Client Alert

Federal Prosecutors and Regulators Probe Investment Funds' 10b5-1 Trading Plans

May 13, 2013


Federal prosecutors and regulators recently initiated investigations into trades in securities of several companies made pursuant to Rule 10b5-1 trading plans by hedge funds and the people who manage them. A Rule 10b5-1 trading plan permits corporate insiders and others to whom material nonpublic information has been entrusted to schedule in advance when to buy or sell securities, how much, and at what price, regardless of whether the trader possesses inside information at the time of the trade, so long as the trader satisfies specific criteria at the time the plan is implemented or amended. Most significantly, the plan needs to be entered into at a time prior to the possession of the material and nonpublic information. As innovative Rule 10b5-1 trading plans were developed, hedge funds and investment funds began to implement them to address the trading of securities of companies for which the fund manager was also a company insider, most often a board member, or a person to whom inside information was entrusted. Hedge funds, investment funds, fund managers, and corporations, should consult with counsel to implement best practices for creating, revising, and utilizing Rule 10b5-1 trading plans to eliminate the appearance of impropriety and ensure they are afforded the protection of the Rule 10b5-1 affirmative defense.

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