The myStockOptions Blog

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.