The CEO of a publicly held company determines to enter into a personal Rule 10b5-1 trading plan (“Plan”).  Among other questions that arise in this circumstance is the question for this series of posts (the “Question”):  Should the CEO or the Company disclose, through a separate public announcement, the adoption of the Plan before any trading begins under the Plan?  Although it is easy to respond that no such disclosure is required by Rule 10b5-1, that does not necessarily answer the question.

In a number of articles, written since the beginning of 2013, that generally address Plans and their use and related practices (“Articles”),[1] knowledgeable lawyers at various top-tier securities-law firms have almost uniformly recommended disclosure, by a press release or the filing of a Form 8-K, of the adoption of a Plan.  Yet surveys and other anecdotal evidence suggest that such disclosure of an executive’s adoption of a Plan is not the prevailing practice.[2]  Because many of the Articles are not lengthy or focused particularly on the disclosure issue, they do not explain in any detail the reasons for the recommended disclosure; and there does not appear to be much written to explain or justify the practice of not disclosing.  To answer the Question, therefore, we should consider the reasons for not disclosing, and for disclosing, the adoption of a Plan before any trading begins under the Plan.

Before describing those reasons, however, some background is appropriate:

  • As recommended in the Articles, the disclosure of the adoption of a Plan is only the disclosure of the existence of the Plan and, perhaps, the total number of shares subject to it.  There is no recommendation that any of the principal terms or details of the Plan, such as its trading parameters or instructions, be disclosed.  Disclosure of the details of the Plan could expose the CEO to the possibility of market professionals anticipating or “front-running” the trading activity under the Plan.
  • A few SEC rules regarding the reporting of securities trading or ownership may require some disclosure regarding a Plan.  As the Plan is implemented, its existence would have to be disclosed in a Form 144 filing in connection with the CEO’s trading under the Plan, if that Form must be filed.  Also, it may be necessary to disclose the existence of the Plan in a Form 4 that reports trading that has been effected under the Plan, at least if the CEO relies on the permitted delay in filing that Form where the broker administering the Plan selected the date of the transaction under the Plan and then notified the CEO of the transaction for the Form 4. Further, if the CEO must file a Schedule 13D and amendments to it, it appears that the material terms of the Plan would have to be disclosed in, and a copy of the Plan would have to be filed as an exhibit to, the Schedule 13D.
  • As mentioned, Rule 10b5-1 does not include a requirement to make any disclosure of the adoption of a Plan.  But in 2002, the SEC proposed that the adoption, modification, or termination of a Plan of a director or executive officer be disclosed by the Company on a Form 8-K. The SEC’s expressed rationale for such disclosure – that investors might thereby obtain “potentially useful information as to management’s views of the performance and prospects of the company” – was, I believe, properly criticized as not really applicable to a Plan.  (The adoption of a Plan is frequently a reflection of the executive’s personal circumstances more than, or even irrespective of, his view of the company’s performance or prospects.)  The SEC’s proposal was not included in the significant revisions to Form 8-K adopted by the SEC in 2004 and appears to have been abandoned.  In late December 2012, a non-profit association of pension funds and other institutional investors, the Council of Institutional Investors (“CII”), publicly requested the SEC to amend or provide interpretative guidance regarding Rule 10b5-1 to address what CII thought were abuses of the Rule, and the requested amendments or guidance apparently included requiring separate disclosure of the adoption, modification, or termination of a Plan.  Although CII’s request generated publicity about the issue – and apparently prompted at least some of the Articles – it is not clear that any such amendment or guidance is currently contemplated by the SEC.

Accordingly, the CEO and the Company are left to answer the Question for themselves.  The reasons for separately disclosing or not disclosing the adoption of the Plan will be described in subsequent posts.