The SEC announced that it will be taking another look at 10b-5-1 plans in the wake of the Qwest insider-trading case. No one yet expects an overhaul of the safe-harbor rule which allowed companies and officers to set up “auto-pilot” buyback programs; however, closer scrutiny will affect treasurers who often oversee or have input into 10b5-1s for senior execs as well as for their company.
The 10b5-1s were set up under a 2000 SEC provision designed to allow companies and managements to avoid being unwittingly tripped up by insider-trading rules.
Once the plans are established, they are entirely hands off until they are terminated. Until the Qwest case, the focus on any potential abuse of 10b5-1s was on their termination date. Now, the SEC is looking at whether plans can be established with insider knowledge.
PLAYING IT SAFE
The popularity of 10b-5-1 plans surged in recent years for two key reasons:
1) Companies have been buying increasingly large chunks of their own stock with excess cash to reduce the dilution of employee stock option exercises as well as prop up stock prices with excess cash (see related story); and
2) Because of Sarbanes-Oxley and growing regulatory focus and restrictions around when companies are even allowed to buy back their shares, the auto-pilot nature of the plans has given companies—and senior executives—a method to execute the transactions without having to navigate black-out periods and other restrictive rules.
“We always know ‘something,’” one treasurer noted. And even the 10b-5-1s have not solved the problem for companies that run billion-dollar buyback plans on a regular basis. “We literally have entire quarters when we are unable to be in the market,” he added.
DEVELOPING BEST PRACTICES
The SEC’s scrutiny in itself is likely to affect the way companies and thus treasurers oversee and manage the plans. “In my view,” said one VP Treasurer, “this will lead to a series of recommendations for best practices that executives should
follow to ensure compliance.”
According to this treasurer, one fundamental best practice his company follows is allowing an executive (i.e., a board member, executive, or Section 16 Affiliate) to implement or make modifications to a 10b5-1 plan only when the Company’s trading window is open.
Here are some other best practices treasurers may want to consider to get ahead of the SEC’s possible questions:
- File a form 8-K. While the SEC does not require a filing when the program is established, companies should consider promoting public disclosure of the plan as soon as it is established.
- Allow a 30-day window. Waiting at least 30 days to start trading puts distance between the set up and any future unfolding events. It prevents even the appearance of insider knowledge, e.g., trading a week in advance of a major announcement.
- Minimize modifications. Once the plan is up and running, it should be minimally, if at all, modified. And if changes are made, again, trading should not resume for at least a month.
- Go small and steady. Finally, instead of large stock purchases, the 10b-5-1s should execute small trades on an ongoing basis or over time (most non-exec plans already do).