Caution at the 10b5-1 Intersection: Buyback Plans and Insider Sales

# Capital Markets

# Risk Management

Companies using 10b5-1 plans for buybacks should keep informed about possible SEC rule changes aimed at executive stock sales.

The treasurer of a mega-cap tech company told peers at a recent NeuGroup meeting that he’s been hearing more “noise with regards to the SEC tightening up controls around repurchase windows” from the company’s legal team. He added, “We’re going to keep a close eye on it. We may tighten up our rules.”

The very same day—Sept. 9—SEC Chairman Gary Gensler thanked members of the SEC’s Investor Advisory Committee (IAC) that formulated recommendations on 10b5-1 plans—which are used by both corporate executives selling shares and corporates doing share repurchases.

“These include a mandatory cooling off period between adoption of a plan and the first trades under the plan; prohibitions against an insider having multiple plans at the same time; and enhanced public disclosure of 10b5-1 plans,” Mr. Gensler said.

Footnotes and intersections. The first sentence of the recommendations has this somewhat intriguing footnote: “The IAC did not consider issuer share buybacks in its deliberations on this recommendation and believes that any changes to the regulation of these programs should be addressed separately.”

But attorneys contacted by NeuGroup Insights said corporates that engage in buybacks should not read too much into the IAC’s decision not to include buybacks in this set of recommendations on 10b5-1 plans.

Jonathan Richman , a partner at Proskauer, noted that “if the Commission were to amend Rule 10b5-1 without expressly excluding buyback plans, the amendments would likely apply to those plans as well to individual plans. So the fact that the current recommendations do not mention buyback plans does not necessarily mean they would not be covered by an amended Rule.”

Matt Rossi , a partner at Vedder Price, who formerly worked at the SEC, said, “I don’t think based on that footnote that it’s wise to disregard what the former Commission chair and the current chair have said about an intersection or interplay between 10b5-1 plans and buybacks.”

Critical context. Indeed, the IAC’s recommendations, aimed at further curbing insider trading, followed comments Mr. Gensler made in June when announcing he had asked staff for suggestions to “freshen up Rule 10b5-1.” His remarks included this sentence:

“In addition, I’ve asked staff to consider other potential reforms to the rule, including the intersection with share buybacks.”

His predecessor, Jay Clayton, had also called attention to share repurchase programs, recommending that companies use “additional hygiene” and implement “policies and procedures to ensure that when [buybacks] are put in place or restarted, the company does not have material nonpublic information (MNPI).”

Earlier, Mr. Clayton had written , “In addition to fostering an environment of compliance…around trading by senior executives and board members, boards of directors, and their compensation committees, should consider the interplay between company share repurchase plans and such trading, including when approving Rule 10b5-1 plans.”

Mr. Rossi observed, “Clearly, there’s some concern there about a corporation buying stock back from its own shareholders when it knows there’s a potential event coming up that may impact the share price but obviously the shareholders don’t have such knowledge.”

It’s not just about insider trading. Another sign that corporates need to make sure they have the proper controls in place around buybacks emerged last fall when the SEC settled charges against the refiner Andeavor, “ for controls violations relating to a stock buyback plan it implemented while it was in discussions to be acquired by Marathon Petroleum Corp. in 2018.”

Andeavor agreed to pay a $20 million penalty to settle the charges.

As Mr. Rossi noted, the SEC charges against Andeavor were based on the company’s failure to follow its own policies and procedures related to stock buybacks—not insider trading.

For the SEC, “if a company fails to follow its own compliance procedures with respect to protection of material nonpublic information and share repurchase programs, nothing is easier than simply bringing a policies and procedures case,” Mr. Rossi said.

Best practices. In July, Mr. Rossi wrote that Mr. Gensler’s initial request for recommendations meant that, “Issuers and corporate insiders should consider now what changes can be made proactively to bring their Rule 10b5-1 plans in line with industry best practices.” He identified two critical areas:

“Companies should make sure they are not in possession of material nonpublic information with respect to things like M&A transactions before they start implementing buybacks, unless the buybacks are done pursuant to a Rule 10b5-1 plan adopted before the company was in possession of that MNPI. That’s certainly something that’s going to attract Commission attention,” he said this week.

“Companies should be similarly vigilant to prohibit senior executives and directors from adopting Rule 10b5-1 sales plans at times when such individuals may possess material nonpublic information concerning the issuer’s stock repurchase plans,” he added.