Discontinuing Company-wide Trading Blackout Periods? (United States)

This Wisdom of the Crowd (ACC member discussion) addresses whether a publicly-traded company should enforce quarterly trading blackout periods for all employees or just a select group (directors, executives, etc.). This resource was compiled from questions and responses posted on the forum of the Corporate and Securities Law and Law Department Management Law ACC Network.*

*(Permission was received from the ACC members quoted below prior to publishing their forum Comments in this Wisdom of the Crowd resource.)

Question:

Hi All, My company is about to enter its fourth year post-IPO, We now have nearly 900 employees working from six domestic and two international facilities, as well as a substantial field sales force. Since our IPO, we have enforced quarterly trading blackout periods applicable to all employees, as well as pre-clearance requirements for stock trades by directors, officers and others with regular access to material non-public information. Some employees have recently questioned the need to continue the all-employee quarterly blackout periods. I put the question to our outside counsel, who gave us a wishy-washy answer along the lines of "some do -- some don't, you could go either way." One way or the other, we would keep the pre-clearance requirement and blackout period in place for directors, execs and a handful of others. The question is whether everyone else should continue to be covered by a quarterly blackout period. What is the practice where you work or have worked in the past? Any advice from those of you who have been there and done that would be most appreciated. Thanks!

Wisdom of the Crowd:

• Response #1: I would not be inclined to enforce quarterly blackout periods for all employees, but would continue them for all directors, officers and anyone in Finance that has access to revenue numbers (FP&A, Treasury, Controller's office, etc.)--with certain considerations. If you have some sort of bonus program that is tied to results and you report achievement to employees prior to quarterly earnings announcements then you either have to change when you inform employees of performance achievement or stop providing that information. Also, you need to consider your corporate culture. Do you share information that could be material with a broad group of people (e.g. a new product introduction that could materially effect your earnings, or a major acquisition that could have a material effect)? If so, then you should keep the blackout periods. The key to the blackout periods is to protect your employees--you do not want them to trade when they could be in possession of material non-public information. Also, if you do eliminate the blackout periods, make sure you have robust insider trading policy training. The burden will be on the employee to determine whether they are in possession of material non-public information.ⁱ

• Response #2: I believe the tools you utilize to prevent insider trading within your organization should be tailored to your organization. Everyone who has regular access to material non-public information should be covered by your blackout periods. If you don't widely share that type of information on a regular basis, I believe it makes sense to decrease the size of the group that is covered. I also believe it is important to educate everyone on insider trading. You do not have to sell. You could merely over hear water cooler conversations and "tip" others. It is important to understand the requirements. I also believe pre-clearance is important to ensure compliance with Section 16 and any ownership guidelines, however, I do not like to pre-clear trades for executives with respect to insider trading as I never know what they know and I do not want to give them a belief that I told them it was ok to trade. They need to make the determination that they are NOT in possession of material non-public information even during an open window. There are also some really good materials on http://www.thecorporatecounsel.net.ⁱⁱ

• Response #3: "Wishy-washy" is being kind in characterizing your outside counsel's statement. Use less CYA is probably better. You definitely do not have to keep your company wide pre-clearance and blackout period in effect. Because of your starting point, I would continue to be a little more broad in terms of non executives that you apply it to, making sure that anyone that has an early look at current period results, for example, is included, and that you ensure insider trading education is a clear part of your compliance program and code of conduct. You take a little risk here of being second guessed, since there is always the slight chance that an employee who you freed from the blackout list could do something, so again start conservatively, but by no means do you need to apply your policy company-wide, and you will do your company a service by having a realistic policy that will be taken more seriously in addition to showing the workforce that you are a business partner not an impediment.ⁱⁱⁱ

• Response #4: Your outside counsel is right about variety of practices. There is no single right answer. As one example, here is our story. We are also 4 years post-IPO, although had implemented public-like procedures earlier in preparation and because we had publicly registered debt. We started out very much as the poster described, but have moved to a less directed model today. Now we apply the trading policy to all employees (e.g., reminder of rules prohibiting trading on material non-public information concerning our stock or that of suppliers/customer etc. and a prohibition on shorting or similar transactions involving our stock), but apply both quarterly blackout and preclearance requirements to a smaller subset. We require all employees who receive equity grants (restricted stock or options) [equity pool does not go deep in organization] and our directors to comply with the quarterly blackout periods, and we require preclearance only from Section 16 persons (certain officers and our directors).^iv

• Response #5: In my experience, blocking out all employees is extremely rare. The more common practice is to (1) adopt a general insider trading policy that is applicable to all employees (i.e., you are prohibited from trading in company securities when you are aware of material, nonpublic information) and is essentially self-policing, and (2) apply official "no trading windows" to the directors, executive officers and select others who typically have access to material nonpublic information (with a particular focus on earnings materials, such as the CFO and his/her direct reports, the investor relations team, the financial analysts for each business unit, etc.). As specific situations arise, such as a material M&A transaction, a separate list of people involved in that deal is created. It is unusual that every employee in a 900 person company would have access to material nonpublic information that a reasonable investor would think is important in making an investment decision - if they do, then you may want to first consider how, when and to whom you communicate sensitive company information!^v

• Response #6: We apply the quarterly blackout period only to those persons we designate as restricted under our stock trading policy (which is broader than just directors & officers and picks up people in functions like Finance or IT that have access to significant amounts of nonpublic information). We still require preclearance of restricted persons outside of a blackout period.^vi

• Response #7: I'm not sure I like the answer you've been given by your outside counsel, at least without more knowledge regarding the circumstances and how you posed the question. I would caution that I'm about as far from being expert on anything to do with this arcane area of law as could be imagined. But, there are people who are expert, and who will do a good job of ferreting out facts that should give you more help than your question suggests you've already received from counsel. Without limiting whatever else you'd need to consider in making your decision, ponder one thing -- How likely is it that a substantial number of your employees may, in the normal course of their job, become privy to material non-public information respecting your company? If your company is one where very few people are going to ever, in normal course, become privy to such knowledge, then you might tend toward a more open practice and not have routine lockdowns. On the other hand, if your company is one where a substantial number of employees might come to know such knowledge, then you might be more tempted to use blunt-force tools like company-wide blackouts (since managing the day to day of individualized messages to in-the-know employees can become a nuisance). As noted, I would bet there are other factors a good advisor would bring to you, and I'm not terribly sure I would be happy with "some do and some don't" as the legal advice I'd just paid for.^vii

• Response #8: We have about 700 employees in central offices and another 700 in smaller offices and on-site locations. We also have open concept floor plans in our central offices and information moves fairly freely to a large senior team that is fairly widely dispersed. As well we have just a few key business segments that have fairly equal impact on revenue and other key factors that can influence our financial results and be involved in material activities. As a result, we implement a company wide blackout (and require employees in our central offices to pre-approve any trades in company shares in non-blackout periods). Although we have considered more selective blackouts to just employees in the central offices, we decided it would become administratively burdensome, as we would need to regularly identify certain employees with regular knowledge of material non-public information who may not be located in the central offices. However, if your organization is set up without these considerations, you should be able to get comfortable with applying a blackout on more limited people.^viii

• Response #9: I am surprised that your counsel is being wishy-washy as it is impractical to restrict every employee, especially as your company gets larger. We have a restricted group that we developed. It includes the board, our executives, large unit leaders certain accounting personnel, and anyone with access to company-wide financial information. We review it quarterly to see if anyone should be added or removed. In my experience, this is how most larger companies handle it.^ix

• Response #10: I have been a securities lawyer for over 20 years and I feel very comfortable telling you that you do not need to have a blackout for all 900 employees. I have worked at 4 companies as in-house securities and now am the Corporate Secretary for a public company. When I came here I worked with outside counsel to come up with a workable solution as to who should be subject to the blackout. Our policy is that all officers of the company, their administrative assistants, everyone in Accounting/Finance that has access to monthly financial reports, the mine managers and controllers (for you it may be plant managers), everyone in Business Development, Strategic Planning and Investor Relations. It should be people that have P & L responsibility over business units as they will have a sense of how the company is doing. We do not have all of the lawyers - only the ones that might have material nonpublic information. Our list is about 250 people, so it is still large but we have about 7000 employees.^x

• Response #11: We are a small publicly traded bank with only 120 employees. We have never had company wide blackouts. Even though we are small, our tellers, loan officers, maintenance folks etc. know next to nothing about our income, forecasts, etc. We black out only directors and senior management, who do have this information.^xi