single-trade plan restrictions) is expected to mitigate some of these
costs. Shortening the cooling-off period for officers and directors
relative to the proposal is expected to decrease some of the costs of
the rule for officers and directors.
---------------------------------------------------------------------------

    \438\ See Lisa Meulbroek, The Efficiency of Equity-Linked
Compensation: Understanding the Full Cost of Awarding Executive
Stock Options, 30 Fin. L. Mgmt. 5 (2001); see also infra note 442
and accompanying and following discussion.
---------------------------------------------------------------------------

    In general, the economic costs of the amendments to Rule 10b5-
1(c)(1) may be partly mitigated by the voluntary nature of the Rule
10b5-1(c)(1) affirmative defense. Insiders who find the amended
conditions to be too restrictive may elect not to rely on Rule 10b5-
1(c)(1). For example, some insiders may elect to make more
discretionary trades during open trading windows when they presumably
do not possess MNPI, while others may adopt trading arrangements not
reliant on amended Rule 10b5-1(c)(1). However, insiders that elect not
to rely on Rule 10b5-1(c)(1) may incur additional costs, such as a
potential increase in liability risk or cost of counsel 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
securities laws and regulations \439\ and a potential decrease in
flexibility to execute trades during pension blackout periods and any
``closed window'' periods that issuers may choose to impose.\440\ As an
important caveat, although the use of Rule 10b5-1(c)(1) is voluntary
under Commission regulations, some companies' insider trading policies
may require insiders to rely on Rule 10b5-1(c)(1).\441\
---------------------------------------------------------------------------

    \439\ In addition, Form 4 must be filed before the end of the
second business day following the day on which the transaction was
executed. Rule 16a-3(g)(2)(i) indicates that for transactions that
satisfy Rule 10b5-1(c), the date of execution is deemed to be the
date on which the executing broker notifies the reporting person of
the execution of the transaction.
    \440\ For example, trading under a Rule 10b5-1 plan is one of
the exceptions from the blackout periods imposed in Section 306 of
SOX. Section 306(a)(1) of SOX makes it unlawful for a director or
officer of an issuer of any equity security, directly or indirectly,
to purchase, sell or otherwise acquire or transfer any equity
security of the issuer during a pension plan blackout period with
respect to the equity security, if the director or executive officer
``acquires such equity security in connection with his or her
service or employment as a director or executive officer.'' Section
306(a)(2) permits an issuer, or a security holder of the issuer on
its behalf, to bring an action to recover any profits realized by a
director or executive from a transaction made in violation of
Section 306(a)(1). Rule 101(c)(2) of Regulation BTR [17 CFR
245.101(c)(2)] provides an exemption from Section 306(a)(1) for
transactions made pursuant to a trading arrangement that satisfies
the affirmative defense conditions of Rule 10b5-1(c). Officers and
directors trading other than under a Rule 10b5-1 plan would not get
this benefit.
    \441\ As noted above, a 2016 industry survey found that 17
percent of surveyed companies required the use of Rule 10b5-1 plans
for trading. See Morgan Stanley & Shearman & Sterling LLP, supra
note 384. A 2021 industry survey found that 13 percent of
respondents required the C Suite, while six percent required
directors to use Rule 10b5-1 plans for trading. See SCG 2021 Survey.
We recognize that the number of companies with such policies in
place may decrease after the rules become effective.
---------------------------------------------------------------------------

    Faced with the additional conditions on the use of Rule 10b5-1
plans, some insiders may seek to reduce their holdings of company
shares in general, such as by buying fewer shares (including
potentially greater reluctance to take advantage of DRIPs), 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.\442\ The amendments also will
make it more difficult for insiders to purchase company shares if they
wish to do so under a Rule 10b5-1 plan.\443\ Reduced insider equity
ownership may in turn affect 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 V.A above). In some cases, if
insiders have sufficient bargaining power, insiders facing illiquidity
risk may seek higher total pay to compensate for the trading
restrictions.\444\ Existing shareholders are expected to bear any costs
incurred by issuers due to potential shifts in executive compensation
in response to the new conditions of Rule 10b5-1(c)(1) (whether in the
form of additional compensation for insiders, or changes in
compensation structure that weaken insider incentives).
---------------------------------------------------------------------------

    \442\ Compensation committees may continue to award incentive
pay even if insiders may prefer to reduce exposure to the issuer's
equity. See, e.g., Darren T. Roulstone, The Relation Between
Insider-Trading Restrictions and Executive Compensation, 41 J. Acct.
Rsch. 525 (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 et
al., Stock Ownership Guidelines for CEOs: Do They (Not) Meet
Expectations?, 69 J. Banking Fin. 52 (2016); see also Executive
Stock Ownership Guidelines, Equilar (Mar. 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 & Don
Kokoskie, Stock Ownership Guideline Administration, 2020 Harv. L.
School Forum Corp. Gov. (June 11, 2020), available at https://corpgov.law.harvard.edu/2020/06/11/stock-ownership-guideline-administration/; NASPP, 5 Trends in Stock Ownership Guidelines,
(Dec. 15, 2020), available at https://www.naspp.com/blog/5-Trends-in-Stock-Ownership-Guidelines (finding that ``[e]ighty-five percent
of respondents to the 2020 survey currently impose ownership
guidelines on executives'').
    \443\ 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 Mavruk & Seyhun, supra note 19.
    \444\ See Darren T. Roulstone, The Relation Between Insider-
Trading Restrictions and Executive Compensation, 41 J. Acct. Rsch.
525 (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
Vand. L. Rev. 503 (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. However, we also
recognize that these provisions may interact with each other and
further reduce the attractiveness of Rule 10b5-1 plans to prospective
traders.
i. Cooling-Off Periods
    We recognize that the cooling-off period condition for officers and
directors will restrict their ability to purchase or sell shares
pursuant to a Rule 10b5-1 plan for the duration of the cooling-off-
period, imposing potentially significant costs on officers and
directors who seek to utilize the Rule 10b5-1(c)(1) affirmative
defense, as indicated by various commenters.\445\ As a result, some
insiders may choose not to rely on a Rule 10b5-1 plan for future
trading.\446\ A long cooling-off period may discourage insiders from
adopting Rule 10b5-1 plans and therefore result in larger, more
concentrated volumes of insider-directed trades taking place during
open-window periods rather than being spread out over the duration of
the Rule 10b5-1 plan, which could lead to increased market volatility,
as

indicated by various commenters.\447\ Insiders who 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 V.B.3
above.
---------------------------------------------------------------------------

    \445\ See supra note 52.
    \446\ But see supra note 441.
    \447\ See supra note 54.
---------------------------------------------------------------------------

    In a change from the proposal, the cooling-off period for the Rule
10b5-1 plans of officers and directors was revised from 120 days to the
later of (1) 90 days after the adoption of the Rule 10b5-1 trading plan
or (2) two business days following the disclosure of the issuer's
financial results for the completed fiscal period in which the plan was
adopted (which need not exceed 120 days after adoption or modification
of the plan). However, because trading during the three months
following adoption of a Rule 10b5-1 plan, or around earnings
announcements, is common based on available data summarized in Section
V.B.1 above, the amendments are likely to reduce officers' and
directors' ability to trade under Rule 10b5-1 plans compared to their
trading today, resulting in potential costs to insiders.\448\
---------------------------------------------------------------------------

    \448\ See Gaming the System, supra note 20; see also supra notes
379 through 381 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 384. A
2021 industry survey examining Rule 10b5-1 plan practices found that
51 percent of survey respondents had a cooling-off period of 30 days
and 67 percent of respondents reported cooling-offs of 60 days or
less. See SCG 2021 survey. Separately, because many issuers release
financial results prior to the filing of a Form 10-Q or 10-K, the
use of the filing of Form 10-Q or 10-K for purposes of identifying
the date of the disclosure of a domestic issuer's financial results
is expected to result in a longer minimum cooling-off period for the
officers and directors of the typical issuer, compared to using the
date of the issuance of a press release announcing earnings results,
resulting in less flexibility for the affected officers and
directors.
---------------------------------------------------------------------------

    In another change from the proposal, in response to suggestions of
several commenters,\449\ the final amendments include 30-day cooling-
off period as a condition of the affirmative defense for persons other
than the issuer that are not officers or directors. We recognize that
this change will result in additional costs for the affected persons,
particularly those rank-and-file employees and other individuals that
have a lower net worth and undiversified stockholdings and lack the
resources and access to alternative liquidity sources to absorb
unanticipated liquidity needs in the presence of the trading
restrictions in the final amendments. Such costs are expected to be
mitigated to a considerable extent by the shorter duration of the
cooling-off period for persons other than officers, directors, or the
issuer. Further, the costs relative to the baseline are expected to be
potentially more modest to the extent that the 30-day duration of the
cooling-off period is generally aligned with existing industry
practices.\450\ In the aggregate, such costs may be further alleviated
to the extent that persons other than officers, directors, or the
issuer may hold less stock or may be less likely to trade under Rule
10b5-1 plans.\451\
---------------------------------------------------------------------------

    \449\ See supra note 422.
    \450\ A 2016 industry survey found that 41 percent of
respondents had a 30-day cooling-off period and an additional eight
percent reported a cooling-off period exceeding 30 days. See supra
note 384. A 2021 industry survey found that 51 percent of
respondents had a 30-day cooling-off period and an additional 13
percent reported a cooling-off period exceeding 30 days. See SCG
2021 Survey. As a caveat, neither survey specifies whether the
cooling-off periods varied depending on the type of insider. As a
further caveat, survey respondents need not be representative of all
affected companies. Several commenters identified 30 days as a
common duration of the cooling-off period (similarly not noting
whether prevailing industry practices with regard to cooling-off
periods vary depending on the type of insider). See supra note 57
and accompanying text.
    \451\ But see supra note 424.
---------------------------------------------------------------------------

    The final amendments are also adding new paragraph (c)(1)(iv) that
states that a modification or change to the amount, price, or timing of
the purchase or sale of the securities underlying a Rule 10b5-1 plan is
treated as a termination of the plan and the adoption of a new plan,
and to the extent that insiders seek to continue to rely on the
affirmative defense, they would incur the costs associated with a new
cooling-off period. Other types of changes to Rule 10b5-1 plans would
not be treated as the adoption of a new plan and would not result in
those potential costs generally in line with the comments
received.\452\
---------------------------------------------------------------------------

    \452\ See supra note 80.
---------------------------------------------------------------------------

ii. Officer and Director Certifications
    The amendments introduce as a condition to the Rule 10b5-1(c)(1)
affirmative defense a new requirement that directors and officers
provide representation in the plan documents that, at the time of
adopting a new or modified Rule 10b5-1 plan: (1) they are not aware of
material nonpublic information about the issuer or its securities; and
(2) 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
Section 10(b) and Rule 10b-5. In a change from the proposal to
eliminate any additional burden that separate documentation may
create,\453\ officers and directors will be required to include the
certification in the plan documents as representations, rather than
provide a separate certification to the issuer. The final rules also do
not provide that officers and directors should retain the certification
for ten years, as was originally proposed. These changes are expected
to incrementally decrease the costs of compliance with the amendments
and avoid any potential costs that issuers might have chosen to incur
to develop systems or procedures to accept officer and director
certifications.
---------------------------------------------------------------------------

    \453\ See supra note 132.
---------------------------------------------------------------------------

    The incremental costs of this provision may be small to the extent
that officers and directors already avoid adopting Rule 10b5-1 plans
while aware of MNPI (for example, due to robust policies and procedures
related to officer and director trading or robust corporate governance
controls). Further, insiders may already make representations to that
effect to broker-dealers that administer the plans, as part of existing
industry practices.\454\ Nevertheless, we recognize that such
representations to broker-dealers may not be universal in practice or
uniform in substance today. We further recognize, consistent with the
concerns of commenters, that the certification condition may result in
increased costs for officers and directors, such as the cost of
consulting with legal counsel to help them analyze whether they have
MNPI and to comply with the certification requirement, which may in
some instances deter officers and directors from relying on Rule 10b5-
1(c)(1).\455\ To the extent that officers and directors forgo Rule
10b5-1 plans due to the certification requirement, they may incur
additional costs of trading outside of such plans (see V.B.3 above for
a more detailed discussion). The associated costs could also lead
officers and directors to potentially seek other compensation terms
with less equity exposure, which may result in additional costs to the
company and its shareholders.\456\
---------------------------------------------------------------------------

    \454\ See supra note 132.
    \455\ See supra note 131.
    \456\ See supra note 442 and accompanying and following text.
---------------------------------------------------------------------------

iii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1
Trading Arrangements
    We are adopting the restriction on multiple overlapping Rule 10b5-1
trading arrangements for open-market

trades, with certain modifications. This restriction is expected to
limit the affected plan participants' flexibility to use Rule 10b5-1
plans to purchase or sell their shares. In a change from the proposal,
we are adopting modifications to this condition that address the use of
multiple brokers in a Rule 10b5-1 plan and that permit an insider to
maintain two Rule 10b5-1 plans at the same time in certain
circumstances. These changes should decrease the incremental costs of
the amendments by preserving some flexibility for insiders that plan to
use a successive Rule 10b5-1 plan after the current Rule 10b5-1 plan
expires but wish to set it up before the first plan concludes as well
as for insiders that have established relationships with, or otherwise
prefer to utilize, multiple brokers. In another change from the
proposal which should further reduce the incremental costs for affected
insiders, the restriction will not apply to sell-to-cover transactions.
The effects of the multiple-plan restriction will be smaller for
insiders that can anticipate and consolidate most upcoming open-market
purchases and sales of securities into a single plan (e.g., utilizing
an algorithm-based strategy). As proposed, the restriction on multiple
overlapping plans will apply only to plans involving open-market
trades, which will enable insiders with purchases and sales planned,
for example, as part of employee benefit plans, ESOPs, or DRIPs, and
not involving open-market purchases or sales to avoid the cost of the
requirement. In a modification from the proposal, trades in different
classes of securities will not be excepted from the restriction on
multiple overlapping Rule 10b5-1 plans, consistent with a commenter's
suggestion.\457\ Compared to the proposal, this modification is
expected to limit flexibility for those plan participants that seek to
implement independent purchase or disposition strategies for different
share classes through separate, overlapping plans.
---------------------------------------------------------------------------

    \457\ See letter from NASAA. See also Roger M. White, Insider
Trading: What Really Protects U.S. Investors? 55 J. Fin. Quant.
Anal. 1305 (2020).
---------------------------------------------------------------------------

    We recognize that the multiple-plan restriction will impose costs
on affected insiders, as suggested by various commenters.\458\ While
some insiders may be able to meet different trading needs involving
open-market purchases or sales with a single plan, or through the
exceptions provided above for one successive plan, a plan executed by
multiple brokers, and sell-to-cover transactions, other insiders will
incur costs due to this restriction.\459\ For example, insiders may
have immediate liquidity or other trading needs involving open-market
transactions at different points in time that are difficult to
incorporate into a single plan, resulting in greater costs. Modifying a
single existing plan based on updated trading needs will initiate a new
cooling-off period, imposing costs on insiders in such cases.
Nevertheless, the incremental costs of the multiple-plan restriction
are expected to be limited for the affected insiders of companies that
already disallow such plans today.\460\ The incremental costs of the
multiple-plan restriction are also expected to be smaller for the
affected insiders of companies that allow trading arrangements that do
not rely on Rule 10b5-1(c)(1) and do not require the use of Rule 10b5-1
for insider trades.\461\ Nevertheless, as noted above, insiders that
maintain trading arrangements not reliant on Rule 10b5-1(c)(1) may
incur other costs.
---------------------------------------------------------------------------

    \458\ See supra note 167.
    \459\ See letter from SIFMA 3.
    \460\ See, e.g., supra note 431 and accompanying text
(discussing restrictions on multiple overlapping plans). According
to a 2016 industry survey, more than 80 percent of respondents do
not allow multiple, overlapping Rule 10b5-1 plans. According to a
2021 industry survey, 52 percent of respondents do not allow such
plans. See SCG 2021 Survey.
    \461\ See supra note 432 and accompanying text.
---------------------------------------------------------------------------

    The final amendments limit the number of single-trade Rule 10b5-1
trading arrangements to one such arrangement in any twelve-month
period. As noted by several commenters, this limitation is expected to
impose costs on the affected insiders.\462\ This limitation will make
it costlier for insiders with repeated sporadic or ad hoc liquidity
needs to divest issuer equity holdings.\463\ At the same time, the
approach of limiting the number of single-trade Rule 10b5-1 plans in a
12-month period, rather than restricting them entirely, alleviates
costs for insiders with occasional unexpected liquidity needs that seek
to avail themselves of the affirmative defense for such a single-trade
plan. This approach has the benefit of protecting investors from trades
that run a higher risk of being opportunistically driven by MNPI, while
still accommodating the liquidity needs of certain insiders. While it
is possible that the same insider would experience multiple instances
of repeated, ad hoc liquidity needs in a 12-month period that can only
be met through a new single-trade Rule 10b5-1 plan and such an insider
would lose flexibility under the final amendments, the likelihood of
such successive unanticipated liquidity needs occurring within the same
12-month period is lower than that of a single occurrence of an ad hoc
liquidity need, for which the final rule provides an exception. In a
modification from the proposal, the limitation on single-trade Rule
10b5-1 trading arrangements will only apply to plans involving open-
market transactions. Similar to the focus of the multiple-plan
restriction on plans for open-market trades, tailoring the limitation
on single-trade Rule 10b5-1 trading arrangements in this manner is
expected to eliminate the cost of the requirement for insiders with
plans not involving open-market purchases or sales. In a further
modification from the proposal, the limitation on single-trade Rule
10b5-1 trading arrangements will not apply to sell-to-cover
transactions, which will also help to mitigate costs of this provision
by allowing insiders to sell shares to cover tax withholding
obligations related to the vesting of equity compensation.
---------------------------------------------------------------------------

    \462\ See supra notes 157 through 162 and accompanying text.
    \463\ Single-trade plans appear to be common. Based on
Washington Service data from Jan. 2016 through May 2020, Gaming the
System, supra note 20, 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 (Jan. 2, 2018 through Sept. 13, 2022),
we estimate that single-trade plans constitute approximately 44
percent of plans during the time period examined. See supra Section
V.B.1. The caveat about classification of plans as ``single-trade''
plans in the available data applies. See supra note 435.
---------------------------------------------------------------------------

iv. The Amended Good Faith Condition
    The amendments specify that a trader must act in good faith with
respect to the plan as a condition to the continued availability of the
affirmative defense. Consistent with the views of various commenters,
this provision is expected to result in additional legal costs (such as
the cost of legal counsel to aid in compliance with the requirement),
ambiguity,\464\ and risks for plan participants (namely, the risk of
loss of the Rule 10b5-1(c)(1) affirmative defense if a trader is found
not to have acted in good faith).\465\ Some commenters also expressed
the concern that the amended good faith provision may create an
``unintended incentive for directors or officers to consider their Rule
10b5-1 plans in connection with corporate actions long after
establishing their plans.'' \466\ If plan participants perceive the
amended good faith provision as increasing the legal cost and risk
associated with the use of Rule 10b5-1 plans, they may reduce their
reliance on Rule 10b5-1 plans.\467\
---------------------------------------------------------------------------

    \464\ See supra note 196 and accompanying text.
    \465\ See supra notes 195 and 198.
    \466\ See letter from Chamber of Commerce 2; see also letter
from Wilson Sonsini.
    \467\ See supra note 198.

---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the 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 V.A above. The effects of the rule on the efficiency of
corporate investment and other decisions are not fully certain because
the 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.\468\ For example, 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 issuer's
shares. This effect would indirectly make it easier for the company to
raise capital from investors.
---------------------------------------------------------------------------

    \468\ See supra note 362.
---------------------------------------------------------------------------

    Finally, the amendments may affect competition. Decreasing the
ability of insiders to trade on MNPI should weaken their competitive
edge in trading, promoting competition among other investors in the
market for the issuer's shares. A lower risk of an insider with a
significant private information advantage trading the issuer's shares
may strengthen the incentive of other market participants to trade the
issuer'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 insiders may trade under non-Rule 10b5-1 trading arrangements
or may trade without a plan. Whether the amendments prompt a large
increase in insider trading under non-Rule 10b5-1 trading arrangements
would depend, in part, on how burdensome insiders find the amendments
and how company policies constrain insider use of MNPI in non-Rule
10b5-1 trading arrangements (including in response to the Item 408
disclosure requirements).
    It is not clear if the amendments will result in meaningful
competitive effects on the labor market. We are not exempting any
categories of public companies from the amendments, which should reduce
potential effects on competition for talent among public companies. We
do not anticipate significant effects of the amendments on the
competition for talent between public and private companies. While Rule
10b5-1(c)(1) amendments may make insider holdings of public company
stock less liquid (as discussed in greater detail in Section V.B.3
above), holdings of public company shares will remain significantly
more liquid than holdings of private company stock.
5. Reasonable Alternatives
    The certification requirements will apply to officers and directors
only, as proposed. Cooling-off periods (with the duration dependent on
the type of insider) and restrictions on multiple overlapping plans and
single-trade plans will apply to persons other than the issuer. The
expanded good faith provision will apply to all persons who seek to
rely on the Rule 10b5-1(c)(1) affirmative defense.
    As an alternative, we could limit each of the provisions to
officers only.\469\ Compared to the amendments, this alternative would
eliminate the costs of the rule (discussed in greater detail in Section
V.B.3 above) for the exempted plan participants but increase the risk
of insider trading by such plan participants. 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, but that likely is not the case for directors. As another
alternative, we could extend all of the Rule 10b5-1(c)(1) amendments,
including the certification requirements and the longer cooling-off
periods applicable to officers and directors, to all persons other than
the issuer. Compared to the amendments, this alternative would subject
additional persons other than the issuer, including employees, to the
costs of all of the provisions of the rule (discussed in greater detail
in Section V.B.3 above) but also decrease the risk of insider trading
by such plan participants. The latter benefits may be smaller to the
extent that persons other than the issuer that are not officers or
directors are less involved in making and overseeing corporate
decisions, may lack control or knowledge about the timing and substance
of the issuer's disclosures, or are less likely to be aware of MNPI.
The aggregate effects of all of the discussed alternatives, compared to
the amendments, may also be smaller to the extent that Rule 10b5-1
plans may be most prevalent among officers (with the caveat about data
availability).
---------------------------------------------------------------------------

    \469\ 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.
---------------------------------------------------------------------------

    Alternatively, rather than adding new conditions to the affirmative
defense, we could rescind the Rule 10b5-1(c)(1) affirmative defense
altogether.\470\ Rescinding Rule 10b5-1(c)(1) would increase the costs
for existing Rule 10b5-1 plan participants (such as the additional
costs 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). Rescinding the Rule 10b5-1(c)(1) affirmative defense would
also increase the liability risk for insiders that continue to trade
due to greater uncertainty about whether they have complied with Rule
10b-5 and subject insiders to additional limitations on trading (such
as restrictions on trading during blackout periods). 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.\471\
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 for trading under
non-Rule 10b5-1 trading arrangements or outside of plans may lead to an
increase in insider trading, compared to the amendments. It also may
increase investor effort to perform due diligence on non-Rule 10b5-1
trading arrangements and trades outside of plans to assess the risk of
trading against an informed insider. Moreover, rescinding Rule 10b5-
1(c)(1) may hinder issuers' efforts to develop and implement corporate
governance practices for trading arrangements that comply with
securities laws and regulations. We expect that the new Item 408
disclosure requirements, discussed in detail in Section V.C below, will
partly mitigate incentives to engage in insider trading under all
trading arrangements, including trading

arrangements that are not reliant on Rule 10b5-1(c)(1) under this
alternative.
---------------------------------------------------------------------------

    \470\ See, e.g., letter from Better Markets.
    \471\ See supra note 442 and accompanying and following text.
---------------------------------------------------------------------------

    As another alternative, we could impose some, but not all, of the
new conditions to the affirmative defense. This alternative would lower
the aggregate costs of the rule and preserve greater flexibility than
the amendments, decreasing the costs discussed in the case of each of
the specific provisions. However, due in part to their expected
synergy, this alternative would make the combined set of amendments
less effective at curbing insider trading behavior under Rule 10b5-
1.\472\
---------------------------------------------------------------------------

    \472\ As discussed in Section V.B.2 above, in particular, for
officers and directors, the certification condition is expected to
complement the effects of the cooling-off period, which, in turn, is
expected to work in tandem with the exclusion of multiple
overlapping plans from Rule 10b5-1(c)(1) to possibly prevent a
portion of potentially opportunistic plan cancellations based on
MNPI.
---------------------------------------------------------------------------

    With respect to the cooling-off period for officers and directors,
the Commission could adopt a shorter or longer cooling-off period.\473\
A shorter cooling-off period for officers and directors (such as the
30-day minimum cooling-off period that the final amendments apply to
persons other than the issuer that are not officers or directors) could
reduce some of the costs of a cooling-off period and preserve greater
flexibility for officers and directors, compared to the amendments, but
it would increase the risk of officers' and directors' trading based on
MNPI. Conversely, a longer cooling-off period for officers and
directors (such as the 120-day minimum cooling-off period proposed for
officers and directors) could increase costs to officers and directors
and limit flexibility, compared to the amendments, but it may further
decrease the risk of officers' and directors' trading based on MNPI. As
another alternative, we could specify a minimum cooling-off period for
officers and directors that extends one trading day past the filing or
furnishing of the issuer's next earnings announcement covering at least
one fiscal quarter (and not include a minimum 90-day cooling-off period
for officers and directors).\474\ Such a variable-length cooling-off
period would, in most cases, be shorter than the cooling-off period for
officers and directors under the final amendments. This alternative
also would introduce much greater variability in the permissible
duration of the minimum cooling-off period for officers and directors,
which may require incrementally greater effort from investors seeking
to evaluate the timing of officer and director trades. Compared to the
final amendments, it would also not be as effective as the adopted
approach in discouraging trading on MNPI that is not tied to quarterly
results.\475\ 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 V.B.2.i and V.B.3.i.
The discussed effects of the alternatives would also depend on whether
they differ from existing, voluntary cooling-off period practices of
issuers.\476\
---------------------------------------------------------------------------

    \473\ See supra note 418 (discussing suggestions for three-month
and four- to six-month cooling-off periods); see also supra note 384
and following text (noting that at over three-quarters of surveyed
respondents, the cooling-off period was 60 days or less); supra note
56 (suggesting a 30-day cooling-off period); letter from Cravath
(suggesting a cooling-off period of the later of (1) 45-days after
the adoption of the Rule 10b5-1 trading plan and (2) the second
trading day following the next publication of the issuer's financial
results for a completed fiscal period); supra note 58 (suggesting a
cooling-off period not exceeding 90 days); supra note 48 (supporting
the proposed 120-day cooling-off period); letter from CII
(recommending a cooling-off period of four to six months).
    \474\ See letter from Davis Polk.
    \475\ For example, one study finds that ``specific disclosures
are associated with subsequent negative news events that may not be
impounded in short-term earnings . . . approximately 25% of the
specific-disclosure sample exhibits a single news event, not related
to earnings, for which the three-day market-adjusted return falls
between 10% and 75%, within an average 140 calendar days of
disclosure. These news events include exchange-imposed stock trade
suspension, drug trial failure, and announcement of the intent to
acquire another firm.'' See M. Todd Henderson et al., supra note 19.
    \476\ See supra notes 379 through 384 and accompanying and
preceding text.
---------------------------------------------------------------------------

    The final amendments include a 30-day cooling-off period for
persons other than the issuer that are not officers or directors. As an
alternative, the Commission could lengthen the cooling-off period or
shorten the cooling-off period applicable to such persons. As another
alternative, the Commission could eliminate the cooling-off period for
persons other than the issuer that are not officers or directors (for
instance, only applying cooling-off periods to officers and directors,
as proposed). Including a longer cooling-off period for persons other
than the issuer that are not officers or directors (such as the longer
cooling-off period applicable to officers and directors) would increase
the costs to the affected plan participants and limit their flexibility
(as discussed in greater detail in Section V.B.3.i above), compared to
the amendments, but it may further decrease the risk of the affected
plan participants' trading based on MNPI. Conversely, shortening or
eliminating the cooling-off period applicable to persons other than the
issuer that are not officers or directors could reduce costs (discussed
in greater detail in Section V.B.3.i above) and preserve greater
flexibility for the affected plan participants, compared to the
amendments, but it would increase the risk of the affected plan
participants' trading based on MNPI. The effects of this alternative
would be smaller than discussed to the extent that persons other than
officers and directors may be less likely to trade under Rule 10b5-
1.\477\
---------------------------------------------------------------------------

    \477\ But see supra note 424.
---------------------------------------------------------------------------

    As an alternative to including the certifications of officers and
directors in Rule 10b5-1 plan documents, we could provide for the
certification to be made to the issuer in a separate document and
retained for ten years, as proposed. Compared to the amendments, this
alternative could result in incrementally greater costs for officers
and directors, to the extent that they do not presently make
representations separately to the issuer. This alternative also could
result in additional costs for issuers to the extent that they decide
to establish new processes and systems to accept officer and director
certifications. In turn, due to the employer relationship between the
issuer and its officers and the fiduciary relationship between the
issuer and its directors, a condition that would require officers and
directors to make a certification to the issuer under this alternative
could be marginally more effective in reminding them of their existing
obligations with respect to MNPI, compared to the amendments. The
potential benefit of the alternative compared to the amendments would
be decreased if officers and directors already comply with their MNPI
obligations under the existing rule and market practices.
    The amendments restrict the availability of the affirmative defense
for multiple overlapping Rule 10b5-1 trading arrangements for open-
market trades. As an alternative, we could allow multiple overlapping
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
amendments, and lower costs for plan participants that have multiple
accounts or trading arrangements through which they trade in the
company stock. However, these alternatives could introduce greater
complexity in companies' oversight of insiders' multiple overlapping
plans and potentially present a greater risk of insider trading,
compared to the amendments (to the extent not mitigated by the other
provisions that we are

adopting, including certifications, the amended good faith condition,
cooling-off periods, and the disclosure requirements). In particular,
the option to maintain multiple, overlapping plans concurrently
facilitates the ability to selectively cancel one of the plans based on
MNPI, without being subject to a cooling-off period with respect to the
remaining plans' trades. The economic effects of this alternative may
be less significant to the extent that companies already may disallow
the use of multiple overlapping plans,\478\ or allow these insiders to
maintain both trading arrangements not reliant on Rule 10b5-1(c)(1) and
Rule 105b-1 trading arrangements.
---------------------------------------------------------------------------

    \478\ See supra note 431 and accompanying text.
---------------------------------------------------------------------------

    The amendments limit the availability of the affirmative defense in
the case of single-trade Rule 10b5-1 plans of persons other than the
issuer to one such trading arrangement in any twelve-month period. As
an alternative, we could disallow single-trade trading arrangements
under Rule 10b5-1(c)(1) altogether. Compared to the final rule, this
alternative could marginally reduce the likelihood that plan
participants would be able to profit from a ``one-off,'' ad hoc trade
based on previously undisclosed MNPI while availing themselves of the
protections of the Rule 10b5-1(c)(1) affirmative defense. However, the
incremental benefit of this alternative, compared to the final rule,
may be attenuated if insiders relying on single-trade plans once in a
twelve-month period are largely driven by a one-time liquidity need or
financial hardship, or if they are effectively deterred from using MNPI
by other Rule 10b5-1 provisions. In turn, this alternative would also
significantly limit the flexibility and impose additional costs on
insiders with a legitimate one-time, ad hoc liquidity need, compared to
the final rule.

C. Disclosure of Trading Arrangements and Policies and Procedures in
New Item 408 of Regulation S-K and Mandatory Rule 10b5-1 Checkbox in
Amended Forms 4 and 5

    The new Item 408(a) of Regulation S-K will require quarterly
disclosures, in Form 10-Q and Form 10-K, of the adoption or
termination,\479\ and the material terms of Rule 10b5-1 and non-Rule
10b5-1 trading arrangements by directors and Rule 16a-1(f) officers. In
a change from the proposal, price terms are excluded from the scope of
material terms required to be disclosed under Item 408(a). New Item
408(b) will require an issuer to file its insider trading policies and
procedures as an exhibit to its annual report on Form 10-K, which will
be linked in the exhibit index (as discussed in greater detail in
Section II.B above). Similar requirements will apply to FPIs that file
annual reports on Form 20-F via new Item 16J.\480\ The new Item 408(a),
408(b)(1), and analogous Form 20-F disclosures are required to be
tagged using a structured data language (specifically, Inline XBRL). As
discussed in Section II.B.1.c above, in response to a recommendation by
some commenters, at this time, we are not adopting the proposed rule to
require corresponding disclosure regarding trading arrangements of the
issuer.
---------------------------------------------------------------------------

    \479\ New paragraph (c)(1)(iv) states that any modification or
change to the amount, price, or timing of the purchase or sale of
the securities underlying a Rule 10b5-1 plan is a termination of
such plan and the adoption of a new plan.
    \480\ 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.
---------------------------------------------------------------------------

    In addition, we are amending Forms 4 and 5 to add a checkbox to
indicate that a reported transaction was intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c)(1) and require
disclosure of the date of adoption of the trading plan. In a change
from the proposal, we are not adopting the optional checkbox for non-
Rule 10b5-1 plans.
1. Baseline and Affected Parties
    The new Item 408(a) disclosure requirements regarding the adoption,
modification, termination, and material terms of officer and director
trading arrangements apply to annual and quarterly reports on Forms 10-
K and 10-Q. During calendar year 2021, based on the analysis of EDGAR
filings, we estimate that there were approximately 7,200 filers with
annual reports on Form 10-K and/or quarterly reports on Form 10-Q or
amendments to them.\481\ The new Item 408(b) disclosure requirements
regarding insider trading policies and procedures will apply to annual
reports on Forms 10-K and proxy and information statements on Schedules
14A and 14C. Disclosure requirements similar to Item 408(b) will also
apply to FPIs that file Form 20-F. During calendar year 2021, based on
the analysis of EDGAR filings, we estimate that there were
approximately 6,300 \482\ filers of annual reports on Form 10-K, proxy
or information statements, or amendments to them, and, in addition,
approximately 800 filers of annual reports on Form 20-F (or amendments
to them).\483\
---------------------------------------------------------------------------

    \481\ The estimate excludes registered investment companies and
asset-backed securities issuers, which will not be subject to the
Item 408 disclosures.
    \482\ The difference between this number of filers of annual
reports on Form 10-K, proxy or information statements, or amendments
to them, and the above number of filers of annual reports on Form
10-K and/or Form 10-Q, or amendments to them, is largely
attributable to the fact that, given that calendar year 2021 was an
active year for initial public offerings, a number of new reporting
issuers may have filed a Form 10-Q during 2021 but not a Form 10-K
as it was not due until 2022.
    \483\ See supra note 481.
---------------------------------------------------------------------------

    Item 408(a) requirements will affect all issuers whose officers or
directors have Rule 10b5-1 or non-Rule 10b5-1 trading arrangements as
well as all officers and directors whose trading arrangements will now
be subject to public disclosure by the issuer.\484\
---------------------------------------------------------------------------

    \484\ See supra Section V.B.1.
---------------------------------------------------------------------------

    Item 408(b) requirements will affect all issuers subject to the
requirements, as well as issuers, directors, officers, and employees
that engage in trading subject to the disclosed policies and
procedures.
    The Rule 10b5-1 checkbox requirement will apply to all filers of
Forms 4 and 5 (including officers and directors as well as other
filers). During calendar year 2021, we estimate that there were
approximately 54,000 such filers.\485\
---------------------------------------------------------------------------

    \485\ The estimate is based on filings of Forms 4 and 5 during
calendar year 2021 in Thomson Reuters/Refinitiv insiders dataset
(version retrieved June 27, 2022).
---------------------------------------------------------------------------

2. Benefits
    New Item 408 and Item 16J will benefit investors by providing
greater transparency about officer and director Rule 10b5-1 and non-
Rule 10b5-1 trading arrangements, as well as governance practices with
respect to insider trading.\486\ This enhanced transparency may enable
better informed voting and investment decisions and more efficient
allocation of investor capital. The timing of trading arrangement
adoptions and terminations by officers and directors, as well as a
description of the material terms of the trading arrangements, is
expected to enhance the value of existing trade disclosures, aiding
investors in obtaining a more accurate valuation of the issuer's shares
and making more informed voting and investment decisions, as supported
by various commenters.\487\ These informational benefits should be
considered in the context of the existing baseline (which includes
partial revelation of information contained in officer and director
trades as part of Section 16

reporting).\488\ Further, informational benefits of the Item 408(a)
disclosure may be low to the extent that plan trades are motivated by
liquidity needs and similar considerations rather than by MNPI
(especially after the amendments to Rule 10b5-1, such as the cooling-
off period condition, aimed to reduce potential for MNPI-based trading
under such trading arrangements). Finally, in a change from the
proposal, price terms will be outside the scope of the required Item
408(a) disclosure of the terms of trading arrangements. This change
will reduce the informational benefits of Item 408(a) to investors,
compared to the proposed amendments.
---------------------------------------------------------------------------

    \486\ See supra Section V.A.
    \487\ See supra note 209.
    \488\ See, e.g., letters from Sullivan and Wilson Sonsini
(indicating that the proposed disclosures would be duplicative of
the disclosures that would be required under the proposed disclosure
amendments to Forms 4 and 5); see also letters from Cravath and
Shearman (indicating that details of non-Rule 10b5-1 trades already
are disclosed on beneficial ownership forms). While beneficial
ownership forms contain information about individual trades, some of
which pertain to Rule 10b5-1 transactions, the information required
in new Item 408(a) is significantly more detailed and comprehensive,
which is expected to provide information benefits to investors above
and beyond those that could be obtained today from the analysis of
Section 16 reports.
---------------------------------------------------------------------------

    The requirement that these data points be tagged in a structured
data language (specifically, in Inline XBRL) is expected to facilitate
access to, and analysis of, the disclosures by investors, potentially
leading to more useful and timely insights, consistent with the
suggestions of several commenters.\489\ In particular, structuring the
disclosures about trading arrangements under Item 408(a) will enable
automated extraction of granular data on such trading arrangements,
allowing investors to efficiently perform large-scale analyses and
comparisons of trading arrangements across issuers and time periods.
Structured data on trading arrangements may 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 is also expected
to enable considerably faster analysis of the disclosed data by
investors. Structuring the narrative disclosure on insider trading
policies and procedures required under Item 408(b)(1) of Regulation S-K
in Inline XBRL is expected to make it easier for investors to extract
information from the disclosures about insider trading policies and
procedures, compare these disclosures against prior periods, and
perform targeted artificial intelligence and machine learning
assessments of specific narrative disclosures about insider trading
policies and procedures.
---------------------------------------------------------------------------

    \489\ See supra note 319.
---------------------------------------------------------------------------

    We expect these benefits to result from disclosure of terminations,
changes in material plan terms, and adoptions of trading arrangements.
A termination or a change in material terms of a prior trading
arrangement may similarly convey information about the views of the
officers or directors regarding the issuer's future outlook and share
price. Further, the timing of trading arrangement adoptions or
terminations, relative to the issuance of other corporate disclosures,
may provide investors with valuable insight into potential insider
trading under such trading arrangements, and thus associated conflicts
of interest that may erode firm value. We expect such benefits from the
disclosure of both Rule 10b5-1 and non-Rule 10b5-1 trading
arrangements. Moreover, by drawing market scrutiny to the adoption and
termination of trading arrangements, enhanced disclosure is expected to
deter insider abuses of trading arrangements based on MNPI. This
scrutiny is expected to reduce insider trading, benefiting investors
and decreasing the economic costs and inefficiencies associated with
insider trading, as discussed in Section V.A above. The described
benefits may be low or not realized in cases of trading arrangements
initiated to meet officers' and directors' liquidity needs or for other
reasons unrelated to MNPI.
    The requirement to provide disclosure regarding insider trading
policies and procedures is expected to provide investors with valuable
information about governance practices with respect to insider trading
of issuer stock. It will allow investors to better understand the
policies and procedures, if any, that guide issuers in which they
invest and the conduct of officers, directors, and employees of those
issuers and the issuers themselves, including whether, and if so, 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. The absence
or presence, and the nature of, such policies and procedures can inform
investors about the likelihood of use of MNPI by these parties and,
thus, the likelihood of incurring the economic costs of insider trading
discussed in Section V.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
use''--as well as guard against the misappropriation of that
information.\490\ Disclosure regarding insider trading policies and
procedures could also aid shareholders' voting and investment
decisions. Moreover, requiring this disclosure would provide greater
consistency in disclosures across issuers to the extent that they
already disclose this type of information. In addition, the
anticipation of market scrutiny following mandatory disclosure may
incentivize issuers without specific insider trading policies to
implement such policies and procedures (with some issuers possibly
converging to a standardized insider trading policy). 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 V.A above, particularly at issuers with weaker
governance practices with respect to insider trading.
---------------------------------------------------------------------------

    \490\ See United States v. O'Hagan, 521 U.S. 642, 654 (1997)
(recognizing that the undisclosed misappropriation of MNPI in breach
of a duty of trust and confidence is ``fraud akin to
embezzlement'').
---------------------------------------------------------------------------

    The amendments adding a Rule 10b5-1 plan checkbox to Forms 4 and 5
will benefit investors by providing transaction-specific disclosures of
sales and purchases under Rule 10b5-1 trading arrangements. The
checkbox disclosure will allow investors easier and timelier access to
information about trades under Rule 10b5-1. This information will
enable investors to more comprehensively identify insider trading
pursuant to Rule 10b5-1 trading arrangements, as well as provide
greater consistency in the disclosure of Rule 10b5-1 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 such trades. Making this
checkbox mandatory will allow investors to more readily interpret
information in Forms 4 and 5.
    The mandatory Rule 10b5-1 checkbox disclosures, in combination with
the quarterly disclosure regarding adoptions and terminations of
officers' and directors' Rule 10b5-1 trading arrangements, will provide
greater transparency to investors regarding the use of Rule 10b5-1
trading arrangements for trading, in line with the suggestions of
several

commenters.\491\ Such information will provide investors with valuable
context for interpreting other corporate disclosures in valuing the
companies' shares and making informed voting and investment decisions.
Because Forms 4 and 5 would continue to use a structured data language,
investors could extract and analyze comprehensive information about
trades under Rule 10b5-1 trading arrangements across multiple time
periods, individuals, and issuers.
---------------------------------------------------------------------------

    \491\ See, e.g., letters from ACCO, CII, Quinn, and Cravath.
---------------------------------------------------------------------------

3. Costs
    First, we consider the direct (compliance-related) costs of the
disclosure requirements for insiders and companies. Such costs include
preparing the disclosure and gathering the information required to
comply with the new disclosure requirements. Such costs are expected to
be lower for companies that already disclose some information about
Rule 10b5-1 trading arrangements and insider trading policies and
procedures. Officers and directors are likely to have information about
the adoption, modification, termination, duration, and number of
securities to be sold through their trading arrangements readily
available and/or accessible. However, issuers may not be systematically
collecting such information from officers and directors today.\492\ In
those cases, issuers will incur additional cost to establish processes
and systems to collect information about officers' and directors'
trading arrangements required to comply with the new Item 408(a)
disclosure requirement.\493\ Officers and directors will incur an
incremental cost to follow internal processes their companies
establish, if any, to gather information about officer and director
trading arrangements for the Item 408(a) disclosure. Issuers are likely
to have information about their insider trading policies and procedures
required to comply with Item 408(b) readily available. The tasks of
identifying, and preparing a disclosure of, such policies and
procedures (and, for issuers without such policies and procedures, the
reasons for not having them) are expected to result in some additional
direct costs; \494\ however, such costs are likely to be relatively
small.\495\
---------------------------------------------------------------------------

    \492\ See, e.g., letter from Sullivan (expressing concern that
requiring disclosure of this information would impose a significant
burden on issuers).
    \493\ Id.
    \494\ See, e.g., letter from Dow (expressing concern about the
administrative burden of the Item 408(b) disclosure requirement).
    \495\ The final amendments may impose higher additional costs on
FPIs. Such additional costs would be relatively small to the extent
an FPI already discloses similar information under its home country
rules.
---------------------------------------------------------------------------

    In a modification from the proposal, the final rules do not require
disclosure of the issuer's policies and procedures in the body of the
annual report, proxy statement, or information statement. Instead, they
require registrants to disclose whether they have adopted insider
trading policies and procedures governing the purchase, sale, and other
dispositions of their securities by directors, officers, and non-
executive 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
a registrant has not adopted such insider trading policies and
procedures, it will be required to explain why it has not done so.
These disclosures will be required in annual reports on Form 10-K and
proxy and information statements on Schedules 14A and 14C. FPIs will be
required to provide analogous disclosure in their annual reports on
Form 20-F. Registrants will also be required to file a copy of their
insider trading policies and procedures as an exhibit to their annual
reports on Form 10-K or 20-F. If all of the registrant's insider
trading policies and procedures are included in its code of ethics (as
defined in Item 406(b)) and the code of ethics is filed as an exhibit
pursuant to Item 406(c)(1), a hyperlink to that exhibit, accompanying
the issuer's disclosure as to whether it has insider trading policies
and procedures, would satisfy this component of the exhibit filing
requirement. Requiring registrants to file their insider trading
policies and procedures as an exhibit would facilitate investor access
to the document as it would be available online through EDGAR and
hyperlinked in the exhibit index. These modifications also may result
in improved readability of the disclosure in the main body of the
filing and incrementally facilitate compliance, compared to the
proposed requirement to disclose the policies and procedures in the
body of the filing.
    The requirement to tag the new Item 408(a) and Item 408(b)(1)
disclosures in Inline XBRL will impose incremental compliance costs on
issuers. Such costs are expected to be modest, because issuers affected
by the Inline XBRL requirements (including SRCs) are already required
(or, in the case of certain business development companies, will be
required no later than February 2023) to use Inline XBRL to comply with
other disclosure obligations.\496\ Moreover, the limited scope of the
disclosure will 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 tagging requirement.
---------------------------------------------------------------------------

    \496\ 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) at 33318 [85 FR 33290 (Jun. 1,
2020)].
---------------------------------------------------------------------------

    Next, we discuss the indirect costs of Item 408 and Item 16J.
Indirect costs include potential reputational and investor relations
costs associated with the disclosure. For example, issuers that have
not implemented specific insider trading policies and procedures, as
well as issuers at which the adoption, modification, or termination of
officer and director Rule 10b5-1 and non-Rule 10b5-1 trading
arrangements appears 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. Relatedly, officers and directors that adopt, modify,
or terminate a Rule 10b5-1 or non-Rule10b5-1 trading arrangement around
the release of MNPI may also suffer reputational or legal costs from
the public disclosure of this information. To the extent that the
amendments to Rule 10b5-1(c)(1), such as the cooling-off period,
eliminate or deter insider trading based on MNPI under Rule 10b5-1
trading arrangements, these legal and reputational costs of public
disclosure may be minimal in cases of such trading arrangements.
    The information in the domestic issuers' quarterly Item 408(a)
disclosure of the material terms of officers' and directors' Rule 10b5-
1 and non-Rule 10b5-1 trading arrangements, which may benefit investors
and other market participants, may cause the affected officers and
directors to incur costs to the extent that it reveals their future
trading plans to other market participants--a concern expressed by
various commenters.\497\ The application of a cooling-off period may
enable other market participants to obtain some

information \498\ about the timing and terms of the officer's or
director's Rule 10b5-1 trading arrangement before trading begins,
potentially enabling other market participants to incorporate this
information in their own trading strategy before the officer's or
director's trading arrangement may be executed. For Rule 10b5-1 trading
arrangements relying on a simple trading strategy (e.g., equally-sized,
equally-spaced periodic transactions), the combination of the Item
408(a) disclosure and the Rule 10b5-1 checkbox on Form 4 may enable
investors to gauge some information about the officer's or director's
trading strategy. This could lead to a potentially less favorable price
than the officer or director might otherwise have obtained because
other market participants are reacting to the officer's or director's
trading strategy.\499\ Officers and directors may continue to use limit
orders to partly insure against an unfavorable price impact of the Item
408(a) disclosure, if any. For planned trades motivated by liquidity
needs and other considerations that do not involve MNPI (especially
after the amendments to Rule 10b5-1 aimed to reduce potential for MNPI-
based trading under such plans), the costs to officers and directors
from the revelation of Item 408(a) information to market participants
will likely be low. Moreover, such costs of Item 408(a) should be
considered in the context of the baseline, under which officers' and
directors' Form 4 filings already reveal some information about their
trades to the market. Importantly, in a change from the proposal, the
amendments exclude price terms of the trading arrangement from the
scope of Item 408(a), which should significantly alleviate the
potential costs to officers and directors.\500\
---------------------------------------------------------------------------

    \497\ See supra note 216.
    \498\ The Item 408(a) disclosure is limited to whether any
director or officer adopted or terminated a Rule 10b5-1 plan or non-
Rule 10b5-1 trading arrangement and a description of its material
terms, including the name of the officer or director, the adoption
or termination date, plan duration, and the number of shares to be
traded. Price terms are not required to be disclosed.
    \499\ However, the described effects may be modest due to the
generally small size of individual officer and director trades.
Further, even the revelation of large predictable planned trades may
not result in front-running. See Hendrik Bessembinder et al.,
Liquidity, Resiliency and Market Quality Around Predictable Trades:
Theory and Evidence, 121 J. Fin. Econ. 142 (2016) (showing, in a
setting with large and predictable exchange-traded fund trades, that
``traders supply liquidity to rather than exploit predictable trades
in resilient markets'' and not finding ``evidence of the systematic
use of predatory strategies'').
    \500\ See supra note 218 (noting that various commenters
expressed concerns that disclosure of pricing information and other
details of a Rule 10b5-1 trading arrangement could impose costs on
issuers and their insiders). But see letter from Quest (stating that
the final rule should not require disclosure of the number of shares
covered by a trading arrangement and the duration of the
arrangement) and letters from Fenwick and Shearman (recommending
that the required disclosures should be limited to the person
adopting the plan, the date of adoption or termination, and
duration). While we recognize that the volume and duration
information may potentially be informative to other market
participants, we expect the potential costs to officers and
directors from the disclosure of such information to be modest in
the absence of pricing information.
---------------------------------------------------------------------------

    Finally, some issuers may implement new insider trading policies
and procedures or update existing insider trading policies and
procedures in anticipation of the Item 408(b) disclosure requirement
and the potential public scrutiny of their policies and procedures, if
any. Additional restrictions on insider trading arrangements adopted in
anticipation of the public disclosure could result in economic costs
for insiders and, in some instances, changes in insider compensation
and insider equity holdings that reduce their exposure to issuer stock
(broadly in line with the discussion of the potential indirect costs of
restrictions on insider use of trading arrangements in Section V.B.3
above). Costs incurred by issuers would be borne by their existing
shareholders.
    Insiders are likely to have information about which of their trades
were executed pursuant to a Rule 10b5-1 trading arrangement readily
available, likely resulting only in small direct costs of providing
checkbox disclosure and the date of adoption of the trading arrangement
on Forms 4 and 5. Systematic identification of trades under Rule 10b5-1
trading arrangements on Form 4 under the amendments, combined with
existing time frames for Form 4 reporting (and for officers and
directors, the new disclosures in Item 408(a)), may enable some market
participants to infer the likely trading strategy employed by the
insider under a Rule 10b5-1 trading arrangement. While this information
may benefit investors and other market participants, it may result in
the indirect cost of information spillovers to market participants,
which may contribute to an unfavorable price movement prior to the
execution of all trades under the plan.\501\ Such indirect costs will
be lowest for insiders other than officers and directors given that
they are not subject to Item 408(a) and for insiders who use Rule 10b5-
1 trading arrangements largely for liquidity rather than due to
information considerations (especially in conjunction with the
amendments to Rule 10b5-1(c)(1) that reduce the potential for MNPI-
based trades). Insiders that already voluntarily disclose Rule 10b5-1
use in their filings of Forms 4 and 5 will not incur these direct and
indirect costs.
---------------------------------------------------------------------------

    \501\ But see supra note 499.
---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the amendments to reduce the information asymmetry
between insiders and outside investors by providing more granular and
timelier detail about officers' and directors' trading arrangements and
issuers' insider trading policies and procedures. The reduction in
information asymmetry as a result of the additional disclosure would
result in more informationally efficient stock prices. Because
disclosure of directors' and officers' trading arrangements and insider
trading policies and procedures can inform investors about insider
incentives and governance practices, which could affect shareholder
value as discussed in Section V.A above, the additional disclosure
about trading arrangements and insider trading policies and procedures
could also better inform investment decisions (enabling more efficient
allocation of capital in investor portfolios) and shareholder voting
decisions.
    Importantly, we expect the amendments to draw market scrutiny to
officers' and directors' Rule 10b5-1 and non-Rule 10b5-1 trading
arrangements, decreasing the ability of insiders to trade on MNPI
through such trading arrangements. As discussed in Section V.B.4 above,
this potential scrutiny 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 issuer's shares. These effects would indirectly
make it easier for the issuer to raise capital from investors. Issuers
that disclose robust insider trading policies and procedures in
particular may elicit greater investor confidence, as well as interest
from investors seeking issuers with stronger corporate governance
practices,

resulting in capital formation benefits for such issuers.
    Finally, in line with the discussion in Section V.B.4 above, the
amendments may affect competition. Decreasing the ability of insiders
and issuers to trade on MNPI will weaken their competitive edge in
trading, promoting competition among other investors in the market for
the issuer's shares. A lower risk of an insider with a significant
private information advantage trading the issuer's shares will
strengthen the incentive of other market participants to trade those
shares and compete in gathering and processing information about the
issuer. Disclosure of insider trading policies and procedures will also
enable investors to access and compare insider trading policies and
procedures across issuers, potentially enhancing issuers' incentives to
compete in, and establish a reputation for, having strong governance
practices in the area of insider trading.
    To the extent that the disclosure requirements impose a fixed cost
on issuers, they would have a negative competitive effect on smaller
issuers subject to the amendments and issuers that do not already
provide disclosure regarding insider trading policies and procedures as
well as Rule 10b5-1 and non-Rule 10b5-1 trading arrangements of their
officers and directors. The final amendments defer by six months the
date of compliance with the additional disclosure requirements for
SRCs,\502\ potentially mitigating some of the adverse competitive
effects of the amendments. The Item 408(a) disclosure requirements will
not apply to FPIs, potentially placing them at a relative competitive
advantage to domestic filers.\503\ With that exception, because the
disclosure amendments will 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.\504\
---------------------------------------------------------------------------

    \502\ Based on staff review of EDGAR filings for calendar year
2021, approximately 3,900 of the filers subject to the Item 408(a)
amendments and 3,200 of the filers subject to Item 408(b) amendments
are SRCs and thus will be eligible for the extended compliance date
under the amendments.
    \503\ FPIs that file annual reports on Form 20-F will be subject
to requirements similar to Item 408(b). Further, FPIs listed on U.S.
exchanges will remain subject to insider trading laws and exchange
listing standards.
    \504\ We do not expect significant effects on the labor market
competition for executive talent between public and private
companies. While the new disclosures will 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 will be smaller to the extent
that some issuers already provide disclosure regarding their insider
trading policies and procedures and the trading arrangements of their
officers and directors today.
5. Reasonable Alternatives
    The amendments require quarterly disclosure related to trading
arrangements of officers and directors and disclosure of issuers'
insider trading policies and procedures, if any, as an exhibit to their
annual reports, proxy statements, and information statements. As an
alternative, we could modify the scope and granularity of the required
disclosure of officer and director trading arrangements or insider
trading policies and procedures. The alternatives of expanding
(narrowing) the scope of the disclosures required by new Item 408 could
potentially provide greater (lesser) detail to investors, enabling
better (less) informed investment decisions and more (less) accurate
assessment of the risk of the use of MNPI for informed trading through
trading plans compared to the amendments. However, the alternative of
expanding (narrowing) the scope of the disclosure could also increase
(decrease) disclosure costs (discussed in greater detail in Section
V.C.3 above) compared to the amendments. As another alternative, we
could permit the Item 408(b) requirement to be satisfied by posting the
insider trading policies and procedures on the issuer's website, as
suggested by some commenters.\505\ Compared to the proposal, this
approach could marginally ease compliance for issuers that prefer to
post the material on their website rather than file it as an exhibit.
However, compared to the proposal, this alternative would marginally
increase investor effort required to access this information as the
disclosure (including historical versions of the policies and
procedures) would no longer be available online through EDGAR, and
investors would not be able to follow a hyperlink directly to the EDGAR
filing exhibit.
---------------------------------------------------------------------------

    \505\ See supra notes 246 and 247.
---------------------------------------------------------------------------

    As another alternative to the quarterly disclosure related to
trading arrangements, we could require a different frequency of
disclosure. Requiring more (less) frequent disclosure under Item 408(a)
would provide timelier (less timely) information to investors about
trading arrangements but also impose higher (lower) costs on issuers
and insiders. A more detailed discussion of the benefits and costs of
the Item 408(a) disclosure is included in Sections V.C.2 and V.C.3
above.
    As another alternative to the quarterly disclosure requirement, we
could narrow its scope to include only Rule 10b5-1 trading
arrangements, consistent with the suggestions of some commenters.\506\
Under this alternative, officers and directors with non-Rule 10b5-1
trading arrangements would not incur the costs of the amendments
(discussed in detail in Section V.C.3 above). However, investors would
receive less information about their non-Rule 10b5-1 trading
arrangements compared to the amendments. This effect on investors would
be more pronounced in cases where officers and directors forgo Rule
10b5-1 trading arrangements in favor of non-Rule 10b5-1 trading
arrangements as a result of the potential increased costs and
complexity of Rule 10b5-1 trading arrangements under the
amendments.\507\
---------------------------------------------------------------------------

    \506\ See supra note 222.
    \507\ Some commenters indicated, however, that Item 408(a)
disclosure of non-Rule 10b5-1 trading arrangements would not be
informative to investors. See, e.g., letters from Cleary, Cravath,
Shearman, and Simpson. While we agree that trades under such plans
are subject to Section 16 reporting, Item 408(a) would require
information about key material terms of such plans that cannot be
obtained from examining Section 16 reports alone. Further, although
non-Rule 10b5-1 officer and director trading arrangements by
definition do not meet the conditions of the Rule 10b5-1(c)(1)
affirmative defense, Item 408(a) disclosure of such plans can
provide valuable additional insight to investors about the future
trading plans of officers and directors (which, similar to Rule
10b5-1 plans can also be informative about officers' and directors'
outlook on the issuer) and potentially inform investment decisions.
---------------------------------------------------------------------------

    As another alternative to the quarterly disclosure requirement, we
could narrow or expand the scope of information required to be
disclosed about trading arrangements as suggested by some
commenters.\508\ For instance, we could only require the disclosure of
the dates of adoption or termination of the trading arrangement (and
not require disclosure of the plan duration or the number of shares to
be traded under the plan) or only require disclosure of the date of
trading arrangement adoption. Alternatively, we could expand the scope
of information required to be disclosed to include price terms of the
trading arrangement, in line with the proposal. Under the alternative
of narrowing (expanding) the scope of the information required to be
disclosed, issuers that prepare the Item 408(a) disclosure, as well as
officers and directors with trading arrangements subject to Item
408(a), would also incur

lower (higher) costs (discussed in detail in Section V.C.3 above),
compared to the amendments. Specifically, narrowing (expanding) the
scope of the disclosure under Item 408(a) could decrease (increase)
information spillovers to investors and other market participants and
potentially decrease (increase) the likelihood of unfavorable price
movement based on such disclosure prior to the officer's or director's
own trades, compared to the amendments. In turn, narrowing (expanding)
the scope of the Item 408(a) disclosure could decrease (increase) the
information benefits of the disclosure to investors, compared to the
amendments. The described effects may be attenuated if officers or
director trades under the trading arrangements subject to the Item
408(a) disclosure are driven mainly by liquidity rather than
information considerations.
---------------------------------------------------------------------------

    \508\ See supra notes 219 through 221.
---------------------------------------------------------------------------

    Item 408(a) and Item 408(b)(1) disclosures will be required to be
tagged using a structured data language (specifically, Inline XBRL).
Alternatively, we could forgo the tagging requirement (consistent with
the suggestion of one commenter \509\) or narrow its scope, such as to
cover only quarterly Item 408(a) disclosures. This alternative would
provide incremental compliance cost savings for issuers, who would not
be required to select, apply, and review Inline XBRL tags for the
disclosure of whether they have insider trading policies and procedures
in annual reports and proxy and information statements. Such cost
savings, however, would likely be low given the very limited number of
Inline XBRL tags that are expected to be needed to tag the new
disclosures. This alternative would also remove the informational
benefits to investors that would accrue from facilitating retrieval of
such disclosures across issuers and time periods, compared to the
amendments.
---------------------------------------------------------------------------

    \509\ See supra note 320.
---------------------------------------------------------------------------

    Item 408(a) disclosure requirements will only apply to domestic
filers. Disclosure requirements regarding insider trading policies and
procedures, however, will apply to both domestic filers (through Item
408(b)) and FPIs that file Form 20-F.\510\ As an alternative, we could
exempt Form 20-F filers from this disclosure requirement, as suggested
by some commenters.\511\ Generally speaking, such an exemption would
eliminate the direct and indirect costs of the rule (as described in
detail in Section V.C.3 above) for FPIs. Exempting Form 20-F filers
also would decrease the amount of information available to investors
about the insider trading incentives and policies and procedures at
such issuers, potentially limiting investors' ability to make informed
decisions with respect to such issuers. This exemption also could lead
to incrementally greater competitive disparities due to the higher
compliance burden of domestic issuers with respect to this requirement.
---------------------------------------------------------------------------

    \510\ FPIs will be required to provide analogous disclosure in
their annual reports pursuant to new Item 16J to Form 20-F.
    \511\ See supra note 249.
---------------------------------------------------------------------------

    As another alternative, we could extend requirements similar to
Item 408(a) requirements to FPIs that file annual reports on Form 20-F.
Because such FPIs do not have a quarterly reporting obligation
equivalent to a Form 10-Q, the incremental benefit of this alternative
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.
    In addition, as another alternative, we could exempt SRCs from the
Item 408(a) requirement, as suggested by one commenter,\512\ rather
than defer the compliance date for SRCs. Compared to the amendments,
this alternative would reduce the costs for SRCs, which may be
disproportionately affected by the fixed component of the compliance
costs (assuming any of the officers or directors have a trading plan
reportable under this Item). However, this alternative also could
prevent investors in such issuers from being able to evaluate trading
plans and their material terms and potentially result in less informed
voting and investment decisions, compared to the amendments.
---------------------------------------------------------------------------

    \512\ See letter from MD Bar. Based on staff analysis of EDGAR
filings for calendar year 2021, we estimate there are approximately
3,900 unique filers with annual reports on Form 10-K and/or
quarterly reports on Form 10-Q or amendments thereto (excluding
asset-backed securities issuers and registered investment companies,
which will not be subject to the amendments).
---------------------------------------------------------------------------

    The amendments to Forms 4 and 5 add a mandatory Rule 10b5-1
checkbox and require the disclosure of the date of Rule 10b5-1 plan
adoption. As an alternative, we also could require this type of
disclosure on Forms 4 and 5 for trades made under non-Rule 10b5-1
trading arrangements. This alternative could provide investors with
more comprehensive information and greater transparency about trades
under a broader range of trading arrangements. However, to the extent
that non-Rule 10b5-1 trading arrangements can take various forms,
requiring trades under such trading arrangements to be identified on
Forms 4 and 5 separately from trades conducted without a trading
arrangement under this alternative may provide less meaningful
information to investors.\513\
---------------------------------------------------------------------------

    \513\ See letters from Cravath and Cleary (noting that the non-
Rule 10b5-1 trading arrangement checkbox would not be informative to
investors).
---------------------------------------------------------------------------

D. Additional Disclosure of the Timing of Option Grants and Related
Company Policies and Practices

    The Commission is adopting new Item 402(x) of Regulation S-K to
enhance the accessibility of information and transparency regarding
issuers' grants of stock options, SARs, or similar option-like
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. As proposed, the amendments would have applied to grants made
during a period beginning 14 calendar days before and ending 14
calendar days after the MNPI filing (to include periodic reports on
Forms 10-K or 10-Q, issuer share repurchases, or current reports on
Form 8-K that contain MNPI). We are adopting the narrative disclosure
requirement as proposed and the tabular disclosure requirement with
several modifications. In a change from the proposal, partly in
response to commenter feedback,\514\ the amendments sharpen the focus
of the new table on the data that can help investors evaluate the
potential presence of spring-loading as well as tailor the trigger
requirements and shorten the coverage window. The new table will apply
only to grants made within a period starting four business days before
and ending one business day after a triggering event. Further, the
final rules remove from the scope of triggering events the share
repurchase triggering event and provide that Forms 8-K disclosing the
grant of a material new option award under Item 5.02(e) do not trigger
this disclosure.\515\ These changes are consistent with the suggestions
of commenters to shorten the reporting window for the tabular
disclosure and remove share repurchase as a triggering event.\516\
---------------------------------------------------------------------------

    \514\ See supra note 297.
    \515\ In a change from the proposal, issuer share repurchases
will not trigger this disclosure, consistent with the suggestion of
one commenter. See letter from Sullivan (noting that many issuers
engage in repurchase activity regularly and, in some instances,
daily, and that this requirement could pose a substantial burden on
issuers without any potential benefit to investors). This change is
expected to decrease the costs of the amendments relative to the
proposal.
    \516\ See, e.g., letters from Davis Polk and Cravath.
---------------------------------------------------------------------------

    We believe that the modified coverage window will make the tabular
disclosure more useful to investors

compared to the proposal, as discussed in Section II.C.3 above. By
eliminating almost all of the post-filing period from the coverage
window included in the proposal, the final amendments significantly
reduce the potential noise in the tabular disclosure due to awards made
after the release of MNPI intended as an effort to avoid spring-
loading, rather than a strategic attempt at bullet-dodging.\517\
Nevertheless, by extending the coverage window to one business day
after the filing date, the final amendments account for potential
spring-loading in cases where it may take the market an additional
trading day to incorporate information in the triggering filing into
share prices (e.g., in the presence of MNPI filings made after trading
hours \518\ or by companies with a less liquid market for their
shares). The asymmetry in the modified coverage window is intended to
balance the costs to companies against the different likelihood of a
grant being strategic (as opposed to a result of a general attempt to
avoid grants while in possession of MNPI) if a grant is made before
versus after the MNPI release. Overall, the modified coverage window
will give investors easier access to data about option grants in the
days leading up to and immediately following the MNPI filing. While we
recognize that it may capture some grants made on the date following
the triggering filing in an attempt to avoid spring-loading, such
grants should generally be discernible by investors from the provided
disclosure \519\ and, on balance, this coverage window is more
appropriately tailored, relative to the proposal. Overall, tailoring
the tabular disclosure requirement in these ways is expected to enhance
the benefits of the resulting disclosure to investors by improving its
usability and including fewer details that could offer little
information value for investors. These changes also should decrease the
costs of the disclosure for issuers and affected NEOs compared to the
proposal.
---------------------------------------------------------------------------

    \517\ See infra note 564.
    \518\ See, e.g., Henk Berkman & Cameron Truong, Event Day 0?
After-Hours Earnings Announcements, 2009 J. Acc. Res. 71.
    \519\ For example, an investor reviewing the disclosure is
unlikely to be concerned about grants made immediately after the
triggering filing representing bullet dodging if the information in
the triggering filing was not negative in nature or was not followed
by much stock price movement or was instead followed by a share
price increase.
---------------------------------------------------------------------------

    Finally, we are combining the two columns that would have reported
the market value of the underlying securities on the trading days
before and after the MNPI filing, respectively, into a single column
with the percentage change in the market value of the underlying
securities between the trading day before and after the MNPI filing.
Compared to the proposal, this column is expected to incrementally make
it easier for investors to understand the impact that spring-loading
may have on the value realized by the NEOs, and somewhat condense the
size of the new tabular disclosure without a meaningful effect on the
cost to companies as the percentage change can be readily calculated
from the market values in dollar terms for the two days.
1. Baseline and Affected Parties
    New Item 402(x) will apply to filers of annual reports on Form 10-K
and proxy and information statements.\520\ During calendar year 2021,
we estimate that there were approximately 6,300 affected filers.
---------------------------------------------------------------------------

    \520\ 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 252. These estimates exclude registered investment
companies and asset-backed securities issuers, which are not subject
to the amendments.
---------------------------------------------------------------------------

    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
Release.\521\ In considering the timing of option grants close in time
to the release of MNPI, the Commission explained in the release that,
if the issuer has such a program, plan, or practice, the issuer should
disclose that the board of directors or compensation committee may
grant options at times when the board or committee is aware of
MNPI.\522\ To the extent that the existing disclosures of issuers 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 close in time to MNPI may be small.
---------------------------------------------------------------------------

    \521\ See 2006 Executive Compensation Release, supra note 277.
    \522\ 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.\523\ However, there is evidence
that strategic option grant timing persists.\524\ For example, one
study, which examined 4,852 scheduled CEO stock option grants from 2007
through 2011, found that managers accelerate bad news before a grant
and delay good news until after a grant, consistent with self-
interested attempts at strategic option grant timing that maximizes
their value to the CEO, and that ``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.'' \525\ Executives also appear to move
earnings from the pre-grant period to the post-grant period, such as by
changing a firm's accounting choices (e.g., accruals management) and
perhaps even by timing investments (e.g., real earnings
management).\526\ Another study concluded that spring-loading partly
replaced the disappearing practice of option backdating.\527\ A
different study documented spring-loading around stock splits but does
not

disaggregate the 1992-2012 period into pre- and post-2006 sub-
periods.\528\
---------------------------------------------------------------------------

    \523\ See Randall Heron & Erik Lie, What Fraction of Stock
Option Grants to Top Executives Have Been Backdated or Manipulated?,
55 Mgmt. Sci. 513 (2009); M. P. Narayanan & H. Nejat Seyhun, The
Dating Game: Do Managers Designate Option Grant Dates to Increase
Their Compensation?, 21 Rev. Fin. Stud. 1907 (2008); Lucian Bebchuk
et al., Lucky CEOs & Lucky Directors, 65 J. Fin. 2363 (2010);
Linxiao Liu et al., Stock Option Schedules and Managerial
Opportunism, 41 J. Bus. Fin. Acct 652 (2014); Rik Sen, The Returns
to Spring-Loading, 2008 N.Y.U. (Working Paper) (2008).
    \524\ See Insider Trading and Stock Option Grants: An
Examination of Corporate Integrity in the Covid-19 Pandemic, Memo
from FSC Majority Staff to Members, Committee on Financial Services,
Sept. 17, 2020, available at https://financialservices.house.gov/uploadedfiles/hhrg-116-ba16-20200917-sd002.pdf, at pp. 2-5.
    \525\ See Robert M. Daines et al., Right on Schedule: CEO Option
Grants and Opportunism, 53 J. Fin. Quant. Anal. 1025 (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[ing] several mechanisms used to lower stock price,
including changing the substance and timing of disclosures;'' and
further contend[ing] that such opportunism ``distorts stock prices,
leading to capital misallocation, and may dissipate firm value if
executives postpone valuable projects.'').
    \526\ Id.; see also David Aboody & Ron Kasznik, CEO Stock Option
Awards and the Timing of Corporate Voluntary Disclosures, 29 J.
Acct. Econ. 73 (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 &
Catherine Shenoy, Stock Price Decreases Prior to Executive Stock
Option Grants, 7 J. Corp. Fin. 53 (2001) (finding, in a May 1991 to
Feb. 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'').
    \527\ See Giulian Bianchi, Stock Options: From Backdating to
Spring Loading, 59 Q. Rev. Econ. Fin. 215 (2016) (examining data
through 2011).
    \528\ See Erik Devos et al., CEO Opportunism? Option Grants and
Stock Trades around Stock Splits, 60 J. Acct. Econ. 18 (2015).
However, companies may adjust exercise prices to account for the
effect of stock splits.
---------------------------------------------------------------------------

2. Benefits
    As discussed in Section II.C above, certain practices related to
the timing of executive compensation option grants may raise investor
concerns about the use of MNPI. Improved disclosure may potentially
enhance the transparency of such compensation awards (informing
investment and voting decisions) and potentially mitigate the economic
costs of the associated incentive distortions, consistent with the
suggestions of commenters that supported the proposed amendments.\529\
---------------------------------------------------------------------------

    \529\ See supra note 293.
---------------------------------------------------------------------------

    The amendments will make information that investors may seek to
help them identify the occurrence and effects of potential spring-
loading more salient and readily accessible. Spring-loading increases
the effective economic value of the options granted to the executive
upon MNPI becoming public.\530\ Holding the number of the granted
options and the policy to grant options with the exercise price equal
to the current observable market price (i.e., ``at-the-money'')
constant, the executive would effectively receive a higher compensation
award than if the timing of option grants were completely independent
of MNPI releases.\531\ Further, lowering an option's exercise price
through timing of an option award around an MNPI release affects the
sensitivity of the awarded options to changes in the issuer's share
price.\532\
---------------------------------------------------------------------------

    \530\ 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.
    \531\ See David Yermack, Good Timing: CEO Stock Option Awards
and Company News Announcements, 52 J. Fin. 449 (1997); see also Iman
Anabtawi, Secret Compensation, 82 N.C.L. Rev. 835 (2004); Alex
Edmans et al., Chapter 7--Executive Compensation: A Survey of Theory
and Evidence, Handbook of the Econ. of Corporate Governance 383-539
(2017). They note that the use of ``stealth compensation'' is a
``challenge for the shareholder value view'' and that, in most
cases, ``[i]f executive pay were efficiently designed and
competitive, there would be no need to disguise it from
shareholders... hiding these compensation elements from shareholders
is suggestive of rent extraction.'' They further note that ``[s]tock
options can be a means of camouflaging pay if directors or
shareholders do not fully understand their cost'' and that
opportunistic option timing practices ``are correlated with weak
corporate governance.''
    \532\ Spring-loading can cause a call option 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 option has a higher sensitivity to the share price
than the value of an at-the-money call. The effects of such changes
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.
---------------------------------------------------------------------------

    Some have argued that these practices may be the result of an
optimal compensation policy.\533\ Whether such practices constitute an
optimal compensation policy or not, a lack of transparency about such
compensation awards may limit investors' ability to fully gauge the key
terms of compensation arrangements and their implications for
executives' incentives and thus, potentially, firm value, and may limit
shareholders' ability to make informed voting decisions. The amendments
incrementally improve the accessibility of information about option
grant timing practices. Item 402(x) will require additional disclosure
regarding practices related to the awards of stock options, SARs, and
similar option-like instruments to provide a more comprehensive picture
of the timing of these awards relative to MNPI releases. New Item
402(x)(1) will require issuers to provide disclosure of their policies
and procedures related to timing of these awards in relation to the
disclosure of MNPI, which is not currently required. The tabular
disclosure requirement of new Item 402(x)(2) will make information
about such awards that are made shortly before MNPI releases more
readily available to investors.
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    \533\ See, e.g., Erik Devos et al., supra note 528 (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. But see
supra note 531.
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    New Item 402(x)(3) will require issuers to submit this disclosure
in Inline XBRL. This requirement is expected to offer incremental
benefits to investors by facilitating automated extraction of the
information for purposes of aggregation, analysis, and comparison
(across time periods and filers), potentially enabling more informed
investment and voting decisions. Even though investors can fairly
readily extract the dates of MNPI disclosures and share prices around
such MNPI disclosures respectively from EDGAR and third-party sources
today, because option grant information in proxy statement disclosures
does not use a structured data language, extracting such information
from HTML filings for a large set of issuers requires additional cost
and effort.\534\
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    \534\ Daily market prices can be obtained from a wide variety of
sources, including commercial databases that provide such data for a
subscription fee. Some commercial databases extract option grant
information from proxy statements and provide it for a subscription
fee, but they tend to focus their coverage on large companies. To
obtain comprehensive option grant information for all NEOs of mid-
size and small companies, investors would presently need to analyze
or ``scrape'' (apply a computer algorithm to extract information
from) a large number of proxy statement filings in the HTML format.
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    We recognize that there may be various reasons, besides strategic
spring-loading, for option grants within the specified number of days
before disclosure of MNPI. Nevertheless, we believe that making this
data more accessible to investors will help them analyze whether
spring-loading is a concern as part of a comprehensive review of the
various elements of compensation practices. Investors can then compare
this information with the executive's on-the-job performance in
assessing the optimality of executive compensation, which, will, on the
margin, benefit investors by equipping them to make better informed
voting and investment decisions. Combined with the narrative disclosure
of the applicable policies, the tabular disclosure also may
incrementally help to alleviate information asymmetries between issuers
and investors with respect to this aspect of executive compensation
practices and better inform investors about executives' incentives.
Besides contributing to better informed voting and investment
decisions, the disclosure may facilitate more informed shareholder say-
on-pay votes and votes in director elections.\535\
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    \535\ See, e.g., Glass Lewis, 2020 Proxy Paper Guidelines: An
Overview of the Glass Lewis Approach to Proxy Advice--United States,
12-13, 41-42 (2020), available at https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf. See also, e.g., Anabtawi,
supra note 531 (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 St. Louis U. L. J.
629 (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 Wash. U. J. L. & Pol'y
413 (2008).
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    Another potential benefit of the disclosure is that, to the extent
that strategically timed option grants 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),\536\ and to the extent that companies
forgo such grants in anticipation of the additional disclosure, the
disclosure requirement may improve shareholder value. However, if the
extra compensation is currently optimally awarded, forgoing such
compensation could negatively impact shareholder value.\537\
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    \536\ 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, e.g., Anabtawi, supra note 531; see also,
e.g., Bianchi, supra note 527 (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.''); see supra note 294.
    \537\ See, e.g., Tompkins, supra note 535; see also supra note
533. But see supra note 531.
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    Further, to the extent that the practice of strategically timed
option grants in some instances created incentives for 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,\538\ the amendments may partly mitigate such incentives. In
those instances, the indirect effect of the amendments may improve the
information content, timeliness, and quality of disclosures and result
in more efficient share prices and better informed voting and
investment decisions.
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    \538\ See supra note 526 and accompanying and following text.
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    We recognize that several factors may potentially limit the
magnitude of these economic benefits. First, the economic benefits of
the amendments are likely to be modest because the information required
by the new tabular disclosure can be obtained from other sources today.
In particular, the benefits of the new tabular disclosure will be
limited by the fact that investors today can research and assess, based
on historical option grant dates already required to be disclosed under
Item 402, how grant timing relates to EDGAR filings containing MNPI and
to share price changes around such filings (information that is
publicly accessible but not all found in one location), as indicated by
various commenters.\539\ The new disclosure will aggregate this
information in a more readily accessible tabular format in one
location, potentially incrementally lowering investor search costs and
increasing investor awareness of option grant timing around MNPI. The
Inline XBRL tagging requirement also is expected to further facilitate
automated extraction of the information for purposes of aggregation,
analysis, and comparison across time periods and filers.
---------------------------------------------------------------------------

    \539\ See supra note 298.
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    Second, the discussed benefits may also be limited to the extent
that issuers are already disclosing similar information today.
    Third, the discussed benefits may be attenuated if some investors
find the new tabular disclosure to be of limited use. For example, some
investors may find the tabular disclosure difficult to parse for
issuers with multiple filings containing MNPI and option awards. As
another example, investors may find that the information value of the
disclosure is diminished due to confounding events that occur between
the option grant date and the dates of MNPI filings within the
reporting window; however, the considerable narrowing of the reporting
window from the proposal should partly alleviate this potential
limitation. Investors in issuers with thinly traded securities may find
that the percentage change in the market value of the underlying
securities on the trading day following the MNPI disclosure, relative
to the trading day before the MNPI disclosure, may not fully capture
the effects of the MNPI disclosure. Some other investors may find that
the information value of the disclosure is diminished due to market- or
sector-wide events that may affect the issuer's share price on some
MNPI filing dates, notwithstanding the substance of the MNPI that was
disclosed. Further, some issuers may issue these awards shortly prior
to MNPI filings due to pure coincidence rather than strategic reasons,
as noted by some commenters.\540\ For instance, several commenters
noted that the timing of equity awards may be based on a meeting
schedule established several months in advance without consideration of
disclosure of MNPI.\541\ Further, issuers that routinely award options
on a specified schedule (e.g., monthly or quarterly) may have grants
within the reporting window of the new disclosure simply due to their
obligations to file quarterly reports or to report current events on
Form 8-K.\542\
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    \540\ See supra note 299.
    \541\ See supra note 300. Nevertheless, even if the grant
schedule dates are set in advance, to the extent that some investors
may be concerned about strategic management of MNPI disclosures
around such pre-scheduled grants, the tabular disclosure may help
investors more readily access information as they evaluate such
occurrences. See Daines et al. (2018), supra note 525.
    \542\ See supra note 301.
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    New Item 402(x)(1) will require annual disclosure of policies and
practices related to option grant timing close in time to the release
of MNPI and will offer new information that is not presently available
to investors. The disclosure of the presence or absence of such
policies and practices may inform investment and voting decisions. The
anticipation of public disclosure may also lead issuers to adopt
policies and practices disallowing option grants around MNPI, leading
to the benefits discussed above. To the extent such disclosures already
are provided by issuers in light of the 2006 Executive Compensation
Release,\543\ such indirect benefits incremental to the amendments
would be diminished.
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    \543\ See 2006 Executive Compensation Release, supra note 277.
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    A few other potential considerations may limit the economic
benefits of the new disclosures (both in Items 402(x)(1) and
402(x)(2)). First, shareholders of some issuers may view the described
option granting practices as an optimal compensation policy set by the
board.\544\ Second, the discussed benefits of the amendments are
expected to be modest at issuers that rely less on stock options and
primarily or exclusively grant restricted stock or do not grant equity-
linked compensation.\545\ Third,

the effects of the amendments may be modest to the extent that other
factors already deter spring-loading (for example, best practices
implemented by the compensation committee or generally robust internal
corporate governance mechanisms). Finally, the effects of the
amendments on executives may be small if issuers adjust compensation to
offset the decline in spring-loading 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).
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    \544\ See supra notes 533 and 537 and accompanying and following
text. But see supra note 531.
    \545\ 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, Equilar (Aug. 23, 2018), available at
https://www.equilar.com/press-releases/103-prevalence-of-options-decreases-as-companies-tie-awards-to-performance; Aubrey Bout et
al., S&P 500 CEO Compensation Increase Trends, 2020 Harv. L. School
Forum Corp. Gov. (Feb. 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
2021 (version retrieved on June 27, 2022), approximately 34 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. Small business issuers and registrants other
than small business issuers were required to comply with FAS 123R
beginning with the first reporting period of the first fiscal year
beginning on or after Dec. 15, 2005 and June 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)].
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3. Costs
    We recognize that the amendments to Item 402 requiring additional
disclosure of the timing of option awards and related corporate
policies will impose certain costs on issuers, as suggested by various
commenters.\546\ The amendments will 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 or
information statement. Because issuers either already provide such
information (option grant information and dates) for other disclosures
or can readily obtain the information (daily share prices and dates of
EDGAR filings), the direct costs are expected to be modest. We
acknowledge that issuers will incur some direct costs of aggregating
such existing information into the tabular format. Further, issuers
will incur compliance-related costs to assess which of the filings from
the reporting period contained MNPI and thus should be a part of the
tabular disclosure. These direct costs of complying with the new
tabular disclosure may be potentially mitigated to the extent that
issuers can leverage existing systems and recordkeeping practices used
to prepare the plan-based table disclosure required today, as well as
internal records on the dates of other disclosures filed on EDGAR with
the Commission.
---------------------------------------------------------------------------

    \546\ See supra note 297.
---------------------------------------------------------------------------

    Issuers will incur compliance costs of structuring the Item 402(x)
disclosure in Inline XBRL. Such costs will be higher for filers with
more option grants subject to the new disclosure. However, because
filers subject to the amendments already are or will soon be 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
compensation disclosure using a structured data language will likely be
relatively modest.\547\ We expect that the direct costs of Inline XBRL
tagging of the new disclosure may be potentially mitigated to the
extent that issuers subject to the amendments, which already utilize
Inline XBRL tagging to comply with other filing obligations, may
leverage existing systems or only incur an incremental cost when
utilizing outside service providers to tag the new disclosures in proxy
statements.
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    \547\ See supra note 496.
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    The amendments also may result in indirect costs for issuers and
executives. Disclosure of option grant timing practices could result in
reputational harms for some issuers or individual executives, such as
unfavorable say-on-pay votes, if investors perceive such practices as
inconsistent with shareholder value maximization and optimal