Mariner Wealth Advisors on setting up a 10b5-1 trading plan for company stock

What does a 10b5-1 trading plan cover, and who needs one?

A 10b5-1 trading plan is a written plan, adopted while you hold no material nonpublic information, that fixes share amounts, dates and price limits, or a formula, in advance. Trades that follow it give you an affirmative defense if insider-trading claims are ever raised. Officers and directors can't sell until cooling-off ends, up to 120 days.

Many executives treat the plan as a broker form. They sign it, then change it when the price moves. Each change to amount, price or timing restarts the cooling-off period.

When they adopt a plan, directors and officers must include a written certification that they are not aware of material nonpublic information and that they are acting in good faith. Other insiders face a 30-day cooling-off period.

Who usually needs one? Section 16 officers and others on blackout lists, whose trading windows are short or often closed. It fits best when there's a fixed date, like Victor's retirement, and stock to sell before it. How much to sell is a separate question, which we cover in our concentrated stock planning work.

Here is the change-cost table for Victor's plan. Notice that only the last row keeps the defense intact and the schedule on track.

What a 10b5-1 plan can't do for you

It gives no defense if you adopted it while knowing material nonpublic information, or if it wasn't operated in good faith. And it doesn't lower a single dollar of tax. Victor's ten sales still realize $450,000 of gain.

It also doesn't decide how much to sell. That question rests on diversification research and your whole balance sheet. Mariner Wealth Advisors won't time a plan to a price forecast, because the evidence on predicting one stock's next move is poor.

Plans are hard to change. Overlapping plans for open-market sales are generally not allowed, and single-trade plans are generally limited to one per rolling 12 months. Companies disclose officer plan adoptions and terminations in their quarterly filings.

So we'd rather set sale amounts slightly conservative and leave the plan alone, because one modification can cost up to 120 days of no sales.

One honest limit: if you aren't an insider, or your company opens trading windows reliably and you have only a modest amount to sell, a plan adds legal paperwork and inflexibility for little benefit.

How does Mariner Wealth Advisors build the plan with you?

Mariner Wealth Advisors builds the plan in five steps, with tax estimated before any document is drafted. You supply the facts and the end date. Your company's counsel and broker own the legal document.

Take Victor, 58, with $600,000 of vested stock at a $150,000 basis, retiring in 36 months. He adopts in month 1, and with up to 120 days of cooling-off, the first sale lands in month 5. The plan sells about $60,000 every three months, ten times, ending in month 32. To keep the math simple, the share price stays flat in this illustration.

Spread basis evenly: each sale carries $15,000 of basis, so $60,000 less $15,000 leaves $45,000 of gain. Ten sales realize $450,000. At an assumed 23.8% federal rate, that's $10,710 a sale and $107,100 in total.

The common mistake is modifying the plan mid-stream to sell more after the price rises. If Victor did that after the month-14 sale, the new cooling-off skips the month-17 sale and pushes his final sale from month 32 to month 35, one month before he retires.

The decision rule: if you're an officer who needs stock sold by a fixed date, adopt early enough that up to 120 days of cooling-off plus the full sale period ends before it, and set amounts you won't want to change.

• Step 1, inventory: Mariner Wealth Advisors lists every vested lot, its basis and holding period, plus upcoming vests and your retirement or departure date.
• Step 2, total and end date: you and the team set the total to sell and a hard finish. For Victor that's $600,000, done by month 32 of 36.
• Step 3, tax first: before anything is drafted, the team estimates federal tax on each year's sales and picks which lots each sale uses. Sales usually have no withholding, so quarterly estimated payments go on the calendar.
• Step 4, parameters and approval: the team proposes dollar or share amounts, frequency, and limit prices low enough that sales actually execute. Your company's legal team and the plan broker review, approve and administer the document.
• Step 5, quarterly check: Mariner Wealth Advisors compares fills with the schedule each quarter without touching the plan.

What do you receive from the plan review?

You leave with four documents you can hand to your accountant and your company's counsel.

Investing involves risk, including loss of principal, and a plan sells at market prices whatever they turn out to be.

• A one-page sale schedule: each expected sale date, estimated dollar amount and the lots to use. Victor's shows ten sales of about $60,000 from month 5 to month 32.
• A tax estimate by calendar year: realized gain and estimated federal tax per sale ($45,000 gain and $10,710 tax in Victor's case), plus suggested estimated-payment amounts.
• A calendar showing when cooling-off ends, earnings release dates, and reminders that Section 16 insiders report plan sales on Form 4 within two business days.
• A written note on the few events that would justify ending the plan early, and what that would cost, using the table on this page.

Starting a 10b5-1 plan review with Mariner Wealth Advisors

Requests come in through the form on this website; the firm doesn't list a phone line. Meetings take place by video call or phone, wherever you live. Mariner Wealth Advisors sets a client minimum of $500K of investable assets, and fees are set out in writing before work begins.

Have ready your equity plan statements, your company's insider trading policy and its pre-clearance contact, and your target retirement or departure date. The first conversation covers your lots, your end date and the tax on each sale.

Count back from your end date. Up to 120 days of cooling-off plus the full sale period must fit before it, so the first conversation belongs well ahead. Deferred pay is a separate topic, handled in our deferred compensation planning work.