On April 25, the SEC staff added two new Compliance and Disclosure Interpretations (CDIs), revised 20 CDIs and withdrew three CDIs related to 10b5-1 plans. The SEC staff largely revised the CDIs to conform to the 2022 Rule 10b5-1 amendments, including updated rule references and adding the new compliance requirements. However, it did make substantive changes to CDIs 120.12, 120.15, and 120.16 regarding limit orders; CDI 120.18 regarding 10b5-1 plan terminations; and CDIs 120.21, 120.22, and 120.23 regarding certain 401(k) transactions. 

Exchange Act Rules – Rule 10b5-1 

New Question 120.32 – A company sponsors a 401(k) plan that permits both employer and employee contributions to be invested through a self-directed “brokerage window.”  Because the counterparty to the self-directed “brokerage window” transaction will be an open market participant, the instruction for any self-directed “brokerage window” transaction will need to satisfy all conditions of Rule 10b5-1(c)(1), including those applicable to purchases and sales of the issuer’s securities on the open market.  

New Question 120.33 – Rule 10b5-1(c)(1)(ii)(D) provides that an individual claiming the Rule 10b5-1(c) affirmative defense may not have multiple Rule 10b5-1 plans. Rule 10b5-1(c)(1)(ii)(D)(3) provides an exception for an eligible sell-to-cover transaction. An eligible sell-to-cover transaction is a contract, instruction, or plan that authorizes an agent to sell only such securities as are “necessary to satisfy tax withholding obligations” arising exclusively from the vesting of a compensatory award where the insider does not otherwise exercise control over the timing of such sales. In this context, “necessary to satisfy tax withholding obligations” refers to tax withholding payments that are calculated in good faith to satisfy the employee or director’s expected effective tax obligation solely with respect to the vesting transaction, consistent with applicable tax law and accounting rules. 

Withdrawn Question 120.02 – A person who has adopted a written trading plan or given trading instructions to satisfy Rule 10b5-1(c) plans to sell the securities in reliance on Rule 144. It is unnecessary to modify the Form 144 representation regarding the seller’s knowledge of MNPI to be as of the date of the Rule 10b5-1 plan rather than the Form 144 signature date since the form already includes the representation. 

Withdrawn Question 120.19 – The cancellation of one or more plan transactions would be a modification of an alteration or deviation from the plan, which would terminate that plan. The Rule 10b5-1(c) defense would be available for transactions following the alteration such termination only if the transactions were pursuant to a new contract, instruction or plan that satisfies the requirements of Rule 10b5-1(c).  

The 2022 amendments added a new section to Rule 10b5-1 clarifying when a modification to a plan would be deemed a termination and adoption of a new plan. 

Withdrawn Question 220.01 – After the written trading plan described in Q&A 120.11 has been in effect for several months, the broker that has been executing plan sales goes out of business at a time when the person is aware of MNPI. The person wishes to continue sales under the plan pursuant to its original terms. The person may transfer plan transactions to a different broker without being deemed to have cancelled the original plan and adopted a new plan if the transfer to the new broker is timed so that there is no cancellation of any transaction scheduled in the original plan, and the new broker effects sales in accordance with the original plan’s terms. 

SEC Updates CDIs on Clawbacks and de-SPAC Transactions

On April 11, the SEC staff added six CDIs regarding clawbacks and one new CDI on de-SPAC transactions. 

Exchange Act Forms – Section 104. Form 10-K 

New Question 104.20 – When a company reports a change to its previously issued financial statements in an annual report, it should determine whether “the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements” for purposes of the Form 10-K check box by looking to applicable GAAP guidance on whether the change represents the correction of an error. The CDI clarifies that “Big R” restatements and “little r” restatements constitute a correction, but “out-of-period adjustments” are not a correction since the previously issued financial statements are not revised. 

New Question 104.21 – Companies must mark the check box on the cover of an amended annual report to indicate that the restatement “required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period” pursuant to Exchange Act Rule 10D-1(b) even when (1) no incentive-based compensation was received by any executive officers at all during the relevant time frame or (2) incentive-based compensation was received but that incentive-based compensation was not based on a financial reporting measure impacted by the restatement (and explain). 

New Question 104.22 – After filing an amended 20X3 10-K, a company includes the same restated financial statements in its subsequent 20X4 annual report. Assuming there are no additional restatements, SEC staff will not object to the check boxes remaining unmarked on the cover page of the 20X4 annual report.

However, any proxy or information statement filed during 20X5 that includes 20X4 executive compensation information pursuant to Item 402 must also include the disclosure of Item 402(w)(2) of Regulation S-K (even if the company previously explained why there was no recovery).  

New Question 104.23 – If a company discovers an error in its previously issued 20X3 financial statements in 20X5 (prior to filing the 20X4 annual report), applies its recovery policy, determines that no recovery is required, checks both boxes on its 20X4 annual report, and provides Item 402(w)(2) disclosure in its proxy or information statement incorporated by reference, the staff will not object if the 20X5 annual report does not include or incorporate by reference Item 402(w)(2) disclosure, notwithstanding that the restatement occurred “during…the [company’s] last completed fiscal year” as long as there are no additional facts that would affect the conclusion of the prior recovery analysis that no recovery is required. 

New Question 104.24 – A company initially reports a restatement of an annual period in a form that does not include a cover page check box requirement, such as a Form 8-K or a registration statement. If that annual period is presented in the issuer’s financial statements in its next annual report, the company must mark that check box on the cover page. 

New Question 104.25 – If a company determines in the fourth quarter that it is required to prepare restatements of its first, second, and third quarterly periods of that year, it is not required to mark any of the check boxes on the cover page of its annual report because the restatements do not impact the annual periods in the issuer’s financial statements.  

However, it must provide disclosure pursuant to Item 402(w) of Regulation S-K in its 10-K or proxy or information statement since, for purposes of that disclosure, an accounting restatement includes interim periods and is not limited to one that impacts annual periods.  

Exchange Act Rules. Section 253. Rule 12h-3 

New Question 253.03 – A SPAC completed a de-SPAC transaction wherein the target company or companies were included as co-registrants on the effective Securities Act registration statement for the de-SPAC transaction. As a result, these co-registrants incurred an obligation to file reports under Section 15(d) of the Exchange Act upon effectiveness of the de-SPAC registration statement. Notwithstanding that a class of securities offered and sold using such registration statement remains outstanding, once the de-SPAC transaction has closed, the staff will not object if each target company files a Form 15 to suspend its 15(d) reporting obligations in reliance on Rule 12h-3 as long as the target company is wholly owned by the combined company and the target company remained current in its 15(d) reporting obligations through the date of filing.  

This article is part of a Fenwick "Securities Law Update" authored by David A. Bell, Ran Ben-Tzur, Amanda Rose, Wendy Grasso, and Merritt Steele.