Transcript
Many companies have 10b5-1 plans for directors and officers, allowing them to sell stock on a preset schedule. The plans can be an affirmative defense to accusations of insider trading. The SEC is weighing several changes to the regulations governing these plans to prevent perceived abuses – changes that might include a minimum waiting (or cooling off) period between the creation of the plan and the first trade and a limit on the number of plans a single person is allowed.
Ann Beth Stebbins:The SEC announced early this year that they are looking at 10b5-1 plans and stock buybacks.
Raquel Fox: There’s been talk about changes to 10b5-1 plans for several years. But Kady Ashley, who is Skadden’s resident expert on 10b5-1 plans, says that there’s more momentum now than she’s ever seen in the past 20 years since this rule was enacted. Many observers have said that, even though the 10b5-1 plan provides clarity to insiders, they perceive that there may be some gaps in the rule and there’s a lot of bipartisan support for changes.
There are really four key areas where people are looking at changes. The first is with respect to a cooling off period. While a cooling off period, or a waiting period, is a common feature of many rule 10b5-1 plans, it’s not mandated under SEC rules to have one, and even when companies have a cooling off period, it varies. Chairman Jay Clayton, at the time, he recommended a four-month cooling off period and Gensler said he recommends four to six months, so we’ll see what happens there.
Ann Beth Stebbins: So that means when someone enters into a plan, they can’t trade under —there are no trades under the plan for four to six months?
Raquel Fox: Right, for four to six months.
Ann Beth Stebbins: So, it’s not like, you enter into a plan and the next day you make a trade?
Raquel Fox: Exactly. A lot of company’s cooling off period is around a month, so four to six months is significantly longer than probably what most companies have in place.
The second thing is termination. Chair Gensler expressed concerns about 10b5-1 plans that can be canceled, really any time, even when an individual or entity has material non-public information. He thinks that this kind of “games” the system, or he called it “upside down.”
The third this, again, is really SEC bread and butter, just requiring more public disclosure about the 10b5-1 plan. Gensler’s hinted at more public disclosure about the adoption of the plan, any time the plan is modified or terminated, and then just more information about the terms of the actual plan. Some people voluntarily already provide details about their 10b5-1 plans. But I would say the potential downside of more disclosure, and how much there is, is it may deter people from putting a plan in place to begin with.
Ann Beth Stebbins: Raquel, this is the disclosure of individual directors’ plans, not just entity level plans?
Raquel Fox: Not just entity level. So individual plans as well. We have to see what the SEC proposes, but this would certainly go down to likely disclosure at an individual level, specifically probably for key executives. Which, yeah, that would be a change for executives and directors.
So, the fourth and final thing is limiting the number of 10b5-1 plans that any one person can have in place. Now there’s no limit in place of how many plans a person can have. I think practitioners usually say two. One is likely more than enough for people and two would be more than enough for even, let’s see, a super senior person with lots of stuff going on. But rule 10b5-1 in its current form doesn’t allow multiple plans to cover the same shares of stock or to permit the cancellation of one plan to kind of influence the trading for shares from another plan.
But I must say that insiders must have legitimate reasons for having multiple plans. They might have one plan that’s just for tax liabilities, and then another plan that really helps them with diversification of their stock portfolio. So, having more than one plan, I would say, is not a harbinger of this is a bad thing but, this is definitely something that is on the SEC’s radar.
Ann Beth Stebbins: I saw a crazy statistic recently that 49% of 10b5-1 trading plans covered a single trade. I mean that’s just, I think, a red flag in front of a bull when it comes to the SEC thinking about and looking at potentially abusive practices with multiple trading plans.
Raquel Fox: I’m guessing that they probably saw those statistics, too, and are very aware of the one that you just mentioned. A 10b5-1 plan is not going to be an affirmative defense to insider trading if there’s an evidence or a lack of good faith even putting it in place. So, there may be good reasons why a plan just happened to cover one trade, but I’m sure that would be something that — I wouldn’t be surprised if the SEC came knocking to ask about.