Corporate Communicator - Spring 2013: Rule 10b5-1 Plans Under Scrutiny

by Snell & Wilmer

There has been renewed focus on Rule 10b5-1 Plans following an article in the Wall Street Journal, published on November 27, 2012, entitled “Executives’ Good Luck in Trading Own Stock,” which reported that executives who traded their own company’s stock recorded gains at a much higher rate than losses. The article also reported that those executives who traded irregularly were much more likely to record quick gains than those who traded according to a more regular pattern. The article further highlighted various executives whose trades occurred at suspicious times—either days or weeks before disclosure of positive or negative news about the company—earning the executives significant gains or saving them from substantial losses.

In a follow-up article entitled “Trading Plans Under Fire,” published on December 13, 2012, the Wall Street Journal discussed the mounting pressure on the SEC to tighten its rules on Rule 10b5-1 Plans after the publication of its November 27th article. The article also noted that federal criminal and civil authorities have opened probes into trading by the seven executives cited in the original article. A third article published on December 30, 2012 in the Wall Street Journal discussed a letter that the Council of Institutional Investors (CII), a group of pension funds, sent to the SEC expressing their concern that executives were improperly using insider information to buy and sell stock in their own companies and suggesting some changes the SEC could make to its rules that may alleviate some of CII’s concerns.

Rule 10b5-1 Plans, which are named after the section of the SEC’s rules that established them, provide an affirmative defense against a claim that a person traded “on the basis of” material non-public information if the person making the trade can prove that he or she adopted a qualifying plan for trading prior to becoming aware of the material non-public information.

The most common users of Rule 10b5-1 Plans are officers and directors of companies who want to buy or sell stock in their own companies, but who often possess material non-public information that could otherwise expose them to liability under the securities laws for insider trading. Rule 10b5-1 Plans can provide executives with an affirmative defense when they trade stock in their own companies as long as they follow the requirements set forth in Rule 10b5-1, including a requirement that the executive adopt the plan in good faith.

Typically, a Rule 10b5-1 Plan takes the form of a contract between the executive and a broker, establishing the circumstances and parameters under which the broker will buy or sell the executive’s stock (e.g., time, amount, price). A plan can either specifically identify, or set out a formula or algorithm for determining, the amount of securities to be sold, the price at which such securities will be sold, and the date on which such securities will be sold.

Since the publication of the series of articles noted above, commenters and industry groups have predicted that the SEC will be looking into Rule 10b5-1 Plans and related trading more aggressively. In January of this year, the Wall Street Journal published another article discussing how many observers, including prominent law firms, are now advocating changes to the SEC rules governing Rule 10b5-1 Plans and advising their corporate clients to be more cognizant of this increased focus.

With the expected continued scrutiny of Rule 10b5-1 Plans, advocacy groups, including CII, are pushing for changes to the SEC’s rules and to the way corporations handle their executives’ Rule 10b5-1 Plans.

Such proposals are based on common criticisms of Rule 10b5-1 Plans, some of which the Wall Street Journal articles highlight. One such criticism is that Rule 10b5-1 Plans do not have to be filed with any agency or authority, nor is an executive required to make them publicly available. Although many do disclose the fact that they have established plans, very few disclose any details about their plans. Furthermore, there is no restriction on the ability of executives to cancel their plans, leaving open the possibility that an executive can cancel his or her plan to avoid a planned sale or purchase based on knowledge of material non-public information with little to no impunity.[1] Although the current rules clearly limit plan amendments to times when an executive does not possess material non-public information, some criticize frequent amendments and cancellations of Plans as casting doubt on an executive’s good faith in implementing the original plan. Also, an executive can institute a plan mere days before he or she plans to sell or purchase stock, or trade outside of a plan even if he or she has a plan in place, which again raises questions of whether the executive established and implemented the plan in good faith.

Although advocates have suggested a variety of changes to the SEC rules governing Rule 10b5-1 Plans, common suggestions include the following:

  • Imposing a waiting period (e.g., three months) prior to trading under a plan: While some plans build in a waiting period before trades commence (e.g., two weeks to a few months), the current SEC rules do not contain any restriction on how soon trading can occur after a plan is put into place.
  • Prohibiting or limiting the adoption of multiple or overlapping plans: Under the current rules, there is no absolute restriction on having in place more than one Rule 10b5-1 Plan at a time. Limiting or prohibiting the adoption of multiple or overlapping plans would lessen the suspicion that an executive is attempting to trade improperly, as multiple plans may suggest an executive is trying to obfuscate his or her intentions or activities.
  • Limiting the ability to make amendments to or cancel a plan: Even if an executive puts a plan into place, he or she can cancel the plan at any time or amend the plan as long as he or she does not possess material non-public information at the time of the amendment. Frequent plan cancellations or amendments may raise doubts as to whether a plan was adopted in good faith and could subject transactions made pursuant to a plan to scrutiny and undermine the Rule 10b5-1 affirmative defense that the plan would otherwise provide.
  • Requiring disclosure of plans: The SEC does not currently require an executive who adopts a Rule 10b5-1 Plan to disclose either its adoption or any details of the plan to anyone, even his or her own company. This makes it difficult for the SEC and other interested parties, including shareholders, to monitor the covered trades.
  • Limiting the window of opportunity to adopt plans: Some suggest limiting when an executive can adopt a plan, possibly to approved trading windows established by the executive’s company.


[1] The federal securities laws currently support the cancellation of a plan on the simple theory that a person cannot be liable for not trading.

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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