February 26, 2019 Practice Points

Continued Congressional Interest—Insider Trading and Rule 10b5-1 Trading Plans

With persistent suspicion around Rule 10b5-1 trading plans, Congress has found a target that both sides of the aisle can rally against.

By Wick Sollers, Dan Sale, Christina Kung, and Kelli Gulite

On January 28, 2019, the U.S. House of Representatives passed the Promoting Transparent Standards for Corporate Insiders Act in a sweeping 413–3 vote. Sponsored by Financial Services Committee Chair Maxine Waters and Ranking Member Patrick McHenry, the act would direct the U.S. Securities and Exchange Commission (SEC) to conduct a year-long study into whether Rule 10b5-1 should be amended to restrict the use of trading plans adopted under the rule. In general, Rule 10b5-1 allows corporate executives to enter into trading contracts, give instructions, or adopt plans for the future purchase or sale of their own company’s securities, at a time when they are not aware of material, nonpublic information about the company. If properly structured and implemented, Rule 10b5-1 trading plans can be an effective safe harbor against insider-trading liability.

Nonetheless, Rule 10b5-1 trading plans have been a source of controversy since the SEC adopted the rule in 2000, and they continue to be heavily litigated. In December, two senators called on the SEC and the Department of Justice to investigate Intel’s CEO, Brian Krzanich, for selling stock under a 10b5-1 plan shortly before the company announced a serious flaw in its processing chip. E*Trade, Lululemon, and Cigna Corp. have all faced shareholder lawsuits for sales made under 10b5-1 plans in the past few years. And shareholders recently brought a suit against CBS for stock sales its executives made under 10b5-1 plans shortly before public disclosure of sexual-harassment allegations against the company’s then-chairman and CEO, Leslie Moonves.

With this persistent suspicion around Rule 10b5-1 trading plans, Congress has found a target that both sides of the aisle can rally against. In fact, the Corporate Insiders Act was part of last Congress’s JOBS and Investor Confidence Act—a compilation of 32 individual pieces of legislation that passed the House but faltered in the Senate. Now a standalone bill, the Corporate Insiders Act again seeks to clarify the rules surrounding 10b5-1 plans and address the perceived opportunities for insiders to abuse this safe harbor. If the act is passed, the SEC would conduct a year-long study on whether Rule 10b5-1 should be amended to:

  • limit an insider’s ability to adopt a 10b5-1 trading plan to specific windows of time;
  • limit an insider’s ability to adopt multiple 10b5-1 trading plans;
  • establish a mandatory delay between adoption of the trading plan and execution of the first trade;
  • limit the frequency with which plans can be modified or cancelled;
  • require the filing of trading plan adoptions, modifications, terminations, and transactions with the SEC; and/or
  • require trading plans adopted by boards of issuers to meet additional requirements.

Although the fate of this bill remains uncertain, the current spotlight on 10b5-1 trading plans could be a sign of further attention to come from both the SEC and the plaintiffs securities bar. Companies, executives, and their counsel should carefully review their insider-trading policies and Rule 10b5-1 trading plans to ensure that they are employing best practices. Five best practices based on the SEC’s Compliance and Disclosure Interpretations are listed below:

  1. Adopt Rule 10b5-1 trading plans only during open-trading windows.
  2. Include a “cooling off” period of 30–60 days between the date of a plan’s adoption and execution of the first trade.
  3. Avoid using multiple, overlapping plans.
  4. Avoid short-term plans—terms of six months to two years are typical—and frequent changes to plans.
  5. Consider publicly disclosing the adoption, amendment, or termination of 10b5-1 trading plans.

Companies and executives should also consider tailoring their policies and plans to provide as much assurance as possible that those plans are adopted in good faith. Regardless of what happens with the act, suspicion over the trading activities of company insiders will likely never fade, so demonstrating effective compliance should be an ongoing priority.

Wick SollersDan Sale, Christina Kung, and Kelli Gulite are with King & Spalding in Washington, D.C.


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