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What You Need to Know About Rule 10b5-1 Plans - YouTube
Channel: National Association of Stock Plan Professionals
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rule 10b51 plans are under attack
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in this video i'm going to talk about
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why that is and i'm going to offer some
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best practices for your own executives
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10b51 plans but first let's talk about
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what a rule 10b51 plan is
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this is simply a predetermined plan to
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trade in company securities
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rule 10 b-51 plans are often used by
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executives employees and other company
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insiders to set up an affirmative
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defense against insider trading the idea
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is that the executive enters into a plan
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to trade companies securities at a time
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when they do not have any material
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non-public information about the company
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then when the trades eventually occur
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under that rule 10b51 plan it's clear
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that those trades were not made on the
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basis of inside information because the
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decision to make the trades was made
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back at a time when the insider did not
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have that information
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the sec adopted rule 10b51 over 20 years
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ago and in that time the these plans
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have grown considerably in popularity
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but
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with popularity
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comes scrutiny that's right
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academics have long been
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very suspicious of rule 10 b51 plans
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a recent study from researchers at
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stanford the university of pennsylvania
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and the university of washington
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identifies three red flags that the
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researchers believe signify abusive or
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opportunistic use of rule 10 b51 plans
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let's talk about what those red flags
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are
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[Music]
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the first is a short cooling off period
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the cooling off period is the length of
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time that elapses from when the plan is
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implemented until when trades begin
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under the plan and if that time period
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is too short that calls into question
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whether the executive may have already
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had some information that influenced
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their decision to trade
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at the time that they entered into the
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plan
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the second red flag is kind of a
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companion to the first one uh this is a
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situation where executives enter into
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rule 10 b51 plans and then have trades
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commence in those plans all in the same
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quarter and all before earnings are
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announced for the quarter the
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researchers concern here is that by the
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time executives enter into the 10b51
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plans they maybe already have an idea of
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how earnings are going to shape up for
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the quarter and so they are trying to
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use rule 10 b51 to get their trades in
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ahead of any impact the earnings
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announcement has on the company's stock
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price
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and then the last red flag is a single
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trade plan so this would be a rule 10 b
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5 1 plan where just one trade occurs in
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the plan and then the plan ends there
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can be legitimate reasons why an
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executive might want to use a rule 10b51
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plan even for just a single trade but
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the researchers are suspicious of it
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so this study got a lot of play in the
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media and then on top of that there were
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some trades by some pharmaceutical
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executives that were made under rule 10
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b 51 plans that were somewhat
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questionable so all of that attracted
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the attention of congress and it
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attracted the attention of some senators
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in particular those senators wrote a
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letter to the sec urging the commission
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to review and reform its policies for
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rule 10 b-51 plans so now this is on the
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sec's agenda it's actually on the sec's
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short-term agenda and the sec tasked its
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investor advisory committee with doing
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some research on this and making some
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recommendations as to how the commission
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might reform rule 10b51 those
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recommendations have been made so we
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fully expect to see some rulemaking from
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the sec
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in this area
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but let's talk about some best practices
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that you might implement now to get
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ahead of that rulemaking
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i'm going to go through several ideas
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and i'm also going to present some data
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on the percentage of companies that have
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already implemented these ideas that
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data is from the nspp's 2020 stock plan
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administration survey which is
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co-sponsored by deloitte consulting
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let's start with something easy my first
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best practice is to require that 10b51
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plans be implemented in open window
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periods this is a great way to signify
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that the individuals implementing those
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plans do not have material non-public
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information at the time that they enter
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into the plan and ninety percent of
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companies already require this
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my second best practice is to impose a
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required cooling off period this is a
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specified period of time that has to
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elapse before trades can commence under
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the plan 79 of companies already require
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a cooling off period
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but this is also an investor advisory
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committee recommendation and what the
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committee recommends is that the sec
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require a
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four month cooling off period most
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companies that have a required cooling
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off period that period is only one to
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three months long so even if you already
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have a required cooling off period you
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may need to lengthen that period by a
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little bit
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my third recommendation is to limit or
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prohibit the use of multiple 10b51 plans
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so this would be a situation where an
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executive has
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two or more 10b51 plans that are
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overlapping they're in operation at the
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same time and the trades that are
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occurring under the plans over the same
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time period this is problematic for a
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whole host of reasons not the least of
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which is how hard it is to administer
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all of those plans 67 of companies
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already prohibit this
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along with that i also think that it is
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a good idea to prohibit trading outside
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of rule 10 b-51 plans while the plans
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are in operation that's also problematic
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for really the same reasons that it is
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problematic to have multiple 10 b-5-1
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plans in operation at the same time this
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is actually arguably more problematic
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because here the trades are completely
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unpredictable 49 of companies already
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prohibit this
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now we're going to get into some areas
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of other ideas that i think are good
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ones but that we haven't seen quite as
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much uptake on the first is to place
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some restrictions around executives
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ability to modify their 10b51 plans and
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to terminate those plans early 46
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percent of companies prohibit
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modifications 30 percent of companies
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prohibit early termination
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along with that i also think it is a
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good idea to set a maximum length that
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10b51 periods can be implemented for
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if you allow executives to implement
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10v51 plans that extend out several
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years into the future or indefinitely
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that is likely to result in a lot of
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early terminations of plans and those
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early terminations are
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almost always viewed with suspicion by
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setting a more reasonable limit on how
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long plans can last
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you are likely to
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eliminate or mitigate at least some of
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that early termination behavior
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44 of companies already have a maximum
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plan length and interestingly 33 percent
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of companies impose a minimum plan
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length
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and then my last best practice is to
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disclose when your executives are using
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10b51 plans this is also a
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recommendation of the investor advisory
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committee
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and and so i fully expect that we're
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going to see the sec require some
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disclosure in the future but for now
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when executives are entering into 10v51
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plans you could report that using a
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press release or on a form 8k and when
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trades occur under 10b51 plans i think
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it is a great idea to footnote that on
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the form 4 that you use to report those
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trades
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so that is my update on rule 10b51 plans
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we have been following the developments
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in this area very closely in the naspp
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blog and we've included a link to some
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of those blogs with this video on
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youtube
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i hope that you enjoyed the video if you
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did please subscribe to our youtube
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channel so that you're notified when we
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post new videos heck you know what
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even if you didn't enjoy it subscribe
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anyway maybe you'll like the next one
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thanks for watching
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you
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