FAQs

SEC Rule 10b5-1: Allowing Corporate Insiders More Opportunities to Sell Their Shares

Corporate officers who wish to sell shares in their company often are hampered by limited trading opportunities. Trading “windows” may be closed when material nonpublic information exists and trading could potentially violate insider-trading laws. SEC rule 10b5-1, which became effective October 23, 2000, offers an opportunity for issuers and their officers and directors to structure selling programs without running afoul of the insider trading prohibitions. It will permit corporate insiders to execute securities transactions in many situations where previously they might not have, out of concern over potential insider trading liability. Importantly, SEC Regulation 10b5-1 allows more opportunity for corporate insiders to sell their shares.

• What are the benefits to Corporate Insiders?
  A properly established plan can allow an insider potentially more opportunities to sell their shares. The rule will benefit corporate insiders by providing greater clarity and certainty on how they can plan and structure securities transactions. This can make diversification, wealth transfer and liquidity management easier to accomplish.

 
• What are the benefits to Issuers?
  One of the SEC's goals in creating 10b5-1 is to provide greater clarity of information to market participants regarding insider transactions. A properly executed 10b5-1 plan can reduce the negative implications of insider stock sales as perceived by market participants. This may reduce negative volatility caused by market misinterpretation of insider sales. Additionally, general counsel or other trading compliance officers may be relieved of the burden of having to make subjective determinations about materiality.

 
• What qualifies as a plan?
  For an individual or an entity, a properly executed plan must include a specific instruction, or a written plan that came into existence before the individual became aware of material nonpublic information, and that the instruction or plan provided a written formula that determines the number of shares, price and date on which the securities are to be purchased or sold and did not permit the person to otherwise exercise any subsequent influence over the transaction.

 
• How specific does the plan have to be?
  Plans can be quite specific or very simple. However, even the simplest plan must include information regarding the date, price and volume to be transacted. For example, an individual can state “Sell 10,000 shares on February 15, 2000 at no lower than $45 per share.” A formula or algorithm can be created such as “On the third trading day of every quarter, sell $50,000 worth of stock.”

 
• Can my trade go forward if I learn adverse information after adopting the plan but before the trade occurs?
  Yes, however, the plan must have been properly executed before you knew of the adverse information. For example, assume you adopt a plan on 1/15/01 that dictates a sale of 25,000 shares on 3/7/01. In late February, you realize that the company is not on track to meet the consensus estimates for the current quarter. The trade scheduled for 3/7/01 under the plan can be executed.

 
• How can I establish a plan?
  William Blair & Company can help you establish a plan in consultation with your trading compliance officer or general counsel. Next, put your instructions in writing and give a copy to the appropriate company official. Then, provide William Blair & Company with a copy of your instructions and all additional data needed to open an account.

 
• May I change or terminate the plan?
  While you are able to alter or cancel a plan, you must not be in possession of any material nonpublic information at the time you make an alteration or cancel. Additionally, you should consult with your trading compliance officer or corporate counsel before you alter an existing plan.

 
• May I sell stock outside the plan?
  Yes. However, such stock sales would not receive any protection under the safe harbor provision of Rule 10b5-1.

 
• How does this provision affect trading windows and blackouts?
  Company policy will dictate trading windows and blackout periods. This rule does not eliminate the existence of company specific trading restrictions. It is up to each company to decide whether or not to adopt a provision for employees to construct trading programs.

 
• Should I disclose the plan externally?
  There is no requirement for public disclosure of trading plans, however, companies might find it useful to disclose the existence of a plan (not the specific details of the plan) in shareholder documents.

 
• Do I still have to complete form 144, form 4 or other documents?
  Yes. Establishing a trading program does not relieve you of your normal regulatory requirements for trade disclosure.

 
• Does the safe harbor apply to trades by the corporation itself?
  Yes. Corporate repurchase programs can be established utilizing a trading plan under these rules. The same standards of possession of material nonpublic information still apply.

William Blair & Company is prepared to assist you in creating and managing your 10b5-1 selling program. For more information, please contact:

Daniel Grant
(312) 364-8701
dgrant@williamblair.com

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