Rethinking 10b5-1 plans for strategic financial wellness

Colleen Arguello, Senior Director, 10b5-1 Trading Plans

E*TRADE Executive Services

06/11/20

A holistic approach to financial wellness is important. Although it is often overlooked, equity compensation can play a key role.

One particularly underestimated tool is the 10b5-1 plan, which provides executives and other company insiders a framework for trading their company stock. But the 10b5-1 plan does much more than help navigate securities laws for those trades; it can be leveraged as a powerful tool for diversification and risk management.

I’m introducing a new series that will explore 10b5-1 plans from a broader perspective, answer frequently asked questions, and share real-world stories of how 10b5-1 plans have been used as a component for financial wellness. Today let’s kick things off with 10b5-1 plan basics to help shed light on how this tool can play an important role in financial wellness.

10b5-1 plan basics

Selling shares of company stock received as equity compensation is subject to complex rules and restrictions to guard against fraud and insider trading. Among these are Rule 144, promulgated under the Securities Act of 1933 (The Securities Act) and Section 16 of the Securities Exchange Act of 1934 (Exchange Act), which govern how and when insiders of publicly traded companies can trade their company stock.

A 10b5-1 trading plan aids insiders in complying with securities laws restrictions—a prearranged set of instructions that allow a company insider to have company stock traded while remaining in compliance. To satisfy the rules, a 10b5-1 plan must be created in good faith when the company insider is not aware of any material non-public information (MNPI) and must clearly identify the amounts, prices, and dates for stock trades.

The idea of a 10b5-1 plan is “set it and forget it.” Once in place, all sales and purchases will be executed based on the plan’s predetermined instructions. Even if the company insider does come into possession of MNPI, a 10b5-1 plan preserves the integrity of the trades and helps the company insider comply with legal requirements.

The idea of a 10b5-1 plan is 'set it and forget it.' Once in place, all sales and purchases will be executed based on the plan’s predetermined instructions.

Thinking outside the box: Customizing 10b5-1 plans

Without a 10b5-1 plan, any trade made by a company insider could become the subject of scrutiny and investigation. But beyond fulfilling regulatory obligations and protecting against potential allegations, 10b5-1 plans provide a steady path to help diversify portfolios and pursue broader financial goals.

Executives and company insiders frequently find themselves barred from selling their stock, either because of company blackout periods or due to possession of MNPI. This can make it difficult to monetize their holdings, and many choose to let their company stock sit untouched in their stock plan account.

But simply holding a high concentration of company stock exposes company insiders to single security risk, since much of their wealth depends on the market performance of a single ticker symbol. Diversifying company stock holdings could be a step toward creating a more balanced portfolio, reducing the risk of having all the eggs in one basket, and opening new possibilities for reaching financial goals.

A 10b5-1 plan solves this conundrum, allowing company insiders to align their stock sales with life events, liquidate assets on a predictable basis, exercise stock options, generate cash flow, cover tax liabilities, or sell their stock if it reaches a certain price. A personalized 10b5-1 plan can be the difference between meeting financial goals and missing opportunities.

Beyond the basics

There are more than a few questions worth considering when it comes time to draft a 10b5-1 plan: Which elements of the equity awards should be included? Are any stock options scheduled to expire? Is liquidity needed for an upcoming expense or purchase? What about outside holdings? What’s the timeframe—are there tax strategies or immediate expenses that need to be addressed?

From a financial wellness perspective, it’s clear that there’s no one-size-fits-all answer when it comes to 10b5-1 planning. Although it can play a major role, equity compensation is just one element of financial wellness. That’s why it’s essential to work with specialists who can help clients discover new possibilities for effectively folding equity compensation into their wider financial pictures.

The 10b5-1 plan is a reliable tool to help reduce risk, preserve integrity, and pursue financial goals, no matter the news of the day. If you’re curious about how these plans can be customized, in the coming weeks we’ll discuss real-world scenarios that illustrate how 10b5-1 plans were implemented and integrated into clients’ financial plans and much, much more. Stay tuned.

Need assistance?

Please don’t hesitate to reach us by email at executiveservice@etrade.com. To learn more visit www.etrade.com/execservices

Colleen Arguello
Senior Director, 10b5-1 Trading Plans

Colleen Arguello, Senior Director, leads the team responsible for E*TRADE Executive Services 10b5-1 plan offering. In her role she is responsible for strategy and business development for both 10b5-1 Automation and for the customizable 10b5-1 plan service.

With over 20 years of experience in the financial industry, Mrs. Arguello joined E*TRADE from Needham and Company, where she served as head of the corporate and venture service desk. Her expertise lies specifically in corporate and venture services, including stock sales, stock options, stock repurchase plans, and in implementing 10b5-1 sales plans for corporate insiders and officers.

Mrs. Arguello received a BS in Business Administration from the University of Dayton and currently holds FINRA Series 7, 63, and 24 licenses.

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