Rule 10B5-1 Trading Plans: Considerations in Light of Increased Scrutiny


The aggressive use (or misuse) of Rule 10b5-1 trading plans is likely to become a significant area of focus for regulatory enforcement and securities class action plaintiffs. The floodlights now aimed at such plans are the result of recent Wall Street Journal articles showing that corporate insiders, even those executing trades pursuant to Rule 10b5-1 plans, have generated significant profits — or avoided significant losses — by trading company stock in the days just before their companies issued market-moving news. Federal prosecutors and the Securities and Exchange Commission (SEC) have commenced investigations into certain of the trades identified in those articles. Shareholder lawsuits undoubtedly will follow.

The Insider Trading and Securities Fraud Enforcement Act of 1988 makes employers liable for acting recklessly in failing to prevent an insider-trading violation, such as the failure to maintain appropriate policies. Accordingly, companies may have liability in certain situations for illegal trades, in addition to the publicity, distraction, expense, increased risk of securities litigation and regulatory enforcement interest, and other ramifications of trades that, with the benefit of hindsight, look suspiciously timed.

In light of these events, we expect corporate boards to come under pressure to increase oversight of Rule 10b5-1 plans and insider trading policies and procedures. The following summary outlines the requirements of Rule 10b5-1 and provides considerations for developing additional policies for the adoption and use of trading plans in light of the heightened scrutiny.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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