Volume 29 Number 11, November 2015
INSIDER TRADING
Proactive Planning: A Guide to Benefits of Rule 10b5-1 Plans
Rule 10b5-1 Plans Rule 10b5-1 plans provide an affirmative
defense for companies and those presumed to be
Given the SEC’s increased focus on insider “insiders” (i.e., directors and officers) transact-
trading by executives and the complicated deter- ing in the relevant company’s securities. These
minations needed to decide if an executive or plans have become relatively commonplace, but
director has material non-public information, it from time to time, they have attracted attention,
is anticipated that the use of Rule 10b5-1 plans usually in response to media coverage of enforce-
will continue to grow. Companies and their execu- ment action by the SEC or reports of suspicious
tives carefully should consider the benefits, and the activity. The instances of public scrutiny have
shortfalls, of these plans. demonstrated the unraveling of perceived abusive
plan practices such as establishing multiple plans,
By Stuart Gelfond and Arielle L. Katzman making excessive modifications to plans or limiting
plan duration. Recently, the SEC has increased its
Stock is routinely an important part of pub- enforcement activity for violations of Section 16
lic company compensation, but insider trading reporting obligations, which demonstrates a
restrictions (e.g., blackout periods and exposure renewed focus on insider trading activity,1 a land-
to material non-public information (MNPI)), scape that Rule 10b5-1 plans also occupy.
can pose a significant challenge to selling cor-
porate stock. Rule 10b5-1 of the Securities and Rule 10b5-1 plans are passive investment
Exchange Commission (SEC) presents a valuable schemes (plan holders relinquish direct control
solution to such a dilemma, but there are nuances over transactions), which provide a mechanism
that need to be understood. Internal and external for companies and corporate insiders to purchase
legal counsel should be familiar with the terms and sell securities of such company when they
and application of the rule, which covers more have MNPI, by providing an affirmative defense
situations than the common scenario. to insider trading. Although attention generally
is focused on the selling aspect, the plans also
can cover purchases of securities. Furthermore,
Stuart Gelfond is a partner, and Arielle L. Katzman is an the protections of Rule 10b5-1 are not limited to
associate, at Fried, Frank, Harris, Shriver & Jacobson, LLP publicly-traded stocks. Private equity funds and
in New York, NY. other investment managers can benefit from Rule
Copyright 2015 CCH Incorporated. All rights reserved.
, 10b5-1, such as by using a Rule 10b5-1 plan to In order to understand how the plans function,
make future acquisitions or dispositions of com- it is also helpful to identify when they are not needed
pany equity or debt without violating insider as an affirmative defense. Trading when not aware
trading restrictions.2 Distressed debt investors of MNPI is always permissible; however it might
also may use Rule 10b5-1 plans to make future be easier to make the case that one was not aware
acquisitions or dispositions of company debt. of MNPI when a plan was established (versus at
the time of executing a transaction). Insider trad-
Companies can also benefit ing is always judged in hindsight. Events that do
not appear to be material at a particular instance
from having their insiders may result in stock price fluctuations. Moreover,
adopt their own plans. stock price may vary for other reasons but proving
the exact cause of the price variation can be com-
Rule 10b5-1 plans benefit both companies and plicated. Additionally, the 10b5-1 plan affirmative
their insiders by offering greater clarity and cer- defense is only necessary in response to a charge
tainty on how participants can plan and structure of trading on MNPI. Thus, the failure to estab-
securities transactions to avoid incurring liability. lish a viable 10b5-1 plan does not independently
They enable insiders to diversify their investment constitute an actionable claim; however, once a
opportunities without being circumscribed by claim is brought, the plan holder bears the legal
restricted trading windows or threats of liability. burden of establishing that trades pursuant to a
Establishing a plan eliminates the need to evalu- Rule 10b5-1 plan are protected. Furthermore, Rule
ate the materiality of any nonpublic informa- 10b5-1 plans are not appropriate for all situations.
tion that insiders may possess at each instance For example, they would not advance the invest-
a transaction is contemplated; rather, the mate- ment objectives of investors desiring tight control
riality determination only needs to be made at over finances or seeking to execute transactions on
the time of plan enactment. But it is important a short timeline.
to note that the time of entering into the plan
is not the only relevant moment as subsequent Rule 10b5-1
actions can impact the strength of the affirmative
defense, as discussed later in this article. In addi- Section 10(b) of the Securities Exchange Act
tion to benefitting directly when companies are of 1934 (Exchange Act) and the associated Rule
the plan participants, companies can also benefit 10b‐5 prohibit the employment of manipulative
from having their insiders adopt their own plans. and deceptive devices in the trading of securi-
When insiders adopt Rule 10b5-1 plans, compa- ties. Rule 10b5‐1 states that the manipulative and
nies have a reduced responsibility in scrutinizing deceptive devices prohibited under Section 10(b)
insider transactions and they can avoid entangle- and Rule 10b-5 include purchases and sales of
ment with insider trading controversies (because securities made “on the basis of” MNPI about
less controversies would be expected when insid- a security or issuer in breach of a duty of trust
ers execute trades under properly implemented or confidence that is owed to the issuer of that
plans). By supporting the adoption of Rule security or the shareholders of that issuer, or to
10b5-1 plans, companies can also align with the any other person who is the source of the MNPI.
investment objectives of their insiders. However, Furthermore, Rule 10b5-1 specifies that a purchase
some companies may disfavor its management’s or sale of a security is made on the basis of MNPI
adoption of Rule 10b5-1 plans because they when the person making the purchase or sale was
could decrease management’s alignment with “aware” of MNPI at the time the purchase or sale
the company by facilitating disposal of company was made. Thus, the SEC contends that “posses-
interests, particularly during difficult times. sion,” not “use,” of MNPI is sufficient to establish
INSIGHTS, Volume 29, Number 11, November 2015 2
Copyright 2015 CCH Incorporated. All rights reserved.
INSIDER TRADING
Proactive Planning: A Guide to Benefits of Rule 10b5-1 Plans
Rule 10b5-1 Plans Rule 10b5-1 plans provide an affirmative
defense for companies and those presumed to be
Given the SEC’s increased focus on insider “insiders” (i.e., directors and officers) transact-
trading by executives and the complicated deter- ing in the relevant company’s securities. These
minations needed to decide if an executive or plans have become relatively commonplace, but
director has material non-public information, it from time to time, they have attracted attention,
is anticipated that the use of Rule 10b5-1 plans usually in response to media coverage of enforce-
will continue to grow. Companies and their execu- ment action by the SEC or reports of suspicious
tives carefully should consider the benefits, and the activity. The instances of public scrutiny have
shortfalls, of these plans. demonstrated the unraveling of perceived abusive
plan practices such as establishing multiple plans,
By Stuart Gelfond and Arielle L. Katzman making excessive modifications to plans or limiting
plan duration. Recently, the SEC has increased its
Stock is routinely an important part of pub- enforcement activity for violations of Section 16
lic company compensation, but insider trading reporting obligations, which demonstrates a
restrictions (e.g., blackout periods and exposure renewed focus on insider trading activity,1 a land-
to material non-public information (MNPI)), scape that Rule 10b5-1 plans also occupy.
can pose a significant challenge to selling cor-
porate stock. Rule 10b5-1 of the Securities and Rule 10b5-1 plans are passive investment
Exchange Commission (SEC) presents a valuable schemes (plan holders relinquish direct control
solution to such a dilemma, but there are nuances over transactions), which provide a mechanism
that need to be understood. Internal and external for companies and corporate insiders to purchase
legal counsel should be familiar with the terms and sell securities of such company when they
and application of the rule, which covers more have MNPI, by providing an affirmative defense
situations than the common scenario. to insider trading. Although attention generally
is focused on the selling aspect, the plans also
can cover purchases of securities. Furthermore,
Stuart Gelfond is a partner, and Arielle L. Katzman is an the protections of Rule 10b5-1 are not limited to
associate, at Fried, Frank, Harris, Shriver & Jacobson, LLP publicly-traded stocks. Private equity funds and
in New York, NY. other investment managers can benefit from Rule
Copyright 2015 CCH Incorporated. All rights reserved.
, 10b5-1, such as by using a Rule 10b5-1 plan to In order to understand how the plans function,
make future acquisitions or dispositions of com- it is also helpful to identify when they are not needed
pany equity or debt without violating insider as an affirmative defense. Trading when not aware
trading restrictions.2 Distressed debt investors of MNPI is always permissible; however it might
also may use Rule 10b5-1 plans to make future be easier to make the case that one was not aware
acquisitions or dispositions of company debt. of MNPI when a plan was established (versus at
the time of executing a transaction). Insider trad-
Companies can also benefit ing is always judged in hindsight. Events that do
not appear to be material at a particular instance
from having their insiders may result in stock price fluctuations. Moreover,
adopt their own plans. stock price may vary for other reasons but proving
the exact cause of the price variation can be com-
Rule 10b5-1 plans benefit both companies and plicated. Additionally, the 10b5-1 plan affirmative
their insiders by offering greater clarity and cer- defense is only necessary in response to a charge
tainty on how participants can plan and structure of trading on MNPI. Thus, the failure to estab-
securities transactions to avoid incurring liability. lish a viable 10b5-1 plan does not independently
They enable insiders to diversify their investment constitute an actionable claim; however, once a
opportunities without being circumscribed by claim is brought, the plan holder bears the legal
restricted trading windows or threats of liability. burden of establishing that trades pursuant to a
Establishing a plan eliminates the need to evalu- Rule 10b5-1 plan are protected. Furthermore, Rule
ate the materiality of any nonpublic informa- 10b5-1 plans are not appropriate for all situations.
tion that insiders may possess at each instance For example, they would not advance the invest-
a transaction is contemplated; rather, the mate- ment objectives of investors desiring tight control
riality determination only needs to be made at over finances or seeking to execute transactions on
the time of plan enactment. But it is important a short timeline.
to note that the time of entering into the plan
is not the only relevant moment as subsequent Rule 10b5-1
actions can impact the strength of the affirmative
defense, as discussed later in this article. In addi- Section 10(b) of the Securities Exchange Act
tion to benefitting directly when companies are of 1934 (Exchange Act) and the associated Rule
the plan participants, companies can also benefit 10b‐5 prohibit the employment of manipulative
from having their insiders adopt their own plans. and deceptive devices in the trading of securi-
When insiders adopt Rule 10b5-1 plans, compa- ties. Rule 10b5‐1 states that the manipulative and
nies have a reduced responsibility in scrutinizing deceptive devices prohibited under Section 10(b)
insider transactions and they can avoid entangle- and Rule 10b-5 include purchases and sales of
ment with insider trading controversies (because securities made “on the basis of” MNPI about
less controversies would be expected when insid- a security or issuer in breach of a duty of trust
ers execute trades under properly implemented or confidence that is owed to the issuer of that
plans). By supporting the adoption of Rule security or the shareholders of that issuer, or to
10b5-1 plans, companies can also align with the any other person who is the source of the MNPI.
investment objectives of their insiders. However, Furthermore, Rule 10b5-1 specifies that a purchase
some companies may disfavor its management’s or sale of a security is made on the basis of MNPI
adoption of Rule 10b5-1 plans because they when the person making the purchase or sale was
could decrease management’s alignment with “aware” of MNPI at the time the purchase or sale
the company by facilitating disposal of company was made. Thus, the SEC contends that “posses-
interests, particularly during difficult times. sion,” not “use,” of MNPI is sufficient to establish
INSIGHTS, Volume 29, Number 11, November 2015 2
Copyright 2015 CCH Incorporated. All rights reserved.
