What Directors Need to Understand About Insider Trading Risks

Outside directors might be surprised to learn that board status alone classifies them as corporate insiders under federal securities law. A Morrison Foerster alert explains that trading on material nonpublic information through direct transactions, tipping others, or even trading in a competitor’s securities can trigger criminal prosecution.

Rule 10b5-1 trading plans offer a recognized affirmative defense, but only when structured and administered with genuine rigor.

Information qualifies as material if a reasonable investor would consider it significant enough to influence a trading decision. This covers everything from earnings surprises and pending acquisitions to leadership changes and major litigation.

Such information remains nonpublic until broadly disseminated and absorbed by the market, typically two business days after a public announcement.

In 2022, the Securities and Exchange Commission tightened existing rules by mandating cooling-off periods, good-faith certifications, and restrictions on overlapping plans.

The article walks through the legal framework governing insider trading for directors, explains how Rule 10b5-1 plans work, and what the 2022 amendments require. It examines three enforcement cases illustrating how broadly regulators pursue abuse.

Four operational recommendations follow: adopting an expansive insider trading policy, treating 10b5-1 administration as a genuine compliance function, using policies and plans to build a defensible record, and maintaining regular training alongside rigorous documentation.

Directors and their counsel should treat insider trading controls as a live governance priority rather than periodic housekeeping. A 2024 case, SEC v. Panuwat, illustrates active enforcement interest in 10b5-1 plan integrity and shadow trading theories.

As companies recruit directors from adjacent industries, enterprise risk management frameworks must account for the expanded universe of securities that could implicate confidential board-level knowledge.