An FAQ on Rule 10b5-1: What the amendments mean for insiders

In December 2022, the SEC adopted new amendments and requirements to finalize Rule 10b5-1, which governs prearranged trading plans used by company executives and other insiders¹ to provide an affirmative defense against insider trading liability.² The new rules include a “cooling-off period” and regulations for gifts of securities, among other new provisions.

Rule 10b5-1 plans permit insiders, such as board members, C-suite executives and others who might potentially possess material nonpublic information to buy or sell company stock without violating insider trading laws. These plans can be effective solutions for insiders who need to maintain ownership holding requirements or desire to partially divest out of their concentrated positions.

The amendments impose new requirements on insiders who implement Rule 10b5-1 plans, including:

• A “cooling-off” period before trading can begin under a new, or in certain cases, modified Rule 10b5-1 plan;
• A personal certification requirement;
• Prohibition of multiple overlapping plans and a limit of only one single-trade plan within a 12-month period; and
• Enhanced reporting requirements on Forms 4 and 5. ³

Here are answers to frequently asked questions on the new restrictions, disclosures and reporting requirements:

When do the new rules go into effect?

The final rules are effective February 27, 2023. Insiders are required to comply with the amendments to Forms 4 and 5 filed on or after April 1, 2023.

How do the new rules affect the Rule 10b5-1 plan I already have?

The amendments will not affect a Rule 10b5-1 plan in place before the effective date of the new rules. Legacy plans in place prior to February 27, 2023, will not need to be changed. However, if an existing plan is modified after the new rules are effective, the plan must then comply with the new requirements to ensure an affirmative defense against insider trading claims.

With the new cooling-off period, how long am I required to wait to trade?

It depends on whether you are a director, officer or other insider. The mandatory cooling-off period will range from 30 to 120 days before the first transaction may occur in a new or modified plan.

• Directors and officers: The later of (i) 90 days after plan adoption or modification; or (ii) two business days following disclosure of the company’s financial results in a Form 10-K or 10-Q for the fiscal quarter in which the plan was adopted or modified. The maximum cooling-off period is 120 days after the plan adoption date.
• Insiders other than directors, officers or issuers: 30-days after plan adoption or modification.

What do the new rules require I certify?

Directors and officers must personally certify and expressly include in a new or modified Rule 10b5-1 plan that they are:

• “Not aware of any material nonpublic information about the security or issuer” and
• “Adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of [Rule 10b5-1].”

In addition to the personal certification of good faith, the affirmative defense will only be available if an insider has “acted in good faith” throughout the duration of the plan.

Under the new rules, how many Rule 10b5-1 plans may I have in place at any given time?

In short, one. The new rules prohibit multiple, overlapping plans covering open market trades.

However, there are limited exceptions when multiple plans may be permitted:

• The use of more than one broker-dealer or other agent to execute trades as part of a single Rule 10b5-1 plan.
• When trades under a new Rule 10b5-1 plan do not begin until trades under a prior plan are complete or expire without execution.
• A Rule 10b5-1 plan to execute a sell-to-cover transaction (e.g., where the sale of securities is necessary to satisfy tax withholding obligations due to the vesting of compensatory awards).

Additionally, the new rules now limit insiders to one single-trade plan within a 12-month period.

What will I be required to report on Forms 4 and 5 when I buy, sell or gift my company stock?

Effective April 1, 2023, insiders will be required to indicate by checkbox whether a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). If so, insiders will be required to disclose the adoption date of the plan.

The new rules also accelerate the reporting of gifts. Bona fide gifts of securities must now be reported on Form 4 within two business days of the gift and may no longer be reported on a delayed basis (i.e., 45 days after a company’s fiscal year-end on Form 5 as previously permitted).

Why are gifts of my company stock now required to be reported on Form 4?

Before the SEC amended Rule 10b5-1, it was an open issue whether insider trading liability could exist on gifts of securities. Under the new rules, the SEC has clarified that a Rule 10b5-1 plan may be used for gifts of securities. The SEC takes the view that a gift of securities is not truly a gift when the donor is aware that the recipient will sell the securities soon after receipt. And if this happens when the donor is in possession of material non-public information, then the donor could be subject to insider trading liability. Given the SEC’s newly stated position, it is likely best for executive insiders to act with extreme caution and limit gifts to open trading windows or in a Rule 10b5-1 plan.

We can help

As you determine how best to transact in your company securities, we’re ready to help you navigate ever-changing laws and regulations. We frequently work with the general counsels of public companies to implement and execute Rule 10b5-1 plans in accordance with a company’s insider trading policy, and to ensure compliance with securities laws while aligning with your goals.

Contact your J.P. Morgan team to learn more about how we can help you manage your company stock holdings.

¹Section 16 of the Securities Exchange Act of 1934 defines insiders as directors, executive officers or stockholders who possess stock that directly or indirectly results in beneficial ownership of more than 10% of the company's common stock or other class of equity. Section 16(a) requires reporting of transactions by insiders, while Section 16(b) imposes recapture of profits from short-swing transactions.

²In 2000, the SEC codified Rule 10b5-1 to provide company insiders with an affirmative defense against insider trading claims when transactions in company securities are executed when the insider may be in possession of material non-public information. Full text of the final rules may be accessed on the SEC’s website in its adopting release: https://www.sec.gov/rules/final/2022/33-11138.pdf.

³SEC Form 4, Statement of Changes in Beneficial Ownership, must be filed within two business days of an insider transacting in company securities. SEC Form 5, Annual Statement of Changes in Beneficial Ownership of Securities, is generally due to the SEC no later than 45 days after the company’s fiscal year ends, and is only required from an insider when at least one transaction, because of an exemption or failure to report, was not reported during the year. Disclosure is mandatory and becomes public record upon filing.