Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP Getting Camera Ready: Refreshing Insider Trading Policies Ahead of Mandatory Public Disclosure | 42 Rule 10b5-1 Trading Plans and Non-Rule 10b5-1 Trading Arrangements As an exception to the general prohibition against trading while in possession of MNPI, insider trading policies have often permitted trading pursuant to a Rule 10b5-1 trading plan adopted in good faith during an open trading window, subject to a cooling- off period after plan adoption. In fact, the policies of many companies have encouraged or perhaps even required directors and officers to conduct their trading in company securities exclusively through Rule 10b5-1 trading plans to provide additional protection against allegations that individual trades were conspicuously well-timed. The SEC's recent changes to Rule 10b5-1 may cause companies to revisit prior recommendations or mandates for the use of Rule 10b5-1 trading plans by their directors and officers. In particular, the new cooling-off period of at least 90 days has made these plans less attractive. It exposes the insider to three months of market risk and makes it challenging to use these plans for near-term liquidity. Upon weighing the burden on the individual against the benefits to the company, requiring executives to use these plans may no longer seem like the right result. New disclosure rules for trading plans may also affect insider trading policies. Since earlier this year, domestic companies have been required to disclose, on a quarterly basis, whether their directors and officers adopted, terminated or modified any Rule 10b5-1 trading plan or "non-Rule 10b5-1 trading arrangement" 5 during the quarter. Against this backdrop, companies may want to expressly require directors and officers to obtain company approval before they adopt, terminate or modify Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements, even if they already prohibit modification or termination of Rule 10b5-1 plans during a blackout or when otherwise in possession of MNPI. This would help companies make required disclosures in a timely manner. Such approval rights would also provide companies additional control in managing the risk that the timing of plan adoption, modification or termination, even if it is in principle legal, could create a perception that insiders have timed company disclosures in a way that would benefit their trading activities or that they have otherwise taken advantage of their positions at the company to time their trades. Gifts In its adopting release for the new disclosure requirements, the SEC called out gifts as being among the dispositions of company securities where MNPI could be misused, and which should therefore be covered by a company's insider trading policy. According to the SEC, a donor violates the law if the donor gifts a security when the donor was aware of MNPI and knew or was reckless in not knowing that the donee, whether it is a family member or a charity, would sell the securities before that MNPI was disclosed. Companies will have to choose among a variety of potential approaches in their policies, ranging from treating a gift like a sale and subjecting it to all of the same blackouts and pre-approvals, to demanding that the donee agree not to sell the donated securities until the insider donor themselves could sell, to simply stating the law or the SEC's view of it. Shadow Trading Last year, the SEC prevailed in court with the argument that the law of insider trading prohibits not only trading in the securities of the company to which the inside information relates, but also "shadow trading," which is the use of information relating to one company to trade in securities of other "economically linked" firms, such as competitors or business partners. 6 The case involved the employee of an oncology- focused biotech company who allegedly traded the securities of another, but similar, company within minutes of learning that his own company would be acquired. The SEC alleged that given the limited number of mid-cap, oncology-focused biotech companies with commercial-stage drugs at the time, the acquisition of one such company would make the remaining ones more attractive investments and cause their stock prices to rise (which they did). The employee tried to have the SEC's case dismissed as impermissibly expanding the law, but the U.S. District Court for the Northern District of California held that the SEC's allegations were sufficient to sustain a charge of insider trading. In finding that by trading the employee had violated a duty to his employer, the court focused on the text of the employer's insider trading policy, which expressly prohibited using MNPI obtained in the course of employment to trade in "the securities of another publicly traded company." 7 5 "Non-Rule 10b5-1 trading arrangements" are effectively securities trading plans, entered into by directors or officers at a time when they did not have MNPI, which comply with the requirements of Rule 10b5-1 as in effect prior to the recent changes, but that do not meet all of the additional conditions newly required by the SEC, such as the cooling-off period of 90 to 120 days for directors and officers and 30 days for anyone else (other than the company itself) using a Rule 10b5-1 plan. 6 See Order Denying Mot. To Dismiss, ECF No. 26, No. 3:21-cv-6322- WHO (N.D. Cal. Jan. 14, 2022). 7 Id.