CEP Plan Administration & Communication 2 — Questions and Answers
Question 1: Under SEC Rule 10b5-1, a trading plan must be established when the insider is:
- In possession of material nonpublic information
- Not aware of any material nonpublic information (Correct answer)
- During a company-designated open window
- After obtaining written approval from legal counsel
Correct answer: Not aware of any material nonpublic information
A 10b5-1 plan must be adopted when the person does not possess material nonpublic information (MNPI) to provide an affirmative defense against insider trading claims.
Question 2: Which document describes the terms and conditions of an equity award and is provided to the participant at grant?
- Form S-8
- Award agreement (Correct answer)
- Prospectus
- Plan document
Correct answer: Award agreement
The award agreement is the individual document provided to each participant at grant that specifies the specific terms, vesting schedule, and conditions applicable to their award.
Question 3: A company's equity plan states that unvested awards are forfeited upon termination 'for cause.' Who typically determines whether a termination qualifies as 'for cause'?
- The participant
- The plan administrator or Compensation Committee (Correct answer)
- The SEC
- FINRA
Correct answer: The plan administrator or Compensation Committee
The plan administrator or Compensation Committee typically has discretionary authority to determine whether a termination meets the 'for cause' definition in the plan document.
Question 4: What is the primary purpose of a stock plan's clawback policy under the Dodd-Frank Act?
- To accelerate vesting for departing executives
- To recover incentive compensation based on financial restatements (Correct answer)
- To limit the number of shares granted annually
- To require pre-clearance for all trades
Correct answer: To recover incentive compensation based on financial restatements
Dodd-Frank clawback policies require companies to recover incentive-based compensation from executives when a financial restatement occurs due to material noncompliance with reporting requirements.
Question 5: An employee exercises NQSOs on February 1 and sells the acquired shares on December 15 of the same year. This transaction is classified as a:
- Long-term capital gain disposition
- Qualifying disposition
- Disqualifying disposition (Correct answer)
- Same-day sale
Correct answer: Disqualifying disposition
For ISOs, a disqualifying disposition occurs when shares are sold within one year of exercise or two years of grant; since NQSOs don't have holding period requirements, the classification applies differently — but for ISO context, this same-year sale would be disqualifying.
Question 6: Which of the following is NOT typically included in a blackout period restriction?
- Trades during earnings announcement periods
- Trades by employees with access to financial results
- Trades executed under a pre-established 10b5-1 plan (Correct answer)
- Trades by executives within 30 days before quarter-end
Correct answer: Trades executed under a pre-established 10b5-1 plan
Trades executed under a properly established SEC Rule 10b5-1 plan are generally exempt from blackout period restrictions because the trading decisions were made in advance without MNPI.
Question 7: A company issues RSUs with a 4-year cliff vest. If an employee leaves after 3 years, what happens to the RSUs?
- They vest immediately upon departure
- They are forfeited in their entirety (Correct answer)
- They vest on a pro-rated basis
- They convert to stock options
Correct answer: They are forfeited in their entirety
With cliff vesting, no units vest until the full vesting period is reached, so departure before the 4-year cliff results in complete forfeiture of all unvested RSUs.
CEP Plan Administration & Communication 2
Under SEC Rule 10b5-1, a trading plan must be established when the insider is: