Blackout periods are an important, though lightly regulated, component of the insider trading compliance programs of Swiss listed companies. We analyze a number of trends that are inherent to the design of blackout periods in Switzerland. We also examine the use of trading plans, known as “Rule 10b5-1 plans” in the United States, which may also form part of a well-designed insider trading compliance program but which appear to be less popular in Switzerland.

By Sandro Fehlmann / Deirdre Ní Annracháin (Reference: CapLaw-2023-23)

1) Blackout Periods

a) Overview and Legal Basis

While not mandated under Swiss securities or corporate law¹, blackout periods are an important component of insider trading compliance programs for (Swiss) listed companies. Blackout periods are an integral part of companies’ efforts to create an environment in which employees are discouraged from insider trading. However, the specific design of the blackout periods is nuanced, particularly in considering who should be subject to them, which transactions should be restricted and how long the blackout periods should last.

In 2021 (and applicable for the first time for the 2021 business year), SIX Swiss Exchange introduced a requirement that information on general blackout periods must be provided in the corporate governance report of SIX listed companies. These rules require the disclosure of deadlines, addressees, scope and any exceptions to the general blackout periods, among other things (cf. item 10, Annex of the SIX Directive on Corporate Governance (DCG)). Special blackout periods, e.g. due to the postponement of ad hoc disclosure, or quiet periods during which corporate executives generally do not engage with market participants and analysts, do not need to be published.

As with all information in the corporate governance report, the information is retrospective and covers the period prior to the relevant balance sheet date, and issuers are not required to publish planned blackout periods.

b) Trends among Swiss Companies (and Internationally)

A brief analysis of the general blackout periods disclosed by major SIX listed companies in their corporate governance reports for 2021 and 2022 reveals certain interesting facts and trends:

Trend #1: As with other corporate governance disclosures, the “comply or explain principle” applies. Therefore, companies may decide not to release information on their blackout periods but do need to explain this decision (art. 7 DCG). However, within the analyzed group, all companies released information on their blackout periods. In our view, this observation is not surprising as ñ from a practical point of view ñ it would be challenging to offer a credible explanation as to why a company would not disclose its general blackout periods.

Trend #2: Board members and senior executives are subject to blackout periods at virtually all SIX listed companies. According to the disclosed information, most SIX listed companies use quarterly blackout periods which are in most cases applicable to the following groups of individuals: (i) board members, (ii) senior executives and (iii) employees who have access to financial or material non-public information (such as members of the finance department who have access to consolidated accounts of the group or assistants and secretaries to board members and senior executives).

Trend #3: Only a limited number companies subject their lower-ranking employees to blackout periods. In general, lower-ranking employees at smaller listed companies are more likely to be subject to blackout periods compared to their peers at larger companies. However, there is one prominent exception to this rule: Swiss Re, one of the largest SIX listed companies, applies its blackout periods not only to board and senior executive members, but to all Swiss Re employees.

Trend #4: The beginning of blackout periods varies significantly among the analyzed companies, starting from 15 days prior to the last trading day of each quarter (or even one month prior to the end of any half-year or full-year reporting period) to two weeks before the release of relevant (quarterly) results with the majority starting their blackout periods on the first day after any (calendar) quarter (i.e. 1 January, 1 April, 1 July and 1 October). In light of the above, the duration of blackout periods may amount to more than 60 days (with average between roughly 45-55 days for the annual results and roughly 30-40 days for quarterly and half-year results). However, some are less explicit, and refer to the time when half-year or full-year profit figures become internally available. In our view, this more flexible approach is less preferable as it might be difficult to exactly define the date when such data become internally available, and it includes an element of discretion with no safety margin (which otherwise exists if the window closes before or by the end of a (calendar) quarter).

Trend #5: The end of the blackout period is more aligned among the analyzed group: all companies allow trading to recommence between the day of publication and two days after publication, with the majority allowing trading as of the first full trading day after publication. In our view, a “cooling-off period” of one full trading day is sensible: it avoids exposure to insider trading allegations which otherwise might exist if a director or employee trades minutes after market opening on the publication date (i.e. before the market could digest the information), but nevertheless provides enough flexibility for the issuer to e.g. carry out a capital market transaction after market close on the publication date (e.g. through an accelerated book-building transaction).

2) Trading Plans

a) Overview and Pros & Cons

Under U.S. securities laws, so-called “10b5-1” trading plans provide an affirmative defense for directors and employees to trading in securities of the company on the basis of material non-public information. Such trading plans may be structured as a contract, instruction or written plan for purchases, sales and other transactions in relevant securities. Transactions are executed by either (i) a broker carrying out transactions in accordance with the contract, instruction or written plan, or (ii) an independent person (e.g. a broker, trustee or asset manager), who, in accordance with the contract, instruction or written plan, is vested with all discretion as to how, when or whether to effect transactions and who does not possess any material non-public information relating to the company at the time of effecting the transaction. The trading plan can, however, be designed in a variety of ways. It can be as simple as an instruction to a broker to buy a specific number of shares on a specific date at the then-prevailing market price or, if more complex, it may instruct a broker to sell a certain percentage of the executive’s then-current holdings of the share, at a price that does not fall below a certain price floor.

While such plans seem less popular among companies listed in Switzerland², in our view there are compelling reasons why they might become an additional component of well-designed insider trading compliance programs of Swiss companies to further discourage insider trading among directors and employees. These reasons include the following:

– Trading plans provide a defense to insider trading liability: If a transaction in relevant securities is made under a pre-existing trading plan, even if the individual possessed material non-public information relating to the company at the time of the transaction, this can be used as defense against insider trading liability. Under Swiss law, the charge of insider trading requires that knowledge of the relevant insider information has at least been a contributing cause for the transaction³. Typically, there is insufficient causality if a transaction is carried out on the basis of an investment decision that was made prior to gaining knowledge of the applicable insider information.^4,5 As the Swiss regulator FINMA increasingly focuses on insider trading, we may see an increase in the importance of trading plans as a defense to potential insider trading cases.   

– Less complication and more security: Once a trading plan is established, a plan participant is not forced to take time to analyze the circumstances surrounding each of his or her transactions in relevant securities to determine if he or she is in compliance with applicable insider trading laws, nor would such person be concerned that he or she may have erred in their analysis of the circumstances surrounding a particular transaction. Furthermore, the individual could also sell relevant securities at a time when he or she may need liquidity for personal reasons, but typically would have been barred from trading due to, for example, a trading window being “closed” or his or her possession of material non-public information relating to the company. Finally, if companies require e.g. directors or executives to pre-clear transactions, no such pre-clearance would typically be required for transactions executed under an established trading plan.

However, the lack of popularity of such plans among Swiss listed companies might, among other things, be owed to the following drawbacks:

– Once adopted, trading plans might be difficult to be terminated or changed: The U.S. Securities and Exchange Commission has taken the view that early or frequent termination or modification of 10b5-1 trading plans may call into question whether the plan participant adopted the trading plan merely to circumvent insider trading laws and, consequently, whether the 10b5-1 affirmative defense should be available to the person. In our view, similar considerations would apply under Swiss laws. Hence, to avoid any possible suspicion of bad faith, plan participants should be slow to terminate or modify their trading plans once they have been adopted, even though most plans would provide the individual with a unilateral right to terminate or modify the plan.

– Not an absolute defense: Showing that an individual established a trading plan is not a carte blanche against all insider trading allegations. The plan must have been adopted in good faith, not as part of a scheme or plan to evade insider trading laws and it must be demonstrated that the independent broker or third person adhered to the plan when such broker or third person executed the transaction in question.

b) Requirements

To provide an effective defense against a claim of insider trading, trading plans, whether in the form of a contract, plan or written instruction, should cover the following aspects:

– Number of securities: The plan typically specifies the number of securities that will be traded under the plan. However, the number of securities does not necessarily need to be expressed as a fixed number. For example, a plan participant could choose to specify a percentage of shares and/or options owned by such person or the number of securities equal in value to a fixed monetary amount or a percentage of the person’s salary. The number of securities may also accommodate one or a number of transactions under the plan.

– Price: The trading plan often indicates the price of the relevant securities that will be traded under the plan, but the price may be fixed according to any formula. For example, an individual may choose to select a fixed monetary amount, a price floor, the market price or a series of price targets. If the trading plan envisions multiple transactions, the prices may be different for each transaction.

– Date: Usually, the date of any transaction to be effected under the plan is set out in the plan, whether by formula or otherwise. For example, a plan participant may specify:

o a particular date or series of dates, the date by which a certain number of securities are to be sold;

o the date by which a certain monetary amount of proceeds are to be obtained from sales under the plan;

o a date tied to a market event, such as a significant rise in the trading price over the course of a day;

o a date tied to a personal event, such as a home purchase or tax deadline;

o the date on which a certain market indicator reaches a set target;

o the date on which the price of a competitor’s securities rises to a certain level; or

o the date on which the price of an industry benchmark index exceeds a certain goal.

– Discretionary plan: In lieu of delineating the amount of securities, price and date of a transaction, the plan participant may give an independent person (such as a broker) discretion to execute trades as the broker sees fit as part of an investment strategy agreed upon in advance by the person and the broker. A discretionary trading plan can be designed in any way that ensures that the individual does not exercise any subsequent influence over how, when or whether to effect purchases or sales, and that the independent person managing the plan does not possess material non-public information relating to the company at the time of any transaction under the plan.

– Duration: A trading plan can have any term (from the time required to complete one transaction to an unlimited amount of time) but it is generally advisable to avoid using too short a term, which could lead to accusations that the trading plan was put in place as a temporary measure to skirt insider trading rules.

– Modifications: It is important that trading plans may be adopted, modified or terminated only at a time when (i) the individual does not possess any material non-public information relating to the company and (ii) no trading blackout period, as typically defined in internal insider trading policies, is in effect.

Trading plans often allow individuals to execute transactions outside of his or her plan. Of course, any trade made outside of a such trading plan would not have the benefit of an effective defense against insider trading claims.

c) Disclosure of Trading Plans in General and under Management Transaction Reporting Obligations in Particular

The adoption of a trading plan by a plan participant, even if institutionally offered by the company as part of its insider trading compliance program, does not result in the director or employee being deemed to act in concert with the company (i.e. qualify as “purchaser or selling group”) under Swiss securities laws. Hence, the adoption of a trading plan is usually not subject to reporting or disclosure requirements under Swiss disclosure rules, subject to applicable management transactions reporting rules (see below). However, there are other circumstances in which the trading plan may be publicly disclosed on a voluntary basis, including the following:

– Announcement: In appropriate circumstances, the company may choose to publicize the adoption, modification and termination of a trading plan, e.g. by issuing a press release and/or posting an announcement on the company’s website (such announcements are in particular common in the United States);

– Compensation report: As part of the disclosure of shareholdings in the shareholding table included in the company’s compensation report for directors or senior executives, the company may consider disclosing any trading plan adopted by such person in a footnote to that table.

For non-discretionary trading plans of directors or senior executives, the applicable management transactions reporting rules of SIX Swiss Exchange offer two alternative reporting options (as set out in SIX’s commentary to article 56 of the SIX Listing Rules and the SIX Directive on the Disclosure of Management Transactions (DMT)). The transactions carried out under a trading plan may be reported all at once with one single notification. In this case, the notification must include the total value of all transactions contemplated under the plan. If, for example, a sale plan provides for a minimum price for a sale, the total number of securities to be sold must be multiplied by this price and the result reported as the total value of the transaction. If the total value cannot be calculated, it may be stated as CHF 1 pro memoria. In any case, the key points of the trading plan (e.g. duration, ranges of transaction prices, etc.) must be notified. The notification must take place within two trading days of conclusion of the plan. If, after the conclusion of the trading plan, the person subject to the reporting obligation has the possibility of exerting an influence or actually exerts an influence on the subsequent transactions, these transactions must nevertheless be notified individually. If the terms and conditions of a reported trading plan are modified or changed, a new notification with the amended, current conditions must be submitted by the respective individual. In the notification of a plan revocation, the volume of the transactions carried out up to the date of revocation and the fact of the revocation must be notified.

Alternatively, it is also possible to report the individual transactions separately (i.e. no reference to any trading plan). If the transactions are reported separately, the period of two trading days pursuant to art. 56 para. 2 SIX Listing Rules begins with the execution of the transaction (in the case of transactions executed via the stock exchange) or upon entering into the respective commitment (art. 7 DMT).

Sandro Fehlmann (sandro.fehlmann@advestra.ch)
Deirdre Ní Annracháin (deirdre.niannrachain@nkf.ch)

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¹ Swiss law only provides for a blackout period under the safe harbor for buybacks of shares or other equity or equity-linked securities (art. 124 FinMIO). Such blackout periods apply and the issuers cannot announce a buyback program, purchase under the program or issue put options under the program, either: (i) while price-sensitive information is available to the offeror but not yet disclosed under the relevant listing rules; (ii) during ten trading days before publication of the offeror’s financial results; or (iii) if the offeror’s latest consolidated financial statements date back more than nine months. However, exemptions apply e.g. if a buyback program is executed through a third party bank or broker dealer.

² Under Swiss law, only FINMA-supervised entities are required to monitor the transactions of their employees in a manner that is suitable for preventing or detecting the misuse of insider information through the employees’ own transactions (FINMA Circular 13/8, para. 53). This duty applies to directors and management personnel (FINMA Circular 13/8, para. 54). The monitoring measures are to be regulated in an internal policy and FINMA requires that the policy constitutes part of the employment or mandate contract with such person.

³ BSK FinfraG-Wohlers/Pflaum, Art. 154 N54.

⁴ SK-Sethe/Fahrländer, Art. 154 N140.

⁵ However, causality can be affirmed e.g. if an individual already before the knowledge of the insider information agreed on subscription rights and/or options, but exercises such rights or options only after the knowledge of the insider information.