10b5-1 Plans Professionally Designed

NEW "10b5-1 PLAN" HELPS SOLVE EXECUTIVES
DIVERSIFICATION PROBLEMS

In October of 2000 the SEC amended and updated "The Securities Exchange Act of 1934", an act to prevent trading fraud, in an effort to clarify the ambiguities of the existing insider trading rules.  In doing so, they also spelled out how a corporate insider can trade their stock without violating the regulations.  Under section 10b5-1 of the "Securities Exchange Act of 1934", a corporate insider can trade their stock if he or she demonstrates that the transaction was made as part of a predetermined, systematic trading plan that was established before the insider became aware of any "material, non-public information". 

Furthermore, the amended rules describe how section 10b5-1 could provide an "affirmative defense" against insider trading litigation. The SEC does not provide details for establishing these plans, but did offer flexibility by identifying certain prerequisites for a "10b5-1 Plan" and "affirmative defense".  In brief, the following conditions must be met:

First, the "10b5-1 Plan" must establish at a time when the insider is un-aware of any "material non-public information" and be through a third party such as an advisor, broker/dealer, or trustee.

Second, the plan must predetermine the number of shares to be traded, at what stock price, and on what date.  You may use formulas or an algorithm, or a computer program for determining amounts, prices and dates.

Finally, once the plan is established the insider cannot exercise any influence, stop or change the plan. While there is no specific plan duration, most plans are effective for one year and can be renewed, if the aforementioned SEC rules are observed.  Of course, the advisor or broker is also prohibited from possessing any "material, non-public information" when executing the trade.

A simple example of a "10b5-1 Plan" might read as follows:  Sell 10,000 shares on the first day of each quarter, at a price no lower than $50 per share.  There is a lot of flexibility in the plan design, but all the rules must be strictly followed.    If these conditions are met, then the insiders knowledge of "material, non-public information" is not an issue when the stock is traded, even if the insider later becomes aware of such information.  With a "10b5-1 Plan" in effect, the executive, director or other corporate insider could begin diversifying his or her stock holdings without the constant worry of violating the SEC insider trading rules.

Additionally, a "10b5-1 Plan" can be designed for someone who might have future liquidity needs like funding for a child's education.  Moreover, corporations who wish to buy back stock of their company over a period of time can also implement a "10b5-1 Plan".  For instance, a corporation during black out periods could employ a "limit order" strategy to protect the stock price.  This would help the corporation protect the stock price during the buy-back period.

The SEC does not require the corporation to establish the "10b5-1 Plan"; any individual can establish a plan. However, most advisors agree that it would be prudent for an individual to inform and discuss their intentions with the corporation before implementing this strategy, since the corporation may have to modify their existing trading policies to enable the new plan.  As always, before entering into any type of securities trading plan first consult a knowledgeable securities attorney.

Thom F. Carroll is a financial advisor with Carroll, Frank & Plotkin, LLC, a Registered Investment Advisor, and separately, a Registered Representative with Royal Alliance Associates, Inc.
For more information call 410-375-0053.

Securities offered through Royal Alliance Associates, Inc. Member FINRA/SIPC

Thom F. Carroll, CLU is a Registered Representative of and offers securities products & services through Royal Alliance Associates, Inc. Member FINRA/SIPC, a registered broker-dealer.  In this regard, this communication is strickly intended for individuals residing in the states of Maryland, New Jersey, Florida, New York, Georgia, New Hampshire and California.

Thom F. Carroll, CLU is also separately registered as an investment advisor representative under Carroll, Frank & Plotkin, LLC, a registered investment adviosr, offering advisory services in the state of Maryland.  As such, these services are strictly intended for individuals residing in Maryland.

IMPORTANT CONSUMER INFORMATION:

A broker-dealer "BD", investment advisor "IA", a BD agent, or IA Representative may only transact business in a state if first registered in that state, or is excluded or exempt from registration in that state as a broker-dealer, investment advisor, BD agent or IA Representative, as appropriate.  Follow-up individualized responses to persons in a state by such a firm or individual that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without first complying with appropriate registration requirements, or an applicable exemption or exclusion. 

For information concerning the licensing status or disciplinary history of a broker-dealer, investment advisor, BD agent, or IA rep, a consumer should contact his or her state securities law administrator.