Rule 10b5-1 trading plans are in the limelight due to investigations initiated by U.S. Attorney’s Offices and the SEC into possible abuses by corporate executives of such plans. Now, more than ever, companies and their boards of directors should review and strengthen their insider trading policies concerning Rule 10b5-1 trading plans.
Rule 10b5-1 trading plans are no stranger to controversy. First introduced in 2000 by the Securities and Exchange Commission (SEC), Rule 10b5-1 trading plans permit a corporate insider to adopt a plan of acquisition or disposition of his or her company’s stock when not in possession of material nonpublic information so that trades may be executed by a broker at predetermined times regardless of whether the insider then possesses material nonpublic information.
Now that investigations have been initiated by U.S. Attorney’s Offices and the SEC into possible abuses by corporate executives of such plans, the private securities bar inevitably will follow suit and file litigation. Nevertheless, the plans continue to be an effective affirmative defense against allegations of insider trading. Companies and their boards of directors should review and strengthen their insider trading policies concerning Rule 10b5-1 trading plans. Such measures will raise the likelihood that the plan will be successful as a defense, the company’s insider trading policy will be deemed rigorous by regulators and governmental entities and more favorable directors’ and officers’ (D&O) insurance policy terms and premiums will be available due to a reduced risk profile.
Renewed Interest in Rule 10b5-1 Trading Plans
In November and December of 2012, a series of articles in the Wall Street Journal reported on corporate executives’ use of Rule 10b5-1 trading plans to sell shares of their own company stock.1 The trades appeared to have drawn the scrutiny of news media and federal prosecutors and securities regulators due to their opportune timing, resulting in highly beneficial sales, just days before the companies’ stock prices plunged. The articles suggest corporate executives may have achieved above-market returns using prearranged corporate-executive trading plans. According to the articles, the U.S. Attorney’s Office for the Southern District of New York and the SEC opened investigations into alleged abuses of such trading plans.
In April 2013, the Journal ran another series of articles on Rule 10b5-1 trading plans, this time, shifting its focus to corporate directors’ use of such plans to sell company shares for investment funds they run.2 One article reported that federal prosecutors in the Eastern District of New York had launched a criminal investigation, expanding on the investigation previously opened by the SEC and the U.S. Attorney’s Office in the Southern District of New York. The articles highlight the well-timed nature of a few corporate directors’ trades, which allegedly spared their investment funds significant declines in the value of their holdings.
Rule 10b5-1 trading plans have long been the subject of debate.3 The recent wave of renewed interest by federal prosecutors and securities regulators in such plans suggests that companies and their directors review their insider trading policies to evaluate compliance and to consider best practices.
Rule 10b5-1 Trading Plans: The Basics
In 2000, the SEC adopted Rule 10b5-1 to clarify “what, if any, causal connection must be shown between the trader’s possession of inside information and his or her trading.” It provides that a trade is made “on the basis of” material nonpublic information “if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.”
The Rule provides officers, directors and other insiders an affirmative defense to allegations of insider trading when, prior to becoming aware of material nonpublic information, the person entered into a binding contract to purchase or sell the security, instructed another person to purchase or sell the security for the instructing person’s account, or adopted a written plan for trading securities. The contract...
