Securities fraud is a more generalized offense that does not require the Director or tippee to buy or sell securities. Instead, it focuses on information disclosed or not disclosed by the defendant and purchases or sales by plaintiffs. Rule 10b-5 prohibits any of the following in connection with the purchase and sale of any security:

• the use of any device, scheme or artifice to defraud;
  
• making any untrue statement of material fact, or omitting to state a material fact necessary to make statements not misleading under the circumstances; or
  
• engaging in any act, practice or course of business that operates as a fraud of deceit upon any person.

The Supreme Court has held that no person can be found to have violated Rule 10b-5, unless they are shown to have acted knowingly or intentionally.

Tipping under Rule 10b-5, however, is usually tied to the motive of trying to allow specific individuals to profit. Selective disclosure, on the other hand, most often occurs because issuers communicate to the market through securities analysts. There is usually no motive of trying to benefit specific individuals or to exclude information from anyone. The motive is usually to get the company's message to the market using existing market channels. There is no breach of a fiduciary duty or trust, which is an element of a Rule 10b-5 violation. The selective disclosure problem arises when parts of the market get the information before other parts of the market.

Regulation FD, promulgated by the SEC, is designed to address selective disclosure by requiring public companies to disclose material information broadly to the public at the same time this information is intentionally disclosed to certain market professionals, or to promptly publicize material information that has been inadvertently disclosed to market professionals.

Regulation FD enumerates four categories of persons covered by the rules relating to disclosure in the regulation. Those persons are:

• broker-dealers and their associated persons;
  
• investment advisors, certain institutional investment managers and their associated person;
  
• investment companies, hedge funds and affiliated persons; and
  
• any holder of the issuer's securities, under circumstances in which it is reasonably foreseeable that the person would trade in the issuer's securities on the basis of the information.

Regulation FD excludes communications to professionals, such as lawyers, accountants and investment bankers, which are deemed "temporary insiders" of the company, because they owe a duty of trust or confidence to the issuer. If these professionals, who provide advice to the company trade, they may have liability for insider trading.

Regulation FD also excludes disclosures made to persons who expressly agree to keep the disclosed information in confidence. Additionally, disclosures made to a party whose primary business is issuing credit ratings are, in certain cases, exempt from the disclosure provisions.

Information is material for securities law purposes, if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision. Not all information is a fact. Information is a fact, if it is more than opinion or a prediction, but information on which opinions or predictions are based may be facts.

Whether information is "material" is made on the basis of the facts and circumstances surrounding the event. Because the determination can be complex and, unfortunately, reviewed with the benefit of hindsight, the SEC has issued the following non-exclusive list of information and events that are likely to be material:

• earnings information
  
• mergers, acquisitions, tender offers, joint ventures, or changes in assets
  
• new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract)
  
• changes in control or in management
  
• change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report
  
• events regarding the issuer's securities, such as defaults on senior securities, changes in dividend policy, calls of securities for redemption, repurchase plans, stock splits, changes to the rights of security holders, public or private sales of additional securities
  
• bankruptcies and receiverships

Many companies adopt "insider trading policies" that govern transactions in their securities by Officers, Directors, employees and others who are exposed to material, non-public information about the company. These policies are designed to help controlling persons demonstrate they have been proactive in taking measures to prevent violations by others under their control as discussed in FAQ 12 above. In addition to adopting the policy, the Board should periodically review what steps the company's officers are taking to make employees aware of the policy, limit access to material information to appropriate personnel and enforce the policy.

Click here for an example of an insider trading policy.

Click here for an example of a Rule 10b5-1 Plan.

Rule 10b5-1 plans are automatic and, generally, may be difficult to change without liability risk. The plan may, by its terms, require you to sell a large number of shares the day before the company announces an earnings shortfall or a restatement of the financial statements. Not only will such sales look terrible to the public, but it may result in an SEC investigation and litigation by private plaintiffs. Investors may also lose faith in company management, thereby causing a loss of market value. The plan may provide a defense to actual liability, but probably will not prevent other damage to you and the Company.

The SEC is considering a proposal that would require disclosure by the company of the existence of any Rule 10b5-1 plan pursuant to which Directors and other insiders will sell securities. Under the proposed rule, Rule 10b5-1 arrangements would need to be disclosed by the close of business on the second business day of the week following adoption of the plan.

Click here for companies where insiders sold large volumes of shares while company share prices declined.