As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.
Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?
If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!
– Barbara
* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.
It’s been about 15 years (yikes, already?) since the SEC adopted Rule 10b5-1. For those new to the concept, a 10b5-1 plan may be best explained as a device that allows company insiders to trade in the company’s securities pursuant to a pre-arranged trading plan or instruction. The pre-arranged element is intended to help the insider avoid automatic liability for insider trading and serve as an affirmative defense to claims of insider trading. While there have been many benefits to enacting such trading plans, 10b5-1 plans have not escaped scrutiny from the SEC. I won’t cover that particular scrutiny in today’s blog, but will tackle another unintended downside: the impact of well-intentioned, pre-determined trades on a company’s stock price.
Haven’t We Seen It All?
In recent years we’ve seen the gamete of questionable situations that arise from having a 10b5-1 trading plan. Did the executive really not have material non public information at the time they created the plan? Or, on the flip side, did the executive time that press release to be just before or shortly after the trade already set to occur in his or her 10b5-1 plan? The thing these scenarios have in common are that they raise a question as to whether a specific individual should have indeed been able to trade in the company’s stock, in spite of having a 10b5-1 plan. We could cover a lot of examples of these instances. But today I want to turn to one thing I hadn’t heard of until recently, a circumstance that had nothing to do with the ethics of the trades executed under an individual’s 10b5-1 plan. It appears to be a completely, unintended consequence of the executives and company being well intentioned and yet still generating some ripples about it.
It Started With A Tweet
On February 9, 2015, CNBC’s Jim Cramer sent a memo to the board of social media darling Twitter. The essence? Stop 10b5-1 trades, because the flow of these trades (albeit pre-timed and planned) are hurting the company’s stock price. As CNBC reported, the actual memo said: “Memo to the board of directors of Twitter: Someone suggest that there be a moratorium on selling stock for a bit, maybe six months, maybe a year, to show that you believe in the company… If I were on the board I would simply say, ‘Hey guys, could you give it a break for a while because you are now telling a good narrative about user growth and engagement and you are starting to get people excited again about the company and its stock and your selling makes them feel foolish.’”
The activity that prompted the memo was a series of sales of stock by top executives at Twitter in the weeks and months prior to the memo. Although the trades were done pursuant to 10b5-1 plans, several were executed in close proximity to each other, bringing in millions of dollars to Twitter executives ($8.5 million to its CEO in January and February alone, with a similar amount to its founder and chairman, and $1.8 million to another executive). Although it may be argued that the trades were executed based on long, pre-planned directives, the quantity and dollar value of the shares liquidated seemed to be sending a message that the executives were dumping stock. Not to mention simultaneously releasing thousands of shares into the market.
So what happened? What did the Twitter board do? The company has not commented on the matter, but in a Fortune article citing exclusive information (Exclusive: Twitter execs put stock sales on ice – April 22, 2015), it appears that the memo was received and action taken. Fortune cites having multiple sources who confirm a moratorium on 10b5-1 transactions, save one insider who continues to be permitted to sell stock. Aside from the transactions of that lone insider, no other 10b5-1 transactions have occurred since February 6, 2015. It’s not clear if the company canceled plans or simply did not renew them. Whatever the details, the end results appears to be a moratorium. Since that time, Twitter’s stock price has risen approximately 25% (as of the date of the Fortune article). You be the judge. Did a halt in insider trading activity send a positive message to shareholders, resulting in an increased stock price?
Takeaways
While the Twitter scenario is the first I’ve heard of this type of moratorium, in particular initiated by a party external to the company, it certainly provides food for thought. Social media has given a voice to many – shareholders, customers, media, and others. It’s quite simple to send a message to a company, including its board of directors. And in this case it seems the message was heard. This raises the question – do other companies need to worry about how their 10b5-1 plan trades are perceived by the market? I don’t have a definitive answer on that, but I do have some suggestions.
Consider the potential timing of trades when approving 10b5-1 plans. One thing companies should consider, if they haven’t already, is how the future trades may be perceived by shareholders in the best and worst of trading scenarios. If an insider has multiple stock price targets to trigger sales, for example, and all those targets are hit in a short period of time given a rapid rise in stock price, how will those multiple trades be perceived?
Evaluate how many plans have similar triggers. Companies approach evaluating and approving proposed 10b5-1 plans differently. One thing to assess is just how many insiders have plans or propose plans with similar triggers. If five executives want to sell shares when the stock price reaches $50, this could result in a large volume of shares and transactions hitting the market all at one time. I’m not a 10b5-1 expert, but it seems there has to be a way to monitor existing plan terms and match those up against those proposed by new trading plans. If volume of shares and shareholder/market perception is a potential concern, perhaps the company can establish collective limits (as a matter of policy) as to how many shares can be sold at a given price or under a certain trigger. I may get flack for even suggesting this option, but I’m throwing it out there. Should companies, as a matter of policy, restrict the number of shares that can be sold under a trading plan, or, even a limit on shares sold cumulatively – based on the collection of all existing plans? This would certainly have helped Twitter buffer against the influx of shares into the market earlier this year.
This type of unintended aftermath of 10b5-1 trades feels like new territory. I’d love to hear from anyone who has (as a matter of policy) specific limits to prevent an influx of shares into the market, or who has ideas about best practices to help companies avoid a public call-out like Twitter received. Although they haven’t publicly admitted to any action taken, if we are to listen to the “sources” in this matter, kudos is due to Twitter’s board for handling the situation in a constructive way.
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 NASPP’s 2014 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. This is the industry’s most comprehensive survey on stock plan administration, 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 25 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:
The Latest Trends in ESPPs: Rumor has it that companies have been implementing new ESPPs and have been enhancing the benefits (discount, lookback, etc.) in their existing ESPPs. We saw a decline in both the number of ESPPs and the benefits offered under ESPPs in the last survey, so I’m very excited to see if this trend really has turned around.
Automatic Exercise on Expiration: For the first time ever, the survey collects data on this emerging practice. I think it makes a lot of sense so I’m very interested to see what percentage of respondents have implemented this program.
Rule 10b51 Plans: Has the recent negative attention that Rule 10b5-1 plans have received from academics and the media impacted the use of these plans? My money says no; if anything, I expect usage to have increased a bit; we’ll see if I’m right when the survey results are published.
Stock Ownership Guidelines: The 2011 Stock Plan Administration survey saw a 35% increase in the percentage of companies that have stock ownership guidelines, a remarkable increase–far higher than we expected based on responses to the 2007 survey. If everyone that said they were considering implementing stock ownership guidelines in 2011 survey did actually implement them, close to 80% of all respondents will now have these guidelines in place.
Social Media: The topic du jour when it comes to educating employees these days is the use of social media (Facebook, Twitter, LinkedIn, etc.) I think these tools have significant potential for reaching younger employees. I look forward to finding out what percentage of respondents use them now and setting a baseline that we can use for comparison purposes in future years.
April 25 will be here before you know it and you are definitely going to want to have access to the full survey results. If you are an issuer, register to participate today. (Service providers that are not eligible to complete the survey can access the full survey results at no cost, provided they are members of the NASPP. This access is available to service providers only; issuer companies must complete the survey to access the full survey results.)
Last week I explored the connection between the affirmative defense provided under Rule 10b5-1(c) and appropriate timing of Rule 10b5-1 trading plans. The same interpretive guidance that got me thinking about creating 10b5-1 trading plans also clarified some issues around the modification or termination of trades under existing Rule 10b5-1 trading plans.
Modifying a Transaction
Any investor may have situations where they want to change their trading behavior based solely on circumstances that are not connected to insider information, including your company’s own insiders. For example, an insider may have an existing plan that includes the sale of 20,000 shares, intending to use the cash generated from the sale to cover a balloon payment that is due on his or her mortgage. If the stock price drops unexpectedly before the trade takes place, the insider may wish to increase the number of shares being sold under the trading plan. In fact, the SEC does say that modifications made “in good faith” may be acceptable.
However, modifications of trades under a Rule 10b5-1 trading plan are not a good practice for insiders. The interpretive guidance from the SEC makes it very clear why. In response to question 120.16, the SEC clarifies that the modification of a trade is the same as terminating the existing trade and entering into a new plan for that trade. Since the modified transaction is considered to be under a new trading plan, the new plan is subject to the same requirements in order to qualify for the affirmative defense under Rule 10b5-1(c), the insider should not be in possession of material nonpublic information at the time of the modification.
One Transaction, One Plan
What’s more, in response to question 120.19 the SEC clarifies that the termination of one or more transactions within a plan is the same as terminating the entire plan and entering into a new plan for all transactions under the plan. Therefore, at the point of the termination of one transaction, all the remaining transactions must still meet the requirements of Rule 10b5-1(c) in order to rely on the affirmative defense. Because this is virtually impossible for your company’s insiders during a closed window, it’s a good idea to require pre-clearance for both modifications and terminations of trades within a plan to ensure that the “new” trading plan created by the modification or termination of a trade still falls within the parameters of your insider trading policy.
Terminating the Entire Plan
So, what about the termination of an entire plan? In isolation, there isn’t necessarily an issue with terminating an entire plan. However, in most cases, an insider terminating a plan will want to enter into a new one. This is where the concept of “good faith” comes into play. In addition to not being in possession of material nonpublic information at the creation of a Rule 10b5-1 trading plan, the insider may not enter into a plan that is “part of a plan or scheme to evade” the prohibitions under Rule 10b5-1(c). Therefore, what happens after the termination of a Rule 10b5-1 trading plan will be key to determining if the termination of the plan was in good faith. In real terms, that means that the insider will want to avoid any appearance that the plan was terminated based on inside information.
As an example, let’s assume that an insider has an existing Rule 10b5-1 trading plan that includes a market sale of 10,000 shares. At some point prior to the sale, that insider learns about an upcoming acquisition that is anticipated to greatly increase the value of the company’s stock. In response to this knowledge, the insider terminates the existing plan and enters into a new plan in the next open trading window, after the acquisition has been disclosed or completed and when the company share price has gone up. The new plan has all the appearances of meeting the requirements for a Rule 10b5-1 trading plan. However, in this case the old plan wasn’t terminated in good faith, and the affirmative defense of Rule 10b5-1(c) may not be available.
Cooling Off Period
One of the reasons that a “cooling off” period between the creation of a Rule 10b5-1 trading plan and the first trade under that plan is highly recommended is to maintain the appearance of good faith. So, what about a situation where an insider wishes to terminate an existing plan and enter into a new one for the purposes of adding a new transaction to the plan and one or more of the original transactions is set to take place almost immediately? Obviously, each situation needs to be analyzed individually, but in most cases this shouldn’t cause an issue with complying with Rule 10b5-1(c). Even though each of the transactions within the new plan, including those carried over from the old plan, are subject to the prohibitions under Rule 10b5-1(c), your company should be able to take the position that trades carried forward unmodified from an old plan are considered to be made in good faith.
You can find more information on Rule 10b5-1 trading plans on our Rule 10b5-1 portal.