The Advisors' Blog

Yesterday, the SEC adopted amendments to “modernize” Rule 10b5-1 insider trading plans and related disclosures. Here’s the 2-page fact sheet and here’s John’s blog on TheCorporateCounsel.net about the primary aspects of the rule.

As contemplated by the proposal, the amendments also add a new subsection (x) to Item 402 of Regulation S-K, which creates new tabular disclosure requirements in Form 10-Ks, proxy & information statements for option awards that are granted close in time to the release of material nonpublic information. Item 402(x) also require narrative disclosure about related policies and procedures. Here’s more detail from the SEC’s adopting release:

– Narrative Disclosure: As proposed, the final rule will require companies to discuss their policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments in relation to the disclosure of material nonpublic information by the company.

– This includes how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the company has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.

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

– Tabular Disclosure: If, during the last completed fiscal year, stock options, SARs, and/or similar option-like instruments were awarded to an NEO within a period starting 4 business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information), and ending 1 business day after a triggering event, the company must provide the following information concerning each such award for the NEO on an aggregated basis in the tabular format set forth in the rule:

• The name of the NEO;

• The grant date of the award;

• The number of securities underlying the award;

• The per-share exercise price;

• The grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles; and

• The percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of material nonpublic information.

– A Form 8-K reporting only the grant of a material new option award under Item 5.02(e) does not trigger the tabular disclosure.

– The new narrative and tabular disclosures will need to be tagged in Inline XBRL format.

– A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.

The final rule shortens the time period during which an option or similar award would trigger the tabular disclosure – the SEC had proposed requiring disclosure for any grants made 14 days before MNPI was released, but reconsidered after reviewing comments on that point. That means things are a little easier than they could have been, but the new table and narrative will still require planning and thinking.

The final rules will become effective 60 days following publication of the adopting release in the Federal Register, which typically takes about a month. For the Section 16-related aspects of the rules, Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.

Companies will be required to comply with the new disclosure requirements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. That’s pretty convoluted, but for this equity award disclosure, I think it works out to all companies first providing it in the Form 10-K/proxy statement that’s filed in spring of 2025, for awards granted during 2024. Please correct me if I’m wrong! You can email me at liz@thecorporatecounsel.net.

– Liz Dunshee