I recently wrote about the heightened level of interest and scrutiny regulators are placing on stock trades in light of COVID-19. Dramatic changes in the economic and business circumstances have created an environment ripe for increased potential for insider trading violations. Today I offer up some additional tips to help mitigate the potential for insider trading troubles.
Just because the trading window is open doesn’t mean that all employees have a blanket green light to trade the company’s stock. A trading window is designed to give an opportunity for most employees to trade the company’s stock. Such a window is usually scheduled outside of known sensitive times, like after the period between the end of the quarter and the release of the company’s earnings for the quarter.
All trades are individual, and it’s up to the individual to ensure they aren’t in possession of material non-public information at the time the trade is placed – regardless of whether there is a company-sanctioned open trading window or not.
10b5-1 plans aren’t a “get out of jail free” card either. The purpose of this type of plan is to help insiders with routine access to material, non-public information (“MNPI”) to be able to trade in the company’s stock. Enacting a 10b5-1 plan with prescheduled trading instructions is done during a time when the insider is not in public of MNPI. Later, the trades are executed according to the instructions. Even if those trades occur during a time when the insider did have MNPI, the idea that trades were planned well before possession of that MNP information seems to provide an affirmative defense against claims of insider trading.
The scrutiny around 10b5-1 plans often comes around modifications to the plans. Since the idea of the plan is to “set it” when not in possession of MNPI, subsequent modifications raise concern about whether the modification was made in consideration of new information – potentially sensitive MNPI.
In the current climate, regulators have indicated additional focus on 10b5-1 plan modifications. Any modifications requested by insiders should be carefully considered, and only made with the review and input from counsel.
Material, non-public information is any information that has a material impact on the company’s market value or trading. As such, information that qualifies as MNPI comes from more than internal company sources. Conversations or information exchanges with vendors, customers, consultants and other participants in the company’s business may all constitute MNPI.
It is important to remind employees of the nature of MNPI and the need to guard the sources of exchange in order to prevent tipping. Conversations with family and friends around the happenings of the business should always be conducted carefully, but it’s even more important to recall this point during times of increased potential for insider trading.
Benjamin Franklin’s old saying still rings true today. Companies should be reminding employees about the insider trading policy, increasing communication, and adding new perspective on the topic in a way that serves as an ounce of prevention.
For COVID-19 related insider trading resources, including a Wilmer Hale article “COVID 19: Key Considerations for Corporate Insiders Who Trade During the Pandemic" that provided some of the inspiration for this blog, visit our COVID-19 Resource Page. For general insider trading tips and information, visit our Insider Trading topic page in our Research Center.
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