Money

Avoiding Insider Trading Claims

Corporate leaders often feel like they live in a fishbowl. Almost everything they do and say is subject to the prying eyes of onlookers

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Corporate leaders often feel like they live in a fishbowl. Almost everything they do and say is subject to the prying eyes of onlookers. And for the leaders of publicly traded companies, this intrusion into their private lives is taken to a whole new level. SEC rules, shareholder relations and analysts’ opinions create a situation where they can’t even sneeze without hearing about it from someone.

This environment is very much at work when a corporate executive of a publicly traded company wishes to sell some of their company stock. They may have accumulated a large holding of company stock through years of hard work, stock grants, awards and options. But when they decide they would like to sell some of their shares, they may find out they can’t.

This is primarily because of a set of SEC rules that are designed to prohibit insider trading.  There are blackout periods, usually before the release of quarterly filings with the SEC, when the corporate executive is prohibited from selling any company stock because they likely know things about the company that the public will not find out about until the quarterly reports are published. There may also be other periods of time between quarterly filings when the executive knows of material nonpublic information because of their position with the company. Shares can’t be sold during these times either, even though they may not be in formal blackout periods.

While these rules are understandable and necessary to protect the public, the result can be a very limited number of days over the course of a year when the executive can sell any of their shares of company stock.  

The 10b5-1 Plan

What if the price of the stock is temporarily low when their trading window opens? Is the executive just supposed to accept this low price because they know their next trading window may not open again for months? Or, do they continue to hold and accumulate more and more company stock, increasing the risk of their investment portfolio and their financial future?

Fortunately the answer to these unsatisfactory options is “No” thanks to a very special kind of strategy called a 10b5-1 plan. 10b5-1 is a rule established by the SEC that allows insiders of publicly traded corporations to set up a plan to sell shares of company stock they own. Rule 10b5-1 allows insiders to sell a predetermined number of shares at a predetermined time and a predetermined price. These plans are used by many corporate executives to avoid accusations of insider trading.

With a 10b5-1 plan in place, the corporate executive may sell shares of company stock even during black out periods since all the parameters of the sale were predetermined. This enables them to manage a stock disposition strategy where they gradually reduce their concentrated holdings of company stock, better diversify their investment portfolio and reduce their investment risk over time.  

We have helped implement this strategy successfully, especially in the five-to-ten-year window before expected retirement when diversification and risk reduction are often top priorities.

But remember the fishbowl! The requirements of rule 10b5-1 are very complicated and technical.  Be sure your plan is approved by corporate counsel and that you work with a WealthCoachTM and investment custodian who are intimately familiar with all that is required. You will want your 10b5-1 plan to be so solid that it can stand the prying eyes of the SEC should they raise questions because you received a good sales price on the disposition of your stock. 

Tom Kirk_BW_About the Author

Tom Kirk is president, founder and WealthCoach at FirstWave Financial in Satellite Beach, Fla. For more information, visit FirstWaveFinancial.com

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