Publications

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The Division of Corporation Finance has updated its Exchange Act Rules Compliance and Disclosure Interpretations (C&DIs) to provide additional guidance on Rule 10b5-1.

These new C&DIs incorporate the Rule 10b5-1 interpretations previously addressed by the SEC staff in its Fourth Supplement to the Manual of Publicly Available Interpretations in May 2001. The C&DIs update some of the old interpretations that were divided into the following categories: Rule 144, Trusts, Options, Loans and Pledges, Written Trading Plans and 401(k) Plan Transactions.

The C&DIs also include some important new guidance:

• The cancellation of one or more plan transaction affects the availability of the Rule 10b5-1(c) defense. C&DI 120.19 explains that the cancellation of one or more plan transactions is considered an "alteration or deviation" from the plan which automatically terminates the plan. In addition, the C&DI notes that in establishing a new contract after terminating a prior plan, "all surrounding facts and circumstances, including the period of time between the cancellation of the old plan and the creation of the new plan" are relevant in determining the person's "good faith" intent.
• New C&DI 120.20 indicates that the Rule 10b5-1(c) affirmative defense is not available as an affirmative defense in instances where a person establishes a Rule 10b5-1 written trading plan while aware of material nonpublic information, even if the plan is structured so that the plan transactions will not begin until after the material nonpublic information is made public.
• New C&DI 220.01 provides timely guidance on what happens when a person enters into a written trading plan with a broker, when the broker subsequently goes out of business. This interpretation indicates that the initial trading plan is not considered cancelled if the plan is transferred to a new broker, so long as the timing of such transfer does not cancel any transaction scheduled under the initial plan and the new broker effects the sales in accordance with the terms of the initial plan. Interestingly, the interpretation does not require that the person not be aware of material nonpublic information at the time he or she transfers the initial plan to the new broker.
• New C&DI 220.02 provides additional guidance on the manner in which a company can effect a stock repurchase plan in accordance with Rule 10b5-1(c) and 10b-18.

The clarification by the SEC staff comes at a time of heightened and well-publicized scrutiny by the Enforcement Division of the SEC regarding trading activity in and around Rule 10b5-1 plans. For example, in a case filed March 4, 2009, against the former CEO, COO and CFO of a public company, the officers were alleged to have created 10b5-1 plans "within days" of participating in what the SEC called "misleading" conference calls with analysts about earnings information. According to the SEC's complaint, the officers created the 10b5-1 plans while in possession of material nonpublic information about the company’s earnings, and the newly created plans essentially guaranteed the immediate sale of company stock. As a result of settling the action with the SEC, each of the former officers disgorged all gains, paid civil penalties and agreed to be subject to a federal court injunction.

In light of the clarifications by the Division of Corporation Finance and the heightened scrutiny by the Enforcement Division, careful consideration should be given to the timing of the creation, alteration or suspension of any Rule 10b5-1 stock sale plans.

The C&DIs are available through this link.