The myStockOptions.com Blog last week featured a topic advisors are seeking to learn more about when they implement a financial plan for executive clients. myStockOptions.com has permitted us to repost their blog commentary below.

We have recommended the use of a Rule 10b5-1 trading plan if you often know important confidential information about your company and are thus at risk of being inconveniently restricted from stock transactions because of the rules against insider trading. A properly created prearranged 10b5-1 trading plan allows you to sell stock and can serve as an affirmative defense should any insider-trading charges arise.

However, it is important to note that Rule 10b5-1 trading plans have become controversial and that best practices for them are still evolving. These plans seem to be under special scrutiny by the SEC and the Department of Justice, as notably reported by many recent articles in The Wall Street Journal (see, for example, Insider-Trading Probe Trains Lens On Boards, by Susan Pulliam, Rob Barry, and Scott Patterson, Apr. 30). The regulatory searchlight on Rule 10b5-1 plans is also discussed in recent memos from some law firms, including Dechert and Pillsbury. These memos outline best practices, as does an FAQ on myStockOptions.com.

In its blog this week, TheCorporateCounsel.net published the results of its small informal survey on some best practices (Survey Results: Rule 10b5-1 Plan Practices). Among the findings of interest:

  • 31%      of companies "strongly encourage" insiders to sell shares only pursuant to a Rule 10b5-1 trading plan.
  • 91%      of companies review and approve each insider's Rule 10b5-1 trading plan.
  • 91%      of companies allow sales of shares through Rule 10b5-1 trading plans during blackout periods.
  • 80%      of companies require a waiting period between execution of Rule 10b5-1 trading plans and time of first sale. One month was the most popular period (44%).

Regardless of what companies voluntarily do, there is a growing sense that the SEC will release proposed rules or some type of guidelines on Rule 10b5-1 trading plans. The Council of Institutional Investors continues to request that the SEC tighten up the rules. It submitted a letter in May with suggestions for amendments or SEC interpretive guidance. For additional information on 10b5-1 plans, see the special section on them at myStockOptions.com.

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