Pension Funds Seek Limits on Executives’ Trading Of Company Stock

When an organization as large and sophisticated as the Council of Institutional Investors (“CII”) speaks, people should listen. And the CII – a nonprofit, nonpartisan association of public, corporate and union pension funds, and other employee benefit plans, foundations and endowments with combined assets that exceed $ 3 trillion – has just spoken about something that readers of the Financial Fraud Law Blog should find of particular interest: Rule10b5-1 stock sales.
 
In a letter to the Securities and Exchange Commission, the CII, pointing to a recent article in the Wall Street Journal by Susan Pulliam and Rob Barry entitled “Executives’ Good Luck in Trading Own Stock,” says that it is concerned that “many executives” at public companies have adopted practices with respect to Rule 10b5-1 plans that are “inconsistent with the spirit, if not the letter of Rule 10b5-1.”
 
As the CII observes, some company insiders may be adopting Rule 10b5-1 plans at a time that they are aware of material non-public information, which should preclude trades affected pursuant to such plans from being protected by Rule 10b5-1.
 
Similarly, the CII adds, some insiders cancel or amend plans after they have been adopted, which raises questions regarding whether such plans have been adopted in good faith, a prerequisite to a legitimate Rule 10b5-1.
 
The CII also points out that it appears that many plans adopted by insiders in reliance on Rule 10b5-1 allow trades to occur pursuant to such plans within mere days after the plan has been adopted, which also raises questions about whether such plans are made in good faith and whether the insider “could have been in possession of material non-public information at the time that the plans were adopted.”
 
In its letter to the SEC, the CII is requesting “clear guidelines regarding the circumstances in which a Rule 10b5-1 plan may be adopted, modified or cancelled, as well as enhanced transparency regarding the existence of such plans.” In particular, the CII is proposing that the SEC consider requiring that Rule 10b5-1 plans adopt the following protocols and guidelines:
 
• Companies and company insiders should only be permitted to adopt Rule 10b5-1 trading plans when they are permitted to buy or sell securities during company-adopted trading windows, which typically open after the announcement of the financial results from a recently completed fiscal quarter and close prior to the close of the next fiscal quarter;
 
• Companies and company insiders should be prohibited from adopting multiple, overlapping Rule 10b5-1 plans;
 
• Rule 10b5-1 plans should be subject to a mandatory delay, preferably of three months or more, between the adoption of a Rule 10b5-1 plan and the execution of the first trade pursuant to such a plan; and
 
• Companies and company insiders should not be allowed to make frequent modifications or cancellations of Rule 10b5-1 plans.
 
We will monitor this issue and provide updates to readers as developments occur.