Rule 10b5-1 trading plans, and those using them, are making headlines. A Rule 10b5-1 trading plan is a written plan for buying or selling securities meeting the requirements of Exchange Act Rule 10b5-1(c). A properly adopted and implemented Rule 10b5-1 trading plan provides an affirmative defense against accusations of insider trading and allows the purchases and sales of securities even when the person using the plan is aware of material nonpublic information.

Rule 10b5-1(c) requires, among other things, that the (i) written trading plan be established in good faith and at a time when the person establishing the plan is not aware of any material nonpublic information, (ii) the written trading plan specify the amount, price and date of the transaction(s) (or include a written formula, algorithm, or computer program for determining the amount, price and date), and (iii) the person establishing the plan not exercise any subsequent influence over how, when, or whether to make purchase or sales. While anyone can establish a Rule 10b5-1 trading plan, they are mostly used by public company insiders, such as executive officers and directors, as company insiders are often aware of material nonpublic information which precludes them from trading. There is no SEC requirement that the existence or details of a 10b5-1 trading plan be made public.

On November 27, 2012, the Wall Street Journal, published "Executives' Good Luck in Trading Own Stock"1 discussing how certain executives, including some executives using 10b5-1 trading plans, have benefitted from trading in their company's own stock. In a subsequent article, the Wall Street Journal2 reported that federal prosecutors and securities regulators were taking a closer look into how company insiders use 10b5-1 plans, including an examination of some of the transactions discussed in the Wall Street Journal's November 27, 2012 article. Furthermore, a December 28, 2012 letter from the Council of Institutional Investors to the SEC detailed the Council's concerns with the potential misuse of 10b5-1 trading plans and asked the SEC to consider pursuing interpretive guidance or amendments to Rule 10b5-1 to provide additional restrictions on the use of such plans.

While it is impossible to determine whether there will be any lasting changes as a result of this current focus on Rule 10b5-1 trading plans, the recent attention is a reminder to public companies and their legal advisors to reevaluate periodically their policies regarding the use of Rule 10b5-1 trading plans to ensure that their policies are up to date. When reviewing such policies, companies may wish to consider the following:

  • requiring that all Rule 10b5-1 plans be well documented and that copies of plans and related documentation be maintained as part of the company's records;
  • a mandated period of delay between the adoption of the plan and the start of trading under the plan;
  • public disclosure of the adoption, termination or amendment of 10b5-1 plans;
  • requiring that insiders have only one 10b5-1 trading plan in effect at any time; and
  • requiring that plans have a minimum duration of at least one year.

Rule 10b5-1 trading plans are undoubtedly a valuable tool to allow executives, directors and other insiders to manage their financial affairs and to diversify their investments. However, especially now with the increased scrutiny trading under Rule 10b5-1 plans is receiving, care should be taken to ensure that the plans are properly implemented and maintained.

Footnotes

1. Available at http://online.wsj.com/article/SB10000872396390444100404577641463717344178.html.

2. Insider-Trading Probe Widens, Dec. 10, 2012, available at http://online.wsj.com/article/SB10001424127887323339704578171703191880378.html.

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