Navigating Rule 10b5-1 for Insiders and Key Employees
In the past, when company insiders wanted to buy or sell company stock, they faced two major hurdles.
One was infrequent, brief trading windows that companies established to allow insider transactions. The other was a great deal of uncertainty as to what was permissible and what might trigger potential insider trading liability, under U.S. Securities and Exchange Commission (SEC) Rule 10b5-1.
The passage of SEC Rule 10b5-1 gave directors, officers, and others with access to material nonpublic information (“insider information”) about their company a way to buy and sell company stock in a pre-established, written trading plan. At Morgan Stanley, a 10b5-1 Preset Diversification Program (PDP, most commonly known as a 10b5-1 Trading Plan) helps you achieve your portfolio objectives while providing you with an affirmative defense against allegations of insider trading.
- An affirmative defense against potential claims of insider trading
- Access to public markets without regard to corporate blackout periods
- Diversification, which reduces the risk associated with a concentrated equity position
- Ability to dispose of stock on a predictable and consistent basis
- Potential to mitigate signaling issues generally associated with sales by insiders
- Convenience of putting diversification on “auto-pilot”
- Discipline during volatile market fluctuations
- Customization of the selling plan to reflect monetization needs
- Potential to facilitate the organized disposition of shares by multiple company insiders
Common Dilemma and Potential Solution
Executives often face corporate blackout periods for company stock trades. These vary in length and can be dictated by quarterly earnings releases, litigation issues, and acquisition negotiations, among other factors. Taking advantage of a PDP enables the potential for trading company stock without these limitations.
By adopting a PDP, you may structure trading schedules that coordinate with your personal timing requirements (such as the vesting dates for stock options and restricted stock plans) and your need for liquidity or diversification. These plans may involve a strategy of market and/or limit orders that combine to help you achieve your goals.
The above illustrations are based on hypothetical conditions and are not representative of any specific company or company stock.
Requirements of a SEC Rule 10b5-1
You may not possess material nonpublic information when you adopt a plan.
You must enter into the plan in good faith and not as part of a plan or scheme to evade the provisions of Rule 10b5-1.
You may not exert subsequent influence, either directly or indirectly, over the plan once it has been adopted.
The Resources of Morgan Stanley
Working with you, your company’s corporate counsel and your Financial Advisor, Morgan Stanley can craft a 10b5-1 PDP to support your investment objectives, and tie the program into a comprehensive wealth management strategy. Your Financial Advisor (FA) can draw on the knowledge and skills of our Executive Financial Services (EFS) group, which provides dedicated expertise to 10b5-1 Trading Plans.
EFS, working with your FA, will help you and your corporate counsel:
- Develop a liquidation strategy
- Create your trading schedule
- Streamline plan administration and execution using proprietary PDP software
- File required Rule 144 forms
- Provide execution notification to facilitate Section 16 filing requirements
- Coordinate stock clearance with the transfer agent
Strategies for Key Employees
Morgan Stanley can provide you with guidance regarding restricted, control, and concentrated securities transactions. In addition to our 10b5-1 PDP, our EFS group provides guidance on:
- The sale and purchase of securities
- Loans secured by eligible restricted, control, and concentrated stock1
- Sales of restricted, control, and concentrated securities under applicable regulations, including Rule 144
- Diversification strategies through exercise of employee stock options
- Corporate repurchases under Rule 10b-18
By tying all of the pieces together, we can replace the uncertainty of the past with confidence in your plan for the future. Contact your Morgan Stanley Financial Advisor to find out how we can help you.
1 Source: The Washington Service tracks insider trade information filed with the Securities and Exchange Commission. The above data is compiled by the Washington Service from Form 144 filings in the period from 2/1/2005 to 12/31/2015. Data from the period 2/1/2005 to 5/31/2009 reflects the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. The above data also includes transactions from Morgan Stanley & Co. LLC. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed. Information contained herein is subject to change.
Important Risk Information for Securities Based Lending: You need to understand that: (1) Sufficient collateral must be maintained to support your loan(s) and to take future advances; (2) You may have to deposit additional cash or eligible securities on short notice; (3) Some or all of your securities may be sold without prior notice in order to maintain account equity at required maintenance levels. You will not be entitled to choose the securities that will be sold. These actions may interrupt your long-term investment strategy and may result in adverse tax consequences or in additional fees being assessed; (4) Morgan Stanley Bank, N.A., Morgan Stanley Private Bank, National Association or Morgan Stanley Smith Barney LLC (collectively referred to as “Morgan Stanley”) reserves the right not to fund any advance request due to insufficient collateral or for any other reason except for any portion of a securities based loan that is identified as a committed facility; (5) Morgan Stanley reserves the right to increase your collateral maintenance requirements at any time without notice; and (6) Morgan Stanley reserves the right to call securities based loans at any time and for any reason.
With the exception of a margin loan, the proceeds from securities based loan products may not be used to purchase, trade or carry margin stock (or securities, with respect to Express CreditLine); repay margin debt that was used to purchase, trade or carry margin stock (or securities, with respect to Express CreditLine); and cannot be deposited into a Morgan Stanley Smith Barney LLC or other brokerage account.
To be eligible for a securities based loan, a client must have a brokerage account at Morgan Stanley Smith Barney LLC that contains eligible securities, which shall serve as collateral for the securities based loan.
Diversification does not guarantee a profit or protect against a loss.
Morgan Stanley Smith Barney LLC is a registered Broker/Dealer, Member SIPC, and not a bank. Where appropriate, Morgan Stanley Smith Barney LLC has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services.
Investment, insurance and annuity products offered through Morgan Stanley Smith Barney LLC are: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT A BANK DEPOSIT | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Preset Diversification Program® (PDP) is a registered trademark of Morgan Stanley Smith Barney LLC, protected in the United States and other countries.
Rankings reprinted with the permission of Washington Service. 301-913-5100—www.washingtonservice.com.
Morgan Stanley Smith Barney LLC and its affiliates and their employees (including Financial Advisors and Private Wealth Advisors) are not in the business of providing tax or legal advice. These materials and any statements contained herein should not be construed as tax or legal advice. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning, and their attorney for matters involving personal trusts and estate planning.
CRC 1425334 03/2016