Corporate Governance - Business Policies

Insider Trading 

Prohibition against Trading on Material Inside Information
This document sets forth the Insider Trading Policy (the "Policy") of Pepco Holdings, Inc. ("Pepco Holdings"). This Policy establishes the policies and procedures that govern trading by personnel of Pepco Holdings or its subsidiaries in Pepco Holdings stock. The Policy has been adopted by Pepco Holdings to fulfill its responsibilities as a public company under the federal securities laws.

Under the federal securities laws, it is unlawful for any person who has a duty of trust and confidence to a public company to trade in the stock of the public company on the basis of material nonpublic information (so-called "inside" information). Generally, the purchase or sale of a security is considered to be on the basis of material nonpublic information if the person making the purchase or sale is aware of the material nonpublic information at the time of the trade.
Insider Trading Policy
Who is covered by the Policy and what are the Policy's prohibitions?
Any director, officer, employee or other person associated with Pepco Holdings or its subsidiaries who is aware of any material information concerning Pepco Holdings or its subsidiaries that has not been disclosed to the public is prohibited from

  1. trading in Pepco Holdings stock,     
  2. advising others concerning the trading of Pepco Holdings stock, or    
  3. disclosing the material information to any other person for the purpose of enabling such person to trade in Pepco Holdings stock.

These restrictions remain in effect until the material information is fully disclosed to the public or until the information, although not disclosed, ceases to be material.
What information is "material"?
"Material" information includes any information that a reasonable investor would consider important in deciding whether to buy, sell or hold Pepco Holdings stock. Although what is "material" will depend on the facts of each event, common examples of information frequently regarded as material are:

  1. quarterly and annual earnings or losses;            
  2. dividend changes, proposed acquisitions, mergers or divestitures;            
  3. news of major new services;            
  4. information about a major joint venture, acquisition or loss of significant contracts; and           
  5. news of significant changes in senior management.

Either positive or adverse information may be material. The broadest interpretation should be given to what is "material". Hindsight may make a relatively insignificant happening appear significant if it becomes the first step toward a substantial financial event. It is also very difficult for an officer, director or general manager to prove that he or she did not know about a development known to other officers or directors or to subordinates. Any director, officer or employee of Pepco Holdings or its subsidiaries who has questions concerning the materiality of any nonpublic information, should contact the Office of the Vice President & Corporate Secretary (202-872-3526) for guidance. When in doubt as to the materiality of any nonpublic information, personnel of Pepco Holdings or its subsidiaries should refrain from trading.
What are the penalties for violating the insider trading rules?
There are strict civil and criminal penalties for violating the insider trading rules.

  • A criminal prosecution can result in a fine of up to $1 million and imprisonment for up to 10 years. Civil actions may be brought by a private plaintiff or the Securities and Exchange Commission (the "SEC").
                
  • A person who has been found in a civil action brought by the SEC to have violated the prohibition on insider trading by purchasing or selling a security while in possession of material, nonpublic information, or by communicating such information to another person who engages in such trading, can be held liable for a penalty up to three times the profit gained, or the loss avoided, by the person who traded.
                
  •  The SEC also has the authority to obtain a court order that bars a director or officer who has engaged in insider trading from serving, either permanently or for a period of time, as a director or officer of a public company.

There are no limits on the size of the transaction that can trigger insider trading liability. Relatively small trades have in the past occasioned investigations by the SEC and lawsuits.
What information is "nonpublic?" When may individuals trade in Pepco Holdings stock?
Information is considered to be "nonpublic" if it has not received adequate public disclosure. Adequate public disclosure requires that the information must be widely disclosed (such as to the wire services through a press release) and that a sufficient period of time must have elapsed for the information to be effectively disseminated to shareholders. Until material information has been publicly disclosed, any director, officer or employee of Pepco Holdings or its subsidiaries with knowledge of the information must stay out of the markets for Pepco Holdings stock. Equally important, they may not authorize or direct any members of their immediate family or anyone acting on their behalf to trade on Pepco Holdings stock. As a general rule, directors, officers and employees of Pepco Holdings or its subsidiaries with inside information should wait until the third business day after a public disclosure of such information in a quarterly or annual earnings or other material event release, before trading in Pepco Holdings stock.
Is there a prohibition on disclosing material nonpublic information to others?
Yes. It is also vital that directors, officers and employees of Pepco Holdings or its subsidiaries not disclose material nonpublic information to others (except where necessary in the proper conduct of Pepco Holdings' business). If the recipient of the information then trades on the basis of the information, the disclosure (referred to as tipping) also is a violation of the federal securities laws and the result can be liability imposed on both the tipper and the recipient of the information.
What other insider trading prohibitions are there?
It also is unlawful and a violation of this Policy for directors, officers and employees of Pepco Holdings or its subsidiaries to trade in the stock of any other public company based on material nonpublic information that they learn in the course of their employment with or service to Pepco Holdings. This includes information about companies that are co-venturers, subcontractors, suppliers or customers.

Are there any exceptions to the general prohibition on trading while in possession of material, nonpublic information?
Under Rule 10b5-1 adopted by the SEC, a purchase or sale of a security will not be deemed to have been made on the basis of material, nonpublic information if the person making the trade demonstrates that the trade was made pursuant to a binding agreement or written plan entered into or adopted at a time that the person was not aware of any material, nonpublic information. Such a binding agreement or written plan must:

  • state (i) the amount of securities to be purchased or sold (either a specific number of shares or a dollar amount), the price at which the securities are to be purchased or sold (either by specifying the transaction occur at the prevailing market price or a at limit price), and the date on which the securities are to be purchased or sold (either a specific date or a number of days during which the limit order is in force);
                
  • establish a written formula for determining the amounts, prices and dates of purchases and sales; or
                
  • confer discretionary authority on another person to make purchases or sales for the account of the instructing person without the exercise by the instructing person of any subsequent influence over how, when or whether the transactions are effected.

After entering into the agreement or plan, the person cannot, while in possession of material, nonpublic information, alter or deviate from the agreement or plan or enter into or alter any corresponding or hedging transaction or position to offset or reduce the risk associated with the agreement or plan. 

A transaction in accordance with an agreement or plan that meets the requirements of Rule 10b5-1 is permitted under this Policy if the following conditions are satisfied:
     (1) The binding agreement or written plan, and any modification thereof, is approved in advance by the General Counsel of Pepco Holdings (the “Approved Plan”); and
     (2) The person entering into the binding agreement or written plan reports to the General Counsel (i) all transactions made pursuant to the Approved Plan and (ii) the completion or termination of the Approved Plan.
Summary of insider trading rules.

  1. The rules against "insider trading" are applicable to all directors, officers and employees of Pepco Holdings and its subsidiaries who receive or are aware of material nonpublic information.
                
  2. Legal constraints and Company policy prohibit all directors, officers and employees of Pepco Holdings or its subsidiaries from trading in Pepco Holdings stock at any time when they are aware of material nonpublic information.
                
  3. All directors, officers and employees of Pepco Holdings or its subsidiaries are expressly prohibited from taking advantage of material nonpublic information, either directly or indirectly, by effecting trades through family members.
                
  4. Officers, directors and other supervisory personnel should take steps to limit the disclosure of confidential and material information to those employees with a "need to know", and when disclosure is necessary, all recipients should be counseled to comply with the laws and Company policy.