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From Securities Regulation Daily, May 10, 2013

Council of Institutional Investors Urges SEC to Issue Guidance on Rule 10b5-1 Trading Plans

By Jim Hamilton, J.D., LL.M

In a letter to SEC Chair Mary Jo White, the Council of Institutional Investors urged the Commission to issue guidance, or adopt amendments under Exchange Act Rule 10b5-1, that would require Rule 10b5-1 trading plans to adopt a number of protocols. The CII said that companies and company insiders should only be permitted to adopt Rule 10b5-1 trading plans when they are permitted to buy or sell securities during company-adopted trading windows, which typically open after the announcement of the financial results from a recently completed fiscal quarter and close prior to the close of the next fiscal quarter.

Rule 10b5-1 Trading Plans. In addition, companies and company insiders should be prohibited from adopting multiple, overlapping Rule 10b5-1 plans. And, Rule 10b5-1 plans should be subject to mandatory delay, preferably of three months or more, between the adoption of a Rule 10b5-1 plan and the execution of the first trade pursuant to such a plan. In addition, companies and company insiders should not be allowed to make frequent modifications or cancellations of Rule 10b5-1 plans. Also, companies and insiders should disclose Rule 10b5-1 program adoptions, amendments, terminations and transactions.

Boards of companies that have adopted Rule 10b5-1 plans should adopt policies covering plan practices and periodically monitor plan transactions. The boards should ensure that company policies discuss plan use in the context of guidelines or requirements on equity hedging, holding and ownership.

The CII expressed its agreement with former SEC Commissioner Joseph Grundfest, who has noted that when the SEC established Rule 10b5-1 in the year 2000 issues and potential for abuse were identified and now, more than a dozen years later, and in light of experience and changing market conditions, the Commission should review Rule 10b5-1 and consider what additional guidance or amendments may be necessary.

The CII said that evidence continues to mount that many companies and company insiders have adopted practices that are inconsistent with the spirit, if not the letter of Rule 10b5-1, citing a recent Wall Street Journal article recounting instances in which company directors, who also operated investment firms, established Rule 10b5-1 plans that their firms then used as vehicles to pursue opaque, opportunistic trades in the company’s stock. The Council viewed these trades as yet another example of the breadth of current uses of Rule 10b5-1 plans that appear, at best, inherently unfair to market participants.

While expressing strong support for the SEC’s reported efforts to work with federal prosecutors in connection with several ongoing criminal investigations relating to alleged abuses of Rule 10b5-1 plans, the CII believes that a more effective and efficient long-term strategy is to combine robust and active enforcement with additional guidance or amendments to Rule 10b5-1 to address the variety and number of abuses that have been identified.

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