My Google alerts have exploded this week with reports of the latest insider trading indictments, leading to more cap feathers in the SEC’s extended effort to uncover insider trading. According to the Wall Street Journal, the crackdown has resulted in 72 convictions out of 80 people charged in the past three years – a pretty impressive result. Most of the charges and convictions did not involve stock plans. However, in the midst of all the attention on outright stock trades, another investigation has been building in the background – the SEC is now turning attention towards probing increasing claims that Rule 10b5-1 plans are fraught with abuse and, ultimately, insider trading. In today’s blog, I explore the issue.
First, A History of 10b5-1 Plans
Rule 10b5-1 was adopted by the SEC in 2000 as an attempt to provide executives and other company insiders with a way to trade shares of stock without risking the error of trading on “inside” information. The concept is that an insider creates a trading plan (which addresses shares to be sold and prices/timing) when he/she is not in possession of material, non public information. Then, the plan is executed over months/years, presumably resulting in trade orders being established long before the actual trade. According to the SEC, the idea behind the plans was to give executives a safe harbor to proceed with these prearranged trades and “give executives regular opportunities to liquidate their stock holdings–to pay their kids’ college tuition, for example–without risk of inadvertently facing an insider trading inquiry.” In the decade plus time since the adoption of Rule 10b5-1, the plans have become a commonplace, routinely implemented by insiders at companies across the nation. Some companies have even extended the use of these plans down within other ranks of the organizations, suggesting the belief that this is a great way to help other non executive insiders avoid trading on inside information.
What’s the Loophole?
In 2006, an accounting professor at Stanford University named Alan Jagolinzer began briefing the SEC on results of research he’d done on 10b5-1 plans. His findings suggested that executives who adopted such plans outperformed their peers that didn’t have a prearranged trading plan. He felt this may be the result of abuse within these programs. What kind of abuse, you ask? It seems that many trades in these plans appear to be “well timed” – perhaps a sale occurs just before bad news is announced. While insiders may have locked themselves into a prearranged trading plan, a loophole seems to have emerged. They may not want or be able to modify the trading plan, but these insiders may certainly have input into the timing of company announcements. So, in a reverse sort of fashion, it’s not the plans that may be causing problems, it’s the fact that insiders can get around their own plans by timing the announcement of good and bad news around their planned stock trades. Of relevance to us as stock professionals is that 10b5-1 plans can include a variety of shares – ranging from stock options, to shares owned outright, to shares previously purchased through the ESPP.
Trouble Ahead?
Since Mr. Jagolinzer first relayed, and subsequently published, his findings, other chatter has emerged from various sources – including a petition to the SEC from the Council of Institutional Investors. Recent press stories have again resurrected the issue, and the SEC seems to be taking note. A recent Harvard Business Review blog suggests that the SEC and other regulators have opened investigations. Could this be the next backdating scandal?
This heightened scrutiny highlights the importance of companies “adopting well-crafted 10b5-1 policies that are designed both to prevent trades based on inside information and to avoid the appearance of impropriety–even when applying 20/20 hindsight.” The Harvard Business Review blog had a few suggestions on how to accomplish this:
Have the first trade under a 10b5-1 plan take place after a reasonable “seasoning period” has passed from the time of adoption of the plan,
Have each executive use only one 10b5-1 plan at a time, and
Minimize terminations and amendments of 10b5-1 plans.
It will be interesting to see how these investigations transpire over the coming months. In the meantime, companies should revisit their 10b5-1 policies and make adjustments that will stand up to the potential microscope and hindsight.
In today’s entry I highlight a few articles that are available on the NASPP website that I think are particularly valuable. Many of these articles are updated on an annual basis; together they comprise the core foundational knowledge necessary to be proficient in stock compensation.
Restricted Stock and Units: The article “Restricted Stock Plans” covers just about anything you could want to know about restricted stock and unit awards and is updated annually.
ESPPs: “Designing and Implementing an Employee Stock Purchase Plan” takes an in-depth look at the regulatory and design considerations that apply to ESPPs, particularly Section 423 plans. This is a reprint of my chapter in the NCEO’s book “Selected Issues in Equity Compensation” so it is updated annually.
Securities Law: Alan Dye and Peter Romeo’s outlines of Rule 144 and Section 16 provide great overviews of these areas of law and are also updated annually.
Here’s what’s happening at your local NASPP chapter this week:
Boston: Dan Walter of Performensation presents “10 Myths and Facts about ESPP.” (Thursday, March 28, 4:00 PM)
Houston: Narendra Acharya and Denise Glagau of Baker & McKenzie present “Never a Dull Moment – Latest Developments and Trends for Global Equity Plans.” (Thursday, March 28, 12:00 PM)
It’s that time of the year again…actually, I wonder how many times during each year we say that…(“it’s that time of the year…time for year-end”, “it’s that time of the year…time for 6039 reporting”, “it’s that time of the year…proxy time”). Ah, but I digress. The time of the year I’m talking about today is “tax time”. I just finished compiling a mountain of paperwork and explanations for my accountant and was painfully reminded of just how much paperwork we do receive in preparation for our tax returns. I started to wonder – are your employees lining up at your doorway with questions? Have your communications been sufficient to anticipate and address their likely questions? In today’s blog I explore some of the key misconceptions that employees develop at tax time when it comes to reporting their stock transactions.
Employee Misconceptions
Thinking that restricted stock unit/awards been reported and taxed based upon the sale of shares. If you don’t believe me, just visit Turbo Tax’s question forums. Employees are out there complaining that the sale has not been properly recorded on their W-2. This points to needing clearer communication about what exactly gets recorded on the W-2, and there the company’s obligation to report stops.
Assuming all cost basis information for stock plan shares is recorded on the new 1099-B. Since this is a fairly new reporting requirement, and the rules only apply to stock that was acquired in 2011 or later, it’s a common possibility that not all transactions will have accurate cost basis information on the 1099-B. Employees need to be able to distinguish between transactions and know exactly what the broker is reporting. The 1099-B originates from the broker, so stock administrators should be aware of how the broker is explaining this to employees. Even though issuers aren’t tasked with preparing these forms, you’re likely to get questions about them. Sometimes a simple factual reminder that “anything before 2011 may not be on there” can go miles to clearing up confusion.
Not understanding which ESPP dispositions are recorded on their Form W-2. In theory employers should be recording both qualified and disqualified dispositions for Section 423 plans on the employee’s W-2. The reality is not all employers report qualified dispositions. The employee will get a Form 3922 from the company for the year of the purchase, and then a 1099-B from the broker for subsequent sales. Those are important pieces of information, but also of importance is the portion of income recorded on the W-2. If employees fail to recognize the W-2 component, they run the risk of paying double taxes.
There are many mistakes and assumptions that employees can make in preparing their tax returns. These misconceptions or misunderstandings can vary by employee level of understanding, advice received from advisers and other factors. Stock administrators can mitigate some of these misconceptions by anticipating common areas of assumption and developing an FAQ to proactively head off or clarify areas of question. You may not be tax advisers, but you can certainly help employees to avoid a mountain of misunderstanding, leading to costly mistakes during tax time. For sample communications and other ideas, visit our Tax Withholding and Reporting Portal.
The 2013 Domestic Stock Plan Design Survey is now open for participation. This is the industry’s most comprehensive survey on stock plan design, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 5 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
Performance Award Usage: In the 2010 survey, usage of full value awards largely caught up to usage of stock options. Usage of performance awards had increased significantly, but still lagged a bit. I am very curious to see if performance award usage has plateaued or if usage of these awards will rival that of traditional service-based awards. The 2010 survey also revealed that companies were granting performance awards down further into the organization. I’m not sure that performance awards work well below management; I’m very interested to see if this trend continues or if companies have pulled back on their performance award programs.
Clawbacks: Only 32% of respondents indicated that awards are subject to a clawback provision. This seemed surprisingly low, given the shareholder optics on this issue, as well as pressure from regulators (a la SOX and Dodd-Frank). When we conducted the survey in 2010, Say-on-Pay had not yet gone into effect. Now that we’ve completed two rounds of Say-on-Pay votes and are in the middle of a third, I’m curious to see where clawbacks come out.
Double-Triggers: Almost 60% of respondents indicated that vesting is automatically accelerated on a change-in-control and only 38% of respondents reported that awards were subject to a double-trigger. I was very surprised to see such low usage of double-triggers and I’m very interested to see if this data reverses itself in the new survey.
Flexible Share Reserves: Only 17% of respondents in 2010 reported that their stock plan had a flexible share reserve. I’ve heard a lot of consultants promoting flexible share reserves and I agree that they make a lot of sense, so I was surprised that usage was low and even more surprised that it really hadn’t changed since we last conducted the survey in 2007. I’m intrigued to see if usage remains flat again in 2013 or if this plan feature has started to take hold.
Deferrals: Only 22% of respondents in 2010 reported that they allowed (or required) deferral of payout of RSUs. I think deferral programs offer some key advantages, including tax planning opportunities for award holders and easier enforcement of clawbacks and stock ownership guidelines for companies. I’m curious to see if usage of deferral programs has increased in 2013.
– Barbara
P.S. (can I do a PS in a blog?) – If you missed my cat, Kaylee’s appearance in the blog last week, you should check it out for your daily quota of cute.
Here’s what’s happening at your local NASPP chapter this week:
Ohio: Dan Walter of Performensation presents on the truth behind common ESPP myths. (Tuesday, March 19, 11:00 AM)
Silicon Valley: Jon Burg of Radford and Fred Whittlesey of Compensation Venture Group present “Value and Valuations: Making Sense of Long-Term Incentive Data.” (Wednesday, March 20, 11:30 AM)
Dallas: Lori Oliphant and Anthony Eppert of Winstead Attorneys present “2013 Corporate Governance Policy Update.” (Thursday, March 21, 8:00 AM)
Twin Cities: Amy Schneider of UnitedHealth Group, Eric Gonzaga of Grant Thornton, and moderator Jim Sillery of Buck Consultants present “Proxy Issues, Hot Topics and Executive Compensation Design Emphasis / Changes in 2013.” (Thursday, March 21, 7:30 AM)
New York/New Jersey: June Anne Burke and Barbara Klementz of Baker & McKenzie present “Grant Agreements (Best Practices to Follow and Common Pitfalls to Avoid) and Key International Updates.” (Friday, March 22)
I hear it everyday (okay, just about everyday) – companies ask about what the other companies are doing. What types of equity are being issued? How are they handling overhang? What new performance related trends are emerging? I’ve come to an astounding conclusion (yes, I’m exaggerating) – drum roll please – I don’t think the “need to know” about what everyone else is doing is ever going to go away. For all you companies who find yourself in a “want to know” status, there’s new information coming, in the form of the NASPP/Deloitte 2013 Domestic Stock Plan Design Survey. In today’s blog I’ll tell you what you need to do to get the full survey results, and I guarantee you won’t want to miss out on such valuable information.
Data Doesn’t Lie
Results from industry surveys are one of the most valuable acquisitions you can make for your stock administration toolbox. I would say this no matter where I work – it’s the plain truth. It’s often suggested that, as plan administrators, we insert ourselves into plan design and other key discussions involving the use of equity compensation. Fighting for a seat at the table is one thing, but once you get there you need to establish sound credibility with your peers and higher ups. How do you do that? You do it two ways: first by sharing your personal experience (which is no doubt important) and second, you come with data – data on your plans and industry data. How great would it be to hear a proposed plan design element, and be able to respond by saying “actually, the majority of companies are not implementing that type of feature”, or, alternatively “that’s exactly the trend we’re seeing in the industry – 70% of companies report having that feature.” The same scenario rings true for service providers. More and more, issuers are calling on their third parties for opinions and a general “lay of the land” when it comes to considering key decisions. I Want It, How do I Get It?
NASPP members will be able to access the results of the 2013 Domestic Stock Plan Design Survey in the following ways:
Issuers: You must complete the full survey by April 5, 2013 in order to access the results.
Service Providers: Those providers that are not eligible to complete the survey will be able to access the survey results for free, if they are NASPP members. This only applies to service providers – issuers must complete the survey in order to receive the results.
Not an NASPP member? Non members who complete the survey get a 10% discount off an NASPP membership.
How to Get Started
Don’t delay – you only have until April 5th to complete the survey. To get started, register to complete the survey today. Upon registering, you will receive an email within three business days that contains your login to the survey. Once you receive your login, you can immediately begin to complete the survey.
Now is your chance to participate in this important survey and end up with solid data to aid in your plan design efforts.
Hot or Not? Give us your feedback on topics for the NASPP Conference; play the “Hot or Not?” game, in yesterday’s blog.
2013 Domestic Stock Plan Design Survey This is the industry’s most comprehensive survey on stock plan design. Make sure you have access to the results; register to participate today. Don’t put it off, the survey is only open through April 5.
New Compliance-O-Meter We’ve posted a new Compliance-O-Meter on Vendor Management.
My New Intern We have a pretty small staff here at the NASPP and everyone has to pitch in. In the pics below, you can see my cat, Kaylee, looking up a few article cites for me in the back issues of The Corporate Executive (click the thumbnail to see the full picture):
NASPP “To Do” List
Here’s your full NASPP “to do” list for this week.