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The Four Characteristics of an Effective 10b5-1 Plan

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by  Keith McKenzie

Shareholding corporate officers in possession of material nonpublic information (MNPI) need a 10b5-1 plan. The reason: even legitimate trades can invite speculation due to the insider’s unique insights into the company. As we’ve discussed before, 10b5-1 plans are an effective solution. They offer a way for insiders to systematically diversify away from their company stock while satisfying SEC scrutiny.

A 10b5-1 plan is only as effective as the individuals who design it, however. If you’re seeking a 10b5-1 solution, it’s important to consider working with a team that’s experienced and committed to the long term. Ideally, your advisory team will act as partners at all stages of the project, from design and execution to reporting and collaboration with your CPA. Executives may unknowingly subject themselves to risk if the advisory team isn’t conscientious. In such cases the protection of the plan erodes.

Getting it right means choosing a team with four key characteristics:

  1. Ongoing experience designing 10b5-1 plans
  2. The ability to interpret the many “grey areas” in these plans
  3. Consideration for long-term consequences
  4. Coordination with compliance and accounting

Below, we take a closer look at these four characteristics to help guide the decision process when choosing a team.

Experience Counts

A 10b5-1 plan is a binding contract to buy or sell securities. Therefore, it consists of many moving parts. An experienced team knows how to navigate this complexity. This involves identifying an outside party to execute trades on behalf of the insider, as well as identifying specified trade dates and prices. In many cases, this step is further complicated by algorithms used to determine those parameters. Experience is critical when operating under the letter of the law.

Consider Linda Thomsen’s remark, former Head of Enforcement for the U.S. Securities and Exchange Commission: “We and others are looking at the disclosures surrounding 10b5-1 plans…. We’re looking at multiple and seemingly overlapping 10b5-1 plans and at asymmetrical disclosure around plans.” With experience comes peace of mind.

Interpreting the “Grey Areas” of a 10b5-1 Plan

The rules governing these plans require interpretation. Executives need trained professionals that are able to read both the implicit and explicit meanings of the rule. Good judgement is critical because while it’s possible to amend a 10b5-1 plan, doing so might encourage unwanted SEC scrutiny and distract from business priorities. Not to mention that altering a plan once an executive possesses MNPI is illegal.

Having outside professionals handle these issues also helps adhere to the SEC’s rule requiring that “the 10b5-1 plan was entered into in good faith.” A thorough interpretation of the law gives executives the 30,000-foot view necessary to make good decisions. Insiders need to know the answers to the questions they haven’t asked.

Considering Long-Term Consequences

Insiders can think of a 10b5-1 plan as a safety net. Drafting and executing such a plan helps ease concerns among the investing public. When investors learn that an officer has liquidated company shares they may worry. Many see these transactions as a sign of impending trouble. A 10b5-1 plan addresses this problem by placing distance between the executive and the decision to sell. With these plans the trades are out of their hands but will still meet the parameters that they’ve set ahead of time.

Research by Morgan Stanley shows that the number of 10b5-1 plans is growing in more than one-third of the companies surveyed. With their growing popularity, these plans are an increasingly important consideration for both individual officers and companies, which may consider designing plans that work for all participants over the long term.

Coordinating Compliance

Completing a 10b5-1 plan marks the beginning of compliance, not the end. The company must review each plan to ensure consistency and legitimacy. Additionally, the plan should allow for a “cooling off” period during which the shareholder refrains from trades in the weeks following the execution of the plan. The shareholder should involve their personal accountant in the details to ensure all transactions are properly recorded and reported.

Finally, in the interest of transparency, executives should disclose the plan’s existence to the public. An effective team of professionals understands that procedures only work if they’re executed consistently.

Lining Up Your Team

A 10b5-1 plan is a defensive measure. However, like any good defense, it must be based in a strategy that starts with the end in mind. Experience, interpretation, consequences, and compliance are all qualities of a skilled team that will help you reach that end.

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About the author: Keith McKenzie is a founding partner at Delphi Private Advisors. The firm offers institutional wealth management in a boutique, personalized service model for high-net-worth individuals and family foundations. Keith can be reached at keith@delphiprivate.com.

 

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