The Council, a nonprofit, nonpartisan association of public, corporate and union pension funds, and other employee benefit plans, foundations and endowments, expressed concern about the potential misuse of trading plans that are intended to satisfy the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. A Rule 10b5-1 trading plan is a program for the periodic purchase and/or sale of stock that provides executives a defense against charges of insider trading if they later trade stock while they know confidential, important information about their company.
The Council said its concerns were heightened by a Wall Street Journal article entitled “Executives’ Good Luck in Trading Own Stock” that noted some company insiders may be adopting Rule 10b5-1 plans at a time that they are aware of material non-public information, which should preclude trades affected pursuant to such plans from being protected by Rule 10b5-1. According to the letter, the article also noted that some insiders frequently cancel or amend plans after they have been adopted, which raises questions regarding whether such plans were adopted in good faith, a prerequisite to a legitimate Rule 10b5-1.
It also appears that many plans adopted by insiders in reliance on Rule 10b5-1 allow trades to occur pursuant to such plans within mere days after the plan has been adopted, the Council said, which also raises questions about whether such plans were made in good faith and whether the insider could have been in possession of material non-public information at the time that the plans were adopted.
The Council requested that the SEC consider pursuing interpretative guidance or amendments to Rule 10b5-1 that would require Rule 10b5-1 plans to adopt the following protocols and guidelines:
- Companies and company insiders should only be permitted to adopt Rule 10b5-1 trading plans when they are permitted to buy or sell securities during company-adopted trading windows, which typically open after the announcement of the financial results from a recently completed fiscal quarter and close prior to the close of the next fiscal quarter;
- Companies and company insiders should be prohibited from adopting multiple, overlapping Rule 10b5-1 plans;
- Rule 10b5-1 plans should be subject to a 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; and
- Companies and company insiders should not be allowed to make frequent modifications or cancellations of Rule 10b5-1 plans.
The Council’s letter is here.