Not as Safe as You Thought: Rule 10b5-1 Trading Plans are not Immune to Insider Trading Claims

As a result of these allegations, the SEC found that the executives had violated Sections 17(a)(2) and (3) of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b) and 13(a) of the Exchange Act of 1934 (the “Exchange Act”), and Rules 10b-5 and 13a-1 thereunder. To settle the charges against them, the executives agreed to, among other things, pay civil penalties equaling $556,580 and $200,254, respectively.

Rule 10b5-1 trading plans are written plans for buying or selling company securities often used by insiders to establish an affirmative defense against insider trading liability. To be effective, a trading plan should comply with the requirements of Rule 10b5-1(c), including that the plan be adopted in good faith at a time when the insider does not have material nonpublic information. If done correctly, a Rule 10b5-1 trading plan can help insulate insiders from insider trading liability even if the insider acquires material nonpublic information after establishing the trading plan but before securities are bought or sold under the plan. This affirmative defense shifts the insider trading analysis as to whether the insider possessed material nonpublic information from the time the securities are purchased or sold to the time when the Rule 10b5-1 trading plan is put into place.

Insiders often rely on the existence of Rule 10b5-1 trading plans as a safe haven for trading company securities, assuming that the affirmative defense will protect them against any suspicions of insider trading. But, it is clear that the SEC can, and will, pursue insider trading charges where, as here, an insider possesses material nonpublic information at the time the Rule 10b5-1 trading plan is put into place. The SEC’s reliance on Section 17 of the Securities Act to enforce violations of Rule 10b5-1 is particularly noteworthy because, unlike the relevant provisions of the Exchange Act that have higher standards for liability, the standard for liability under Section 17 is negligence.

This settlement is a good reminder that, prior to establishing a Rule 10b5-1 trading plan, it is important to carefully consider whether an insider has any material nonpublic information.