Licensed from 123RFFinancial advisors with executive clients that receive employer stock and option grants need to understand 10b5-1 trading plans. The following 10b5-1 Overview from the myStockOptions.com Blog provides an introduction to these trading plans. However, in addition to understanding the basics, advisors also need to be able to identify appropriate exercise and sell price targets and to track or execute the 10b5-1 trading instructions.
10b5-1 plan price targets are often selected by clients without consideration of risk or tax ramifications. Advisors that subscribe to StockOpter.com are able to help clients create 10b5-1 trading plans based on risk analytics and tax and cash flow objectives. This press release describes StockOpter’s comprehensive equity compensation planning capabilities.
In addition to helping clients make better decisions regarding their company stock and options holdings, StockOpter is also able to track 10b5-1 plans and send trading instructions when price targets are reached. Although most 10b5-1 trading plans are executed by large stock plan service companies like E*Trade, Fidelity and Morgan Stanley, smaller firms can use StockOpter to monitor the execution these plans.
10b5-1 Overview
Executives and other key employees with equity compensation face a unique conundrum with company stock. While much of their pay is in the form of restricted stock units (RSUs) and/or stock options, they often cannot sell company shares because they possess what’s called material nonpublic information (MNPI), i.e., knowledge of confidential company info that will affect the stock price when made public. In other words, they have to sell company shares to meet financial goals but also don’t want to be accused of insider trading.
Fortunately, there is a way out of this Catch-22 situation: SEC Rule 10b5-1, which provides for a Rule 10b5-1 trading plan.
Insider-Trading Risk
MNPI is confidential information about the company that will move the stock price up or down. When an employee knows MNPI about a company, whether they’re an executive, key employee, or outsider, they cannot trade in that company’s securities until the MNPI is disclosed.
When clients possess MNPI, regardless of whether or not they factor that information into buying or selling decisions, they’re at risk of being charged with insider trading by the Securities and Exchange Commission (SEC) and criminal prosecution. To make matters even more challenging, the intervals when company insiders do not possess MNPI, and can sell shares without the risk of insider trading, may be brief and infrequent.
Test your knowledge of the rules: Try the quiz on insider-trading prevention and its interactive answer key at myStockOptions.com
Rule 10b5-1 to the Rescue
When a client is in this position, they can use a Rule 10b5-1 trading plan to regularly sell company stock. When properly created, a 10b5-1 plan gives employees with MNPI a way to diversify their stock holdings, sell stock to meet goals under a financial plan, and avoid getting into trouble for insider trading.
Alert: The SEC is focusing on abuses with these plans and has proposed new rules.
myStockOptions.com recently held an advisor webinar on 10b5-1 plans and other SEC rules: 10b5-1 Trading Plans & Other SEC Rules Advisors Need to Know. A panel of three experts provided key insights on both the legal framework of 10b5-1 plans and the role they can play in financial planning for company insiders. To read about some of the highlights of the webinar, see their blog article about it How To 10b5-1 Plans Can Help You Build Wealth and Avoid Insider Trading with Your Company Stock