If you work for a company that's publicly traded, you could be subject to blackout periods during which you're not allowed trade the company's stock. You might have access to nonpublic information, with a potential for illegal insider trading. A blackout period is generally part of a company's internal policy. It's meant to prevent corporate insiders from unfairly benefiting -- intentionally or inadvertently -- from trades in the stock market. A company may impose a blackout period only on key executives, or it may apply it to a broader group of employees.
Illegal insider trading happens when people with nonpublic information about a company use it for profit or to prevent a loss in the stock market. A securities law called Regulation Fair Disclosure requires that company officials announce major developments to the largest possible audience at once, to level the investing playing field. Even top company officials can't trade on the news before it is announced to the public. However, as long as a company's financial statements are current with regulators, the business usually isn't legally obligated to impose a blackout period. Regulators keep track of insider trading activity through disclosures that corporate insiders must file. But companies use blackout periods anyway to reduce illegal behavior.
Blackout periods generally occur when insiders have access to material information, such as financial performance. A company may impose a recurring blackout period on a quarterly basis in the days surrounding an earnings report. Trading also might be restricted in response to major events, such as mergers or acquisitions, when corporate insiders have access to material information. For quarterly earnings, the blackout period could systematically begin on the last day of the financial quarter and continue until one or two trading days after the company files its financial results. This way, the public has a fair amount of time to dissect financial results, according to a 2012 report on law firm Parker Poe's website.
If a corporate official violates a company's blackout period, his future with the company could be in jeopardy. In 2012, two members of the board of directors at Green Mountain Coffee Roasters sold shares of the company during a blackout period. The officials sold shares because of a pre-existing broker agreement, but the transaction coincided with the blackout period. The executives lost some pay and they were removed from their posts and were shifted into less prominent roles on the board, according to a 2012 article in "The Wall Street Journal."
Financial analysts provide research about publicly traded companies. When it comes to initial public offerings, research analysts, too, face blackout periods. Starting in 2003, a policy known as the Global Settlement forbad analysts from publishing research reports on initial public offering companies before those stocks begin trading in the public markets, and for up to 40 days afterward. The blackout rule was issued to prevent analysts from fulfilling a marketing role for new stocks. In 2012, in conjunction with a new policy that encouraged small businesses to issue IPOs, the rules were relaxed and the blackout period was shortened. As a result, analysts could begin publishing reports on IPO companies 25 days after the deal, according to a 2012 article in "The Wall Street Journal."
- The Wall Street Journal: SEC Won’t Take on Global Research Settlement With Jobs Act
- Davis Polk: Securities Offerings During Blackout Periods and Following a Quarter-End: What You Need to Know
- Parker Poe: Shedding Light on Blackout Periods
- The Wall Street Journal: Demotions Rock Coffee Firm
- Columbia Daily Tribune: Big Lots CEO Under Investigation for Stock sale
- U.S. Securities and Exchange Commission: Fair Disclosure, Regulation FD
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