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Summary
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 Accepted
tool to enable trading in securities
by issuers and insiders
- Used by company insiders to sell securities
- Used by issuers repurchasing their own
securities
Can
provide an affirmative defense to Rule 10b-5 liability
- Per Rule 10b5-1(c)
- Despite the trader possessing material inside information
at time of
purchase or sale
- Without this defense, trader would be deemed
to
have acted on the inside information
Requires
a pre-existing contract, instructions or
written plan established in good
faith
- Cannot have any material
inside information at outset
- Cannot exercise control or influence over
subsequent execution of plan
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Developments - Enforcement
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SEC
targeting abuses in trading plans
- In speech on 10.10.07 at
2007 NASPP Annual Conference,
Linda Chatman Thomsen (SEC Enforcement Director) advised audience that Rule
10b5-1 plans are under increased scrutiny (e.g., disclosure practices, use of
multiple plans, trading practices)
- "The academic data shows that executives
who trade within a 10b5-1 plan outperform their peers who trade outside of such
a plan by nearly 6%; .... This raises the possibility that plans are being
abused in various ways to facilitate trading based on inside information. We're
looking at thishard. We want to make sure that people are not doing here what
they were doing with stock options. If executives are in fact trading on inside
information and using a plan for cover, they should expect the 'safe harbor' to
provide no defense."
- Reference to "academic data" is to a study by a
Stanford business school professor
- Found that trades under 10b5-1 plans beat the
market by more than 6 percent over a period of six months
- Alan Jagolinzer study
12.06.06
Do Insiders Trade Strategically within the SEC
Rule 10b5-1 Safe Harbor?
Criminal
conviction of Joseph Nacchio, former Qwest CEO
- Included charges over two trades made pursuant to
10b5-1 trading plans
- Scheduled to be sentenced in July 2007
Kenneth
Lay - Enron CEO
Commentary
- In striking similarity to the analysis that precipitated the option backdating cases, recent SEC attention is focused on reports of seemingly fortuitous returns generated by executives selling shares under automatic trading or Rule 10b5-1 Plans.
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Rule 10b5-1
SEC Releases
SEC FAQs
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Telephone
Manual 4th Supplement 2000 - 2001
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Issues
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 Exceptions
to affirmative defense
SEC_CODE_REF_0090001192884
- Could provide grounds for challenging the timing
of an amendment or a termination of a pre-existing plan
Accelerated
§ 16(a) reporting, per SOX Act § 403
Pension
fund blackout periods Reg BTR
Ban
on insider loans, per SOX Act § 402
- Could apply to cashless option exercise programs
- Which have often been included in
broker-sponsored 10b5-1 trading plans
- Officer / director regulation
Disclosure
requirements
- SEC proposed requiring Form 8-K disclosures about
Rule
10b5-1 trading plans
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Proposal release 33-8090 2002
- This proposal predated SOX Act
- Other 8-K proposals in this release were
superseded by SOX Act requirements
- Trading plans weren't added to list of specified
8-K items,
even though this list was expanded in 2004
- Many issuers still file Form 8-Ks about trading
plans
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Commentary
Sample Trading Plans - Individual seller
Sample Trading Plans - Issuer repurchase
Sample Disclosures
Related Topics
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