4 Things To Know About Structuring 10b5-1 Plans

The Ultimate Partnership - Part Four

• Part One
• Part Two
• Part Three

Establishing A 10b5-1 Plan

When establishing a 10b5-1 trading plan, executives must make four key decisions:

• Which stock grants to sell: Once a specific stock grant vests, executives can sell directly held shares from that grant at any time following a 30-day “cooling off period” that starts on the date the 10b5-1 plan is initiated.
• The limit price for each grant included in the plan: Executives do not have to accept the prevailing market price when they sell stock. They can divide shares into blocks with set limit prices for each block. Using the approach explained earlier in this series, executives can follow the best practice of using fundamental and technical analysis to determine these limit prices.
• How long the plan will be in place: A 10b5-1 plan can last anywhere from six months to two years. However, the most common approach is to establish a plan with a duration of one year.
• Whether to change the chosen criteria that trigger stock sales: It is important to review the criteria set in 10b5-1 trading plans during open trading windows to determine whether the original price targets continue to be relevant and appropriate. While changing the criteria on some or all blocks of stock may be necessary as circumstances change, it is important to keep in mind that doing so may weaken the good faith defense against insider trading accusations.

There are also wealth management questions that can arise during the lifetime of a 10b5-1 trading plan. For example, if existing criteria triggered a sale of some amount of shares, it is important to update an overall financial plan to reflect these newly liquid assets.

The Benefits of a 10b5-1 Trading Plan

A 10b5-1 trading plan is a strategic way to return control of equity compensation to executives, particularly within the confines of a well-designed financial plan. Without the structure that a 10b5-1 trading plan provides, executives may find it difficult to maintain the discipline of periodically selling shares. This is often true, even when it provides the executive with an important level of asset diversification.

A 10b5-1 plan provides other benefits as well, including:

• An affirmative defense against insider trading claims
• Access to financial markets without regard to corporate blackout periods
• Customized diversification at predetermined price levels
• Transactions that trigger on autopilot, ensuring a predictable and consistent outcome

Consider Partnering With Blue Chip Partners

Multiple advisors at Blue Chip Partners hold the Chartered Market Technician (CMT) designation – a credential held by few in the private wealth management community. This allows our team to provide individual stock analysis, which can be particularly valuable when an insider is considering selling a portion of their concentrated position.

We recommend corporate insiders explore our thinking prior to transacting directly held shares, vested RSUs (Restricted Stock Units), PSUs (Performance Share Units), and stock options. We are confident that our perspective can help insiders achieve a better outcome when selling and managing their holdings in company stock.

Read more articles on Executive Compensation here.

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