Planning for Executives - 12 Value, risks and tax implications of utilizing Section 10b-5(1) plans in concentrated stock situations

Question 1

What is the SEC Rule 10b-5 plan?

Answer 1

This rule prevents inside trading. An employee who has access to nonpublic information, will be liable for any profits realized by others whom the employee provides with inside information.

Question 2

What is the SEC Rule 10b-1 plan?

Answer 2

This rule proactively helps avoid the apprearance of participating in inside trading. It allows insiders to sell company stock by setting up a predetermined plan that specifies in advance the share price, amount, and transaction date

Question 3

What are some key requirements for Rule 10b-1 to be applicable?

Answer 3

1) The predetermined plan must be established before the
executive became aware of the material inside information
2) The predetermined plan must either:
- specify the amount, price, and date
- provide a written formula for determining those parameters
- not permit any subsequent discretion by the executive over how, when, or whether to execute the plan.
3) The executive/director does not enter into or alter a corresponding or hedging
position regarding the same stock.

Question 4

Once the the 10b-1 plan is submitted, can it be revised or ended early?

Answer 4

Yes, but this will substantially weaken the affirmative defense

Question 5

The more a wealth management client modifies or starts and stops advance plans like this, the _____
susceptible to inside information trading claims the client could become.

(more or less)

Answer 5

more

Question 6

What should wealth managers do to avoid new problems from the 10b-1 plan?

Answer 6

Wealth managers should
encourage their clients to adopt plans with relatively short durations, perhaps only one year, so that relatively frequent second looks are, in effect, built into the plan. Once one period comes to an end, a new plan for the next, brief period can go into effect.