Tag Archive: Insider trading

Investors Recommend Board Oversight of Trading Plans

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New oversight responsibilities could be in store for directors. Although 10b5-1 trading plans have existed since 2000, a confluence of events—including several Wall Street Journal articles and a letter from the Council of Institutional Investors (CII) to the Securities and Exchange Commission (SEC)—has recently placed these plans in the regulatory spotlight. As noted in NACD Directors Daily this week, the SEC and federal prosecutors have opened investigations into a number of insider transactions, many centered on 10b5-1 trading plans.

Rule 10b5-1 plans were created to deter corporate insiders from trading while in possession of material, non-public information. An executive must enter such a plan when not in possession of insider information, and he or she must specify the amount, price, and date for the securities transaction, and must not be able to alter or influence the terms of the plan. However, significant loopholes still exist; for example, executives maintain the ability to cancel a plan. The SEC said that because such a cancellation does not directly result in insider trading liability because the cancellation did not occur “in connection with the purchase or sale of a security” there was no insider trading. In a November 2012 investigation, the Wall Street Journal found that 46 percent of plan terminations occurred if plans called for a stock sale prior to the company releasing good news, and thus leaving money on the table, while only 11 percent of plan terminations occurred if the plan called for a stock sale prior to the company releasing negative news.

Following the Wall Street Journal investigation, in December CII submitted a comment letter to the SEC expressing concern over potential insider trading. In this letter, CII recommends that boards be responsible for the oversight of preset trading plans, stating “making boards explicitly responsible for the oversight of Rule 10b5-1 plans will make them more responsible to long-term shareholders and more vigilant in their oversight responsibilities.” This is the sole comment letter to the SEC on the topic.

In Mary Jo White’s nomination to head the SEC, President Obama highlighted her prosecutorial experience. Many have speculated on this, including the New York Times, which noted that with her appointment, “the president showed renewed resolve to hold Wall Street accountable for wrongdoing.”

With increased public scrutiny, federal investigations, and pressure on the SEC to implement stricter rules on 10b5-1 plans, directors may wish to increase how they monitor this area.


NACD Insight & Analysis: Boardroom Confidentiality Policies

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On Wednesday, it was revealed that one of the largest insider-trading cases seen in decades stemmed from a violation of boardroom policy. In the insider-trading trial of Raj Rajaratnam, Goldman Sachs CEO Lloyd Blankfein testified that former director Rajat Gupta violated the firm’s code of conduct in disclosing confidential information from 2008 board meetings. According to Blankfein’s testimony, Gupta allegedly revealed to Rajaratnam via telephone strategic discussions regarding the possibility of Goldman Sachs acquiring a commercial bank or insurance company, as well as advance notice of Berkshire Hathaway’s vitalizing five billion dollar investment in Goldman.

This is not the first instance of leaked high-profile boardroom discussions. After a thorough investigation, it was discovered in 2006 that Hewlett-Packard Director George Keyworth divulged confidential strategy points to CNET. With more potential channels of communication than ever, directors may choose to revisit and clarify boardroom confidentiality policies.

Often companies do not articulate boardroom confidentiality agreements, as confidentiality is implied in a director’s duty of loyalty. According to this fiduciary duty, a director cannot use confidential information for his or her own benefit, or to the benefit of a person or entity outside the company. However, a lack of clear policy would prove a weak defense for Gupta, as Goldman Sachs clearly defines a boardroom confidentiality policy in its corporate governance principles:

Confidentiality. The proceedings and deliberations of the board and its committees shall be confidential. Each director shall maintain the confidentiality of information received in connection with his or her service as a director.*

While confidentiality policies are not explicitly required, in 2000 the SEC enacted a policy to enhance fairness and transparency: Regulation Fair Disclosure, commonly referred to as “Reg FD.”  With the intent to eliminate “selective disclosure,” Reg FD mandates that publicly traded companies must disclose material information to all investors at the same time. While this mandate does not necessarily extend to nonpublic boardroom discussions, the gray area created can be easily solved by including a code of conduct or other confidentiality agreement in the company’s corporate governance principles.


*Source: Goldman Sachs Corporate Governance Guidelines