Planning Relief for Insiders
Overshadowed by the new fair-disclosure rules that took effect in October were companion regulations that promise to let insiders sell shares without the worry of being accused of trading on material, nonpublic information.
With this new safe harbor, known as Rule 10b5-1, the Securities and Exchange Commission expects to protect executives from the appearance of illegal insider trading as long as they unload their company holdings according to a preset selling plan. "This is a very positive step," says David Priebe, a securities lawyer at Wilson Sonsini Goodrich & Rosati, in Palo Alto, Calif. "Most executives want to follow the rules, and the SEC has just made it easier."
Currently, most executives are permitted to sell stock during a "trading window," the period each quarter when a company is least likely to have material information that has not been released publicly. But this approach often results in trades being bunched, and it still raises suspicions about what the executives might know that investors do not. In contrast, the new rules permit insiders to sell shares on a regular basis throughout the year, and should insulate them from shareholder lawsuits and concerns about management bailing out.
The new trading plans are expected to come in different forms. Some may set a date and volume for regular sales; others may specify the proceeds the executive is looking to accumulate over a certain period of time. More sophisticated plans may tie the number of shares sold to a certain share-price range, or give a broker the discretion to sell a certain number of shares over the next year in amounts and at prices deemed appropriate.
One potential downside is that these plans may lock an executive into selling shares during a time when the stock is crashing. But fiddling with the trading formula would foster the notion that it is a sham. "You may call the whole thing off, but it would be harder to use the plan as a defense to insider-trading allegations," says Priebe. —Stephen Barr
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