I think it’s safe to say that if you work in this industry, you’re familiar with the concept of insider trading. What do we know? You can’t trade in a company’s stock based on material non-public information. If you do, the Securities and Exchange Commission (“SEC”) could hunt you down and make your life very, very miserable. Isn’t that what time and experience have taught us? In the past, I’ve blogged about the SEC’s renewed and aggressive interest in pursuing a variety of insider trading violations (see Husbands and Wives Insider Trading and “There’s a Reason They Call it “Insider” Trading). With more sophisticated technology and monitoring mechanisms, even the smallest trades are not below the line of scrutiny, and it’s an area where I’ve been advocating the use of caution for a while now. However, what was left unsaid in those many recounts of insider trading crackdowns was the fact that although there have been prosecutions and penalties and repercussions for trading based on material non-public information, there isn’t actually a federal law that specifically makes insider trading illegal. Now, that tide may be changing, with multiple bills in pending in Congress that intend to create a federal statute to address this legislative hole. In today’s blog I’ll catch you up on what’s happening on that front.
How Can That Be?
I already know what you are thinking: “Huh? Insider trading is illegal.” I mean, isn’t that why we’ve seen dozens of successful prosecutions in the last few years? You know what I’m talking about – and we’ve seen it all. CEOs, hedge fund managers, employees who accidentally passed on inside information to their wives, friends having brunch together and sharing small talk about their jobs. I think the variety of circumstances is broad, with one commonality: the SEC has been successful in working with the Justice Department to bring charges, obtain convictions and levy penalties. Jail time has been a very real outcome in some of these cases. So how could this all happen if insider trading is NOT illegal? Well, technically it’s not. And, although the SEC has been successful in pursuing these cases, they have had to use loopholes to do so – relying on general antitrust laws and decades of case law (and, I’m not a lawyer, but I’m told that case law is subject to interpretation by individual judges, so the application of that could vary widely). The bottom line is there isn’t a statute that specifically addresses insider trading, which leads to potential ambiguity and inconsistencies in the courts.
Why the Interest Now?
We’ve established that there are no clear federal insider trading laws on the books, but what’s the sudden interest in creating one? The initial catalyst was a landmark ruling (December 2014) by the Second U.S. Circuit Court of Appeals (U.S. v. Newman) that overturned two “key” insider trading convictions, dealing a blow to the Justice Department and the SEC. At the time, the Wall Street Journal summarized the situation as follows: “…a federal appeals court overturned two insider-trading convictions and ruled it isn’t always illegal to buy or sell stocks using inside information.
The ruling raised the bar for prosecutors on a crime that is already hard to prove, and it will likely limit the types of cases the government can pursue.
Specifically, the three-judge panel of the Second U.S. Circuit Court of Appeals said prosecutors must prove traders knew that the person who provided an inside tip gained some sort of tangible reward for doing so. The judges also said it may be legal to trade on inside information, even if it gives an investor an unfair advantage in the markets, as long as the tipper didn’t commit an illegal breach of his or her duty.”
What’s the Fallout?
The Newman decision has created a still ongoing fallout, making it more challenging for the SEC and Justice Department to pursue insider trading cases. As a result, some pending cases have been dropped, others who were successfully convicted are now seeking review of their cases, and Congress is taking action to statutorily define insider trading and also to reverse the requirement under the appellate decision that:
“the tippee know both that the tipper breached a duty of confidentiality and
the tipper received a personal benefit of “some consequence.”
What’s Happening in Congress?
There are currently three bills pending in Congress that seek to define insider trading. The National Law Review describes them as follows:
“Two bills introduced by Democrats have been pending without bipartisan support and have stalled. The broadest of these is the Stop Illegal Insider Trading Act, which was introduced by Sen. Jack Reed (D – RI) and Sen. Robert Menendez (D – NJ). The Stop Illegal Insider Trading Act would make it illegal to trade on “material information” that the person “knows or has reason to know” is not publicly available – excluding information a person developed from publicly available sources.
The second bill is the Ban Insider Trading Act of 2015, which was introduced by Rep. Stephen Lynch (D – MA), and would redefine “material” nonpublic information as information that would likely affect the stock’s price if it were made public.
Most recently, Rep. Jim Himes (D – CT) and Rep. Steven Woman (R – AK), introduced the first bill with bipartisan support, which would ban trading based on material, nonpublic information that the person knew or recklessly disregarded was wrongfully obtained.”
What’s Next?
It’s not clear what the outcome of any of these efforts will be, but what we do know is that the fallout from the Newman decision has caused a ruckus, and there is more pressure than ever to find a consistent way for the courts to define insider trading. It’s quite possible that any new legislation in this area will trigger a need to revamp the insider trading policy, educate employees and possibly adjust some practices and procedures. We’ll keep you informed on any new developments in this area.
We are excited to bring our popular “Meet the Speaker” series back to the NASPP Blog, featuring interviews with speakers at the 22nd Annual NASPP Conference. This is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For our first Meet the Speaker interview, we feature Mike Andresino of Posternak Blankstein & Lund, who will moderate the session “10b5-1 Plan Twists & Turns.”
NASPP: What is the most critical thing NASPP Conference attendees need to know about Rule 10b5-1 plans?
Mike: If your company does not yet use 10b5-1 plans as part of its insider compliance program, you are missing out on an important tool. If you do use these plans, there are important best practices that companies ignore at their peril.
NASPP: What are some best practices companies should implement for 10b5-1 plans?
Mike: Companies need to address, up-front, the expectations that plan participants should have regarding issues such as suspension, amendment or termination of 10b5-1 plans, SEC disclosure of their plans, price targets and other hot button issues that are not addressed in the 10b5-1 regulations but are part of the administrative environment for the plans.
NASPP: What is the worst horror story you have heard about a 10b5-1 plan gone wrong?
Mike: Angelo Mozilo, former CEO of Countrywide Financial, agreed in 2010 to a $67.5 million settlement with the SEC over charges that he abused his 10b5-1 plans for trading gains. If I’m trying to get directors and officers to pay attention to compliance issues, sixty-eight million bucks will usually do it!
NASPP: And last, just for fun, if you had a store on Etsy, what would you sell in it?
Mike: One word–Marinade! More specifically, I would bottle and sell a marinade that I use for salmon and other fish, that uses oil, soy sauce, honey and dark rum. Maybe I would package it in a kit with the rub I use. Hmm, now I just need a good design for the bottle….
The newest edition of Peter Romeo and Alan Dye’s Section 16 Forms & Filing Handbook arrived in my mailbox last week. I thought the last edition contained a model form for every possible Section 16 reporting scenario, but no–there are 15 new forms in this version. It’s so big, I practically needed some assistance toting it upstairs to my office. Here are four things I learned from perusing the new forms.
1. Reporting Performance Awards with a Service Tail
New Model Form 135 clears up some of the confusion with respect to a performance award that is still subject to service-based vesting conditions after the performance goal has been achieved. As my readers know, performance awards in which vesting is conditioned on goals other than stock price targets aren’t reportable until the performance goes are achieved. Once the compensation committee has certified achievement of the goals, however, the award is reportable, even where it isn’t paid out immediately or is still subject to time-based vesting requirements. The award essentially becomes a standard RSU once the performance goals have been achieved. Assuming the award can only be paid out in stock, it can then be reported as the acquisition of either a derivative security or common stock, just like any other time-based RSU.
2. Voluntary Reporting of ESPP Purchases
Alan Dye doesn’t always report purchases under Section 423 ESPPs, but when he does, he uses transaction code A of J. (I couldn’t resist–it’s not often that I can invoke beer commercials in my blogs). Because purchases under an ESPP aren’t reportable, there’s no transaction code assigned to them. If you are going to voluntarily report these transactions, New Model Form 145 suggests using code A or J and including a footnote to explain the transaction. Personally, I like code A because it specifically applies to exempt acquisitions, whereas code J can apply to either exempt or nonexempt transactions.
3. Voluntary Exit Forms
I did already know that it isn’t necessary to file an exit form unless the former insider has reportable transactions that occur after his/her termination. Despite this, some companies voluntarily file exit forms for departing insiders anyway. I’d never really thought about some of the specifics related to filing a voluntary exit form when there aren’t any transactions to report on the form. New Model Form 214 provides some guidance. In addition to the obvious (check the “Exit” box and include a note in the remarks field explaining the reason for the filing), if using a Form 4, the date of the “earliest transaction” in box 3 should be the insider’s termination date (if using a Form 5, the date of the fiscal year end is reported in box 3), and the insider’s title in box 5 can either be his/her former title or you can select the “other” checkbox and specify his/her status (e.g., “former insider”).
4. Grants to Spouses of Insiders
Given how common dating is in the workplace, I bet that this situation comes up more frequently than you’d think: an insider meets someone at work, they fall in love and get married and then, unconnected to the marriage, the insider’s spouse is granted an option or an award. Because they are married, the grant has to be reported as an acquisition of an indirectly held security on a Form 4 for the insider. But because the spouse isn’t an insider, the award might not be submitted to the compensation committee/board for approval, making it a non-exempt grant unless the shares underlying the grant are held for at least six months. The 2014 Handbook includes new Model Form 91 explaining how to report the grant.
It’s probably unlikely that the shares underlying the grant would be sold within six months, but even so, my takeaway here is to consider submitting grants to spouses of insiders to the comp committee for approval. I imagine that it wouldn’t be that much extra work for the committee, it seems like it might be a good idea from a shareholder optics perspective anyway, and then the exempt status of the grant is one less thing to worry about.
Luckily, grants to any person(s) the insider is having an affair with probably aren’t considered to be indirectly owned by the insider (unless it’s some sort of weird Woody Allen-type situation) and, thus, aren’t reportable. Moreover, when the insider divorces, Model Form 74 (which is not new) explains that any transfers of securities pursuant to the divorce settlement generally aren’t reportable.
I never quite know where the world of blogging will take me. This week I planned to blog on a completely different topic (that I will save for another time), when I found myself mesmerized by a recent Forbes article titled “Insider Trading Nightmare, the IBM Trade That Went Bad.” Attention captured, I just had to blog about it this week.
What More is there to Say?
I’ve spent many past blogs exploring the ins and outs of insider trading, including the recent SEC investigations surrounding the issue. So what more could there be to say on the topic? This week, the above mentioned article struck me because it centered on yet another recent SEC investigation, leading to yet another guilty plea. The interesting part? The amount of the profit was small – only $7,900, and there was no “hot” stock tip that led to the insider trading. In fact, the “tip” that started it all began with two friends venting about their jobs over brunch. It was the latter fact – that such an ordinary circumstance, one likely repeated millions of times a week around the country, touched off a sequence of events that included an international manhunt, an extradition, jail time, and a guilty plea. Whoa!
A Venting Session
The intricacies that made up this situation are many, so I will have to summarize. One day two friends met for brunch. Both friends discussed their jobs – one was a research analyst and the other was a lawyer with a firm that handled M&A transactions, amongst other things. The lawyer confided to his friend that he was overwhelmed with a project he was working on – IBM’s acquisition of SPSS, Inc., a Chicago software company. As the Forbes article says – “The partner on the job was tough and the lawyer’s lack of experience, combined with long hours at the office, had led to the open therapy session over brunch. There was no “hot tip”, or “You gotta buy these shares and get some for me;” there were just two kindred souls consoling one another about the misery of working for someone else.” I mean, how many times have employees vented about their jobs over a meal? I’m guessing that’s standard conversation amongst friends, right?
Too Tempting to Resist
A few days later, the research analyst friend realized what he had “learned” from his friend through the venting session – that IBM was acquiring SPSS. Another long story short – he took that information and bought shares of SPSS, Inc. Then, he passed along the information to friends, who shared the information with more friends. Eventually the SEC caught on to the trades (and the series of text messages back and forth between all involved documenting their fears about getting caught didn’t help). The interesting part is that the lawyer who unwittingly provided the “tip” wasn’t involved. He didn’t trade – and he may not have realized at the time that the information he shared with his friend over that brunch set off a chain of insider trading events.
Consequences, Consequences…
Ultimately in the end, the SEC had enough information to pursue charges. The friend who first received the innocent tip and passed it along (profiting $7,900) had fled the country by then (having originally been in the U.S. on a work visa) and was eventually caught in Hong Kong and extradited back the U.S., where he recently pleaded guilty to charges related to insider trading. The lawyer who vented about his job (but did not purchase any stock) lost his job. And the consequences go on.
The Moral of the Story is…
I’m thinking, there must be a moral here. What I’ve come up with is that we’ve got to get employees to equate insider trading to more than just big stock trades. Even though the “tipper” never mentioned trading stock, or made any kind of suggestion that his friend may profit from purchasing SPSS stock (as we typically envision when we think of insider trading), he still ultimately lost his job – presumably because he (even innocently) passed along material, non-public information in the first place. And, the SEC is demonstrating that no amount is too small – they will find you, and in this case hunt you down for insider trading. Surely the cost of finding the insider trading offender and extraditing him back to the U.S. far exceeded the amount that he profited from insider trading. This sends the message that a crime is a crime, and punishment will be pursued.
This lends a prime opportunity and example for employers to use in educating employees. Sharing material, non-public information is very risky – even if you didn’t intend for it to be misused. This is a strong message about safeguarding information – even from close friends and family – because you never know what happens to the information after it leaves your mouth. At the end of the day, even if you don’t act on it, even if you didn’t intend for it to be used for profit, you can still be held responsible. If not by the SEC, perhaps by an angry employer (as was the case here). If you have a hand in employee education about insider trading, contemplate using this example in your message. If you routinely come into contact with material, non-public information, consider this a lesson learned.
We do have many resources in our Insiders portal that can further enhance your understanding or aid in preparing communications.
Next week’s blog will feature photo highlights from our 21st Annual NASPP Conference in Washington, DC. Be sure to check it out!
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.
Last week, hedge fund manager Raj Rajaratnam was sentenced to a record 11 years in prison, following his conviction last May for insider trading. From my desk in metropolitan Washington, D.C., I could almost hear the celebration echoing from the Justice Department and the SEC.
In catching up on the news of the sentencing, I came across several op-ed articles that began to raise a provocative question: should we just take the plunge and legalize insider trading? My first thought: really? My second thought: REALLY? Intrigued, I began to dig deeper into the various opinions on the matter.
The Argument for Legalized Insider Trading
I can guess where the SEC falls in the debate over legalized insider trading. Mr. Rajaratnam’s conviction sends a message that the SEC is still focused on enforcement of insider trading violations. Interestingly, in Japan, where insider trading enforcement is nearly non-existent, CEOs are paid less in salary, but still come out overall as wealthy as their American counterparts. Some surmise that one reason may be that insider trading is more widely accepted in Japan. As a result, Japanese CEOs earn less in guaranteed pay, and rely on inside information to make lucrative trades in their company’s stock. Supporters of legalized insider trading claim that it’s a win-win situation. The CEO and company employees make money, but it’s a benefit of their employment and also motivates them to have a more vested interest in the upward mobility of the company’s stock price. When the stock price moves upward, all shareholders benefit. In addition, if employees rush out to trade on inside information, the flood of activity will cause the stock price to react more quickly to the information, limiting their immediate upward gain potential. Other arguments for the issue include the cost of enforcement.
Public Opinion
In the U.S., public opinion seems to be clear: insider trading is unfair and should be punished. The argument: Why should I have to work hard for an average pay, while the elite gain access to privileged information and use it to make themselves wealthier? In addition, the impact on corporate governance, public disclosures to shareholders, and economic issues are also hefty considerations in the debate. Would executives become more secretive in disclosing information to their boards and shareholders if they knew they could legally trade on material non-public information?
Taking a Stand
Where do I stand? I find myself squarely on the side of public opinion. We have enough problems in our economy; we shouldn’t even begin to entertain the idea of legalized insider trading. I’m always in favor of learning from my own mistakes and those made by others. In the case of Mr. Rajaratnam, the SEC and Justice Department seem to have sent a clear message: you can’t get away with it. In seeking meaning to the message, I believe we have an opportunity to remind employees that the SEC means business when it comes to enforcement of insider trading violations, and for now it appears that the laws aren’t going to change. So dust off that Insider Trading policy and take a moment to remind employees about the dos and don’ts of trading in the company’s stock.
One detailed article on this subject is Larry Harris’ op-ed article in the LA Times. You may also want to visit our Insider Portal for more information and sample documents.
In addition to the various changes we know are coming under the Dodd-Frank Act–e.g., CEO to median employee pay ratio, disclosures of hedging policies, expanded clawback requirements, expanded pay-for-performance disclosures, Say-on-Pay (wait, that’s already here)–this week, I blog about a potential change you might not have been aware of: less time to file Forms 3.
Form 3 Deadline In a little-known provision (at least to me), the Dodd-Frank Act amended Section 16(a) to authorize the SEC to shorten the deadline for filing Forms 3. The amendment isn’t effective until July and then some SEC rulemaking will be necessary to effect the change, but, since the SEC requested the authority to do this, it seems likely that they will follow through on it.
Currently, when someone becomes an insider at a reporting company, a Form 3 must be filed within ten days. Alan Dye, of Section16.net and Hogan Lovells, speculates that the SEC will change the deadline to be more in line that of Form 4–e.g., two business days.
As things stand now, most new officers and directors receive a grant upon assuming their new role that must be reported on Form 4 within two business days anyway, even if the Form 3 is not due for ten days (and, in this circumstance, the SEC encourages insiders to file the Form 3 concurrently with the Form 4). It does seem to me to create a fundamental unbalance in the universe to file a Form 4 before filing a Form 3 for an insider–now, presumably, balance will be restored (at least, that’s what Alan thinks–and my money’s on him–but this is all speculation, we don’t actually know what the new Form 3 deadline will be).
A two-day deadline on filing Forms 3 will make it even more critical to be on top of obtaining EDGAR codes for new insiders.
Thanks to Tami Bohm of Radian Group (and member of the NASPP Executive Advisory Committee) for bringing this development to my attention.
A More Social NASPP The NASPP is networking socially: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
Online Fundamentals–Early-Bird Ends February 25 The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation. It’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register by February 25 for early-bird savings.
Submit Speaking Proposals for the NASPP Conference by February 28 The NASPP is currently accepting speaking proposals for 19th Annual NASPP Conference. Submit your proposal by February 28.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
A policy is only as solid as its exceptions. You may have a well-defined plan or policy for your company’s current situation that has bare spots that may not stand the test of time–and unusual circumstances. It’s difficult to cover all your bases when you are creating a new policy or plan, but it’s even more difficult when you jump into managing an existing plan under inherited policies.
The problem is that it is rare that a stock plan manager has time to pick through every piece of every plan document and policy and play out every scenario to determine if there are cracks that need to be exposed. This is where experience really counts; whether it is your own personal experience or experience you picked up second hand by listening to the holes other stock plan administrators have encountered. Whenever you are networking, attending a presentation, or perusing a discussion forum and you hear a new predicament, run–don’t walk–back to your desk and check to see if your company could potentially run into the same issue.
Just to give you a taste, here are three problems to think about:
Insider Trading Policy
Generally speaking, insider trading policies restrict the transactions of individuals deemed to be in possession of insider information. They help to protect both the company and the individuals by preventing transactions that would either be or appear to be insider trading. However, there are a couple places where ambiguity could trip you up. For example, if your insider policy doesn’t detail what constitutes a transaction, you could find yourself up against (or in the middle of) a blackout period scrambling to determine the correct course of action. Cash exercises and trading shares to cover tax liability on restricted stock vests are the most common sources of contention. Even if you’ve covered yourself by getting all your insiders into Rule 10b5-1 trading plans, there could still be an issue when someone not normally considered to be an insider is marked for a particular blackout period because she or he is either recently promoted or currently in the middle of a project that provides access to nonpublic information. If that same person has, for example, a restricted stock vest during the company blackout window, you could have a situation on your hands.
Fair Market Value
The fair market value for both grants and transactions can be pretty much any reasonable definition, which means that companies may set fair market value differently. Non-market days can be blind spot when it comes to restricted stock vests. Another tricky situation may arise if your FMV is defined in such a way that it is possible for someone to exercise an underwater option. For example, if your company uses the prior day’s closing price as the FMV for option exercises, an employee could exercise barely-in-the-money options and end up with an exercise price that is higher than the defined FMV.
Terminations
Your company can treat all terminations equally, but most companies do not. Voluntary, involuntary, for cause, death, disability, and retirement are all on the list of potentially unique termination reasons with varying impact to equity compensation. Of course, you want to have each reason clearly defined, but the blind spot could be what happens if the circumstance combines more than one reason. For example, what if an employee leaves the company and subsequently passes away during the post-termination grace period?
Take Charge
For larger issues regarding plan design and policy, there are a number of resources on the NASPP site to provide essential guidance. Our April 2010 webcast, “25 Ways to Improve Stock Plan Documents,” details more than 25 plan design issues that you need to be aware of and we have an entire portal dedicated to plan design with a host of resources under multiple topics.
Finally, don’t overlook your opportunities to learn from others. The NASPP has over 30 local chapters planning regular meetings. Making sure you attend your chapter’s meetings gives you access not only to timely topics and great speakers, it also gives you the networking opportunity to discover which issues are most important to your peers and how they are dealing with them. We also have an active Discussion Forum where you can browse, search, and even subscribe to the topics that matter most to you.
Last week, I covered the ground rules for Section 16 exit reporting. This week, I have a few more pointers on the topic.
Best Practices
I’ve already covered a couple of best practices: whenever insiders cease to be subject to Section 16, review their transactions for the year for any that haven’t been reported and file a Form 4 to report these transactions at that time, rather than waiting until the end of the year, when you are more likely to forget about them. Also, be sure to include these former insiders in your year-end surveys and reconciliations for Section 16 (and obtain a “no Form 5 due” statement from them).
It’s also a good idea to review their transactions for the past six months for any non-exempt transactions. Count out six months from their last non-exempt purchase and that tells you how long they need to report non-exempt sales. Then count out six months from their last non-exempt sale to determine the last date they need to report non-exempt purchases. Inform former insiders of these dates, so they are aware that their non-exempt transactions are still subject to Section 16, both for reporting purposes and short-swing profits recovery purposes. If the company will continue to assist with their post-Section 16 reporting, you may want to make a note of these dates in your calendar as well.
The Exit Box
Both Form 4 and Form 5 include a checkbox to indicate that the reporting person is no longer subject to Section 16, commonly referred to as the “exit box.” Any time a new form is submitted after an insider is no longer subject to Section 16, whether to report newly occurring non-exempt transactions that are still reportable or to report previously unreported transactions, this box should be selected.
Who Is Responsible for Post-Termination Reporting?
Section 16 imposes an obligation on the individual insider, but, as my readers well know, most companies assist their officers and directors with this obligation by preparing and submitting the required forms on their behalf. And my guess is that this continues to be the case during that short period where the individual has ceased to be a designated insider but is still subject to the reporting and short-swing profits recovery provisions of Section 16.
I would certainly expect this to be the case if the individual is still employed by the company but has merely experienced a reduction in responsibility (no sense in adding insult to injury by making them take on their own Section 16 filings). But, even in the case of former insiders that have terminated their employment, the company probably still submits their Section 16 filings for them. The exception might be where an insider has left on bad terms, e.g., was dismissed for some sort of egregious behavior or violated a non-compete or other agreement. In that case, some companies might leave the offending insider to his/her own devices for Section 16 purposes (and be happy to disclose a reporting violation and recover profits in the event that the insider doesn’t manage the obligation sufficiently).
What About Form 144?
Most Section 16 insiders are also considered affiliates of the company and are required to sell under Rule 144. They are subject to Rule 144 by virtue of the authority they possess over the company. If they no longer possess this authority, then they also should no longer be subject to Rule 144 (unless, of course, they hold unregistered shares). But when exactly does Rule 144 no longer apply?
Although the determination should be made based on the relevant facts and circumstances, the Rule 144 experts we look to here at the NASPP–Jesse Brill, Bob Barron, and Alan Dye–generally believe that, in most cases where individuals have cut all ties to the company, they cease to be subject to Rule 144 when their employment ends. A recent SEC interpretation, however, suggests that it is a good idea for former affiliates to sell under Rule 144 for three months or until the company files its next periodic report and many companies have implemented similar policies.
Got Questions on Section 16? Alan Dye has the answers. Tune in later today for his popular, annual Q&A webcast on Section 16.
Quick Survey on Section 6039 Take our Quick Survey on Section 6039 and learn how companies are planning to comply with this new tax reporting requirement. A mere seven questions–you can complete the survey in less than five minutes!
ShareComp 2011 The NASPP is happy to announce its support of ShareComp 2011, a fully virtual conference on stock compensation. NASPP members can attend the event for free using the sponsor pass “VCP”; feel free to share this sponsor code with others at your company.
ShareComp 2011 will be held live on February 23, 2011 and all presentations, documents, and booths will be available on-demand for a year afterwards. More than just a series of webinars, ShareComp is a 3-D rendered environment with all of the features of a physical conference, without the cost and time of travel. Benefits of attending include:
16 hours of live global interactive learning and networking
Best practices for designing, implementing and managing stock compensation programs
Instructional sessions that will share real-world examples, tactics and lessons learned
Facilitated discussion forums with experts and practitioners
A searchable library, including presentations, Q&A sessions and booth materials
A year of access to the conference center and materials
To find out more, visit ShareComp2011.com. Register today for this no-risk, high-impact event (be sure to enter sponsor pass “VCP” for free registration). While you are attending the event, we hope you’ll stop by the NASPP virtual booth to say hello.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.