10B5-1: Insider Trading

by | Jun 22, 2023

Do I need a 10B5-1, podcast about insider trading

Show Notes:

10B5-1… is it a license plate number? Is it the combination to the lock on your luggage?  No, it’s the form you need to pay attention to if you’re in a position to worry about insider trading.  Should you be paying attention to this process?  Let’s take a dive into crafting a 10B5-1, why you might need to and how it might keep you out of the slammer.

Episode Insights:
SEC Adopts 10B5-1 Amendments
SE Charges Peizer with Insider Trading

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I am Sean.

And I’m Kevin.

This is Capture the Upside brought to you by Hill Island Financial, a podcast for those with $200 million or more to invest. But it’s not 200, right? That’s way too much. Although I would trust you with my 200 million, Kevin.

Hey, I like this.

Maybe dial that back to $2 million or more.

That’s exactly right. Where we have among the lowest client two advisor ratios in the industry. And we pledged to invest our own assets consistently with how we invest yours.


That’s right, actually. Right.

That sounds like a license plate. Sounds like a Star Wars droid. What that has to do with insider trading, right.

It does. And my favorite part of that is that I happen to know in the Strimple household, if it was a Star Wars droid, no matter how esoteric or sideline of a character that was, one of your two children would know what Droid 10B5-1 intimately about that, but. They would know it’d.

Be on the tip of their tongue.

All of the details. So the fact that you think star lights droid just so perfectly lets you glimpse this Sean’s world right there.

I’m an eighties, kid. All right, This stuff sticks.

So yeah, if you are a person who is lucky enough to be an employee of a corporation and have risen to the top levels, or you you’re a lateral hire or they bought out the company, you’re often going to have a significant amount of your own net worth in company shares, whether it’s ESOS, Nso’s rescues, whatever it might be. And when you need to go and sell that to buy the cottage to, but to get through school to pay for the wedding because you are considered an insider, you can’t just go and sell. Especially because if you know, you just are trying to sell and then the next day the stock plummets by 20% and you had no idea. Well, it sure doesn’t look that way, right? So we have to inform the FCC and the FCC has given us official guidance for the last 20 years. They just updated it in 2023 that says, look, if you’re going to put these plans together, they need to be composed of these few elements. And it’s not hard. It does take experience.

They can be tailored very specifically to your situation. And you got to find somebody who knows what they’re doing. So for families with great wealth, they are going to be in touch frequently with insiders. The founders are people who are aware of transactions prior to them happening. Additionally, we are in a network of professionals, so as opposed to internally having the best tax person or the best attorney, we would argue that none of our clients are best served by whomever we’re going to be able to get in house in Grand Rapids, Michigan. That because we have clients across over across the entire United States and across a variety of different industries, we have the tax person over here, the attorney over here, the right person is, are you going to be living internationally? Are you in sports? Are you in a position, you know what what what’s your niche market? And because of that, we essentially have the guy who does all the taxes for McDonald’s executives, the person who does all the work for, you know, people who are in the supply chain industry. Well, you’ll have somebody call them up and say, I’m about to sell my company, and he’ll now know who he’s going to sell that company to and he’ll know who’s about to acquire that company. And so he’s in a position to be like, I’d like 100 shares of X, Y, Z. I happened to know it’s a good investment.

Again, just to kind of give a big picture here, meaning there’s fines, but then there’s 20 years jail sentences for insider trading. Right? So the free and fair market with equal access to information is a very big deal. The United States, right? It it is it’s it’s one of the most regulated things that we have. So bottom line is it is very normal for us to have a executive come to us with a concentrated stock position. Let’s say you got $20 million and $10 million evidence in company stock ups, Coca-Cola, whatever it might be. And if you’re considered a corporate insider and that’s something that your general counsel’s office is going to let you know right then We specialize in putting together S.E.C. Rule 10B5-1 plans. And so Sean, these are written plans that have three elements associated with them, right? They have number of shares that you’re going to buy or sell. Right. The price at which you’re going to buy or sell these shares and the timing that you’re going to buy and sell these shares. So, Sean, if you think about it, the intent here is to try and say, well, it’s fair for you, executive who has 50% of your net worth or 1% of your net worth tied up in one single stock to want to exit that position. Right. It’s not fair. Right. In a childlike sense of fairness for you to exit that position. You know, when you know things right, when you know, like, oh, we’re about to go up or we’re about to go down or ride to be able to take advantage of that situation. Now, the reason for this podcast is because the SEC revamped the rule in January of 23, right?

They first came out with this guidance in 2000. So 20 years ago, 2023, they re-upped the guidance and said, Hey, here, here’s how you do this. If you’re going to be an insider and you’re going to trade because we want to keep markets free and fair. And they made their first arrest of a corporate executive who was trying to use the new revamped 10B5-1 rules as a total smokescreen for insider trading.

Tyrann Pizer right, is who you’re referring to.

That’s exactly right. CEO and chair of the board of directors of On Tracking. Yes. And he had filed a 10B5-1. And his broker said, hey, I don’t think you’re doing this right. And it came along. The FCC found him again. He, 63 years old. Right. multi-Millionaire already little bit of a checkered past. This is not a guy who is exactly a Boy Scout. Right. But between May and August of 2021, he avoided 12 and a half million dollars in losses by incorrectly following a 10B5-1. So essentially he would come into possession of bad news and it quickly put together A 10B5-1 sign and then trade or good news and same thing right in this situation. The bad news. The news wasn’t only bad. Right. And so when we take a look at this arrest, it’s a kind of a great example of, okay, how do we put together our plans and why do we maintain flexibility? We tailor these 10B5-1s. And there’s this concept, Shawn, that to be able to do these 10B5-1s, they’ve got to be really strict, right? They’ve got to be really stringent. They don’t have to be. They’re three elements, number of shares, right? Price and timing. So we talked about number of shares bought or sold, right? We can talk about a percentage of holdings because the amount that you have goes up and down, you get granted different amounts. So you can put in 10B5-1 and see if the next two years or the next six months. That’s the other thing. Timing we can talk about. This plan is going to be in place for a short period of time or for a long period of time, almost always from signing the 10B5-1 to when it first does a transaction. There needs to be a cooling off period, right? That’s what Mr. Prisoner did not get right was like, I filed the plan, I sold 10 minutes later. You’re like, Well.

Nothing was cool. The start of the day.

The jig is up right? And you can also have it be around a life event. I’m going to sell shares when my child goes to college. When we buy a cottage. Like I’ve written that into a plan and you’re like, Yep, that made sense. They did. Now, you know, could you go out and buy? Could I have been like buying a cottage? Like, you know, But at least the plans in place, we’re like, it’s, it’s defensible. We followed the guideline, you tracked what I’m getting in, and so we will often put that in place from a timing perspective of when we take a look at prices. I don’t have to say I’m going to sell it at 50. I can say I’m going to sell it when my kid goes to school. As long as the price meets this minimum or I’m going to sell it at any one of these five prices, or I can even have it if it is 10% above the S&P 500, or if there is a big gap up in the price. Got you track it or if it underperforms this industry benchmark or overperformed.

I was going to ask how malleable these plans are, how locked in to what they lay out you are. For instance, I have you know, a lot of the things you just mentioned were market factors, right? Things that I don’t necessarily have control over What happens when my wife passes away, I get a divorce. How does time in life affect these plans and am I beholden to them regardless?

No, we have great flexibility. And again, it depends. A lot of people don’t just have straight up shares. Right. So in other words, if you’re just sitting there on straight up shares, it’s one thing. But usually we also have to look at this through a tax liens, right. Of these NSLs I ourselves IRS use, right. Do you not I mean what’s the story in terms of how these are granted? But no, we can suspend a plan, change a plan. We can have it be a life event. The key, though, is once like, let’s say the divorce again, if you are in possession of material and information, you’re like, let’s get divorced. I’m going to trigger the plan. You know, it’s kind of like, but if you’ve got a plan and you’re clearly entering into it, having the conversation saying, yes, this makes sense for the next two years, the next six months, the next whatever. Right. Like the FCC is going to say, looks like it quacks like a duck, that is a duck. It just so happens that you sold and then the stock went down. Right. And go along. And you’ll often see in the news this is one of the things that’s important about a 10B5-1 we will publicize 10B5-1, right? Sean Strimple, CEO of Simple Inc, has published a selling plan in order to fund his kids college. Right. And you’ll see sometimes if you read the Wall Street Journal like a nerd that I am, you know, hey, company executives had sold 10% of their shares as part of an ongoing long term plan. Right. So they’ll still mention that like like they got out and. Right. But they got out because it’s part of long term Plan B and that’s their 10B5-1. So the intent of this podcast is to say, look, if you are an insider in a publicly traded corporation and you’ve got a concentrated stock position, or even if you just want to be able to understand your options, you do need help putting together 10B5-1.

And you need somebody who’s done it and somebody who’s actually lived through it and we’ve lived through it, both with the tech bubble back in ’02 and in ’08. You really have to deal with this carefully, somebody who knows what they’re doing and he’s had experience with it. And you can count on our office to be able to guide you for that.

Sounds like time and transparency, really kind of your friends. And the sooner you start these conversations and more transparent, you are the less of a chance you’re going to get a phone call and knock on the door or a letter from the FCC. So how can people get a hold of you and start these conversations?

Anybody can have a jet cabin at Hill Island financial dot com or my website, my phone number and the show notes and let’s chat through your situation. And again bring some experience to writing your 10B5-1.

Thanks, Kevin.

Hey thank you Sean talk to you soon.


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Kevin Toler, CRPC®, APMA®

Partner & Private Wealth Advisor.