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Selling Corporate Stock: How a 10b5-1 Plan Could Smooth Out Your Sale

Your stock has gone up with the broader markets. Should 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 increase, how will 10b5-1 plan sales be perceived? 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 to market conditions.

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 may regularly use 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 may use 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 when, how many shares of, and 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 patterns 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.

Will selling stock pass a negative message to investors?

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, extra care should be taken when markets are volatile. 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 article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the consequences of any strategies mentioned in this document. The information has been verified by the author, but it does not constitute legal or tax advice and First Republic is not acting as your attorney or tax advisor. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.


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