overlapping plans, such as gifts and estate-planning transactions, and
that directors and officers are the group most likely to have material
nonpublic information.\154\
---------------------------------------------------------------------------

    \152\ See, e.g., letters from AFL-CIO, Better Markets, CO PERA,
MD Bar, NYCC, NASAA, and Public Citizen.
    \153\ See letter from Kirkland.
    \154\ See, e.g., letters from SIFMA 3 and Sullivan.
---------------------------------------------------------------------------

    With respect to single-trade plans specifically, commenters had
mixed responses. One commenter expressed support for the limitation on
single-trade plans,\155\ while another commenter recommended that the
Commission eliminate the availability of the Rule 10b5-1 affirmative
defense for all single-trade plans.\156\ On the other hand, some
commenters noted that single-trade plans often have legitimate
uses.\157\ For example, one commenter maintained that, if adopted, the
Commission should provide exceptions for derivative transactions,
gifts, estate-planning transactions, and employee benefit plan
transactions.\158\ Other commenters indicated that the proposed
restriction could be evaded by splitting one trade that would be
authorized under such a plan into two trades.\159\
---------------------------------------------------------------------------

    \155\ See letter from NYSE.
    \156\ See letter from Sen. Warren et al.
    \157\ See, e.g., letters from Monday.com Ltd (``Monday.com''),
BioNJ, SCG, SIFMA 3, Davis Polk, Fenwick, Jones Day, Shearman, and
Wilson Sonsini
    \158\ See letter from Sullivan.
    \159\ See letter from Cravath and Davis Polk.
---------------------------------------------------------------------------

    In addition, several commenters expressed concern that the proposed
restrictions on multiple overlapping and single-trade Rule 10b5-1 plans
would negatively impact certain employee compensation plan transactions
that are structured as Rule 10b5-1 plans, such as sales of securities
used to generate funds to cover the withholding taxes associated with
equity vesting and elections under 401(k) plans or employee stock
purchase plans that may be structured as Rule 10b5-1 plans (``sell-to-
cover transactions'').\160\ Some of these commenters asserted that
these transactions do not implicate the concerns that the proposed
amendment is intended to address because a

corporate insider has limited discretion as to the timing or the number
of shares sold to cover the tax liability.\161\ Other commenters
generally stated that under the proposed limitations, insiders could
not maintain both a traditional Rule 10b5-1 plan and a plan designed to
execute sell-to-cover transactions.\162\
---------------------------------------------------------------------------

    \160\ See, e.g., letters from Fenwick, HP, Monday.com, SCG,
Sullivan, and Wilson Sonsini.
    \161\ See, e.g., letters from BioNJ, Monday.com, and Simpson
Thatcher.
    \162\ See, e.g., Sullivan and Wilson Sonsini.
---------------------------------------------------------------------------

    With respect to the aspect of the proposed definition of ``multiple
concurrent trading arrangements'' under which an insider could
establish a separate arrangement for each ``class of securities,''
several commenters generally supported the limitation on multiple
overlapping plans as proposed.\163\ One commenter, however, argued that
the proposed definition would encourage insiders to establish parallel
trading arrangements for common stock, preferred stock, and
options.\164\ Because the values of these instruments are all highly
correlated, the commenter stated, the proposed rule would still allow
insiders to opportunistically use material nonpublic information by
establishing such parallel arrangements and then cancelling one or more
of them.
---------------------------------------------------------------------------

    \163\ See letters from Better Markets, CII, and CO PERA.
    \164\ See letter from NASAA.
---------------------------------------------------------------------------

    Many commenters did not support the proposed restriction on
multiple overlapping Rule 10b5-1 plans.\165\ Some commenters asserted
that this limitation was unnecessary, because, given that the
affirmative defense already does not permit adoption of hedged plans in
which a person takes offsetting financial positions, there is no
additional abusive conduct to address.\166\
---------------------------------------------------------------------------

    \165\ See, e.g., letters from ABA, ACCO, BioNJ, Chamber of
Commerce 2, Chevron, Coalition Letter, Cravath, Davis Polk, DLA,
Dow, FedEx, Fenwick, HP, HRPA, HudsonWest, Jones Day, K&L Gates,
Kirkland, Manulife, Monday.com, NAM, NVCA, NYC Bar, Paul Weiss, PNC,
Quest, Quinn, SCG, Shearman, Simpson, and Wilson Sonsini.
    \166\ See, e.g., letters from Davis Polk and Shearman.
---------------------------------------------------------------------------

    As with single-trade plans, a number of commenters indicated that
there are legitimate, common uses of multiple, overlapping Rule 10b5-1
plans.\167\ Some commenters noted, for example, that issuers often use
multiple concurrent Rule 10b5-1 plans with different brokers to execute
share repurchase transactions.\168\ Other commenters indicated that
directors and officers often employ multiple Rule 10b5-1 plans because
they hold shares in different accounts with multiple financial
institutions.\169\ They noted, for example, that a corporate insider
may hold shares received upon the exercise of stock options in an
account with the financial institution that is the administrator of the
issuer's incentive equity plan, and hold shares acquired through open
market transactions or other means in a separate account with a
different financial institution.
---------------------------------------------------------------------------

    \167\ See, e.g., letters from Chamber of Commerce 2, Cravath,
Davis Polk, Dow, FedEx, HP, Jones Day, Manulife, Monday.com, NVCA,
NYC Bar, Quest, Shearman, Sullivan, and Wilson Sonsini.
    \168\ See, e.g., letters from Cravath, Davis Polk, Dow, FedEx,
Quest, Shearman, and Sullivan.
    \169\ See, e.g., letters from Quest, and Wilson Sonsini.
---------------------------------------------------------------------------

    A number of commenters expressed concern that the wording of the
proposed amendment regarding multiple overlapping plans was overly
broad as it could encompass every open market transaction, including
transactions that are not executed under a Rule 10b5-1 plan.\170\
Several commenters urged the Commission to clarify that this provision
would not prohibit the adoption of a new Rule 10b5-1 plan while an
existing plan is in effect as long as no trades could commence under
the new plan until the existing plan has expired.\171\
---------------------------------------------------------------------------

    \170\ See, e.g., letters from Dow, SCG, ABA, Cleary, Paul Weiss,
Shearman, Sullivan, and Wilson Sonsini.
    \171\ See, e.g., letters from Jones Day, Kirkland, Paul Weiss,
Simpson, Shearman, and Wilson Sonsini.
---------------------------------------------------------------------------

    Finally, several commenters contended that the proposed cooling-off
period for Rule 10b5-1 plans was a more effective method to address the
concerns over potential abusive uses of multiple overlapping and
single-trade Rule 10b5-1 plans.\172\
---------------------------------------------------------------------------

    \172\ See, e.g., letters from Manulife, Cravath, NAM, and
Cleary.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments, we are adopting the proposed
amendment addressing multiple overlapping Rule 10b5-1 plans with
certain modifications. With respect to multiple overlapping Rule 10b5-1
contracts, instructions or plans, the final amendment will add a
condition to the Rule 10b5-1(c)(1) affirmative defense that persons,
other than issuers, may not have another outstanding (and may not
subsequently enter into any additional) contract, instruction or plan
that would qualify for the affirmative defense under the amended Rule
10b5-1 for purchases or sales of any class of securities of the issuer
on the open market during the same period. We disagree with commenters
who urged us to limit these provisions only to directors and
officers.\173\ While it is true, as commenters note and as we observed
in the Proposing Release, that officers and directors are most likely
to have access to material nonpublic information,\174\ other traders
may at times also have such access. Trading by these other persons can
impact investors and investor confidence in much the same ways as
trading by officers and directors. For example, we think it could
undermine investor confidence to learn that insiders who are not
Section 16 officers were able to opportunistically manipulate their
trading after receiving material nonpublic information, so that the
insider could profit at the expense of uninformed investors. As we
explain below, we think that any financial impact on insiders other
than officers and directors resulting from these limitations will be
more limited than in the case of the cooling-off period.
---------------------------------------------------------------------------

    \173\ See letters from Sullivan and SIFMA 3.
    \174\ See Proposing Release at 23; letters from CII, Cravath,
and SIFMA.
---------------------------------------------------------------------------

    Accordingly, we disagree with those commenters who suggested that
trades by individuals other than officers and directors would not
affect the integrity of securities markets.\175\ While other traders
may not necessarily control corporate trading or disclosure decisions,
they still may stand to profit substantially from trading on any
material nonpublic information to which they have access. Further,
because Form 4 may reveal potentially opportunistic trades to the
public, we think the fact that most persons, other than Section 16
officers, do not file Form 4 is a reason for more safeguards with
respect to their trading, not fewer.
---------------------------------------------------------------------------

    \175\ See letters from Cravath and Davis Polk.
---------------------------------------------------------------------------

    In reaching our determination, we are mindful that some traders,
such as rank-and-file employees, may have liquidity and diversification
needs that are greater than those of more highly compensated officers,
as commenters noted.\176\ In recognition of these needs, we are
adopting a modification to the proposed limitations, described in more
detail below, under which traders may employ multiple plans to satisfy
certain tax obligations incident to equity compensation. For insiders
who are already trading under an existing plan when such liquidity
needs arise, meeting those needs will typically require the insider to
modify the existing plan, as our limitation on multiple plans will
prevent the insider from adopting an additional plan to cover the newly
planned transactions. This modification will in turn likely require the
insider to pause trading under the preexisting plan for the duration of
the insider's cooling-off

period. Because the cooling-off period for insiders other than officers
and directors is 30 days, however, we believe that any resulting impact
on the insider should be limited. While we agree that it is possible
this cost, or other barriers, may reduce the appeal of requiring non-
officers to make use of a Rule 10b5-1 plan, as one commenter
noted,\177\ we think on balance that it is better to ensure that any
Rule 10b5-1 plans that are adopted in fact impose meaningful limits on
opportunistic trading. More widespread adoption of Rule 10b5-1 plans is
unlikely to be helpful to investors or markets if such plans do not
constrain many opportunistic trades.
---------------------------------------------------------------------------

    \176\ See letters from Chamber of Commerce 2 and NAM.
    \177\ See letter from Davis Polk.
---------------------------------------------------------------------------

    We are modifying the original proposal by removing the reference to
``same class of securities,'' so that the multiple overlapping plans
restriction will apply to contracts, instructions or plans for any
class of securities of the issuer. We agree with the commenter who
argued that, given the strong likelihood that the values of different
classes of securities of a given issuer are highly correlated, allowing
the use of multiple plans for trading in the securities of one issuer
would allow for significant possibility of opportunistic behavior.\178\
As a result, persons (other than the issuer) may only have one such
contract, instruction or plan, rather than one contract, instruction or
plan for each class of securities.
---------------------------------------------------------------------------

    \178\ See letter from NASAA.
---------------------------------------------------------------------------

    This condition is intended to address the concerns discussed above
about an insider's use of multiple overlapping plans in ways that could
allow material nonpublic information to factor into the trading
decision. Because these concerns are not limited to hedged plans where
a trader takes offsetting financial positions, we disagree with those
commenters who asserted that the existing hedging restriction of the
Rule 10b5-1 affirmative defense renders this limitation unnecessary.
With a sufficient number of different plans, an insider could achieve a
desired trading outcome. For example, an insider could adopt several
plans to sell their company stock at varying prices in excess of the
current share price, and then cancel the plans authorizing trades at
the lowest of these prices upon learning nonpublic information that the
insider expects to substantially increase the share price. For similar
reasons, we disagree with commenters that the cooling-off period
sufficiently addresses our concerns given that an insider could
maintain multiple overlapping plans that satisfy the cooling-off period
and then cancel plans based on later-obtained material nonpublic
information.
    In light of comments received, we are making three further
modifications to this condition. The first addresses an insider's use
of multiple brokers to execute trades pursuant to a single Rule 10b5-1
plan that covers securities held in different accounts. Specifically, a
series of separate contracts with different broker-dealers or other
agents acting on behalf of the person (other than the issuer) to
execute trades thereunder may be treated as a single ``plan,'' provided
that the contracts with each broker-dealer or other agent, when taken
together as a whole, meet all of the applicable conditions of and
remain collectively subject to the provisions of Rule 10b5-1(c)(1). A
modification of any such contract will be a modification of each other
contract or instruction such single plan. We agree with commenters that
in circumstances where a corporate insider holds securities in separate
accounts with different financial institutions, the execution of trades
by multiple brokers under a Rule 10b5-1 plan is less likely to raise
the concerns underlying this condition of the rule. We recognize that a
trader will typically enter into a formally distinct contract or
agreement with each agent authorized to conduct trades. Thus, for
purposes of the multiple overlapping plans restriction, a series of
formally distinct such contracts may be treated as a single ``plan''
where taken together the contracts otherwise satisfy the conditions of
the rule. As we have described, the overlapping-plans condition is
intended to prevent selective alteration or cancellation of Rule 10b5-1
plans to achieve a particular trading outcome when an insider is aware
of material nonpublic information, and for that reason, we are
providing that modification (as defined in the Rule) of a contract with
any given agent will also be treated as a modification of the other
contracts making up the plan.
    In addition, the final amendment provides that a broker-dealer or
other agent executing trades on behalf of the insider pursuant to the
Rule 10b5-1 plan may be substituted by a different broker-dealer or
other agent as long as the purchase or sales instructions applicable to
the substituted broker and the substitute are identical, including with
respect to the prices of securities to be purchased or sold, dates of
the purchases or sales to be executed, and amount of securities to be
purchased or sold. Under this provision, an insider will not lose the
benefit of the affirmative defense where the insider closes a
securities account with a financial institution and transfers the
securities to a different financial institution. If an insider provides
instructions to the new broker-dealer in accordance with this
provision, there is more limited possibility for selective cancellation
because substituting a broker authorized to trade under a Rule 10b5-1
plan would not change the remaining trades in ways that likely would
allow the insider to profit on material nonpublic information. We note,
however, that a plan modification, such as the substitution or removal
of a broker that is executing trades pursuant to a Rule 10b5-1
arrangement on behalf of the insider that changes the purchase or sale
amount, price or date on which purchases or sales are to be executed is
a termination of such plan and the adoption of a new plan. This will
further limit opportunities for opportunistic manipulation of broker-
dealers executing trades on behalf of the insider.
    The second change permits persons (other than the issuer) to
maintain two separate Rule 10b5-1 plans at the same time so long as
trading under the later-commencing plan is not authorized to begin
until after all trades under the earlier-commencing plan are completed
or expire without execution.\179\ This provision would not be available
for the later-commencing plan, however, if the first trade under the
later-commencing plan is scheduled to begin during the ``effective
cooling-off period''--namely, the cooling-off period that would be
applicable under paragraph (c)(1)(ii)(B) to the later-commencing plan
if the date of adoption of the later-commencing plan were deemed to be
the date of termination of the earlier-commencing plan.\180\ Absent
this qualification, an

insider might cancel the earlier-commencing plan before its scheduled
completion but still trade under the later-commencing plan in fewer
than the minimum 90 days (or 30 days) that would otherwise be required
for a new plan that is established after a plan termination. Both plans
must meet all other conditions of the affirmative defense, including
the cooling-off period. Under these circumstances, we agree with
commenters that there would be a much lower risk of a corporate insider
who is aware of material nonpublic information profiting by
opportunistically canceling a trading plan as the Rule 10b5-1 plans
would not authorize trading during the same period of time.
---------------------------------------------------------------------------

    \179\ See Rule 10b5-1(c)(1)(ii)(D) which provides that a
contract, instruction, or plan that would meet the other
requirements of Rule 10b5-1(c)(1)(i) may still qualify for the
affirmative defense where the director or officer has one other
contract, instruction, or plan that would qualify for the
affirmative defense for purchases or sales of the same class of
securities on the open market and trading under one contract,
instruction, or plan (``later-commencing plan'') is not authorized
to begin until after all trades under the other contract,
instruction, or plan (``earlier-commencing plan'') are completed.
    \180\ For example, an insider who is not an officer or director
has in place an existing Rule 10b5-1 plan with a scheduled date for
the latest authorized trade of May 31, 2023. On May 1, 2023, that
insider adopts a later-commencing plan, intended to qualify for the
affirmative defense under Rule 10b5-1, with a scheduled date for the
first authorized trade of June 1, 2023. If the insider terminates
the earlier-commencing plan on May 15, the later-commencing plan
will not receive the benefit of the affirmative defense, because
June 1 is within 30 days of May 15, the date of termination of the
earlier-commencing plan, and thus June 1 is during the ``effective
cooling-off period.'' However, if the later-commencing plan were
scheduled to begin trading on July 1, 2023, it could still receive
the benefit of the affirmative defense because July 1, 2023 is more
than 30 days after May 15 and thus is outside the ``effective
cooling-off period.''
---------------------------------------------------------------------------

    Third, we are adopting a modification for plans authorizing certain
``sell-to-cover'' transactions in which an insider instructs their
agent to sell securities in order to satisfy tax withholding
obligations at the time an award vests. Under this modification, an
insider will not lose the benefit of the affirmative defense with
respect to an otherwise eligible Rule 10b5-1 plan if the insider has in
place another plan that would qualify for the affirmative defense, so
long as the additional plan or plans only authorize qualified sell-to-
cover transactions. Such plans that authorize only such qualified sell-
to-cover transactions are eligible for the affirmative defense
notwithstanding the fact that the insider may have another plan
eligible for the affirmative defense in place. A plan authorizing sell-
to-cover transactions is qualified for this provision where the plan
authorizes an agent to sell only such securities as are necessary to
satisfy tax withholding obligations incident to the vesting of a
compensatory award, such as restricted stock or stock appreciation
rights, and the insider does not otherwise exercise control over the
timing of such sales.\181\
---------------------------------------------------------------------------

    \181\ In our view, a plan that authorizes an agent to sell only
such securities as are necessary to satisfy tax withholding
obligations incident to the vesting of a compensatory award meets
the requirement that the plan does ``not permit the person to
exercise any subsequent influence over how, when, or whether to
effect . . . sales,'' Rule 10b5-1(c)(1)(B)(3) [17 CFR 240.10b5-
1(c)(1)(B)(3)].
---------------------------------------------------------------------------

    We are providing this modification because we agree with commenters
who contended that under these limited circumstances, there is little
danger of opportunistic trading. Because vesting schedules are
generally set in advance by the issuer, the amount of securities to be
sold would be determined by the value of the award and the taxes due on
that value. We are further stipulating that eligible plans cannot
provide the insider with control over the timing of any sales. For
these reasons, we think it is highly unlikely that insiders would be
able to make opportunistic use of such additional plans.
    We are not extending this modification to include sales incident to
the exercise of option awards because it could create a risk of
opportunistic trading. Option exercises occur at the discretion of the
insider, and such decisions could occur when the insider later obtains
material nonpublic information. To the extent that commenters have
suggested that an insider with a sell-to-cover plan tied to an option
exercise could not use the revised Rule 10b5-1 affirmative defense, we
disagree.\182\ The revised affirmative defense would not prevent a
corporate insider from entering into a Rule 10b5-1 plan that includes
instructions directing a broker to sell securities sufficient to meet
the tax withholding obligations incident to an option or similar award
exercise. For example, the insider might provide that a designated
agent is authorized to sell sufficient securities to cover any tax
withholding obligations incident to an option exercise. Such
instructions can be included in a single Rule 10b5-1 plan along with
instructions to sell based on other financial variables. Accordingly,
an officer or director may take advantage of the affirmative defense
both for sell-to-cover transactions and other planned trades, provided
that the conditions of the affirmative defense are met, including the
cooling-off period.
---------------------------------------------------------------------------

    \182\ See supra note 161.
---------------------------------------------------------------------------

    In addition, we are not adopting the proposed limitation on
multiple plans and single-trade plans for the issuer at this time. As
with the cooling-off period, we believe that further consideration of
potential application to the issuer is warranted.
    Finally, we are adopting the proposed limitation on single-trade
plans with modifications. Consistent with the approach to multiple
overlapping plans, the limitation will apply to the Rule 10b5-1 plans
of all persons, other than the issuer. As a result, the final rule
provides that if the contract, instruction, or plan is designed to
effect the open-market purchase or sale of the total amount of
securities as a single transaction, the contract, instruction or plan
will not receive the benefit of the affirmative defense unless: (1) the
person who entered into the contract, instruction, or plan has not,
during the prior 12-month period, adopted another contract,
instruction, or plan that was designed to effect the open-market
purchase or sale of the total amount of securities subject to that plan
in a single transaction; and (2) such other contract, instruction, or
plan in fact was eligible to receive the affirmative defense. A person
(other than the issuer) will be able to rely on the Rule 10b5-
1(c)(1)(ii) affirmative defense for only one single-trade plan during
any 12-month period. The defense will only be available for a single-
trade plan if the person had not, during the preceding 12-month period,
adopted another single-trade plan, where the other plan qualified for
the affirmative defense under Rule 10b5-1.\183\ We disagree with the
commenter who argued that, due to the possibility that an insider might
divide their planned single trade into multiple trades, any limit on
single-trade plans would be ineffective.\184\ For example, certain
insiders who divide a planned trade over several days are likely to
realize reduced profits from trading after a Form 4 is filed, which at
least in part, will reduce an insider's incentives to engage in trading
while aware of material nonpublic information.
---------------------------------------------------------------------------

    \183\ We have added this qualification because we do not intend
for a plan that is ineligible for the affirmative defense to
preclude the affirmative defense for another plan, even if both
trades are single-trade plans.
    \184\ See letter from Davis Polk.
---------------------------------------------------------------------------

    For this purpose, a plan is ``designed to effect'' the purchase or
sale of securities as a single transaction when the contract,
instruction, or plan has the practical effect of requiring such a
result. In contrast, a plan is not designed to effect a single
transaction where the plan leaves the person's agent discretion over
whether to execute the contract, instruction, or plan as a single
transaction. Similarly, a plan is also not designed to effect the
purchase or sale of securities as a single transaction when (1) the
contract, instruction, or plan does not leave discretion to the agent,
but instead provides that the agent's future acts will depend on events
or data not known at the time the plan is entered into, such as a plan
providing for the agent to conduct a certain volume of sales or
purchases at each of several given future stock prices; and (2) it is
reasonably foreseeable at the time the plan is entered into that the
contract, plan, or instruction might result in multiple transactions.
    We are adopting the limitation on single-trade plans because we are
concerned that trades under such plans may provide particularly
profitable opportunities for insiders who are trading while aware of
material

nonpublic information. As we described in the Proposing Release, a
recent study found that trades under a single-trade plan avoid losses
that appear statistically unlikely to be avoided by uninformed
traders.\185\ This pattern persisted even when the first such trade
occurred more than 120 days after adoption of the plan, suggesting that
a cooling-off period alone may not be sufficient to prevent
opportunistic single-trade plans.\186\ For these reasons, we disagree
with the commenters who suggested that the cooling-off period would be
sufficient to address the problem addressed by the single-trade
limitation.\187\
---------------------------------------------------------------------------

    \185\ See Gaming the System, supra note 20 at 2, 14 (observing
that ``trades of single-trade plans are consistently loss-avoiding
regardless of cooling-off period''). But see infra note 400.
    \186\ See id.
    \187\ See letters from Manulife, Cravath, NAM, and Cleary.
---------------------------------------------------------------------------

    Several commenters expressed concern about potential ambiguity or
uncertainty around the concept of a single-trade plan and asked us to
clarify the scope of this provision, such as its potential application
to block trades of venture capital funds.\188\ We agree with those
commenters who indicated that an insider should not be at risk of
losing the benefit of the affirmative defense due to decisions outside
the insider's control when the insider did not design the Rule 10b5-1
plan to effect the authorized purchases or sales in a single
transaction, such as in the case where the insider's agent exercises
their own discretion to complete all authorized trading in a single
transaction. For that reason, we have added the ``designed to effect''
provision discussed above. We are concerned, however, that further
delineating what constitutes a single transaction for purposes of this
rule could create incentives to design Rule 10b5-1 plans that avoid
application of the single-trade plan limitation.
---------------------------------------------------------------------------

    \188\ See letters from Sullivan, SIFMA 3 and NVCA.
---------------------------------------------------------------------------

    For reasons similar to those we have explained with respect to
multiple overlapping trades, in response to comments, we are modifying
the proposed single-trade limitation with respect to qualified sell-to-
cover transactions. This modification applies to the same plans
eligible for the sell-to-cover provision of the overlapping trade
limitation. Again, we think that such plans present little, if any
risk, of opportunistic trading.
    Also for reasons similar to those we have explained with respect to
multiple overlapping trades, we are applying the single-trade
limitation to all persons other than the issuer. The single-trade
limitation helps to ensure that the affirmative defense provides
meaningful constraints on the extent to which material nonpublic
information affects an insider's decision to trade. While we recognize
that the limitation also may impose some moderate limitations on
insiders' ability to obtain liquidity and diversification, as noted, we
think that there are alternative means for such insiders to achieve
these goals.
    Because single-trade plans may have legitimate uses to address one-
time liquidity needs, we also disagree with the commenter who suggested
that the affirmative defense should not be available for any single-
trade plan.\189\ Overall, the limitation we are adopting is intended to
balance legitimate uses of single-trade plans against the potential for
abuse.
---------------------------------------------------------------------------

    \189\ See letter from NASAA.
---------------------------------------------------------------------------

4. The Amended Good Faith Condition
a. Proposed Amendments
    The Rule 10b5-1(c)(1) affirmative defense is only available if a
trading arrangement was entered into in good faith and not as part of a
plan or scheme to evade the prohibitions of the rule. The Commission
proposed to amend this condition to require that the contract,
instruction, or plan also be ``operated'' in good faith.
    In proposing this amendment, the Commission noted its concern that
some corporate insiders may try to improperly influence the timing of
corporate disclosures to benefit their trades under a Rule 10b5-1
trading arrangement, such as by delaying or accelerating the release of
material nonpublic information.\190\ The Commission also noted its
concern that a Rule 10b5-1 plan may be canceled or modified in an
attempt to evade the prohibitions of the rule without affecting the
availability of the affirmative defense. Moreover, the Commission
stated that requiring that a trader both enter into and operate a Rule
10b5-1 plan in good faith would help deter fraudulent and manipulative
conduct and enhance investor protection throughout the duration of the
trading arrangement. Thus the Commission intended the proposed
amendment to make clear that the affirmative defense would not be
available to a trader who, for example, modifies their plan in an
effort to evade the prohibitions of the rule or uses their influence to
affect the timing of corporate disclosure to occur before or after a
planned trade to make it more profitable or to avoid or reduce a loss.
---------------------------------------------------------------------------

    \190\ See Proposing Release, supra note 23, at 8693.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters generally supported the proposed amendment.\191\
Some of these commenters indicated that the proposed amendment would
deter opportunistic trading in connection with Rule 10b5-1 plans and
increase investor confidence.\192\ One of these commenters also
expressed the view that, among other things, this requirement would
ensure that there is liability where persons attempt to manipulate the
timing of corporate announcements to benefit trades made pursuant to a
Rule 10b5-1 plan.\193\ Another commenter asserted that adding the
``operate in good faith'' requirement would be helpful in improving the
insider trading compliance programs of issuers.\194\
---------------------------------------------------------------------------

    \191\ See, e.g., letters from CII, AFL-CIO, Better Markets, CO
PERA, NYCC, NASAA, NYSE, and O'Reilly.
    \192\ See, e.g., letters from AFL-CIO, Better Markets, CII, and
NASAA.
    \193\ See letter from Better Markets.
    \194\ See letter from O'Reilly.
---------------------------------------------------------------------------

    A number of commenters, however, opposed adding the condition that
a Rule 10b5-1 plan be ``operated'' in good faith.\195\ Many of these
commenters indicated that the concept of ``operated in good faith'' was
not sufficiently clear and would lead to uncertainty surrounding the
availability of the affirmative defense.\196\ Similarly, another
commenter asked the Commission to clarify the extent to which a failure
to operate a Rule 10b5-1 plan in good faith would invalidate the
affirmative defense for transactions that were executed under the
plan.\197\ Some commenters contended that, given that the scope of
conduct or activity covered by the phrase was potentially extensive,
this condition could inhibit the use of Rule 10b5-1 plans.\198\
Finally, another commenter suggested requiring that a Rule 10b5-1 plan
be ``modified in good faith'' as an alternative.\199\ This commenter
contended that ``modified'' is a clearer term and would cover
circumstances where a trader amends or terminates a Rule 10b5-1 plan
based on material nonpublic information.
---------------------------------------------------------------------------

    \195\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath,
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2,
and SIFMA 3.
    \196\ See, e.g., letters from Quest, Cleary, Cravath, Davis
Polk, DLA, Fenwick, Shearman, Wilson Sonsini, and PNC, SIFMA 2,
SIFMA 3 and Chamber of Commerce 2.
    \197\ See letter from PNC.
    \198\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath,
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2,
and SIFMA 3.
    \199\ See letter from Fenwick.

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c. Final Amendment
    Having considered the comments received, we are adopting the
amendment to Rule 10b5-1(c)(1)(ii) with a modification in response to
comments concerning the term ``operated in good faith.'' The final
rules add the condition that the person who entered into the Rule 10b5-
1 contract, instruction, or plan ``has acted in good faith with respect
to'' the contract, instruction, or plan. As discussed above, since the
time that Rule 10b5-1 was adopted, we have become concerned that
corporate insiders may take actions after adopting a Rule 10b5-1 plan
to benefit from material nonpublic information the insider acquires
after establishment of the plan. We therefore agree with commenters
that this requirement will help ensure that traders do not engage in
opportunistic trading in connection with Rule 10b5-1 plans, and will
help deter corporate insiders from improperly influencing the timing of
corporate disclosures to benefit their trades under such a plan.\200\
---------------------------------------------------------------------------

    \200\ See, e.g., letters from AFL-CIO, Better Markets, CII, and
NASAA.
---------------------------------------------------------------------------

    Many commenters appeared to understand that the proposed ``operated
in good faith'' language was intended to govern the behavior of the
trader.\201\ Some commenters, however, expressed concern that the term
``operated'' could be ambiguous or cause confusion because it could be
read to apply, or might apply only, to the insider's agents, such as
brokers who executed the trades authorized by the insider.\202\ To make
clear that the good faith obligation applies to the activities of the
insider (including the insider's efforts to direct the activities of
others), we have modified this language to state that the trader must
``act[ ] in good faith with respect to the contract, instruction, or
plan.''
---------------------------------------------------------------------------

    \201\ See letters from Davis Polk, DLA Piper, Dow, Home Depot,
and Shearman & Sterling.
    \202\ See letters from Cravath, Fenwick, and PNC.
---------------------------------------------------------------------------

    In adopting this amendment, we disagree with commenters that the
expanded good faith requirement is not sufficiently clear. The concept
of ``good faith'' should be familiar to corporate insiders as it has
been a component of Rule 10b5-1 since its adoption two decades
ago.\203\ This amendment extends this familiar concept from the time of
adoption through the duration of the Rule 10b5-1 plan to better ensure
that material nonpublic information does not factor into the decision
to trade under such plans, as it would when, for example, a corporate
insider materially modifies a planned trade at their own direction and
to their own benefit,\204\ based on material nonpublic information
acquired after the plan was entered into. Indeed, a corporate insider
would not be operating a Rule 10b5-1 plan in good faith if the
corporate insider, while aware of material nonpublic information,
directly or indirectly induces the issuer to publicly disclose that
information in a manner that makes their trades under a Rule 10b5-1
plan more profitable (or less unprofitable). In such a scenario,
notwithstanding that the Rule 10b5-1 plan may have been adopted or
entered into in good faith, the corporate insider would not be entitled
to the affirmative defense. Moreover, we disagree with commenters who
argue that this requirement will deter adoption of Rule 10b5-1 plans by
individuals who do not intend to misuse material nonpublic information.
---------------------------------------------------------------------------

    \203\ See 2000 Adopting Release, supra note 8.
    \204\ A modification of a Rule 10b5-1 plan in an effort to allow
the individual to trade on the basis of material nonpublic
information would not constitute acting in good faith. In light of
our adoption of a limitation on multiple plans, however, we
anticipate that an individual will generally not be able to engage
in any trade under a Rule 10b5-1 plan following a cancellation of
such a plan, and therefore the applicability of the affirmative
defense will not be at issue in that situation.
---------------------------------------------------------------------------

    Commenters also asked us to clarify whether the obligation to act
in good faith would not be met in other factual settings, such as in
the event an issuer halts any trading by insiders under Rule 10b5-1
plans due to a possible merger, or where it similarly blocks sales
transactions after learning of material nonpublic information that it
expects will lead to a decline in the market price of its
securities.\205\ As we have stated, this amendment relates to
activities within the control of the insider. Accordingly, we agree
with the commenter that cancellations directed by the issuer where such
cancellations are outside the control or influence of the insider may
not, by themselves, implicate the good faith condition.
---------------------------------------------------------------------------

    \205\ See, e.g., letters from Davis Polk, Shearman (requesting
that we clarify that cancellations for legitimate reasons are not
bad faith); and Wilson Sonsini (requesting we clarify that
cancellations are not per se bad faith).
---------------------------------------------------------------------------

    Finally, we disagree with the commenter who recommended that we
instead require good faith ``modification'' of a plan as this narrower
condition would not address all of our concerns. For example, as we
have noted, efforts to manipulate the timing of releases of corporate
information to benefit an officer's or a director's planned trades may
not involve a modification of a plan but would be inconsistent with
established notions of good faith. While the condition that we are
adopting would cover such efforts, the commenter's alternative might
not do so.

B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

    Currently, there are no mandatory disclosure requirements
concerning the use of Rule 10b5-1 trading arrangements or other trading
arrangements by issuers or corporate insiders.\206\ The lack of
comprehensive public information about the use of these arrangements--
whether pursuant to a Rule 10b5-1 plan or otherwise--creates an
environment in which it is more difficult for investors to assess
whether those parties may be misusing their access to material
nonpublic information. This lack of transparency may allow improper
trading to go undetected and thereby undermine the deterrent impact of
our insider trading laws. In addition, the lack of public information
about the use of these arrangements by corporate insiders limits
investors' ability to assess potential incentive conflicts and
information asymmetries when making investment and voting decisions.
Requiring more robust disclosure of particular trading arrangements
should reduce potential abuse of the rule, and inform investors and the
Commission regarding potential violations of Rule 10b-5.
---------------------------------------------------------------------------

    \206\ Form 144 (17 CFR 239.144) under the Securities Act
contains a representation that is used by a filer of the form to
indicate whether such person has adopted a written trading plan or
given trading instructions to satisfy Rule 10b5-1. Form 144 is a
notice form that must be filed with the Commission by an affiliate
of an issuer who intends to resell restricted or ``control''
securities of that issuer in reliance upon Securities Act Rule 144
(17 CFR 230.144). In 2002, the Commission proposed amendments to
Form 8-K that, among other things, would have required registrants
to report on the form any adoption, modification or termination of a
Rule 10b5-1 trading arrangement by any director and certain officers
of the registrant. See Form 8-K Disclosure of Certain Management
Transactions, Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914 (Apr.
23, 2002)]. The Commission did not adopt this proposal.
---------------------------------------------------------------------------

    In addition, issuers are currently not required to disclose their
insider trading policies or procedures. In the Proposing Release, the
Commission stated that information about insider trading policies and
procedures is important, and would help investors to understand and
assess how the registrant protects material nonpublic information from
misuse. While the codes of ethics that registrants are required to
disclose pursuant to Item 406 of Regulation S-K may address insider
trading issues, they may lack the detail necessary for investors to
assess actual practices

surrounding potential insider trading. General statements such as that
an issuer ``has a policy regarding insider trading'' or ``prohibits
insider trading'' do not meaningfully assist investors in their
assessments of whether an issuer's efforts to prevent insider trading
are likely to be effective. While not every individual component of an
insider trading policy is necessarily material on its own, together, a
comprehensive description of an insider trading policy can help
investors to assess the thoroughness and seriousness with which the
issuer addresses the prohibition of trading on the basis of material
nonpublic information by its officers, directors and employees. More
detailed disclosure about these policies and procedures could therefore
improve investor confidence, and in turn, potentially contribute to
market liquidity and capital formation.
    To address these information gaps, the Commission proposed new Item
408 under Regulation S-K and corresponding amendments to Forms 10-Q and
10-K to require: (1) quarterly disclosure of the use of Rule 10b5-1 and
other trading arrangements by a registrant, and its directors and
officers for the trading of the issuer's securities; and (2) annual
disclosure of a registrant's insider trading policies and procedures.
The Commission also proposed new Item 16J to Form 20-F to require
similar annual disclosure of a foreign private issuer's insider trading
policies and procedures. In addition, the Commission proposed
amendments to Forms 4 and 5 to require insiders to identify whether a
reported transaction was executed pursuant to a Rule 10b5-1(c) trading
arrangement.
1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 Trading
Arrangements
a. Proposed Amendments
    Proposed new Item 408(a) of Regulation S-K would require
registrants to disclose:
     Whether, during the registrant's most recently completed
fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report), the registrant adopted or terminated any contract,
instruction or written plan to purchase or sell securities of the
registrant, whether or not intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c), and provide a description of the material
terms of the contract, instruction or written plan, including:
    [cir] The date of adoption or termination; \207\
---------------------------------------------------------------------------

    \207\ As discussed above, the Commission also proposed to state
explicitly in the rule that any modification or amendment of an
existing Rule 10b5-1 trading arrangement would be the equivalent of
terminating the existing arrangement and adopting a new arrangement.
See supra note 46.
---------------------------------------------------------------------------

    [cir] The duration of the contract, instruction or written plan;
and
    [cir] The aggregate amount of securities to be sold or purchased
pursuant to the contract, instruction or written plan.
     Whether, during the registrant's last fiscal quarter, any
director or ``officer'' (as defined in Rule 16a-1(f)) has adopted or
terminated any contract, instruction or written plan for the purchase
or sale of securities of the registrant, whether or not intended to
satisfy the affirmative defense conditions of Rule 10b5-1(c), and
provide a description of the material terms of the contract,
instruction or written plan, including:
    [cir] The name and title of the director or officer;
    [cir] The date on which the director or officer adopted or
terminated the contract, instruction or written plan;
    [cir] The duration of the contract, instruction or written plan;
and
    [cir] The aggregate number of securities to be sold or purchased
pursuant to the contract, instruction or written plan.
    Under the proposed rule, the disclosures would be required in Forms
10-Q and 10-K, as applicable. Registrants would be required to provide
this information if, during the quarterly period covered by the report,
the registrant, or any director or officer who is required to file
reports under Section 16 of the Exchange Act,\208\ adopted or
terminated a Rule 10b5-1 plan. Such disclosures would allow investors
to assess whether, and if so, how, issuers monitor trading by their
directors and officers for compliance with insider trading laws and
whether their compliance programs are effective at preventing the
misuse of material nonpublic information.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 78p.
---------------------------------------------------------------------------

    The Commission stated that the proposed rule would provide material
information that would better allow investors, the Commission, and
other market participants to observe how directors, officers and
issuers use Rule 10b5-1 plans. For example, disclosure of the
termination (including a modification) of a trading arrangement by an
officer, even in the absence of subsequent trading by the officer,
could provide investors or the Commission with important information
about the potential misuse of inside information such as, for example,
if the termination occurs close in time to the release of material
nonpublic information by the issuer. Making information about these
arrangements public may also serve as a deterrent against potential
abuses of Rule 10b5-1 plans or other trading arrangements by making
those who use these arrangements more likely to focus on following the
requirements applicable to such arrangements and compliance with Rule
10b-5. In addition, requiring disclosure of these events on a quarterly
basis would present this disclosure to investors in a consolidated
manner in a single document. The Commission also proposed to require
similar disclosure with respect to the adoption or termination of other
pre-planned trading contracts, instructions, or plans (``non-Rule 10b5-
1 trading arrangements'') through which the issuer, officer or director
seeks to transact in the issuer's securities.
b. Comments on the Proposed Amendments
    Many commenters generally supported the proposed reporting
requirements.\209\ For example, one of these commenters stated that the
proposed disclosures would provide important information regarding
insider stock trades and useful information to investors to inform
their own investment decisions.\210\ Another commenter asserted that
the proposed disclosures would provide long-term shareholders with
information about insider trades that complete the partial picture
provided by Form 144 and Section 16 reports.\211\ A few commenters
supported the proposed requirements, but asked that issuers also report
plans with respect not only to officers and directors, but also more
generally any employee of the issuer.\212\
---------------------------------------------------------------------------

    \209\ See, e.g., letters from AFL-CIO, Better Markets, CII, CO
PERA, DLA, ICGN, NASAA, O'Reilly, and Simpson.
    \210\ See letter from AFL-CIO.
    \211\ See letter from CII.
    \212\ See, e.g., letters from BrilLiquid and NASAA.
---------------------------------------------------------------------------

    Several commenters, however, did not support the proposed reporting
requirements.\213\ Some of these commenters contended that the proposed
disclosures are unnecessary because they would be duplicative of the
disclosures that would be required under the proposed amendments to
Forms 4 and 5.\214\ One of these commenters also asserted that it would
be a significant burden on issuers to

provide the proposed disclosures concerning all of the trading actions
of their directors and officers.\215\
---------------------------------------------------------------------------

    \213\ See, e.g., letters from ACCO, IBC, MD Bar, NVCA, NAM, SCG,
Sullivan and Wilson Sonsini.
    \214\ See, e.g., letters from Sullivan and Wilson Sonsini.
    \215\ See letter from Sullivan.
---------------------------------------------------------------------------

    A number of commenters expressed concern regarding the requirement
for registrants to provide a description of the ``material terms'' of
the Rule 10b5-1 trading arrangement.\216\ Several commenters indicated
that the proposal could be interpreted as requiring registrants to
disclose specific details of a trading arrangement, such as pricing
information.\217\ Many commenters stated that the disclosure of pricing
information and other details of a Rule 10b5-1 plan could facilitate
the front-running of transactions under the plan by other traders.\218\
---------------------------------------------------------------------------

    \216\ See, e.g., letters from ABA, Davis Polk, Cleary, DLA,
FedEx, Fenwick, Kirkland, NVCA, NAM, Quest, SCG, SIFMA 2, Sullivan
and Wilson Sonsini.
    \217\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA,
Fenwick, Quest, SCG, SIFMA 2, and Wilson Sonsini.
    \218\ See, e.g., letters from Davis Polk, DLA, Fenwick, NVCA,
SCG, SIFMA 2, and Wilson Sonsini.
---------------------------------------------------------------------------

    Due to these concerns, commenters were divided in their
recommendations of what information about trading arrangements should
be disclosed. Some commenters stated that the final rule should not
require disclosure of the number of shares covered by a trading
arrangement or the duration of the arrangement.\219\ Other commenters
recommended that the Commission limit disclosures to the name of the
person adopting the plan, the date of adoption or termination of the
plan, and the plan's duration.\220\ In contrast, other commenters
opposed requiring disclosure of the termination of a plan, contending
that this information could signal to the market that there has been a
material development concerning the issuer, such as an impending merger
agreement.\221\
---------------------------------------------------------------------------

    \219\ See, e.g., letters from Quest and Simpson.
    \220\ See, e.g., letters from Fenwick and Shearman.
    \221\ See letters from Sullivan and SIFMA 3.
---------------------------------------------------------------------------

    In addition, a number of commenters recommended that the Commission
should not require disclosure regarding non-Rule 10b5-1 trading
arrangements.\222\ Several commenters asserted that this term was
confusing and overly broad.\223\ One commenter indicated that this term
would raise a number of interpretive issues as it potentially
encompasses a wide range of transactions, such as transactions related
to open market purchases, derivative securities and employee benefit
plans.\224\ Other commenters claimed that this disclosure would not
provide valuable information to investors, the Commission, or other
market participants.\225\ For example, some of these commenters stated
that the details of trades executed under a non-Rule 10b5-1 trading
arrangement are already required to be disclosed in Section 16
filings.\226\
---------------------------------------------------------------------------

    \222\ See, e.g., letters from Cleary, Cravath, Davis Polk,
Shearman, Sullivan, and Simpson.
    \223\ See, e.g., letters from Cleary, Cravath, SIFMA 3, and
Sullivan.
    \224\ See letter from Sullivan.
    \225\ See, e.g., letters from Cleary, Cravath, Shearman, and
Simpson.
    \226\ See, e.g., letters from Cravath and Shearman.
---------------------------------------------------------------------------

    A few commenters recommended that the disclosure requirements
regarding registrant trading arrangements should be removed from
proposed Item 408(a) and included with the pending proposed rulemaking
\227\ to update the disclosure requirements for purchases of equity
securities by an issuer and affiliated purchasers under Item 703 of
Regulation S-K.\228\
---------------------------------------------------------------------------

    \227\ See Share Repurchase Disclosure Modernization, Release No.
34-93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)].
    \228\ See, e.g., letters from Cravath and Simpson.
---------------------------------------------------------------------------

    Another commenter suggested the Commission exempt smaller reporting
companies (``SRCs'') \229\ from the proposed disclosure
requirement.\230\ This commenter claimed SRCs and their insiders are
less likely to engage in the kinds of trading in the securities of
their companies that would cause concern, but that the reporting burden
could disproportionately impact these issuers.
---------------------------------------------------------------------------

    \229\ ``Smaller reporting company'' is defined in Securities Act
Rule 405 and Exchange Act Rule 12b-2 as an issuer that is not an
investment company, an asset-backed issuer (as defined in 17 CFR
229.1101), or a majority-owned subsidiary of a parent that is not a
smaller reporting company and that had: (1) a public float of less
than $250 million; or (2) annual revenues of less than $100 million
and either: (a) no public float; or (b) a public float of less than
$700 million.
    \230\ See letter from MD Bar.
---------------------------------------------------------------------------

    Finally, one commenter suggested that it would be more appropriate
to include proposed Item 408(a) disclosure in Part II, Item 9(B) of
Form 10-K, and Item 408(b) disclosure in Part III, Item 10 of Form 10-
K.\231\ This commenter claimed that requiring Item 408(a) disclosure in
Item 9(B) rather than Item 10 of Form 10-K would align with the
Commission's proposal to require Item 408(a) disclosure in Item 5 of
Form 10-Q because both Items cover similar types of information.
Further, this commenter posited that this approach would ensure that
Item 408(a) disclosure, which relates to the last fiscal quarter,
appears in each periodic report.
---------------------------------------------------------------------------

    \231\ See letter from ABA.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting new Item 408(a) with several modifications in
response to comments. Specifically, we are not adopting the proposed
requirement regarding contracts, instructions, or plans of registrants;
we are providing that the description of material terms need not
address pricing terms; and we are adding a definition of ``non-Rule
10b5-1 trading arrangement.'' As proposed, these disclosures will be
required in Forms 10-Q and 10-K.\232\
---------------------------------------------------------------------------

    \232\ In a slight modification, we are adopting the approach
suggested by a commenter to include new Item 408(a) in Part II, Item
9(B) of Form 10-K. See letter from ABA.
---------------------------------------------------------------------------

    The final rule will require registrants to (1) disclose whether,
during the registrant's last fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report), any director or
``officer'' (as defined in Rule 16a-1(f)) has adopted or terminated (i)
any contract, instruction or written plan for the purchase or sale of
securities of the registrant that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c) (a ``Rule 10b5-1(c)
trading arrangement''), and/or (ii) any written trading arrangement for
the purchase or sale of securities of the registrant that meets the
requirements of a non-Rule 10b5-1 trading arrangement as defined in
Item 408(c) (a ``non-Rule 10b5-1 trading arrangement''); and (2)
provide a description of the material terms of the Rule 10b5-1 trading
arrangement or non-Rule 10b5-1 trading arrangement other than terms
with respect to the price at which the individual executing the
respective trading arrangement is authorized to trade, such as:
     The name and title of the director or officer;
     The date of adoption or termination of the trading
arrangement;
     The duration of the trading arrangement; and
     The aggregate number of securities to be sold or purchased
under the trading arrangement.
    With respect to any given trading arrangement subject to disclosure
under Item 408(a), the registrant must indicate whether such trading
arrangement is a Rule 10b5-1 trading arrangement or is a non-Rule 10b5-
1 trading arrangement.
    In addition, any modification or change to a Rule 10b5-1 plan by a
director or officer that falls within the meaning of new Rule 10b5-
1(c)(1)(iv) would also be required to be disclosed under Item 408(a) as
it constitutes the termination of an existing plan and the adoption of
a new contract, instruction, or written plan.

    Having considered comments received, we view this information as
necessary to better allow investors, the Commission, and other market
participants to observe how directors and officers use Rule 10b5-1
plans and other non-Rule 10b5-1 trading arrangements. The information
also will add important context to other disclosures of trades by
directors and officers, such as in Forms 4 and 5, and may aid investors
in obtaining a more accurate valuation of the issuer's shares and
making more informed investment decisions.\233\ Furthermore, this
information will provide investors with valuable information about the
specific uses of such arrangements, which could bring focus to the
particular arrangements and deter potential abuses. While it is true,
as commenters observed, that Forms 4 and 5 may already include some of
this information, we expect it will be more useful and time-saving for
investors to have information regarding all of the trading arrangements
for directors and officers of a given issuer in a single location. We
are also requiring disclosure of details about the content of such
arrangements that is not mandated on Form 4 or Form 5, which, pursuant
to the amendments that we are adopting as described below, will require
only the date of adoption of the Rule 10b5-1 plan.
---------------------------------------------------------------------------

    \233\ See infra Section V.C.2. The mandatory Rule 10b5-1 plan
checkbox disclosures on Forms 4 and 5, in combination with this
disclosure will provide greater transparency to investors regarding
the use of Rule 10b5-1 plans for trading. All of this information
will provide investors with valuable context for interpreting other
corporate disclosure, which should help them value the companies'
shares and make informed voting and investment decisions.
---------------------------------------------------------------------------

    In response to the concerns expressed by some commenters that the
proposal could require the disclosure of pricing information,\234\
however, we have revised the final rules to clarify that new Item
408(a) does not require disclosure of the price at which the individual
executing the trading arrangement is authorized to trade. We agree with
these commenters that disclosing this information could allow other
persons to trade strategically in anticipation of an officer's or a
director's planned trades, increasing the costs or reducing the
profitability of that officer's or director's trading. Although we
recognize that some commenters urged us to not require disclosure of
the trading arrangement's duration or the aggregate number of
securities that could be purchased and sold under it, we view this
information as necessary context for a trading arrangement that does
not raise similar concerns because, in most cases, general information
about the volume and duration of an officer's or director's Rule 10b5-1
plan or non-Rule 10b5-1 trading arrangement will not be sufficient to
permit strategic trades by other market participants. We also disagree
with commenters that we should not require disclosure related to
terminations because, first, Rule 10b5-1 plans or non-Rule 10b5-1
trading arrangements may be terminated for many reasons, making it
unlikely that a termination would be interpreted as an indication of a
pending material event (such as a merger announcement), and second,
because the interval between a termination and the filing of the Form
10-Q or Form 10-K disclosing the termination should mitigate any such
potential strategic trading.
---------------------------------------------------------------------------

    \234\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA,
Fenwick, Quest, SIFMA 2, SCG, and Wilson Sonsini.
---------------------------------------------------------------------------

    In addition, the final rule will also require disclosure regarding
the adoption or termination of non-Rule 10b5-1 trading arrangements. In
response to the concerns expressed by some commenters that the term
``non-Rule 10b5-1 trading arrangements'' was confusing and overly
broad,\235\ we are adopting a definition of this term to clarify the
types of pre-planned trading arrangements that should be disclosed
under Item 408(a). To ensure that market participants are familiar with
how to apply this concept, the definition we adopt accords with the
requirements of the Rule 10b5-1 affirmative defense that the Commission
adopted in 2000. Under the final rule, a trading arrangement with
respect to a director or ``officer'' (as defined in Rule 16a-1(f))
would be a ``non-Rule 10b5-1 trading arrangement'' where the director
or officer asserts that, at a time when they were not aware of material
nonpublic information about the security or the issuer of the security,
they
---------------------------------------------------------------------------

    \235\ See, e.g., letter from Sullivan.
---------------------------------------------------------------------------

     adopted a written arrangement for trading the securities;
and
     The trading arrangement:
    [cir] Specified the amount of securities to be purchased or sold
and the price at which and the date on which the securities were to be
subsequently purchased or sold;
    [cir] Included a written formula or algorithm, or computer program,
for determining the amount of securities to be purchased or sold and
the price at which the securities were to be purchased or sold; or
    [cir] Did not permit the covered person to exercise any subsequent
influence over how, when, or whether to effect purchases or sales;
provided, in addition, that any other person who, pursuant to the
trading arrangement did exercise such influence must not have been
aware of material nonpublic information when doing so.
    In adopting this requirement, we recognize that Rule 10b5-1
provides affirmative defenses, but that corporate insiders may assert
other defenses to liability under Section 10(b). Absent this disclosure
requirement, directors and officers may be more likely to choose to
trade in reliance on alternative defenses to liability other than this
affirmative defense in order to avoid the disclosure requirements for
Rule 10b5-1 plans, as well as avoiding the other requirements of the
affirmative defense. Further, we believe these disclosures would be
useful to investors for largely the same reasons that disclosure of
plans that fully satisfy Rule 10b5-1 is useful: they provide important
context about how insiders use their trading plans, such as in the case
where an insider cancels a plan close in time to the release of
material nonpublic information. We therefore disagree with commenters
who assert this information would not be useful to investors.
    At this time, we are not adopting the proposal to require
corresponding disclosure regarding the use of trading arrangements by
the issuer. In light of the various comments we received on this
proposal,\236\ we believe that further consideration of potential
application of the disclosure requirement for purchases of equity
securities by an issuer is warranted. We are also declining to extend
disclosure obligations to plans adopted by insiders other than officers
and directors, as suggested by some commenters, because we have
concluded that collecting such information could be significantly
burdensome for issuers, and because we think that granular disclosure
about the adoption, termination, modification, and material terms of
such plans is likely to be less important to investors than plans
adopted by directors and officers.
---------------------------------------------------------------------------

    \236\ See, e.g., letters from Cravath and Simpson.
---------------------------------------------------------------------------

    Finally, we are not exempting SRCs from the disclosure
requirements, as recommended by a commenter.\237\ While we are aware of
the potential for a disproportionate impact on SRCs, we disagree that
corporate insiders at SRCs are less likely to engage in the types of
trading with which we are concerned. In our view, stock ownership by
corporate insiders is common at SRCs, and exempting SRCs from this
disclosure

requirement would deprive investors in those issuers of material
information about the use, and potential abuse, of Rule 10b5-1 plans
and non-Rule 10b5-1 trading arrangements by an SRC's officers or
directors.
---------------------------------------------------------------------------

    \237\ See supra note 230.
---------------------------------------------------------------------------

2. Disclosure of Insider Trading Policies and Procedures
a. Proposed Amendments
    The Commission proposed new Item 408(b) of Regulation S-K, which
would require registrants to:
     Disclose whether the registrant has adopted insider
trading policies and procedures governing the purchase, sale, and other
dispositions of the registrant's securities by directors, officers, and
employees or the registrant itself that are reasonably designed to
promote compliance with insider trading laws, rules, and regulations,
and any listing standards applicable to the registrant. If the
registrant has not adopted such insider trading policies and
procedures, explain why it has not done so; and
     If the registrant has adopted insider trading policies and
procedures, disclose such policies and procedures.
    These disclosures would be required in a registrant's annual
reports on Form 10-K and proxy and information statements on Schedules
14A and 14C.\238\ Foreign private issuers (``FPIs'') would also be
required to provide analogous disclosure in their annual reports
pursuant to a new Item 16J in Form 20-F.
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    \238\ Item 1 of Schedule 14C requires that a registrant furnish
the information called for by all of the items of Schedule 14A
(other than Items 1(c), 2, 4 and 5) which would be applicable to any
matter to be acted upon at the meeting if proxies were to be
solicited in connection with the meeting.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that well-designed
policies and procedures that address the potential misuse of material
nonpublic information can play an important role in deterring and
preventing trading on the basis of material nonpublic information.
Specific disclosures concerning registrants' insider trading policies
and procedures would benefit investors by enabling them to assess
registrants' corporate governance practices and to evaluate the extent
to which those policies and procedures protect investors from the
misuse of material nonpublic information.
    Item 406 of Regulation S-K requires a registrant to disclose
whether it has adopted a code of ethics that applies to its principal
executive officer, chief financial officer, and other appropriate
executives and, if it has not adopted such a code, to state why it has
not done so.\239\ Many registrants also are required to maintain codes
of ethics or conduct under exchange listing standards.\240\ These codes
may contain specific policies and restrictions that address insider
trading.\241\ Apart from these codes of ethics or conduct, some
registrants have other policies and procedures specifically addressing
insider trading. The Commission structured the proposed amendments to
provide investors with comprehensive information regarding a
registrant's insider trading policies and procedures to enable
investors to better assess the manner in which the registrant promotes
compliance with insider trading laws and protects material nonpublic
information from misuse.
---------------------------------------------------------------------------

    \239\ 17 CFR 229.406; see also Section 406 of the Sarbanes-Oxley
Act of 2002 (``SOX'') [15 U.S.C. 7264].
    \240\ See, e.g., NYSE Listed Company Manual Section 303A.10
(stating in relevant part that every NYSE ``listed company should
proactively promote compliance with laws, rules and regulations,
including insider trading laws'' and that ``[i]nsider trading is
both unethical and illegal, and should be dealt with decisively'');
see also NASDAQ Listing Rule 5610 (requiring every Nasdaq listed
company to adopt a code of conduct that complies with the definition
of a ``code of ethics'' set out in SOX Section 406 (c) and that
applies to all directors, officers, and employees).
    \241\ Insider trading policies and procedures may be part of the
standards that are reasonably necessary to promote: honest and
ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships; full, fair, accurate, timely, and understandable
disclosure in the periodic reports required to be filed by the
issuer; and compliance with applicable governmental rules and
regulations. See 15 U.S.C. 7264(c); see also supra Section I.
---------------------------------------------------------------------------

    The Commission recognized that insider trading policies and
procedures may vary from issuer to issuer and that decisions as to
specific provisions of the policies and procedures are best left to the
issuer. Therefore, the proposed amendments did not specify the
information that a registrant would be required to provide regarding
its insider trading policies and procedures.
b. Comments on the Proposed Amendments
    Commenters were divided over disclosure of a registrant's insider
trading policies and procedures. Several commenters generally supported
the proposed disclosure.\242\ One of these commenters asserted that
this disclosure would improve transparency for investors and
potentially create incentives for corporate boards and management teams
to scrutinize the issuer's ``corporate hygiene'' regarding material
nonpublic information and insider trading.\243\ Other commenters,
however, asserted that the proposed disclosures would not meaningfully
benefit investors, or that they would not be material.\244\ Another
commenter expressed concern that requiring this disclosure in both
annual reports and proxy statements would create administrative burdens
on issuers by requiring them to craft additional disclosure for two
separate compliance documents.\245\
---------------------------------------------------------------------------

    \242\ See, e.g., letters from Better Markets, BrilLiquid, CO
PERA, CII, ICGN, NASAA, O'Reilly, and Sullivan.
    \243\ See letter from NASAA.
    \244\ See, e.g., letters from Davis Polk, Home Depot, NAM, and
Simpson.
    \245\ See letter from Dow.
---------------------------------------------------------------------------

    Several commenters recommended modifications to the proposal. For
example, several commenters recommended that the Commission should
provide flexibility and allow issuers to post their insider trading
policies and procedures on their website and direct readers to the
posting in their annual report on Form 10-K rather than disclosing such
policies in the Form 10-K, similar to the existing disclosure
requirements for an issuer's code of ethics under Item 406(c)(2) of
Regulation S-K.\246\ Another commenter similarly recommended that the
final rules should allow issuers to post their insider trading policies
and procedures on their website or file their insider trading policy as
an exhibit to the annual report to satisfy this disclosure
requirement.\247\ A few commenters suggested that the final rule should
use the word ``describe'' rather than ``disclose'' to elicit disclosure
that is consistent in tone and detail with the other Regulation S-K
disclosure requirements of the proxy statement or the annual
report.\248\
---------------------------------------------------------------------------

    \246\ See, e.g., letters from Cravath, Fenwick, Home Depot, and
Shearman.
    \247\ See letter from Dow.
    \248\ See, e.g., letters from Davis Polk, and SIFMA 2.
---------------------------------------------------------------------------

    Finally, several commenters recommended that the Commission exempt
FPIs from these disclosure requirements.\249\ These commenters
contended that FPIs are already subject to home country corporate
governance disclosure requirements, and that the disclosure requirement
could function as an implicit requirement that FPIs adopt insider
trading policies.
---------------------------------------------------------------------------

    \249\ See, e.g., letters from Cravath, Jones Day, SIFMA 2, and
Sullivan.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting new Item 408(b) and new Item 16J with certain
modifications in response to comments. Under the final rule,\250\
registrants will be required

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 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 must 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. Pursuant to new Item 16J in Form 20-F, FPIs will be required to
provide analogous disclosure in their annual reports on that form. We
disagree that requiring this disclosure in both annual reports and
proxy or information statements would impose an unreasonable burden on
registrants by requiring them to prepare additional disclosures for two
documents as suggested by a commenter.\251\ In this regard, we note
that under General Instruction G to Form 10-K, a registrant can
incorporate by reference the information required by Item 408(b) from a
definitive proxy or information statement involving the election of
directors, if the proxy or information statement is filed within 120
days of the end of the fiscal year.\252\ In a modification of the
proposal and in response to comments,\253\ the final rules do not
require disclosure of the registrant's policies and procedures within
the body of the annual report or proxy/information statement. Instead,
we are adopting amendments to Item 601 of Regulation S-K and Form 20-F
to require issuers to file a copy of their insider trading policies and
procedures as an exhibit to Forms 10-K and 20-F, respectively. We
considered permitting registrants to post their policies and procedures
on their website in lieu of providing disclosure in the filing, as
suggested by some commenters,\254\ similar to Item 406(c)(2), which
allows a registrant to post its codes of ethics on its website and
disclose the internet address in its annual report to satisfy the code
of ethics disclosure requirement. Requiring registrants to file their
insider trading policies and procedures as an exhibit would make the
document available online through our Electronic Data Gathering,
Analysis, and Retrieval (``EDGAR'') system. Documents that are filed as
exhibits to registration statements and periodic reports must be
hyperlinked from the exhibit index of the document,\255\ which
facilitates investor access to the exhibit.
---------------------------------------------------------------------------

    \250\ While the Proposing Release stated that proposed Item
408(b)(1) would include insider trading policies and procedures
governing the purchase, sale, and/or other dispositions of the
registrant's securities by directors, officers and employees or the
registrant itself, the language ``or the registrant itself'' was
inadvertently omitted from the proposed regulatory text. See
Proposing Release, supra note 22, at 8695, 8712, and 8728. We have
corrected this omission in the final rules, which now include the
language ``or the registrant itself.'' See Item 408(b)(1).
    \251\ See supra note 245.
    \252\ See Note 2 to General Instruction G(2) to Form 10-K.
    \253\ See, e.g., letters from Davis Polk, Dow, and SIFMA 2 (all
recommending that the final rule not require full disclosure of the
policies and procedures within the body of the filing).
    \254\ See supra note 246.
    \255\ See 17 CFR 229.601(a)(2) and 17 CFR 232.102(d).
---------------------------------------------------------------------------

    EDGAR allows active hyperlinks to documents that are filed on EDGAR
but does not allow hyperlinks to non-EDGAR documents.\256\ We therefore
believe that the approach of hyperlinking to an exhibit filed on EDGAR
would facilitate better access for investors as compared to permitting
registrants to post their insider trading policies and procedures on
their website and provide a web address (without a hyperlink) in their
annual report. 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 registrant's
disclosure as to whether it has insider trading policies and procedures
would satisfy this component of the disclosure requirement.
---------------------------------------------------------------------------

    \256\ See 17 CFR 232.105(b).
---------------------------------------------------------------------------

    We disagree with commenters who suggested that the disclosure
regarding these policies and procedures would not be material and
useful information to investors. The thoroughness and precision of such
policies and procedures may help investors to understand whether they
will be successfully implemented, even if any single detail taken on
its own may not otherwise be material. An investor might reasonably
conclude that an issuer adopting a policy generally prohibiting insider
trading, but without disclosing how it prevents the unlawful
communication of and trading on material nonpublic information,
provides fewer such assurances to investors than an issuer that has
developed and disclosed more particular and thorough policies and
procedures. As noted in the Proposing Release, investors may find
useful, to the extent it is included in the issuer's relevant policies
and procedures, information on the issuer's process for analyzing
whether directors, officers, employees, or the issuer itself when
conducting an open-market share repurchase have material nonpublic
information; the issuer's process for documenting such analyses and
approving requests to purchase or sell its securities whether through
Rule 10b5-1 plans or otherwise; and/or how the issuer enforces
compliance with any such policies and procedures it may have. Investors
may also use this information to assess the strengths and weaknesses of
particular elements of these policies and procedures, which would help
show how well the issuer protects its material nonpublic information
from being misused in unlawful communications and securities trading,
and how its protections compare with its competitors. Furthermore, the
disclosure under Item 408 and Item 16J would address not only policies
and procedures that apply to the purchase and sale of the registrant's
securities, but also other dispositions of the registrant's securities
where material nonpublic information could be misused, such as through
gifts of such securities.\257\
---------------------------------------------------------------------------

    \257\ The Exchange Act does not require that a ``sale'' of
securities be for value, and instead provides that the ``terms
`sale' or `sell' each include any contract to sell or otherwise
dispose of.'' Compare Exchange Act Section 3(a)(14) [15 U.S.C.
78c(a)(14)], with Securities Act Section 2(a)(3) [15 U.S.C.
77b(a)(3)] (``[T]he terms `sale' or `sell' shall include every
contract of sale or disposition of a security or interest in a
security, for value.''). For example, a donor of securities violates
Section 10(b) if the donor gifts a security of an issuer in
fraudulent breach of a duty of trust and confidence when the donor
was aware of material nonpublic information about the security or
issuer, and knew or was reckless in not knowing that the donee would
sell the securities prior to the disclosure of such information. The
affirmative defense under Rule 10b5-1(c)(1) is available for planned
securities gifts.
---------------------------------------------------------------------------

    In extending this disclosure requirement to FPIs, we are cognizant
of the concerns raised by commenters, such as the concern that some
issuers may already be subject to home-country governance disclosure
and that additional disclosure may pressure an FPI to adopt additional
measures not required by its home jurisdiction. To the extent that an
FPI already discloses similar information under its home country rules,
the additional burden imposed by the final rule may be minimal. As we
have discussed, information about the efforts an issuer undertakes to
prevent misuse of its material nonpublic information is likely to be
important to investors, regardless of whether it is a domestic issuer
or an FPI. Indeed, we are aware that one reason FPIs register in the
United States is to provide greater transparency and

assurances of the reliability of their disclosures to investors.
    Finally, the disclosures that are required in Forms 10-K and 20-F
discussed in this section as well as those discussed in Section II.B.1
will be subject to the certifications required by Section 302 of the
Sarbanes-Oxley Act of 2002.\258\ Section 302 requires an issuer's
principal executive officer and principal financial officer to certify,
among other things, that based on their knowledge, the Form 10-K or
Form 20-F that they have signed does not contain untrue statements of
material facts or omit to state material facts necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods
covered by the reports.\259\ In making these certifications, principal
executive and principal financial officers attest to the accuracy of
the statements in their Form 10-K or Form 20-F.\260\ Thus, principal
executive and principal financial officers may be liable under Rule
13a-14 if they certify as to a fact ``about which [they are] ignorant
or which [they] know[ ] is false.'' \261\
---------------------------------------------------------------------------

    \258\ Public Law 107-204, 116 Stat. 745 (2002).
    \259\ In effectuating this statutory responsibility, the
principal executive and financial officers of an issuer may be aided
by a written representation (such as a sub-certification) from the
issuer's principal legal or compliance officer (or person performing
similar functions) that, based on a reasonable review, they have
determined the issuer's insider trading practices and procedures
comport with what the issuer is disclosing about them in its
periodic reports. However, it would not be reasonable for a
principal executive or financial officer to rely on such a
representation if they are aware of information that is inconsistent
with, or raises doubts about the reliability of, the representation.
    \260\ See, e.g., SEC v. Jensen, 835 F.3d 1100, 1112-13 (9th Cir.
2016); see also GAF Corp. v. Milstein, 453 F.2d 709, 720 (2d Cir.
1971) (``the obligation to file truthful statements implicit in the
obligation to file'') ((emphasis in original)).
    \261\ Id. at 1113.
---------------------------------------------------------------------------

3. Identification of Rule 10b5-1 and Non-Rule 10b5-1 Transactions on
Forms 4 and 5
a. Proposed Amendments
    Section 16(a) of the Exchange Act provides that every person who
beneficially owns, directly or indirectly, more than 10 percent of any
class of equity security (other than an exempted security) registered
pursuant to Exchange Act Section 12, or who is an officer or director
of the issuer of such security, shall file with the Commission an
initial report disclosing the amount of all equity securities of such
issuer of which the insider is the beneficial owner, and a subsequent
transaction report to disclose any changes in beneficial ownership.
Section 16 was designed to provide the public with information on
securities transactions and holdings of corporate officers, directors,
and principal shareholders, and to deter those individuals from seeking
to profit from short-term trading in the securities of their
corporations while in possession of material nonpublic
information.\262\
---------------------------------------------------------------------------

    \262\ See Ownership Reports and Trading By Officers, Directors
and Principal Security Holders, Release No. 34-28869 (Feb. 8, 1991)
[56 FR 7242 (Feb. 21, 1991)].
---------------------------------------------------------------------------

    Persons subject to Section 16 reporting must disclose changes in
their beneficial ownership on Form 4 \263\ or 5,\264\ which are
publicly available on EDGAR. In December 2020, the Commission proposed,
among other things, amendments to Form 4 and Form 5 \265\ to add a
checkbox to these forms that would permit filers, at their option, to
indicate whether a transaction reported on the form was made pursuant
to a contract, instruction, or written trading plan for the purchase or
sale of equity securities of the issuer that satisfies the conditions
of Rule 10b5-1(c).\266\ In response to this proposal, the Commission
received feedback from several commenters who asserted, based on
analyses of sales of securities executed under Rule 10b5-1 plans, that
many of the surveyed transactions may have been made on the basis of
material nonpublic information.\267\ These commenters recommended that
the proposed Rule 10b5-1 checkbox disclosure be mandatory on Forms 4
and 5 because such disclosure would help investors and the public
better discern whether Rule 10b5-1 plans are being used to engage in
opportunistic trading on the basis of material nonpublic
information.\268\
---------------------------------------------------------------------------

    \263\ A person subject to Section 16 must report specified
changes in beneficial ownership on Form 4 before the end of the
second business day following the date of execution of the
transaction. See 17 CFR 240.16a-3(g).
    \264\ Form 5 is a year-end report to be used by a person subject
to Section 16 to disclose certain transactions that were exempt from
Section 16(b), and transactions and holdings that were required to
be reported during the fiscal year, but were not. See 17 CFR
240.16a-3(f).
    \265\ Form 5 is a year-end report to be used by any person who
was an officer, director or a 10% beneficial owner during any
portion of the issuer's fiscal year to disclose transactions and
holdings that are exempt from Section 16(b) or that were required to
be reported during the fiscal year, but were not.
    \266\ See Rule 144 Holding Period and Form 144 Filings, Release
No. 33-10911 (Dec. 22, 2020) [86 FR 5063 (Jan. 19, 2021)]
(``December 2020 Proposing Release'').
    \267\ See letters from Council of Institutional Investors (dated
Mar. 18, 2021), Alan Jagolinzer (dated Mar. 10, 2021), and David
Larcker et al. (dated Mar. 10, 2021), available at https://www.sec.gov/comments/s7-24-20/s72420.htm.
    \268\ Id.
---------------------------------------------------------------------------

    In consideration of this feedback, the Commission proposed to add a
Rule 10b5-1(c) checkbox as a mandatory disclosure requirement on Forms
4 and 5. A Form 4 or 5 filer would be required to indicate via the
checkbox whether a transaction reported on that form was made pursuant
to Rule 10b5-1(c). Filers would also be required to provide the date of
adoption of the Rule 10b5-1 plan, and would have the option to provide
additional relevant information about the reported transaction.
Requiring this disclosure on Forms 4 and 5 would provide greater
transparency around the use of Rule 10b5-1 plans and would be
consistent with the primary purpose of Section 16.\269\ It also would
provide information that could be used by registrants to comply with
their Item 408 disclosure obligations.
---------------------------------------------------------------------------

    \269\ See S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934).
---------------------------------------------------------------------------

    In addition, the Commission proposed to add a second, optional
checkbox to both of Forms 4 and 5. This optional checkbox would allow a
filer to indicate whether a transaction reported on the form was made
pursuant to a pre-planned contract, instruction, or written plan for
the purchase or sale of equity securities of the issuer that does not
satisfy the conditions of Rule 10b5-1(c).
b. Comments on the Proposed Amendments
    Most of the commenters who discussed this matter generally
supported the proposal to add a mandatory checkbox on Forms 4 and 5 for
the disclosure of trades under a Rule 10b5-1 trading arrangement.\270\
For example, some of these commenters indicated that these checkboxes
would provide useful information to investors and other market
participants and may help prevent misuse of Rule 10b5-1 plans.\271\
Another commenter, however, expressed the view that these checkboxes
likely would not provide useful information if the Commission adopted
the proposed cooling-off period.\272\
---------------------------------------------------------------------------

    \270\ See, e.g., letters from ACCO, CII, Cravath, and Quinn.
    \271\ See letters from CII and Quinn.
    \272\ See letter from Cravath.
---------------------------------------------------------------------------

    In addition, one of the commenters that generally supported the
proposal did so subject to a recommended change. This commenter urged
the Commission to amend the Rule 10b5-1 checkbox to state ``whether a
transaction was intended to satisfy'' the Rule 10b5-1 affirmative
defense rather than

whether a transaction ``was made'' pursuant to the affirmative
defense.\273\ This commenter was concerned that, for a number of
reasons, it could be difficult for a reporting person to definitively
affirm whether a transaction was in fact made pursuant to the Rule
10b5-1 affirmative defense. This commenter also stated that using
``intended to satisfy'' would be consistent with the Commission's
approach in other proposed rules, such as proposed Item 703(c)(2)(iii)
of Regulation S-K.\274\
---------------------------------------------------------------------------

    \273\ See letter from Sullivan.
    \274\ In a separate release, the Commission proposed amendments
to Item 703(c)(2)(iii) of Regulation S-K to require disclosure of a
plan that ``is intended to satisfy'' the conditions of Rule 10b5-
1(c). See Share Repurchase Disclosure Modernization, Release No 34-
93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 1, 2022)] (proposing
amendments to modernize and improve disclosures about repurchases of
an issuer's equity securities that are registered under the Exchange
Act).
---------------------------------------------------------------------------

    A few commenters opposed the optional non-Rule 10b5-1 checkbox on
Forms 4 and 5.\275\ These commenters indicated that this checkbox would
not provide any valuable information to investors, the Commission or
other market participants because the details of such transactions are
already provided in Forms 4 and 5.
---------------------------------------------------------------------------

    \275\ See, e.g., letters from Cravath and Cleary.
---------------------------------------------------------------------------

c. Final Amendment
    After considering these comments, we are adopting the mandatory
Rule 10b5-1 checkboxes to Forms 4 and 5 as proposed with one
modification. In response to the concerns expressed by a commenter that
the proposed checkbox language would have required a filer to
definitively state that the reported transaction was in fact made
pursuant to the Rule 10b5-1 affirmative defense,\276\ we have revised
the text accompanying the checkboxes to state that a reported
transaction is pursuant to a plan that is ``intended to satisfy the
affirmative defense conditions'' of Rule 10b5-1(c).
---------------------------------------------------------------------------

    \276\ See letter from Sullivan.
---------------------------------------------------------------------------

    This checkbox will help investors and the public better understand
how trading plans that rely on the revised Rule 10b5-1(c) affirmative
defense are being used by corporate insiders, including whether they
are being used to engage in opportunistic trading. We disagree with the
commenter who indicated that the checkbox would not provide useful
information to investors in light of the cooling-off period that we are
adopting for officers and directors. The checkbox provides transparency
into the use of Rule 10b5-1 plans to help deter potential misuse of
those plans, which would complement the cooling-off period. For
example, the checkbox might be useful to investors in combination with
disclosures regarding the adoption and termination of Rule 10b5-1 plans
as it may help them to identify instances in which an officer or
director may have opportunistically cancelled a trade or terminated a
plan. Moreover, the potential effects of such a disclosure could
discourage such opportunistic cancellations.
    Finally, we are not adopting the optional checkbox that would allow
a filer to indicate whether a transaction reported on the form was made
pursuant to a non-Rule 10b5-1 trading arrangement. We are persuaded by
commenters who stated that this checkbox would not provide investors
and other market participants with useful information because the
details of the transaction will already be disclosed in the form.

C. Disclosure Regarding Option Grants and Similar Equity Instruments
Made Close in Time to the Release of Material Nonpublic Information

1. Proposed Amendments
    Since the enactment of the Securities Act and the Exchange Act, the
Commission has sought to enhance its rules regarding the disclosure of
executive and director compensation and to improve the presentation of
this information to investors.\277\ One area of focus for the
Commission has been disclosure related to equity-based compensation.
Many companies use stock options as a form of compensation for their
employees and executives.\278\ In a simple stock option award, a
company may grant an employee the right to purchase a specified number
of shares of the company's stock at a specified price, called the
exercise price, which is typically set as the fair market value of the
company's stock on the grant date. Stock options with exercise prices
at or above the fair market value of the underlying stock are designed
to motivate the recipient to work to increase company value, because
the option holder would only benefit if the company's stock price
exceeds the exercise price at the time of exercise.\279\ Alternatively,
if a company is aware of material nonpublic information that is likely
to decrease its stock price, it may decide to delay a planned option
award until after the release of such information (a practice commonly
referred to as ``bullet-dodging'').\280\
---------------------------------------------------------------------------

    \277\ See, e.g., Executive Compensation and Related Person
Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept.
8, 2006)] (hereinafter ``2006 Executive Compensation Release'') at
53160 at n. 45; Proxy Disclosure Enhancements, Release No. 33-9089
(Dec. 16, 2009) [74 FR 68334 (Dec. 24, 2009)].
    \278\ The term ``option'' includes stock options, SARs and
similar instruments with option-like features. See 17 CFR
229.402(a)(6).
    \279\ When the exercise price for an option is less than the
fair market value of the underlying security, the option is ``in the
money.'' If the exercise price and fair market value are the same,
the option is ``at the money.'' If the exercise price is greater
than the fair market value, the option is ``out of the money.''
    \280\ See Allan Horwich, The Legality of Opportunistically
Timing Public Company Disclosures in the Context of SEC Rule 10b5-1,
71 Bus. Law. 1113, 1143 (2016) (noting that ``bullet-dodging''
occurs when a board delays the grant of an option until adverse
material nonpublic information known to the board is disclosed,
which reduces the market price and the option exercise price that is
set at the time of the grant).
---------------------------------------------------------------------------

    In 2006, the Commission revised its executive compensation
disclosure rules to, among other things, provide investors with a more
complete picture of compensation paid to principal executive officers,
principal financial officers, and the other highest paid executive
officers and directors.\281\ In the 2006 Executive Compensation
Release, the Commission stated that under the principles-based
compensation disclosure requirements of Item 402 of Regulation S-K,
registrants may be required to disclose in their Compensation
Discussion and Analysis (``CD&A'') information about the timing of
option grants in close proximity to the release of material nonpublic
information by the company.\282\ Such disclosure should include, for
example, whether a company is aware of material nonpublic information
that is likely to result in an increase of its stock price, such as a
product development announcement or positive earnings, and grants stock
options immediately before the release of this information. Timing
option grants to occur immediately before the release of positive
material nonpublic information (a practice commonly referred to as
``spring-loading'') can benefit executives with an option award that
will likely be in-the-money as soon as the material nonpublic
information is made public.\283\
---------------------------------------------------------------------------

    \281\ 2006 Executive Compensation Release, supra note 277.
    \282\ See 17 CFR 229.402(b)(2)(iv) and 2006 Executive
Compensation Release, supra note 277, at 53163-4.
    \283\ See Lucian A. Bebchuk & Jesse M. Fried, Paying for Long-
Term Performance, 158 U. Pa. L. Rev. 1915, 1937-39 & n. 63 (2010)
(noting that the practice of spring-loading may also disguise an in-
the-money option award as having been granted at-the-money).
---------------------------------------------------------------------------

    In the 2006 Executive Compensation Release, the Commission noted
that the existence of a program, plan, or practice to select option
grant dates for executive officers in coordination with the release of
material nonpublic information

would be material to investors and should be fully disclosed.\284\
---------------------------------------------------------------------------

    \284\ 2006 Executive Compensation Release, supra note 277, at
53163.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission expressed concern that our
existing disclosure requirements do not provide investors with adequate
information regarding an issuer's policies and practices on stock
option awards timed to precede or follow the release of material
nonpublic information. The Commission noted that, under the current
executive compensation disclosure rules, compensation-related equity
interests (including options, restricted stock, and similar grants) are
required to be presented in a tabular format and accompanied by
appropriate narrative disclosure necessary for an understanding of the
information presented in a table. Option grants that are spring-loaded
or bullet-dodging are not required to be separately identified in these
tables. Investors therefore may not have a clear picture of the effect
of an option award that is made close in time to the release of
material nonpublic information on the executives' or directors'
compensation and on the company's financial statements. Understanding
that issuers may have reasons for granting these types of options, but
that increased transparency may be warranted, the Commission proposed
amendments that would require registrants to disclose in a new table
any option awards to a ``named executive officer'' \285\ (``NEO'') or
director that is made close in time to the release of material
nonpublic information such as an earnings announcement.
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    \285\ Named executive officers include all individuals serving
as the registrant's Principal Executive Officer (``PEO'') or
Principal Financial Officer (``PFO'') during the last completed
fiscal year, the registrant's three most highly compensated officers
other than the PEO and PFO who were serving as executive officers at
the end of the last completed fiscal year, and up to two additional
individuals for whom disclosure would have been provided but for the
fact that the individual was not serving as an executive officer at
fiscal year-end. See Item 402(a)(3) of Regulation S-K.
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    Specifically, to identify if any such timed options are granted,
the Commission proposed adding a new paragraph to Item 402 of
Regulation S-K that would require: (1) tabular disclosure of each award
of stock options, SARs, or similar option-like instruments (i.e. the
grant date, number of securities underlying the award, the exercise
price of the award, and the grant date fair value of the award) granted
within 14 calendar days before or after the filing of a periodic
report, an issuer share repurchase, or the filing or furnishing of a
current report on Form 8-K that discloses material nonpublic
information (including earnings information); (2) the market value of
the underlying securities the trading day before disclosure of the
material nonpublic information; and (3) the market value of the
underlying securities one trading day after disclosure of material
nonpublic information.
    The proposed 14-day window was designed to cover the period that an
issuer would be aware of material nonpublic information at the time
that its board of directors grants these awards. The Commission noted
that many issuers also voluntarily communicate material nonpublic
information regarding their results of operations or financial
condition for a completed fiscal quarter or annual period through an
earnings release.\286\ After completion of a fiscal quarter, a
company's board of directors will usually meet a week or two before the
earnings release.\287\ During this period, the board would likely be
aware of material nonpublic information that could affect the price of
the company's stock.
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    \286\ The staff estimates that approximately 63% of the Form 10-
Qs filed with the Commission in calendar year 2017 were accompanied
by a prior or concurrent earnings release by the issuer.
    \287\ While some companies provide earnings releases in advance
of the corresponding Form 10-Q filings, many companies also issue
earnings releases concurrently with their Form 10-Q filings.
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    To further address these concerns, the Commission also proposed to
require narrative disclosure about an issuer's policies and practices
regarding the timing of grants of these awards in relation to the
disclosure of material nonpublic information by the issuer, including
how the board determines when to grant such awards and whether, and if
so, how, the board or compensation committee takes material nonpublic
information into account when determining the timing and terms of an
award; and whether the issuer has timed the disclosure of material
nonpublic information for the purpose of affecting the value of
executive compensation. For issuers that are subject to the CD&A, the
proposed narrative disclosure could be included in the CD&A.
    Overall, the Commission intended the proposed amendments to provide
shareholders with a full and complete picture of any spring-loaded or
bullet-dodging option grants during the fiscal year. The Commission
found it important for shareholders to understand company practices
with respect to these types of grants as they consider their say-on-pay
votes, and director elections. Accordingly, the Commission proposed to
require this disclosure in annual reports on Form 10-K,\288\ as well as
in proxy statements and information statements related to the election
of directors, shareholder approval of new compensation plans, and
solicitations of advisory votes to approve executive compensation.\289\
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    \288\ The executive compensation disclosure requirements in Part
III of Form 10-K may be incorporated by reference from a proxy or
information statement involving the election of directors, if filed
within 120 days of the end of the fiscal year. See Note 3 to General
Instruction G(3) to Form 10-K.
    \289\ Exchange Act Rule 14a-21 [17 CFR 240.14a-21] requires,
among other things, that companies soliciting proxies for an annual
or other meeting of shareholders at which directors will be elected
include a separate resolution subject to a shareholder advisory vote
to approve the compensation of named executive officers.
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    Under the proposal, SRCs and emerging growth companies (``EGCs'')
\290\ would be subject to the new disclosure requirement. However,
consistent with the scaled approach to their executive compensation
disclosure,\291\ they would be permitted to limit their disclosures
about specific option awards to the PEO, the two most highly
compensated executive officers other than the PEO at fiscal year-end,
and up to two additional individuals who would have been the most
highly compensated but for not serving as executive officers at fiscal
year-end.\292\
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    \290\ An EGC is defined as a company that has total annual gross
revenues of less than $1.235 billion during its most recently
completed fiscal year and, as of Dec. 8, 2011, had not sold common
equity securities under a registration statement. A company
continues to be an EGC for the first five fiscal years after it
completes an IPO, unless one of the following occurs: Its total
annual gross revenues are $1.235 billion or more; it has issued more
than $1 billion in non-convertible debt in the past three years; or
it becomes a ``large accelerated filer,'' as defined in Exchange Act
Rule 12b-2. See Securities Act Rule 405; Exchange Act Rule 12b-2.
    \291\ See Item 402(l) of Regulation S-K.
    \292\ See Item 402(m)(2) of Regulation S-K.
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2. Comments on the Proposed Amendments
    Many commenters supported the proposed tabular and narrative
disclosures.\293\ Some of these commenters generally indicated that the
proposed disclosures would increase investor confidence and might deter
or discourage the use of spring-loaded and bullet-dodging option
grants.\294\ For example, they agreed that these disclosures would help
investors make informed choices when voting on director elections and
on executive pay and other compensation matters.

Commenters also expressed the view that the proposed disclosures would
improve investor confidence by indicating that such awards are
appropriately tied to long-term performance targets \295\ and,
similarly, giving insight into practices that could appear similar to
insider trading, which would undermine the perceived fairness and
integrity of the markets.\296\
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    \293\ See, e.g., letters from ACCO, AFL-CIO, ICGN, NASAA,
O'Reilly, and Public Citizen.
    \294\ See, e.g., letters from ICGN and NASAA.
    \295\ See letter from ICGN.
    \296\ See letter from NASAA.
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    A number of commenters, however, did not support this
proposal.\297\ Many of these commenters contended that the proposed
disclosure requirements were unnecessary because the information is
already available to the public through current executive compensation
disclosure requirements and Section 16 reports, such as Form 4.\298\
Several commenters contended that the proposed disclosures could be
misleading as they could suggest a causal link between these awards and
the release of material nonpublic information where none exists.\299\
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    \297\ See, e.g., letters from ABA, Chevron, Cleary, Cravath,
Davis Polk, DLA, Dow, Home Depot, FedEx, Fenwick, Jones Day, MD Bar,
NAM, Paul Weiss, Quest, SCG, Shearman, Sullivan, and Wilson Sonsini.
    \298\ See, e.g., letters from Cleary, Cravath, Dow, Fenwick,
Home Depot, SCG, Shearman, and Wilson Sonsini.
    \299\ See, e.g., letters from Dow, FedEx, Home Depot, PNC.
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    In particular, many commenters were opposed to the proposed tabular
disclosure of each option award granted within 14-calendar days before
or after a triggering event.\300\ Several commenters contended that the
proposed disclosure would capture a large number of ordinary-course
equity award grants and would not help investors distinguish spring-
loaded or bullet-dodging grants from routine option grants.\301\ Some
of these commenters asserted that the timing of equity award grants is
typically based on a meeting schedule for directors that is established
several months in advance without consideration of disclosure of
material information.\302\
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    \300\ See, e.g., letters from ABA, Davis Polk Cleary, Cravath,
Dow, Fenwick, Home Depot, SCG, and Shearman.
    \301\ See, e.g., letters from Cleary, Cravath, Dow, Fenwick,
Home Depot, SCG, Shearman, and Wilson Sonsini.
    \302\ See, e.g., letters from Cleary, Cravath, Dow, FedEx, Home
Depot, and SCG.
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    A few commenters that opposed the tabular disclosure suggested
modifying the requirements if adopted, to better ensure that the
disclosure does not unduly encompass routine awards. A few commenters
suggested shortening the disclosure window from 14 days,\303\ to a
shorter period, such as to three or five days.\304\ Other commenters
recommended that the Commission narrow the triggering events for this
disclosure. Some of these commenters suggested that the Commission
remove the Form 8-K disclosure trigger or limit it to Forms 8-K
reporting an event under Item 1.01 \305\ or Item 2.02 \306\ of the form
rather than using a materiality standard.\307\ These commenters argued,
among other things, that these reports are more likely to impact the
price or trading in an issuer's securities \308\ and that a more
bright-line approach would benefit investors by providing them with
more consistent and material information while removing the potential
burden on issuers that making a materiality assessment for each Form 8-
K may impose.\309\ One of these commenters also urged the Commission to
remove the share repurchase trigger or change it to trigger disclosure
upon the adoption or announcement of a new share repurchase program,
rather than any share repurchase transaction.\310\ This commenter
asserted that the proposed requirement could pose a substantial burden
on issuers without any potential benefit to investors as many issuers
engage in share repurchases activity regularly and, in some instances,
daily.
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    \303\ See, e.g., letters from Cravath and Davis Polk.
    \304\ See letter from Cravath.
    \305\ Item 1.01 requires disclosure of the entry into a material
definitive agreement by the registrant.
    \306\ Item 2.02 requires disclosure of, among other things, a
public announcement or release (including any update of an earlier
announcement or release) disclosing material nonpublic information
regarding the registrant's results of operations or financial
condition for a completed quarterly or annual fiscal period.
    \307\ See, e.g., letters from Fenwick and Sullivan.
    \308\ See letter from Fenwick.
    \309\ See letter from Sullivan.
    \310\ Id.
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    In addition, another commenter asserted that the proposed narrative
disclosure sufficiently addressed the Commission's concerns regarding
spring-loading and bullet-dodging.\311\ This commenter expressed the
view that disclosure regarding the compensation committee's
consideration of whether the issuer has material nonpublic information
at the time of the grant and how the compensation committee considers
the impact of timing and nature of corporate disclosures, share buyback
announcements, and similar events would sufficiently address the
concerns.
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    \311\ See letter from Dow.
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    Finally, a few commenters contended that these rules are
unnecessary because the staff guidance of Staff Accounting Bulletin 120
\312\ mitigates disclosure concerns regarding spring-loaded
options.\313\
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    \312\ See Staff Accounting Bulletin No. 120, Release No. SAB 120
(Nov. 24, 2021) [86 FR 68111 (Dec. 1, 2021)] (``SAB 120''). In SAB
120, among other topics, the staff provided interpretative guidance
for public companies to consider regarding the accounting treatment
of option awards made when the company possessed material nonpublic
information. All staff statements, including SAB 120 and any other
staff statement cited in this release, represent the views of the
staff. They are not a rule, regulation, or statement of the
Commission. The Commission has neither approved nor disapproved
their content. These staff statements, like all staff statements,
have no legal force or effect: they do not alter or amend applicable
law, and they create no new or additional obligations for any
person.
    \313\ See, e.g., letters from SCG, Cravath, and Jones Day.
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3. Final Amendments
    Having considered the comments received, we are adopting Item
402(x) as proposed with respect to the narrative disclosure and with
several modifications to the tabular disclosure.
    With respect to the narrative disclosure, as proposed, the final
rule will require registrants to discuss the registrant's policies and
practices on the timing of awards of stock options, SARs and/or similar
option-like instruments in relation to the disclosure of material
nonpublic information by the registrant, including how the board
determines when to grant such awards (for example, whether such awards
are granted on a predetermined schedule); whether, and if so, how, the
board or compensation committee takes material nonpublic information
into account when determining the timing and terms of an award, and
whether the registrant has timed the disclosure of material nonpublic
information for the purpose of affecting the value of executive
compensation.\314\
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    \314\ Item 402(x)(1) does not require a registrant to adopt
policies and practices on the timing of awards of stock options,
SARs and/or similar option-like instruments if it has not already
done so, or to modify any such existing policies.
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    We disagree with commenters who suggested this narrative disclosure
would not provide useful information to investors. While it is true
that investors can with some effort identify the timing both of awards
and earnings announcements, this information would not reveal the
extent to which a board considered the effects of such timing on its
executive compensation practices, and may have modified other aspects
of the executive's total compensation to reflect any impact that the
timing of the award may have had. For similar reasons, we do not agree
that the staff guidance in SAB 120 sufficiently mitigates disclosure
concerns regarding

the timing of options and similar awards as contended by some
commenters. To the contrary, the narrative disclosures required by the
final rule will increase the mix of information available to investors
and better inform them of the appropriateness of any adjustments made
by the board.
    In addition, we are adopting the tabular disclosure requirement
with several modifications in light of comments received. To address
concerns that this disclosure may be misleading or otherwise overly
broad, we have narrowed the disclosure window, with the result that
disclosure would be required for awards made in the four business days
before the filing of a periodic report or the filing or furnishing of a
current report on Form 8-K that discloses material nonpublic
information (including earnings information) and ending one business
day after a triggering event. We have also removed the share repurchase
disclosure trigger. In addition, the final rule provides that a Form 8-
K reporting only the grant of a material new option award under Item
5.02(e) does not trigger this disclosure. We also combined the last two
columns of the proposed table that would have required disclosure of
the market value of the securities underlying the award one trading day
before and one trading day after disclosure of material nonpublic
information into a single column that discloses the percentage change
in the market value of the securities underlying the award between
those dates.
    The final rules provide that, if, during the last completed fiscal
year, stock options, SARs, and/or similar option-like instruments were
awarded to an NEO within a period starting four business days before
the filing of a periodic report on Form 10-Q or Form 10-K, or the
filing or furnishing of a current report on Form 8-K that discloses
material nonpublic information (including earnings information), other
than a current report on Form 8-K disclosing a material new option
award grant under Item 5.02(e), and ending one business day after a
triggering event, the issuer must provide the following information
concerning each such award for the NEO on an aggregated basis in the
tabular format set forth in the rule:
     The name of the NEO;
     The grant date of the award;
     The number of securities underlying the award;