One of the many interesting topics that came up during our webcast “Rule 10b5-1 & Buybacks: Practical Impacts of SEC’s Proposals” earlier this week (a replay is now available and a transcript will be coming soon) was whether companies should review and update their insider trading policies now given the SEC’s proposed disclosure requirement in Item 408(b) of Regulation S-K. Proposed Item 408(b) of Regulation S-K would require companies to disclose whether the company has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the company’s securities by directors, officers, and employees or the company itself that are “reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the issuer.” If a company has not adopted such insider trading policies and procedures, the company must explain why it has not done so, and if the company has adopted insider trading policies and procedures, it must disclose such policies and procedures.
I note that yesterday the SEC took the unusual step of posting a new version of the Rule 10b5-1 and Insider Trading proposing release and removing the prior version from the website. There is no indication of why the old version was replaced. The original version of releases that are posted on the SEC’s website are sometimes replaced with corrected versions to conform to the Federal Register version, but that does not appear to be the case in this instance because the website does not indicate that the proposing release has been published in the Federal Register.
As we discussed during the webcast, there are a few areas that companies may want to revisit now in their insider trading policies:
- The treatment of bona fide gifts – in the proposing release, the SEC says the disclosure “could address not only policies and procedures that apply to the purchase and sale of the registrant’s securities, but also other dispositions of the issuer’s securities where material nonpublic information could be misused such as, for example, through gifts of such securities.”
- The approach to monitoring material nonpublic information – in the proposing release, the SEC mentions as a potential disclosure item “information on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information.”
- The preclearance process – in the proposing release, the SEC mentions as a potential disclosure item “the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities.”
- The policy’s compliance mechanisms – in the proposing release, the SEC mentions as a potential disclosure item “how the issuer enforces compliance with any such policies and procedures it may have.”
One of the perennial challenges with updating insider trading policies is trying to benchmark a company’s policies against those of other companies, because only some companies voluntarily choose to post their insider trading policies on their website. Over the years, we have often conducted surveys about practices around things like trading restrictions and to whom within the organization the various aspects of the policy apply, as well as other areas of common interest, but it is usually impossible to get a picture of the entire landscape from the voluntary disclosures and survey results. As a result, if Item 408(b) were adopted, it would probably go a long way to helping companies get a handle on what their peers are doing in their insider trading policies.
-Dave Lynn, TheCorporateCounsel.net January 14, 2022