April 27, 2000

Jonathan G. Katz, Esq.
Secretary, Securities & Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609

Re: File No. S7-31-99
Propose Rules Regarding Selective Disclosure And Insider Trading

Dear Mr. Katz:

The Securities Litigation Group of Brobeck, Phleger and Harrison LLP is pleased to present this response to your request for comments regarding proposed Rule 10b5-1, one of several new rules proposed in Release No. 33-7787, 34-42259, IC-24209, File No. S7-31-99.

Brobeck's Securities Litigation Group is comprised of over forty-five attorneys in seven offices. We have represented parties in hundreds of securities cases before the Courts and the Commission and we frequently counsel corporate executives on securities laws and regulations.

Our comments regarding proposed Rule 10b5-1 can be summarized as follows: (1) the "affirmative defenses" enumerated in Rule 10b5-1(c)(1)(i) should instead create a rebuttable presumption under certain circumstances that the individual did not trade on the basis of inside information; (2) Rule 10b5-1(c)(1)(ii) should be modified to allow for instances where an individual's adherence to a pre-determined plan would result in hardship or conflict with another law or regulation; (3) protection should be extended to selling plans where the sale is contingent on market price, such as plans utilizing limit orders; and (4) Rule 10b5-1 should be amended to avoid conflicts with Rule 144 under the Securities Act of 1933. These suggestions are set forth in further detail below. Please let us know if we can provide any additional information regarding our comments or answer any questions you or the Commission may have.

1. Adherence to A Selling Plan Should Create A Rebuttable Presumption Under Certain Circumstances That the Individual Did Not Trade Based on Inside Information

One of the Commission's stated reasons for the proposed regulations is to bolster investor confidence in the securities markets by reducing public perception that corporate insiders possess an unfair advantage when trading. These objectives can best be achieved by providing strong incentives for insiders to trade pursuant to pre-established plans. In proposing these regulations the Commission has recognized that such selling plans minimize the likelihood that inside information is a factor in trading decisions. If increasing numbers of corporate officers and directors trade in company securities pursuant to a plan established well in advance of the first trading date, then we believe the public will be less skeptical of trades by company insiders thereby enhancing confidence in the integrity of the securities markets.

Making adherence to a pre-established trading plan, contract or agreement a mere "affirmative defense," however, provides relatively weak incentive for corporate officers and directors --who may have much of their net worth tied up in company stock-- to opt for the inflexibility of a trading plan. Based on our experience, a corporate executive would be more likely to adopt a formal trading plan if the Commission declared that trades made in good faith pursuant to a pre-established plan, contract or other instruction are presumed not to have been made "on the basis of" material inside information, if the plan were established sufficiently far in advance of the trade in question. We would suggest that this protection be provided to sales taking place under a plan adopted at least six months in advance of the trade in question. The presumption could only be overcome by proof that the insider possessed material inside information at the time the plan was established and intended to take advantage of that information in creating the plan. This would not only encourage more insiders to adopt plans, but would encourage them to adopt the plans well in advance of the time when they expected to begin selling their securities.

Such a safe harbor would also more efficiently utilize Commission resources. If the Commission were able to quickly assess whether a trade were made pursuant to a long-established plan, it could more efficiently determine which trades warranted further investigation.

2. Rule 10b5-1(c)(1)(ii) Should Allow For Situations In Which Failure To Trade Pursuant To A Plan Is The Result of Hardship, Necessity Or Compliance With Other Laws

Rule 10b5-1(c)(1)(ii) as presently written eliminates any defense for a trade if the previous contract, plan or instruction to trade is altered in any respect after the insider becomes aware of inside information. This qualification is ambiguous, as it is unclear whether the elimination of the defense then affects all sales previously made in conformity to the plan, or only those that deviated from it. Moreover, this limitation fails to provide for several important situations where, because of hardship or necessity, the individual is forced to deviate from the previously established contract, plan or instruction to trade.

For example, alteration of the plan, contract or instruction may be necessary to comply with other provisions of the securities laws such as Rule 144 (see comments below pertaining to the interaction of proposed Rule 10b5-1 and Rule 144). A personal financial hardship such as medical bills and expenses from the serious illness or injury of a child, spouse or other family member, foreclosure of a home, divorce, or unexpected financial liability may all require the insider to deviate from his pre-established trading plan. Under the proposed regulation, all of these unforeseen circumstances would preclude a defense and subject the insider to 10b5-1 liability.

This is quite a harsh result and not one we believe the Commission intended. We propose that the Commission add to Rule 10b5-1(c)(1)(ii) a clause which provides that an insider will not lose a defense previously available if the plan, contract or instruction is altered due to undue hardship, necessity or to comply with any of the laws or regulations of any state, the United States or government agency.

Furthermore, we suggest that the rule make clear that unexcused alteration of a plan only affects the protection available for those trades that deviated from the plan.

3. Rule 10b5-1 Should Permit Sales Contingent On Future Market Price

The Commission's comments on the proposed rule provide that an affirmative defense will not be available for a contract, plan, or instruction to trade that uses a limit order. According to the Commission, pre-established limit orders should not be an affirmative defense to liability because "the person would not firmly be committing to make a trade, because if the market price at the relevant date exceeded the limit order price, the trade would not be made." See Proposed Rule: Selective Disclosure and Insider Trading, Exchange Act Release No. 34-42259 n. 88. We do not believe that this reasoning is correct or that such a restriction on the use of limit orders is necessary or desirable.

An insider certainly has the intent to trade when placing a limit order and is prepared for the consequences when the trade is executed. Because the factors that would result in the failure to execute the trade are out of the insider's control, providing a defense to liability for those plans that utilize limit orders does not conflict with the policy objectives behind the proposed rule.

Moreover, as a practical matter, inability to specify that sales shall be contingent on future market price may preclude many insiders from using selling plans. Many--perhaps most--corporate insiders derive their share ownership from options. For financial and tax reasons, options are typically exercised only at the time when stock is to be sold. Most option holders would be unwilling to commit to sell stock at a future date if doing so involved a risk of having to sell at a price less than their option exercise price. The only type of selling plan that would be practical for such insiders is one that permits them to specify that the sale be contingent upon the market price exceeding the option exercise price.1

4. Proposed Rule 10b5-1's Interaction With Rule 144 of the Securities Act of 1933

Stock sales by corporate insiders are frequently made pursuant to Rule 144, which imposes a variety of restrictions that are difficult to plan for in advance. For example, sales pursuant to Rule 144 in any rolling 3-month period may not exceed the greater of (i) 1% of the outstanding shares of the same class or (ii) the average weekly trading volume in the securities for the 4 calendar weeks preceding the filing of the requisite Rule 144 notice, and sales of a donor and donee must be aggregated for purposes of the volume limitations for a period of one year from the date of the gift. Insiders have no way of predicting in advance what the average weekly sales volume may be during a future period, and may not be able to control or predict sales by donees. We recommend that Rule 10b5-1(c)(1)(ii) provide that failure to follow a pre-established trading plan in order to comply with Rule 144 restrictions should not preclude assertion of the plan as a defense.

The Commissions' objectives will best be achieved if public companies encourage their officers and directors to trade in the company's securities pursuant to pre-established trading plans. However, companies may feel inhibited from advocating plans or encouraging their officers and directors to use plans out of fear that such corporate sponsorship could result in the insiders being deemed to be "acting in concert" under Rule 144(e), thus triggering the rule's aggregation provisions and significantly limiting the number of shares the company's officers and directors could sell. While we are not under the impression that such activity would constitute "acting in concert," an affirmative statement to this effect by the Commission would alleviate these concerns and promote widespread adoption of selling plans.

We appreciate this opportunity to comment on the proposed rule. If you have any questions about our comments, please contact David Furbush (650) 496-2770 or Holly Haskew Tambling (650) 496-2940.

Very truly yours,

David M. Furbush


1 It is not clear to us whether such a market price contingency would constitute a "limit order" as referred to in the Commission's comments thus, in the view of the Commission, eliminating the defense under proposed Rule 10b5-1.