On December 15, 20211, the Securities and Exchange Commission (“SEC”) issued proposed rules that would significantly impact Rule 10b5-1 trading plans. Among other things, the proposed rules impose new conditions on the availability of the affirmative defense to insider trading afforded by 10b5-1 plans, require quarterly disclosure of the adoption, modification and termination of trading plans by directors, officers and issuers and require identification of transactions made pursuant to such plans on Forms 4 and 5. The proposed rules would also introduce new annual disclosures regarding insider trading policies, amend the existing executive compensation disclosure requirements relating to the timing of option grants and require reporting of gifts on Form 4.

Certain of the proposals would have a particular impact on equity compensation plans and their administration and operation.

Specifically, if the proposed rules are enacted, it is unclear whether companies using a “sell-to-cover” method for collecting withholding taxes on restricted stock units (“RSUs”) or other equity awards will be able to continue structuring such market sale transactions to meet the requirements of 10b5-1(c)(1), as many currently do through equity award terms that provide for the automatic sale of sufficient shares on the settlement of RSUs or other awards to cover the tax withholding obligation. This is primarily because the proposed rules provide that the affirmative defense under Rule 10b5-1(c)(1) would not apply to multiple overlapping 10b5 1 trading arrangements for open market trades in the same class of securities. Therefore, if employees have multiple RSUs or other awards subject to a sell-to-cover requirement or have other 10b5-1 trading plans outside of their equity awards2, they could run afoul of this “overlapping plans” rule as there is no exception for sales to cover taxes on employee equity awards.  However, the SEC has asked for comment on whether the proposed rules would affect current tax withholding practices with respect to equity compensation arrangements, such as stock options and restricted stock units. Therefore, we would hope that the final rules will be designed to allow for mandatory sales to cover equity award tax withholding obligations to be made under the protections of Rule 10b5-1(c)(1), at least where such sales are required by the company and non-volitional by the individual award holder.

Additionally, the proposed rules require a new proxy table disclosing option or similar grants (such as stock appreciation rights) made to a named executive officer during the 14-day period before or after the filing of a Form 10-Q or Form 10-K, an issuer share repurchase, or the filing or furnishing of a Form 8-K that discloses material nonpublic information (“MNPI”), including earnings information. The information to be disclosed includes the number of options/awards, the exercise price, the grant date fair value and the market price of the underlying securities on the trading day before and after disclosure of the MNPI. The purpose of the disclosure is to provide shareholders a full and complete picture of any “spring-loaded” or “bullet-dodging” option grants3 during the fiscal year as they consider their say-on-pay votes and when approving executive compensation and electing directors. In anticipation of the potential enactment of this rule, companies should be evaluating their option grant practices and should consider adopting an equity grant policy or revisiting any existing policies to ensure that there is appropriate governance around the timing of option grants, particularly during the 14-day period that would require disclosure under the proposed rule.

Companies wishing to provide comments to the SEC on these equity award issues or any other aspect of the proposed rules may do so here until the end of the public comment period on April 1, 2022.

[1] The SEC re-issued the proposed rules on January 13, 2022, but without substantive changes.

[2] The proposed rules do provide an exception for shares acquired directly from (or sold directly to) the issuer, such as through participation in an employee stock ownership plan or a dividend reinvestment plan, but these are transactions not involving a market sale.

[3] A “spring-loaded” grant is made before the release of positive MNPI and may result in the option being in-the-money as soon as the information is released. A “bullet-dodging” option is made after the release of negative MNPI when the stock price, and therefore the exercise price, is likely to be lower.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.