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The role of 10b5-1 Plans in helping executives meet their financial goals
For executives in the most senior roles at organizations, compensation with a portion of company stock is not uncommon. However, as executives focus on building their careers, taking the time to properly manage their equity compensation — including planning for college tuition, retirement, tax liabilities, lifestyle expenses, etc. — often doesn't happen.
Lack of time spent on personal financial planning can lead to missed opportunities. For example, one of the biggest mistakes a company shareholder tends to make is not knowing the expiration date of their holdings. They might also fail to understand or plan for the tax implications resulting from sales of their equity. Some executives can also get emotionally connected to their hard-earned stock.
Consequently, as they continue to receive company stock while lacking the tools and expertise to maximize the associated financial benefits, executive morale can suffer.
A better way to manage equity compensation
To make sure a company shareholder makes the most of their stock options, many companies and executives create a trading plan under Rule 10b5-1 of the Securities and Exchange Commission. A 10b5-1 provides insiders an affirmative defense, which is the ability to refute allegations of trading on the basis of material nonpublic information. Specifically, an executive can claim an affirmative defense if a purchase or sale took place in accordance with a pre-established plan. The key to this defense is the creation of a plan, which normally covers nine to 12 months, and relinquishing direct control of each transaction.
Given the degree of government oversight, and the inherent complexity of helping executives manage their equity holdings in compliance with the law, advisors who work in this arena must possess specialized knowledge of the relevant rules and regulations.
"Not every advisor is up to speed and able to convey it to the executives in the right way," Sandy Galuppo, Managing Director with SVB Private, said. "There's a handful of advisors that become subject-matter experts when it comes to 10b5-1 Plans."
The role of a trusted advisor
From Galuppo's perspective, a 10b5-1 Plan provides executives with considerable flexibility to manage their equity holdings to meet their financial goals, while doing so in compliance with SEC rules.
"A plan follows personal goals set by the executive," Galuppo said. "We then back into the stock sales based on established price parameters in the 10b5-1."
Nonetheless, executives must identify their financial goals before they can establish and benefit from a 10b5. For time-pressed executives, this may prove challenging. An advisor who specializes in significant equity holdings can help establish clarity about their long-term plan.
When working with executives to document their 10b5-1 plan, Galuppo develops a holistic view of the executive's financial needs.
"The first meeting is a discovery meeting to really understand what the executive would like to achieve financially. The next meeting would be to discuss ideas and suggestions," Galuppo said. "From there, I'll be able to put together a 10b5-1 to sell shares they already own, or shares that they're going to be getting from the company at a later date. We'll also plan to minimize the tax implications of the sales."
Throughout the process, Galuppo never loses sight of the executive's overarching objectives. "As part of this exercise, we'll also review the cash flow from the sales and how utilizing the company stock allows them to reach their financial goals."
The optimal approach
If executives try to manage their finances without expert assistance, the resulting plans may deliver a less-than-optimal approach, which can leave them frustrated and possibly expose them to questions from regulators regarding their handling of company stock.
That's why working with an advisor is so important. The right one will approach the situation holistically, taking into account the executive's complete financial picture and offering a fiduciary objective that provides conflict-free advice and solutions.
With an advisor and a 10b5-1 Plan, an executive can maintain compliance with SEC rules, manage their equity compensation more efficiently and realize their short- and long-term financial goals.
SVB Private, its affiliates and wealth advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving legal matters. Individuals executing a 10b5-1 Plan should keep in mind that such plans are subject to approvals by the individual's company, may be subject to various trading limitations and do not relieve the seller from other regulatory requirements.