Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material, non-public information (MNPI) if it is pursuant to a contract, instruction, or plan that: (1) was entered into before the person became aware of the information; (2) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them) and; (3) does not subsequently allow the person to influence, how, when, or whether transactions will occur. This is known as the safe harbor defense.
Since these planned trades are set up in advance of subsequent trading, they allow insiders to buy and sell shares despite possessing MNPI at the time of the trade, and, consequently, they can serve as an affirmative defense in case of litigation. However, these plans are not foolproof. There is growing suspicion among enforcement authorities and financial and legal experts that the plans are being abused to obscure more informed insider trading.1
In light of these developments, executives and directors of public companies should pay renewed attention to the timing and substance of their trading plan activities and consult available guidance, including from the SEC’s Division of Corporation Finance. Particular care should be taken to avoid adopting or amending trading plans when in possession of MNPI.
1 See In re Countrywide Fin. Corp. Derivative Litig., 554 F. Supp. 2d 1044 (C.D. Cal. 2008).