The Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (the “Commission”) recently updated its interpretive guidance regarding Rule 10b5-1 trading plans. The Division published two new Compliance & Disclosure Interpretations (“C&DIs”), withdrew three previously issued C&DIs, and revised 18 more C&DIs regarding Rule 10b5-1 plans. The updated C&DIs largely align with the Commission’s 2022 amendments to Rule 10b5-1 under the Exchange Act, with many reflecting non-substantive edits to rule references. Below is a summary of the key takeaways from the updated Rule 10b5-1 C&DIs. The updated Rule 10b5-1 C&DIs, including comparisons to previously issued C&DIs that the Commission provided, have been compiled in Annex A.
New Question 120.33 – Number of Securities Sold in “Eligible Sell-to-Cover Transactions” Can Exceed Minimum Withholding Requirements
New Question 120.33 confirms prior statements by the Division’s staff[1] that “eligible sell-to-cover transactions” can provide for the sale of a number of securities in excess of the number necessary to satisfy minimum tax withholding obligations, as long as the number of securities to be sold was calculated in good faith. Rule 10b5-1(c)(1)(ii)(D) provides that an individual claiming the Rule 10b5-1(c) affirmative defense to insider trading cannot have more than one active Rule 10b5-1 plan at any given time nor effect more than one Rule 10b5-1 single-transaction plan during any 12-month period. Rule 10b5-1(c)(1)(ii)(D)(3) provides an exception to these overlapping plan and single-transaction plan restrictions for plans that provide for “eligible sell-to-cover transactions.” Rule 10b5-1(c)(1)(ii)(D)(3) defines “eligible sell-to-cover transactions” as a contract, instruction or plan authorizing the sale of “only such securities as are necessary to satisfy tax withholding obligations arising exclusively from the vesting of a compensatory award.”
New Question 120.33 states that in calculating the number of securities “necessary to satisfy tax withholding obligations,” individuals can rely on “good faith” calculations consistent with applicable tax law and accounting rules. Thus, a sell-to-cover Rule 10b5-1 plan will not lose its “eligibility” if the actual number of securities sold pursuant to the plan exceeds the minimum number of securities needed to satisfy applicable tax withholding requirements, as long as the number of securities was calculated in good faith.
New Question 120.32 – Self-Directed “Brokerage Window” Transactions in a 401(k) Plan Treated as “Open-Market” Plan Transactions
Rule 10b5-1(c)(1)(ii)(D) and (E) limit a person’s eligibility to maintain concurrent “open market” Rule 10b5-1 trading plans and to have more than one “single-transaction” “open market” trading plan during any 12 month period. New Question 120.32 confirms that Rule 10b5-1(c) transactions occurring through a self-directed “brokerage window” under a 401(k) plan will be treated as “open market” plan transactions, and thus need to satisfy all conditions of Rule 10b5-1(c)(1), including the Rule’s restrictions on overlapping and single-transaction plans, to qualify for the affirmative defense. As such, a plan participant relying on Rule 10b5-1(c) to purchase or sell employer shares in a self-directed “brokerage window” could not maintain another concurrent open-market Rule 10b5-1 trading plan. In contrast, Question 120.21 (addressed below) suggests that a 401(k) participant effecting purchases through a company stock fund can rely on Rule 10b5-1(c) without satisfying the requirements applicable to “open market” plans, and Question 120.30 (issued in August 2023) clarifies that a 401(k) plan administrator can purchase employer stock in the open market to make matching contributions to plan participants, and those transactions will not be treated as “open market” transactions by the employee so long as the purchases are “conducted at the direction of the plan administrator, and not at the direction of the plan participant.”
Revised Questions 120.21 and 120.22 – Payroll Deduction Purchases and Fund Switching Transactions Resulting in Purchases or Sales of Employer Stock in 401(k) Plans Must Satisfy Certain Conditions of Rule 10b5-1(c)(1)
Revised Questions 120.21 and 120.22 address 401(k) plans making use of payroll deductions and fund-switching transactions resulting in purchases or sales of employer stock. These C&DIs indicate that the Rule 10b5-1(c) affirmative defense is available to these transactions if certain requirements of Rule 10b5-1(c)(1) are met, including the good faith, cooling-off period and certification requirements (if applicable). Notably, the C&DIs do not indicate that the transactions have to satisfy the Rule’s restrictions on overlapping and single-transaction plans, suggesting that these transactions will not be treated as “open market” transactions.
Revised Questions 120.12, 120.15 and 120.16 – Additional Clarifications Regarding Use of Limit Orders in Rule 10b5-1 Plans
Revised Questions 120.12, 120.15 and 120.16 pertain to written Rule 10b5-1 plans implemented through the use of non-discretionary limit orders. Revised Question 120.12 clarifies that when such plans do not specify the dates that a limit order will be in force, the relevant date for the Rule 10b5-1(c) compliance analysis (including presumably the application of the “cooling off” period requirements under Rule 10b5-1(c)(ii)(B)) will be the date that the limit order instruction is placed with a broker. Revised Questions 120.15 and 120.16 also clarify that persons who have established such plans can effect additional sales through market orders without affecting the availability of the Rule 10b5-1(c)(1) safe harbor for such plans, though any modification or change to a standing limit order implementing a Rule 10b5-1 plan will be treated as a termination and entry into a new plan under Rule 10b5-1(c)(1)(iv). Although these C&DIs are focused on limit orders in Rule 10b5-1 plans, the same reasoning regarding the ability to conduct discretionary non-plan transactions while maintaining protections for transactions occurring under a Rule 10b5-1 plan should also apply to other types of Rule 10b5-1 plans.
Revised Question 120.18 and Withdrawn Question 120.19 – Additional Clarifications Regarding Terminations and Modifications
Revised Question 120.18 clarifies that the termination of a Rule 10b5-1 plan (or the cancellation of one or more transactions under the plan) could affect the availability of the Rule 10b5-1(c) defense for prior transactions made pursuant to the plan. The revised guidance notes that the termination or cancellation may call into question whether the plan was entered into in good faith and whether the person who entered into the plan has acted in good faith with respect to the plan, which are necessary conditions for establishing an affirmative defense under Rule 10b5-1(c).
The Division also withdrew its explanation under previously-issued Question 120.19 that cancelling one or more transactions under a plan would constitute a plan modification, as this question is now more directly addressed by Rule 10b5-1(c)(1)(iv), which provides that any change to the amount, price, or timing of the purchase or sale of the securities underlying a Rule 10b5-1 plan constitutes a termination of such plan and the adoption of a new plan.
We would like to thank Nathan Marak in our Washington, D.C. office for his work on this post.
[1] See Memorandum to Members of the ABA Subcommittee on Employee Benefits, Executive Compensation, and Section 16 (Feb. 9, 2024), available at www.thecorporatecounsel.net/member/Memos/MemoFiles/ABA_2024_15-28-50.pdf.