Insider Trading Update: SEC Rules Coming

The SEC is expected this fall to issue Rules restricting the use of so-called Rule 10b5-1 “Plans,” which are used as trading safe harbors by executives and directors of public companies to permit trading even while they may possess material inside information.

Briefly, a Plan provides a program for permitted trades, buy or sell, based on pre-determined metrics: date, number of shares, price or other triggering events.  The theory is that the Plan runs automatically and thus the trader is not by definition using inside information.

The SEC effort is being informed by the SEC’s Investor Advisory Committee, which Committee has just made recommendations to the Commission.  These include a cooling off period of four months before trading can begin under a Plan, and a ban on multiple Plans for one person.

It is not clear whether the SEC will attack the ability to de facto alter a Plan by aborting its operation in certain defined circumstances; such alteration can render a Plan subject to inside information manipulation.  Plans are on the SEC’s own list of rulemaking priorities, driven by the 3-2 Democratic majority.

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