The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Massachusetts is representative of a common question relating to types of retirement plans. The advisor asked:
“I overheard some of my colleagues discussing a ‘10b5-1 plan’ the other day. I’ve never heard of such a plan — what is it?”
Highlights of Discussion
- To start, a 10b5-1 plan is not a qualified plan under Internal Revenue Code Section 401(a), as DB or 401(k)/profit sharing plans are. Rather, it is a plan under the purview of the SEC, and can serve as a defense against charges of insider trading by individuals who may have material, nonpublic information who execute trades. Therefore, officers and directors of companies, individuals who are most likely to have inside information, typically, are the types of individuals that will use 10b5-1 plans.
- Under the insider trading rules, it is illegal to purchase or sell a security on the basis of material, nonpublic information (see Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934). In order for a 10b5-1 plan to serve as a defense against charges of insider trading, it must meet five criteria:
- Entered into in good faith without intent to abuse Rule 10b5-1.
- Adopted when the individual trading the security was not aware of any material, nonpublic information.
- The terms of the plan contain a pre-set formula for determining the amount, price and date of transactions.
- The individual subsequently cannot affect criterion #3 once it is in place.
- The purchase or sale of the security was made according to the plan.
- Companies, generally, maintain insider trading policies, and individuals interested in pursuing 10b5-1 plans should consult such policies regarding procedures and parameters for establishment.
Conclusion
A properly executed 10b5-1 plan can stand as an affirmative defense against allegations of insider trading for someone who is in a position to have inside information. Extreme care should be used when establishing and using such plans as they are not infallible, however.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2015 Columbia Management Investment Advisers, LLC. Used with permission.
