SEC Allows Termination of 10b5-1 Trading Plans Through September 28 Without Jeopardizing Protection for Previous Sales Made Under Plans

Originally published on this site Sepember 24, 2001


On September 21, 2001, the Securities & Exchange Commission issued several interpretations regarding provisions of the securities laws affected by the tragedies of September 11. One of the interpretations concerns Rule 10b5-1(c) trading plans. SEC Interpretation:

Calculation of Average Weekly Trading Volume under Rule 144 and Termination of a Rule 10b5-1 Trading Plan, Release Nos. 33-8005A; 34-44820A; FR-58A (Sept. 21, 2001). As the SEC had reaffirmed in its May 2001 Telephone Intepretations, the termination of a trading plan may, in some circumstances, call into question whether it was entered into in good faith. (As I have contended from the outset, due to this concern, trading plans should be set up to operate for at least six months and should not be changed too frequently.) The SEC further noted that if a trading plan was not entered into in good faith, then it does not exist as an affirmative defense to protect previous trades made under the plan.

The new interpretation notes that these rules may have unintended adverse consequences in light of the September 11 tragedies: "for example, if a plan previously had specified that sales be made during the week of September 17, 2001, a security holder would be terminating the plan if he or she cancelled that sale in order to continue to hold the securities." To avoid this inappropriate result, the SEC expressed its belief that the termination of a written plan between September 11 and September 28, 2001, inclusive, of a plan established prior to September 11, 2001 will not, by itself, call into question whether the plan was entered into in good faith. Therefore, the availability of the Rule 10b5-1(c) defense for transactions under the written plan would not be affected solely by termination of that plan in that time frame.

The SEC's interpretation arises in the context of the cancellation of a single trade that had been scheduled upon the reopening of the markets following the September 11 tragedies. In my assessment, the same reason why the cancellation of a single trade is understandable and not a sign of bad faith -- namely, the gravity of the September 11 tragedies and their dislocative effect on the market -- would apply to a decision to terminate an entire trading plan, i.e., the remainder of the trades contemplated under a plan. Indeed, I would contend that September 11 is the quintessential - and, hopefully, the final -- example of an assumption-shattering event that could cause an honest person to modify her trading plan without calling into question the good faith of her existing plan.

Beyond providing relief as the nation copes with September 11, the SEC's interpretation is noteworthy because it heralds the significance of trading plans. Less than a year ago, Rule 10b5-1(c) was a novelty. It is now a portion of the trading-related securities laws that the SEC monitors and updates.

© David Priebe 2016