Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 41 | Getting Camera Ready: Refreshing Insider Trading Policies Ahead of Mandatory Public Disclosure Although companies have long been incentivized to adopt, implement and enforce insider trading policies to help avoid liability and public fallout for actual or alleged employee misconduct, making companies' insider trading policies public is certain to shine a spotlight on the robustness of policies even in the absence of any alleged misconduct. Having a strong insider trading policy will become an even more important mark of good corporate governance, reflected in company scorecards used by institutional investors as well as by proxy advisors and other governance watchdogs. Once policies are public, reporters and researchers alike are likely to compare their scope and strictness across companies, and regulators may use the information to ask questions and identify enforcement targets and, importantly, use them as a basis for enforcement actions if the requirements of the policy were not followed. Now is a good time for companies to start getting their policies "camera ready" for 2025. Companies will want to allow for sufficient lead time for review and input from advisers and stakeholders before policies are exposed to public scrutiny. In addition to a general refresh, companies should consider recent developments in SEC rules and enforcement, including new disclosure requirements for trading plans of directors and officers, and the increased regulatory focus on those plans by the SEC. This article highlights these and other insider trading policy design questions. Should the Insider Trading Policy Cover Trading by the Company Itself? Existing insider trading policies typically do not extend to the company's own purchases and sales of securities. Unlike insiders, companies have control over public disclosure of MNPI and may choose to make such disclosure in order to trade, such as by disclosing preliminary earnings information to conduct a securities offering after quarter-end but before their scheduled earnings release. Companies can also make nuanced and real-time determinations of whether any information they have is in fact material before transacting, avoiding the need for bright-line blackouts which are imposed on insiders for administrative convenience. However, given that, at least for domestic issuers, the new disclosure requirement specifically references trading by "the registrant itself," companies should address their approach to trading by the company in their insider trading policies, ideally in a way that continues to allow for the flexibility that companies should have with respect to trading in their own securities. How Long Should Quarterly Earning Blackouts Be? The new public filing of insider trading policies will for the first time provide comprehensive information about the duration of quarterly earnings blackouts. These blackout periods—or their counterparts, trading windows—are a typical feature of insider trading policies, designed to restrict trading by insiders with access to earnings information and other MNPI for a defined period of time surrounding the end of each fiscal quarter and prior to the release and market absorption of quarterly financial results, thereby helping to avoid the risk that such insiders could engage, or be perceived to engage, in trading during this sensitive period. When precisely these goalposts should be set can vary from industry to industry and company to company. For example, a quarterly blackout which begins two months into the quarter may be appropriate for a manufacturer which by that time has a good sense of how its sales are tracking, especially if forward visibility is enhanced by an order book. However, the same period may be unnecessarily long for a biotechnology company whose stock price is primarily driven by clinical progress rather than financial results or whose revenue derives largely from third-party royalties, the amount of which is not known to the company until some time after quarter end. Although the SEC recently tied the new cooling-off periods for Rule 10b5-1 plans of directors and officers to the filing of a Form 10-Q/10-K, as opposed to the earnings release, it does not appear to be necessary for companies to follow this approach in their insider trading policies. Ultimately, companies should consider the blackout duration that would be appropriate for their business, be mindful of how such duration compares to peers and be prepared to defend their decision if questions arise.