Rule 10b5-1 Plans: A portfolio diversification tool

Strategically sell company stock and achieve your personal wealth goals.

As a corporate executive or insider, owning stock or other equity holdings in your company shows your commitment to the business, but it’s important to realize the risks of an overly concentrated position. If you’re looking to diversify your portfolio or liquidate assets, a Rule 10b5-1 plan can help you sell company shares systematically and strategically.

Here’s how it works.

What is a Rule 10b5-1 plan?

A Rule 10b5-1 plan is a pre-arranged trading contract that allows corporate executives more opportunities to trade company stock, including during blackout periods. It provides an affirmative defense against potential allegations of insider trading if these transactions occur during a time when you have access to material non-public information.

You must follow certain rules and meet specific conditions, including those outlined by your insider trading policy. But, implementing a Rule 10b5-1 plan can help you meet various wealth management goals, including diversification, liquidity needs, tax planning and estate planning.

Requirements

Your Rule 10b5-1 plan will need to adhere to these requirements:

• Adopt the plan when you don’t possess any material non-public information about your company or your company’s stock.
• Adopt the plan in good faith, and not as a part of a plan or scheme to evade the prohibitions of Rule 10b-5, and continue to operate in good faith for the duration of the plan
• The plan must specify the quantity of shares to be sold, the price at which shares are to be sold, and the timing for the shares to be sold.
• The plan must contain the appropriate “cooling-off period”, or the amount of time that must elapse before trading under the plan may begin, as required under Rule 10b5-1
• Once the plan is adopted, you can’t exercise any subsequent influence over how, when or whether to sell.
• With very few exceptions (i.e., “sell-to-cover” plans), the affirmative defense is not available (1) for overlapping plans, or (2) to more than one single-trade plan during any consecutive 12-month period.

It’s important to compare adopting a Rule 10b5-1 plan to selling during an open trading window without a plan. Both routes have similar requirements, including prohibitions from possessing material non-public information and your company’s acknowledgement or approval.

Best practices

Because of the potential tax implications associated with the sale of your equity holdings, and because a Rule 10b5-1 plan is a legally binding contract, it is important to consult your tax and legal professionals in conjunction with your advisor.

Involve your company’s general counsel early in the process so they can review your plan, confirm it doesn’t violate company trading policies, and sign the plan in acknowledgement on behalf of your company.

Some helpful tips for a properly constructed and executed Rule 10b5-1 plan include:

• Clearly state sales instructions with no degree of ambiguity.
• Spread sales over time; the “just right” plan duration typically falls between six and 12 months following the cooling off period.
• Utilize limit orders to minimize market impact.
• Consult your counsel before considering a plan amendment or early termination.

A 10b5-1 plan gives you the opportunity to achieve your personal wealth management goals, like diversification and liquidity needs. Consult with your tax, legal and financial advisors to confirm it’s the best course of action for your situation.

Diversification does not guarantee a profit nor protect against loss.