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Markets Have Pulled Back, What To Do With Your 10b5-1 Plan

Your stock has fallen with the broader markets. Can you continue selling stock in the open market or within a defined selling plan?

Ordinarily, top execs employ 10b5-1 plans to provide cover against the appearance of insider selling. However, if stock prices drop, even 10b5-1 plan sales can come under scrutiny and public perception becomes very important. So what is an executive to do?

This article walks through the basics of a 10b5-1 plan, considerations when establishing one and how to respond when market conditions are less than favorable.

What’s a 10b5-1?

Introduced in 2000 during the height of the dot-com boom, the Securities and Exchange Commission (SEC) created a framework for executives to execute a contract—while not in possession of material non-public information—to sell stock over a future defined period of time at regular intervals.

Who needs a 10b5-1 plan?

Officers, directors and principal security holders of companies required to report sales of stock with the SEC are the most logical candidates to use such plans. In practice, however, even executives not required to report stock sales employ them. Anyone potentially subject to internal company blackouts has regularly used them as well. For example, legal, accounting or sales executives who have knowledge of material company actions are frequently blocked from selling stock. These executives have used 10b5-1 plans to enable them to diversify their holdings of concentrated positions.

Variables to consider within a plan

With a 10b5-1, you can dictate 1) when, 2) how many shares and 3) at what limit or trigger price a stock should be sold. While these levers are clear, market perception should be strongly considered. In addition, each individual’s financial picture is unique, so using a 10b5-1 plan in conjunction with a detailed financial plan is highly recommended. Humans inherently project future outcomes as a continuation of the past. Stock prices don’t tend to follow such rational patters in the short run. Potential turns for the worse (or better) should align with your financial plan and how the market will perceive executive stock sales.

What are my choices if my stock is going down?

In theory all stocks should go up and to the right, however, in practice, executives find themselves watching their stock follow a declining market. How can you project a message of strength to the market while diversifying your own [often concentrated] portfolio? One common approach is twofold. If you prefer to sell stock, make sure you are selling in a consistent predictable pattern (i.e. the same number of shares per month as has been done consistently in the past). Any increase in sales will likely be scrutinized because when investors lose money fingers get pointed. Conversely, if you believe in your company and have sufficient financial means to not sell it might be the right time to exercise some options to send a signal to the market that you are bullish. Consult your financial planner to explore the most tax efficient ways to do this. However, keep in mind that incentive stock options affect your alternative minimum tax.

While 10b5-1 plans are a useful tool to give executives an affirmative defense against insider trading, when markets are volatile extra care should be taken. Just like any contract, you don’t see how well it works until the tide turns. It might be time to revisit your strategy with your financial advisor.

The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here.  Client’s tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.

©First Republic Investment Management, 2018


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