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How Advisors Can Build a Better 10b5-1 Plan

Advisors, not corporate counsel, are often in the best position to design 10b5-1 plans that align with both regulations and insiders' financial goals.

Most people need a detailed recipe to successfully bake a cake. The same is true for company insiders and affiliates who want to sell their shares.

Rule 10b5-1, approved by the Securities and Exchange Commission in 2000 as a clarification of Rule 10b5 of the Securities Exchange Act of 1934, allows company insiders—such as directors, executives, employees and large shareholders—with potential access to material nonpublic information—to create plans for making predetermined trades in accordance with insider trading laws. The prices, amounts and dates of these trades must be predetermined or calculated using metrics or formulas. Additionally, sellers and their brokers cannot possess any material nonpublic information. After all, the whole point of a successful 10b5-1 plan is to generate liquidity while simultaneously avoiding activity that could be misconstrued as insider trading.

While Rule 10b5-1 discusses what these predetermined trading plans are designed to accomplish, it doesn’t provide any guidance or commentary on how to put a 10b5-1 plan together. Some companies may have preexisting 10b5-1 plans. Otherwise, employees can craft their own corporate counsel-approved plans.

Although corporate counsel must approve 10b5-1 plans, their primary expertise is legal in nature, not necessarily equity compensation planning, and while they might understand insider trading rules and their company’s insider trading policies, they may not be as familiar with stock market transactions, trends or best practices. Additionally, they likely don’t understand the tax consequences associated with selling different types of equity compensation or know the personal financial goals of insiders or affiliates. It is also worth noting that corporate counsel is typically prohibited from making individual recommendations pertaining to plan designs.

For such reasons, a financial advisor who is experienced at crafting 10b5-1 plans that align with both a company’s insider trading policy and insider/affiliate’s holistic financial plan is a better choice when it comes to guidance on 10b5-1 plan content and structure. In particular, advisors who understand what all parties are seeking to gain from a 10b5-1 plan and how plan rules can affect company insiders/affiliates’ long-term financial goals are in a stronger position to create plans that satisfy all relevant stakeholders.

10b5-1 plans shouldn’t be Googled because, while myriad online templates may exist, the advisors who design them must work with a company’s corporate counsel and preferred trading partner, as well as the insider/affiliate, to build customized 10b5-1 plans that address a variety of issues, including:

  • The Company Insider/Affiliate’s Objectives & Expectations: What does the company insider/affiliate want to accomplish through their predetermined trades? Are they seeking to raise cash at any cost or obtain cash only if the stock hits a certain price? An advisor should take the time to fully understand what the insider/affiliate is looking to achieve and make sure the latter will be satisfied with the outcome of any trades.

Nobody can predict the market with 100% certainty—a company’s stock price could soar far beyond the price someone agrees to sell their shares at months prior or fall far short of an overly optimistic pricing forecast. If this latter scenario would have a negative impact on the insider/affiliate’s long-term financial goals, the advisor can work with them to calculate less optimistic stock prices for which they can agree to sell their shares while simultaneously helping them budget, and ensure they have enough cash on hand to cover expenses if they raise less cash than expected.

  • Plan Optics: The perception of impropriety can seriously damage a public company’s reputation. If a company approves 10b5-1 plans for time spans deemed to be too brief, outsiders might come to believe that executives, employees and controlling/large shareholders are being allowed to take advantage of such insider knowledge to sell their shares in line with short-term stock price movements. This is why companies and insiders/affiliates must consider how time frames and other features of 10b5-1 plans will appear to outsiders. In general, 10b5-1 plans should be in effect for at least 12 to 18 months.
  • Vesting RSUs & Expiring Options: Restricted stock units (RSUs) are company shares that can be given as a form of equity compensation when employees achieve performance or tenure milestones—but until they vest, these shares have no monetary value. When they do vest, RSUs receive fair-market valuations and are considered income, with a portion of the shares withheld for income tax payments. Employees can then sell their remaining RSUs; however, they may be prevented from selling recently vested shares if an existing 10b5-1 plan is already in place. Experienced financial advisors will determine whether employees entering into 10b5-1 plans have RSUs scheduled to vest, work with them to structure plans that take this into consideration and guide them on how to manage their RSUs under the terms of any existing 10b5-1 plans as well as corporate insider-trading policies.

Unlike with employees, RSUs granted to nonemployee directors do not have a portion of their vested shares automatically withheld for income tax payments. Therefore, the nonemployee director is responsible for paying any resultant income tax payments. Their financial advisor can help them implement a 10b5-1 plan that allows them to sell a certain number of shares to cover this tax liability generated by a vesting event.

Employee stock options can also potentially complicate 10b5-1 plans. Advisors should remind insiders and affiliates that they should exercise or sell all of their stock options within 12 to 18 months before their expiration date, to ensure that they do not expire worthless.  

Corporate counsel and 10b5-1 plan groups at brokerage firms often don’t possess the full context and holistic perspective necessary for designing an effective plan that adheres to the vision and goals of both the company and insider/affiliate. A master race car mechanic may never have driven in a race, and a championship race car driver might not be able to fix the car. Financial advisors who are experienced at building 10b5-1 plans in alignment with corporate insider-trading policies and company insiders/affiliates’ financial goals are positioned to both fix the car and win the race for their clients.


Fritz Glasser, CIMA® is co-founder and CEO of Optas Capital.

TAGS: Equities
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