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10b5-1 Preset Diversification Program (PDP)®

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.

Key Benefits:

  • 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

  1. You may not possess material nonpublic information when you adopt a plan.

  2. 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.

  3. 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.

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