Insider trading has been a hot topic in the last few years, due in part to unethical behavior by top-level executives and traders alike, along with the added exposure from social media and other news outlets. While insider trading is not a new concept, it is one that can be avoided if the parties involved are diligent about taking steps to prevent it.
If you are reading this post, you are a top-level executive that wants to remove any and all misconceptions about you, your company, and your trading positions. You likely have heard of 10b5-1 plans and the protection they offer corporate executives against insider trading allegations. The reality is, even if you do everything by the book, it may not be enough to prevent an outside party from accusing you of such behavior. And, in today’s world, perception, unfortunately, seems to be as powerful as reality itself. Let’s take a look at how to set up a 10b5-1 plan with the help of an experienced executive financial advisor.
Understanding 10b5-1 Plans
A 10b5-1 plan is a trading platform that sets limits on how and when you execute trades of your corporate stock outside of open trading windows. An open trading window is a time when executives can freely trade company stock. This occurs in the weeks immediately following a company’s public earnings report for the quarter. During these open trading windows, there is no risk of insider trading because all relevant information has been shared with the public, which means there is no material non-public information (MNPI) available.
If you trade or sell outside of those open trading windows, however, you could be perceived as conducting insider trading because you could be acting on information not available to the public to make trades for gain. If an executive is exposed to material that is not public information, and then acts on that information by executing trades for gain, that executive is essentially committing insider trading and could be subject to fines and even jail time.
This is, of course, unless you have a 10b5-1 plan, which allows you to trade or sell when those open windows are closed using a predetermined formula. For example, you might say that you want to sell 500 shares of company stock when it reaches a certain share price. Establishing this plan with the help of your financial advisor and filing it with the U.S Securities and Exchange Commission (SEC) protects you from insider trading allegations because it provides a completely quantitative formula for making trades.
How to Set Up a 10b5-1 Plan: Steps to Take
When it comes to setting up a 10b5-1 plan, there are three main steps:
- Find a financial advisor. It’s important to identify an experienced financial advising team that has at least a decade of experience dealing with 10b5-1 plans, along with a wide understanding of equity compensation for top-level executives. This is a vital step to ensuring that your plan is set up correctly and includes the type of trade strategy that you want to employ for your unique financial situation. It is possible to set up a 10b5-1 plan on your own and file it with the SEC. However, by not working with an expert, you could be failing to capitalize on one of the biggest benefits of the 10b5-1 plan, which is that it can be custom-designed to suit your unique financial situation and long-term investment strategy.
- Consult your employer. The next step you must take in setting up your plan is consulting with your employer to see what types of rules and regulations they have set forth for executives wanting to establish a 10b5-1 plan. Your employer should be elated that you are taking the proper steps to protect yourself from insider trading allegations. After all, it ultimately protects the company as well. A simple request to see any and all documents pertaining to 10b5-1 plans through your employer should be commonplace for them. Once you receive the documents, share them with your advisor to ensure you meet both SEC and company requirements.
- Devise your trading formula. Lastly, you will need to work with your advisor to develop your quantitative investment strategy that will be executed through your 10b5-1 plan. Again this will involve establishing a formula that outlines a trade order to sell or buy a specific number of shares. The formula will identify the price at which you want to buy or sell the stock as well as the timing of the trade. The trade could be executed at the open of the market, on a market order, or at the close of the market.
No matter what type of strategy you employ, it is crucial that the formula it is written out clearly and concisely on your 10b5-1 plan document and filed with the SEC. This ensures it is completely evident you did not make a trade based on MNPI.
Getting Started on Setting Up a 10b5-1 Plan
As an executive, the last thing you want to do is unknowingly commit insider trading simply because you failed to prepare yourself. When setting up your plan, do your research, partner with an experienced and trusted executive financial advisor, and don’t be afraid to ask questions throughout the process. The more clear and concise you can be when setting up your 10b5-1 plan, the more protection you gain for yourself.
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 equity compensation planning. For more information on how Wade and the Carpenter Team can advise you on establishing a 10b5-1 plan, reach out today for a complimentary consultation.
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