Late last year, the Securities and Exchange Commission (SEC) adopted new disclosure requirements regarding insider trading policies and procedures. These new disclosure requirements are codified in section 408(b) of Regulation SK. It is important to note that SEC rules do not specifically regulate a registrant’s insider trading policies themselves. In contrast, SEC rules govern only the disclosure of whether a registrant has adopted an insider trading policy (the Policy). As a result, registrants have some flexibility in designing their insider trading policies and procedures, as long as they are designed to help directors, officers and other employees comply with the insider trading prohibitions and other requirements of the federal securities laws and regulations.
Under new section 408(b), registrants are required to disclose on an annual basis whether they have adopted insider trading policies and procedures that govern the purchase, sale or other disposition of the registrant’s securities by directors, officers, other employees and the registrant itself. If a registrant has not adopted such policies and procedures, it must explain why it has not done so. These disclosures must be made pursuant to Part III of a registrant’s Form 10-K or may be incorporated by reference from a definitive proxy or information statement involving the election of directors if filed within 120 days after the end of the registrant’s fiscal year. In addition, registrants must file a copy of the policy as an exhibit to their Form 10-K.
Components of the policy
Generally, these policies provide guidelines with respect to transactions in the registrant’s securities designed to assist the registrant’s directors, officers and other employees in understanding their obligations under the federal securities laws. Note that each affected person is personally responsible for complying with the policy and applicable legal requirements.
Applicability of the policy. The policy should apply to all transactions of the registrant’s securities, including common stock, restricted stock, restricted stock, options and warrants to purchase common stock and any other debt or equity securities that the registrant may issue from time to time, such as bonds, preferred stock and convertible debentures as well as derivative securities relating to the registrant’s securities, whether or not issued by the registrant, such as exchange-traded options. The policy should apply to all directors, officers and other employees of the registrant. It should also apply to members of their immediate family who live with them, anyone else who lives in their households and family members who live elsewhere but whose transactions in registered securities are directed by them or subject to their influence and control. Most importantly, these policies often impose blackout periods and pre-clearance procedures for directors, officers and certain other designated employees who routinely receive or have access to information that is both “non-public” and “material” (often referred to as insiders).
General and Specific Statements in the Policy. A registrant’s policy should include a general statement that the registrant will oppose the unauthorized disclosure of any material non-public information acquired in the workplace, the use of material non-public information in securities trading, and any other violation of applicable securities laws. The policy should also contain a specific statement that no director, officer or employee may engage in any transactions in the registrant’s securities during any period in which he or she possesses material non-public information about the registrant, except as permitted by the policy.
What is “material” information? Information is “material” if there is a substantial likelihood that a reasonable investor would consider the information important in deciding whether to buy, sell or hold a security, or if there is a substantial likelihood that the information will be seen by a reasonable investor as significantly changing the overall mix of publicly available information about the company. Any information that could reasonably be expected to affect the market price of a security is likely to be considered material.
What is “non-public” information? “Non-public” information is information that is not available to the public. For information to be considered public, it must be widely disseminated in a manner that makes it generally available to investors, including through the issuance of a press release or a filing with the SEC. In addition, even after a public disclosure of material information, a reasonable period of time must pass for the market to absorb and react to the information.
Mandatory guidelines. Policies often include certain mandatory guidelines applicable to insiders designed to promote compliance with both the policy and applicable federal securities laws to avoid insider trading.
Trading blackout period. Policies often require Insiders to refrain from conducting transactions involving the purchase or sale of the registrant’s securities during certain blackout periods as determined by the registrant, such as the period beginning on the 15th calendar day of the third fiscal month of each of the first three accounting months. months quarters (i.e. 15 March, 15 June and 15 September) and the first day of the last month of the fourth fiscal quarter (i.e. 1 December) and ends at the close of business on the third trading day following the date of publication of the financial results for each financial quarter.
Eradication of trades. Policies often require Insiders to pre-approve all transactions in the registrant’s securities, subject to limited exceptions. The policy can, for example, require insiders to obtain prior written approval from the registrant’s designated insider trading compliance officer not less than two business days prior to the commencement of any trade or transfer of the registrant’s securities (such as any purchase or sale; stock plan transaction, an option involving a sale of the acquired securities or any gift, transfer to a trust or any other transfer). The policy should state that the transaction will not take place without such pre-approval and note that the insider trading compliance officer is not required to approve a transaction submitted for pre-approval and may decide not to allow it.
Other things the provisions of the policy. Various other provisions may be incorporated into such policy, including exceptions to the policy, use of Rule 10b5-1 plans, permissibility of pledging and hedging of registrant securities, applicability to post-termination transactions, and applicability to publicly traded options and transactions in securities of other companies with which the registered person trades. As noted above, registrants have some flexibility in setting certain elements of their policies. However, because these policies will be publicly filed, they will now be more closely scrutinized by shareholders, activists and other interested parties, so registrants should ensure that their policies are up-to-date and thorough.
SEC-registered companies should consult with their SEC counsel regarding the design and components of an insider trading policy to ensure that the policy complies with the SEC’s insider trading rules and regulations. In addition, in light of the SEC’s new disclosure requirements regarding such policies, which will be required in future proxy statements and Form 10-Ks, we suggest that counsel be consulted promptly.