SEC Reform is Brewing in the World of Trading Plans

An unexpected COVID-related regulatory action is coming

For a Season, these C-Suite Blogs are going to be, well, “Short & Suite” observation pieces, not technical white papers. As readers, if you desire a more detailed technical application, please give us a call, and we would be delighted to jump into detail on any topic.

SEC Chairman Gary Gensler indicated on June 7, 2021, that a refresh of the affirmative defense to insider trading through the use of 10b5-1 Trading Plans is currently in the works. Suggestion: as soon as the new guidance is issued, all parties with an active Trading Plan (or those who are contemplating using one) should contact informed professionals to be certain of compliance with the coming changes. According to the National Law Review, July 21, 2021, SEC staff is already scrutinizing trading plans to comply with current standards. Can you say, “Red Flag?” Yes… should insiders be talking to informed advisors? Yes!

  • Here is the link to this insightful overview in the National Law Review.
  • Suggestion: Call your current advisor and ask them to summarize Gary’s recent comments about 10b5-1 trading plans. If you hear crickets, then consider obtaining a second opinion from an informed advisor. You deserve specialized advocacy.

Background: Filing a properly structured trading plan is a way for you as an insider to communicate to your company, the SEC, and the public that you will execute a transaction (purchase company stock, exercise stock options, or sell company stock) at a certain time, price, event, or for a specific reason. The trading plan assures all stakeholders that the transaction is happening in a fully disclosed legal manner, protecting you from violating insider trading laws and winding up like Martha Stewart. The plan protects you even if, at the transaction date, you possess material, nondisclosed, nonpublic information (such as a pending corporate acquisition). Here’s the catch: at the time a trading plan is signed, you must NOT be in possession of material nondisclosed information.

The Rub: Examples provided in the referenced article highlight that the manipulative behaviors of a few actors, elevated to new heights during Covid, have adversely brought scrutiny upon the entire insider population. The actions of a few ill-advised officers have brought a public outcry against a sound affirmative defense against Insider Trading, which has endured for 21 years since Rule 10b5-1’s inception in 2000.

Anecdotally, we have had many conversations with Comp & Benefit Leaders, internal Compliance & Legal officers, and the less well-known but highly influential VP’s of Investor Relations about how they see 10b5-1 trading plans working in their corporate environments. With these plans now coming under greater scrutiny, to be a worthy advocate for an officer demands that a firm like ours continue to invest the time to meet and collaborate with these important policymakers operating within a client’s employer.

Over time, as we have shared our design philosophy, we’ve seen a few chuckles regarding how we design 10b5-1 trading plans. These chuckles now seem to be no longer quite so funny, given some of the more recent COVID-related shenanigans. In the end, while we suggest design parameters, our clients make the final design decisions. In fairness, in the largest of public companies, trading plans must also be approved by company leadership, one more reason to know the leaders who influence plan design and approval in each client company.

In short, history informs that practice does not make perfect. It is “perfect practice” that leads us to a more optimal result. It is in this spirit of gaining “perfect practice” for each new client’s initial 10b5-1 trading plan, especially when they have never previously implemented one, that we conservatively design the initial plan to expire in no less than 12 and no more than 18 months, having triggered NO TRANSACTION, and allowing between 18 and 24 months to manually exercise the covered grant prior to each grant’s expiration date.  Why? Because this conservative plan design begins to close the “Knowing/Doing Gap.”

A secondary objective of the initially conservative plan design is to cast the net just wide enough to catch a statistically abnormal pop higher in stock price due to a convergence of unforeseen events that act to cause a price pop during the plan’s operative life.  More frequently than we might expect, positive things happen in unforeseen markets, and if you are an insider, why not set yourself up for success to exercise a grant at a statistically opportune moment when you might otherwise be blocked from trading or so that the automated nature of the plan kicks in when you are otherwise occupied on a long flight to Argentina to fish and hike in Patagonia!

Bottom Line: Optimally managing Stock Option exercises and exiting concentrated stock positions is art, not science. Achievement of client objectives is an opus, written across the entire arc of an executive’s career and frequently for 10-years into retirement as the largest grants live on until fully exercised. Success is not determined by the outcome of exercising any one or two grants. For a fresh perspective, please talk to one of our art-focused advisors about your plans and objectives! Collaboratively, we can make beautiful music for your family over time.

Stoddard Barnhill

Phillip Barnhill

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The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

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Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Authors

Phil Barnhill, CLU

Private Wealth Advisor
Director of Risk Management

Stoddard Barnhill, CFP®

Private Wealth Advisor

For nearly 25 years Phil has worked exclusively with senior leaders of public and large private companies. Over the past six years Stoddard has been carefully mentored in this niche market, leading to a highly-specialized practice knowledge within the team. This focus on corporate executives and their family dynamics comes with significant insights into executive compensation, stock concentration, equity monetization, and the full life-cycle of a career in the C-Suite.

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