Programmed Stock Trading Plans Eyed

The National Law Journal recently published Programmed Stock Trading Plans Eyed, which highlights recent efforts by corporate boards to ensure that executives’ stock-trading plans meet the requirements of Rule 10b5-1. That Rule permits firms to trade the company’s stock for the benefit of insiders on the basis of a predetermined plan, but corporate directors are concerned that the SEC may be preparing to bring enforcement actions on the ground that executives made changes to their plans while in possession of inside information.

Those concerns, the piece explains, stem from recent allegations that Countrywide Financial executive Angelo Mozilo, who allegedly made changes to his 10b5-1 plan in the midst of recent mortgage-market turmoil. Those claims, combined with the recent conviction of former Quest CEO Joseph Nacchio, have led boards to seek counsel as to whether their executives have made changes to the plans that run afoul of the Rule, especially because the plans are generally prepared by outside brokerage houses rather than in-house counsel or members of the board.

The SEC’s attention, the article explains, has been drawn to the issue in part by a recent study by Alan Jagolinzer of Stanford Business School. That study, which can be downloaded here, found that insiders with 10b5-1 plans managed to generate abnormal forward-looking returns larger than their colleagues who did not have such plans. Following the release of the study, the Director of the SEC’s Division of Enforcement, Linda Chatman, commented that the Commission “wanted to make sure that people are not doing [with 10b5-1 plans] what they did with stock options.” To date, the article notes, the SEC has not yet brought an enforcement case based on changes to a Rule 10b5-1 plan, but boards of directors have begun the process of learning exactly how and when an executive can make changes to such plans.

The full article is available for download here.