On March 25, 2009, the SEC’s Division of Corporation Finance updated its Compliance and Disclosure Interpretations, or C&DIs, as they relate to Rule 10b5-1. In particular, the Division provided new guidance on canceling a 10b5-1 plan and creating a new 10b5-1 plan in its place, establishing a 10b5-1 plan while aware of material nonpublic information, transferring a 10b5-1 plan to a new broker to replace a broker that goes out of business, and company stock repurchase plans.

Relevant Rules

Rule 10b-5 of the Securities Exchange Act of 1934 prohibits any person from making misleading statements or otherwise defrauding or deceiving any person in connection with the purchase or sale of any security. Rule 10b5-1 of the Exchange Act extends the reach of Rule 10b-5 to prohibit any person from purchasing or selling any security while in possession of material nonpublic information about the issuer of that security if trading on the basis of this information would be a breach of trust or confidence owed by that person to the issuer, the shareholders of the issuer or the source of the information. This rule often can apply not only to the issuer itself, but also to officers and directors of the issuer, who are likely to obtain such information, receive compensation for their services in the form of the issuer’s securities and owe a duty of confidence to the issuer.

Rule 10b5-1(c) provides affirmative defenses against a claim that a person has unlawfully purchased or sold on the basis of material nonpublic information. One defense under Rule 10b5-1(c)(1) is that the purchases or sales were made pursuant to a lawfully adopted trading plan. A person has adopted a valid 10b5-1 plan if he or she, while not in possession of any material nonpublic information regarding the issuer, entered into a binding contract to purchase or sell the issuer’s securities, instructed another person to purchase or sell the issuer’s securities for his or her account, or adopted a written plan for trading securities. In each case, the 10b5-1 plan must specify, or include a written formula to determine, the amount of the securities to be traded and the price at which and the date on which the transaction should occur. The person establishing the 10b5-1 plan may not exercise any further influence over the transactions. So long as the person who established the 10b5-1 plan did not enter into a corresponding hedging transaction with respect to the securities traded and the person established the 10b5-1 plan in good faith and not as a part of a plan or scheme to avoid the prohibitions of Rule 10b5-1, any transactions made under the 10b5-1 plan will not be considered to have been made on the basis of material nonpublic information.

New SEC Guidance

Cancellation of Trading Plan Transaction/Creation of New Plan

The Division has previously stated that if a person cancels a transaction scheduled pursuant to a 10b5-1 plan, the cancellation would be considered an alteration or deviation from, and thus a termination of, the plan. To take advantage of the Rule 10b5-1(c)(1) defense after the cancellation, the person would have to adopt a new 10b5-1 plan, which could be identical to the original plan. Revised C&DI 120.17 confirms that terminating an existing 10b5-1 plan, even while aware of material nonpublic information, cannot, standing alone, be the basis of liability under Rule 10b-5. In new C&DI 120.19, however, the Division clarifies that, as with the establishment of the original 10b5-1 plan, the person must be acting in “good faith and not as part of a plan or scheme to evade” the prohibitions of Rule 10b5-1(c) when establishing the new plan. All facts and circumstances surrounding the creation of the new 10b5-1 plan after the termination of the original plan, including the period of time elapsed, would be relevant to this assessment. In light of this guidance, companies should consider including in their insider trading plans a required waiting period between the termination of an old 10b5-1 plan and the creation of a new plan.

No Possession of Material Nonpublic Information Requirement

In new C&DI 120.20, the Division states that the Rule 10b5-1(c)(1) affirmative defense is not available to a person who, while aware of material nonpublic information, established a trading plan that was structured so that transactions under the trading plan would not occur until after the information was made public. It has been common practice for insiders to include a waiting period before the first trade is executed under 10b5-1 plans, and some company insider trading policies specifically require this type of a “cooling-off” period. The Division’s new interpretation arguably eliminates the primary purpose of the waiting period between the entry into a 10b5-1 plan and the execution of the first transaction under the plan. Nonetheless, we expect many 10b5-1 plans to continue to include a cooling-off period, as it is not yet clear whether the courts will concur with the Division’s interpretation. Furthermore, a cooling-off period can allow an issuer to disclose a 10b5-1 plan to the market and have the market digest the disclosure before trading under the plan commences, possibly reducing the impact that trading under the plan may have on the issuer’s stock price.

Replacing a Broker that Goes Out of Business

In new C&DI 220.01, the Division offers guidance on the timely issue of a broker going out of business. According to the Division, if the broker who has been executing the sales of an existing 10b5-1 plan ceases operations, the 10b5-1 plan can be transferred to a new broker without the transfer being deemed a termination of the 10b5-1 plan, even if the person who established the 10b5-1 plan is aware of material nonpublic information at the time of the transfer. The new broker must execute the 10b5-1 plan on the same terms as the original broker, and the transfer must be timed so that no transaction scheduled under the original 10b5-1 plan is cancelled.

Company Repurchase Plans

Under previous interpretations, the Division has said that the Rule 10b5-1(c)(1) affirmative defense is available to an issuer of securities that adopts a repurchase plan, if the repurchase plan complies with the requirements of Rule 10b5-1(c)(1). In new C&DI 220.02, the Division clarifies that an issuer establishing a repurchase plan allowing for reductions to the amount of shares scheduled for automatic repurchase upon a repurchase of shares in a privately negotiated transaction cannot use the Rule 10b5-1(c)(1) affirmative defense. The Division stated that this arrangement “would give the issuer the potential to effectively modify the plan by doing the block trades while aware of material nonpublic information.”


This alert is meant to update you as to the recent developments in the SEC’s interpretations as they relate to Rule 10b5-1, and not as a comprehensive overview of the law related to Rule 10b5-1. For the Division’s full C&DIs relating to the Exchange Act, see http://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm.