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Maximizing Opportunities During Employer Stock Trading Blackouts: 10b5-1 Trading Plan Best Practices

10b5-1 trading plans can be a valuable tool in wealth building by permitting an executive to trade in employer stock during blackouts, particularly for executives who may be in a virtually perpetual blackout. The plans can also be used as a way to satisfy exercise prices and tax obligations on equity awards.

Business Point

Given that an executive must enter into a 10b5-1 trading plan in “good faith” and “not as part of a plan or scheme to evade”1 insider trading restrictions, the executive should take into account best practices regarding the implementation of such plans to increase the chances that the Rule 10b5-1 affirmative defense to insider trading applies to trades under the plan.

Technical Points

Below is a list of some best practices for executives to consider with respect to 10b5-1 trading plans:

  • Review the issuer’s insider trading and hedging policies, and stock ownership guidelines.

  • Determine whether (i) the issuer must approve the form of plan, (ii) the issuer requires a particular form or designated broker and (iii) pre-clearance of the plan is required under the insider trading policy.

  • Adopt a plan only when the executive could otherwise trade under the issuer’s insider trading policy, as this will support the good faith requirement.

  • Include a brief “cooling off” period following adoption of a plan during which no trades are made. A typical cooling off period is 30 days, though some plans do not permit transactions until the next open trading window.

  • Consider avoiding large trades shortly after adoption of the plan.

  • Provide for a reasonable life span for the plan. Avoid plans shorter than six months or longer than two years. Plans that are too short may be viewed negatively as not in good faith, and plans that are too long may require amendment or early termination.

  • Consider disclosing adoption of the plan through an 8-K or press release. No disclosure requirement currently applies; however, affirmative disclosure by the company, including reasons for such sales, may help to address potential market confusion or investor concerns (particularly for significant sales). If public disclosure is made regarding adoption, consider similar disclosure for material changes or early terminations.

  • Avoid amendments and early terminations if possible. Such changes may bring into question whether the plan was adopted in good faith. Amendments or termination need to be at a time when the insider could otherwise trade under the issuer’s insider trading policy. Transactions after any amendments should be subject to a cooling-off period.

  • Avoid multiple plans. This could call into question whether the good faith requirement was met or be viewed as prohibited hedging.

  • Trading outside the plan will not be covered by the plan’s affirmative defense for purposes of Rule 10b-5.

  • Trading under a plan does not alleviate Section 16(b) short-swing liability concerns or reporting obligations under Section 16(a) of the Security Exchange Act of 1934.


1. 17 CFR 240.10b5-1.

© 2017 Andrews Kurth Kenyon LLP

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About this Author

 Matthew B. Grunert, Andrews Kurth, Employee Benefits Implementation Attorney, Welfare Plans litigation lawyer
Partner

Matt's practice focuses on tax matters with an emphasis on employee benefits. Matt works with clients in the design, implementation, maintenance and termination of defined contribution plans, defined benefits plan, health and welfare plans and executive compensation plans. He also has experience with the employee benefits aspects of mergers, acquisitions, dispositions and spin-offs.

Matt represents clients on benefits-related matters before the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. He...

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