While not mandated under law, the use of blackout periods is a nearly universal component of the insider trading compliance programs of most publicly held companies. The SEC requires public companies to create an environment in which employees are discouraged from insider trading; companies that fail to do this can be held liable for any insider trades by their employees. Over time, trading blackout periods have emerged as one concrete way companies can demonstrate that they discourage insider trading.
Trading blackouts are arguably a blunt (but effective) instrument. Even so, there are many nuances to consider, including who should be subject to them, which transactions are prohibited, and what periods should the blackouts be in effect for. For today’s blog entry, I discuss four trends in blackout period design from the NASPP/Deloitte Consulting 2020 Domestic Stock Plan Design Survey.
Blackout periods are just one component of insider trading compliance. The 2020 survey also reports trends in pre-clearance procedures, Rule 10b5-1 plans, and other aspects of a well-rounded insider trading compliance program. Check out the latest episode of the NASPP’s Equity Expert podcast series, "Trends in Insider Trading Compliance" in which Jenn Namazi and I chat about findings on insider trading compliance from the survey, including whether stock plan administration is commonly responsible for Form 4 and Form 144 filings.
It probably comes as no surprise to learn that most public companies use quarterly blackout periods to discourage insider trading and that the following four groups of individuals are most likely to be subject to these quarterly blackout periods:
We see considerably more variation in practice for lower ranking employees. Overall, middle management employees are subject to quarterly blackouts at only 61% of companies, other exempt employees at 47% of companies, and nonexempt employees at 35% of companies.
But if we compare practices by company size, we see that the percentage of companies that impose blackout periods at these employee levels increases for smaller companies and decreases for larger companies. The percentage of small companies (less than 1,500 employees) that impose blackout periods on middle management, other exempt, and nonexempt employees increases to 81%, 66%, and 44%, respectively. On the other hand, for large companies (more than 10,000 employees), these percentages drop to 53%, 41%, and 30%, respectively. We can also see that tech companies are more likely to subject lower-ranking employees to blackout periods that non-tech companies.
Click through the interactive chart below to see how practices in this area change by company size and industry.
Quarterly blackout periods coincide with the end of fiscal quarters and are lifted shortly after earnings are released. Eighty percent of companies close their trading window 11 days or more before the end of their fiscal quarter:
Almost half (48%) of companies allow trading to recommence two trading or calendar days after earnings are announced. Another 30% open the trading window even sooner—one trading or calendar day after earnings are announced.
Transactions involving open market sales, such as same-day sale exercises, are typically prohibited during blackout periods, but companies are often less restrictive for transactions that don’t occur on the open market. This makes sense; open market transactions involve the greatest risk of violations of insider trading laws. Below are common nonmarket transactions and the percentage of companies that prohibit each during blackout periods:
You can see that less than a third of companies prohibit share withholding for restricted stock/unit awards during blackouts.
About half of companies require terminated employees to comply with blackout periods, particularly if they terminate while a trading blackout is in effect.
Want to know more? Check out the latest episode of the NASPP’s Equity Expert podcast, "Trends in Insider Trading Compliance." For more trends from the NASPP/Deloitte Consulting 2020 survey, view the NASPP webcast “Top Trends: Plan Administration, ESPPs, Ownership Guidelines, and Insider Trading Compliance.”
If your company participated in the survey, the full results are now available.
Stock Plans from Home: Surviving to Thriving
We recently polled our members to learn about which COVID-19 themed topics are of most interest right now. Clearly there is much to contemplate, and the list of associated topics is long. H...Read More
Insider Trading: A 124k Penalty and Other Insights
The SEC announced last week that it had settled insider trading charges against a contract accountant working for Illumina. The basis fo...Read More
10b5-1 Plan Best Practices for any Market Climate
Rule 10b5-1 trading plans are one of the tools that employees and board members of issuer companies have as a resource in creating an affirmative defense against insider trading. Although R...Read More
Tips to Aid Insiders in Trading During COVID-19
I recently wrote about the heightened level of interest and scrutiny regulators are placing on stock trades in light of COVID-19. Dramatic changes in the economic and business circumstan...Read More
Administration and Governance Challenges Meet Tech Innovation
When a company is growing at lightning’s pace, such growth can bring a need to streamline or expand processes to ensure errors and hiccups are minimized. Sometimes the momentum of expansion c...Read More