The NASPP Blog

In a speech at the Corporate Counsel Institute in March of 2007 (here), Linda Chatman Thomsen of the SEC announced that the SEC would be focusing on finding instances of insider trading through the misuse of Rule 10b5-1 trading plans. Since then, the SEC has been looking for a good test case, and appears to have found it in the case against Countrywide CEO Angelo Mozilo . Even though Mr. Mozilo was trading under a Rule 10b5-1 trading plan, he apparently changed his trading plan to sell more shares more frequently in 2006 and 2007 prior to a drop in share price in early 2007. The SEC has been investigating whether or not those changes were made in response to insider information.

In order to qualify for the affirmative defense against insider trading afforded by Rule 10b5-1, individuals must enter into a trading plan or agreement prior to the becoming aware of material nonpublic information. The trading plan must specify (either by specific number or by formula) the number of shares to be bought or sold, the price at which the transaction should take place, and the date on which the transaction will take place. Not only must the plan be entered into at time when the insider is not in possession of material nonpublic information, it must not be changed on the basis of such information.

Companies need to be taking a close look at their own policies on trading plans. All Section 16 Insiders should be required to trade only within a plan (and only a single plan) that complies with the not only the SEC’s insider trading rules, but also the company’s own policy on trading plans. There should be a specific amount of time between the creation or termination of a trading plan and the first transaction (or terminated transaction), and I do not recommend that companies allow modification of plans at all.  It is not only cleaner for administrative purposes to terminate one plan and create an updated plan, it eliminates the appearance of ad-hoc changes to plans. Technically Rule 10b5-1 does not specifically say that terminating a plan in advance of a schedule trade is prohibited, but preventing an upcoming trade from taking place does give the appearance of impacting a market transaction on the basis of inside information. Likewise, there is no stipulation that the individual must have only one such trading plan. However, multiple trading plans can create an administrative burden not only to the company, but also to the broker who is handling the trading plans that may create a situation in which transactions take place incorrectly or are missed.

The SEC will be looking at patterns of trading activity for insiders and the timing of trading activity. If one of your Section16 insiders comes under investigation for insider trading, there will be a negative impact on your company as well as the individual. Your company should have a policy in place to help insiders, or any participant who may have access to material nonpublic information, to enter into a trading plan that will provide the best protection against the appearance of insider trading.

For detailed information on Rule 10b5-1 trading plans, be sure to check out the workshop “Your 10b5-1 Plans: Practical Issues” offered next Thursday at our 16th annual NASPP Conference in New Orleans.

If you haven’t already signed up to attend the conference, today is your last day to do so online.

I’ll see you in New Orleans!