10b5-1 Trading Plans and Material Non-Public Information

by Laura Anthony, Esq. on November 23, 2009 in Insider Trading, SEC Guidance, Securities Attorneys

As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.

Good Faith Practices When Establishing Trading Plans

In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial although all complained of trades were within a 10b5-1 trading plan. The SEC alleges that Mr. Mozila had material nonpublic information about Countrywide’s deteriorating business when he instituted his trading plans. In addition, the SEC found it especially relevant that Mr. Mozila instituted four separate plans in a three month period and that trading began almost immediately in each plan, all while the Company was failing, a fact which was not public knowledge.

Recent SEC Points of Guidance

The SEC’s staff recently provided new guidance about Rule 10b5-1 plans in its Compliance and Disclosure Interpretations. The following is a brief discussion of the key points in the guidance.

First, the SEC has made clear that delaying the commencement of sales until the release of nonpublic information may not legitimize the plan. The SEC takes the position that a person may not rely on a Rule 10b5-1 plan when he or she institutes a trading plan while aware of material non-public information, even if the plan is structured to delay all transactions until after the information becomes public.

Second, the Rule 10b5-1 plan defense to insider trading is only available for plans that are entered into in good faith and not as part of a “plan or scheme to evade” insider trading laws. The SEC has stated that this requirement will be assessed in light of all relevant facts, specifically including the time period between canceling one trading plan and establishing a new one. It is advised that insiders observe a “cooling off” period between terminating and establishing trading plans.

Finally, the new interpretations confirm that a corporate insider may transfer a long standing 10b5-1 plan to a new broker, if the broker that has been executing the plan’s transactions goes out of business, even if the insider knows of material nonpublic information at the time of transfer. Provided, however, the transfer must be timed to avoid any cancellation of transactions under the plan and the new broker must observe the plan’s original terms.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!


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