In today’s day and age, public perception is everything. Being a top-level executive, you already know that. It can especially be a concern when you own company stock. We’ve all heard stories of well-known figures being accused of insider trading. An accusation like this can be damaging not only to the individual involved, but to the company as a whole.
There is, however, a wealth management strategy to help with this. It’s called a 10b5-1 plan. Rule 10b5-1 was established by the Security Exchange Commission (SEC) to allow corporate executives (insiders) of a publicly traded company to sell company stock they own within a trading plan. The plan prevents insiders from using material nonpublic information (MNPI) to make trades, known as insider trading.
As an executive financial advisor, I’ve helped many directors and other executives of publicly traded companies establish these plans. If you’re a holder of company stock, it’s something you should consider not only to maintain public perception, but to protect yourself and the financial portfolio you’ve worked hard for. Here’s a closer look at these plans, as well as some 10b5-1 plan best practices executives should know.
What Is a 10b5-1 Plan?
The purpose of a 10b5-1 plan is to give you a trading platform that sets boundaries on when and how you execute trades of company-owned stock. When you set up a 10b5-1 plan, it allows you to buy or sell a predetermined number of shares at a predetermined time. As an insider, these times are scheduled for when you do not have access to MNPI. This helps prevent you from partaking in insider trading and helps provide a defense if you are ever accused of it.
Unlike other executive benefit plans provided by an employer, these plans are set up by you with the help of your wealth manager, while following SEC guidelines and any guidelines put in place by your employer.
10b5-1 Plans: Best Practices Executives Should Know
You have a great opportunity to accumulate wealth through corporate stock. However, if you don’t have a solid plan in place to maintain and manage that wealth, it can leave as fast as it came. The following 10b5-1 plan best practices can help ensure that you leverage your plan to the best of your ability.
Use a quantitative approach. When you need to prove to people and governing bodies that you did not act on any MNPI, you better have some hard data to back up your claim.
In forming your 10b5-1 plan strategy, you must spell out your trading intentions with the help of your broker ahead of time. That means providing quantitative metrics and reasoning for choices you make regarding the buying or selling of shares. This is one of the criteria set by the SEC in establishing 10b5-1 plans.
Your company will also likely have information and guidelines that you must follow when you are setting up your 10b5-1 plan, so it’s important to consult with your employer. Your employer may provide legal counsel before, during, and after you establish your plan.
Work with a trusted advisor. Because you set up your individual trading plan, you are responsible for ensuring it aligns with the SEC rules and regulations regarding 10b5-1 plans. If you are not compliant with the SEC guidelines—or in the worst case scenario you are found guilty of insider trading—you are at fault because you are the one who set up your plan and exercised trades within that plan. This is why one of the most important 10b5-1 plan best practices is to work with an experienced executive financial advisor who can offer expertise and advice when it comes to setting up and executing these plans.
Having worked with top-level executives for many years, I can tell you that every one of them has had the best intentions and surely hasn’t wanted to profit by illegal means. Unfortunately, in today’s world of litigation and lawsuits, you need to prove without a shadow of a doubt that you are compliant with rules and regulations and that you never acted on any MNPI. One way to ensure this is to work with an expert who can guide you through setting up your plan and be there when it comes time to trade within that plan.
Design a plan for the long term. While it is possible to make changes or amendments to a 10b5-1 plan, it is not necessarily in your best interest to do so. Many companies require you to make changes only under the conditions of an open trading window. The thought process behind that strategy is to protect you from potential accusation. If a corporate executive makes changes or amendments to their plan, regulatory bodies like the SEC consider it an entirely new plan.
To minimize any accusations, many companies will limit the total number of amendments an executive can make to their 10b5-1 plan. Also, some companies will not allow 10b5-1 plans to be terminated by executives and other insiders except during an open trading window.
For all of these reasons and more, it is important to design your plan with the long term in mind. Consider how and when you want to execute sales of company stock currently and how you might want to sell off stock in the future as well. A wealth manager experienced in helping top-level executives sell company stock can help you anticipate future company stock trends that could affect you.
Exercise disclosure and transparency. While there is no SEC law that requires you or any other top-level executive to disclose the fact that they are utilizing a 10b5-1 plan, it doesn’t mean that it’s not a good idea to do so. The 10b5-1 rule was enacted to protect executives and other insiders from being accused of insider trading, but it also helps to ease the minds of the general public as they invest in the publicly traded stock.
In today’s business world, it is best to leave little to chance when it comes to your reputation and the reputation of your company. Being transparent about using a 10b5-1 plan really has no downside. It shows shareholders that you value transparency and want to be honest with them. It also shows the general public that you have taken steps the eliminate the possibility of insider trading within your company.
Develop a 10b5-1 Plan Strategy
While an effective 10b5-1 plan may not completely prevent you from ever being accused of insider trading, it will certainly help protect you in the event something like that were to happen. By following these 10b5-1 plan best practices and developing solid strategies, you can take actionable steps to protect your reputation, your family, and your assets.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for executives with equity compensation packages. For more information on how Wade and the Carpenter Team can advise you on setting up and managing a 10b5-1 plan, reach out today for a complimentary consultation.
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