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Developments Affecting 10b5-1 Trading Plans - YouTube
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hi i'm sarah payne co-head of smc's
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capital markets group and based in palo
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alto
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and i'm here with kathy clarkin who
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co-heads our capital markets group in
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new york
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today we're talking about the latest
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developments affecting 10b51 trading
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plans
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particularly with the change in
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administration there's been a lot in the
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news recently on these plans
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kathy can you give our listeners the key
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facts that they should know now
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certainly sarah so by way of background
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rule 10v51 provides an affirmative
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defense to potential charges of insider
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trading by corporate insiders and
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companies when purchases are sales of
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company stock or made pursuant to a
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trading plan that satisfies the rule and
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there's two key elements here first that
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the trading plan be adopted in good
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faith and second that the person not be
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in possession of material non-public
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information at the time they enter into
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the plan
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and because corporate insiders as well
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as the company itself are often in
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possession of mnpi the use of rule 10b51
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trading plans are used frequently
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representing approximately 60 percent of
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all insider trades during 2020. and over
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the past several years these plans have
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come under increasing scrutiny and calls
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for reform have been mounting
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shortly after gary gensler took the helm
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of the sec this year he asked his staff
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to make recommendations on how rule
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10b51 might be quote unquote freshened
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up he identified five areas for the
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staff to consider in making
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recommendations for potential reform
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first he recommended insiders and
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companies observe a cooling off period
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between the time a plan is adopted and
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the execution of the initial trade under
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the plan
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second he asked the staff consider
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limitations on when and how plans can be
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cancelled because currently there's no
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regulatory prohibition on cancellation
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of plans even when a person is in
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possession of material non-public
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information
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third he also recommended that there be
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disclosure requirements covering the
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adoption modification and the term of
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the plan
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next he suggested that there should be a
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limitation on the number of plans an
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insider may have in place at any given
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time since multiple plans effectively
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permit insiders to cancel amend or
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choose the most favorable plan to rely
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on
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and finally gensler asks the staff to
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consider reform that addresses a
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relationship with corporate share
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buybacks
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now we'll float a few months following
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gensler's statement and a subcommittee
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of the sec's investment advisory
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committee released draft recommendations
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calling for similar changes
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at this point it's widely expected that
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the sec will propose rules although the
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timing is a bit unclear given the sec's
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ambitious regulatory agenda
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kathy you note that the advisory
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committee's recommendations were similar
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to those made in chair gendler's speech
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there were some areas that weren't
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repeated namely terminating plans while
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in the possession of mnpi
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and intersections with corporate plans
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on the other hand there were also some
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additions
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including requiring electronic filing of
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forms 144 and then interestingly
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applying section 16 to foreign private
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issuers
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that's right sarah to summarize quickly
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the advisory committee's recommendations
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included three things
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one that there be a cooling off period
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of at least four months intended to
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ensure that trades cannot happen in the
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same quarter
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next a prohibition on overlapping plans
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and third mandatory disclosure regarding
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10b5 plans notably the advisory
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committee recommended expanding section
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16 reporting requirements on form 4 to
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insiders of foreign private issuers now
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that would certainly be quite a
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departure from existing requirements and
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could be a separate topic of another
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podcast
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you're right kathy let's stick with
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trading plans here
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kathy as we get to your end and
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particularly in the current tax
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environment we see an uptick in insider
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sales and have clients seeking to
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implement 10b51 trading plans
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is there any guidance that you have for
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insiders given the prospect of pending
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rules would you tell executives to hold
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off on adopting a plan
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sarah that's a great question and one
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we're discussing with many clients
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executives can continue to enter into
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plans however they should exercise
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caution in doing so
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and although it's going to be some time
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before final rules are adopted and
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become effective executives are now on
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notice of the sec's position on these
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issues and so against this backdrop as
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we've been advising clients
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it's really important for issuers and
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corporate insiders to examine their
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practices and ensure they're following
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good corporate hygiene with respect to
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these plans so what does that mean
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first as required by the rules the plan
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should be adopted when the insider is
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free of mnpi
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and these are often difficult subjective
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determinations as to whether or not
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there is in fact mnpi
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second we do recommend an insider
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observe a cooling off period and this is
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consistent with many companies policies
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the time period of going off can vary
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and some companies require insiders to
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observe a period of at least 30 days and
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others require a cooling off period
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until the opening of the next trading
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window which is typically about three
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months
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and finally we continue to advise
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insiders to exercise caution in
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modifying or terminating existing plans
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kathy let's stop on that point for a
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minute as you mentioned the advisory
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committee recommendations call for four
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months cooling off period and share
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gensler in his june speech also
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mentioned a cooling off period of four
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to six months
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that's certainly a longer period than
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many practitioners advise
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and i think everyone should keep their
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eye out on this one
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i can imagine that this would be an area
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of a lot of public comments
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i completely agree sarah i expect that
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there to be much dialogue around that
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switching quickly to the topic of
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disclosure both chair gensler and the
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advisory committee are focused on
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greater transparency of trading plans
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the advisory committee for example
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recommended there be disclosure in the
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proxy statement of the number of shares
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covered under a plan as well as
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disclosure in an 8k as to the adoption
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modification or cancellation of plans
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so at this point it's really too early
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to say what form a rule may take in this
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area for example will disclosure be
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limited to identifying the entry into
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the plan itself and identifying trades
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made pursuant to the plan or will it go
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beyond that and require additional
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disclosures such as the term of the plan
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we'll have to wait and see
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kathy another question that we
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frequently receive from individuals is
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on the topic of terminating plans
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we see people wanting to do this for a
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variety of reasons whether it's a change
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in circumstances or a desire to put in a
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new plan with different parameters
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and the topic of terminating plans while
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in possession of mnpi
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was discussed in share gensler's speech
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but there's no mention of it in the
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advisory committee recommendations
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even if the sec does not adopt rules in
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this area individuals should tread
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carefully when terminating plans whether
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in possession of mnpi or not
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the general advice is that terminating
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plans can call into question the
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integrity of the plan and whether the
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plan was entered into a good faith
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kathy can you talk a little more about
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that
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sure i think the key question here is
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that cancellation of a plan could call
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into question the good faith requirement
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of the rule
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although cancellation itself doesn't
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give rise to an insider treating
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violation even if the insider is in
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possession of mnpi because cancellation
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does not involve a trade it could
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however give rise to a challenge of
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trades under future plans particularly
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if the insider has a history of
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cancellation and while i think there's a
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recognition that there must be some
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flexibility here as an insider
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circumstances may change or there's
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other legitimate reasons to halt trading
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cancellation in and of itself could be a
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red flag when considered in light of
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other trading activity so if an
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executive has canceled multiple plans
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future plans may be challenged leaving
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the insider without the protection of
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the affirmative defense so these
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decisions must be taken thoughtfully and
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observing a waiting period after
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cancellation can certainly help
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demonstrate that a plan was executed in
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good faith
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no matter where the sec ends up on
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rulemaking here
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the recent speeches and other
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pronouncements serve as a useful
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reminder regarding some of the best
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practices around 10b51 trading plans
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this concludes our podcast we want to
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thank you for listening to smc critical
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insights for more information about our
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practice please visit us at
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www.solcrom.com
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