The benefits of offering a 10b5-1 plan

Here's how human resources can help company stockholders manage their equity

In addition to a salary, cash bonuses and perquisites, many companies provide their executives with compensation in the form of stock.

Executives often wonder how or when selling stock options or accumulated holdings is allowed. To help company stockholders manage their equity compensation, some executives create a trading plan under Rule 10b5-1(c) of the Securities and Exchange Commission. A 10b5-1 plan serves an important purpose as it provides insiders with an affirmative defense, meaning the ability to refute allegations of trading on the basis of material nonpublic information.

"It's an affirmative defense for not only the individual but for the company," Sandy Galuppo, Managing Director with SVB Private, said. "If you are a restricted employee of the company, in other words, if you have certain times of the year that you can sell the company's stock, this allows you to put a systematic selling program in place regardless of the blackout periods. That's as long as you put this plan in place in an open window, not during a blackout or restricted period."

Executive benefits

Notwithstanding the ability of a 10b5-1plan to help ensure regulatory compliance, it also provides considerable benefits for executives who wish to take control of their finances.

"A 10b5 plan allows executives to have the ability to sell their company stock for their own financial goals and objectives," Galuppo said. "It's a personal plan for each individual; it's not a company-wide, static plan. Each executive has their reasons and their parameters for establishing a 10b5."

From Galuppo's experience, when companies do not support the creation of 10b5 plans, they're not providing executives the flexibility to meet their personal financial goals.

"Their hands are tied due to the restrictions and constraints around when they can and cannot sell their company stock," Galuppo said. Consequently, executives miss out on capturing financial gains due to insider trading rules, as well as their inability to take advantage of positive stock market moves by not selling stock options.

A partnership with Human Resources

A 10b5 plan is a benefit that serves as a compliance tool for the executive and their employer. On that basis, it often falls on the human resources department to make executives aware of the company's support for 10b5 plans.

HR teams are always on the lookout for innovative benefits to offer executives that do not burden the department with excessive red tape, which is why a 10b5 plan is particularly appealing. To make executives aware of the company's willingness to support 10b5 plans and the advantages of creating one, HR representatives need not become experts in the rule. Instead, an independent advisor can meet with executives to discuss why it makes sense to create a plan.

"I become an extension of the HR team. I set the meeting with the executives either one-on-one or in small groups," Galuppo said. And while some HR teams become experts in 10b5 plans, others prefer to leave the details to Galuppo and his team.

"Certain HR executives really don't get involved with the stock plan. In those circumstances, I work more closely with the company's general counsel," Galuppo said.

Creating the plan

After HR helps spread the word and the company's legal department creates or blesses a template of the 10b5-1 plan, it's then up to the executive, working in partnership with an independent trusted advisor, to build it. During that phase, the executive develops a comprehensive financial plan that goes beyond stocks. It's holistic wealth planning with an eye toward the executive's complete financial picture.

"This provides a financial checkup for the executive. We review personal goals and objectives for each individual and how the company stock could help them reach those goals," Galuppo said.

The recipients of stock options often need help managing their holdings for compliance with regulations and as a means of achieving their financial goals. In such cases, it makes sense for HR departments to partner with a suitably qualified financial advisor who specializes in helping executives manage and extract value from concentrated stock positions through offering conflict-free advice and solutions.

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.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.