Based on SEC enforcement actions, court cases, and public perceptions as largely reflected in proposed legislation, Morrison & Foerster suggests companies consider these best practices for Rule 10b5-1 plans (see the firm's "Rule 10b5-1 Plans: An Overview" here) to increase the likelihood that the plans will be deemed to have been established in good faith and thus will provide an affirmative defense against allegations of insider trading:
- Establishment of a Plan: Require company approval of any Rule 10b5‐1 plan, and permit plans to be established only during an open trading window to avoid the appearance of establishing a plan while in possession of material non‐public information and to bolster the good-faith element.
- Waiting Period: Impose a mandatory waiting period between the establishment of a plan and the date the initial trade is made.
- Modifications, Terminations, Suspensions: Disallow any plan modification, termination, or suspension other than during open trading windows. In the event of any modification, termination, or suspension, companies should impose a waiting period before trades can be reinstated under a plan.
- Multiple Plans: Prohibit insiders from adopting multiple overlapping Rule 10b5‐1 plans.
- Trades Outside of the Plan: Once a plan is established, limit transactions outside of the plan.
- Term of Plan: Consider minimum and maximum terms for plans, such as a minimum of six or 12 months and a maximum of two years. This will enable users to establish new plans over time while preventing the need for any voluntary modifications, terminations, or suspensions.
- Disclosure: Consider disclosing all events in the lifecycle of a Rule 10b5‐1 plan – adoption, modification, termination, or suspension – either through a press release or by a Form 8‐K.
- Form of Plan: Consider adopting a pre‐approved form of plan.
- One Broker: Consider requiring all insiders to use a pre‐selected broker.
- Trading Parameters: Consider prohibiting large sales at initiation of the plan or plans that give the implementing broker discretion on sales.
The firm also suggests companies conduct robust training on insider trading, disclosure policies and Rule 10b5-1 plans, and periodically review trading plans to ensure compliance.
Access additional information & resources on our Insider Trading/Section 16 page. This post first appeared in the weekly Society Alert!