The per-share exercise price;
     The grant date fair value of each award computed using the
same methodology as used for the registrant's financial statements
under generally accepted accounting principles; and
     The percentage change in the market price of the
underlying securities between the closing market price of the security
one trading day prior to and one trading day following the disclosure
of material nonpublic information.
    The purpose of the new table is to highlight for investors options
award grants that may be more likely than most to have been made at a
time that the board of directors was aware of material nonpublic
information affecting the value of the award.
    In a modification from the proposing release, we are requiring that
the table include only option awards granted in the period beginning
four business days preceding a triggering event and ending one business
day after a triggering event. We agree with commenters that the
proposed 14-day disclosure window may result in disclosure of many
routine awards that are less likely to have been affected by material
nonpublic information. To address these concerns, similar to the
recommendation of one of those commenters to shorten the timeframe to
three or five days,\315\ we selected a four-business day period
preceding a triggering event because a registrant must generally file a
Form 8-K within that period of time upon becoming aware of a triggering
event. It therefore is less likely that the registrant would be able to
grant an award based upon the board's awareness of a triggering event
more than four business days before the filing of a corresponding Form
8-K. We are adopting the same time period for awards preceding
disclosures on Forms 10-Q and 10-K to make such disclosures readily
comparable to those triggered by an 8-K filing. In addition, we are
requiring disclosure of options awards in the one-business day period
after the filing or furnishing of Forms 8-K, 10-Q, or 10-K because in
some circumstances the issuer's share price will not fully reflect the
information disclosed immediately after disclosure.\316\ Including
post-filing option awards beyond that period might reduce the value of
the information in the table by including awards that may be less
likely to be affected by material nonpublic information.
---------------------------------------------------------------------------

    \315\ See letter from Cravath.
    \316\ See infra Section V.D.
---------------------------------------------------------------------------

    In addition, to further ensure that this disclosure covers the
types of grants that we are concerned with, we have removed the share
repurchase triggering event and provided a limited exception from the
tabular disclosure of option awards based on the filing or furnishing
of a Form 8-K. We are persuaded by commenters that including awards
close in time to any issuer share repurchases could result in
disclosure of virtually every award, greatly reducing the information
value of the table. With respect to the Form 8-K trigger, we have
created an exception for Item 5.02(e) Forms 8-K that only disclose a
material new option award grant because we believe including this
particular information in the new table would be redundant and not
informative to investors. We disagree, however, with the commenters
that recommended removing the Form 8-K trigger or limiting it to Item
1.01 or Item 2.02 Forms 8-K because a broad range of Forms 8-K could
disclose material information that raises spring-loading concerns, not
just these types of Forms 8-K. For example, the disclosure of an event
under Item 8.01 of Form 8-K, such as the status of a patent
application, may constitute material information that could affect the
value of an option award.
    Lastly, we combined the final two columns of the proposed table
into a single column that requires disclosure of the percentage change
in the market value of the securities underlying the award between the
closing market price of the securities one trading prior to the
disclosure of material nonpublic information and one trading day
following the disclosure of material nonpublic information. This change
is intended to make it easier for investors to understand the impact
that spring-loading may have on the potential value realizable by the
NEO.

D. Structured Data Requirements

1. Proposed Amendments
    The Commission proposed to require registrants to tag the
information specified by proposed Items 408 and 402(x) of Regulation S-
K, and Item 16J of Form 20-F in Inline XBRL in accordance with Rule 405
of Regulation S-T and the EDGAR Filer Manual.\317\ The proposed
requirements would include block text tagging of narrative disclosures,
as well as detail tagging of quantitative amounts disclosed within

the narrative disclosures. Inline XBRL is both machine-readable and
human-readable, which improves the quality and usability of XBRL data
for investors.\318\
---------------------------------------------------------------------------

    \317\ This tagging requirement would be implemented by including
cross-references to Rule 405 in proposed Item 408(a)(3), Item
408(b)(3) and Item 402(x), and Item 16J of Form 20-F, and by
revising Rule 405(b) to include the Item 408(a), 408(b)(1), and Item
402(x) disclosure. In conjunction with the EDGAR Filer Manual,
Regulation S-T governs the electronic submission of documents filed
with the Commission. Rule 405 specifically governs the scope and
manner of disclosure tagging requirements for operating companies
and investment companies, including the requirement in Rule
405(a)(3) to use Inline XBRL as the specific structured data
language for tagging the disclosures.
    \318\ See Inline XBRL Filing of Tagged Data, Securities Act
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
Inline XBRL allows filers to embed XBRL data directly into an HTML
document, eliminating the need to tag a copy of the information in a
separate XBRL exhibit. Inline XBRL is both human-readable and
machine-readable for purposes of validation, aggregation, and
analysis. Id. at 40851.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Most of the commenters who addressed this proposal supported
requiring the tagging of the disclosures.\319\ One commenter, however,
opposed this proposal and urged the Commission not to adopt it.\320\
This commenter asserted that XBRL tagging was not well adapted to the
disclosure of trading policies and procedures that would be required
under proposed Item 408 and proposed Item 16J of Form 20-F, and that
the full impact of this requirement would depend on what tagging would
be required, which was not included with the Proposing Release.
---------------------------------------------------------------------------

    \319\ See, e.g., letters from CII, AFL-CIO, ICGN, and XBRL US,
Inc. (``XBRL-US'').
    \320\ See letter from Cleary.
---------------------------------------------------------------------------

3. Final Amendments
    After considering these comments, we are adopting the amendments as
proposed. The final amendments will require registrants to tag the
information specified by new Items 402(x), 408(a), and 408(b)(1) of
Regulation S-K, and new Item 16J(a) of Form 20-F, in Inline XBRL in
accordance with Rule 405 and the EDGAR Filer Manual. We do not agree
with a commenter's contention that XBRL tagging is not well adapted to
these disclosures.\321\ Rather, XBRL tagging is well adapted to
narrative disclosures such as those specified by new Items 408(a),
408(b)(1), and 402(x)(1) of Regulation S-K and new Item 16J(a) of Form
20-F. In that regard, we note that the Commission has required XBRL
tagging for narrative disclosures, such as descriptions of significant
accounting policies in footnotes to financial statements since the
initial implementation of XBRL requirements in 2009.\322\ Requiring
Inline XBRL tagging of these disclosures will benefit investors by
making the disclosures more readily available and easily accessible to
investors, market participants, and others for aggregation, comparison,
filtering, and other analysis, as compared to requiring a non-machine
readable data language such as HTML. Registrants must comply with the
Inline XBRL tagging requirements in Forms 10-Q, 10-K and 20-F, and any
proxy or information statements that are required to include the Item
408 and/or Item 402(x) disclosures, beginning with the first such
filing that covers the first full fiscal period beginning on or after
April 1, 2023, for companies other than SRCs. SRCs will be required to
provide and tag the disclosures after an additional six-month
transition period. This compliance date is intended to provide
sufficient time for filers, filing agents, and software vendors to
transition to the new requirements, as well as to provide time for any
necessary taxonomy or EDGAR changes.
---------------------------------------------------------------------------

    \321\ Id.
    \322\ See 17 CFR 232.405(d).
---------------------------------------------------------------------------

    This Inline XBRL tagging will enable automated extraction and
analysis of the granular data required by the final rules, allowing
investors and other market participants to more efficiently perform
large-scale analysis and comparison of this information across
registrants and time periods. For example, an Inline XBRL requirement
will allow investors to extract and search for disclosures about the
use of Rule 10b5-1 plans by directors and officers reported in a
registrant's periodic reports rather than having to manually run
searches for these disclosures through entire documents. The Inline
XBRL requirement would also enable automatic comparison of tagged
disclosures against prior periods. At the same time, we do not expect
the incremental compliance burden associated with tagging the
information specified by new Items 402(x), 408(a), 408(b)(1), or new
Item 16J(a) will be unduly burdensome because registrants subject to
the tagging requirements are for the most part subject to similar
Inline XBRL requirements in other Commission filings.

E. Reporting of Gifts on Form 4

1. Proposed Amendments
    Currently, Section 16 reporting persons may report any ``bona fide
gift'' \323\ of equity securities registered under Exchange Act Section
12 on Form 5. Exchange Act Rule 16a-3(f) permits officers, directors
and ten percent holders to report on Form 5 within 45 days after the
issuer's fiscal year end certain transactions during the most recent
fiscal year that were exempt from Section 16(b).\324\ As transactions
that are exempted from Section 16(b) by Rule 16b-5,\325\ both the
acquisition and disposition of bona fide gifts are eligible for delayed
reporting on Form 5 pursuant to Rule 16a-3(f)(1). This filing schedule,
under the current rules, can permit Section 16 reporting persons to
report ``bona fide'' gifts more than one year after the date of the
gift.\326\
---------------------------------------------------------------------------

    \323\ A bona fide gift is a gift that is not required or
inspired by any legal duty or that is in any sense a payment to
settle a debt or other obligation, and is not made with the thought
of reward for past services or hope for future consideration. See
Ownership Reports and Trading by Officers, Directors and Principal
Stockholders, Release No. 34-26333 (Dec. 2, 1988) [53 FR 49997 (Dec.
13, 1988)].
    \324\ 17 CFR 240.16a-3(f).
    \325\ 17 CFR 240.16b-5.
    \326\ Reports on Form 5 are due within 45 days after the
issuer's fiscal year end, which potentially allows a delay of up to
410 days between a reportable transaction and the filing of the Form
5.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted that the delayed
reporting of gifts on Form 5 may allow Section 16 reporting persons to
engage in problematic practices involving gifts of equity securities,
such as making stock gifts while in possession of material nonpublic
information,\327\ or backdating stock gifts in order to maximize the
tax benefits associated with such gifts.\328\ To address these
concerns, the Commission proposed to amend Exchange Act Rule 16a-3 to
require the reporting of dispositions by bona fide gifts of equity
securities on Form 4. Under the proposal, an officer, director, or a
beneficial owner of more than 10 percent of the issuer's registered
equity securities who makes a gift of equity securities would be
required to report the gift on Form 4, which has a deadline of the end
of the second business day following the date of execution of the
transaction. This deadline would be significantly earlier than what is
required under Form 5. The earlier reporting deadline is intended to
help investors, other market participants, and the Commission better
evaluate the actions of these Section 16 reporting persons and the
context in which equity securities gifts are being made.
---------------------------------------------------------------------------

    \327\ See Daisy Maxey, Improper `Insider Charitable Giving' Is
Widespread, Study Says, Wall St. J. (July 5, 2021) (retrieved from
Factiva database).
    \328\ See S. Burcu Avci et al., Insider Giving, 71 Duke L.J.
619-700 (2021) (finding that insiders' charitable gifts of
securities are unusually well timed suggesting that such results are
likely due to the possession of material nonpublic information and
from the backdating of the stock gift). See also David Yermack,
Deductio ad Absurdum: CEOs Donating Their Own Stock to Their Family
Foundations, 94 J. Fin. Econ. 107 (2009).
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Several commenters generally supported the proposal to require
Section 16 reporting persons to report dispositions of equity
securities by bona

fide gifts on Form 4.\329\ One of these commenters agreed with the
reasons cited in the Proposing Release that the earlier reporting
deadline would help investors, other market participants, and the
Commission better evaluate the actions of these Section 16 reporting
persons and the context in which these gifts are made.\330\
---------------------------------------------------------------------------

    \329\ See, e.g., letters from AFL-CIO, Cravath, and ICGN.
    \330\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of commenters, however, expressed concern over the
reporting of dispositions by bona fide gifts of equity securities on
Form 4, and in particular expressed concern about the proposed
reporting two-day deadline, including the resulting compliance and
administrative burdens.\331\ Some of these commenters contended that
certain estate planning transactions involving gifts of equity
securities are complex and that Section 16 reporting persons will spend
substantial time analyzing these transactions to ensure proper
reporting under Section 16.\332\ One commenter contended that the
proposed amendment could discourage Section 16 reporting persons from
making gifts of equity securities and, as a result, urged the
Commission to not adopt this proposal, or, at a minimum, limit it to
bona fide gifts of securities made to charities affiliated with the
insider and to extend the reporting deadline for bona fide gifts of
securities, such as to 45 days.\333\ Another commenter suggested that a
donor should be able to avoid insider trading liability by obtaining a
commitment from the charitable donee not to sell the donated stock
until after any material nonpublic information known by the donor at
the time of the donation has become public or stale.\334\ This
commenter also argued that the proposed amendment was overbroad in that
it applied to some gifts, such as in case of transfers to a trust
controlled by the donor, that the commenter asserted were not
``problematic.'' \335\
---------------------------------------------------------------------------

    \331\ See, e.g., letters from HRPA, Davis Polk, and NAM.
    \332\ See, e.g., letters from HRPA and Davis Polk.
    \333\ See letter from HRPA; see also letter from NAM (expressing
concern that the ``tight timeframe'' in the proposal will be
``functionally unworkable'' and urging that the Commission consider
a reporting deadline longer than two days).
    \334\ See letter from Davis Polk.
    \335\ See id; see also letter from HRPA (asserting that the
proposed amendment could ``unnecessarily complicate estate planning
activities that have a very low likelihood of abuse'').
---------------------------------------------------------------------------

    Finally, this same commenter also expressed concern that language
in the proposing release purporting to illustrate the application of
Section 10(b) to gifts of securities appeared to represent an extension
or modification of insider trading law.\336\ In footnote 55 of the
Proposing Release, the Commission stated that ``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.'' \337\ This
commenter noted that shareholders often make charitable donations of
stock at the end of the year to obtain an income-tax deduction for the
current year, and that the charitable organization that receives the
stock often sells the securities upon receipt. This commenter asserted
the Commission should clearly explain the basis for its conclusion and
provide guidance as to how a Section 16 reporting person could make a
charitable donation of securities without running afoul of Section
10(b) and Rule 10b-5. The commenter expressed concern that the
Commission's position would criminalize this type of gifting.
---------------------------------------------------------------------------

    \336\ See letter from Davis Polk (citing footnote 55 of the
Proposing Release).
    \337\ See Proposing Release at 8695.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the comments, we are adopting the amendments to
Rule 16a-3 as proposed. Under the final amendments, Section 16
reporting persons will be required to report dispositions of bona fide
gifts of equity securities on Form 4 (rather than Form 5) in accordance
with Form 4's filing deadline (that is, before the end of the second
business day following the date of execution of the transaction). To
address our concerns that the lengthy reporting deadline may allow
Section 16 reporting persons to engage in the problematic practices
noted above, we intend for this reporting deadline to help investors,
other market participants, and the Commission better evaluate the
actions of Section 16 filers and the context in which they make gifts
of equity securities. In that regard, we agree with the academic
authors, cited in the Proposing Release,\338\ who observe that a gift
followed closely by a sale, under conditions where the value at the
time of donation and sale affects the tax or other benefits obtained by
the donor, may raise the same policy concerns as more common forms of
insider trading.\339\ As these academic authors have found, because the
donor is in a position to benefit from the asset's value at the time of
donation and sale, the donor may be motivated to give at a time when
donor is aware of material nonpublic information and may expect the
donee to sell prior to the disclosure of such information.\340\
Investors cognizant of this dynamic may be more reluctant to trade. We
also agree with the academic authors that a gift made with the
knowledge that the donee will soon sell can be seen as in effect a sale
for cash followed by gift of the cash.\341\
---------------------------------------------------------------------------

    \338\ See Section II.D. of the Proposing Release.
    \339\ See supra note 328.
    \340\ We disagree with the commenter who argued that donors are
not motivated by financial advantage and that tax considerations do
not warrant treating gifts ``as if they were market transactions.''
See letter from HRPA. Although we agree that many gifts are likely
driven by other than pecuniary motives, the tax treatment of any
particular gift can substantially affect the net cost of that
donation. Extensive academic literature documents that such
differences affect the amount and timing of gifts. See, e.g., James
A. Andreoni & A. Abigail Payne, Charitable Giving, in 5 Handbook of
Public Economics 1 (Alan J. Auerbach et al. eds., 2013). To be
clear, we understand that in the common case of charitable donations
of stock to a public charity, the value of the donor's tax benefit
is (subject to some limitations) the value of the asset on the date
of donation, not the value obtained by the recipient upon sale. See
26 U.S.C. 170(e); 26 CFR 1.170A-1(c)(1). But, when a sale occurs
close in time to the time of donation, these two may be the same. In
addition, we note that non-pecuniary motives can also lead donors to
consider the value a donee realizes upon sale, as in the case where
the donor wishes to maximize the amount of cash available to the
gift recipient.
    \341\ See Avci et al supra note 328, at 650-52.
---------------------------------------------------------------------------

    We are clarifying here, however, that the affirmative defense of
Rule 10b5-1(c)(1) is available for any bona fide gift of securities,
including a gift that might otherwise cause the donor to be subject to
liability under Section 10(b), because when making the gift 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.\342\
In our view, the terms ``trade'' and ``sale'' in Rule 10b5-1(c)(1)
include bona fide gifts of securities.\343\ For example, a covered
individual may enter into a binding arrangement instructing their
attorney or tax advisor to gift shares to a charitable organization,
with the amount of shares gifted determined according to a traditional
algorithm or formula, or instead according to some tax objective, such
as the amount of shares that would maximize the

individual's annual charitable contribution deduction.
---------------------------------------------------------------------------

    \342\ We are aware that some covered individuals currently make
bona fide gifts under a Rule 10b5-1 plan. See letter from Sullivan.
In clarifying that the affirmative defense of Rule 10b5-1(c)(1) is
available for bona fide gifts of securities, we do not intend to
suggest that this defense was previously unavailable for such
transactions.
    \343\ See supra note 257.
---------------------------------------------------------------------------

    We are not persuaded by the concerns of commenters who suggested
that we not adopt this proposal, or that we adopt a separate reporting
deadline for bona fide gifts of securities that is much longer than the
existing Form 4 deadline. As noted in Section V below, we recognize
that this amendment may increase compliance costs and may do so to a
greater extent for estate planning transactions given their
complexity.\344\ Any such increases, however, should be limited as the
majority of insiders already report these gifts on Form 4. Further,
while we acknowledge that the amendment may make year-end tax planning
incrementally more difficult as filers must delegate analysis of or
anticipate their year-end tax needs three or four months earlier, our
clarification that bona fide gifts are eligible for the Rule 10b5-
1(c)(1) affirmative defense should mitigate any adverse consequences
that commenters suggested, such as discouraging bona fide gifts. We
also are not convinced that a shorter reporting period will
substantially affect estate planning transactions, which generally are
carefully planned and analyzed in advance and adopted under the advice
of tax counsel who may assist in any needed analysis.
---------------------------------------------------------------------------

    \344\ See infra Sections V.E.1. and V.E.3.
---------------------------------------------------------------------------

    Further, we disagree with the commenter who suggested that we
narrow the scope of the gift limitations, such as by applying it only
to gifts made to charities affiliated with the Section 16 reporting
person or exempting donors who obtain a commitment from the charitable
donee not to sell the donated stock until after any material nonpublic
information known by the donor at the time of the donation has become
public or stale.\345\ While, in some cases, a close affiliation between
the donor and donee can make an abusive transaction easier to carry
out, none of the potential concerns we have identified are limited to
transfers to entities controlled by or affiliated with the donor. In
addition, the commenter argued that donated stock would not implicate
any insider trading concerns if the donor obtained commitments that the
stock would not be sold until any material nonpublic information became
public or stale. We doubt any such approach would be effective in
maintaining investor confidence because it may be difficult or
impossible to verify whether the donor had obtained a binding
commitment to refrain from such a sale. Moreover, this commenter
appears to urge us to adopt an exception for gifts to estate planning
vehicles controlled by the donor, because the commenter believes that
such transfers would not permit the practices described in the
Proposing Release. There may be circumstances, however, under which it
would be advantageous for the donor if the donee entity obtains a high
sales price shortly after the donation, such as where the entity allows
the donor to take advantage of tax-favorable diversification
opportunities. As we see no practical way to identify which gifts pose
this risk and which do not, we are not adopting such an exception.\346\
---------------------------------------------------------------------------

    \345\ See letter from Davis Polk.
    \346\ With respect to estate planning vehicles controlled by the
donor, we further note that transactions that ``effect only a change
in the form of beneficial interest without changing a person's
pecuniary interest in the subject equity securities'' are exempt
from Section 16 reporting. See Rule 16a-13a [17 CFR 240.16a-13].
---------------------------------------------------------------------------

III. Transition Matters

    A number of commenters recommended that the Commission provide
transition guidance or a phase-in period, such as a 12-month phase-in,
for the proposed disclosure amendments. In response, we are providing
the following compliance dates for the final amendments:
     Section 16 reporting persons will be required to comply
with the amendments to Forms 4 and 5 for beneficial ownership reports
filed on or after April 1, 2023; and
     Issuers that are SRCs will be required to comply with the
new disclosure and tagging requirements in Exchange Act periodic
reports on Forms 10-Q, 10-K and 20-F and in any proxy or information
statements that are required to include the Item 408, Item 402(x), and/
or Item 16J disclosures in the first filing that covers the first full
fiscal period that begins on or after October 1, 2023.
     All other issuers will be required to comply with the new
disclosure and tagging requirements in Exchange Act periodic reports on
Forms 10-Q, 10-K and 20-F and in any proxy or information statements
that are required to include the Item 408, Item 402(x), and/or Item 16J
disclosures in the first filing that covers the first full fiscal
period that begins on or after April 1, 2023.
    While we acknowledge that several commenters requested a longer
phase-in period for these amendments, we believe that these compliance
dates strike an appropriate balance between affording issuers and
Section 16 reporting persons time to prepare to comply with the new
rules and ensuring that this information becomes available to investors
in a timely manner. For example, Section 16 reporting persons should
have the information needed to comply with the amendments to Forms 4
and 5 readily available.
    In addition, some commenters requested that we clarify the
application of the amendments to Rule 10b5-1(c)(1) to existing Rule
10b5-1 plans and/or provide transitional relief for existing
plans.\347\ The amendments to Rule 10b5-1(c)(1) would not affect the
affirmative defense available under an existing Rule 10b5-1 plan that
was entered into prior to the revised rule's effective date, except to
the extent that such a plan is modified or changed in the manner
described in Rule 10b5-1(c)(iv) \348\ after the effective date of the
final rules. In that case, the modification or change would be
equivalent to adopting a new trading arrangement, and, thus, amended
Rule 10b5-1(c)(1) would be the applicable regulatory affirmative
defense that would be available for that modified arrangement.
---------------------------------------------------------------------------

    \347\ See letters from BioNJ, Chevron, Cleary, Cravath, Davis
Polk, Jones Day, SIFMA 2 and 3, Sullivan, and Wilson Sonsini.
    \348\ See Rule 10b5-1(c)(iv) (``Any modification or change to
the amount, price, or timing of the purchase or sale of the
securities underlying a contract, instruction, or written plan as
described in paragraph (c)(1)(i)(A) of this section is a termination
of such contract, instruction, or written plan, and the adoption of
a new contract, instruction, or written plan'').
---------------------------------------------------------------------------

IV. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
    Pursuant to the Congressional Review Act,\349\ the Office of
Information and Regulatory Affairs has designated these rules a ``major
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \349\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

V. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Under Section 2(b) of the Securities Act,\350\ Section
3(f) of the Exchange Act,\351\ and Section 2(c) of the Investment
Company Act,\352\ whenever the Commission is engaged in rulemaking and
required to consider or determine whether an action is necessary or
appropriate in (or, with

respect to the Investment Company Act, consistent with) the public
interest, it shall also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation. In addition, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the impact on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\353\
---------------------------------------------------------------------------

    \350\ 15 U.S.C. 77b(b).
    \351\ 15 U.S.C. 78c(f).
    \352\ 15 U.S.C. 80a-2(c).
    \353\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We have considered the economic effects of the amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from the amendments, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the amendments, we provide a
qualitative assessment of the potential benefits, costs, and impacts of
the amendments on efficiency, competition, and capital formation.

A. Broad Economic Considerations

    The amendments are expected to provide greater transparency to
investors (i.e., decrease information asymmetries between insiders and
outside investors) about issuer and insider trading arrangements and
restrictions, as well as insider compensation and incentives, enabling
more informed investment and voting decisions. The amendments are also
expected to limit the opportunity for insider trading based on material
nonpublic information (``MNPI'') \354\ by adding new conditions to the
Rule 10b5-1(c) affirmative defense, resulting in benefits to investors
and improvement in insiders' incentives.
---------------------------------------------------------------------------

    \354\ See supra note 3.
---------------------------------------------------------------------------

    Insider trading enables certain investors who have access to inside
information or who have the ability to influence the timing or
substance of corporate disclosures to profit at the expense of other
investors. Due to their access to MNPI, insiders can obtain
illegitimate profits through the strategic timing of trades in the
issuer's securities. These profits essentially unlawfully transfer
wealth from other investors to the insider.\355\ In addition, insider
trading can distort the incentives of corporate insiders, which results
in a loss of shareholder value and erodes investor confidence in the
markets. Insider trading can also lead to reputational costs for
companies.
---------------------------------------------------------------------------

    \355\ See, e.g., Michael D. Guttentag, Avoiding Wasteful
Competition: Why Trading on Inside Information Should Be Illegal, 86
Brook. L. Rev. 895 (2021).
---------------------------------------------------------------------------

1. Insider Trading Harms Investors, Distorts Insiders' Incentives, and
Imposes Economic Costs on Investors and Capital Markets
    The amendments are expected to decrease the incidence of unlawful
insider trading.\356\ Insider trading represents a breach of fiduciary
or other similar obligation of trust and confidence.\357\ Congress, the
Courts, and the Commission have concluded that such insider trading is
illegal.\358\ Before analyzing each aspect of the final rule, in the
interest of completeness, the Commission first reviews the economic
literature on the insider trading prohibition.\359\
---------------------------------------------------------------------------

    \356\ The discussion of broad economic considerations generally
focuses on insider trading in stock except where specified
otherwise. To the extent that insiders benefit from the timing of
option awards and gifts of stock around MNPI, some of the economic
effects associated with insider trading also may be manifested in
those contexts. For a detailed discussion of the economic
considerations applicable to option award timing and insider gift
timing, see infra Sections V.D and V.E.
    \357\ See infra note 490.
    \358\ See supra Section I.
    \359\ See, generally, Alexandre Padilla & Brian Gardiner,
Insider Trading: Is There an Economist in the Room?, 24 J. Private
Enterprise 113, 123 (2009) (noting ``economists have progressively
reached the same conclusion: that insider trading is harmful to
investors, corporations, and stock exchanges, and, therefore, ought
to be prohibited'').
---------------------------------------------------------------------------

    Insiders have information advantages that place them in a unique
position to improperly obtain profits for themselves through strategic
timing of trades. When an insider profits by trading on MNPI, those
profits are obtained at other investors' expense.\360\ Thus, reducing
the incidence of insider trading is expected to benefit investors.\361\
---------------------------------------------------------------------------

    \360\ See Michael Manove, The Harm from Insider Trading and
Informed Speculation, 104 Q. J. Econ. 823 (1989); William K.S. Wang,
Trading on Material Non-Public Information on Impersonal Stock
Markets: Who Is Harmed and Who Can Sue Whom Under SEC Rule 10b-5? 54
S. Cal. L. Rev. 1217 (1981).
    \361\ Misappropriation of information may have many economic
effects, including but not limited to, revealing information to the
market in a manner suboptimal to the issuer (and thus discouraging
investment in information and increasing costs of keeping
information private). Further, increased trading by insiders reduces
incentives for liquidity provision through adverse selection,
imposing economic costs on investors broadly. Finally,
misappropriation has associated agency costs as it represents an
undisclosed form of compensation and may lead to further divergence
of interests between the manager and the shareholders. See Frank H.
Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges,
and the Production of Information, 1981 Sup. Ct. Rev. 309, 315, 323,
331 (1981); In re Melvin, SEC Release No. 3682, 2015 WL 5172974, at
*4 & n.31 (Sept. 4, 2015).
---------------------------------------------------------------------------

    When investors anticipate that they are dealing with better
informed insiders that can profit at the investors' expense (i.e., they
anticipate the adverse selection problem due to the insiders' ability
to trade on MNPI), investors can become reluctant to trade the issuer's
shares. For this same reason, insider trading is likely to adversely
affect price efficiency (i.e., the extent to which stock prices reflect
an issuer's fundamental value) \362\ and liquidity.\363\
---------------------------------------------------------------------------

    \362\ A number of studies demonstrate adverse effects of insider
trading on market efficiency. See, e.g., Michael J. Fishman &
Kathleen M. Hagerty, Insider Trading and the Efficiency of Stock
Prices, 23 RAND J. Econ. 106 (1992) (showing that ``under certain
circumstances, insider trading leads to less efficient stock prices.
This is because insider trading has two adverse effects on the
competitiveness of the market: it deters other traders from
acquiring information and trading, and it skews the distribution of
information held by traders toward one trader.''); Zhihong Chen et
al., The Real Effect of the Initial Enforcement of Insider Trading
Laws, 45 J. Corp. Fin. 687 (2017) (finding evidence that the initial
enforcement of insider trading laws ``improves capital allocation
efficiency by increasing price informativeness and reducing market
frictions''); Robert M. Bushman et al., Insider Trading Restrictions
and Analysts' Incentives to Follow Firms, 60 J. Fin. 35 (2005)
(arguing that ``insider trading crowds out private information
acquisition by outsiders'' and showing that ``analyst following
increases after initial enforcement of insider trading laws'' in a
cross-country sample); Nuno Fernandes & Miguel A. Ferreira, Insider
Trading Laws and Stock Price Informativeness, 22 Rev. Fin. Stud.
1845 (2009) (finding that price informativeness increases with the
enforcement of insider trading laws, but only in countries with a
strong ``efficiency of the judicial system, investor protection, and
financial reporting''); see also Alexander P. Robbins, The Rule
10b5-1 Loophole: An Empirical Study, 34 Rev. Quant. Fin. Acct. 199
(2010) (finding, in a sample of 10b5-1 plans of 81 NASDAQ-listed
companies from 2004 to 2006 that ``10b5-1 plans have a significant
negative effect on the liquidity of a firm's shares, and therefore
the firm's cost of capital''). Some studies argue that insider
trading improves price efficiency. See, e.g., Hayne E. Leland,
Insider Trading: Should It Be Prohibited?, 100 J. Pol. Econ. 859
(1992) (showing in a model that ``stock prices better reflect
information'' when insider trading is permitted.); Utpal
Bhattacharya et al., When an Event Is Not an Event: The Curious Case
of An Emerging Market, 55 J. Fin. Econ. 69 (2000) (suggesting ``that
unrestricted insider trading causes prices to fully incorporate the
information before its public release''). See generally Henry G.
Manne, Insider Trading and the Stock Market (1966). A reduction in
insider trading can have nuanced effects on market efficiency. For
example, the conclusions about the effect of insider trading on
market efficiency may depend on whether the framework is static or
dynamic. See David Easley et al., Is Information Risk a Determinant
of Asset Returns?, 57 J. Fin. 2185 (2002).
    \363\ Various studies show that insider trading negatively
impacts liquidity. See, e.g., Raymond P.H. Fishe & Michel A. Robe,
The Impact of Illegal Insider Trading in Dealer and Specialist
Markets: Evidence From a Natural Experiment, 71 J. Fin. Econ. 461
(2004); Louis Cheng et al., The Effects of Insider Trading on
Liquidity, 14 Pacific-Basin Fin. J. 467 (2006); Leland, supra note
362 (showing in a model that ``markets are less liquid'' and
``outside investors and liquidity traders will be hurt'' when
insider trading is permitted); Laura N. Beny, Do Insider Trading
Laws Matter? Some Preliminary Comparative Evidence, 7 Am. L. & Econ.
Rev. 144 (2005) (finding that ``countries with more prohibitive
insider trading laws have more diffuse equity ownership, more
accurate stock prices, and more liquid stock markets''); Lawrence R.
Glosten, Insider Trading, Liquidity, and the Role of the Monopolist
Specialist, 62 J. Bus. 211 (1989) (showing in a model that insider
trading reduces liquidity). But cf. Charles Cao et al., Does Insider
Trading Impair Market Liquidity? Evidence from IPO Lockup
Expirations, 39 J. Fin. Quant. Anal. 25 (2004) (not finding a
negative effect of insider trading on liquidity).

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

    Insider trading also imposes a cost on the investors in the company
by distorting managerial incentives, as discussed below, which results
in a loss of shareholder value. Thus, whether insiders are
strategically timing stock sales and purchases based on MNPI can
provide information to investors about insider incentives. In
particular, the ability of officers and directors (who are either
involved in making corporate decisions or play a crucial role in the
oversight of such decisions) to profit from MNPI exacerbates conflicts
of interest between officers/directors and other shareholders,
resulting in inefficient, value-decreasing corporate decisions. For
example, by protecting the insider from the brunt of the effects of
poor corporate performance on the value of the insider's equity
position through the ability to sell ahead of negative news, insider
trading weakens incentive alignment and exacerbates agency conflicts
(and, in turn, increases the cost of monitoring insiders).
    One incentive distortion is that an insider may steer the company
towards projects that require less effort or that yield higher private
benefits even if such projects have a negative net present value (NPV)
and thus decrease shareholder value.\364\ To mitigate agency conflicts
and better align insider incentives with those of shareholders,
insiders are often compensated with equity. Because of insiders'
ability to sell shares in advance of negative news, as described above,
insiders may be less motivated to avoid negative NPV projects. Downside
protection also incentivizes the insider to choose riskier negative-NPV
projects due to the possibility of profiting on the upside.\365\
Relatedly, if short-term investment projects yield more profitable MNPI
(due, in part, to the reality that MNPI about long-term projects
arrives less frequently or is less definitive), an insider may exhibit
short-termism in making decisions at the company level at the expense
of shareholder value.\366\
---------------------------------------------------------------------------

    \364\ See, e.g., Antonio E. Bernardo, Contractual Restrictions
on Insider Trading: A Welfare Analysis, 18 Econ. Theory 7 (2001)
(showing in a model that ``[f]or many reasonable parameter values,
however . . . that managers may be too willing to take risky
projects. In fact, managers will often choose the risky investment
project when it has a lower expected return than the riskless
investment project.''). In some circumstances, insider trading may
remedy a manager's excess conservatism due to under-diversification.
See Lucian A. Bebchuk & Chaim Fershtman, Insider Trading and the
Managerial Choice Among Risky Projects, 29 J. Fin. Quant. Analysis 1
(1994). However, Bebchuk & Fershtman (1994) similarly acknowledge
that ``[t]he desire to increase trading profits might lead the
managers to prefer a very risky project even if it offers a lower
expected return than a safer alternative.''
    \365\ See, e.g., Easterbrook, supra note 361 (stating that
``[t]he opportunity to gain from insider trading also may induce
managers to increase the volatility of the firm's stock prices. . .
They may select riskier projects than the shareholders would prefer,
because if the risk pays off they can capture a portion of the gains
in insider trading and, if the project flops, the shareholders bear
the loss.''). But see Robbins, supra note 362 (finding, in a sample
of 10b5-1 plans of 81 NASDAQ-listed companies from 2004 to 2006 that
``insiders do not appear to increase the volatility of their own
firms' shares in order to profit by trading on the basis of material
nonpublic information under the protection of the 10b5-1 affirmative
defense'').
    \366\ See M. Todd Henderson, Insider Trading and Executive
Compensation: What We Can Learn from the Experience with Rule 10b5-
1, Res. Handbook on Exec. Pay 299 (2012) (stating that short-termism
is a cost of insider trading and that ``[e]xecutives looking to
maximize the value of their shares may engage in conduct that
increases the stock price in the short run at the expense of the
long term so that they can profit from trading in firm stock'').
Such managerial short-termism/myopia reduces shareholder value. See,
generally, John R. Graham et al., The Economic Implications of
Corporate Financial Reporting, 40 J. Acct. Econ. 3 (2005); Alex
Edmans, Blockholder Trading, Market Efficiency, and Managerial
Myopia, 64 J. Fin. 2481 (2009).
---------------------------------------------------------------------------

    Being able to profit from MNPI also can distort insider incentives
with respect to other corporate decisions that can affect the share
price. For example, officers and directors engaged in insider trading
may be disincentivized from sharing information efficiently within the
firm if they can profit from withholding it and personally trading on
it, which leads to inefficient corporate decisions and thus decreased
shareholder value.\367\
---------------------------------------------------------------------------

    \367\ See, e.g., Robert J. Haft, The Effect of Insider Trading
Rules on the Internal Efficiency of the Large Corporation, 80 Mich.
L. Rev. 1051, (1982).
---------------------------------------------------------------------------

    Another economic cost of insider trading is that it may incentivize
insiders to adjust the timing or content of corporate disclosure (e.g.,
delaying the release, or increasing the frequency, of disclosing
MNPI).\368\ Manipulation of corporate disclosure causes price
distortions and impairs the ability of investors to make informed
investment decisions. Less informed investment decisions result in less
efficient allocation of capital in investor portfolios, compared to a
setting with more timely disclosures. To the extent that investors
anticipate such disclosure gaming, they may commensurately increase
their information gathering effort, resulting in higher information
gathering costs for investors. Investors, however, have a limited
ability to obtain timely and accurate information elsewhere.
---------------------------------------------------------------------------

    \368\ See, e.g., Ranga Narayanan, Insider Trading and the
Voluntary Disclosure of Information by Firms, 24 J. Banking Fin. 395
(2000) (stating that ``[s]tringent enforcement of insider trading
regulations induces more disclosure by firms''); Qiang Cheng & Kin
Lo, Insider Trading and Voluntary Disclosures, 44 J. Acct. Rsch. 815
(2006) (finding that when ``managers plan to purchase shares, they
increase the number of bad news forecasts to reduce the purchase
price . . . insiders do exploit voluntary disclosure opportunities
for personal gain, but only selectively, when litigation risk is
sufficiently low''); Easterbrook, supra note 361 (stating that
``[t]he prospect of insiders' gains may lead the firm to delay the
release of information''). Some studies also note that an opposite
effect is possible--managers concerned about litigation may provide
higher-quality disclosure before selling shares. See, e.g., Jonathan
L. Rogers, Disclosure Quality and Management Trading Incentives, 46
J. Acct. Rsch. 1265 (2008) (finding that ``[c]onsistent with a
desire to reduce the probability of litigation . . . managers
provide higher quality disclosures before selling shares than they
provide in the absence of trading'' but also finding that
``[c]onsistent with a desire to maintain their information
advantage, . . . some, albeit weaker, evidence that managers provide
lower quality disclosures prior to purchasing shares than they
provide in the absence of trading.''). In the context of Rule 10b5-1
plans, see, e.g., Stanley Veliotis, Rule 10b5-1 Trading Plans and
Insiders' Incentive to Misrepresent, 47 Am. Bus. L. J. 313, 330 &
nn. 77-78 (2010) (stating that ``Rule 10b5-1 plans give insiders an
incentive to accelerate the release of good news ahead of planned
stock sales and to delay the release of bad news until after the
sales are completed . . . As a practical matter, manipulation of the
announcement's timing would be extremely difficult to prove because
insiders are not required to disclose their 10b5-1 plans and firms
seldom disclose a schedule for corporate announcements in advance .
. .''); Karl T. Muth, With Avarice Aforethought: Insider Trading and
10b5-1 Plans, 10 U.C. Davis Bus. Law J. 65, 71 & nn. 32-33 (2009)
(stating that ``executives can participate in the timing of news . .
. about the company. Withholding or `timing' news allows the
executive to (imperfectly) time market response to news . . .'');
John Shon & Stanley Veliotis, Meeting or Beating Earnings
Expectations, 59 Mgmt. Sci. 1988 (2013) (finding that ``firms with
insider sales executed under Rule 10b5-1 plans exhibit a higher
likelihood of meeting or beating analysts' earnings expectations
(MBE) . . . [that] this relation between MBE and plan sales is more
pronounced for the plan sales of chief executive officers (CEOs) and
chief financial officers (CFOs) and is nonexistent for other key
insiders,'' and concluding that ``[o]ne interpretation of [their]
results is that CEOs and CFOs who sell under these plans may be more
likely to engage in strategic behavior to meet or beat expectations
in an effort to maximize their proceeds from plan sales'').
---------------------------------------------------------------------------

    Investor recognition of the potential incentive distortions and the
risk of lower-quality corporate disclosures resulting from insider
trading, as well as the risk of buying shares from or selling shares to
a better informed insider, is likely to decrease investor confidence in
the issuer and make investors less willing to buy or hold the issuer's

shares.\369\ The resulting reluctance to invest could have negative
effects on capital formation and the ability to fund investments due to
challenges in raising the required amount of capital.
---------------------------------------------------------------------------

    \369\ See, e.g., Lawrence M. Ausubel, Insider Trading in a
Rational Expectations Economy, 80 Am. Econ. Rev., 1022 (1990)
(showing in a rational expectations model that ``[i]f `outsiders'
expect `insiders' to take advantage of them in trading, outsiders
will reduce their investment. The insiders' loss from this
diminished investor confidence may more than offset their trading
gains. Consequently, a prohibition on insider trading may effect a
Pareto improvement.''). Further, informed trading by insiders can
reduce the incentive for outside investors to acquire information.
See, e.g., Fishman & Hagerty, supra note 362.
---------------------------------------------------------------------------

2. Certain Rule 10b5-1 Plan Trading Practices May Raise Concerns About
Potential Insider Trading
    Over the years, various parties have raised concerns that certain
persons have engaged in securities trading based on MNPI while availing
themselves of the Rule 10b5-1(c)(1) affirmative defense.\370\ Examples
of practices that have raised such concerns include the strategic
cancellation of previously adopted plans or individual trades on the
basis of MNPI,\371\ as well as the initiation or resumption of trading
close in time to plan adoption or modification.\372\
---------------------------------------------------------------------------

    \370\ See IAC Recommendations, supra note 22; letter from David
Larcker et al. (Mar. 10, 2021), available at https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf; letter from CII (Apr.
22, 2021), available at https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf; letter from CII (Mar. 18, 2021),
available at https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf; letter from CII (Sept. 25, 2020), available at https://www.sec.gov/comments/s7-06-20/s70620-7843308-223819.pdf; letter from
CII (Dec. 13, 2018), available at https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf; letter from CII (July 11, 2018),
available at https://www.cii.org/files/July%2011%202018%20SEC%20Reg%20Flex%20Letter%20Final.pdf; letter
from CII (Feb. 12, 2018, available at https://www.sec.gov/comments/s7-07-17/s70717-3025708-161898.pdf; letter from CII to Former
Chairman Jay Clayton (January 18, 2018), available at http://www.cii.org/files/issues_and_advocacy/correspondence/2018/January%2018%202018%20Rule%2010b5-1%20(finalI).pdf; letter from CII
(July 8, 2016), available at https://www.sec.gov/comments/s7-06-16/s70616-49.pdf; letter from CII to Former Chair Mary Jo White (May 9,
2013), available at http://www.cii.org/files/issues_and_advocacy/correspondence/2013/05_09_13_cii_letter_to_sec_rule_10b5-1_trading_plans.pdf; CII Rulemaking Petition.
    \371\ See, e.g., Insider Trading and Stock Option Grants: An
Examination of Corporate Integrity in the Covid-19 Pandemic Before
the H. Subcomm. On Investor Protection, Entrepreneurship, and
Capital Markets, H. Comm. on Fin. Servs., 116th Cong. 5 (2020)
(statement of Jill E. Fisch), available at https://docs.house.gov/meetings/BA/BA16/20200917/111013/HHRG-116-BA16-Wstate-FischJ-20200917.pdf,; Jagolinzer, supra note 19 (finding ``for a sample of
54 firms for which there is public disclosure of early sales plan
terminations'' that ``early sales plan terminations are associated
with pending positive performance shifts, reducing the likelihood
that insiders' sales execute at low prices'' and noting that the
sample size is small because there is no requirement to disclose
sales plan terminations); Veliotis, supra note 368, at 328-30
(discussing concerns related to selective cancellations); Mavruk &
Seyhun, supra note 19 (discussing selective cancellation concerns,
providing indirect evidence, and concluding that its findings are
``consistent with the hypothesis that insiders intervene in their
planned transactions to increase profitability''); see also Stephen
L. Lenkey, Cancellable Insider Trading Plans: An Analysis of SEC
Rule 10b5-1, 32 Rev. Fin. Stud. 4947 (2019) (concluding, in a
theoretical framework, that ``[b]ecause the conditions under which
the insider elects to adopt a plan often coincide with the
conditions under which the termination option reduces welfare, an
alternative regulatory framework wherein the insider could adopt a
non-cancellable plan (and, thereby, credibly commit to execute his
planned trade) would improve the investors' welfare under a wide set
of circumstances.'').
    \372\ For a discussion of the evidence of returns following
insider trades occurring close to plan adoption, see infra notes 387
through 397 and accompanying and preceding text. But see infra notes
398 through 406 and accompanying and following text. Existing
disclosure requirements do not allow investors to obtain systematic
or comprehensive data on plan cancellations or plan modifications
(including cancellations of planned trades).
---------------------------------------------------------------------------

    As discussed in detail in Section II above, the Commission is
adopting several amendments to address these practices, including
modifications to the conditions of the affirmative defense under Rule
10b5-1(c)(1), additional disclosure requirements under new Item 408 of
Regulation S-K, and additional disclosure of Rule 10b5-1 plan use in
beneficial ownership forms. The new disclosure requirements are
expected to affect the behavior of insiders by drawing scrutiny of
investors and other market participants to trading practices of
insiders.\373\
---------------------------------------------------------------------------

    \373\ Studies have found evidence that changes in mandatory
disclosure affect behavior. See, e.g., Elizabeth C. Chuk, Economic
Consequences of Mandated Accounting Disclosures: Evidence from
Pension Accounting Standards, 88 Acct. Rev. 395 (2013); Alice Adams
Bonaim[eacute], Mandatory Disclosure and Firm Behavior: Evidence
from Share Repurchases, 90 Acct. Rev. 1333 (2015).
---------------------------------------------------------------------------

    Combined, the amendments are expected to reduce the potential for
insider trading through both Rule 10b5-1 plans and certain other
trading arrangements not reliant on Rule 10b5-1. Deterring insider
trading is expected to result in benefits for investor protection,
capital formation, and orderly and efficient markets. By deterring
insider trading, the amendments are expected to disincentivize insider
behavior that is likely to harm the securities markets and the issuer,
and undermine investor confidence.
3. Current Levels of Disclosure About Insider Trading Plans Limit the
Ability of Investors To Identify the Risk of Insider Trading and To
Consider the Associated Incentive Conflicts and Information Asymmetries
in Their Investment Decisions
    Existing gaps in the disclosure framework limit the information
currently available to investors and other market participants
regarding the use of insider trading plans and the extent to which
trading based on MNPI potentially distorts insider incentives with
respect to corporate decisions (and thus shareholder value). These gaps
therefore limit the ability of investors to correctly value the
issuer's shares, and thus make informed investment decisions.
    The disclosure amendments will provide greater transparency to
investors and decrease information asymmetries between insiders and
outside investors about insider trading arrangements and insider
trading policies and procedures, enabling more informed decisions about
whether to invest in the issuer's shares and at what valuation. This
added transparency may result in more efficient capital allocation and
more informationally efficient pricing. The additional disclosure
requirements may also indirectly yield potential capital formation
benefits if they increase investor confidence in the issuer's
governance.
4. The Economic Effects of the Amendments Are Uncertain or Difficult To
Generalize
    An important factor contributing to the uncertainty about the
magnitude of the benefits of the amendments to Rule 10b5-1 is the
potential for substitution of Rule 10b5-1 plans by other trading
arrangements. The use of the Rule 10b5-1(c)(1) affirmative defense is
voluntary. Insiders and companies may elect not to rely on the Rule
10b5-1(c)(1) affirmative defense if they perceive the costs of doing so
to be too high. For example, insiders may instead adopt trading
arrangements that do not rely on the amended Rule 10b5-1(c)(1)
affirmative defense or trade without trading plans. However, doing so
may entail its own costs and limitations for insiders.\374\ The
application of the disclosure requirements of new Item 408(a) of
Regulation S-K to all officer and director Rule 10b5-1 and non-Rule
10b5-1 trading arrangements is expected to partly mitigate concerns
that trading under non-Rule 10b5-1

trading arrangements may adversely impact investors.
---------------------------------------------------------------------------

    \374\ See infra notes 439 through 440 and preceding and
accompanying text.
---------------------------------------------------------------------------

    The considerations presented above are generally applicable to all
of the amendments discussed in this release. In the sections that
follow, we provide a more detailed discussion of economic effects of
the individual amendments, including the expected costs and benefits
relative to the market baseline as well as reasonable alternatives. We
separately discuss economic considerations related to the timing of
option grants and insider gifts of stock in Sections V.D and V.E,
respectively.
    As discussed in Section III above, in response to commenters'
concerns,\375\ we are providing a six-month transition period for SRCs
for compliance with the disclosure amendments. The transition period is
expected to defer the costs and benefits of the amendments. By giving
insiders and companies time to adjust their trading plans and
recordkeeping processes, this transition period is expected to
partially mitigate some of the SRCs' initial costs of preparing to
comply with the amendments. In addition, it will enable these smaller
companies to benefit from observing the compliance and disclosure
practices of larger companies.
---------------------------------------------------------------------------

    \375\ See, e.g., letters from Cleary, Cravath, BioNJ, SIFMA 2,
and Sullivan.
---------------------------------------------------------------------------

B. Amendments to Rule 10b5-1(c)(1)

    The Commission is adopting additional conditions that must be
satisfied for a trading arrangement to be eligible for the Rule 10b5-
1(c)(1) affirmative defense. These amendments are intended to protect
investors by decreasing the likelihood of, and the opportunities to,
profit from MNPI through such trading arrangements.
    The amendments narrow the conditions under which the Rule 10b5-
1(c)(1) affirmative defense is available. First, the amendments
establish mandatory cooling-off periods before any trading can commence
under a Rule 10b5-1 trading arrangement after the adoption of a new or
modified trading arrangement by persons other than the issuer. Second,
the amendments impose a certification requirement as a condition of the
Rule 10b5-1(c)(1) affirmative defense for trading arrangements of
officers and directors. Third, the amendments restrict the availability
of the affirmative defense for multiple overlapping trading
arrangements involving open-market transactions under some conditions,
as well as limit open-market single-trade trading arrangements to one
such arrangement in any twelve-month period. Finally, the amendments
expand the existing requirement that a Rule 10b5-1 trading arrangement
must be ``given or entered into'' in good faith to add the condition
that the trader ``act in good faith'' with respect to the trading
arrangement. In a change from the proposal, we are not, at present
time, adopting cooling-off periods or restrictions on multiple
overlapping Rule 10b5-1 trading arrangements or single-trade trading
arrangements with respect to the issuer. In response to public
comments, we are making several changes from the proposal, including
providing for a cooling-off period for officers and directors that is
tied to both a specific number of days and to the date of disclosure of
fiscal period results; imposing a shorter (30-day) cooling-off period
for persons other than the issuer that are not officers or directors;
clarifying the treatment of plan modifications; requiring the proposed
officer and director certifications to be included in the plan itself
and eliminating the requirement to maintain the certification for ten
years; and making certain changes to the restrictions on multiple plans
and single-trade plans.
1. Baseline and Affected Parties
    We consider the economic effects of the amendments in the context
of the regulatory and market baseline. A lack of comprehensive
disclosure of Rule 10b5-1 trading arrangements makes it more difficult
to provide complete data on existing Rule 10b5-1 practices and affected
plan participants. Our estimates are limited by the voluntary nature of
the Rule 10b5-1 disclosure in beneficial ownership filings, where
insider trades are reported, as well as the limited scope of Rule 10b5-
1 trades for which Form 144 reporting is required.\376\ Based on
beneficial ownership filings (Forms 3, 4, and 5) during calendar year
2021, we estimate that approximately 5,900 natural persons at
approximately 1,700 companies reported trades under Rule 10b5-1 trading
arrangements. This figure includes approximately 5,800 officers and
directors at 1,600 companies; narrowing the sample to officers yields
an estimate of approximately 4,700 officers at approximately 1,500
companies.\377\ Due to the data limitations mentioned above, the actual
number of affected parties likely is significantly larger.
---------------------------------------------------------------------------

    \376\ Form 144 must be filed with the Commission by an affiliate
as a notice of the proposed sale of restricted securities when the
amount to be sold under Rule 144 during any three-month period
exceeds 5,000 shares or units or has an aggregate sales price in
excess of $50,000. See Rule 144(h) [17 CFR 230.144(h)]. Thus, Rule
10b5-1 plan trades below that threshold are not required to be
reported on Form 144 and thus may not be in our data. Further,
because the vast majority of Form 144 filings were made in paper
form during the considered period, we rely on information from such
paper filings extracted and processed by the vendor for the Thomson
Reuters/Refinitiv insiders dataset (version retrieved June 27,
2022).
    \377\ The estimate is based on the data from filings on Forms 3,
4, and 5 for trades during calendar year 2021 that reported Rule
10b5-1 plan use (obtained from Thomson Reuters/Refinitiv insiders
dataset (version retrieved June 27, 2022)). The estimate only
captures natural persons with Rule 10b5-1 plans that have Section 16
reporting obligations, and thus represents a lower bound on the
number of affected plan participants (for instance, it excludes
employees that are not Rule 16a-1(f) officers as well as any other
persons with a Rule 10b5-1 trading plan that do not have a Section
16 reporting obligation). Officers and directors are identified
based on the role code (beneficial owners and affiliates are not
included in the count). Combining data from Form 144 filings with
planned sale dates in calendar year 2021 that reported Rule 10b5-1
plan use (also obtained from Thomson Reuters/Refinitiv insiders
dataset (version retrieved June 27, 2022)) and the data from filings
on Forms 3, 4, and 5 cited above, we estimate that approximately
7,000 natural persons at approximately 1,800 companies (which
includes approximately 6,000 officers and directors at approximately
1,700 companies; or when limited to officers only, approximately
4,900 officers at approximately 1,500 companies) reported trades
under Rule 10b5-1. Due to gaps in the reporting regime, we cannot be
certain whether the higher prevalence of plans reported for officers
is due to their higher prevalence in general or due to greater
disclosure of such plans.
---------------------------------------------------------------------------

    Below, we discuss the available evidence on Rule 10b5-1 plans of
officers, directors, and other natural persons. A recent academic study
analyzed Form 144 data on insider trades under Rule 10b5-1 plans from
January 2016 through May 2020.\378\ The study documented that ``[t]he
mean (median) cooling-off period is 117.9 (76)

days,'' ``[a]pproximately 14 percent of plans commence trading within
the first 30 days, and 39 percent within the first 60 days,'' and
``[a]pproximately 82 percent of plans commence trading within 6
months.'' \379\ A set of subsequent analyses by the Wall Street Journal
(collectively, the ``WSJ Analysis'') examined Washington Service \380\
data on ``169,000 forms from company insiders submitted from 2016
through 2021'' and found that ``about a fifth of the [prearranged stock
sales] occurred within 60 trading days of a plan's adoption.'' \381\ As
a caveat, this data did not indicate whether the trading time frames
were due to an issuer's policies, the insider's own timing or
scheduling, or execution of trades under a plan (i.e., whether there is
a ``cooling-off period'' is not known--only the time between plan
adoption and the first trade is calculated).
---------------------------------------------------------------------------

    \378\ See Gaming the System, supra note 20. The study presents
data ``on all sales of restricted stock filed on Form 144 between
January 2016 and May 2020 and the adoption date of any corresponding
10b5-1 plans . . . In total, we have data on 20,595 plans, which
covers the trading activity by 10,123 executives at 2,140 unique
firms. These plans are responsible for a total of 55,287 sales
transactions totaling $105.3 billion during our sample period.
Average (median) trade size is $1.9 million ($0.4 million) . . . .''
The analysis based on Form 144 data has the advantage of not being
subject to voluntary reporting bias. However, as a caveat, planned
resales reported on Form 144 represent a subset of all trades and
may not be representative of all Rule 10b5-1 trades by insiders
(e.g., of purchases, or of sales of unrestricted stock). By
comparison, Mavruk & Seyhun examine a larger sample of plan trades
identified by a voluntary Rule 10b5-1 checkbox on beneficial
ownership forms. They examine transactions for ``an average of
14,211 insiders in 3875 firms for each year between 2003 and 2013.''
See Mavruk & Seyhun, supra note 19. Relatedly, Hugon & Lee (2016)
utilize a sample of ``voluntary disclosures of 10b5-1 plan
participation in SEC Form 4 filed between October 2000 and December
2010.'' See supra note 19. See also, e.g., Lee (2020), supra note
35; See Rik Sen, Are Insider Sales Under 10b5-1 Plans Strategically
Timed?, 2008 N. Y. U. (Working Paper) (2008); Eliezer M. Fich et
al., When and How Are Rule 10b5-1 Plans Used for Insider Stock
Sales?, 2021 Drexel U., U.T. Austin & C.U.L. (Working Paper) (2021)
(also utilizing Form 4 data). Data on Rule 10b5-1 trades by issuers
is not available.
    \379\ Gaming the System, supra note 20.
    \380\ The Washington Service is a research firm that provides
data about trades by insiders.
    \381\ See McGinty & Maremont, supra note 32; see also Tom
McGinty, Methodology: How the Journal Analyzed the Data on Insider
Stock Sales, Wall St. J. (June 29, 2022 (retrieved from Factiva
database).
---------------------------------------------------------------------------

    Using Form 144 data provided by the Washington Service for a more
recent period (January 2, 2018-September 13, 2022), we find that the
mean (median) Rule 10b5-1 plan has the first trade 102 (71) days after
adoption, with 13.2 percent of first trades pursuant to a plan
occurring within thirty days of the plan date and 41.5 percent
occurring within 60 days of the plan date.\382\ A shorter period of
time between plan adoption and the first trade under the plan is also
associated with a larger trade size: trades occurring within 90 days of
plan adoption have a median size of $748,000 compared with a median
size of $403,000 for those trades occurring more than six months after
plan adoption. Further, single-trade plans constitute approximately 44
percent of plans during the time period examined.\383\
---------------------------------------------------------------------------

    \382\ We estimate that 13.2 percent of trades occur within 0-30
days. 28.3 percent of trades occur within 31-60 days, and 22.3
percent within 61-90 days. In total, 63.8 percent of trades occur
within 90 days of the date of plan adoption and 86.9 percent of
plans commence trading within six months.
    \383\ As a caveat, the data does not show the dates of all
scheduled trades, only the dates of executed trades. Thus, some
``single-trade'' plans may be multi-trade plans in progress, or
multi-trade plans with all but one trade cancelled.
---------------------------------------------------------------------------

    A 2016 industry survey of public companies also examined their Rule
10b5-1 plan practices.\384\ The survey found, among other things, that:
(i) 77 percent of the respondents had a mandatory cooling-off period of
60 days or fewer and a cooling-off period of 30 days was the most
common cooling-off period among respondents (41 percent); (ii) 98
percent of the respondents reviewed and approved their insiders' Rule
10b5-1 plans to some degree; (iii) 55 percent of the respondents
allowed early termination of plans, and 40 percent of the respondents
allowed modification of plans (the survey does not report the extent of
overlap between these two subsets of respondents); and (iv) 18 percent
of respondents allowed insiders to maintain multiple overlapping plans
while 82 percent disallowed multiple overlapping plans.\385\ A 2021
industry survey of public companies (cited by one commenter) provided
more recent information about Rule 10b5-1 plan practices.\386\ The
survey found, among other things, that: (i) at 39 percent of
respondents the aggregate number of 10b5-1 plans by their C Suite had
increased over the prior two years, and at 74 percent of respondents at
least one insider adopted a Rule 10b5-1 plan in the prior fiscal year;
(ii) 13 percent of respondents required the C Suite to use Rule 10b5-1
plans, 6 percent required directors to use Rule 10b5-1 plans, and three
percent required other insiders to use Rule 10b5-1 plans, with
companies with higher market capitalization being more likely to
require insiders to sell through Rule 10b5-1 plans; (iii) a significant
majority of respondents reported reviewing and approving the Rule 10b5-
1 plans entered into by their C Suite and directors; (iv) the most
common cooling-off period was 30 days--9 percent of respondents
reported not imposing a cooling-off period, 10 percent--a cooling-off
period of less than 30 days, 51 percent--30 days, 13 percent--longer
than 30 days, and 8 percent--a cooling-off period until the opening of
trading window in the next quarter (with ``other'' cooling-off periods
comprising the remainder); (v) the majority of respondents allowed
insiders to terminate or modify their Rule 10b5-1 plans (with many of
those imposing restrictions in conjunction with terminations or
modifications) and permitted insiders with an existing Rule 10b5-1 plan
to sell shares outside of the plan; (vi) 48 percent of respondents
allowed while 52 percent of respondents prohibited multiple,
overlapping Rule 10b5-1 plans; and (vii) 23 percent of respondents
required disclosures of Rule 10b5-1 plan adoptions by the C Suite.
---------------------------------------------------------------------------

    \384\ See Morgan Stanley & Shearman & Sterling LLP, Defining the
Fine Line: Mitigating Risk with 10b5-1 Plans (2016), available at
https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf. The survey included public
company members of the Society of Corporate Secretaries & Governance
Professionals. The respondents and their practices related to Rule
10b5-1 plans are not necessarily representative of all issuers
subject to the amendments and their Rule 10b5-1 plan policies and
practices. Separately, the survey stated that that 51 percent of S&P
500 companies had Rule 10b5-1 plans in 2015.
    \385\ Id.
    \386\ See letter from SCG; Soc'y for Corp. Governance et al.,
10b5-1 Plan Practices 2021 Survey (2021), available at https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/Final_10b5-1_Plan_Report_CS_Survey_2021_V6_-10-19-21_W_o_Comments.pdf (``SCG
2021 Survey''). The survey included 145 respondents (with fewer
respondents providing answers to some questions) among public
company members of the Society for Corporate Governance (which need
not be the same respondents as the respondents to the 2015 survey).
The respondents and their practices related to Rule 10b5-1 plans are
not necessarily representative of all issuers subject to the
amendments and their Rule 10b5-1 plan policies and practices. For
example, 92 percent of respondents to the 2021 survey had their IPO
more than five years ago and 58 percent had market capitalization of
at least $10 billion, which may indicate a greater representation of
larger, more established companies.
---------------------------------------------------------------------------

    Various studies have sought to examine the potential use of MNPI
for trading under Rule 10b5-1 by looking at the returns around trades
under such plans (with the caveats about data availability). The WSJ
Analysis concluded that, on average, Rule 10b5-1 sales occurring closer
in time to plan adoptions were more likely to precede declines in share
prices than sales conducted later after plan adoptions.\387\ For
insiders that sold shares within 0-30 days, 31-60 days, and 61-90 days
following plan adoptions, average two-month post-sale excess returns
(calculated net of sector returns) were negative: -1.7 percent, -1.4
percent, and -0.7 percent, respectively. For insiders that sold shares
within 91-120, 121-150, 151-180, and 181+ days following plan
adoptions, average two-month post-sale excess returns were positive:
0.3 percent, 1.5 percent, 1.4 percent, and 0.6 percent,
respectively.\388\ The Gaming the System study documented abnormal
trends and returns following some insider sales under Rule 10b5-1 (as
compared to both standard open-market trades and different kinds of
Rule 10b5-1 trades), which suggests potential insider trading under
such plans. For example, the study shows abnormal industry-adjusted
returns over a six-month period following the first sale to be -2.5
percent for plans with the first trade occurring less than 30 days
after plan adoption and -1.5 percent for plans with the first trade
occurring between 30 and 60 days after plan adoption, but no evidence
of such

abnormal returns after the insider sale when the first trade occurs
more than 60 days after plan adoption. However, the study also finds
that the trades of single-trade plans (which comprise 49 percent of the
10b5-1 plans in the study) are consistently loss-avoiding regardless of
cooling-off period, with single-trade plans with short cooling-off
periods exhibiting the highest average loss avoidance (avoiding an
industry-adjusted price decline of -4 percent).\389\ In contrast, the
study finds that the trades under multiple-trade plans are only loss-
avoiding within 30 days of plan adoption (industry-adjusted price
decline of -1 percent). The study also finds abnormal returns of
between -2 percent and -3 percent for plans that execute sales in the
window between when the plans are adopted and quarterly earnings
announcements, but no price drop is found following sales after the
earnings announcements.
---------------------------------------------------------------------------

    \387\ See McGinty & Maremont, supra note 381.
    \388\ Id.
    \389\ See supra note 383 and infra notes 400 and 435.
---------------------------------------------------------------------------

    Negative abnormal returns after insider sales under Rule 10b5-1
plans indicate potential insider trading ahead of negative news. A lack
of such negative returns after insider sales under plans with more time
between plan adoption and first trade could be indicative of inside
information becoming stale with the passage of time. Similarly, a lack
of negative returns when insider sales occur after the quarter's
earnings announcement may suggest less potential for informed selling
once the earnings information has been made public. As a caveat, the
tests of statistical significance of the differences are not shown in
the study, so we cannot assess whether the economic differences
discussed above have statistical significance.
    Several other studies document abnormal returns following trading
by insiders who use Rule 10b5-1 plans. For example, a 2009 study of the
use of Rule 10b5-1 plans finds that ``insiders' sales systematically
follow positive and precede negative firm performance, generating
abnormal forward-looking returns larger than those earned by
nonparticipating colleagues,'' that ``a substantive proportion of
randomly drawn plan initiations are associated with pending adverse
news disclosures,'' and that ``early sales plan terminations are
associated with pending positive performance shifts.'' \390\ A 2016
study examined insider sales at financial institutions prior to the
2008 financial crisis and found that ``net insider sales in the 2001Q2-
2007Q2 pre-financial crisis quarters predict not-yet-reported non-
performing securitized loans and securitization income for those
quarters, and that net insider sales during 2006Q4 predict write-downs
of securitization-related assets during the 2007Q3-2008Q4 crisis
period'' and, crucially for this analysis, that ``insiders avoid larger
stock price losses through 10b5-1 plan sales than through non-plan
sales.'' \391\ A different 2016 study presented evidence of ``insiders
selling shares prior to imminent bad earnings news through their Rule
10b5-1 trading plans.'' \392\ A 2020 study presents evidence consistent
with insiders using 10b5-1 plans to sell stock in advance of
disappointing earnings results.\393\ The study further finds that some
of the more aggressive insider trading on earnings information shifted
into Rule 10b5-1 plans after adoption of the rule.\394\ The study also
found that these insiders make the following types of trades:
infrequent, irregularly timed, close to the plan initiation date, and
executed during traditional blackout periods.\395\ Finally, a different
2020 study found that ``public companies disproportionately disclose
positive news on days when corporate executives sell shares under
predetermined Rule 10b5-1 plans,'' with such disclosure of good news on
Rule 10b5-1 selling days being most prevalent ``in the health care
sector and among mid-cap firms.'' \396\ The study further observed that
``stock prices reverse after high levels of Rule 10b5-1 selling on
positive news days, and that the price reversal increases with the
share volume of Rule 10b5-1 selling.'' \397\
---------------------------------------------------------------------------

    \390\ See, e.g., Jagolinzer, supra note 19, at 224.
    \391\ See Stephen G. Ryan, et al., Securitization and Insider
Trading, 91 Acct. Rev. 649 (2016).
    \392\ See Jonathan A. Milian, Insider Sales Based on Short-Term
Earnings Information, 47 Rev. Quant. Fin. Acct. 109 (2016)
(examining data on insider sales under Rule 10b5-1 based on
beneficial ownership filings from August 2004 through May 2010). As
a caveat, the study specifies that the plan identification may be
imprecise: it ``use[s] the timing of insiders' Rule 10b5-1 trades
relative to each other in order to infer a sales plan,'' ``[g]iven
the lack of disclosure requirements in SEC Rule 10b5-1 and the
nature of the data.''
    \393\ See Lee (2020), supra note 35.
    \394\ Id.
    \395\ Id.
    \396\ See Joshua Mitts, Insider Trading and Strategic
Disclosure, 2020 Colum. U. (Working Paper) (2020).
    \397\ Id.
---------------------------------------------------------------------------

    However, a 2008 study found ``no significant difference in stock
price performance following plan sales and non-plan sales.'' \398\ The
study also reports that ``price contingent orders (e.g., limit orders),
a common feature in trading plans, give rise to empirical patterns that
have been taken as evidence of strategic timing of sales.'' \399\
Insiders may incorporate limit orders into trading plans because such
plans may involve trading over months and even years and therefore
expose the insider to potentially significant market fluctuations. The
limitations of the data about insiders' trades prevent us from
estimating the prevalence of limit orders in such plans and comparing
it to trades outside such plans, or assessing the magnitude of the
potential bias in the profitability of trades executed under Rule 10b5-
1 plans due to limit order use.\400\ Nevertheless, some evidence
suggests that limit orders cannot account for the entirety of the
abnormal returns documented in other studies.\401\ Thus, we remain
concerned about abnormally profitable insider trading under Rule 10b5-
1.
---------------------------------------------------------------------------

    \398\ See Rik Sen, Are Insider Sales Under 10b5-1 Plans
Strategically Timed?, 2008 N.Y.U. (Working Paper) (2008). The study
uses Form 4 data from January 2003-June 2006. As an important
caveat, reporting of 10b5-1 trades on Form 4 is voluntary. Thus,
trades classified as ``non-10b5-1'' trades in the study may include
10b5-1 plan trades.
    \399\ Id; see also letter from Anonymous.
    \400\ Data biases due to the potential use of limit orders may
potentially interact with data biases due to incomplete
identification of Rule 10b5-1 trades in existing data based on
beneficial ownership reporting requirements. Thus, the true
magnitude of the abnormal profits from insider trading in Rule 10b5-
1 plans may differ from those observed in the data from available
reporting.
    \401\ See, e.g., Jagolinzer, supra note 19 (comparing Rule 10b5-
1 plan and non-Rule 10b5-1 trading arrangement subsamples with a
similar one-month price run-up and concluding that ``predictable''
mean reversion following sustained price increases that may have
triggered limit sell orders is unlikely to explain the abnormal
returns following 10b5-1 sales); see also Shon & Veliotis, supra
note 368 (advising ``caution in making inferences, because the
potential presence of limit order transactions makes it difficult to
unambiguously determine the direction of causality'' but also
performing several tests to attempt to rule out the effects of limit
orders--including, for instance, the finding that, with the caveat
that such disclosure is voluntary, only approximately 1.07 percent
of the 10b5-1 sample included keywords related to limit orders in
the footnotes to Form 4; the finding that either controlling for the
indicator for disclosed limit order use or excluding such
observations from the analysis does not change any of the results;
the finding that excluding the categories of firms found more likely
to be associated with disclosed limit order use does not affect the
results; and the finding that abnormal returns are driven by CEOs
and CFOs, who are more likely to have discretion over meeting or
beating earnings expectations). Further, ``[t]here is evidence,
however, that a substantive proportion of randomly drawn plan
initiations are associated with pending adverse news disclosures.
There is also evidence that early sales plan terminations are
associated with pending positive performance shifts, reducing the
likelihood that insiders' sales execute at low prices.'' See
Jagolinzer, supra note 19.
---------------------------------------------------------------------------

    Two other studies find evidence that insiders can profit when
trading under 10b5-1 plans, although these profits may be the same as
or smaller than trades that do not qualify for the

affirmative defense. A 2016 study finds negative abnormal returns after
insider sales under Rule 10b5-1 as well as positive abnormal returns
after insider purchases under Rule 10b5-1 (over a one-month holding
period).\402\ However, the study does not find significant differences
between the abnormal returns following insider trades under Rule 10b5-1
and other insider trades.\403\ A 2021 study finds that ``non-plan sales
are, on average, preceded by a larger price run-up (3.0 percent versus
1.4 percent) and followed by a larger price decline (-1.6 percent
versus -1.0 percent) than plan sales . . . consistent with greater
opportunistic behavior by CEOs who trade outside of Rule 10b5-1
plans.'' \404\ Further, focusing on ``the 25 percent of sales with the
largest ratio of transaction value to the CEO's most recent total
annual compensation,'' this study found that ``the average cumulative
abnormal return (``CAR'') during the 40 trading days before the sale is
3.68 percent for non-plan sales and 1.77 percent for plan sales'' and
``the average CAR for the 40 trading days after the sale is -2.24
percent for non-plan sales and -2.41 percent for plan sales.'' \405\
The study concludes that ``the overall level of opportunistic behavior
is smaller for sales within Rule 10b5-1 plans than for sales outside of
such plans'' but that ``CEOs who have a lot of money at stake are able
to trade opportunistically even if the transaction is executed under a
Rule 10b5-1 plan.'' \406\ The findings of these studies differ, in
part, due to differences in the samples used for analysis (i.e., the
sample periods and data source, which were beneficial ownership forms
or Form 144 filings) and their methodologies (including, among other
assumptions, whether insider trading under Rule 10b5-1 is examined in
isolation or in comparison with other insider sales and purchases). As
noted above, the lack of data on Rule 10b5-1 plans can make it
difficult to extrapolate from the available evidence to all trading
under Rule 10b5-1. However, overall, the evidence on the use of Rule
10b5-1 plans in the above studies raises concerns about insider
trading.
---------------------------------------------------------------------------

    \402\ See Mavruk & Seyhun, supra note 19.
    \403\ Id. As noted above, due to voluntary reporting of the Rule
10b5-1 flag on beneficial ownership forms, trades classified as
``non-10b5-1'' trades in the study may include Rule 10b5-1 plan
trades.
    \404\ See Eliezer M. Fich et al., supra note 378. This study
examined ``11,250 stock sales by 1,514 CEOs at 1,312 different
public firms during the 2013 to 2018 period'' and found that, ``[o]f
these stock sales, 6,953 are identified in SEC Form 4 filings as
executed through Rule 10b5-1 plans.'' As noted above, due to
voluntary reporting of the Rule 10b5-1 flag on beneficial ownership
forms, trades classified as ``non-10b5-1'' trades in the study may
include Rule 10b5-1 plan trades.
    \405\ Id. Cumulative abnormal returns are returns in excess of
returns that would be expected given the security's systematic risk
over the period of time in question.
    \406\ Id.
---------------------------------------------------------------------------

    Data on companies' use of Rule 10b5-1 plans are very limited. Most
of the commenters discussing issuer Rule 10b5-1 plans referred to
issuer repurchases.\407\ However, one commenter expressed concern that
the Proposing Release underestimated the number of issuers that conduct
repurchases under Rule 10b5-1.\408\ Some companies voluntarily disclose
their use of Rule 10b5-1 plans to carry out stock repurchases on Form
8-K or in periodic reports. Such voluntary reporting is likely to
underestimate the number of affected companies. Nevertheless, in the
current disclosure regime, it is the main direct source of information
on the prevalence of Rule 10b5-1 repurchases. One study examining
different repurchase methods identified ``at least 200 announcements of
repurchases using Rule 10b5-1 per year from 2011 to 2014'' and found
that ``[In 2014] 29% [of repurchase announcements] included a 10b5-1
plan.'' \409\ Based on a textual search of calendar year 2021 filings,
we estimate that approximately 210 companies disclosed share repurchase
programs executed under a Rule 10b5-1 plan.\410\ Another, indirect
approach to estimating the number of affected issuers involves
extrapolating the number of companies conducting repurchases under Rule
10b5-1 in a given year from a combination of the incidence of Rule
10b5-1 plan use among voluntarily announced repurchases (estimated at
29 percent as previously noted \411\) and the overall number of
companies conducting repurchases based on their financial
statements.\412\ Based on data from Compustat and EDGAR filings for
fiscal years ending between January 1, 2021 and December 31, 2021, we
estimate that approximately 3,600 operating companies conducted
repurchases, yielding an estimate of approximately 1,000 companies
affected by the Rule 10b5-1 amendments.\413\ Due to a lack of an issuer
trade reporting requirement similar to that for officers and directors,
we are not aware of data or studies specific to companies' actual
trading under Rule 10b5-1 plans.
---------------------------------------------------------------------------

    \407\ See supra note 71.
    \408\ See letter from Cravath.
    \409\ See Alice Bonaim[eacute] et al., Payout Policy Trade-Offs
and the Rise of 10b5-1 Preset Repurchase Plans, 66 Mgmt. Sci. 2762
(2020). The study does not provide evidence of issuers' use of such
plans for insider trading through issuer repurchases. It focuses on
such plans being less flexible and representing a stronger pre-
commitment than open market repurchases. The study finds that,
``[c]onsistent with [such] plans signaling commitment, Rule 10b5-1
repurchase announcements are associated with greater and faster
completion rates, with more positive market reactions, and with more
dividend substitution than open market repurchases.''
    \410\ The estimate is based on a textual search of calendar year
2021 filings of Forms 10-K, 10-Q, 8-K, as well as amendments and
exhibits thereto in Intelligize. The estimate is based on a textual
search using keywords ``10b5-1 repurchases'' or a combination of
keywords ``repurchase plan'' and ``10b5-1'' (the approach used in
the Proposing Release estimate). Due to a lack of standardized
presentation and the unstructured (i.e., non-machine-readable)
nature of the disclosure, these estimates are approximate and may be
over- or under-inclusive.
    \411\ See supra note 409.
    \412\ Using the number of issuers that announce repurchases in a
given year would underestimate the number significantly because
issuers may continue to implement a previously announced repurchase
program over multiple years.
    \413\ As a caveat, a complete estimate of the number of affected
filers is limited by data coverage. A source of data commonly used
in existing studies, Standard & Poor's Compustat, has limited
coverage of small and unlisted registrants and foreign private
issuers. Therefore, we supplemented Standard & Poor's Compustat
Fundamentals Annual data (version retrieved June 27, 2022) with
structured data from financial statement disclosures in EDGAR
filings (retrieved June 27, 2022), with the caveat that variation in
filer use of tags to characterize their repurchases may result in
some data noise. 29 percent x 3,600 = 1,044 ~ 1,000.
---------------------------------------------------------------------------

2. Benefits
    The main benefit of the amendments to Rule 10b5-1(c)(1) is the
anticipated reduction in insider trading based on MNPI through such
plans (the benefits of which are discussed in greater detail in Section
V.A above). Below, we discuss how each of the amendments to Rule 10b5-
1(c)(1) individually is expected to reduce such insider trading. In
addition, we expect the provisions to work in tandem to substantially
reduce insider trading through Rule 10b5-1 plans. In particular, for
officers and directors, the certification requirement is expected to
complement the effects of the cooling-off period. Cooling-off periods
are expected to work together with the restrictions on the use of
multiple overlapping plans under Rule 10b5-1(c)(1) to possibly prevent
a portion of potentially opportunistic plan cancellations based on
MNPI. Thus, while we separately discuss below the benefits of each
individual provision for reducing insider trading through such plans,
the combined application of the various amendments discussed here may
also generate synergies.
    As discussed in Section V.A above, because the Rule 10b5-1(c)(1)
affirmative defense is voluntary, if insiders find the conditions of
this defense to be overly burdensome, they

may elect not to rely on it.\414\ If migration of trading outside of
Rule 10b5-1 plans results, in some instances, in an increase or no
change in the incidence of insider trading, the benefits of the
amendments may be attenuated or offset.\415\ Whether any shift to
trading outside of Rule 10b5-1 plans results in a change to the amount
of insider trading will depend on the extent to which other mechanisms
(such as legal liability, enforcement actions, listing standards,
reputational concerns, and corporate governance mechanisms) and any
changes that companies implement to their insider trading policies
after the amendments deter insider trading incentives.
---------------------------------------------------------------------------

    \414\ But see infra note 441.
    \415\ But see infra notes 439 through 440 and preceding and
accompanying text.
---------------------------------------------------------------------------

    In the subsections below we discuss the individual benefits of
these amendments to Rule 10b5-1(c)(1).
i. Cooling-Off Periods
    With respect to Rule 10b5-1 plans of officers and directors, the
final rules add, as a condition to the availability of the affirmative
defense under Rule 10b5-1(c)(1) a cooling-off period before any
purchases or sales under the trading arrangement may commence. In a
change from the 120-day cooling-off period proposed for officers and
directors, the cooling-off period for officers and directors in the
final rules is the later of (1) 90 days following plan adoption or
modification or (2) two business days following disclosure of the
financial results for the reporting period in which the plan was
adopted (which need not exceed 120 days following plan adoption or
modification). The cooling-off period for officers and directors is
expected to reduce incentives to enter or modify plans based on MNPI by
ensuring that trades under the plan are executed at prices that fully
reflect the material information that was previously non-public. This
is expected to substantially weaken officers' and directors' incentives
to enter or modify Rule 10b5-1 plans based on MNPI, in line with the
suggestions of commenters.\416\ The length of the cooling-off period
will largely prevent officers and directors from profiting on
unreleased earnings results for the quarter in which the Rule 10b5-1
plan was adopted as well as other types of MNPI (such as a potential
merger or regulatory action).\417\ It also is consistent with several
recommendations regarding cooling-off periods for officers and
directors.\418\ To the extent that MNPI may be time-sensitive, we
expect the cooling-off period to effectively discourage officers and
directors from adopting new or modified plans on the basis of
MNPI.\419\
---------------------------------------------------------------------------

    \416\ See supra notes 47 through 51 and accompanying text; see
also supra Section II.A.1.c for a discussion of the rationale for
the cooling-off period we are adopting.
    \417\ See, e.g., Gaming the System, supra note 20; see also
supra note 393 and accompanying text.
    \418\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN,
Public Citizen O'Reilly, NASAA; see also Council of Institutional
Investors, Request for rulemaking concerning amending Rule 10b5-1 or
further interpretive guidance regarding the circumstances under
which Rule 10b5-1 trading plans may be adopted, modified, or
cancelled, Dec. 28, 2012, at p. 3, available at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf (recommending a minimum three-
month waiting period); Yafit Cohn & Karen Hsu Kelley, Simpson
Thacher Discusses Combating Securities Fraud Allegations with 10b5-1
Trading Plans (Aug. 10, 2017), available at https://clsbluesky.law.columbia.edu/2017/08/10/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/
(recommending that ``insiders wait 30 to 90 days before selling
stock under the trading plan for the first time''); David B.H.
Martin et al., Rule 10b5-1 Trading Plans: Avoiding the Heat,
Bloomberg BNA Securities Regulation & Law Report, 45 SRLR 438, 2013
(referring to the three-month cooling-off period recommended by the
Council of Institutional Investors and stating that ``[w]aiting
periods of this duration, or those which restrict trading until
after issuance of the next regular earnings release, may assist
insiders in demonstrating good faith and that trades under a Rule
10b5-1 plan were not designed to take advantage of material
nonpublic information.''); IAC Recommendations, supra note 22
(recommending a cooling-off period of at least four months).
    \419\ The cooling-off period condition for officers and
directors that involves the disclosure of financial results
references the disclosure on Form 10-K or 10-Q (or for a foreign
private issuer, on Form 20-F or 6-K). Earnings results are typically
announced prior to the periodic report filing. This provision is
expected to benefit investors by ensuring that officers and
directors trading under a Rule 10b5-1 plan cannot profit from MNPI
contained in a periodic report that was not incorporated in a
current report or press release. Form 10-Q and 10-K filings are
associated with an announcement return, consistent with such
disclosures conveying new information to the market. See Paul A.
Griffin, Got Information? Investor Response to Form 10-K and Form
10-Q EDGAR Filings, 8 Rev. Acc. Stud. 433 (2003). Periodic reports
have been shown to have incremental information content compared to
earnings releases. See, e.g., Yifan Li, Alexander Nekrasov, & Siew
Hong Teoh, Opportunity Knocks But Once: Delayed Disclosure of
Financial Items in Earnings Announcements and Neglect of Earnings
News, 25 Rev. Acc. Stud. 159 (2020); Angela K. Davis & Isho Tama-
Sweet, Managers' Use of Language Across Alternative Disclosure
Outlets: Earnings Press Releases versus MD&A, 29 Contemp. Acc. Res.
804 (2012); Steven Huddart, Bin Ke, & Charles Shi, Jeopardy, Non-
public Information, and Insider Trading around SEC 10-K and 10-Q
Filings, 43 J. Acc. Econ. 3 (2007).
---------------------------------------------------------------------------

    Some evidence of the extent to which requiring a longer period of
time between Rule 10b5-1 plan adoption and the first trade under the
plan could prevent insider trading is presented in the WSJ analysis. It
shows that shorter periods between plan adoption and the first sale
were associated with more negative stock returns after the sale, which
implies that more insider trading occurs in cases of trading commencing
closer to plan adoption.\420\
---------------------------------------------------------------------------

    \420\ See supra note 381; see also Gaming the System, supra note
20 (similarly finding that shorter periods between plan adoption and
first sale are associated with more negative returns following the
sale, and also noting that approximately 14 percent of insider Rule
10b5-1 plans have the first trade within 30 days of plan adoption,
39 percent within the first 60 days, and 82 percent within six
months). More negative returns following an insider sale indicate
greater loss avoidance by the selling insider. As Gaming the System
notes, such plans ``avoid significant losses and foreshadow
considerable stock price declines that are well in excess of
industry peers.''
---------------------------------------------------------------------------

    The cooling-off period for officer and director Rule 10b5-1 trading
arrangements will also help deter trades under a newly adopted or
modified plan before the disclosure of that quarter's earnings. Trades
under a Rule 10b5-1 trading arrangement prior to an earnings
announcement appear to be more likely to involve insider trading. For
example, the Gaming the System study found that ``38 percent of plans
adopted in a given quarter also execute trades before that quarter's
earnings announcement (i.e., in the 1 to 90 days prior to earnings
[sic]),'' that ``[s]ales occurring between the adoption date and
earnings announcement are about 25 percent larger than sales occurring
more than six months after the earnings announcement,'' and that
``plans that execute a trade in the window between when the plan is
adopted and that quarter's earnings announcement anticipate large
losses and foreshadow considerable stock price declines.'' \421\
---------------------------------------------------------------------------

    \421\ Id., at pp. 2-3.
---------------------------------------------------------------------------

    With respect to persons other than the issuer that are not officers
or directors, in a change from the proposal, in line with the
suggestions of several commenters,\422\ the final amendments impose a
shorter (30-day) cooling-off period (discussed in greater detail in
Section II.A.1.c above). Similar to the cooling-off period for officers
and directors, the cooling-off period for persons other than officers,
directors, or the issuer is expected to benefit investors by reducing
the potential for the use of Rule 10b5-1 plans for insider trading
based on MNPI. Although persons other than officers, directors, or the
issuer may be less likely to have MNPI about company-wide financial
results or influence key corporate decisions, such persons may
nevertheless come into possession of MNPI. For example, large
shareholders other than officers and directors may exert control rights
or have informational advantages enabling

access to MNPI before it is released. As another example, non-executive
employees may obtain MNPI in the course of their employment.\423\ To
the extent that persons other than officers and directors are less
likely to rely on Rule 10b5-1 for their trading, the discussed benefits
would be attenuated.\424\
---------------------------------------------------------------------------

    \422\ See letters from Better Markets, NASAA, and Senator Warren
et al.
    \423\ See, e.g., letter from NASAA (stating that ``other
corporate insiders and lower-level employees can also have access to
such [material nonpublic] information''). Separately, prior research
provides some evidence of information advantages of rank-and-file
employees. See, e.g., Ilona Babenko & Rik Sen, Do Nonexecutive
Employees Have Valuable Information? Evidence from Employee Stock
Purchase Plans, 62 Mgmt. Sci. 1843 (2016); Steven Huddart & Mark
Lang, Information Distribution within Firms: Evidence from Stock
Option Exercises, 34 J. Acc. Econ. 3 (2003); Kenneth Ahern,
Information Networks: Evidence from Illegal Insider Trading Tips,
125 J. Fin. Econ. 26, Table 4 (noting insider trading by some lower-
level employees). As an important caveat, these studies focus on
data outside of Rule 10b5-1 plans. See also infra note 424.
    \424\ The current reporting regime impairs our ability to obtain
comprehensive data on the use of Rule 10b5-1 plans by other
insiders, including non-executive employees. According to a 2021
industry survey, only three percent of respondents required the use
of Rule 10b5-1 plans for ``other insiders'' (insiders besides the C
Suite and the board of directors) while an additional seven percent
strongly encouraged it and 85 percent of respondents permitted it.
By comparison, 13 percent of respondents required Rule 10b5-1 use
and 28 percent strongly encouraged it for trading by the C Suite
while six percent required Rule 10b5-1 plan use and 23 percent
strongly encouraged it for trading by the board of directors. The
survey also found that 77 percent of respondents that allowed other
insiders to enter Rule 10b5-1 plans did not impose limitations on
the ability of ``other insiders'' to enter Rule 10b5-1 plans, while
the remainder imposed some limitations (e.g., allowing only
employees at a certain level or from certain departments to enter
such plans or imposing another limitation). The survey also found
that at close to a third of respondents, the usage of Rule 10b5-1
plans by ``other insiders'' had increased in the prior two years.
See SCG 2021 Survey. As a caveat, the survey contained a relatively
small number of responses and had a high representation of large,
more established public companies and thus the survey findings
discussed above need not be representative of Rule 10b5-1 plan
practices at all affected companies.
---------------------------------------------------------------------------

    The application of the shorter cooling-off period to Rule 10b5-1
trading plans of persons other than officers and directors is intended
to tailor the application of the most restrictive of the additional
conditions of the affirmative defense in a way that balances the
additional costs to insiders with the investor protection benefits.
Directors and Rule 16a-1(f) officers, who will be subject to the longer
cooling-off periods under the final amendments, are generally more
likely than other insiders (1) to be involved in making or overseeing
corporate decisions about whether and when to disclose information; and
(2) to be aware of MNPI.\425\ In addition to these risk considerations,
the shorter cooling-off period for non-officer-and-director insiders
recognizes that a longer cooling-off period might impose
disproportionate costs on those insiders, who may be less highly
compensated or face greater liquidity needs.
---------------------------------------------------------------------------

    \425\ See, e.g., Mavruk & Seyhun, supra note 19, at 179; see
also letters from CII and Cravath.
---------------------------------------------------------------------------

ii. Officer and Director Certifications
    The amendments require that, as a condition of the amended Rule
10b5-1(c)(1) affirmative defense, officers and directors include
certain representations in their trading plan. In a change from the
proposal, to eliminate any additional burden that separate
documentation may create,\426\ the final amendments require the
certification to be included in the plan documents as a representation.
This approach would continue to reinforce directors' and officers'
cognizance of their obligations with regard to MNPI.
---------------------------------------------------------------------------

    \426\ See supra note 132.
---------------------------------------------------------------------------

    The certification requirement is expected to incrementally benefit
investors by reinforcing officers' and directors' cognizance of their
legal obligation not to trade or adopt a trading plan while aware of
material nonpublic information about the issuer or its securities. As a
result, we expect the certification will reinforce investors'
confidence that the officers and directors who make such certifications
are not trading on the basis of information derived from their
position, and also generally improve investor confidence in the
securities markets.\427\ This requirement, on the margin, is expected
to act as an additional deterrent to officer and director trading based
on MNPI through Rule 10b5-1 plans. Because the application of cooling-
off periods to officer and director Rule 10b5-1 plans increases the
likelihood that any MNPI becomes stale by the time trading commences,
the benefits of the certification provision are expected to be greatest
in instances where officers and directors have MNPI with a longer time
horizon than the cooling-off period (for example, MNPI related to
future corporate transactions or longer-term earnings forecasts). The
benefits of this provision may be smaller if officers and directors
already abstain from adopting Rule 10b5-1 plans while aware of MNPI
(for example, as a result of robust insider trading policies and
procedures or strong internal corporate governance controls). The
incremental benefits of this provision may also be smaller in cases
where officers and directors already make similar representations to
broker-dealers that administer Rule 10b5-1 plans as part of existing
industry practices.\428\ Nevertheless, because such practices may not
be universal, and the requirement may differ among the various broker-
dealers that do require such representations, requiring these
representations in the Rule 10b5-1 plan documents will likely have
incremental benefits for investor confidence that the officer or
director in fact is not aware of MNPI at the time of the
representations.
---------------------------------------------------------------------------

    \427\ See United States v. O'Hagan, 521 U.S. 642, 658-59, 117 S.
Ct. 2199, 2210, 138 L. Ed. 2d 724 (1997).
    \428\ See supra note 132.
---------------------------------------------------------------------------

iii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1
Trading Arrangements
    A new condition to the affirmative defense will restrict the use of
multiple overlapping Rule 10b5-1 plans for the open-market trades of
persons other than the issuer. The restriction on multiple overlapping
plans, which was supported by several commenters,\429\ is expected to
reduce the likelihood that insiders enter into multiple, overlapping
plans and selectively cancel some of the plans at a later time based on
MNPI, while availing themselves of Rule 10b5-1(c)(1)'s affirmative
defense.\430\ The effects of this provision may be modest to the extent
that companies may already prohibit multiple Rule 10b5-1 plans,\431\ or
to the extent that companies may allow a trading plan not reliant on
Rule 10b5-1(c)(1) to exist in conjunction with a trading plan reliant
on Rule 10b5-1(c)(1).\432\
---------------------------------------------------------------------------

    \429\ See supra notes 153 and 154 and accompanying text. But see
supra note 166.
    \430\ As a result, the benefit of strategically canceling an
existing plan based on MNPI will be significantly reduced for many
insiders. An insider that cancels a plan will be subject to
disclosure obligations. This provision is expected to work in tandem
with cooling-off periods, which will apply to any new plan and a
modified plan that falls within the meaning of new Rule 10b5-
1(c)(1)(iv), making a strategically planned cancellation
significantly less attractive for insiders that plan to continue
trading. Therefore, insiders will not be able to effectively shorten
or circumvent the applicable cooling-off period by setting up
multiple plans covering a similar period.
    \431\ A 2016 industry survey found that 82 percent of
respondents do not allow multiple, overlapping Rule 10b5-1 plans.
See Morgan Stanley & Shearman & Sterling LLP, supra note 384. A 2021
industry survey found that 52 percent of respondents do not allow
multiple, overlapping Rule 10b5-1 plans. See SCG 2021 Survey. The
data is based on the responses of the surveyed public company
members of the Society of Corporate Secretaries and Governance
Professionals in the respective survey years and may not be
representative of other companies.
    \432\ But see infra note 441 and accompanying text. Also,
trading under a plan not reliant on Rule 10b5-1 could entail
additional legal costs and limitations.
---------------------------------------------------------------------------

    The restriction on the availability of the affirmative defense for
multiple

overlapping trading arrangements will not apply to plans not involving
open-market transactions, such as, for example, employee benefit plans,
ESOPs, or DRIPs. This is expected to preserve the benefits of
flexibility for participants in such plans, which may be less likely to
be associated with MNPI-based trading but impractical or costly to
consolidate with an open-market Rule 10b5-1 plan.
    In a modification from the proposal, trades in different classes of
securities will not be excepted from the restriction on multiple
overlapping Rule 10b5-1 plans. While different classes of securities
may differ in the specific voting and cash flow rights they confer to
the insider, as noted by a commenter,\433\ MNPI is likely to have the
same directional effects on potential insider trading profits.
Therefore, applying the multiple overlapping plan restriction across
all classes of securities is expected to result in greater investor
protection benefits.
---------------------------------------------------------------------------

    \433\ See letter from NASAA. See also Roger M. White, Insider
Trading: What Really Protects U.S. Investors? 55 J. Fin. Quant.
Anal. 1305 (2020).
---------------------------------------------------------------------------

    In a modification from the proposal, the restriction on multiple
overlapping plans will not apply in certain circumstances involving
plans with more than one broker dealer or other agent, as discussed in
Section II.A.3.c above. This change is expected to preserve flexibility
for insiders to rely on multiple financial intermediaries, with whom
they may have previously established relationships or from whom they
may obtain better financial terms. The final amendments also contain a
modification to the multiple-plan restriction that permits an insider
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. This provision will preserve the ability
of insiders to set up two successive plans for open-market trading,
which may better address their trading needs compared to the proposal.
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'', which
is expected to strengthen investor protection. Finally, in a
modification from the proposal, the restriction on multiple overlapping
plans will not apply to sell-to-cover transactions, which will preserve
the flexibility for insiders to meet tax withholding obligations
related to the vesting of equity compensation.
    The amendments limit the availability of the affirmative defense in
the case of single-trade Rule 10b5-1 trading arrangements to one such
trading arrangement in the prior twelve-month period, which was
generally supported by several commenters.\434\ The limitation on
single-trade Rule 10b5-1 trading arrangements is expected to reduce the
likelihood that plan participants would be able to repeatedly profit
from ``one-off,'' ad hoc trading arrangements based on previously
undisclosed MNPI while availing themselves of the protections of the
Rule 10b5-1(c)(1) affirmative defense.\435\ The incremental benefit of
this limitation may be somewhat attenuated if insiders relying on
single-trade plans are largely driven by one-time liquidity needs, or
if they are effectively deterred from using MNPI by other provisions
also being adopted. Nevertheless, there could be a benefit to limiting
the frequency of single-trade arrangements to the extent that some MNPI
may remain undisclosed for periods longer than the cooling-off period.
In a modification from the proposal, the limitation on single-trade
Rule 10b5-1 trading arrangements will only apply to plans involving
open-market transactions. Similar to the application of the restriction
on multiple overlapping trading arrangements to plans involving open-
market transactions, this provision is expected to preserve the
benefits of flexibility for participants in such plans, which may be
less likely to be associated with MNPI-based trading. In a further
modification from the proposal, the limitation on single-trade Rule
10b5-1 trading arrangements will not apply to sell-to-cover
transactions, which will preserve the flexibility for insiders to meet
tax withholding obligations related to the vesting of equity
compensation.
---------------------------------------------------------------------------

    \434\ See supra notes 152 and 155 and accompanying text; see
also supra note 156.
    \435\ For instance, some suggestive evidence is presented in
Gaming the System, supra note 20 (finding that, for single-trade
plans, share prices decreased following insider sales under Rule
10b5-1). As a caveat, the data does not show the dates of all
scheduled trades, only the dates of executed trades. Thus, some
``single-trade'' plans may be multi-trade plans in progress, or
multi-trade plans with all but one trade cancelled. See also Milian
(2016), supra note 392 (finding that sales under Rule 10b5-1 plans
with few trades are associated with more negative subsequent returns
than sales under plans with more trades). As a caveat, Milian (2016)
does not specifically compare single-trade to multi-trade plans.
Further, the number of trades in the plan is highly correlated with
the duration of the plan in the study, which can make it difficult
to isolate the effect of the number of trades in the plan. But see
supra note 399 and accompanying text (citing letter from Anonymous,
which asserts that some of the observed profitability of single-
trade plans may be due to the greater reliance on limit orders).
However, see, generally, supra note 401 (indicating that abnormal
insider trading profits may still be present after consideration of
the effect of limit orders on the data).
---------------------------------------------------------------------------

iv. The Amended Good Faith Condition
    The amendments expand the good faith provision to specify that all
traders must act in good faith with respect to a Rule 10b5-1 plan (and
not just enter into such plans in good faith), as a condition to the
availability of the affirmative defense. The expansion of the good
faith condition was generally supported by various commenters and is
expected to further deter potential insider trading as part of such
plans.\436\ As discussed in Section V.A above, a decrease in insider
trading is expected to alleviate associated incentive distortions and
generate benefits for investors. By making clear that insiders must act
in good faith with respect to the plan, including with respect to any
trading under the plan, the amendments may discourage insiders from
attempting to evade the prohibitions of the rule by, for example, using
their influence to affect the timing of a corporate disclosure to occur
before or after a planned trade under a trading arrangement (one of the
economic costs of insider incentive distortions due to insider trading
discussed in Section V.A above).\437\ The amendments are expected to
strengthen investor protection by helping deter fraudulent and
manipulative conduct throughout the duration of the trading
arrangement.
---------------------------------------------------------------------------

    \436\ See supra note 191.
    \437\ See supra note 368 and accompanying and following text.
---------------------------------------------------------------------------

3. Costs
    The amendments will impose additional conditions on the use of the
Rule 10b5-1(c)(1) affirmative defense. All else being equal, the
conditions on the use of Rule 10b5-1 plans will make it more
complicated for insiders to sell or buy shares under such plans. The
conditions that impose additional barriers to sales of company stock
under Rule 10b5-1(c)(1) are expected to result in decreased liquidity
of the insider's holdings, including reduced ability to meet
unanticipated liquidity needs (such as emergency or unplanned
expenses), as well as potential constraints on portfolio rebalancing
and achieving optimal portfolio diversification and tax treatment.
Greater difficulty of selling shares under Rule 10b5-1 plans will
impose illiquidity costs on insiders and may reduce the value of their

compensation.\438\ The final amendments may have relatively greater
impacts on some insiders, for example, those with a lower net worth and
limited means, who may suffer greater adverse effects from the trading
restrictions in the event of liquidity needs. The tailored nature of
the final amendments (including the application of shorter cooling-off
periods to Rule 10b5-1 trading plans of persons other than officers,
directors, or the issuer; the limitation of certification requirements
to officers and directors; and the exceptions to the multiple-plan and