10b5-1 Plan Best Practices for any Market Climate

Rule 10b5-1 trading plans are one of the tools that employees and board members of issuer companies have as a resource in creating an affirmative defense against insider trading. Although Rule 10b5-1 has been around for about 20 years now, best practices continue to evolve.
 
Rule 10b5-1 was adopted by the Securities and Exchange Commission (SEC) in 2000 and permits insiders of publicly traded corporations to set up an advance trading plan for selling stocks they own. The basic premise of 10b5-1 is to allow employees who have limited access to trading windows to transact in the company’s stock in a way that creates an affirmative defense to claims of insider trading.

In a recent NASPP Podcast, “Best Practices for 10b5-1 Plans,” Joshua Shek and Rich Baker, both Executive Directors with Morgan Stanley, discussed trends and practices that companies should consider in allowing and monitoring these plans. While I strongly recommend a listen to the entire episode, I’ll cover a few of the highlights in this blog.
 

Should 10b5-1 Plans be Required for Key Employees?

According to a 2018 survey (“2018 Survey”) conducted by Morgan Stanley, Shearman & Sterling LLP and the NASPP, 49% of the responding companies indicated that they require or strongly encourage their C-suite employees to sell stock via a 10b5-1 plan. This figure was 42% for company board members.

While it may sound ideal to require a plan at the top levels of the organization (where insiders routinely come into contact with material, non-public information and may be limited in trading opportunities), Shek and Baker float the suggestion that some companies may want to consider the path of “strongly encourage” rather than “require” adoption of a trading plan. Strongly encouraging use of a plan, while similar to a requirement, leaves room for the company to make exceptions in the event needed.
 

Implement a Cooling Off Period

A cooling off period is the time between when a plan is completed/signed and when trading can begin. According to the 2018 Survey, 81% of companies require a cooling off period of at least 30 days. While 30 days is the most common time period, 45 and 60 days are also options.

In implementing a cooling off period, consider requiring a minimum, rather than a fixed time period.  This will give the company flexibility in the final plan approval stages to determine if a longer cooling off period may be needed.
 

Establish Guidelines for Amendment and Termination Scenarios

It is common to hear advice suggesting that modifications of 10b5-1 plans should be avoided or extremely limited. This is because changing a plan after it is implemented could potentially raise questions about whether the insider subsequently used material non-public information to drive plan amendments. Although alterations to a plan should be an exception rather than common practice, 80% of survey respondents said they allow amendments, with varying rules around changes.

Knowing that there are scenarios that may trigger a 10b5-1 plan modification, companies should enact a very clear policy to guide such situations in a consistent manner.

Create a Checklist to Match Equity Award Holdings with Planned Trades

Since the insider is responsible for pursuing the 10b5-1 plan, it’s quite possible that they are the person documenting the share numbers to be sold under the plan. When a plan arrives for company review, the stock plan administrator should carefully evaluate planned trades against equity plan holdings.

A common scenario for a mis-match in share figures is rounding. Let’s say an insider has an award that vests quarterly or even annually. Oftentimes when shares are divided into vesting periods, some amount of rounding up or down is involved in order to avoid vesting of fractional shares. The Stock Plan Administrator should check the insider’s calculations to ensure enough shares will be vested and available for sale on the planned trading dates.

For more best practices on 10b5-1 plans, including other items to look for in reviewing a draft plan and things that are sometimes overlooked, check out the entire podcast episode.