Debevoise Digest: Securities Law Synopsis – September 2023

September 2023

SEC Releases New and Updated Guidance on Amended Rule 10b5-1

On August 25, 2023, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) released several new and updated Compliance & Disclosure Interpretations (“C&DIs”) regarding amended Rule 10b5-1 plans and related reporting requirements. The C&DIs address the calculation of the mandatory cooling-off period for directors and Section 16 officers, overlapping plans involving 401(k) plans, the new Form 4 check box and disclosures about the adoption and termination of trading arrangements:

  • Calculation of the mandatory cooling-off period - Directors and Section 16 officers are subject to a cooling-off period before the date on which trading under a plan may commence, extending to the later of: (i) 90 days after the adoption or modification of a Rule 10b5-1 trading plan; and (ii) two business days following the disclosure of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following adoption or modification of the plan). C&DI 120.29 clarifies that the filing date does not count as the first business day for the purposes of Rule 10b5-1(c)(1)(ii)(B)(1) but rather that “the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date.”
  • Overlapping plans - C&DI 120.30 discusses a fact pattern in which a 401(k) plan administrator uses issuer cash advances to purchase stock in the open market to make matching grants to plan participants in circumstances where purchases are made at the direction of the plan administrator and not the plan participant. The staff advises that this arrangement would not be considered an overlapping plan for the purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open-market trading plan.
  • Form 4 Check Box - The staff clarifies that the Rule 10b5-1(c) check box on Form 4 does not apply to trading plans that were adopted prior to February 27, 2023. The check box only applies to “transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c).”
  • Regulation S-k 408 – Insider trading arrangements and policies - Item 408(a) of Regulation S-K requires disclosure of whether any director or Section 16 officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the fiscal quarter in the applicable Form 10-K or Form 10-Q. Item 408(a) applies to any trading arrangement covering securities in which the officer or director has a direct or indirect pecuniary interest reportable under Section 16 that the officer or director has made the decision to adopt or terminate. The staff confirms that Item 408(a)(1) does not require disclosure of the termination of a plan that ends due to its expiration or completion.

For more information, including the text of the new C&DIs, see Debevoise Insights.

Second Circuit Affirms That Syndicated Term Loans Are Not Securities

On August 24, 2023, the Second Circuit issued a highly anticipated decision in Kirschner v. JP Morgan, affirming that a syndicated term loan is not a “security.” The plaintiff in the case, the trustee of the Millenium Lender Claim Trust (the “Trust”), alleged on behalf of the Trust’s beneficiaries that JP Morgan Chase and other financial institutions violated state securities laws by making misrepresentations and omissions of material facts in the offering materials provided in connection with the syndication of $1.8 billion of syndicated loans that closed on April 16, 2014. In 2020, the district court dismissed Kirschner’s claims, finding that the syndicated term loan did not meet the definition of a security under the Supreme Court’s four-factor “family resemblance” test established in Reves v. Ernst & Young. In affirming the district court’s decision, the Second Circuit’s analysis focused on the Reves test, finding that three factors—the plan of distribution, the reasonable expectations of the public and the existence of other risk-reducing factors—favored a conclusion that the term loan should not be classified as a security while only one factor, the investment-focused motivation of the sophisticated parties to whom the term loan was syndicated, favored classifying the term loan as a security.

The Second Circuit’s affirmation of the district court’s decision maintains the regulatory status quo for syndicated term loans, thereby avoiding the significant upheaval in the syndicated loan market that could have resulted if the district court’s decision had been overturned or if the Second Circuit had otherwise signaled that term loans should be considered securities.

For more information, see Debevoise Insights and the August edition of our Debevoise Digest.

Insurance Industry Attracts Activists

While activists have long been powerful players in a range of industries, the insurance industry has not historically been a frequent target for activist intervention. However, as life insurers have struggled with a low-interest-rate environment, and property and casualty (re)insurers have been beset by weather-related disasters and social inflation, activists have taken a closer look at the insurance industry. Further, insurance groups with both property and casualty and life and retirement businesses have sometimes traded at a discount relative to more focused companies, which has attracted interest from activists. As a result, activist campaigns involving insurers have increased each year from 2019 to 2022, with 23 activist campaigns in 2022. The trend has continued in 2023 with 15 more campaigns in the first five months of the year.

For more information, including a spotlight on recent Insurance Industry Activism, see Debevoise Insights.

SEC Charges Broker Dealer with Recordkeeping Failures concerning Underwriting Expenses

The SEC settled cease-and-desist proceedings against a broker-dealer for willfully violating recordkeeping requirements concerning expenses that the firm incurred in connection with its underwriting business. The SEC’s order charges the broker-dealer with violating Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. The order found that for at least a decade, the broker-dealer used an unsubstantiated and unverified method to calculate and record indirect expenses associated with its work as an underwriter. The SEC suggested that the broker-dealer based those expenses on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter and then, using fixed “allocation grids,” divided that amount into specific categories of expenses. Without admitting or denying the SEC’s findings, the broker-dealer consented to a cease-and-desist order, a censure and a civil penalty of $2.9 million. Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, says that the SEC will continue to “vigorously enforce the books and records provisions of the federal securities laws, which are crucial to well-functioning markets.”

For more information, see the SEC Press Release.