Insights

Mitigate risks by reviewing 10b5-1 policies

May 6, 2013

Management Liability/D&O

Insider trading is a terrible crime – and a terrible accusation as well. To avoid the latter, prudent insiders often use 10b5-1 trading plans.

These plans, which are intended to provide safe harbors against allegations of insider trading for their users, have certainly increased in popularity over time. According to The Wall Street Journal, the use of these plans by non-executive directors has leaped 55 percent since 2008. In theory, implementing these plans is a very pro-corporate governance move: the plans are adopted when an individual has no material non-public information, and trades are made automatically after that.

Unfortunately, it turns out that there are clever ways to abuse even 10b5-1 trading plans. Merely having a plan doesn’t mitigate all the risk involved with trading – abuse can still occur among insiders using 10b5-1 trading plans.

Since abuses can take place, should everyone stop using 10b5-1 trading plans? Clearly not. And not all plans are equally well designed to protect against even the appearance of the improper use of material non-public information.

The good news is that a lot can be done to structure plans to mitigate the risk of insiders being accused of plan misuse. These steps are discussed in detail in an article recently published by Woodruff Sawyer. Here are a few of them:

Ensure delay between disclosure, alterations and trading
It can be helpful if the implementation of a 10b5-1 plan is made public. Also, consider imposing at least a 60 day pause before any trading begins. Plan modifications should take place only rarely, if at all.

Determine stock broker requirements
Some companies may choose to have 10b5-1 trading plans administered by brokers who don’t manage an insider’s other trades. By ensuring a broker is relatively isolated, the trader will have less of an opportunity and fewer reasons to communicate with the broker, making it harder for an insider to be accused of having disclosed nonpublic information that could potentially impact trades.

Trade only within the plan
An insider who is trading pursuant to a 10b5-1 trading plan should stick with that. Making trades in a company’s stock outside a 10b5-1 plan after having implemented one is simply not helpful.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

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Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn