SEC Intensifies Scrutiny on Stock Sales by Insiders and 10b5-1 Plans

On February 5, 2013, the Wall Street Journal published the third in a series of articles discussing trading by public company executives in their companies’ securities, including trading pursuant to Rule 10b5-1 trading plans.  A 10b5-1 trading plan is a plan for buying or selling securities meeting the requirements of Securities Exchange Act Rule 10b5-1(c).  A properly adopted and implemented Rule 10b5-1 trading plan provides an affirmative defense against accusations of insider trading and allows the purchases and sales of securities even when the person who adopted the plan is aware of material nonpublic information. 

This latest Wall Street Journal article, “SEC Expands Probe on Executive Trades,” reports that the Securities and Exchange Commission has expanded its investigation into trading by corporate executives beyond the seven companies named in the first article in the series.  This latest article also refers to “shortcomings of the regulations” and “loopholes in the rules . . . known as a 10b5-1 plans.”  Whether or not you agree with the characterization of 10b5-1 plans as “loopholes” (I don’t), the Wall Street Journal’s recent reporting makes clear that trading by executives pursuant to 10b5-1 trading plans is likely to be subject to intense scrutiny in the coming months.  If you have not done so recently, now may be a very good time to review your company’s policies with respect to 10b5-1 trading plans and other insider trading policies to be sure they are adequate for today’s environment.  For some tips on what you may wish to consider in such a review, please see our December 2012/January 2013 Up to Date newsletter.

2 thoughts on “SEC Intensifies Scrutiny on Stock Sales by Insiders and 10b5-1 Plans”

  1. I did the first academic study that examines whether there are patterns of strategic trade within Rule 10b5-1. The evidence suggests that some insiders appear to avail themselves of opportunities (perhaps “loopholes”) within the Rule. There are many cases where they do not and I would agree with those who suggest that, in many cases, 10b5-1 provides a useful opportunity for insiders to credibly diversify their portfolios. I suspect it will be difficult for regulators to consider how to proceed on the Rule because one should likely not constrain credible diversification opportunities. However, there also seems to be reasonable and independently consistent academic and anecdotal (e.g., Jane Sasseen’s Business Week article in 2006 and recent WSJ reports) evidence to support some strategic use. How this unfolds should be quite interesting.

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