For busy corporate executives, managing personal finances with the rigors of a demanding job can be a lot to handle. But what happens when requirements from the corporate office directly impact the family finances? In this post we’ll go under the hood to uncover the basics of a 10b5-1 Trading Plan and key considerations when faced with implementing one.

What are they? 10b5-1 Trading Plans are pre-determined trading schedules that outline when employees buy or sell their company stock, often in coordination with vesting stock options (i.e. RSUs). The plans are used by executives of publicly traded companies that are privy to material non-public information (MNPI). 10b5-1 refers to the name of the tax code established by the Securities and Exchange Commission (SEC).

Why are they important? 10b5-1 plans provide protection to employees and their employers from regulators, company shareholders and the general public against claims of fraudulent trading activity based on insider information. While establishing these plans help insiders avoid conflicts of interest and establish innocence against public scrutiny, they do not completely absolve executives from future accusations. The adoption of such plans varies from company to company but are generally recommended and/or required by the legal team.

How do they work? 10b5-1 contracts are drafted jointly by the broker (i.e. eTrade or UBS) that manages the stock plan for the publicly traded company and the employee. Before implementation, the contract needs to be signed by the employee, broker, and the employer’s general counsel. Brokerage companies have specialized teams that will match the employer’s recommendations with their own contract template. It’s recommended that these contracts are drafted during open trading windows when the employee is not in possession of MNPI.

In addition, the following considerations need to be made by the employee when drafting a plan.

What else should be considered?

Holding Requirements – Most executives are required to hold a minimum number of stock shares requisite with their company rank. This needs to be considered when drafting future transactions. Make sure you will have enough shares to meet the holding requirement as purchasing additional shares outside of the pre-determined schedule will be a headache for the employee at best, and at worse a potential red-flag for regulators.

Concentration Risk – We’ve talked about this before here, here and here. Without clicking the links, it’s probably obvious that we’re not big fans of concentrated risk when it comes to long-term planning. However, because of minimum holding requirements, a small amount of concentration in company stock is impossible to avoid. Establishing a 105b-1 plan can help investors meet company requirements while also keeping concentration risk to a minimum.

Cash Flow Needs – Whether it’s college tuition or a down payment on the beach house, cash flow needs change from year-to-year. In years when accessing your company stock is necessary, employees with MNPI will be restricted from doing so unless they’ve planned ahead. Because of this, planning for cash flow needs is crucial when implementing a 10b5-1 trading plan.

Connecting the Pieces

At Cordant, we have the opportunity to work with busy corporate executives to help them achieve financial clarity in life. Part of this responsibility includes coordinating 105b-1 trading plans that take into account all of the moving parts of their life. If this is something that you’re interested in, please get in touch.