Up In The Air: How Boeing's 737 Max Problem Teaches Key Points About Preventing Insider Trading

At myStockOptions.com, we are always looking for new ways to make learning about stock compensation more fun. This includes our coverage of the ways in which employees and executives at public companies need to avoid insider trading in company stock.

A compelling hypothetical question recently came our way. You probably heard about the recent aviation emergency, widely reported in the news, in which a door panel blew off a Boeing 737 Max 9 in mid-flight. Fortunately, while everyone on board was understandably terrified, nobody was hurt. Perhaps this relatively good outcome to the potential disaster led to the high spirits behind the creative question below, posted last week to the Reddit discussion forum wallstreetbets:

While it seems unlikely that an airline passenger’s first thought in this situation would be stock trading, the question remains: Would it be illegal insider trading to trade Boeing securities (which includes buying puts or calls) while you’re on a damaged Boeing airliner before the news has been reported and thus made public?

After all, you know that the incident will drive down the company’s stock price. But at the time only you, the other passengers, and the crew know about the incident. It is easy to independently connect the dots that this accident will impact Boeing’s share price.

There are two very different outcomes of this hypothetical situation. They depend on your relationship with Boeing. Below we explain.

What Is Insider Trading?

Insider trading occurs when you trade a company’s stock or other securities (e.g. put and call options) while knowing what is termed material nonpublic information (MNPI) about the company. MNPI is confidential knowledge that will affect the company’s stock price either positively or negatively when it is publicly disclosed.

You can obtain MNPI about your company while you're on the job or not. Public companies have clear policies and procedures to try to prevent insider trading among their employees and executives. These include blackout and window periods for when these insiders can or cannot trade the company’s stock.

A related behavior known as insider tipping, i.e. sharing MNPI with others, is also illegal. It means telling someone MNPI about a public company which leads that person to trade the company’s securities. Many insider-trading charges have been brought against friends or family members of company insiders who, whether carelessly or deviously, tipped MNPI to them.

Pursuing insider-trading violations has long been a high priority of the US Securities and Exchange Commission (SEC), which can bring civil enforcement actions with big financial penalties against violators, and the US Department of Justice (DOJ), which can bring criminal charges.

Rules Apply To Everyone

The insider-trading laws apply to everyone, not just to executives and other company insiders. Moreover, the laws apply to MNPI not only about a company you work for but also about any company you may know through a professional or personal relationship, e.g. a vendor, client, or competitor of your employer, or from a family member or friend affiliated with that company.

Gray Areas Of Insider Trading

Insider-trading law has grown extensively out of the general antifraud provision of Rule 10b-5 in the famous Securities Exchange Act of 1934. It has evolved mostly from court interpretations as the SEC tests the edges of Rule 10b-5. The SEC and prosecutors continue to develop legal theories to reach anyone who trades on a company’s misused MNPI. These include the “misappropriation” and “temporary insider” theories.

One high-profile example is an insider-trading case in 2016 involving professional golfer Phil Mickelson and a corporate director (see the related SEC public statement). It shows that when the SEC finds insider trading somewhere in a chain of events, all who profited will be forced to pay back their gains, even if they did not know that the information in question was tainted. In the SEC’s action, Mr. Mickelson was named as a “relief defendant,” i.e. an individual who must turn over ill-gotten gains arising from schemes perpetrated by others.

Even the definition of confidential material information is expanding beyond just straightforward good news (e.g. mergers, financials better than expected, new products ahead of schedule) and bad news (e.g. poor earnings, dividend cuts, FDA denies drug approval). The SEC often brings cases of all sizes to probe the edges of the law’s reach. Sometimes it is successful; sometimes it is not.

Over the years, the SEC and the DOJ have also looked for insider trading as it has adapted in novel circumstances. See another article on this blog for examples of SEC and DOJ charges of insider trading stemming from the Covid-19 pandemic: How To Avoid Insider Trading: Cautionary Tales For Employees From The Pandemic.

Recently the SEC has yet again pushed the boundaries by bringing insider-trading enforcement actions for what it calls “shadow trading.” This is when you learn material nonpublic information about your company that you believe will also impact the stock price of another public company and then trade in the other company’s stock.

In 2021, the SEC filed a complaint (SEC v. Panuwat) in a California federal court that tests this legal theory. The SEC claims that the defendant misappropriated confidential information about his employer, Medivation, when he learned that the company was an acquisition target of Pfizer. Rather than buying his company’s stock, the defendant purchased options in a competitor company “whose value he anticipated would materially increase when the Medivation acquisition announcement became public,” the SEC alleges. The stock of that competitor did increase by 8% after the acquisition’s announcement.

As those examples show, the SEC is not shy in hunting for insider trading in novel circumstances. But what about potential insider trading in Boeing stock on a damaged Boeing airliner in mid-flight? That’s about as novel as circumstances can be.

Outcome #1: No Fiduciary Duty Or Relationship To Boeing

In our opinion, the hypothetical situation presented by the Reddit poster would probably not be insider trading, assuming the passenger is just an airline customer with no connection to Boeing or any supplier of the defective part—also assuming the passenger did not cause the fuselage blowout (in which case the insider-trading charges would be the least of their worries).

The reason for our opinion is that insider trading/tipping arises when the trader or tipper has a fiduciary duty or relationship to the company whose stock is traded. To commit insider trading: (1) the person would have to be an employee, contractor, vendor, executive, or director of the company with inside knowledge of the plane’s defect, or have a contractual agreement not to use what they learn as a customer for their personal benefit; or (2) a passenger without any Boeing connection would need to have been given (i.e. tipped) the information by, or have stolen it from, any of those types of individuals with a fiduciary relationship to the company.

An airline passenger without any of these connections would not be committing insider trading. While certainly a case of trading inside the plane, the act would not be insider trading of Boeing securities. The knowledge of the aircraft accident fell out of the clear blue sky, so to speak. This person can use the information gained in mid-flight as the reason to purchase Boeing put options or sell stock before the news goes public.

Outcome #2: Fiduciary Duty Or Relationship To Boeing

For all of the reasons discussed earlier in this article, the Reddit poster's hypothetical situation would be a potential case of insider trading if the person trading Boeing stock on the plane works for Boeing, whether as a employee, executive, director, or contractor; similarly works for a vendor or supplier of Boeing; or has some other fiduciary relationship with Boeing. The SEC would almost certainly at least investigate the trade to discover whether the person possessed MNPI, such as knowledge about an ongoing plane defect. Depending on the outcome of the investigation, the SEC might not only bring a civil action for liability but also make a criminal referral to the DOJ.

Employees, executives, and directors of a company must be extremely careful when they are tempted to trade company stock on the basis of information they learn about the company, whether on the job or not. Is it material nonpublic information not yet released to the public? If so, they must not trade until the information has been made public.

In the context of employee stock compensation, the concerns about insider trading may even extend to decisions about whether to exercise stock options (see the myStockOptions FAQ on that topic).

For company insiders who frequently know MNPI, a prearranged Rule 10b5-1 trading plan, created when you do not know MNPI and over which you exert no subsequent influence, can allow periodic stock trades while providing an affirmative defense against insider-trading charges. The SEC has recently tightened its rules about 10b5-1 plans.

Try To Avoid Being An SEC Test Case

The SEC likes to test the borders of insider-trading law. Even if you’re acquitted or not formally charged, being the focus of an SEC investigation is costly, embarrassing, and stressful. Therefore, even if you have no link to a company and its stock, it is best to seek legal counsel before trading its securities while knowing information you come across that has not yet been reported or released to the public.

Abundant resources on insider-trading law and prevention are available at myStockOptions.com (see the section SEC Law), including an interactive quiz to help you stay out of trouble.

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• How can you minimize your tax bill?
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How To Avoid Insider Trading: Cautionary Tales For Employees From The Pandemic

The unique circumstances of the Covid-19 pandemic created new opportunities to commit familiar types of crime, some of which we have discussed elsewhere. Insider trading is yet another example.

With allegations involving insider trading and tipping during the height of the pandemic, recent charges brought by the Securities and Exchange Commission (SEC) and federal criminal prosecutors offer sobering lessons. They are cautionary tales for any employees and executives who learn confidential corporate information and may then be tempted to trade the company’s stock.

What Is Insider Trading?

Insider trading, which is illegal, occurs when someone trades a company’s stock or other securities when he or she knows what is termed material nonpublic information (MNPI) about the company. MNPI is confidential knowledge about a company that will affect its stock price either positively or negatively when it is publicly disclosed. A related behavior known as insider tipping is also illegal. It means sharing MNPI with others.

The insider-trading laws apply to everyone, not just to executives and other company insiders who receive stock compensation, such as grants of employee stock options or restricted stock units. Moreover, the laws apply to MNPI not only about a company you work for but also about any company you may know through a professional or personal relationship, e.g. a vendor or client of your employer or a family member affiliated with a different company.

Covid-19 Drug Offers No Immunity From Prosecution

A recent SEC complaint and federal criminal indictment present a classic lesson in what not to do when you know MNPI about a company.

In 2021, at the pharmaceutical giant Pfizer, Amit Dagar was employed as a senior statistician working on the team running the clinical trial of the company’s Covid-19 treatment Paxlovid, an antiviral drug. According to the SEC’s complaint, on the day before Pfizer announced the success of the clinical trial, Mr. Dagar learned the good news via a chat message from his supervisor and expressed excitement about it.

The SEC complaint alleges that just hours later Mr. Dagar bought out-of-the-money Pfizer call options, including options set to expire the next day. The SEC claims that he then tipped a friend, who purchased similar call options in Pfizer on the same date.

On the following day, November 5, Pfizer publicly announced the success of the Paxlovid clinical trial. The company’s stock price jumped almost 11%. According to the SEC’s allegations, Mr. Dagar made $214,395 and the friend he tipped made $60,300 via their purchase of Pfizer call options on the basis of the information before it was made public.

On June 29, 2023, the SEC charged both men with insider trading and stated it was seeking civil penalties. That wasn’t all. On the same day they were also arrested and criminally indicted with multiple counts of securities fraud by prosecutors in the US Attorney’s Office for the Southern District of New York (SDNY). According to the SDNY press release on the indictment, each charge carries a maximum sentence of 20 years in prison.

If true, the allegations represent an egregious case of insider trading and tipping on the basis of material nonpublic information. The story especially shows the importance of timing. It doesn’t matter if a stock trade prompted by MNPI occurs just hours—or even minutes—before the confidential information is made public. As long as the news is not yet available to the investing public, it’s illegal insider trading.

According to the SEC’s press release on its complaint, the case originated from the Analysis and Detection Center of the SEC’s Market Abuse Unit. That SEC team applies sophisticated data analytics, including pattern recognition, to detect suspicious stock trading. It wields technology to spot, track, and examine links between people involved or connected with suspicious stock-trading activities.

Alert: The fact that the SEC’s detective work prompted a criminal referral to federal prosecutors should be enough to scare anyone into not trading stock while possessing MNPI. “Today’s announcement serves as a reminder to anyone attempting to tilt the balance in their direction using insider trading,” warned Michael J. Driscoll, the FBI assistant director in charge of the case, when announcing this indictment and several others (including the case described below). “Investigating this illegal behavior is a top priority of the FBI,” he asserted.

Covid-19 Remote Work Gets Criminally Complicated

As mentioned earlier, it isn’t just employees of a company who can commit insider trading. Anyone who learns MNPI about a company is in a position to be accused of insider trading if they buy or sell that company’s stock before the information is made public. That applies even to MNPI acquired via the most personal relationships, as our next horror story shows.

On June 29, 2023, an SEC complaint and two separate SDNY indictments brought insider-trading charges against Jordan Meadow, a registered rep for a New York broker-dealer, and Steven Teixeira, the chief compliance officer of a big payment-processing company. According to these charges, Mr. Teixeira furtively accessed the laptop of his girlfriend, an employee of a major investment bank who was working at home amid the Covid-19 pandemic. The charges claim he used this access to steal information on potential future mergers and acquisitions (M&A) of public companies.

The SEC and SDNY allege that this knowledge motivated Mr. Teixeira to buy call options in several of those M&A companies before those deals were made public, and that he tipped the information to his friend Mr. Meadow. According to the SEC’s press release on its complaint, “Meadow recommended trades to his brokerage customers based on the material nonpublic information from Teixeira, resulting in millions of dollars in profits for them and hundreds of thousands of dollars in commissions for Meadow.”

In addition to the SEC case against him, Mr. Meadow was arrested and indicted by SDNY on charges including seven counts of securities fraud that carry the potential for decades of prison time. SDNY indicted Mr. Teixeira separately and said in a statement that he “pled guilty pursuant to a cooperation agreement.”

The case against these men also originated in the SEC’s Market Abuse Unit. The SEC’s ability to trace stock-trading activity to MNPI allegedly stolen from the girlfriend’s laptop shows how committed the agency is to both digital analysis and old-fashioned real-world detective work. With such serious allegations, a criminal referral to federal prosecutors was inevitable.

If the allegations are true, they represent a brazen insider-trading scheme by two people (a compliance professional and a stockbroker) who very clearly know that the theft of confidential information and stock trading on the basis of it are illegal activities.

However, no larcenous conspiracy is needed to commit insider trading. Even if you accidentally learn MNPI about a company from, say, a family member or a company vendor and then trade the company’s stock before the information is public, you can be charged with insider trading—and the person who let slip the information could be charged with insider tipping!

Be Careful When Working Remotely

Working remotely at home greatly increases the risk of insider tipping that can lead to insider trading. For further cautionary tales from SEC cases in which remote-work employees revealed MNPI to people in their personal lives, see an article from attorneys at the law firm King & Spalding: Working From Home? Stay Alert To Avoid Insider Trading Or Tipping Liability!.

“Even when surrounded by the ones we love,” the authors warn, “it is important to keep confidential information away from them. Others may not realize that they should not trade after overhearing interesting comments—or worse, they may try to listen, intending to trade if they learn something exciting.”

More Resources

myStockOptions has an extensive section with articles, FAQs, and a podcast on all aspects of preventing insider trading and tipping. The coverage includes information about prearranged Rule 10b5-1 trading plans, which when correctly created can provide a legal affirmative defense against charges of insider trading. Meanwhile, an interactive quiz tests your knowledge of insider trading to help you stay out of trouble!

ALERT: SEC Adopts Key Changes To 10b5-1 Plans To Prevent Insider Trading

A Rule 10b5-1 trading plan is a prearranged plan for selling and/or buying company stock under SEC Rule 10b5-1 that provides an affirmative defense against charges of insider trading if you later trade stock while you possess MNPI. Many companies now either require or strongly encourage their executives and directors to set up 10b5-1 plans. The SEC has just finalized important additional rules for 10b5-1 plans that affect those who use them, as we summarize in this article.

SEC Has Long Suspected Misuse Of Rule 10b5-1 Trading Plans

First, some background. The law prohibits you from trading stock on the basis of material nonpublic information (MNPI), i.e. information that will move the company's stock price when it is made public. You can commit insider trading accidentally as well as intentionally, even if the MNPI that you possess did not influence your decision to trade. Avoiding insider trading is a major concern for executives, directors, and employees with company stock who need to sell shares to diversify or generate cash but also frequently know MNPI. Those could be shares you purchased on the open market or from a stock option exercise, restricted stock unit (RSU) vesting, or employee stock purchase plan (ESPP).

The SEC has been building up to its new rules for 10b5-1 plans over the past several years. A growing body of evidence suggests 10b5-1 plans have occasionally been abused to commit insider trading rather than prevent it. The SEC has been scrutinizing 10b5-1 plans in the wild for some time and is bringing more enforcement actions for abuses.

For example, earlier this year the SEC announced it had settled an enforcement proceeding involving alleged insider trading by Cheetah Mobile's CEO and its former president; this case and the related SEC Order involved the misuse of a 10b5-1 plan. The SEC's statement on the matter quotes Joseph G. Sansone, Chief of the SEC Enforcement Division's Market Abuse Unit, who explains that "while trading pursuant to 10b5-1 plans can shield employees from insider-trading liability under certain circumstances, these executives' plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it."

SEC Adopts Additional Rules For 10b5-1 Plans

In response to its findings, the SEC has taken action to tighten up the rules for 10b5-1 plans. On December 14, the agency adopted final amendments for 10b5-1 plans, a year after these additional rules were proposed.

For corporate officers, directors, and employees seeking to use 10b5-1 plans as an affirmative defense against insider-trading liability when they sell or buy company stock, these rule changes include:

1. A "cooling off" (i.e. waiting) period before trades can start after the plan's adoption or modification:

• For directors and officers, the later of (1) 90 days or (2) two business days after the disclosure in SEC Form 10-Q or 10-K of the company's financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days). The proposed rules had a 120-day cooling-off period before any trading could start after the plan's adoption or modification.
• For people other than directors and officers, 30 days. This is an important difference from the proposed rules, which did not clearly specify a cooling-off period for regular employees and managers.

2. A requirement to certify in the plan itself when adopting or modifying it that you are not aware of material nonpublic information about the company. This certification requirement is just for directors and officers.

3. No overlapping 10b5-1 plans for open-market trades. One exception would be another plan set up just to allow sales of stock (i.e. sell-to-cover) for tax withholding when restricted stock/RSUs vest.

4. A limit on single-trade plans to one per 12-month period.

These final rules are effective 60 days after publication of the adopting release in the Federal Register. Existing plans appear to be grandfathered unless modified.

Companies must also now annually disclose their insider-trading policies and procedures. For more details on the additional requirements, including the need to check a box on SEC Form 4 and Form 5 when a reported stock transaction is made under a 10b5-1 plan, see the SEC Fact Sheet on the rule changes.

The related FAQ at myStockOptions explains the background of this development, including the SEC's long-running scrutiny of 10b5-1 plans and research suggesting that abuses of 10b5-1 plans do occur, and has a growing curated list of detailed commentaries on the rule changes from law firms.

Equity Comp Survival Guide For Pandemic Times

The COVID-19 pandemic has affected everyone, including employees with equity compensation.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably declined, leaving you wondering about your equity comp and financial planning.
• You may be considering the best use of your stimulus payment from the IRS.
• If you work for a small business that's seeking a forgivable loan from the Paycheck Protection Program, you need to understand the legal risks in the application and the use of the funds.

Here we present recent articles from the myStockOptions editorial team on these and other timely topics.

See also a full list of new and recently updated content at myStockOptions. Because Tax Season 2020 has been extended to July 15, it includes the fully updated tax-return content in our Tax Center.

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7 Things To Know When You Sell Company Stock To Raise Cash

You may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. One source of these funds can be proceeds from selling shares of your company's stock, whether acquired via the open market or equity compensation (e.g. stock options, RSUs, ESPPs). Before you sell your company shares, review this article's checklist of topics to understand on tax, company, brokerage firm, and SEC rules: 7 Things To Know When You Sell Company Stock To Raise Cash.

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Insider Trading: How To Stay Out Of Trouble

If you do sell company stock quickly to raise cash, be careful. Depending on your access to confidential company information, trading company stock can actually get you into serious legal trouble, including criminal liability for insider trading. A new article at myStockOptions explains what you need to know: Insider Trading: How To Stay Out Of Trouble.

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Market Volatility: A Survival Guide For Equity Comp

When stock markets become a rollercoaster and the economy is in a downturn, you need to hang in there and remember equity comp and company shares are best viewed as a long-term deal. Several articles at myStockOptions provide useful advice on coping with stock-price volatility, down markets, and job termination (whether layoffs or other types). These include:

• Stockbrokers' Secrets: Equity Compensation Strategies For Volatile Markets
• Stomach Volatility In Your Company's Stock Without Losing Your Mind
• Job Loss And Your Stock Grants (Parts 1 and 2)
• Preventing Irrational Decisions About Selling Company Stock Or Exercising Options
• Manage Your Expectations To Avoid The Option Blues
• Reframing Your Stock Option Exercise Strategy In Volatile Markets
• Equity Compensation Strategies For Down And Rising Markets

You can find these articles and extensive related content in the sections Basics: Volatility and Job Events: Termination.

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Donating Your Stimulus Check: 4 Key Tax Rules To Know

If you don't need the extra cash, one possible use of your stimulus payment from the IRS is to donate the money to a worthy cause. For this beneficence, you may get a tax deduction. Before you seek the deduction, learn the IRS rules that apply in an article at the Forbes.com blog of our editor-in-chief Bruce Brumberg.

For guidance on the tax deduction for donations of stock instead of cash, see the related FAQ at myStockOptions.

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How To Avoid Legal Problems With Your Paycheck Protection Program Loan

Potentially forgivable loans to small businesses are available via the Paycheck Protection Program (PPP).

• In an article at Forbes.com, we present advice from former federal prosecutors on avoiding legal problems with PPP loans.
• In a separate Forbes.com article, we share insights from small-business attorneys about how to meet the conditions that make the loan forgivable, and how to use PPP loan funds in a way that avoids abusing the loan program.

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Learning Center Offers CE Credits

Keep up your continuing professional education! In our Learning Center, myStockOptions has six courses and exams offering CE credits for several professional designations:

• 30 continuing-education credits for Certified Equity Professionals (CEPs): 100% of the total requirement
• 15 continuing-education credits for Certified Financial Planners (CFPs): 50% of the total requirement
• 15 continuing-education credits for Certified Private Wealth Advisors (CPWAs) and Certified Investment Management Analysts (CIMAs): 37.5% of the total requirement
• Chartered Financial Analysts (CFAs) and Certified Public Accountants (CPAs) are encouraged to take our courses and exams and include them, if possible, when they self-document their continuing professional education

Each course of study features podcasts, articles, and FAQs from myStockOptions. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Stock Sales: 7 Topics To Understand When You Sell Shares To Raise Cash Quickly

These are challenging times for everyone. For reasons beyond your control, you may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. The proceeds from selling shares of your company's stock, whether acquired via equity compensation or open-market purchases, can be a source of these needed funds.

However, when making stock sales you must always proceed with caution. Before you sell your company shares, review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

1. Understand Capital Gains Tax Basics To Generate Capital Losses

When you sell shares, assuming they’re not in a retirement plan account (e.g. a 401(k) or IRA), you generate a capital gain or a capital loss. The calculation is the amount of the sale proceeds over or under your cost basis, i.e. what the shares cost to acquire plus any W-2 income you recognized for the equity compensation. For stock held over one year after a stock option exercise, vesting of restricted stock units (RSUs), or a purchase in an employee stock purchase plan (ESPP), the gain or loss is long-term, meaning a lower tax rate applies. Shares held for less than one year are taxed at short-term capital gains rates, similar to that of your salary income.

If you have a choice of company shares to sell, you want to first sell stock that generates a capital loss which you can harvest against capital gains. What that means is that you can net the capital losses against any current capital gains, with unused losses deducted against $3,000 of your ordinary income. The remainder of the loss is carried forward to future tax years. When you do not have shares to sell at a loss, your next choice is stock that has the smallest long-term capital gain.

2. Clearly Identify The Lot Of Shares You Want To Sell

When you hold company shares that you’ve received at various times, such as yearly RSU vesting or twice-yearly ESPP purchases, you want to identify at the time of sale which share lot is being sold. The default rule is “first in, first out” (FIFO), but you can choose. Any shares you received at a recent market high are the ones you want to sell for a loss. Make sure you get clarification on how to indicate specific lots to sell through your brokerage firm’s website.

3. Watch Out For Wash Sales

A “wash sale” is deemed to occur if you sell company stock at a loss but you have also separately purchased the same stock within 30 days before or after the sale. That triggers the special rules for wash sales. Under those rules, the loss and holding period are carried over to the replacement shares.

According to most experts, any restricted stock or RSU vesting 30 days before or after the loss sale would be considered a wash sale and trigger the related rules. Similar treatment applies to an option exercise, ESPP purchase, or dividend reinvestment plan on company stock. Those are all considered purchases.

4. Job Loss? Carefully Follow Your Company’s Post-Termination Stock Option Exercise Rules

You may intend to exercise stock options and immediately sell the shares to generate needed cash.  However, if you lose your job, vesting usually stops on all types of stock compensation. In that case, you must quickly exercise any outstanding vested stock options, typically within 90 days or less of your employment termination. As explained in the section Job Events at myStockOptions.com, if you do not exercise vested in-the-money stock options in time you will forfeit their value.

Alert: Check your stock grant agreement and your stock plan for the rules and exercise deadlines that apply to each option grant upon job loss. If anything is unclear, ask your company’s stock plan administrator.

5. Know Your Company’s Rules For ESPP Contributions

In an employee stock purchase plan, you can usually withdraw any accumulated funds that are waiting for the next purchase date. You need to check your company’s ESPP rules for how you do this. While an ESPP with a lookback and a 15% purchase discount can be an attractive investment in down markets, withdrawn ESPP funds can be another source of emergency funds. Furthermore, you can reduce or stop future ESPP contributions from your salary.

6. Be Mindful Of Holding Periods For ESPPs And ISOs

With stock from a purchase in a tax-qualified ESPP or an exercise of incentive stock options (ISOs), holding the shares for more than one year from enrollment/grant or two years from purchase/exercise gives you special tax treatment on the sale. Remember that the tax treatment is affected by selling those shares early. That’s called a disqualifying disposition, with different ramifications for ESPPs and ISOs. This is another reason to carefully choose and specify the lot of shares you want to sell, as explained in #2 above.

7. Beware Of Insider Trading

Understand that sometimes stock trades can actually get you into trouble. If you buy or sell shares of your company’s stock while you know material nonpublic information (MNPI), you are committing insider trading, which is illegal. Material nonpublic information refers to company secrets that, when made public, would move the company’s stock price up or down. This prohibition against trading on confidential inside information applies even if you are no longer employed by the company.

The type of information that could be considered MNPI is not always clear. However, common sense is a good guide. MNPI is any confidential company information that, once publicly known, could affect your company’s stock price in a positive or negative way. Examples include undisclosed financial results, a merger or acquisition that has not been announced, or a new product that has not been publicized. This prohibition also applies to confidential information you learn in your job about a corporate client, supplier, or other organization that you work with.

Alert: The SEC and the US Department of Justice are watching closely for insider trading related to the stock-market impacts of the COVID-19 pandemic and expect to pursue enforcement activities.

In addition to the securities laws about insider trading, your company may also have its own stock-trading pre-clearance rules, along with mandated blackout periods and window periods for stock trading.

T+2 Is Here: What It Means For Stock Compensation

A big shift in the rules for stock transactions quietly began earlier this month. With effect from September 5, 2017, the settlement period for securities trades was shortened from three to two business days after the date of the transaction. This interval is expressed in the notation T+2, in alignment with the notation used to indicate the previous three-day settlement period (T+3).

T+2 is an important concept for any stock plan transactions that involve open-market sales, such as same-day sales and sell-to-covers. For example, in a cashless exercise of stock options or in a stock sale at restricted stock/RSU vesting or after ESPP purchase, the cash will now show up in your brokerage account sooner, within two days after the execution date. Additionally, to settle by T+2, the broker must, sooner than previously, receive the shares and know the funds to send the company to cover the exercise cost and/or the tax withholding. Companies may also now need to give withheld taxes to the IRS sooner after NQSO exercise and restricted stock vesting.

Details of the change to the T+2 settlement cycle are available at a website operated by US financial-services industry. The main reason for the move to a shorter period was to reduce risk in the securities-settlement process. A blog commentary from the NASPP provides background on the change, details about it, and what T+2 means for companies, stock plan brokers, and employees.