines for Schedule 13D and Schedule 13G filings are creating information asymmetries in today’s market, the SEC has proposed to:

  • Revise the Rule 13d-1(a) filing deadline for the initial Schedule 13D to five days after the date on which a person acquires more than 5% of a covered class of equity securities;
  • Amend Rules 13d-1(e), (f) and (g) to shorten the filing deadline for the initial Schedule 13D required to be filed by certain persons who forfeit their eligibility to report on Schedule 13G in lieu of Schedule 13D to five days after the event that causes the ineligibility;
  • Revise the filing deadline under Rule 13d-2(a) for amendments to Schedule 13D to one business day after the date on which a material change occurs;
  • Amend Rules 13d-1(b) and (d) to shorten the deadline for the initial Schedule 13G filing for Qualified Institutional Investors (“QIIs”) and exempt investors to within five business days after the last day of the month in which beneficial ownership first exceeds 5% of a covered class;
  • Amend the deadline in Rule 13d-1(c), which permits passive investors to file an initial Schedule 13G in lieu of Schedule 13D within 10 days after acquiring beneficial ownership of more than 5% of a covered class, to five days after the date of such an acquisition;
  • Revise the filing deadlines required for amendments to Schedule 13G in Rule 13d-2(b) to five business days after the end of the month in which a reportable change occurs;
  • Amend Rule 13d-2(c) to shorten the filing deadline for Schedule 13G amendments filed pursuant to that provision to five days after the date on which beneficial ownership first exceeds 10% of a covered class, and thereafter upon any deviation by more than 5% of the covered class, with these requirements applying if the thresholds were crossed at any time during a month; and
  • Amend Rule 13d-2(d) to revise the filing deadline for Schedule 13G amendments filed pursuant to that provision from a “promptly” standard to one business day after the date on which beneficial ownership exceeds 10% of a covered class, and thereafter upon any deviation by more than 5% of the covered class.

In addition, instead of an amendment obligation arising for Schedule 13G filers upon the occurrence of “any change” in the facts previously reported regardless of the materiality of such change, the SEC has proposed to revise Rule 13d-2(b) to require that an amendment to a Schedule 13G be filed only if a “material change” occurs. Further, the SEC has proposed to amend Rule 13(a) of Regulation S-T to permit Schedules 13D and 13G, and any amendments thereto, that are submitted by direct transmission on or before 10 p.m. eastern time on a given business day to be deemed to have been filed on the same business day. This amendment would provide additional time for beneficial owners to prepare and submit their Schedule 13D or Schedule 13G filings.

According to the SEC, the proposed amendments would align the text of Rule 13d-5, as applicable to two or more persons who act as a group, with the statutory language in Sections 13(d)(3) and (g)(3) of the Exchange Act. By conforming the rule text to Sections 13(d)(3) and 13(g)(3), the proposed amendments to Rule 13d-5 are intended to remove the potential implication that an express or implied agreement among group members is a necessary precondition to the formation of a group under those provisions of the Exchange Act and, by extension, Regulation 13D-G. In connection with those proposed amendments, the SEC has proposed to add a new provision in Rule 13d-5 that would affirm that if a person, in advance of filing a Schedule 13D, discloses to any other person that such filing will be made and such other person acquires securities in the covered class for which the Schedule 13D will be filed, then those persons are deemed to have formed a group within the meaning of Section 13(d)(3).

In addition, the SEC has proposed amendments that would revise Rule 13d-6 to set forth additional exemptions from Sections 13(d) and (g). Specifically, new Rule 13d-6(c) would set forth the circumstances under which two or more persons may communicate and consult with one another and engage with an issuer without concern that they will be subject to regulation as a group with respect to the issuer’s equity securities.

More specifically, proposed Rule 13d-6(c) would provide that two or more persons will not be deemed to have acquired beneficial ownership of, or otherwise beneficially own, an issuer’s equity securities as a group solely because of their concerted actions related to an issuer or its equity securities, including engagement with one another or the issuer, provided they meet certain conditions. Such interactions, depending upon the level of coordination and degree to which the persons advocate in furtherance of a common purpose or goal, could be found to satisfy the “act as” a group standard under Section 13(d)(3) or 13(g)(3) for the purpose of “holding” a covered class. To help ensure that the exemption is available only where such persons independently determine to take concerted actions, the proposed exemption would be available only if such persons are not directly or indirectly obligated to take such actions (e.g., pursuant to the terms of a cooperation agreement or joint voting agreement).

The SEC has proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to:

  • Require new current reporting of certain events for large hedge fund advisers and advisers to private equity funds;
  • Decrease the reporting threshold for large private equity advisers; and
  • Revise reporting requirements for large private equity advisers and large liquidity fund advisers.

New Current Reporting for Large Hedge Fund Advisers and Advisers to Private Equity Funds

Currently, Form PF requires advisers to file Form PF months after their quarter- and yearends, depending on the size and type of private funds they advise.

The proposal would require large hedge fund advisers to file current reports within one business day of the occurrence of one or more reporting events with respect to their qualifying hedge funds pertaining to certain extraordinary investment losses, significant margin and counterparty default events, material changes in prime broker relationships, changes in unencumbered cash, operations events, and events associated with withdrawals and redemptions.

The proposal also would require advisers to private equity funds to file current reports within one business day of the occurrence of one or more reporting events pertaining to the execution of adviser-led secondary transactions, implementation of general partner or limited partner clawbacks, removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund.

The proposal is designed to allow the SEC and FSOC to receive more timely information about certain events that may signal distress at qualifying hedge funds and private equity funds or market instability.

Large Private Equity Adviser Reporting

The proposed amendments would reduce the threshold for reporting as a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management. According to the SEC, lowering this threshold will enable the Commission and FSOC to receive reporting from a similar proportion of the U.S. private equity industry based on committed capital as when Form PF was initially adopted.

Additionally, the proposal would amend section 4 of Form PF for large private equity advisers to gather more information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (“CPCs”) and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations.

The proposed amendments are designed to provide useful empirical data to FSOC to better assess the extent to which private equity funds or their advisers may pose systemic risk and to inform the Commission in its regulatory programs for the protection of investors.

Many persons and entities mail or otherwise provide to the SEC Divisions of Corporation Finance and Investment Management paper “courtesy copies” of materials that are filed or submitted via EDGAR, email, online form or other electronic method of communication. Registrants often send copies of electronically filed registration statements or marked copies of amendments to registration statements showing changes from previously submitted or filed versions.

Noting the above, the SEC announced the Divisions request that paper courtesy copies no longer be sent as a matter of course. Such paper copies should only be furnished at the request of the staff.

The SEC announced settled charges against formerly publicly-traded Leaf Group Ltd. for failing to adequately evaluate and disclose in its annual proxy statement the lack of independence of a director and a board committee as well as an “interlocking” board-of-directors relationship between that director and Leaf’s Chief Executive Officer.

According to the SEC’s order, Leaf made material misstatements in 2020 concerning the independence of a director and the existence of an interlocking relationship between that director and Leaf’s CEO. The order finds that Leaf materially misstated that the director was independent even though he served as Chief Financial Officer of another company, for which Leaf’s CEO served as a director and whose compensation committee Leaf’s CEO chaired. The order further finds that this “compensation committee interlock” disqualified the Leaf director as independent under the listing standards of the securities exchange on which Leaf’s stock traded and also required specific disclosure, under the SEC’s Regulation S-K, in Leaf’s proxy statement. According to the order, Leaf further materially misstated the independence of a special committee that it had established to explore strategic alternatives, including a possible sale of Leaf, and also failed to maintain, during the 2019-20 period, disclosure controls concerning director independence and interlocks.

Other interesting points of the SEC order are:

  • Leaf filed a Form 8-K with an attached press release announcing the conclusion of Leaf’s strategic review and materially misstating that the Strategic Review Committee had “consist[ed] of independent directors.” Although Leaf believed that all of the directors on the committee were independent under Delaware law, the Form 8-K did not reference any alternative definition for “independence” different from the NYSE standards previously referenced in Leaf’s 2020 Proxy Statement and Form 10-K.
  • Leaf did not maintain disclosure controls or procedures to identify and analyze potential director independence and interlock issues for disclosure in its proxy statements, Forms 10-K, and Forms 8-K during 2019 and 2020. Certain of Leaf’s procedures failed, resulting in the company not collecting information from directors that would reasonably have been expected to elicit information from which the company could have assessed director independence and compensation committee interlock disclosures requirements for its 2020 Form 10-K and 2020 Proxy Statement. For example, Leaf did not send and/or collect independence questionnaires from its CEO and the new director in advance of drafting the 2020 Proxy Statement, even though it had done so in advance of drafting the prior year’s proxy statement. Additionally, Leaf did not have a procedure for complying with its written Code of Business and Ethics, which required Leaf to present director conflicts to its board of directors for potential waiver and disclosure. The new director and Leaf’s CEO each separately asked Leaf’s counsel, by September 2019, whether the new director’s CFO position posed an independence problem, but the matter was not presented to Leaf’s board for consideration and potential disclosure as a conflict of interest.
  • Leaf’s board did not consider or pass a resolution determining which of its directors qualified as “independent” under NYSE listing standards until after its 2020 annual meeting even though the 2020 Proxy Statement materially misstated that it had already made such a determination. Also, Leaf’s board passed a resolution appointing the new director to Leaf’s audit committee in May 2020 without a contemporaneous collection or review of information to determine the New Director’s “independence” under NYSE standards, instead relying on Leaf’s outdated review from 2019.

Pursuant to the order, Leaf has agreed to cease and desist from violating the SEC’s disclosure-controls, proxy-disclosure, and reporting rules and to pay a penalty of $325,000.

Leaf did not admit or deny the SEC’s findings in the order.

 

ISS has announced the planned January 10 launch of a new data verification (DV) portal for U.S. corporations ahead of the 2022 annual meeting season. According to ISS, the launch represents a major expansion of ISS’ current DV program now used by many companies that are the subject of ISS’ proxy research and recommendations.

The program will, through a newly created portal, allow for verification of more than 400 governance and compensation datapoints, including those related to stock plans previously available for verification through the now-retired Equity Plan Data Verification platform. Datapoints available for verification are principally those used and reflected in ISS’ proxy research report on companies, including:

  • Individual director details such as name, gender, ethnicity, etc. (as disclosed)
  • Board and committee characteristics to include committee names, memberships, etc.
  • Individual executive pay figures including salary and bonus from the summary compensation table and grant details, equity plan details, gross-ups, etc.

Portal access will be via Governance Analytics, which is managed by ISS’ separate, wholly owned subsidiary, ISS Corporate Solutions Inc. (ICS). Company representatives now registered on the Governance Analytics platform will receive e-mail notification when a company’s 48-hour data verification window opens (to occur between the filing of a company’s definitive proxy statement and prior to publication of ISS’ benchmark proxy research report). Company representatives who have previously used Governance Analytics for data verification or downloading of complimentary proxy research reports may use the same login credentials previously used, while those new to Governance Analytics can write to the ICS support team here for platform access and to receive e-mail notification of the opening of their company’s data verification window.

ISS’ Governance QualityScore and Environmental & Social QualityScore data verification platforms will not be impacted by the new portal and remain active and available for use. Data verified through the new portal will, where applicable, be reflected in ISS’ Governance QualityScore and Environmental & Social QualityScore corporate profiles.

The SEC has proposed amendments to disclosure requirements regarding repurchases of an issuer’s equity securities that are registered under Section 12 of the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase.

Proposed Form SR

The SEC is proposing new Exchange Act Rule 13a-21 and Form SR that would require an issuer, including a foreign private issuer, to report any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to Exchange Act Section 12. The issuer would have to furnish a new Form SR before the end of the first business day following the day on which the issuer executes a share repurchase.

The Form SR would require the following disclosure in tabular format, by date, for each class or series of securities:

  • Identification of the class of securities purchased;
  • The total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
  • The average price paid per share (or unit);
  • The aggregate total number of shares (or units) purchased on the open market;
  • The aggregate total number of shares (or units) purchased in reliance on the safe harbor in 17 CFR 240.10b-18 (“Rule 10b-18”); and
  • The aggregate total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

Proposed Revisions to Item 703 and Form 20-F

The SEC is proposing to revise Item 703, with corresponding changes to Form 20-F, to require additional disclosure about an issuer’s share repurchases. Specifically, the SEC proposes to require an issuer to disclose:

  • The objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases;
  • Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions;
  • Whether it made its repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated; and
  • Whether purchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor.

The SEC is additionally proposing to require that issuers disclose if any of their officers or directors subject to the reporting requirements under Section 16(a) of the Exchange Act purchased or sold shares or other units of the class of the issuer’s equity securities that is the subject of an issuer share repurchase plan or program within 10 business days before or after the announcement of an issuer purchase plan or program by checking a box before the tabular disclosure of issuer purchases of equity securities.

Structured Data Requirement

The SEC is proposing to require issuers to tag information disclosed pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, and Form SR in a structured, machine-readable data language. Specifically, the SEC is proposing to require issuers to tag the disclosures in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. The proposed requirements would include detail tagging of quantitative amounts disclosed within the tabular disclosures in each of the aforementioned forms, as well as block text tagging and detail tagging of narrative and quantitative information disclosed in the footnotes to the tables required by Item 703 of Regulation S-K and Item 16E of Form 20-F.

The SEC has issued proposed amendments to Rule 10b5-1 and to related forms and disclosures.  The amendments are intended to address perceived abuses of Rule 10b5-1 plans. The amendments also address several other matters such as:

  • Mandatory disclosure of trades pursuant to a 10b5-1 plan on Form 4.
  • Requiring gifts to be reported on Form 4.
  • Disclosures regarding the timing of option grants and similar equity instruments shortly before or after the release of material nonpublic information

Cooling-Off Period

The SEC proposes to amend Rule 10b5-1(c)(1) to add as a condition to the availability of the affirmative defense to require that:

  • 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 Rule 16a-1(f)) before any purchases or sales under the new or modified trading arrangement; and
  • 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.

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.

Director and Officer Certifications

The SEC is 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 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 at the time of the adoption of a new/modified trading arrangement.

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.

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. The proposed amendments would not require a director, officer, or the issuer to file the certification with the SEC. 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.

Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and Single-Trade Arrangements

The SEC is 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.

In addition to restricting the use of multiple overlapping trading arrangements, the SEC is 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.

Requiring that Trading Arrangements be Operated in Good Faith

The SEC is proposing to amend Rule 10b5-1(c)(1)(ii) to add the condition that a contract, instruction, or plan be “operated” in good faith. The amendment is meant to address concerns such as 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.

Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

The SEC is proposing new Item 408 under Regulation S-K and corresponding amendments to Forms 10-Q and 10-K to require:

  • 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
  • Annual disclosure of a registrant’s insider trading policies and procedures.

The SEC is 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, the SEC is 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.

Quarterly Reporting of Rule 10b5- 1(c) and non-Rule 10b5-1(c) Trading Arrangements

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:
    • The date of adoption or termination;
    • The duration of the contract, instruction or written plan; and
    • 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:
    • The name and title of the director or officer;
    • The date on which the director or officer adopted or terminated the contract instruction or written plan;
    • The duration of the contract instruction or written plan; and
    • The aggregate number of securities to be sold or purchased pursuant to the contract, instruction or written plan.

Disclosure of Insider Trading Policies and Procedures

The SEC is 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, the registrant woule be required explain why it has not done so.

If the registrant has adopted insider trading policies and procedures, the registrant would be required to 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. Foreign private issuers would also be required to provide analogous disclosure in their annual reports pursuant to a new Item 16J in that form.

Structured Data Requirements

The SEC is 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 Filer Manual.

Identification of Rule 10b5-1(c) and non-Rule 10b5-1(c)(1) Transactions on Forms 4 and 5

The SEC is 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 adoption of the Rule 10b5-1 trading arrangement, and would have the option to provide additional relevant information about the reported transaction.

In addition, the SEC is 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).

Disclosure Regarding the Timing of Option Grants and Similar Equity Instruments Shortly before or after the Release of Material Nonpublic Information

The SEC proposes to revise Item 402 of Regulation S-K 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.

In addition, revised Item 402 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.

Reporting of Gifts on Form 4

The SEC is proposing to amend Exchange Act Rule 16a-3 to require the reporting of dispositions of bona fide gifts of equity securities on Form 4 instead of delayed reporting on Form 5. 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.

In November, 2021 the SEC Division of Corporation Finance announced it had rescinded Staff Legal Bulletin (“SLBs”) Nos. 14I, 14J and 14K after a review of staff experience applying the guidance in them.  Apparently as a result of this, the SEC staff announced it would again respond to no action requests.

The SEC staff issued this statement:

“In 2019, the Division’s staff discontinued the longstanding practice of responding to each shareholder proposal no-action request with a written letter.[1]  During the last two proxy seasons, the staff instead responded with a written letter only in limited instances and communicated the vast majority of responses via notations to a chart maintained on the Division’s website.

We have reconsidered this approach, and after review of the practice we believe that written responses will provide greater transparency and certainty to shareholder proponents and companies alike.  Beginning with the publication of this announcement, we will return to our prior practice and the staff will once again respond to each shareholder proposal no-action request with a written letter, similar to those issued in prior years.  Our response letters will be posted publicly on the Division’s website in a timely manner.  We will no longer communicate our responses via a chart, but we expect to publish a chart upon completion of the proxy season.”