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Monday
Dec312012

Council of Institutional Investors Recommends Changes to Rule 10b5-1

Rule 10b5-1 provides in part that:

[A] person's purchase or sale [of securities] is not “on the basis of” material nonpublic information if the person making the purchase or sale demonstrates that:
(A) Before becoming aware of the information, the person had:
(1) Entered into a binding contract to purchase or sell the security,
(2) Instructed another person to purchase or sell the security for the instructing person's account, or
(3) Adopted a written plan for trading securities;
Rule 10b5-1 trading plans have come under fire recently after the Wall Street Journal published an article  noting how much "good luck" corporate insiders have had in terms of generating profits by trading under these plans.  Now, the Council of Institutional Investors has sent a letter to the SEC recommending the following changes to the rule (HT: Financial Fraud Law Blog):
  • 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.

Whether the SEC adopts these recommendations or others, changes likely need to be made because the rule as currently constituted is apparently considered a bit of a joke when it comes to providing a legitimate outlet for insider trading because of how easily the plans are manipulated to allow for trading on the basis of material inside information by corporate insiders who have been given access to that information subject to the understanding that they would only use it for corporate purposes consistent with their fiduciary duties.

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