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By Che Odom
June 21 — Very few boards are tasked with approving plans that allow directors, executives and other corporate insiders to legally trade in the company's stock, a new survey found.
The poll of 296 members by the Society of Corporate Secretaries & Governance Professionals found that only 1 percent of boards are asked to approve such arrangements, known as Rule 10b5-1 plans.
The survey—the results of which were shared exclusively with Bloomberg BNA before their public release—also found that only 4 percent of boards approve Rule 10b5-1 plan trading restrictions and 5 percent of boards receive a report on plan usage.
In one recent example, Big Lots Inc. said in a June 20 regulatory filing that Chief Executive Officer and President David J. Campisi established stock trading plans for himself and the company's chief financial officer. Although internal trading by either of the executives will be reported to the Securities and Exchange Commission, the company did not say that the transactions will be reported to its board.
Rule 10b5-1 stock trading programs allow directors and executives to trade their companies' securities without violating 1934 Securities Exchange Act Rule 10b5-1, which specifies when an individual illegally trades stock based on material nonpublic information. Rule 10b5-1(c) provides an affirmative defense against insider trading liability if corporate executives can show that the trades were made pursuant to a Rule 10b5-1 plan.
In recent years, regulators, investors and academics have voiced concerns that such arrangements are being abused. The Council of Institutional Investors has asked the SEC to issue rule amendments or guidance to rein in the transactions, including barring executives from adopting multiple, overlapping Rule 10b5-1 plans (11 CARE 526, 5/17/13).
Big Lots was investigated by the SEC in 2013 over stock trading by then-CEO Steve Fishman, but the agency closed the probe without bringing any action.
Since the SEC's adoption of Rule 10b5-1 in 2000, the plans have gained in popularity, with about half of the S&P 500 and a quarter of public companies as a whole using them, said Stephen Giove, a partner at Shearman & Sterling LLP and co-founder of its corporate governance advisory group.
Giove, who helped develop the survey, said that Rule 10b5-1 arrangements provide corporate insiders with flexibility for their stock trading and are not being abused.
Companies and boards should view the plans as “risk management” tools, which may be more appropriate for some companies, such as those in financial services, than others, Giove said.
“We all know boards have a lot to do,” he told Bloomberg BNA. “Put this on the list, decide how often you need to do a deep dive” into the details.
Society president and CEO Darla Stuckey told Bloomberg BNA in an e-mail that the purpose of the survey was to help determine benchmarks in the use of 10b5-1 plans and to develop best practices for boards and corporate secretaries.
The survey was designed by Shearman & Sterling and Morgan Stanley.
In other highlights, the survey found that 83 percent of the polled companies don't require employees to sell through a 10b5-1 plan. When plans are required for employees, it is typically for the C-suite and directors.
The survey also found that 30 percent of the companies have seen increases in their Rule 10b5-1 plans over the past two years, while 60 percent indicated the number of plans has remained static, and 10 percent said the number has shrunk.
As to trading restrictions, 99 percent of companies that have 10b5-1 plans allow some, if not all, employees to sell shares during blackout periods, during which the majority of employees are not allowed to make alterations to their retirement or investment plans.
Meanwhile, when it comes to illegal insider trading, the survey found that two-thirds of the respondents' boards review their companies' policies for preventing and detecting such misconduct.
“We were pleased to find that most boards are involved in” approval of such policies, Stuckey said.
To contact the reporter on this story: Che Odom in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Yin Wilczek at email@example.com
The survey results will soon be available at the society's website, http://www.governanceprofessionals.org/home.
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