Timing is Everything: Ensure Grant Practices Fly with New Regs

Employers are examining equity grant procedures and timing in response to the SEC’s amendment to Rule 10b5-1 and a Special Accounting Bulletin on “spring-loading.” A primer co-written by White & Case and Equity Methods provides a valuable summary of what is and is not permitted and offers a useful sample timeline for calendar-year companies.

The bottom line: The SEC rules focus on ensuring that equity awards are granted only during open quarterly windows under a company’s insider trading policies and when company executives are not in possession of material non-public information. (MNPI). It’s critical that the teams in charging of information release are in close communication with the teams in charge of option grants to avoid these colliding.

Why it matters: Granting equity awards when the company has MNPI may create an appearance of “spring loading” - a scenario where the grantee receives an award ahead of positive company news and immediately benefits from the boost in stock price. If there is a perception that MNPI is in question, under SAB 120, a re-evaluation of the share-based awards fair market value and expected volatility of may be required, adding complexity to the accounting treatment.

Next steps: Evaluate the likelihood that certain information could result in a material change in stock price. A few things to think about:

• Will the market be pleasantly surprised by the information? (i.e., advancement of a product or service, entering into a strategic partnership, attainment of a critical operational milestone).
  
  
• Will this information reveal the company has exceeded previously issued financial guidance? Have similar scenarios resulted in material stock price changes?

Ideal grant timing:  Calendar fiscal year companies should ensure the grant date occurs at least 2 business days after the earnings / 10-K announcement (and, in the case of NEOs granted option awards, at least 5 business days before filing the Form 10-K).