What Is a Blackout Period in Finance? Rules and Examples
What Is a Blackout Period?
A blackout period in financial markets is a period when certain executives and employees are prohibited from buying or selling shares in their company or making changes to their pension plan investments. A blackout period usually comes before earnings announcements with company stock. It comes at a time when major changes are being made for pensions.
Key Takeaways
- A blackout period in financial markets is when certain company employees are prohibited from buying or selling company shares.
- Most companies voluntarily impose a blackout period on employees who might have insider information ahead of earnings releases.
- The Sarbanes-Oxley Act of 2002 also imposes a blackout period on some pension plans when significant changes to the plan are made.
- A company will typically define its blackout period, stipulating the time frame and who is and isn’t allowed to trade shares.
- The Securities and Exchange Commission (SEC) doesn’t prohibit executives from stock transactions ahead of earnings provided that the transactions are registered properly.
What Are the Rules on Stock Trades?
The Securities and Exchange Commission (SEC) doesn’t prohibit executives from buying or selling stock ahead of earnings announcements provided that the company’s legally required disclosures are up to date.
Most listed companies do prohibit directors and specific employees who might have important insider information from trading in the weeks ahead of earnings releases, however. They do this to avoid any possible suspicion that the employees might use that information to their benefit ahead of its public release, which would violate SEC rules on insider trading.
Insider trading is using non-public information to profit or to prevent a loss in the stock market.
Pension Plans and Blackout Periods
Pension plan blackout periods are imposed when plan participants are restricted from making changes to their investment allocation. This is generally the case when the plan makes significant changes. It could include changes in management personnel, a corporate merger or acquisitions, implementation of alternative investments, or even a change in recordkeepers.
Under the Sarbanes-Oxley Act of 2002, it’s illegal for any director or executive officer of an issuer of any equity security to buy, sell, or otherwise acquire or transfer securities during a pension plan blackout period if they acquired the security in connection with their employment. An exception exists if the security is exempt. This includes securities that aren’t held within the pension plan itself.
Stock Analysts and Blackout Periods
Stock analysts are also subject to blackout periods around the launch of an initial public offering (IPO). Analysts were previously forbidden from publishing research on IPOs beforehand and for up to 40 days after, but those rules were loosened in 2015.
No,w only analysts with firms that were involved as underwriters or dealers are prohibited from publishing research or making public appearances about an IPO, and for only 10 days after the offering is completed.
How Will I Use This in Real Life
Assume you hold a significant position with your employer, and you also hold several shares of the company’s stock. Your position gives you insider information regarding an upcoming earnings release. You’re aware that the company has been through a tough time, and the information you have tells you that it’s about to get worse.
You want to unload your stock now while it still has some value, but you can’t do so due to the blackout period. You can’t use your insider information to personally protect yourself against a loss. The same concept would apply if the information you possess indicates a thriving upcoming season for your employer. The blackout period prohibits you from purchasing stock to take advantage of gains as well.
“Insider” is the key term here. Other employees and personnel would be free to act under specific circumstances .
Can I Transfer Stock During a Blackout Period?
A blackout period prevents the buying, selling, or transferring of any security either directly or indirectly. This specifically applies to your position as either a director or executive officer.
Do Blackout Periods Apply to Family Members?
This is typically left to the discretion of the company’s blackout period’s rules but blackout periods quite often apply to family members when a blackout period has been announced by a company. Neither you nor your family members are allowed to trade in the company’s shares until the blackout period is over.
Can Insiders Sell Shares Before Earnings?
Yes, insiders can sell shares before earnings as long as the sale is done legally through the proper process and is registered with the Securities and Exchange Commission (SEC). It must be done as advanced filings.
The Bottom Line
Blackout periods refer to a specific period when certain individuals, usually executives or employees of a company, are prevented from buying or selling shares in their company. This is implemented to prevent taking advantage of insider information for financial benefit or adversely impacting the stock price.
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