Yesterday, I had the opportunity to participate in a Computershare FreeSMARTS webcast with my NASPP colleagues Danyle & Robyn on insider trading compliance policies. Preparing for this webcast gave me the perfect excuse to peruse some of the policies available on the web. Our sister site, TheCorporateCounsel.net has a fantastic list of example policies in the Insider Trading Policy practice area.
One aspect of the insider trading policy that stock plan managers might be expected to participate in is employee education and communication. I’m a big fan of quizzes to supplement standard education practices, particularly because they provide a means to gage the effectiveness of your program. Insider trading is an area that is perfect for a situational quiz–one that gives employees a situation and asks whether or not it is a case of insider trading. This type of a quiz is very much like an interactive FAQ and requiring employees to stop and actually consider their answers helps them apply the concepts to their own jobs and circumstances.
Today I want to share with you a bit of what I uncovered in the process of preparing for this presentation:
MyStockOptions.com offers a quiz on insider trading that serves as a general knowledge poll. These are questions that all of your employees should be able to answer, including the question on penalties for insider trading. It’s important for every employee to understand the potential sanctions that are the teeth behind insider trading regulations.
Smart Money recently published an intriguing article on the advantages of making insider trading legal. One of the hypothetical scenarios from this article was among the questions posed to two leading law professors in this follow-up article. The responses to some of these questions demonstrate the difficulty inherent in a vague set of regulations such as what we have with insider trading.
Finally, in reviewing some posted insider trading policies on company websites, Boeing’s FAQs really stood out to me as a stellar example of a short set of questions that clarify what actions might constitutes insider trading. If you are looking to build a quiz, questions like those provided by Boeing are a great place to start.
Of course, you don’t need to create FAQs or quizzes in-house. There are a number of service providers who specialize in HR training, including insider trading, if you have even a relatively small budget for it.
-Rachel
Tags: FAQ, insider trading, policy, quiz
How does your company approach the issue of in-the-money options that are nearing their expiration date? This has always been a potential issue for terminated employees whose vested shares are no longer exercisable for the full term of the option. We now also see more companies with options that are actually nearing full term, especially when the options have remained underwater for an extended period of time.
Communications
The first decision on expiring options is whether or not the company will endeavor to notify participants of the impending expiration. At face value, this appears to be a fantastic idea, but there are still issues to consider. Ideally, these communications would be automated to some degree to avoid the administrative burden of manual distribution.
Identifying the grants and employees who should receive a notice regarding expiring in-the-money options may not be easy. Even if your stock plan administration software has a report that generates a list, you could be faced with a daily verification depending on the vesting schedules for your employee options. Most brokers have the ability to alert employees of upcoming option expirations through the employee accounts and some may even be able to send out automated email notification.
Another important consideration is how to ensure that the communication is universal. It is reasonable to exclude specific groups of employees (e.g., employees holding underwater options), but it is important that the exclusion is consistent to avoid even the appearance of discrimination. When considering the timing of communications, keep your termination parameters and typical administrative delays in processing terminations in mind. As with any communication, you run the risk of an employee relying on the notification, not receiving it due to an administrative anomaly, and find yourself in the middle of a lawsuit.
Automatic Exercise
More brokers are now willing and able to support a company’s policy to have expiring in-the-money options automatically exercised on the day before they expire. Automatic exercise has existed for many years for publicly traded options, so it’s not a stretch to apply the same logic to an employee plan. However, there are more considerations for employee stock options.
Exercise Type
When instituting an automatic exercise policy, careful consideration should be given to how the employee will pay the exercise price and tax withholding associated with the transaction. It is possible to initiate a same-day sale on an expiring option on behalf of the employee providing you have the appropriate permissions to do so and your broker is willing to execute the transaction. However, my opinion is that the best fit for an automatic exercise is some form on net share settlement. The key advantage is that employees would simply receive the net shares in their account, which could be held or sold at their discretion. You won’t have to ensure that brokerage accounts are open and unrestricted and you don’t have to worry about coordinating a market transaction. Regardless of the exercise type you choose, there should be a way for employees to opt out of the automatic exercise.
How Much is Enough?
Another consideration for automatic exercise is just how in the money options need to be for an exercise, especially if you are doing a net share settlement. Even with a sell-to-cover transaction, it is better if the employee receives more than a fraction of a share in value for the transaction. For non-qualified stock options, you have to account for not only the exercise price, but also the tax withholding, which could dramatically reduce the value returned to the employee. Although in general some value is better than nothing, there are many situations where the exercise of an option that is barely in the money could actually do more harm than good. If you set a minimum value, be sure that it can be consistently administered and is clearly communicated to employees.
Documentation
If you are instituting a new automatic exercise policy, confirm with your legal team on how to handle both existing options and new grants. Does your plan accommodate and will your company feel comfortable simply making it a policy and notifying employees, or will you need to have some kind of agreement from employees. For future grants, will you need to include specific language for an automatic exercise in the grant agreement?
Early Bird Special for the 19th Annual NASPP Conference
Speaking of expiring options, don’t miss out on your option to register for the 19th Annual NASPP Conference at a reduced price! Now through May 13th, NASPP members will receive a special discount on Conference registrations. Register today!
-Rachel
Tags: cancellation, communication, exercise, expiration, option, policy