Public Companies, Insider Trading Restrictions and Individual Account Plans


Earlier this year, the U.S. Department of Labor (“DoL”) and the Securities Exchange Commission issued regulations to address blackout period trading restrictions, including advance notice requirements, under the Sarbanes-Oxley Act on participant-directed investments under “individual account plans”, such as 401(k) plans (”IAP’s”). The blackout period rules apply to all IAP trading restrictions, including those imposed on trading in employer stock.

The DoL regulations define a “blackout period” broadly enough to include all blackout periods of more than three consecutive business days, even those not imposed by the IAP. Thus, quarterly freezes on trading in a public company’s stock, which are timed to coincide with the release of earnings reports and affect the ability of certain participants in the public company’s IAP to trade in employer stock under the IAP, are covered by these rules.

The DoL regulations contain two exceptions to what constitutes a blackout trading period that arguably could apply to these quarterly freezes.  The first exception addresses restrictions that occur “by reason of the application of securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934).”  However, we understand this exception is not intended to apply to quarterly freezes. That interpretation is consistent with the Preamble to the DoL regulations.

The second exception applies to any regularly scheduled restriction, if that restriction has been disclosed to plan participants through a plan communication, such as a summary plan description, or a communication describing plan investment alternatives or other plan document.  Thus, if an IAP wishes to avoid the DoL blackout notice requirements for any plan blackout period required as a result of insider trading restrictions on employer stock, the restriction should be contained in some form of plan documentation that is distributed to the affected participants and beneficiaries.

If you have any questions concerning the issues addressed in this Alert, please contact any one of the attorneys listed above.

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