Market & Investing

Diversification Strategies for Public Company Executives

Public company executives who receive equity may face concentration risk. Discover seven ways they may be able to diversify.

Are you a public company executive who receives equity compensation? If so, you may face a dilemma. While the link between company performance and share price may drive your personal wealth, your investment portfolio may also be overly concentrated in a single stock.

 

Given the limited options for diversification available to C-suite executives, we offer some tactics for consideration. While traditional diversification strategies may not work for you, alternative strategies do exist. We recommend seeking legal and tax advice before implementing any of the ones described below. Here are a few to consider:

  1. Direct Indexing. Direct indexing could help counterbalance over-exposure to your company stock by enabling you to set up a separately managed account that directly owns the individual holdings underlying an existing stock index. Using this strategy, you could build a portfolio that avoids exposure to your company stock—or even to its sector—as long as you have assets outside your company equity to work with.

    2.  

  2. 10b5-1 Plans. Under SEC Rule 10b5-1, your company could establish a preset trading plan that lets you sell company stock under predetermined conditions that could help provide an affirmative defense to insider trading. One thing to note: Recent regulatory changes now require a minimum 90-day cooling off period for directors and officers before selling shares under this type of plan, among other new limitations.

    3.  

  3. Exchange Funds. Structured as limited partnerships, exchange funds allow investors with concentrated positions to swap them for a diversified stock portfolio, typically after a seven-year holding period. That said, some executive stock agreements disallow the use of exchange funds or limit the number of shares you may contribute.

    4.  

  4. Estate Planning. By transferring company equity to family members, you may be able to reduce your concentration risk. Before implementing any estate planning strategy, however, be sure to seek legal and tax advice—especially as gifts may be subject to scrutiny by the SEC under insider trading laws.

    5.  

  5. Charitable Gifting. Gifting publicly traded and restricted shares to a Donor Advised Fund or other charity may make you eligible to receive charitable tax deductions (subject to limitations) However, SEC rules suggest insiders should avoid making such gifts if they possess material non-public information. To avoid missteps, it’s important to seek legal and tax advice before implementing this type of strategy.

    6.  

  6. Leveraging Public Market Liquidity. Arranging a transaction away from the public markets, such as a block trade or a private sale to an institutional buyer, may offer liquidity if your shares are thinly traded. That said, these types of transactions may be prohibited under company stock agreements or prevailing securities laws and be sure to seek legal and tax advice.

    7.  

  7. Pledging Corporate Stock. A somewhat riskier strategy for obtaining liquidity and diversifying your portfolio involves using your company shares as collateral for a loan, and then applying the proceeds of that loan to meet your liquidity needs or invest in a diversified portfolio. As a downside, if the pledged stock’s share price drops considerably, you could face a margin call. Some companies do not allow insiders to pledge these shares, so executives interested in this strategy should confirm it is allowed under their company policy before exploring further.

    8.  

Making Informed Choices

While your situation may be nuanced, there are ways that you can make your portfolio work for you. If you face restrictions on the sale of your company shares and would like to learn more about the diversification strategies available to you, consider reaching out to a professional, such as a Financial Advisor. 

Diversification does not guarantee a profit or protect against loss in a declining financial market.

This material has been prepared for informational purposes only and is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Information and data contained herein have been obtained from multiple sources and Morgan Stanley Smith Barney LLC ("Morgan Stanley") makes no representation as to the accuracy or completeness of the information and data from sources outside of Morgan Stanley. We have included information that we found to be pertinent for our purposes. We make no representation as to the completeness of the information, and information which you may find material for your own investment or planning purposes may not have been included. The information and data are subject to change at any time without further notice.

This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.

The information provided in this material is affected by laws and regulations in effect from time to time. It also is affected by facts and assumptions regarding your life circumstances which may change from time to time. Morgan Stanley Smith Barney LLC. undertakes no obligation to update or correct this information as laws, regulations, facts and assumptions change over time. If you have a change in your life circumstances that could impact your investment or planning, it is important that you keep your financial, tax and legal advisors informed, as appropriate.

Morgan Stanley Smith Barney LLC, its affiliates, employees and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.

Morgan Stanley Smith Barney LLC does not accept appointments, nor will it act as a trustee but it will provide access to trust services through an appropriate third-party corporate trustee.

Past performance is not necessarily indicative of future performance.

Participating in a new issue/syndicate is subject to availability. IPOs are highly speculative and may not be appropriate for all investors because they lack a stock-trading history and usually involve smaller and newer companies that tend to have limited operating histories, less experienced management teams, and fewer products or customers. Also, the offering price of an IPO reflects a negotiated estimate as to the value of the company, which may bear little relationship to the trading price of the securities, and it is not uncommon for the closing price of the shares shortly after the IPO to be well above or below the offering price.

Individuals executing a 10b5-1 trading plan should keep the following important considerations in mind: (1) 10b5-1 trading plans should be reviewed and approved by the legal and compliance department of the individual’s company. (2) Recent rule changes will require a mandatory cooling-off period between the execution of a 10b5-1 trading plan (or a material modification) and the first sale pursuant to the plan (or the first sale following such material modification). (3) 10b5-1 trading plans do not alter the nature of restricted and/or control stock or regulatory requirements that may otherwise be applicable (e.g., Rule 144, Section 16, Section 13). (4) 10b5-1 trading plans that are modified or terminated early may require new cooling-off periods and may weaken or cause the individual to lose the benefit of the affirmative defense. (5) 10b5-1 trading plans may require a cessation of trading activities at times when the company engages in securities offerings or when lockups may be required at the company (e.g., secondary offerings). (6) Recent rule changes will require companies to publicly disclose material terms of Section 16 director and officer 10b5-1 trading plans, and the adoption, material modification or early termination of such plans.

The Morgan Stanley Global Impact Funding Trust, Inc. (“MS GIFT, Inc.”) is an organization described in Section 501(c) (3) of the Internal Revenue Code of 1986, as amended. MS Global Impact Funding Trust (“MS GIFT”) is a donor-advised fund. Morgan Stanley Smith Barney LLC provides investment management and administrative services to MS GIFT.

References to third parties and third-party websites by web addresses or hyperlinks contained herein should not be considered a solicitation on behalf of or an endorsement of those entities by Morgan Stanley. Equally, except to the extent to which the material refers to website material of Morgan Stanley, the firm takes no responsibility for, and makes no representations or warranties whatsoever as to, the data and information contained therein. Nor do we guarantee their accuracy and completeness. Such addresses or hyperlinks (including addresses or hyperlinks to website material of Morgan Stanley) are provided solely for your convenience and information and the content of the linked sites does not in any way form part of this document. Accessing such websites or following such links through the material or the website of the firm shall be at your own risk, and we shall have no liability arising out of, or in connection with, any such referenced websites. By providing the third-party publications and/or links to a third-party web site, we are not implying that Morgan Stanley has an affiliation, sponsorship, endorsement, etc. with the third party or that any monitoring is being done by Morgan Stanley or its affiliates of any information contained within the publications or web sites. The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data provided by the third-party websites or publications is as of the date of the material when it was written and is subject to change without notice.

Morgan Stanley at Work, Morgan Stanley Smith Barney LLC, and its affiliates and employees do not provide legal or tax advice. You should always consult with and rely on your own legal and/or tax advisors.

Morgan Stanley at Work services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.

© 2024 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC#6460366  (03/2024)

View Disclosures Close Disclosures