Last December, the SEC proposed rules that would alter how some Rule 10b5-1 plans work, including requiring a 120-day cooling-off period for officers and directors, and a ban on overlapping plans. Much ink has been spilled on that rule proposal—see our blog and the comments sent in on that proposal.

Even though the SEC’s Reg Flex Agenda predicts that final rules are not expected until next April, that doesn’t necessarily mean that Rule 10b5-1 plans aren’t top-of-mind. And a recent SEC enforcement action is adding to many practitioners’ heightened focus as it may signal how that final rule will look and also serves as a warning to companies that they should take care about how they handle their Rule 10b5-1 plans now.

In this enforcement action, the company derived a significant amount of its revenue from an advertising partner, which alerted the company of planned advertising algorithm changes that would result in less revenue to the company. According to the SEC’s enforcement order, the company failed to disclose this known trend on an earnings call and in its annual report on Form 20-F in March and April 2016 as revenues were declining (3% decline in Q4 2015 and 8% decline in Q1 2016), finally announcing that it was lowering 2016 guidance in May 2016.

While the company’s CEO and President were in possession of this material non-public information in March 2016, they used a jointly-held entity to enter into a Rule 10b5-1 plan to sell some of the company’s securities. The entity sold shares under the plan prior to the May announcement, avoiding approximately $300,000 in losses.

In addition to civil penalties, the SEC’s order requires the company’s CEO and President to abide by the 120-day cooling-off period and the overlapping plan ban that is part of the SEC’s proposed rule. It’s a warning shot worth noting.

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Photo of Allison Handy Allison Handy

Allison Handy is the firmwide co-chair of the Corporate & Securities practice. Her extensive experience includes advising public and private companies in connection with corporate governance practices, disclosure issues, and capital markets transactions, such as equity offerings, debt offerings and tender offers. She…

Allison Handy is the firmwide co-chair of the Corporate & Securities practice. Her extensive experience includes advising public and private companies in connection with corporate governance practices, disclosure issues, and capital markets transactions, such as equity offerings, debt offerings and tender offers. She is also a leader of the firm’s Environmental, Social, and Governance advisory team.

Allison provides counsel to companies on a broad range of issues faced by management and directors in connection with the many compliance aspects of securities laws, including governance rules adopted by the Securities and Exchange Commission (SEC) and stock exchanges. She advises boards and committees in matters related to internal investigations and the efforts of shareholder activists, and works closely with in-house counsel, financial personnel, and outside auditors and advisors to help her clients prepare proxy statements and other reports to investors that meet complex disclosure obligations.

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