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ETP 10b5-1

Why do employees choose ETP 10b5-1?

ETP 10b5-1

Employees primarily choose a 10b5-1 employee trading plan (ETP )for three reasons:

  1. To gain affirmative defense against any insider trading concerns.
  2. To systematically diversify their portfolio for overall financial well-being.
  3. To convert stock to cash on a regular and predictable timetable to meet their expenses.

Most companies already offer some form of paper-based 10b5-1 plan to employees who could potentially be routinely exposed to material non-public information (MNPI). ETP can offer the same affirmative defense because it complies with the 10b5-1 framework, but instead of needing weeks of administrative paper-work, an ETP can be set up in just a few minutes online.

Some employees, especially those who are long-tenured, could potentially have a large portion of their wealth tied to their employer’s stock. It may be prudent for them to diversify systematically while also gaining affirmative defense.

Some employees, who live in expensive cities like San Francisco or New York, just need to be able to convert their stock to cash to meet their living expenses.

All in all, a company can expect 1 to 10% of its employees to participate and benefit from an employee trading plan (ETP).

Is ETP 10b5-1 right for your company?

ETP 10b5-1

All publicly traded companies will benefit from implementing a 10b5-1 compliant employee trading plan (ETP), which allows their employees to sell company stock on a predetermined schedule.

A 10b5-1 compliant ETP offers affirmative defense to your employees, which not only protects them from any insider trading concerns but also guards your company’s reputation against any insider trading scandals.

If some of your officers and directors are already enrolled in a paper-based 10b5-1 plan, you will benefit immediately by migrating these employees to an online ETP.

A paper-based 10b5-1 plan takes a few weeks to set up and is extremely tedious to administer. In contrast, an online ETP can be set up in a few minutes and requires minimal administration. As a bonus, online ETP comes with reports that provide constant visibility to the participants as well as the administrators.

The simplicity of ETP improves participation rates of the officers, directors, and other insiders in the 10b5-1 program making it easier for them to remain compliant with the insider trading policies of the company.

Migrating your senior management or corporate insiders from a paper-based 10b5-1 to an ETP 10b5-1 is a win in itself. However, to unlock the full potential of the ETP, it should be offered to all employees of the company who are given stock compensation and are also asked to abide by trading blackouts. (Read: Why do employees choose ETP 10b5-1?)

Since ETP is a much simpler online workflow, it is preapproved by the legal teams, and thus can be offered at scale to all employees without a significant rise in the administrative cost.

To understand whether or not you should offer ETP to all employees, ask yourself these four questions:

  1. Does the company compensate a large number of its employees with publicly traded stock?
  2. Does the stock compensation represent a significant portion of its employees’ income?
  3. Does the company have quarterly blackout windows for all or most of the employees?
  4. Do the company employees routinely deal with sensitive intellectual property, financial information, or any other forms of material non-public information (MNPI)?

If the answer to all the above questions is “yes” then ETP is a suitable program for your entire organization.

The employees who do not necessarily have access to MNPI could still benefit from a trading plan that gives them an opportunity to reduce personal financial risk through systemic diversification, or, just to raise enough cash on a schedule to meet their expenses without running afoul of insider trading policies. (Read: Why do employees choose ETP 10b5-1?)

What is ETP 10b5-1?

ETP 10b5-1

An employee trading plan (ETP) is an online form of the SEC Rule 10b5-1 plan that allows employees to sell their employer-issued stock on a predetermined schedule.

 A 10b5-1 plan provides affirmative defenses for company insiders to sell stock as long as they adopt the plan in good faith, prior to becoming aware of any material non-public information.

ETP, by design, is the simplest form of 10b5-1 online instructions, thus, it can be offered at scale without creating an excessive administrative burden for the employers or the brokers.

ETP is also a convenient way for employees to sell their company stock without having to constantly deal with the trading blackouts, all the while, having affirmative defense against insider trading as per SEC rule 10b5-1. 

An ETP, to maintain simplicity, offers only two types of sell orders to participants :

Sell all shares as they vest for the grants at a volume-weighted average price (VWAP).

  1. Sell all shares at a volume-weighted average price (VWAP) as they vest during the ETP trading period.
  2. Sell already held shares at a market price on a predetermined schedule during the ETP trading period.

Currently, both Charles Schwab and Morgan Stanley offer online Employee Trading Plans (ETP 10b5-1).

An ETP will generally have the following characteristics:

  1. An enrollment window of two to four weeks during which participants set up the future sell instructions. Followed by:
  2. A cooling-off period of 30 to 90 days during which no trades can be made. Followed by:
  3. A trading period of twelve months or longer during which the brokers will sell shares as per the instructions.

Depending on the nature of your company’s business, size, and stock compensation plan there will be specific policies and nuances layered on top of the basic characteristics of an ETP.

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