Boston Chapter Meeting
Rule 10b5-1 Panel
Update and Best Practices
September 2015
Panelists
Thomas S. Brennan
Posternak, Blankstein & Lund LLP
James Fucigna
Executive Director
Morgan Stanley Wealth Management
Rich Baker, CEP
Vice President
Morgan Stanley Executive Financial Services
Mr. Brennan is a partner at Posternak Blankstein & Lund LLP, a 60 attorney firm
specializing in business law for early stage and middle market companies. Mr. Brennan
specializes in public company compliance issues, including corporate disclosure,
corporate governance, insider trading and reporting, annual meeting and proxy-related
issues, stock exchange listing requirements, and executive compensation. Mr. Brennan
also has extensive experience in mergers and acquisitions and intellectual property
licensing. Mr. Brennan is a graduate of The Johns Hopkins University, Fordham
University and the University of Maryland School of Law.
James Fucigna is an Executive Director within Morgan Stanley’s Corporate Equity
Solutions group. He leads a team of fourteen professionals that are dedicated to
providing wealth management and equity compensation services to public companies,
their employees and executives. James serves as the lead strategist on all wealth
management relationships and focuses on helping the executives of client companies
integrate their equity compensation into a customized, holistic wealth management
plan. James received a Bachelor of Arts degree in Economics with distinction from the
University of Connecticut.
As Corporate Relationship Manager for the Executive Financial Services group, Rich
manages the industry-leading(1) Rule 10b5-1 Trading Plan business for Private Wealth
Management, focusing on some of the firm’s most sensitive relationships with directors,
officers and issuers. Rich joined the firm in 2008 after completing his MBA at the Lubin
School of Business at Pace University where he graduated with the Finance Department
Award and was named the Birnbaum Scholar.
(1) Based on data is compiled by the Washington Service from Form 144 filings in the period from 2/1/2005 to 12/31/2014. The Washington Service tracks insider trade information filed
with the Securities & Exchange Commission. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be
guaranteed. Information contained herein is subject to change.
2
Table of Contents
Section 1
Overview of Rule 10b5-1 and 10b5-1 Trading Plans
Section 2
10b5-1 Market Data
Section 3
Key Issues to Consider
Section 4
Q&A
Please note that any opinions expressed by the speakers are solely their own and does not necessarily reflect those of Morgan Stanley Wealth Management
or its affiliates (“Morgan Stanley”). Morgan Stanley does not render legal or tax advice.
3
Overview of Rule 10b5-1 and
10b5-1 Trading Plans
4
SEC Rule 10b5-1 Background
• Adopted in 2000.
• Result of an acknowledgement by the SEC that senior executives and other
insiders are often in possession of material non-public information (“MNPI”),
and accordingly, it is difficult to trade their company stock without raising
insider trading issues.
• Rule 10b5-1 provides an affirmative defense from insider trading liability, even
when the insider is aware of MNPI on the date of the trade, if certain
requirements are met.
• Typically, this is done through the use of a 10b5-1 Trading Plan (“10b5-1 Plan”)
between the insider and his or her broker.
5
What is an Affirmative Defense?
Affirmative Defense
Safe Harbor
Litigation tool, not an insurance policy
Prove the safe harbor requirements and you
are proven not guilty
• Allows a defendant to raise a defense
• Does not guarantee that he or she will
win on that defense
Example – Rule 144:
• If you follow the rule, you will not even be
charged with selling unregistered
securities – the Rule defines an exemption,
and that’s the end of the inquiry
Under Rule 10b5-1
Even if you prove you have a trading plan, you could still:
• Be sued for insider trading
• Have to litigate an insider trading case
• Be found liable for insider trading
6
How and when a
plan is adopted and
executed is key
Key Requirements of a 10b5-1 Plan
• No possession of MNPI at time of adoption of the 10b5-1 Plan.
• Must be entered into in good faith and not in a scheme to defraud.
• Insider can not exert any subsequent influence over execution of the 10b5-1 Plan.
• The 10b5-1 Plan must:
– Specify amounts, prices and dates, or
– Provide a selling formula, or
– Grant discretion to the broker (not common).
• Should be part of issuer’s Insider Trading Policy.
7
Key Benefits of a 10b5-1 Plan
Benefits to Insider:
• Affirmative Defense: Offers protection
against potential claims of insider trading.
• Access to Public Markets: May allow
order/trade executions without regard to
corporate blackout periods.
• Diversification: Reduces the risk associated
with a concentrated equity position.
• Customization: Addresses the particular
monetization needs of each individual seller.
• Auto-pilot and Discipline: Disposes of stock
on a predictable and consistent basis;
encourages stability during volatile market
fluctuations.
8
Benefits to Issuer:
• Mitigates Signaling Issues: Sales by insiders
are carefully monitored and the market may
draw inferences from unplanned sales.
• Reduces Adverse Publicity/Legal Issues:
Accusations of insider trading can be costly
and time-consuming for issuers to investigate,
defend and address.
• Facilitates Timely SEC Reporting: Allows
advance notice of trades so that Form 4
reports can be planned.
• Predictability: Prevents surprises among
executive team as to a given insider’s sales.
10b5-1 Market Data
9
10b5-1 Growth – All Public Companies
Number of public companies with a 10b5-1 plan filing, 2004 - 2014
Year
Total Public
Companies with
Form 4 Filings
# of Companies (1) with 10b5-1 Filings
2014
5,628
1,407
2013
5,706
1,322
2012
5,785
1,325
2011
6,050
1,263
2010
6,330
1,182
2009
6,466
1,001
2008
7,152
1,062
2007
7,601
1,347
2006
7,464
1,258
2005
7,582
1,114
Source: The above numbers are compiled by the Washington Service from Form 4 filings in the period listed.
2004
7,655
878
2003
7,227
468
2002
6,607
6
10b5-1 Penetration (%)
25%
23%
23%
21%
19%
15%
15%
18%
17%
15%
11%
6%
0%
Source: The Washington Service tracks insider trade information filed with the Securities and Exchange Commission. The above numbers are compiled by the Washington Service from
Form 4 filings in the periods listed. Information contained herein was obtained from sources believed reliable, but the accuracy and completeness thereof cannot be guaranteed.
Information contained herein is subject to change. October 15, 2015
Reprinted with the permission of The Washington Service. (301) 913-5100 www.washingtonservice.com
10
10b5-1 Growth – S&P 500
Number of S&P 500 companies with a 10b5-1 plan filing, 2004 - 2014
Year
Total S&P 500
Companies1
# of S&P 500 Companies
with Form 4 filings2
# of S&P 500 Companies
with 10b5-1 Filings3
10b5-1
Penetration (%)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
500
500
500
500
500
500
500
500
500
500
500
499
499
498
498
498
498
498
496
495
494
494
272
256
260
242
220
197
180
214
194
175
131
54%
51%
52%
48%
44%
39%
36%
43%
39%
35%
26%
Source: The Washington Service tracks insider trade information filed with the Securities and Exchange Commission. The above numbers are compiled by the Washington Service from
Form 4 filings in the periods listed. Information contained herein was obtained from sources believed reliable, but the accuracy and completeness thereof cannot be guaranteed.
Information contained herein is subject to change. October 15, 2015
Reprinted with the permission of The Washington Service. (301) 913-5100 www.washingtonservice.com
1. Based on companies in the S&P 500 Index as of December 31st of each reporting year.
2. Number of S&P 500 companies with one or more Form 4s filed during the reporting year.
3. Number of S&P 500 companies with one or more 10b5-1 trades filed during the reporting year.
11
10b5-1 Plan Growth
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
All numbers in Millions
Gross Value
1,800
1,500
1,200
900
600
300
0
Shares
Value
Rule 144 Filing Value and Share Amounts for 10b5-1 Plans
Shares
Reprinted with the permission of Washington Service. (301)-913-5100—www.washingtonservice.com
The Washington Service tracks insider trade information filed with the Securities & Exchange Commission. The above data is compiled by the Washington Service from Form 144 filings
in the period from 2/1/2005 to 12/31/2014. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed.
Information contained herein is subject to change.
12
2005 – 2014 Rule 10b5-1 Market Share
League Table
•
Morgan Stanley’s
experience, service
focus and business
model has translated
into a #1 (1) rank for
2005 – 2014 based on
total notional value of
shares filed on Form
144 pursuant to Rule
10b5-1 trading plans
($Bn)
50.0
48.4
40.0
32.7
30.0
20.0
17.2
14.7
14.3
12.0
9.4
10.0
Value
($Bn)
Total
(%)
Top 10 Total
168.3
83.83
Total
200.7
100.00
6.8
6.8
Credit
Suisse
Group
Allen & Co.
Charles
Schwab
Corp.
E-Trade
Financial
Corporation
4.71
3.40
3.39
2.81
5.6
0.0
Morgan
Stanley (1)
Total (%)
24.14
Bank of
America
JPMorgan
Chase & Co.
UBS AG
16.30
8.61
7.33
Fidelity
Goldman
Investments
Sachs
Group Inc.
7.14
6.02
Reprinted with the permission of Washington Service. (301)-913-5100—www.washingtonservice.com
(1) The Washington Service tracks insider trade information filed with the Securities & Exchange Commission. The above data is compiled by the Washington Service from Form 144
filings in the period from 2/1/2005 to 12/31/2014. Data from the period 2/1/2005 to 5/31/2009 reflects the formerly separate 10b5-1 Plan businesses of the Global Wealth
Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. The above data
also includes transactions from Morgan Stanley & Co. LLC. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof
cannot be guaranteed. Information contained herein is subject to change.
13
Key Issues to Consider
14
Company Obligations in 10b5-1 Plans
Currently there is no requirement for a company to approve 10b5-1 Plans or have policies covering 10b5-1
Plans.
Current Practice: Nearly all companies are involved with their insiders’ 10b5-1 Plans to some extent, as
many brokers will require the company to acknowledge or represent certain facts about the 10b5-1 Plan.
Company policies, however, may vary greatly and some companies may not address 10b5-1 Plans in their
insider trading policies.
Best Practice: Companies should establish policies for 10b5-1 Plans for the protection of the insider and
the company, including a requirement that the plan is cleared through their legal department.
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
15
Disclosure of 10b5-1 Plans
Rule 10b5-1 does not require either the company or the insider to publicly disclose the adoption of a
10b5-1 plan.
Current Practice: Companies generally do not disclose, although some companies disclose the adoption
of a 10b5-1 Plan by the most senior officer(s) through a Form 8-K. Upon the first trade, insiders often
disclose the existence of a 10b5-1 Plan on the Form 4 filing and there is required disclosure on Form 144,
where applicable, although the disclosure on each form is limited.
Best Practice: In the near-term, do not see company disclosure at a 10b5-1 Plan’s adoption as a
developing market practice. The SEC had previously considered requiring insider disclosure upon
adoption of a 10b5-1 Plan and this disclosure may be a future SEC requirement:
• Would support and could be used as evidence of the insider’s good faith.
• Promotes transparency, may also be advantageous for investor relations to explain why the trades are
taking place.
• Footnote disclosure on Form 4 is recommended
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
16
The Waiting Period
•
Rule 10b5-1 does not impose any minimum cooling-off period between the date that the insider
adopts the 10b5-1 Plan and the first possible trade date.
•
Cooling-off period supports the position that any MNPI the insider may have had at the time he or
she adopted the 10b5-1 Plan has either become stale or been disclosed.
Current Practice: Some cooling-off period, as little as a few days (although rare) to three months, could
be dependent on the company policy.
Best Practice: Council of Institutional Investors suggested three months, more realistic would be a
couple of weeks at a minimum, but could depend on other factors, including potential possession of
MNPI, length of plan or execution details (e.g., a plan established to execute market orders during a twoyear period will not need as long a waiting period as a plan that will likely be completed quickly due to
lower priced limit orders or a shorter term 10b5-1 Plan).
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
17
Amending or Terminating an Established 10b5-1 Plan
• Likely to cause suspicion and increase risk that the affirmative defense will not be available, especially
if the amendment or termination works out favorably to the insider.
• Does not eliminate the affirmative defense, as long as the amendment or termination was made at a
time when the insider was not in possession of MNPI and the insider was acting in “good faith.”
• SEC’s Compliance and Disclosure Interpretations note that the act of terminating does not
automatically result in liability under Section 10b and Rule 10b-5, but calls into question “good faith.”
Current Practice: Permitted although the company or the broker may inquire about the details.
Best Practice:
• Companies should discourage amendments or terminations to the extent possible.
• Company’s policies may, formally or informally, address amendment or termination, including
appropriate waiting periods for entering into a new plan, or imposing limits on the frequency of
amendments and other restrictions (e.g., only during open window periods).
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
18
Trades Outside of a 10b5-1 Plan
• Rule 10b5-1 does not prohibit the insider from trading outside of an established 10b5-1 Plan.
• Trades outside a plan are clearly not protected by Rule 10b5-1.
• Cannot trade securities covered by plan or engage in hedging or corresponding transactions.
Current Practice: Permitted by some companies, and addressed by SEC interpretations. Several of the
problematic trades highlighted in the WSJ articles occurred outside plans.
Best Practice: Never permit if the outside transaction would reduce or eliminate the economic
consequences of the trades in the plan.
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
19
Other Topics
Other Frequent Topics of Discussion
• Requirement or encouragement?
• Defining population eligible or required to use 10b5-1 Plans
• Captive or preferred broker
• Optics
– Selling after IPO lockup expiration
– Frequency of filings
– Individual plan design
• Tax sales in closed windows
• IPOs
– Timing of initial plan adoption
– Participant education
• Morgan Stanley / NASPP Survey Results to be released at NASPP National Conference
Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley
20
Q&A
21
Disclaimers
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a U.S. registered broker-dealer. These
materials are solely for informational use based upon publicly available information believed to be reliable, and may change without
notice.
Morgan Stanley Wealth Management and its affiliates (“Morgan Stanley”) shall not in any way be liable for claims relating to them, and
make no express or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in,
or omissions from them. Morgan Stanley has no obligation to tell you when opinions or information in these material changes.
Please note that any opinions expressed by the speaker are solely their own and do not necessarily reflect those of Morgan Stanley.
Morgan Stanley does not render legal or tax advice.
10b5-1 Trading Plans – Important Considerations
Clients executing a 10b5-1 Plan should keep the following important considerations in mind: (1) 10b5-1 Plans should be approved by the
compliance officer or general counsel of the company; (2) A 10b5-1 Plan may require a cessation of trading activities at times when
lockups may be necessary to the company (i.e. secondary offerings, pooling transactions, etc.); (3) A 10b5-1 Plan does not generally alter
the regulatory requirements (e.g. Rule 144, Section 16, Section 13D) that may otherwise be applicable; (4) 10b5-1 Plans that are
modified or terminated early may weaken or lose the benefit of the affirmative defense; (5) Public disclosure of 10b5-1 Plans (e.g., via
press release) may be appropriate for some insiders; (6) Most companies will permit 10b5-1 Plans to be implemented only during open
window periods; and (7) Morgan Stanley Smith Barney, as well as some issuers, imposes a mandatory waiting period between the
execution of the 10b5-1 Plan and the first sale pursuant to the 10b5-1 Plan.
© 2015 Morgan Stanley Smith Barney LLC. Member SIPC.
22
CRC #1299292, Date of Use 9/17/2015