10b5-1 Insider Trading-1

The Time Has Come to Address Rule 10b5-1 Trading Plans and Their Shortcomings

by Alfred L. Fatale III, Lisa Strejlau

March 06, 2019

In the wake of the U.S. House of Representatives passing a bill that, if enacted, would direct the SEC to examine whether Rule 10b5-1 should be amended, of counsel Alfred Fatale III and law clerk Lisa Strejlau wrote in the New York Law Journal about what additional requirements would be needed to mitigate insider trading by corporate insiders.

Rule 10b5-1 was adopted by the SEC in 2000 to balance the need for corporate insiders to sell stock with the need to maintain integrity of equity markets by preventing insiders from trading on material non-public information ("MNPI").  The Rule allows insider to enter into a "plan" that specifies in advance the amounts, prices, and dates for the insider's stock to be sold.  However, as academic studies have shown that trades under Rule 10b5-1 outperform the market, the question is often asked whether an insider who sees financial success pursuant to a Rule 10b5-1 plan improperly used MNPI in designing, entering into, and amending the plan.  

Al and Lisa write that changes to Rule 10b5-1 will help alleviate litigation concerning improper trading despite the existence of Rule 10b5-1 trading plans.   

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