If you have been granted company stock, Rule 10b5-1 provides a means for you to sell the stock using a trading plan, thereby avoiding any accusation of insider trading. Read here to find out more.
Established by the Securities and Exchange Commission in 2000, Rule 10b5-1 allows insiders of publicly-traded corporations to set up a trading plan for company stock. Stocks represent an important piece of public company compensation; however, insider trading restrictions can pose a significant challenge to selling corporate stock. To avoid accusations of insider trading, Rule 10b5-1 is commonly used. Under Rule 10b5-1, the purchase or sale of securities made on the basis of material non-public information (MNPI) about a security or issuer is strictly prohibited. In other words, a purchase or sale of a security must be adopted while the executive does not possess MNPI. Rule 10b5-1 plans are passive investment schemes, meaning plan holders do not maintain direct control over transactions. This permits major holders or executives to sell a predetermined number of shares at a predetermined time.
The ‘good faith’ provision in Rule 10b5-1 grants the SEC permission to challenge the affirmative defense created by Rule 10b5-1 when it suspects abuse. This provision recommends that executives refrain from modifying or cancelling plans once they are in place, although it should be noted that some modifications are permitted by Rule10b5-1 and are appropriate in rare cases. It is a good idea to have in place a termination clause, which would effectively suspend trading upon mergers or acquisitions, an underwritten public offering, a change in the executive’s employment status or personal events such as divorce, ill health or bankruptcy.
To be effective, a Rule 10b5-1 plan must be in writing and meet three requirements. First, the plan must state the number of shares to be purchased or sold. This can be determined by the number of shares, percent of the executive’s holdings, number of shares needed to reach a specific dollar amount or an amount set by an algorithm or computer program. Rule 10b5-1 plans allow for multiple transactions, so different amounts of shares can be assigned at each purchase and sale. Second, a Rule 10b5-1 plan must state the price at which shares will be purchased or sold. This price can be determined by a number of things, including dollar price, limit-order price, market price or an algorithm or computer program. Again, multiple transactions at varying prices can be ordered. Lastly, the timing of the purchases or sales must be outlined in the plan. This can be determined by a specific date or time, or the time at which a particular event occurs.
Please reach out to your advisor if you have more questions regarding Rule 10B5-1.
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