Rule 10b5-l plans: put them to work: if properly designed, disclosed, and followed, 10b5-l plans can accomplish virtually any executive's investment goals, without being limited by insider-trading policies. So why aren't more executives using them?

• Author: Rains, Darryl P.
• Position: EXECUTIVE COMPENSATION

Insider trading restrictions are a constant headache for companies and their executives. Executives who receive a significant portion of their compensation in the form of options, restricted stock, or stock grants have a continual need to sell stock. Yet SEC regulations, company insider trading policies, and fears of allegations of insider trading keep many executives from properly diversifying their holdings.

Rule 10b5-l trading plans are an ideal solution to this problem. Properly drafted Rule 10b5-l plans allow executives the flexibility to sell stock without regard to limitations imposed by companies' insider trading policies and without violating SEC insider trading regulations. They also provide an affirmative defense to allegations of insider trading.

So why aren't more executives adopting Rule 10b5-l trading plans? We think there are three main reasons. First, some executives still don't really understand Rule 10b5-l plans. They don't fully appreciate how the plans work or the benefits they can provide. Second, many executives fear Rule 10b5-l plans might deprive them of desired flexibility, forcing them to sell stock at the wrong time or at an unfavorable price. And third, executives fear that sales made under these plans might generate negative publicity or send the wrong message to shareholders.

This article addresses all three concerns. We think properly prepared Rule 10b5-l trading plans can allow executives to diversify their holdings in a flexible and advantageous manner without negative consequences. We encourage executives to use Rule 10b5-l plans, and we encourage companies to adopt insider-trading policies that explicitly authorize such plans.

How Rule 10b5-l plans work

Rule 10b5-1 creates an affirmative defense to charges of insider trading by allowing executives to create a plan for future sales of stock. A Rule 10b5-1 plan protects a seller, so long as the plan is adopted at a time when the seller does not have inside information, from insider trading liability, even if he comes into possession of material nonpublic information before a sale actually occurs.

To be effective, Rule 10b5-l plans must be in writing and must meet three requirements. They must state the:

* Number of shares to be sold. The number can be specified as a number, as a percentage of the executive's holdings, or as the number of shares needed to produce a specific dollar amount of proceeds. Rule 10b5-l even allows the number of shares to be generated by an algorithm or computer program. Rule 10b5-l plans can provide for...