Rule 10b5-1, enacted in August 2000, codified the SEC’s position that trading while in possession of material non-public information is sufficient to establish liability for insider trading. The rule also provided an affirmative defense for individuals who could prove that the purchase or sale of stock was made pursuant to a pre-existing written plan executed before the individual became aware of the material non-public information. These so-called 10b5-1 plans have long been considered to be an efficient way to trade company stock without raising suspicion of insider trading or another improper motive.
However, recent news stories have reignited concerns that corporate insiders may be abusing 10b5-1 trading plans to trade on material non-public information. An April Wall Street Journal article reported that not only has the use of 10b5-1 plans by non-executive directors nearly doubled between 2006 and 2011, but a significant percentage of the plans were being used to unload all or a large percentage of the directors’ holdings in a short period of time. An earlier November 2012 Wall Street Journal article analyzing thousands of trades made by corporate executives found evidence that company insiders did statistically much better than expected in realizing trading profits. Together, these articles suggest that the lack of transparency and regulation of 10b5-1 trading plans has allowed them to be misused as vehicles to effectuate opportunistic trades.
On the heels of both Journal articles mentioned above, the Council of Institutional Investors (“CII”) sent letters to the SEC urging it to adopt interpretive guidance designed to limit practices that are inconsistent with the intent of Rule 10b5-1. The proposed guidance contained in the most recent letter recommends that:
- Companies and company insiders should be permitted to adopt Rule 10b5-1 trading plans when only when the restrict the purchase or sale of securities to company-adopted trading windows;
- Companies and company insiders should be prohibited from adopting multiple, overlapping Rule 10b5-1 plans;
- Rule 10b5-1 plans should be subject to mandatory delay, preferably of three months or more, between the adoption of a Rule 10b5-1 plan and the execution of the first trade pursuant to such a plan;
- Companies and company insiders should not be allowed to make frequent modifications or cancellations of Rule 10b5-1 plans;
- Companies and company insiders should disclose Rule 10b5-1 program adoptions, amendments, terminations and transactions; and
- Boards of companies that have adopted Rule 10b5-1 plans should (1) adopt policies covering plan practices, (2) periodically monitor plan transactions and (3) ensure that company policies discuss plan use in the context of guidelines or requirements on equity hedging, holding and ownership.
Although the SEC has not responded to CII’s letter or offered any additional guidance on Rule 10b5-1, the guidelines offer at least some roadmap to prevent actual or perceived wrongful trading by corporate insiders.