Corporate Governance

Shearman & Sterling LLP 35 | SEC Proposes Significant Changes to Share Repurchase Disclosure and Rule 10b5-1 Requirements and Disclosure RULE 10B5-1 RELEASE Currently, there are no mandatory disclosures related to the use of Rule 10b5-1 plans and other trading arrangements for corporate insiders and companies or of insider trading policies and procedures. The Rule 10b5-1 Release would: • amend Rule 10b5-1 to change the terms of the plans that will benefit from the affirmative defense; and • add new disclosure requirements related to Rule 105b-1 plans, insider trading policies and procedures and Section 16 officer and director actions. Proposed Amendments to Rule 10b5-1 Plans To qualify for the affirmative defense under the Rule 10b5-1 Release, 10b5-1 plans would need to: • include a cooling-off period of 120 days for officers and directors and 30 days for companies between adopting or modifying a 10b5-1 plan and trading under it or terminating it. The SEC's objective behind selecting 120 days for officers and directors is to span an entire quarter, so that no trading could occur under the plan until the financial results for that quarter are announced. Cancellation of a trade under a Rule 10b5-1 plan would be deemed a termination of the entire plan, which would result in the application of the cooling-off periods for subsequent trades; • include certifications by directors and officers that they are not aware of any MNPI at the time of plan adoption or modification and that they are adopting the plan in good faith. The elements of these certifications are already a basis for a valid Rule 10b5-1 plan so this part of the proposed rule appears designed to reinforce a director's or officer's understanding of the law; • be "operated" in good faith, in addition to the existing requirement that the plan be "entered into" in good faith. This addition is aimed at the SEC's concern that corporate insiders will time the release of MNPI in accordance with trades under a plan, which would not be operating the plan in good faith. The proposed rule also suggests that terminating or modifying a plan could be considered not operating the plan in good faith; and • be relied on with another overlapping Rule 10b5-1 plan for the same class of securities. This restriction would not apply to share transactions where securities are issued directly from the company (for example, participation in employee stock ownership plans or dividend reinvestment plans), which are not executed by the director or officer or on the open market. Proposed New Disclosure Under Regulation S-K The Rule 10b5-1 Release also adds disclosure requirements for Rule 10b5-1 plans and related topics through the addition of new items under Regulation S-K. • Proposed new Item 408(a) would add an obligation to quarterly disclose the use of 10b5-1 plans and other trading arrangements by a company and its directors and officers. This disclosure will need to be included in reports on Form 10-Q and Form 10-K (for the fourth fiscal quarter) if, during the quarter covered by the report, the company or any Section 16 officers or directors adopted or terminated a Rule 10b5-1 plan or any other arrangement to transact securities of the issuer, even if the plan isn't intended to satisfy Rule 10b5-1. The disclosure would include the material terms of any plans adopted or terminated by the company, officers, or directors. • Proposed Item 408(b) of Regulation S-K would require companies to disclose if they have adopted an insider trading policy or procedures or explain why they have not done so. These disclosures would be required annually in reports on Form 10-K and Form 20-F, as well as proxy and information statements on Schedules 14A and 14C. • Proposed Item 402(x) would require disclosure of certain information about option awards to named executive officers and directors within 14 calendar days before or after the release of MNPI in a tabular format and a narrative discussion of related policies and practices. This additional disclosure would be required in annual reports on Form 10-K and proxy statements and information statements related to director elections, the approval of compensation plans and solicitations of advisory votes on executive compensation. • The proposed rule also adds a requirement that Section 16 reporters disclose whether transactions that prompt a Form 4 or 5 filing satisfy Rule 10b5-1(c). Currently, this disclosure is voluntary in the form of an optional checkbox, but the proposed rule would make the checkbox mandatory. • The proposed rule would require corporate insiders to report bona fide gifts of equity securities on Form 4 before the end of the second business day following the gift. This would accelerate disclosure compared to the current standard of reporting within 45 days after the issuer's fiscal year end, which can result in corporate insiders reporting gifts more than a year after the gifting occurred.

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