The NASPP Blog

Category Archives: Insider Trading

May 24, 2016

The Muddled Waters of Insider Trading

This week’s news that Phil Mickelson, a professional golfer, was caught up in an insider trading crackdown and had to disgorge nearly $1M in profits from stock sales (but was not prosecuted by the SEC) gave me pause. I wasn’t actually surprised by this seeming paradox – and maybe it’s because I’ve been sporadically blogging about insider trading for a while now. The question of how you can be obligated to return profits obtained from trading stock on inside information, without actually being prosecuted is a good one, and I’m guessing the muddled answer may elude some. An article in the New York Times this week summed up the matter of Mickelson’s insider trading quite handily: “How to Get Away with Insider Trading.” In today’s blog I’m not going to focus on how to get away with insider trading, but rather on how muddled the definition of insider trading has become in recent years.

The Short Story

You may have caught wind of this story already, so I’ll keep my summary of it short. The former chairman of Dean Foods admitted to passing on inside information to a well-known professional sports bettor in Las Vegas. According to the NY Times, “The sports bettor made an estimated $43 million over five years from this information, according to federal prosecutors. A second beneficiary of stock tips was the professional golfer Phil Mickelson, who had gambling debts of his own.” Mickelson received the tip to sell stock, sold stock and paid off his gambling debts. So why was Mickelson not charged if he did indeed trade on inside information? Well, he was not named a “defendant” in the civil lawsuit, but rather a “relief defendant.” What is a relief defendant? A Fortune article on the topic described the term as “someone who is not accused of wrongdoing but has received ill-gotten gains as a result of others’ illegal acts.”  The key here is that Mickelson may not have been aware that the tip he got, though inside information, was obtained illegally. Mickelson did agree to disgorge $931,000 in profits from the sale and pay $105,000 in prejudgment interest.

Did you follow all that? I had to sort through it myself. So just how do we define what is considered legal or illegal when trading on non-public information? I’ve decided to create a short quiz to help sort through the matter.

Test Your Insider Trading Know-All

I’ve come up with a few questions to help test your know-how, and also sort through the answers. Fun and educational all in one.

  1. True or False? Federal law defines “insider trading” as any trade that is made on the basis of material, non-public information.
  2. True or False? One is not likely to be charged with insider trading if they trade on a stock tip but remained unaware of any benefit the provider of the tip obtained for that information (e.g. friend says “buy this stock” with no further details as to how they got the information.)
  3. True or False? In order to be required to disgorge trading profits to the SEC, you must be found guilty of charges of civil or criminal wrongdoing related to insider trading.


The Answers

Okay, so the quiz doesn’t come with a prize. Otherwise I’d have to work harder to hide the answers a little farther away from the questions. But at least you can learn something from our Q&A game.

True or False? Federal law defines “insider trading” as any trade that is made on the basis of material, non-public information: False. There is no federal law that defines insider trading. This is particularly problematic in prosecuting insider trading cases. The New York Times reported that “First, neither Congress nor the S.E.C. has ever defined “insider trading” in a comprehensive way. So our laws are largely made by judges who, bound by precedent, rarely update law to fit new circumstances.” In a previous NASPP Blog titled “Insider Trading Isn’t Illegal?) (April 2, 2015), I explained that “…although the SEC has been successful in pursuing these cases, they have had to use loopholes to do so – relying on general antitrust laws and decades of case law (and, I’m not a lawyer, but I’m told that case law is subject to interpretation by individual judges, so the application of that could vary widely). The bottom line is there isn’t a statute that specifically addresses insider trading, which leads to potential ambiguity and inconsistencies in the courts.”

True or False? One is not likely to be charged with insider trading if they trade on a stock tip but remained unaware of any benefit the provider of the tip obtained for that information (e.g. friend says “buy this stock” with no further details as to how they got the information.): True (likely). The answer to question 3 is a bit muddled, but thanks to the appeals court case of United States v. Newman, which overturned the convictions of two hedge fund managers for insider trading because the government failed to prove they had known about any benefit provided to the sources of the information, it’s not likely the SEC will be bringing formal charges against those innocents embroiled in insider trading cases who lacked understanding of the benefit the tipper may have received for that information (which is seemingly how things played out in the Mickelson case.) The Supreme Court has agreed to hear the appeal of the securities fraud conviction in Salman v. United States. According to the New York Times, “The court will consider what evidence the government must introduce to prove a benefit passed between a source of confidential information and the recipient who trades on it, called the ‘tippee.'” That won’t happen until 2017. For more details, view the full New York Times article “The Rocky Road of Insider Trading Law.” (April 2016)

True or False? In order to be required to disgorge trading profits to the SEC, you must be found guilty of charges of civil or criminal wrongdoing related to insider trading: False. As we have seen with the Mickelson case, the SEC has means to prompt those involved in insider trading (even if they did not engage in wrongdoing themselves) to return the profits they obtained from the related trades. In the Mickelson case, naming him as a relief defendant in the civil case allowed the SEC to pursue disgorgement of the profits.

Clearly a lot still needs to be settled when it comes to clearly defining insider trading. What seems clear is that those involved in trading stock should do their absolute best to ensure the trade is not based on any material, non-public information. Even if prosecution isn’t imminent, profits would still likely need to be repaid in an SEC investigation that finds insider trading somewhere in the chain of events. As stock plan professionals we’re likely well aware of insider trading policies and practices designed to prevent trading on inside information. Education of our employees in this area should address the recent publicity around insider trading that has likely created more questions than provided answers. At minimum, employees should be taught to scrutinize information they receive about trading stocks, and be very careful about sharing their own company’s information with others. That’s pretty consistent age old advice that still applies in modern times, even with all the ambiguity around what really is truly illegal when it comes to trading on inside information.


February 4, 2016

Speculating About 10b5-1 Plans

Last week’s news that the CEO of Telsa Motors, Elon Musk, had exercised stock options with an estimated value of $100 million spread like wildfire. Picked up by the national news outlets – the news was well covered. It’s not every day that a CEO exercises $100M worth of stock options and pays cash for the taxes (yes, the company confirmed he paid cash for his taxes). This was a cash exercise with no sale involved. As I read several articles on this transaction, I realized there is still much taken for granted when an executive transacts in the company’s stock. I’ll cover highlight some of those areas in today’s blog.

The article that caught my rapid attention was Forbes’ “Elon Musk Exercising Stock Options Could Mean Tesla Will Disappoint Next Week.” Now, before I get too far down this path, I have to say I know nothing about Tesla’s inner-workings and nothing about their earnings. So anything I am saying IS pure speculation. The title of the article got me interested, though. I mean could the exercise of stock options really, single handedly foreshadow less than stellar earnings? If I had to dissect that assumption, my own thoughts went to something far more benign – I mean, what if the CEO had a 10b5-1 plan (after all, these options that were exercised were scheduled to expire in December 2016) that was merely acting on autopilot in an attempt to exercise these stock options before they expire? I have no idea whether Tesla’s CEO has a 10b5-1 plan or not. According to Tesla’s proxy statement, 3 officers do have 10b5-1 plans. And, according to the NASPP’s 2014 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, of the companies that do allow (but not require) 10b5-1 plans for insiders, 62% of CEOs of those companies were using the plans.  Is it possible? Yes, it is. Do we know? No, we do not. That’s not even the point, though.

What does a 10b5-1 plan have to do with things taken for granted? These plans got some negative publicity a couple of years ago when the SEC looked into whether or not the plans, in principle, were being abused. There were some situations where it appeared that 10b5-1 transactions were well-timed around negative news – as in the company may have delayed or accelerated the timing of that news around the planned transactions. Nothing much ever happened from that speculation, and, for the most part, I’d venture to say these plans are not being abused. Rather, this type of plan works fairly well if used as intended, especially in aiding executives and other insiders to put distance between their decision making about their shares and the execution of those transactions. What worries me is that the possibility of a 10b5-1 plan’s existence still often seems to be overlooked when the media casts the spotlight onto these larger, high profile transactions. Not all of it is their fault, though. There is no present requirement for the existence of a 10b5-1 plan to be disclosed. Some companies voluntarily disclose the existence of plans and subsequently footnote their Form 4s noting transactions that occurred pursuant to a trading plan. Without disclosure, the media remains unaware that the executive may be operating under one of these plans. Does disclosure need to happen? The law firm of Morrison and Foerster summarized that consideration in an FAQ on 10b5-1 plans:

Should a Rule 10b5-1 plan be publicly announced?
A public announcement by any person of the adoption of a Rule 10b5-1 plan is not required. A company may choose to disclose the existence of certain Rule 10b5-1 plans in order to reduce the negative public perception of insider stock transactions. A company making such disclosu
re generally will disclose the existence of a plan but not the specific details. Typically, the disclosure will be for executive officers, directors, and 10%
shareholders required to file ownership forms under Section 16(a) of the Exchange Act (that is, Forms 3, 4,and 5). A company can choose whether to announce the existence of a Rule 10b5-1 plan by a press release followed by a Form 8-K or solely by a Form 8-K. The applicable Form 8-K item is Item 8.01, although Item 7.01 may be used under appropriate circumstances.
If a company decides to publicly announce the adoption of a Rule 10b5-1 plan, it is advisable to publicly announce changes to or termination of such plan as well. Under the Dodd-Frank Act, the SEC is required to implement a regulation prescribing disclosure by reporting issuers of their hedging policies. The proposed rule, if it becomes final in its current form, may result in more companies disclosing the existence of trading programs of executive officers.
While we await final hedging rules from the SEC, companies may consider proactively looking at their 10b5-1 disclosures and the potential positive potential such disclosures could have on mitigating public perception of their executive transactions. Disclosing the existence of a plan and attributing transactions related to an automatic plan in a Form 4 footnote may go miles in helping to ease some of the rampant speculation around transactions that could occur absent this information.
We won’t know anytime soon if CEO was operating under a 10b5-1 plan when he exercised his stock options, but if he did, a footnote on the Form 4 could have alleviated some of the speculation about the timing of the transaction and its relationship to earnings and other important company events.
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January 15, 2016

“Inadvertent” is No Excuse for Untimely Section 16 Filings

It’s been a while since I tackled Section 16 reporting in this blog. The last time I covered it, the SEC was on widespread mission to crack down on the smallest of infractions, Section 16(a) included. That was in 2014, and things seem to have quieted since then. Or have they? In today’s blog I’ll address that question.

All is (not) Quiet on the Section 16 Front

This time last year, there was a fair amount of buzz circulating around about the SEC’s (at the time) newfound aggression in pursuing enforcement for Section 16(a) reporting violations. It was the latest in a line of actions brought by the Commission as part of what SEC Chairman White had described as a “broken windows” initiative, where the agency put focus on frequently overlooked minor violations and highlighted that it was “important to pursue even the smallest infractions.”

While some companies have struggled to file Section 16 reports on a timely basis, the SEC’s ability to identify even the smallest of those infractions has increased greatly in recent years. Advances in technology and renewed attention to enforcement have combined to create an environment where it’s no longer safe to assume that a tiny infraction, even if just an oversight, will be overlooked. Although hype around this type of enforcement has quieted in recent months, it doesn’t mean that SEC attention has waned. Companies should be attentive in pursuing flawless (or near flawless) compliance with Section 16 reporting requirements.

Proxy season is on the horizon for many companies, and although any Section 16(a) reporting violations that happened in the past are what they are, there’s still time to focus on the Item 405 proxy disclosure piece that identifies any late reported Section 16 activity. Effort can also be made to ensure no Section 16 reporting mishaps occur going forward. It’s time to examine opportunities for improvement in these areas.

Inadvertent Mistakes Aren’t a Defense

There was a time where it almost seemed reasonable to say “it was just an inadvertent mistake.” That language appears in the Item 405 disclosure of many proxy statements. Why? Because, the truth is that inadvertent mistakes do happen. What is important to know is that violations of Section 16(a) reporting requirements are enforced only by the SEC, and (key to note) there is no “intent” or other “state of mind requirement” for there to be a “violation”; therefore, inadvertent failures to timely file Section 16 Forms 3, 4 and 5 may constitute violations of the federal reporting requirements. Essentially, nobody had to have “intended” to violate Section 16 in order for there to be an infraction. Additionally, relying on others is not a defense either: (“The insider didn’t give us timely information and therefore, I couldn’t make the filing on time.”)

Since an inadvertent mistake won’t necessarily absolve an issuer (or an insider) from responsibility and potential SEC enforcement action, it’s more important than ever to develop practices that prevent mistakes from occurring in the first place.

Must-Have Section 16 Resources

This month, Section 16 is getting a lot of NASPP coverage. With the goal to achieve “flawless” reporting this year, there’s lots to focus on, especially if you have a history of recent Item 405 disclosures in the proxy (pointing to opportunities for improvement in this area).

On January 27, Alan Dye will be doing his annual webcast on the Latest Section 16 Developments (free for NASPP members). Since the SEC’s major Section 16 enforcement initiative in late 2014, involving 28 insiders and civil penalties totaling $2.6 million, Section 16 filings have been in the spotlight like never before, commencing a new era of enforcement for the SEC. This is a Q&A webcast, designed to make sure you are equipped to comply. Hear practical tips on refining your Section 16 procedures and answers to your questions on the challenges you are facing today (submit your questions to

We’ve also got a great interview with Alan Dye that will be featured in the next episode of our Equity Expert podcast series (out next week). Be sure to subscribe today so that you are notified when Alan’s interview becomes available. The podcast is all audio, and is accessible on the NASPP website or through a podcast app on your mobile device (search for “Equity Expert”). The podcast is available for free to everyone. If you’re not listening to it, you’re missing out on some great interviews!

The Jan-Feb issue of The NASPP Advisor is due out next week, and both the Top 10 List and Administrators’ Corner articles are dedicated to Section 16 practices. Keep an eye out for it, because you won’t want to miss the tips and practices for achieving better compliance with Section 16 reporting requirements.

Watch for and take advantage of these great resources to help improve Section 16 compliance and reporting practices this year.


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October 1, 2015

Charitable Donations of Stock

We’re into fall already, and before we know it the end of the year will be upon us. This upcoming period of time is a busy one for stock administration professionals. In the mix of activity that tends to spike in the month of December is that of charitable giving and gifts. In today’s blog I’ll cover some reminders about ensuring proper tax reporting and securities law compliance for stock related donations.

My inspiration for this blog actually came from a Fortune magazine article about John Mackey, co-CEO and co-founder of Whole Foods. Only a single sentence in the entire article mentioned stock options. In talking about Mackey’s $1 per year salary, the article also mentioned that “The company donates stock options Mackey would have received to one of its foundations.” As I started thinking about how that transaction would be handled on the company side, I realized that it’s been a while since we talked about gifts and donations.

This is honestly a topic that could command a lot of written coverage. The intricacies of gifting stock can be complex from several angles. In the interest of space, I’ll focus on a few areas that touch stock administration.

Timing of Donation to Charity: For tax purposes, the IRS considers the charitable donation to be complete on the date it is received by the charity – not the date it was requested, not the date the company approved the transfer. This is something to be mindful of the closer the request is made to December 31st. If the donor personally delivers a stock certificate with all necessary endorsements to the charitable recipient, the gift is complete for federal income tax purposes on the day of delivery. If the shares are being transferred electronically to the charity, then the transfer is complete when the shares are received into the charity’s account. It’s not enough to have made a transfer request to a broker. This timing can be important to companies who are tracking dispositions of ESPP shares and ISOs. For dispositions due to charitable donations occurring near December 31st, it’s best to verify the date the shares were actually received by the charity in order to apply the disposition to the proper tax year.

Donations of shares acquired through an ESPP or Incentive Stock Option (ISO) exercise: There are some tricky nuances around taxation on the participant side that hopefully will have been discussed with their tax advisor. What stock administrators need to know is that in tracking dispositions of ESPP and ISO shares, a disposition is a disposition – even a charitable one. That means for purposes of tracking qualified vs. disqualified dispositions, the same rules apply to charitable donations of the shares. See the above section on “Timing of Donation to Charity” to ensure tax reporting in the proper year.

Rule 144 Considerations: Rule 144 is concerned with the sale of control securities, not their gratuitous transfer, so the subsequent sale of the stock by a charity, not the actual gift of the shares to the charity, would be subject to the restrictions of Rule 144, if it is applicable. The charity must follow Rule 144 if it has a control relationship with the issuing company. Those wanting more detail on Rule 144 and gift requirements can read the March-April 2013 issue of The Corporate Counsel.

In summary, if an affiliate gifts stock to a non-affiliate that was originally acquired by the affiliate in the open market (i.e., not restricted in the affiliate’s hands), since the securities were not subject to a holding period requirement in the affiliate donor’s hand, SEC staff has stated that the donee need not comply with the Rule 144(d) holding period requirement for its sales of the securities. Moreover, the Staff notes that if the donee is not an affiliate and has not been an affiliate during the preceding three months, then the donee is free to resell the securities under Rule 144(b)(1) “subject only to the current public information requirement in Rule 144(c)(1), as applicable.”

“The one-year cut off for the application of the current public information requirement to donees does run from the donor’s original acquisition. Good news—but don’t forget that the six-month “tail,” adopted in 2007 (which requires donors to aggregate with their donees’ sales) runs from the date of the gift.” The “tail” mentioned in the article applies to the donor, who must aggregate his/her sales of stock with those of the donee for purposes of complying with the Rule 144 volume limitation. This requirement applies for six months after the gift (12 months where the issuer is not a reporting company or is not current in its Exchange Act reporting).

If you are not a subscriber to The Corporate Counsel (or have not yet renewed) you can gain immediate access online to sample gift compliance letters by taking advantage of the no-risk trial. (Almost all of our member companies and law firms are long-term subscribers to The Corporate Counsel.)


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September 1, 2015

Random Answers

Here are the results to my random questions in last week’s blog entry.

Terminated Employees & Black-out Periods

Two-thirds of respondents (37 out of 54) do not subject terminated employees to black-out periods.

For those respondents that do subject employees to black-out periods, the majority (11 out 16 respondents), don’t make any accommodation for them.  The terminated employees are simply expected to finance their exercises in a way that doesn’t involve an open market sale.

Two respondents noted in the comments that they would automatically exercise the options if they aren’t exercised by the end of the exercise period.  One person noted that their black-out period is shorter than their post-termination exercise period, so this hasn’t been a concern for them.

Evaluating Stock Plan Administration

The majority of respondents don’t have any specific metrics that they use to evaluate the performance of the stock plan administration team (which probably explains why no one has responded to this question in the NASPP Discussion Forum).

Of the metrics suggested in the question, the most popular choices were:

  • Accuracy of reports produced for tax/financial purposes (7 respondents)
  • Total time spend on various tasks (e.g., employee inquiries, processing transactions, reporting) (4 respondents)

One respondent indicated that they are evaluated on their average time to resolve employee inquires/escalations and one respondent indicated that they are evaluated on the processing and direct costs per participant.

Some of the metrics suggested in the other comments were:

  • Timeliness and accuracy of all transactions, participant communications, and tax/financial reporting
  • Demonstration of increasing knowledge and ability to take on more complex tasks
  • Quality of response to employee inquiries/escalations
  • ESPP participation
  • Responsiveness to plan managers and various company contacts in addition to participants

Personally, I think that having at least a rough idea of how much time you spend on various tasks is an important and valuable metric to be aware of.  It can be very helpful when trying to prioritize various initiatives and projects.  For example, if tax reporting takes a huge amount of time compared to everything else you are doing at year-end, that might be an indication that you need to invest in improving your tax reporting processes.

I’m also a big fan of the ESPP participation metric, but only if you have the proper tools and resources to impact this (e.g., education budget, attractive plan, etc.)

Grant Conversion

Close to 90% (38 out of 43 respondents) don’t convert grant values into foreign currency before determining grant sizes for non-US participants.

What About the Family Feud Contest?

I will announce those results in tomorrow’s blog.

– Barbara

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