Rule-making Petition Regarding 10b5-1 Plans

News Brief

By Cydney Posner

The Council of Institutional Investors is starting off the new year with a rule-making petition filed with the SEC regarding Rule 10b5-1 and the circumstances under which 10b5-1 plans may be amended or cancelled. You may remember that the potential for abuse of 10b5-1 plans has certainly surfaced as an issue in the past. (See News Briefs dated 3/9/07, 10/10/07, 6/4/09 and 11/28/12.) Given that CIC is a prominent voice in the corporate governance community, it will be interesting to see if the SEC takes action on the basis of this petition.

CIC's concern, stemming largely from the Wall Street Journal article discussed in this News Brief, is the "potential misuse" of 10b5-1 plans. In the cited article, the authors questioned the strikingly "fortuitous" results from trading under 10b5-1 plans. The petition notes that, as discussed in the WSJ article, "many executives at public companies have adopted practices with respect to Rule 10b5-1 plans that are inconsistent with the spirit, if not the letter of Rule 10b5-1." In particular, the petition highlights issues regarding adoption of plans while in possession of material nonpublic information (which should render the plans ineffective), frequent cancellations or amendments and trades occurring shortly after adoption.

Specifically, the petition requests that the SEC "consider pursuing interpretative guidance or amendments to Rule 10b5-1 that would require Rule 10b5-1 plans to adopt the following protocols and guidelines:

  • Companies and company insiders should only be permitted to adopt Rule 10b5-1 trading plans when they are permitted to buy or sell securities during company-adopted trading windows, which typically open after the announcement of the financial results from a recently completed fiscal quarter and close prior to the close of the next fiscal quarter;
  • Companies and company Insiders should be prohibited from adopting multiple, overlapping Rule 10b5-1 plans;
  • Rule 10b5-1 plans should be subject to a mandatory delay, preferably of three months or more, between the adoption of a Rule 10b5-1 plan and the execution of the first trade pursuant to such a plan; and
  • Companies and company insiders should not be allowed to make frequent modifications or cancellations of Rule 10b5-1 plans."

CIC also advocates adoption of CIC's own membership-approved governance policy, which requires the following:

"Executives should be required to sell stock through pre-announced 10b5-1 program sales or by providing a minimum 30-day advance notice of any stock sales. 10b5-1 program adoptions, amendments, terminations and transactions should be disclosed immediately, and boards of companies using 10b5-1 plans should: (1) adopt policies covering plan practices, (2) periodically monitor plan transactions and (3) ensure that company policies discuss plan use in the context of guidelines or requirements on equity hedging, holding and ownership."

While CIC views that suggestions as just a "good starting point," it believes that imposition of these protocols and policies will strengthen the capital markets, help restore public confidence, provide greater transparency and make "boards explicitly responsible for the oversight of Rule 10b5-1 plans[, which] will make them more responsive to long-term shareowners and more vigilant in their oversight responsibilities, while such oversight also will make insiders more thoughtful about the Rule 10b5-1 plans that they adopt."

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