As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.

Good Faith Practices When Establishing Trading Plans

In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial although all complained of trades were within a 10b5-1 trading plan. The SEC alleges that Mr. Mozila had material nonpublic information about Countrywide’s deteriorating business when he instituted his trading plans. In addition, the SEC found it especially relevant that Mr. Mozila instituted four separate plans in a three month period and that trading began almost immediately in each plan, all while the Company was failing, a fact which was not public knowledge.

Recent SEC Points of Guidance

The SEC’s staff recently provided new guidance about Rule 10b5-1 plans in its Compliance and Disclosure Interpretations. The following is a brief discussion of the key points in the guidance.

First, the SEC has made clear that delaying the commencement of sales until the release of nonpublic information may not legitimize the plan. The SEC takes the position that a person may not rely on a Rule 10b5-1 plan when he or she institutes a trading plan while aware of material non-public information, even if the plan is structured to delay all transactions until after the information becomes public.

Second, the Rule 10b5-1 plan defense to insider trading is only available for plans that are entered into in good faith and not as part of a “plan or scheme to evade” insider trading laws. The SEC has stated that this requirement will be assessed in light of all relevant facts, specifically including the time period between canceling one trading plan and establishing a new one. It is advised that insiders observe a “cooling off” period between terminating and establishing trading plans.

Finally, the new interpretations confirm that a corporate insider may transfer a long standing 10b5-1 plan to a new broker, if the broker that has been executing the plan’s transactions goes out of business, even if the insider knows of material nonpublic information at the time of transfer. Provided, however, the transfer must be timed to avoid any cancellation of transactions under the plan and the new broker must observe the plan’s original terms.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Attorneys who accept stock as compensation from public companies need to be aware of a vigilant regarding their insider trading obligations. Before analyzing the dynamics of proper compliance in stock compensation scenarios, it is assumed that the stock received by the attorney was issued pursuant to a registration statement or valid exemption and is being resold also pursuant to a registration statement or valid exemption to registration.

Insider Trading

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Securities attorneys are in a unique position as they are often privy to material, non-public information regarding their public company clients.

The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or the Securities Exchange Act of 1934, as amended. The law of insider trading is otherwise defined by judicial opinions construing these rules. Rule 10b-5 is the general anti-fraud provision under the Exchange Act. Rule 10b5-1 provides that a person can be guilty of insider trading if at the time of the purchase or sale, they are aware of material non-public information. The Rule also sets forth several affirmative defenses or exceptions to liability. In particular, the rule permits persons to trade in certain specific circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract or instruction that was made in good faith.

Confidential Information

Rule 10b5-2 clarifies how the misappropriation theory applies to insider trading. In particular, when a person is aware of confidential information and owes a duty of trust or confidence as to such information, such person is deemed to have misappropriated the information when they make a purchase or sale of securities while aware of such information. For example, when a person has signed a confidentiality agreement or is a party to an attorney/client or other trust relationship.

Securities attorneys can violate both theories of insider trading. Attorneys need to be aware of their knowledge of insider information both at the time of purchase and the time of the sale of the securities. When an attorney accepts stock as compensation, they have “purchased” such stock. That is, the attorney has made an investment decision to accept stock instead of cash for their services. Clearly when an attorney sells such stock on the open market, they have engaged in a sale.

Attorneys should exercise great caution in making the decision to accept stock as compensation from public company clients. Attorneys should systems and safeguards already in place to ensure absolute compliance at the time of accepting stock and at the time of sale. Particular care should be paid to the existence of pending transactions, or any other material non-public information that could impact the share price of the stock at a later date.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!