The Securities and Exchange Commission has not reached a conclusion if there will be change to the Exchange Act Rule 10b5-1 stock trading plans, if it should amend the rule, or to provide additional guidance.
Given the SEC’s focus on insider trading, the Enforcement Division would “love to catch” a chief executive officer abusing an Exchange Act Rule 10b5-1 plan. Exchange Act Rule 10b5-1 stock trading programs allow corporate insiders to trade their companies’ securities without violating Exchange Act Rule 10b-5. Exchange Act Rule 10b5-1(c) provides an affirmative defense against insider trading liability if corporate executives demonstrate that the trades were made pursuant to an Exchange Act Rule 10b5-1 plan.
The SEC already regulates corporate inside stock transactions by baring short-swing profits. The Sarbanes-Oxley Act of 2002 also requires executives to report within two business days to the Commission if they buy or sell their companies stock.
The fact that the executives may fare better in their insider transactions than the average shareholder is not that surprising. Although Exchange Act Rule 10b5-1(c) provides an affirmative defense, it is not insurance. If a particular transaction raises the staff’s suspicions, the executive would have to show that his or her trade was legitimate.
In sum, Exchange Act Rule 10b5-1 plans are under the SEC microscope.