The Latest on Insider Trading: Directors and Executives Face Heightened Scrutiny Associated with Stock Trades Even under Rule 10b5-1 Trading Plans

by Wilson Sonsini Goodrich & Rosati
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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.1 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.

Adding fuel to the fire, a group of pension funds overseeing some $3 trillion in assets now is urging the SEC to impose new rules on the adoption and use of Rule 10b5-1 trading plans by corporate insiders. The rules would, among other things, prohibit company insiders from adopting multiple, overlapping Rule 10b5-1 plans; require a three-month delay between the adoption of a Rule 10b5-1 trading plan and execution of the first trade under the plan; and prohibit frequent modifications or cancellations of Rule 10b5-1 plans. The group also is seeking greater disclosure regarding the adoption, amendment, and termination of trading plans. (See http://www.sec.gov/rules/petitions/2013/petn4-658.pdf.)

In light of these events, there can be no doubt that corporate boards will come under significant pressure to intensify oversight of both Rule 10b5-1 plans themselves and trades made under such plans. Moreover, while we believe that Rule 10b5-1 trading plans adopted and used in accordance with best practices will continue to afford protection against accusations of impropriety, companies and their officers and directors increasingly will be called upon to answer questions about trades made under such plans.

On February 12, 2013, at 11:00 a.m. Pacific/2:00 p.m. Eastern, Wilson Sonsini Goodrich & Rosati partners Steve Bochner and Nicki Locker will host a webinar focused on managing the risks associated with these latest developments. The webinar will address issues such as the timing of Rule 10b5-1 trading plan adoption, and whether best practices may require restrictions on plan modification and termination, imposition of daily or weekly volume trading limits, or predetermined waiting periods before trading can begin under such plans. Additional details about this webinar will follow.

For more information or any questions about Rule 10b5-1 trading plans, please contact a member of Wilson Sonsini Goodrich & Rosati's securities litigation practice or corporate and securities practice.


1 Please see the following articles published in The Wall Street Journal: "Executives' Good Luck in Trading Own Stock," November 27, 2012; "Insider-Trading Probe Widens, U.S. Launches Criminal Investigation Into Stock Sales by Company Executives," December 10, 2012; and "Trading Plans Under Fire Despite 2007 Warning, Experts Say Loopholes Remain for Corporate Insiders," December 14, 2012 (subscription required).

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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