Overview, Process & Best Practices

Transcription

1 Richard J. Fischer Vice President Executive Financial Services Direct: Christine Cognetti Executive Director Executive Financial Services Direct: Overview, Process & Best Practices 10b5-1 Preset Diversification Program (PDP) June 2014

2 Table of Contents Section 1 Section 2 Section 3 Section 4 Overview Process Best Practice Competitive Advantage 2 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

3 Overview 3 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

4 Preset Diversification Program ( PDP ) Background The implementation of Rule 10b5-1(c) has fundamentally altered the ability of insiders to transact in their own stocks to help them achieve their portfolio objectives Key Requirements of a PDP No possession of material, nonpublic information at time of implementation Must be entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5, and Seller exerts no subsequent influence over execution of program Rule 10b5-1: Affirmative Defense for Pre-Established Trading Plans In August 2000, the SEC amended insider trading rules by adopting Rule 10b5-1(c ) in an effort to clarify the distinction between the possession and the use of material nonpublic information The rule provides affirmative defense available to protect against allegations of trading on material nonpublic information, provided such trades are made pursuant to a pre-existing contract, instruction or plan. At Morgan Stanley, these are known as a Preset Diversification Program ( PDP ) or 10b5-1 Trading Plan It provides that a person s sale (or purchase) of securities is not, in fact, on the basis of material nonpublic information, if that person can demonstrate that before becoming aware of that information, that person had: Entered into a binding contract to sell (or purchase) the security, Instructed another person to sell (or purchase) the security for the instructing person s account, or Adopted a written plan for trading securities This written contract, instruction and plan must either: Specify the amounts, prices and dates for such securities to be sold (or purchased), or Be based on a written formula for determining such parameters, or Delegate all trading discretion and decisions to a person who does not possess material nonpublic information, and Prevent the exercise of subsequent influence over the trading parameters by the person providing the contract, instruction and plan 4 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

5 Key Benefits of a PDP Affirmative Defense: Protects against potential claims of insider trading Customization: Addresses the particular monetization needs of each individual seller Access to Public Markets: Allows order/trade executions without regard to corporate blackout periods Auto-pilot: Disposes of stock on a predictable and consistent basis Diversification: Reduces the risk associated with a concentrated equity position Discipline: Encourages stability during volatile market fluctuations Reduce Investor Concerns: Potentially mitigates signaling issues generally associated with sales by insiders Organized Disposition: Facilitates the sale of shares by multiple company insiders 5 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

6 With a PDP Limiting Events Typical A Common Dilemma and Potential Solution Illustrative Timeline 1/1 Typical Corporate Blackout/Window Trading Program 4/1 7/1 10/1 Blackout Trading Permitted During Window Periods Blackout Blackout Blackout 1/1 Certain Events May Cause Trading Windows to Close 4/1 7/1 10/1 Litigation Settlement Negotiations Internal Receipt Of Clinical Trial Results Acquisition Negotiations Blackout Trading Prohibited during Window Periods when Key Employees or Insiders are in Possession of Material Non-public Information 1/1 4/1 Trading Pursuant to a PDP 7/1 10/1 PDP Implemented Litigation Settlement Negotiations Internal Receipt of Clinical Trial Results Acquisition Negotiations Trading Permitted Pursuant to Terms of Plan 1. The above illustrations are based on hypothetical conditions and are not representative of any specific company or company stock 6 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

7 Process 7 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

8 Uses of a PDP Select Examples Stock Sales Facilitate the execution of a selling program free from concern about blackout periods and with an affirmative defense against allegations of insider trading Stock Option Exercise and Sale Allow for the exercise of stock options and the immediate sale of the shares received in connection with such exercise Establish a trading plan to protect against an option expiring worthless by setting an order to execute above the strike price at a pre-determined date that is close to the option expiration date, even if the window is closed Restricted Stock Awards/Units To cover the tax liability due upon vesting of a time or performance based Restricted Stock Awards or Unit If the Restricted Stock Program is distributed in net shares from the individual s total award, the balance of restricted shares received can be included in their overall diversification objective Corporate PDP Selling programs established at the corporate level to facilitate the organized disposition of shares by an entire management team or corporate board. Benefits include potentially improved execution and ease of administration 8 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

9 Establishing a PDP Four Key Items The PDP trading schedule offered by Morgan Stanley is customizable. Through the coordination of your Morgan Stanley team and the PDP group, we can craft a trading plan schedule to help meet each client s particular needs Number of Shares to be Sold in the Trading Plan (or mechanism for determining such number) Typically, a PDP provides a set number of shares to be sold over the life of the plan. A formula, for example the Rule 144 volume limit, can also be used to set the number Frequency of Sales While it is possible to have a single set of time limits for sales in a PDP, clients may prefer to have their orders adjust more frequently. For example, sales can be set within daily, weekly, monthly, quarterly, semi-annual or annual time frames. These periods are known as the Interim Sales Periods Duration of the Plan The duration of the PDP s selling period, the time during which sales may occur, may be defined either by set dates or by a formula. As examples, a PDP can be set up to run from January 1, 2014 to December 31, 2014 or predetermined time from the date the trading plan is signed. A typical PDP is one to two years, but there is no required minimum or maximum period of time 4 Selling Methods There are a wide variety of possible selling methods; as long as the method s formula is reasonable and can be quantified, it is acceptable. The flexibility of the selling method is a key positive element of a PDP 9 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

10 Common Selling Strategies Morgan Stanley works with each seller participating in a 10b5-1 Preset Diversification Program to develop a customized trading strategy to help meet each client s specific monetization and diversification objectives Frequency, Periodic Selling Sales are triggered by date(s). A plan may include, weekly, monthly, quarterly, semi-annual or annual Sales Periods Example Sell 7,500 each day at the market price, Sell 50,000 each month at the market price Limit Orders, Set Amounts of Stock Sales are made at, or above, a specified limit price. Example Sell 10,000 $45 in each Sales Period (day, week, month, etc). Accelerated Selling A variation where multiple Limit Orders are used with increasing amounts of stock at each limit price. Example 10,000 $45, 15,000 $50, and an 20,000 shares at $55 Top Price Order A plan can include one or more one-time orders to sell at a limit price above the price(s) of the periodic sales. Example Each month sell 10,000 $45, an additional 8,000 $50, an additional 5,000 shares at $55 and a one time sale during the plan of 100,000 $60 Quantity Limits Plans can include limits on the number of shares that can be sold in a designated period. This is especially useful when shares accumulate over time Example Sell no more than 50,000 shares in a calendar month or target 10% of the daily volume. Flexibility to Adjust Limit Orders Orders can be adjusted over time. Example for the first year of the plan the levels could be $60/$40, for the second year $65/$45 or vice versa Combination Strategy A plan can incorporate multiple elements into a hybrid solution tailored to the individual needs of a Seller b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

11 PDP Examples Hypothetical strategies for a one-year trading plan to sell a total of 120,000 shares of Company XYZ with an average historical selling price of $25 Goal Generate liquidity while limiting impact of selling on the market Sample Plan #1 Monthly Selling Plan, unsold shares from each month carry forward to subsequent months 10,000 shares at market An additional 10,000 shares at $30 or better An additional 10,000 shares at $40 or better Advantages: Ability to dispose of stock on a predictable and consistent basis, while allowing for accelerated selling if stock trends higher Disadvantages: May not generate desired proceeds if market price is below your desired limits (Can mitigate selling at undesired limit prices by setting a pre-determined minimum sale price but this runs the risk of not selling at all) Sample Plan #2 Monthly Selling Plan, unsold shares from each month carry forward to subsequent months. No more than 50,000 shares can be sold in any given day (can be week, month, or set period) Sell 10,000 shares at $20 or better An all unsold shares at $40 or better Advantages: Ability to dispose of stock on a predictable and consistent basis with relatively flat stock performance, while allowing for liquidation of entire plan if stock hits a dream price. Setting a maximum quantity sold in a given period can help mitigate undesired large volume sales. Disadvantages: If stock goes below $20, you risk not selling. Sample Plan #3 All orders are effective from the Selling Plan Start Date until the Selling Plan End Date 40,000 shares at $25 or better An additional 40,000 shares at $30 or better An additional 40,000 shares at $40 or better Advantages: Gives a chance to take advantage of sales at your desired price limits, regardless of timing Disadvantages: Concentrated selling reduces ability to take advantage of a longer term upward stock price trend, all shares can potentially be sold quickly, or requires upward stock movement for sales to occur at all 1. Samples are theoretical examples not intended to serve as actual plans 11 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

12 Presentation1\07 JUL 2014\3:11 PM\2 10b5-1 Implementation & Execution Process Overview To initiate the 10b5-1 process, client contacts MS Advisor by or phone (Info on Cover) Plan Adoption Plan Execution CLIENT Morgan Stanley will obtain holding summary from Issuer and works with client to develop 10b5-1 sale parameters, open accounts and transfer shares Plan is signed by client Available proceeds can be distributed to address client s financial needs or re-invested to meet portfolio objectives MORGAN STANLEY Morgan Stanley incorporates plan parameters in Issuer approved document template Morgan Stanley monitors 10b5-1 plan, executes trades, and forwards notifications to Client & Issuer ISSUER Issuer approves Morgan Stanley obtains Issuer signature, countersigns plan and circulates a final copy to all parties. Morgan Stanley works with Issuer, Transfer Agent & Legal to remove share restrictions, transfer shares and settle trades b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

13 Best Practice 13 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

14 Company Obligations in 10b5-1 Plans Current Practice Nearly all companies are involved with their insider s 10b5-1 Plan to some extent, as many brokers will require the company to acknowledge or represent certain facts about the 10b5-1 Plan. Company policies, however, may vary greatly and some companies may not address 10b5-1 Plans in their insider trading policies Although there is no requirement under Rule 10b5-1 for a company to approve 10b5-1 Plans or have policies covering 10b5-1 Plans, most companies will permit a plan to be implemented only during open window periods Morgan Stanley requires a signed Issuer Representation Letter which is an Exhibit to Morgan Stanley s 10b5-1 trading plan contract. Companies should create or amend existing policies for 10b5-1 Plans for the protection of the insider and the company, including a requirement that the plan is cleared through their legal department Several benefits from company involvement: Best Practice Provides independent verification that the insider did not have MNPI at the time the insider adopted the plan and that the plan is in compliance with the company s insider trading policies Provides a record in the event there is an inquiry into trades covered by the 10b5-1 Plan Delegate all trading discretion and decisions to a person who does not possess material nonpublic information, and Prevent the exercise of subsequent influence over the trading parameters by the person providing the contract, instruction and plan Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley 14 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

15 Disclosure of 10b5-1 Plans Current Practice Rule 10b5-1 does not require either the company or the insider to publicly disclose the adoption of a 10b5-1 Plan Some companies choose to disclose the adoption of a 10b5-1 Plan by the most senior officer(s) through a Form 8-K or Press Release Upon the first trade, insiders often disclose the existence of a 10b5-1 Plan on the Form 4 filing and there is required disclosure on Form 144, when applicable, although the disclosure on each form is limited Although it is currently not a regulatory requirement, disclosure upon adoption of a 10b5-1 Plan by the Issuer and insider disclosure may be a future SEC requirement. In the near-term, a Issuer s voluntary disclosure at a 10b5-1 Plan s adoption would: Support and could be used as evidence of the insider s good faith Best Practice Promotes transparency, may also be advantageous for investor relations to explain why the trades are taking place Disclose the existence of a 10b5-1 Plan within the a footnote on the Form 4 filing and the required disclosure on Form 144 could mitigate the negative signing issues associated with an executive s stock sale Any person subject to Schedule 13D requirements, which generally apply where a person holds more than 5% of a class of Issuer s stock, must comply with the filing requirements (e.g., disposition of more than 1% of holdings) and disclose the plan Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley 15 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

16 The Waiting Period Current Practice Rule 10b5-1 does not impose any minimum waiting period between the date that the insider adopts the 10b5-1 Plan and the date of the first trade Waiting period supports the position that any MNPI the insider may have had at the time he or she adopted the 10b5-1 Plan has either become stale or been disclosed at the time of the first sale Some waiting period, as little as a few days (although rare) to three months, could be dependent on the company policy Morgan Stanley requires a minimum waiting period of 14 days Best Practice Waiting periods could depend on different factors, including potential possession of MNPI, length of plan or execution details (e.g., a plan established to execute market orders during a two-year period will not need as long a waiting period as a plan that will likely be completed quickly due to lower priced limit orders or a shorter term 10b5-1 Plan) Issuers actively acquiring new corporations or frequent announcements of new products might impose a longer wait periods to ensure that MNPI has been disclosed prior to the first execution under the 10b5-1 plan Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley 16 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

17 Amending or Terminating an Established 105b-1 Plan Current Practice Permitted although the company or the broker may inquire about the details Does not eliminate the affirmative defense, as long as the amendment or termination was made at a time when the insider was not in possession of MNPI and the insider was acting in good faith SEC s Compliance and Disclosure Interpretations note that the act of terminating does not automatically result in liability under Section 10(b) and Rule 10b-5, but calls into question good faith Companies should avoid amendments or terminations to the extent possible. Likely to cause suspicion and increase risk that the affirmative defense will not be available, especially if the amendment or termination works out favorably to the insider Best Practice Company s policies should, formally or informally, address amendment or termination, including appropriate waiting periods for entering into a new plan, imposing limits on the frequency of amendments and other restrictions (e.g., only during open window periods) A 10b5-1 plan may require a suspension of trading activities at times when lockups may be necessary to the Company (e.g., follow-on offerings, secondary offerings, mergers, etc.) Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley 17 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

18 Trades Outside of a 10b5-1 Plan Current Practice Rule 10b5-1 does not prohibit the insider from trading outside of an established 10b5-1 Plan Clearly not protected by Rule 10b5-1 Permitted by some companies, several of the problematic trades highlighted in the WSJ articles and under investigation occurred outside their plans Morgan Stanley requires prior notification of any outside trading activity Ensures we have the information needed to comply with Rule 144 Trades outside or within a 10b5-1 plan do not generally alter the restricted stock or other regulatory requirements (e.g., Rule 144, Section 16, Section 13D) which may otherwise be applicable Best Practice Do not permit unless completely defensible in hindsight Provides an opportunity for executive to sell with the protection of 10b5-1 and therefore inadvertently deviating from their plan (e.g. selling shares outside the plan that are accounted for in the plan) Note: The best practice suggestions are based on review of public opinions and statements by industry participants and does not necessarily reflect those of Morgan Stanley 18 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

19 Competitive Advantage 19 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

20 Competitive Advantage Morgan Stanley enjoys a competitive advantage in the PDP business Team Approach & Experience Morgan Stanley s PDP Team is staffed with 14 experienced professionals with over 100 years of cumulative experience in 10b5-1 & related subject matter Morgan Stanley (1) helped pioneer the use of creative structures to facilitate the sale of stock by affiliates outside of restrictive blackout periods as early as 1997 Structure Morgan Stanley has been recognized as one of the first major firms on Wall Street to invest in the establishment of a separate PDP Trading Desk to focus on 10b5-1 order flow while preserving open lines of communication between the firm s PDP clients and their Financial Advisors Customization of Trading Schedule Morgan Stanley s PDP Team works closely with the client and his/her Financial Advisor to structure, draft and execute customized PDP trading strategies which are in sync with the client s risk management needs and investment objectives Market Leaders Since the adoption of SEC Rule 10b5-1(c) in August of 2000, Morgan Stanley s (1) proprietary PDP Trading Desk has: Monetized over $52.5Bn in sales (1.4Bn + shares) pursuant to Rule 10b5-1 Adopted, monitored and executed over 21,500 customized selling programs 1. Please note this refers to the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC 20 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

21 Market Share League Table Morgan Stanley s experience and business model has translated into a #1 (1) rank for based on total notional value of shares executed ($Bn) Value ($Bn) Total (%) Top 10 Total Morgan Stanley (1) Bank of America JPMorgan Chase & Co. UBS AG Fidelity Investments Goldman Sachs Group Inc. Credit Suisse Group Allen & Co. Charles Schwab Corp. E-Trade Financial Corporation Total Total (%) Reprinted with the permission of Washington Service. (301) The Washington Service tracks insider trade information filed with the Securities & Exchange Commission. The above data is compiled by the Washington Service from Form 144 filings in the period from 2/1/2005 to 12/31/2013. Data from the period 2/1/2005 to 5/31/2009 reflects the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. The above data also includes transactions from Morgan Stanley & Co. LLC. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed. Information contained herein is subject to change b5-1 PRESET DIVERSIFICATION PROGRAM (PDP)

22 Disclaimers Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors do not render advice on tax and tax accounting matters to clients. For the resolution of specific tax or legal questions, professional advice should be obtained from an attorney, accountant or tax advisor. The information and opinions contained herein were prepared by Morgan Stanley. These materials are solely informational based upon publically available information believed to be reliable, and may change without notice. Morgan Stanley shall not in any way be liable for claims relating to them, and makes no express or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in, or omissions from them. Morgan Stanley has no obligation to tell you when opinions or information in these material changes. Preset Diversification Program is a registered Trademark of Morgan Stanley Smith Barney LLC, protected in the United States and other countries Morgan Stanley Smith Barney LLC. Member SIPC 22 10b5-1 PRESET DIVERSIFICATION PROGRAM (PDP) CRC /2014