Strict SEC insider trading laws and company limitations on stock trading can make it difficult for executives to sell shares in company stock. And while insider trading laws and company policies both serve legitimate and important purposes, the inability of an executive to sell shares has the potential to diminish the retention and incentive qualities of equity compensation. As a result, two practices have developed to help ensure these purposes are accomplished while also helping executives facilitate their financial objectives:
Share pledging permits executives to use company shares as collateral for a loan or to promise shares for charitable purposes during a blackout period. Rule 10b5-1 plans allow executives to execute future trades according to a pre-determined plan while creating an affirmative defense to alleged violation s charges of the federal securities laws or company trading rules. The Center believes that 10b5-1 plans if designed an executed properly and share pledging, in appropriate circumstances may be appropriate. However, the Center believes that hedging of company stock by executives is inappropriate. Share Hedging, which is most commonly used to offset portfolio diversification risks, occurs when an individual adopts an investment position intended to offset potential losses by company stock, thus potentially undermining the incentive purposes of equity compensation and sending a contradictory message to shareholders.