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The Securities and Exchange Commission (SEC) promulgated rule 10b5-1(c) as one component of a broad insider trading reform package in 2000. The rule offers an affirmative defense from insider trading liability for corporate insiders who trade in their own firm’s shares pursuant to qualified trading plans (Trading Plans). Studies suggest, however, that contrary to their intended purpose, insiders are using these Trading Plans strategically to trade based on material nonpublic information. The SEC has been aware of the strategic use of Trading Plans for years but has not yet addressed the problem. Congress may, however, force the SEC’s hand with the Promoting Transparent Standards for Corporate Insiders Act (the Act). If signed into law, the Act would require the SEC to study a number of proposed amendments to 10b5-1 aimed at limiting the strategic use of Trading Plans, report to Congress, and then implement the study’s recommendations. There are, however, reasons for concern that the piecemeal changes proposed in the Act would do more harm than good.
Origin and Purpose of 10b5-1 Trading Plans
The crime of insider trading has never been defined by statute in the United States. The principal statutory authority for America’s insider trading enforcement regime is found in Securities Exchange Act of 1934 section 10(b), a general antifraud provision that prohibits the use or employment of “any manipulative or deceptive device or contrivance” in connection with the “purchase or sale of any security.” While section 10(b) was intended by Congress as a catchall provision, the Supreme Court has made it clear that “what it catches must be fraud,” which means, inter alia, that insider trading liability requires proof of scienter (a guilty mind). The SEC began recognizing Trading Plans as part of a broad insider trading reform package that looked, at least in part, to resolve a split among federal courts over this demand of scienter.
Before 2000, the SEC had pushed a “knowing possession” test, whereby insiders would incur liability if she traded while in knowing possession of material nonpublic information, even if that information played no motivational role in the trade (e.g., the insider traded solely to raise funds to pay for his or her child’s college tuition). Some courts, however, rejected the SEC’s preferred test in favor of a more demanding “use” test, whereby the SEC and prosecutors must prove that material nonpublic information actually played a causal role in the insider’s decision to trade to satisfy the requirement of scienter. To resolve this dispute, the SEC promulgated rule 10b5-1(b), which defines trading “on the basis of” material nonpublic information broadly as trading with mere “awareness” of such information—essentially codifying its preferred knowing possession test. Imposing liability for trading while merely aware of material nonpublic information, however, presented two related problems for the rulemakers. First, with mere awareness as the only test, the rule imposes liability even on insiders who can prove to a jury that their trades had nothing to do with their awareness of material nonpublic information (and were therefore presumably free of scienter), potentially exceeding the rulemakers’ statutory authority under section 10(b). Second, since senior management can rarely—if ever—be certain that it is not in possession of material nonpublic information, the broad awareness test may chill legitimate trading by insiders (e.g., for portfolio diversification), and this would negatively impact the value of firm shares as a form of executive compensation. To address these concerns, the SEC adopted 10b5-1(c) Trading Plans as an affirmative defense to insider trading liability at the same time that it promulgated its rule 10b5-1(b) awareness test.
To qualify, a Trading Plan must (1) be in writing; (2) detail the amount, price, and date of the securities to be purchased or sold or include a “written formula or algorithm” that determines the Plan transactions; (3) have been entered into while the insider was unaware of material nonpublic information; (4) not be subsequently influenced by any insider “over how, when, or whether to effect [particular Trading Plan] purchase or sales”; and, finally, (5) it must have been “entered into in good faith.” Moreover, a purchase or sale is not “pursuant” to a qualified Trading Plan if the trader “entered into or altered a corresponding or hedging transaction or position with respect to those securities” trading under the Plan.
Strategic Use of Trading Plans
It seems that at the time of adoption, the SEC was aware that an affirmative defense to insider trading for those who execute their transactions through valid Trading Plans would present risks. First, Trading Plans would make it harder to detect insiders who hide their illegal trades by executing them through invalid Trading Plans that were adopted based on material nonpublic information, and second, Trading Plans would provide a loophole in the law for others to strategically terminate otherwise valid Plans based on material nonpublic information. Such concerns were proven valid by a series of studies conducted soon after the rule’s adoption.
| # | Наименование новости | Тональность | Информативность | Дата публикации |
|---|---|---|---|---|
| 1 | СМИ: WhatsApp тестирует функцию записи видеосообщений | 0 | 0 | 14-06-2023 |