The Future of 10b5-1 Plans
Odds are unless you are required by your employer to have one in place, you have never heard of a 10b5-1 plan. Named after the rule established by the SEC in 2002, 10b5-1 plans are a means for company insiders and officers to limit the possibility of insider trading. This is accomplished by having the shareholder establish a set of conditions to trade the security in advance of them having access to non-public information. As an example, an executive can establish a plan to sell 2,500 shares of their company stock on the 10th day of every month or set a limit to sell 10% of their vested shares if the stock price rises to $22.
On the surface, 10b5-1 plans establish a means for company insiders to purchase or sell shares without betraying the public’s trust. However, these plans are not without their limitations. Currently, the contract that is established when the plan is written is non-binding to the shareholder. They are allowed to modify it as long as they are not in possession of non-public information. Furthermore, they are able to cancel the plan even if they are aware of non-public data.
In addition, there is no minimum requirement on the number of days that the plan must be in place. There are also no maximum number of 10b5-1 plans that can be in place at a given time and the SEC does not require public disclosure of the plan details. An executive may establish multiple plans with different sets of criteria and execute on the one that is most advantageous. They may simply cancel the other plans that are less desirable. Lastly, there are no limitations on how many shares can be purchased or sold in one transaction under a 10b5-1 plan.
10b5-1 plans drew additional scrutiny in 2020 when pharmaceutical executives made trades of company stock prior to the announcement of approval of COVID vaccinations. In an attempt to increase investor confidence, Gary Gensler, the Chairman of the SEC, suggested changes to 10b5-1 plan restrictions earlier this year. The main proposals included:
- Restricting the ability cancel plans at any time
- Creating a cooling off period before trading can occur
- Placing a limit on the number of 10b5-1 plans that can be established
- Requiring more public disclosure on the contents of the 10b5-1 plan
At this time, these items are merely proposals. Clearly the intention of these changes is to protect the average investor by subjecting insiders to greater disclosure. Even prior to these proposals, many publicly traded companies were expanding the number of their employees who were subject to 10b5-1 trading restrictions with the hope of restricting the use of non-public information. The majority of these shares are obtained through equity grants and stock options. Insiders may also benefit from these proposals as it may limit the appearance of impropriety when they are simply trying to follow the established rules and buy/sell their company stock. For the time being, it is likely best to simply wait and see how the SEC proceeds with these proposals.
Chris Wall is a Certified Public Accountant and Certified Financial Planner. He best serves those with complex stock compensation needs, including Incentive Stock Options(ISO), Nonqualified Stock Options(NSO), Restricted Stock(RSU/RSA), and Employee Stock Purchase Plans(ESPP). His specialties include tax planning, cash flow analysis, distribution modeling, retirement planning, and withdrawal strategies.
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