A new take on the 'blind trust'
How executives insulate themselves from holdings that could get them into trouble
There was a time in the not-too-distant past when corporate insiders had a significant leg up on the rest of us when it came to making personal investment decisions.
Armed with the kind of sensitive, confidential information you obtain only by being close to a company's inner sanctum, many insiders bought and sold holdings in their own companies in a way that practically guaranteed they would stay one-up on both Wall Street and Main Street.
Now, some experts say, increasingly stringent insider-trading regulations can make that information more of a burden than a boon. As a result, a growing number of US corporate executives are choosing to operate with blinders on when it comes to personal holdings in their own firms' stocks.
A new kind of so-called "blind trust" - the hands-off financial arrangements favored for years by politicians, judges, and other public figures who need to guard against both real and perceived conflicts of interest - is finding favor in corporate America.
Called 10b5-1 trading plans - after the Securities and Exchange Commission rule that provides those who establish them with a legal defense against insider-trading allegations - these plans can help indemnify corporate insiders.
They may help level the investment playing field between mom-and-pop shareholders and executives.
"We're recommending that all our clients adopt them," says J. David Washburn, a Dallas attorney with the law firm Arter & Hadden. "Corporate insiders are almost always in possession of what the SEC calls 'material nonpublic information,' and it's illegal for them to make trades using that information ... so it makes sense to give over to someone else the discretionary authority to maximize the value of their holdings."
In the political arena, blind trusts are struck when candidates, office-holders, or appointees turn over day-to-day management of their financial affairs to a third party. The overseer of the trust must cut off most personal communications with the client to ensure objectivity and independence.
"The big difference between these public figures and our other clients is the lack of contact," says Ed Higgins, director of US Bank's private client group in St. Louis, who has helped manage blind trusts for presidential candidates and federal judges. "The investment objectives are set at the start, and after that there are no statements and no face-to-face contact."
In the corporate sector, insiders seldom have need to relinquish control over their entire investment portfolios. But 10b5-1 plans do provide a means for executives and directors to delegate the purchase or sale of shares in their own companies' stocks to an outsider. Shifting that responsibility helps shelter executives from any charge that they profited from insider information.
Not that "blind trustees" are expected to keep themselves completely in the dark about how their clients' companies are performing.
"You want the person to educate himself, but the key is that he be researching just like any other regular schlub, not working with nonpublic information," Mr. Washburn says. "He has to get a sense of what the executive is trying to accomplish, but once those ground rules are in place, that's it."
Mark Christopher, an attorney who runs seminars on blind trusts, says that while the plans are complex to set up, they make executives' lives easier by virtually eliminating the need for company-instituted blackout periods and trading windows that dictate when insiders may buy and sell stock.
"Giving someone else the authority to sell provides a kind of safe harbor from insider-trading liability, because the executive isn't the one making the selling decision," he says. "And ... an institutional trustee will have a broader sense of the marketplace, and can therefore make decisions with greater objectivity and perspective."
Because the SEC does not track these blind trusts or require that companies make a formal public announcement when executives adopt them, it is difficult to know exactly how many have been established since Rule 10b5-1 took effect in October 2000.
Dozens of public companies, including Staples Inc. and Priceline.com, have issued press releases this past year to ensure that insider sales are seen as routine transactions rather than a sign that executives are dumping shares.
But there is broad consensus that blind trusts will become increasingly popular in months and years to come.
"When [company] values start rising again and selling picks up, I suspect a lot of the plans will be implemented," Mr. Christopher predicts.
Stephen Laws, financial technology analyst with the San Francisco investment bank WR Hambrecht + Co., agrees.
"Analysts and investors definitely look favorably on these kinds of plans. It's much better than waking up and seeing that someone's sold a half million shares as soon as the trading window opened."
While 10b5-1 plans may help create the perception of being above-board, some experts question whether blind trusts will actually make companies more ethical.
"I guess I'm a little cynical about these things," says Barbara Toffler, a corporate-ethics consultant and adjunct professor at the Columbia University Graduate School of Business. "Blind trusts can be effective if applied properly, but ... just having one doesn't mean you've necessarily removed a conflict of interest. It all depends on how they're constructed, and how they're run."