Tag: Rule 10b-5-1

Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs

Robert Parrino is Professor of Finance at the University of Texas at Austin. This post is based on an article by Professor Parrino; Eliezer Fich, Associate Professor of Finance at Drexel University; and Anh Tran, Senior Lecturer in Finance at City University London. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here), Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In October 2000, the SEC enacted Rule 10b5-1 which enables managers to reduce their exposure to allegations of trading on material non-public information by announcing pre-planned stock sales up to two years in advance. In our paper, Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs, which was recently made publicly available on SSRN, we examine the impact of Rule 10b5-1 on the gains that CEOs earn when they sell large blocks of stock.


Trading Plan Storm Clouds Move to the Boardroom

The following post comes to us from William H. Hinman, Jr. and Daniel N. Webb, partners in the Corporate Department at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Hinman and Mr. Webb.

The revived scrutiny of Rule 10b5-1 trading plans that began late last year has now expanded to the trading activities of corporate board members and affiliated large investors. Some recent press coverage has asserted that directors’ and investors’ use of 10b5-1 trading plans is “exotic” or beyond the intended scope of the rule—despite the fact that Rule 10b5-1 does not limit its use to corporate executives. Indeed, Rule 10b5-1 has consistently been used by directors and institutional investors since its adoption over a decade ago.

Nevertheless, with regulators and prosecutors continuing to take interest, corporate directors, investment funds and other insiders should consider best practices, such as those discussed below and previously here, in order to reduce the risk that scrutiny will result in liability or reputational damage.


Getting Back to Basics with Rule 10b5-1 Trading Plans

Brian V. Breheny is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. The following post is based on a Skadden memorandum by Mr. Breheny, Katherine D. Ashley, and Amber K. Hillard.

In late 2012, The Wall Street Journal published a number of articles that analyzed the trading practices of certain public company executives, in many cases under trading plans that were entered into in accordance with the affirmative defense provisions adopted by the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. [1] The trades examined in the Journal articles were called into question because they were sizable and were reported to have occurred shortly before company news updates. The articles also compared returns by executives who traded irregularly against those who followed a consistent pattern, and concluded that irregular trading resulted in greater gains. These articles have reignited interest in “best practices” for Rule 10b5-1 trading plans.

The Council of Institutional Investors (CII), a group of pension funds that oversees more than $3 trillion in assets, has picked up on the issue of potential misuse of Rule 10b5-1 trading plans and submitted a rulemaking petition to the SEC requesting interpretive guidance or amendments to Rule 10b5-1. [2] CII recommends that the SEC:


SEC Expands Probe into Rule 10b5-1 Plans

The following post comes to us from William H. Hinman, Jr. and Daniel N. Webb, partners in the Corporate Department at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Hinman and Mr. Webb.

Recent press stories have revived speculation that corporate insiders may be abusing rule 10b5-1 trading plans to reap unfair profits from inside knowledge of their companies. [1] The SEC is reported to have expanded its probe beyond trades highlighted by the press to cover a larger range of executive trading activity. [2] Other regulators have launched their own investigations, and investor groups have joined the conversation. [3]

In light of this widespread and intensifying scrutiny, companies and executives should consider techniques that make it easier to demonstrate compliance with the requirements of rule 10b5-1, such as:

  • having the first trade under a 10b5-1 plan take place after some reasonable “seasoning period” has passed from the time of adoption of the plan,
  • having each executive use only one 10b5-1 plan at a time, and
  • minimizing terminations and amendments of 10b5-1 plans.

The current controversy centers on trading by executives under 10b5-1 plans that, in hindsight, appears “well-timed.” Much like in the stock option pricing controversy from a few years ago, the press and some analysts have employed a retrospective statistical analysis of 10b5-1 plan trades to argue that insiders using the plans seem to be doing surprisingly well.


Questions Surrounding Share Repurchases

Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden, Arps memorandum by Phyllis Korff, Michael Zeidel, Stacy Kanter, Michael Schwartz, Donnie Clay, and Yossi Vebman; the full text, including footnotes, is available here.

In recent months, a number of companies have repurchased or announced plans to repurchase their shares. Management and boards of directors overseeing companies with significant cash stockpiles yet finding fewer mechanisms to boost earnings may soon need to decide whether or not a share repurchase is the most productive use of their cash. This post addresses the questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases.


What are the ways a company can repurchase its shares?

There are four principal ways a company can repurchase its shares, all of which are discussed below:

(1) open market purchases;

(2) issuer tender offers;

(3) privately-negotiated repurchases; and

(4) structural programs, including accelerated share repurchase programs.

Most share repurchases are effected over time through open market purchases. These are often referred to as share repurchase programs or plans.


The Best-Laid Plans of 10b5-1

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

In the world of insider trading, Rule 10b5-1 plans are a blessing and a curse: a blessing, because they enable executives to diversify their company holdings in a stable, law-abiding manner; a curse, because they tempt cheaters into hiding their malfeasance in a cloak of invisibility.

For years, 10b5-1 plans received little scrutiny. In private shareholder lawsuits, plaintiffs’ lawyers generally scrunched their eyes shut and tried to ignore them. The SEC, having created the structure, lost interest postpartum. As a result, aggressive insiders sometimes were able to use the plans in ways the framers never intended.

Recently, journalists have started to focus on the specifics of 10b5-1 plans, along with perceived abuses of them. [1] Those articles appear to have roused the SEC. So this may be a good time for counsel, both inside and outside, to revisit their existing plans. In this post, I address what I consider to be best practices under 10b5-1. This does not mean that contrary practices are improper or unlawful. Think of it, rather, as 10b5-1 for the risk averse.


Rule 10b5-1 Plans: What You Need to Know

The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk & Wardwell memorandum.

Rule 10b5-1 plans are back in the news. These plans are widely used by officers and directors of public companies to sell stock according to the parameters of the affirmative defense to illegal insider trading available under Rule 10b5-1, which was adopted by the SEC in 2000. Several recent Wall Street Journal articles suggest that some executives may have achieved above-market returns using the plans. [1] These articles are reported to have drawn the interest of federal prosecutors and the SEC enforcement staff. Rule 10b5-1 plans are no strangers to controversy. An academic study published in December 2006 found that, on average, trades under 10b5-1 plans outperformed the market by about 6% after six months. The resulting scrutiny did not lead to a significant uptick in insider-trading prosecutions, but did cause many companies to revisit their executives’ use of the plans. We suggested then that the potential for controversy was not by itself a reason to forego the benefits of employing 10b5-1 plans. We continue to believe that using properly designed plans is a good idea in many cases and can be at least as prudent as discretionary selling under normal insider-trading policies, with trading windows, blackouts and the like. Although regulators and the media may scrutinize trades made under 10b5-1 plans even when above board and done according to best practices, a well-thought-out and implemented 10b5-1 plan may help a company and its executives avoid or ultimately refute accusations of impropriety.

In light of the renewed focus on 10b5-1 plans, companies should review their 10b5-1 policies for conformity with current best practices. Below we provide an overview of 10b5-1 plans and some guidelines for their use.