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This is question that a financial lawyer is most qualified to answer. However, the following two articles might help you decipher the SEC rules.INVESTOPEDIAThe Securities and Exchange Commission (SEC) has set rules to ensure that employees are not at a disadvantage during a blackout period. The SEC prohibits any director or executive officer of an issuer of any equity security from, purchasing, selling or otherwise acquiring or transferring securities during a pension plan blackout period. In addition, the SEC has established rules requiring the issuer to notify the director or executive officer when imposing a blackout period.The purpose of these rules is to prevent insider trading that could otherwise occur during the period when changes are being made. However, the financial security of employees who are unable to make changes during a blackout period may be jeopardized. Therefore, SEC regulations stipulate that employees must receive advance warning about the occurrence of blackout periods.Read more: What is a blackout period? | Investopedia What is a blackout period? | InvestopediaDAY JONESNew SEC Rule Facilitates Insider Trades During Blackout PeriodsOctober 2000On August 15, 2000, the SEC adopted a new Rule 10b5-1 that provides specific affirmative defenses against liability for insider trading. Under the new rule, which became effective on October 23, 2000, a purchase or sale is not "on the basis of" material, nonpublic information if it is implemented pursuant to one of three types of nondiscretionary or automatic trading programs. The trading programs described in the rule are designed to define situations in which the information possessed was not a factor in the investment decision. The practical significance of the rule is to permit corporate insiders to trade shares during "blackout" periods that surround quarterly earnings and other important corporate announcements when insiders typically cannot buy or sell shares. The creation of a safe harbor from insider trading clarifies existing law and offers corporate executives and directors the opportunity to diversify their portfolios. These techniques will be especially useful for holders of large blocks of company stock, such as founders of technology companies, but will also be beneficial to insiders holding smaller blocks.Rule 10b5-1's RequirementsProgram Types.Under the new rule, a purchase or sale of stock by an insider would not be "on the basis of" material, nonpublic information if the insider demonstrates that, before becoming aware of the information, he or she:Entered into a binding contract to trade the security;Instructed another person to trade the security for the instructuring person's account; orAdopted a written plan for trading securities.Trade Terms.In order to qualify for Rule 10b5-1's exemption, a contract, plan, or instruction for a purchase or sale of securities must be either sufficiently specific or prohibit the insider from directing the trades. In particular, the contract, instruction, or plan must either:Specify (a) the amount of securities to be traded, (b) the price at which the securities are to be traded, and (c) the date on which the securities are to be traded;Include a written formula or algorithm, or computer program, for determining the trade terms described in (a)-(c) above; orProhibit the insider from exercising any influence over how, when, or whether to effect purchases or sales. Under this type of program, the person authorized to exercise such influence must not be aware of material, nonpublic information when doing so.Under the rule, "amount" means either a specified number or dollar value of shares or other securities. For example, an insider can plan a sale of either 1,000 shares or $10,000 worth of stock. An insider could not, however, plan a trade within a range—for example, a sale of between 1,000 and 2,000 shares."Price" means the market price on a particular date, a limit price, or a particular dollar price. Therefore, an insider has the flexibility to commit to trading at either a specified price per share or at the market price on the date of trade. Although the rule as originally proposed was not available for limit orders, in response to comments, the SEC eliminated this restriction. Accordingly, the inclusion of a price floor or ceiling in a trade order would not disqualify the trade under the rule."Date" means, in the case of a market order, the specific day on which the order is to be executed (or as soon thereafter as is practicable under ordinary principles of best execution). In the case of a limit order, "date" means a day on which the limit order is in force.Loss of Affirmative DefenseStructuring a trade along the lines described above is not sufficient to satisfy all conditions of the new rule. The rule also requires that the purchase or sale that does occur be "pursuant to the contract, instruction or plan" and that the contract, plan, or instruction specifying the trade be made in good faith. If an insider alters or deviates from the contract, plan, or instruction to trade (whether by changing the amount, price, or timing of the trade), the affirmative defense will not be available. For example, if an insider enters into a contract or plan to sell 1,000 shares of company stock without being aware of material, nonpublic information, then learns of negative material, nonpublic information and doubles the planned sale to 2,000 shares, the insider will lose the defense for the entire sale of 2,000 shares. Similarly, if the insider accelerates the timing of a planned sale in order to complete it before the release of negative corporate news that the insider has recently learned, the insider will have no defense for the transaction.The rule also vitiates any defense for a trade if the insider alters or enters into a "corresponding or hedging transaction or position" with respect to the planned securities trade. This requirement is designed to prevent persons from devising schemes to exploit inside information by setting up preexisting hedged trading programs and then canceling execution of the unfavorable side of the hedge, while permitting execution of the favorable transaction. By altering the corresponding position, the insider would lose any defense for the transaction that the insider permitted to be executed.The SEC has stated that some opportunity for modifying a preexisting trading plan does exist under the new rule. A person acting in good faith may modify a prior contract, instruction, or plan if, at the time the modification is made, the insider is not aware of material, nonpublic information (i.e., during the period when insiders may otherwise effect open market trades in the company's securities). In that case, a purchase or sale that complies with the modified contract, instruction, or plan will be considered made pursuant to a new contract, instruction, or plan.Recordkeeping IssuesThe new rule does not expressly require any particular documentation or recordkeeping by insiders. However, the SEC has indicated that the rule "would, in some cases, require a person to document a particular plan, contract, or instruction for trading if he or she wished to establish an affirmative defense that his or her trading was not ‘on the basis of' material, nonpublic information." In addition, given the potential impact on a public company of trading by its executives during restricted periods, insider trading policies that are tailored to permit Rule 10b5-1 compliant trades should (1) provide the company with preapproval and oversight rights for these types of programs, and (2) require that a 10b5-1 "record" be maintained not only by the insider but by the company and in solid detail. We recommend, therefore, that a record be kept supporting the availability of any Rule 10b5-1 defense that an insider intends to assert in connection with trades.Relationship to Other Legal Requirements and Planning IssuesOther SEC Compliance Procedures.Insiders looking to design a prearranged or nondiscretionary trading program will need to take care to comply with other legal requirements applicable to insider stock sales, including the following:Rule 144 may require compliance with manner of sale, volume, and notice requirements.Because a Rule 10b5-1 plan will involve periodic sale or purchase transactions, insiders will need to confirm that no Section 16(b) matching, non-exempt purchases or sales have occurred, or are anticipated to occur, within six months of any of the scheduled sales or purchases (as the case may be).Insiders must obtain timely information on trades to permit them to satisfy Form 4 filing requirements on a monthly basis.Issuers who have completed acquisitions accounted for as poolings may need to restrict sales by insiders.Existing insider trading policies may require modification to permit trades under Rule 10b5-1 or to remove or change preclearance processes, especially where the contract or program has been approved by the company's board of directors and/or reviewed and cleared in advance by issuer's counsel.Each company should evaluate whether prearranged trading programs are likely to be considered material and should be announced in a press release or disclosed in a Form 8-K.Impact of Intervening Equity Offerings.Registered equity offerings by issuers are always a possibility. Since these offerings normally require insiders to execute lock-up agreements, issuers with insiders engaging in long-term, automatic sales programs should gauge the view of underwriters to a carve out under these lock-ups for sales pursuant to pre-established programs. Registration rights agreements between a company and its venture capital investors may also contain prospective lock-up agreements prohibiting executive investors from publicly selling equity securities a certain number of days prior to and following the effective date of a registration statement. The inclusion of a stop-gap clause in an automatic sales program triggered upon the effectiveness of a registration statement could be problematic to the extent the timing of any filing of a registration statement would be, in part, under an insider's control. As such, the SEC could view the invocation of such a stop-gap measure as an impermissible modification to a previous contract, plan, or instruction. Accordingly, since the impact of such a stop-gap provision on the availability of a Rule 10b5-1 defense is not clear at this time, insiders who desire to put in place a pre-established sales plan should obtain a waiver of the application of any holdback restrictions to sales under such a plan.Issuer Repurchase Programs.Rule 10b5-1 has important implications for issuer repurchase programs that can be structured to comply with the conditions of the rule. For example, an issuer operating a repurchase program would not need to specify with precision the amounts, prices, and dates on which it will repurchase its securities. Rather, an issuer could adopt a written plan, when it is not aware of material, nonpublic information, that uses a written formula to derive amounts, prices, and dates. Alternatively, the plan could delegate all discretion to determine amounts, prices, and dates to another person who is not aware of the information, provided that the plan did not permit the issuer to (and in fact the issuer did not) exercise any subsequent influence over the purchases or sales.Employee Stock Plans.The new rule would also facilitate increases or decreases of insider holdings under issuer stock plans. For example, an employee looking to exercise stock options and sell the underlying shares could, while not aware of material, nonpublic information, adopt a written plan specifying the amount of the employee's vested options to be exercised and/or sold at or above a specific price. The plan would provide that the employee will exercise options and sell the shares on specified dates and in specified amounts. Alternatively, such a plan could include a formula linked to, for example, periodic cash outlays (such as mortgage or tuition payments) required to be made by the insider.Acquisitions under the new rule could also be made through payroll deductions under an employee stock purchase plan or a 401 (k) plan. The employee could provide elections as to his or her plan participation at a time when the employee would otherwise be able to effect open market trades. The transaction price could be computed as a percentage of market price, and the transaction amount could be based on a percentage of salary to be deducted under the plan. The date of a plan transaction could be set by the plan. Alternatively, the date of a plan transaction could be controlled by the plan's administrator, assuming that he or she is not aware of material, nonpublic information at the time of executing the transaction, and the employee does not exercise influence over the timing of the transaction.Portfolio Diversification.Automatic, periodic divestiture programs have been of particular interest to corporate insiders, especially founding shareholders in emerging growth companies, who have significant wealth concentrated in issuer stock. For insiders seeking liquidity and diversification, Rule 10b5-1 provides legal certainty that long-term, periodic open market sales made in the midst of blackout periods will not subject the sellers to insider trading liability. And while these programs have become common even prior to the promulgation of Rule 10b5-1, the rule's bright lines for structuring these programs provides greater comfort to counsel advising insiders on such programs. But while the SEC's new rule provides a legal mechanism for insiders to precommit to trades, as with any trading program, automatic programs carry certain financial risks, especially if the program contractually locks in trades for large numbers of shares over extended periods. In deciding how and whether such a program should be instituted, executives need to test their willingness to continue to sell into a falling market or buy when market exuberance has overtaken trading, especially when their knowledge of developments affecting the company suggests that market price changes will be forthcoming in future periods. To mitigate these risks, executives should honestly assess their risk tolerances and include appropriate limit orders when their programs are structured.Lawyer ContactsFor further information, please contact your principal Firm representative or one of the lawyers listed below. General e-mail messages may be sent using our "Contact Us" form, which can be found at Jones Day | Home.Elizabeth Clough [email protected] Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at Jones Day | Home. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the author and do not necessarily reflect those of the Firm.