How to structure your 10b5-1 trading plan.


When executives want to sell or buy company stock, they have to jump through hoops. Securities laws prevent anyone with access to undisclosed financial information from trading when in possession of material information. Therefore, trading "blackouts" are imposed on insiders around material events such as earnings announcements, an acquisition, product rollout delays, or even the landing of a major contract. Given these restrictions, there may not be many open time frames for an insider to trade.

This is why so many executives who want to diversify embrace a popular program with an ungainly name: the 10b5-1 trading plan. (34) A properly devised and executed 10b5-1 trading plan allows an executive to sell in predetermined stages without regard to "blackout periods," and the sales should pass muster with regulators.(35) These plans are also common enough that an executive may be able to sell without being viewed as "bailing out" of the stock.

Simple 10b5-1 trading plans often specify selling a constant number of shares over a certain time period--for example, 3,000 shares every quarter for two years. But the plans are more flexible than many people realize and can accommodate different strategies for selling. We used our Wealth Forecasting System to compare the effectiveness of several staged-selling strategies:

* Sell 50% immediately, then equal amounts quarterly over the next two years

* Structured Sale Plan: Sell equal amounts quarterly over the next two years

* Profit Taker: Sell only after the stock price rises (25% of shares if it rises 20%; 50% of shares if it rises 40%; 75% of shares if it rises 60%; 100% of shares if it rises 80%; and all or whatever is remaining at the end of the two years, regardless of price)

Probability Probability 5-10% 50% 90-95% [Greather than]$3 Mil 98% Sell All 5.6 4.3 3.4 Now 95% 50% Now, 5.9 4.3 3.2 50% over time 87% Structured 6.5 4.3 2.8 Sale plan 81% Profit 6.8 4.5 2.4 Taker 78% Sell at 7.3 4.2 2.3 end Note:Table made from Ber Graph Based on Bernstein '$ estimates of the range of returns for the applicable capital markets over the next two years. Analysis assumes quarterly sales for the "50% Now, 50% over Time" and "Structured Sale Plan " scenarios. Values are net of embedded capital gains tax. Assumes cost basis of $0. Data do not represent any past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System, page 44, for further...

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