Trading Plan

NEED FOR TRADING PLAN

To reconcile the need to maintain the prohibition on trading in securities when in possession of Unpublished Price Sensitive Information (UPSI) with the need to provide a regime in which compliance-conscious insiders are able to put in place a compliant mechanism to trade in securities where they are insiders, the concept of trading plan has been introduced that would enable compliant trading by insiders without compromising the prohibitions imposed.

CONCEPT OF TRADING PLAN

The concept of a trading plan is meant for those who are perpetually in possession of UPSI. Therefore, it would not be possible to formulate a plan when the insider is not in possession of any UPSI. Instead, the regulatory framework for the trading plan would entail permitting an insider to formulate the plan in advance to effect trades at a subsequent date, by which time they will be in possession of new UPSI but the UPSI that would have been in his possession when formulating the plan would have become generally available. The possession of new UPSI that was not even in existence when the trading plan is formulated should not act as a barrier to the trades being executed provided the safeguards stipulated are met.

SAFEGUARDS

It is felt that the concept of trading plan should be introduced with sufficient safeguards and adequate care should be taken to ensure that rampant abuse does not lead to this significant reform measure being removed in the near future as a reaction to abuse.

Some of the salient features of the safeguards are that the execution of the trading plan may commence only at least six months after the trading plan is publicly disclosed. Such a period is considered reasonably long for UPSI that is in possession of the insider when formulating the trading plan, to become generally available or time in which new UPSI may come into being without adversely affecting the trading plan formulated earlier.

No trading plan should entail trading for the period between the twentieth trading day prior to the last date of a financial period for which results are to be announced and until the third day after the disclosure of the results. Since the trading plan is envisaged to be an exception to the general rule prohibiting trading by insiders when in possession of UPSI, it is important that the trading plan does not entail trading for a reasonable period around the declaration of financial results as that would generate UPSI.

Trading plans are required to be in place for at least twelve months. This safeguard indicates that trading plan should be for a reasonable period of 12 months diminishing chances of frequent formulation of number of trading plans all covering short period of time on the basis of UPSI.

The trading plan should not entail overlap. It would be undesirable to have multiple trading plans operating during the same time period. Since it would be possible for an insider to time the publication of the UPSI to make it generally available instead of timing the trades, it is important not to have the ability to initiate more than one plan covering the same time period

A trading plan should be reviewed and approved by the compliance officer of the company and for doing so, he may need the insider to declare that he is not in possession of unpublished price sensitive information or that he would ensure that any unpublished price sensitive information in his possession becomes generally available before he  commences executing his trades. Once satisfied, he may approve the trading plan, thereafter it should be publicly disclosed after which it has to be implemented in accordance with the plan.

BASIC PARAMETERS UNDER TRADING PLAN

A trading plan may set out either the value of the trades to be effected or the number of securities to be traded. It should also set out the nature of the trade and the intervals at which or the dates on which the planned trades may be executed. It is intended that while Regulations should not be too prescriptive and rigid about what a trading plan should entail, they should stipulate certain basic parameters that a trading plan should conform to and within which, the plan may be formulated with full flexibility.

If it can be reasonably inferred that the UPSI that was in possession of the insider when formulating the plan is not yet generally available, the compliance officer would be empowered to defer the commencement of the trading plan. However, the trading plan once commenced cannot be revoked and would have to mandatorily be implemented.

A public disclosure of every trading plan is envisaged to make it clear to the market at large that such a planned set of trades would be effected and the public would be able to take an informed decision about trades in the same securities.

This Article has been Compiled by Swati Garg (Senior Associate)

You can direct your queries or comments to the author at swati@factumlegal.com

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The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.