High-ranking employees at publicly-traded companies may be required to follow specific rules and regulations that don’t apply to the broader employee pool. These regulations usually apply to C-suite level executives, but can also apply to people in key roles, such as researchers or lawyers working with intellectual property. They also apply to board members and shareholders with an influential stake in the company (usually more than 10%).
And yet, very few executives inherently know that when they take on a new job or agree to an updated compensation package, they will be subject to Section 16 and Rule 144, or that a 10b5-1 plan can help you execute a financial plan despite some of these restrictions. Let’s dig into what these rules and regulations are and how they may affect you.
Who is subject to Section 16 and Rule 144?
Before we dive in, it’s important to note: We are not legal experts and no financial advisor should tell you whether these rules do or don’t apply to you. That is the job of your company’s general counsel. A good financial advisor will prompt you to ask questions during onboarding or key transitions (such as a promotion) to ensure you (and they) have accurate information.
Generally speaking, you will find this information out during onboarding, or be briefed on the rules that apply to you when you reach a level that triggers them.
While most companies are diligent about sharing this information (it’s better for the company when employees understand and follow the relevant rules), the responsibility ultimately falls on the individual. When in doubt, ask questions.
What is Section 16?
Section 16 of the Securities and Exchange Act requires certain people (as noted above) to file paperwork documenting their holdings and trades with the SEC. The goal is to prevent these insiders from profiting off of material non-public information.Â
Section 16 might apply to lower-level employees if they are involved in proprietary research, such as clinical trials or product development.
If Section 16 applies to you, you must document any trades you make within 48 hours by filing either a Form 3, Form 4, or Form 5 with the SEC. These filings then become part of the public record.
What is Rule 144?
Rule 144 limits the amount of stock an individual can sell. It usually impacts high-level executives, as noted above, but may also apply to individuals with a heavy concentration of restricted shares that aren’t registered with the SEC. For instance, if you acquired a lot of shares of a private company that goes on to IPO, those shares may be subject to Rule 144 even if you aren’t currently a high-level executive of that company.
The amount of shares you’ll be able to sell will be calculated based on the average trading volume in the month before you file Form 144, a Notice of Proposed Sale, with the SEC. If you don’t file this paperwork before trading affected shares, you could forfeit any profits you generate.
What is Rule 10b5-1?
Rule 10b5-1 allows individuals to submit trading plans to the SEC, an approach that proactively defends against any potential future allegations of insider trading. These plans can help individuals subject to Rule 144 or Section 16 and may also be beneficial to any employees impacted by lockups or blackouts that might otherwise make it difficult for them to sell or trade shares.
A 10b5-1 plan outlines your intention to sell shares when certain conditions are met; the rules cannot be subjective. For instance, you might decide to sell shares using time (monthly selling), price (any time shares hit X), or trading volume as triggers.
Execution usually starts 60-90 days after you file your plan with regulators; they are usually valid for a year.
Next steps
If you think these regulations might apply to you, or if you want to use a 10b5-1 plan to help manage your employee stock, consider working with a financial advisor who understands the complexities of equity compensation.
Your company likely provides the tools you need to stay compliant; a financial advisor can help ensure you ask the right questions. They can also help you understand how your concentrated stock position fits into your overall portfolio and broader financial plan.Â
At Quorum, we can also work directly with your company’s legal and HR departments to help you understand the process surrounding Section 16 and Rule 144, or to implement a 10b5-1 plan.
