Is New Insider Trading Plan An Inroad Or Off-Ramp?

January 3, 2013

Seal of the U.S. Securities and Exchange Commi...

By letter to the Securities and Exchange Commission ("SEC") Chair dated December 28, 2012, the the Council of Institutional Investors ("CII") raised its concerns about the potential misuse of trading plans that are intended to satisfy the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. CII noted that the timing of the adoption of some new trading plans may be prompted, in part, by efforts to shield or protect insiders who had only recently come into possession of inside information. In essence, the implementation of such plans may be less a function of a sincere desire to achieve aspirational corporate governance standards and more a scramble to give the appearance of compliance - perhaps, at worst, even to provide an inside trader with the appearance of sanctioned conduct. More bluntly stated, these scrambles for implementing new trading rules may be little more than CYA.

In addition to raising concerns about the sincerity with which some new plans are drafted and implemented, CII was troubled by the frequency with which some insiders have cancelled or amended plans to which they were subject.  The inference clearly being that those intent on wrongdoing are prepared to tolerate the high-sounding and well-meaning corporate governance restrictions only to the point where such regulations do not inhibit the making of a buck or the avoidance of a loss.

On October 5, 2012, CII's membership approved the following corporate governance best practice provision:

5.15b Stock Sales: 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.

In its letter to the SEC, CII urges the federal regulator to require trading 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.

Bill Singer's Comment

When regulation works best, it is usually as the result of a partnership between the regulator and the regulated.  As such, I applaud CII's attempt to engender a meaningful debate and discussion about insider trading. Although bolstering compliance at the point-of-attack: at the companies themselves, is a commendable idea, it's everything that comes after that point which poses the challenge - and I'm not sure that CII's proposal puts either more teeth or more bite into current enforcement.  Once folks have made the pinky swear, how do you enforce the oath and how do you prosecute the violators?

Faced with far too many indications of insider trading, Wall Streets regulators are overwhelmed by the growing docket of cases, and the flowery press releases about each day's conviction or settlement only give the impression of flailing against insurmountable odds rather than the proof that these cops are making meaningful headway.  What the SEC and the Department of Justice would argue are inroads, I see as nothing more than off-ramps and detours.

Reluctantly, I refer you to my "Street Sweeper" article: " Elvis Presley Had It Right When It Came To Insider Trading" for my position on this thorny issue. Nonetheless, I wish CII well and urge them to press on.