Employer stock

[Guest ENT]

Can anyone refer me to some guidance or best practices regarding the limitations on frequency for trading employer stock in a plan with participant directed investments? The 404© regulations require (for purposes of 404© protection) that participants/beneficiaries be permitted to give investment instructions with a "frequency which is appropriate in light of the investment alternative's reasonably expected market volatility." What is appropriate with respect to an employer stock fund, which is generally considerably more volatile than a mutual fund? One month? Two months too long?

I am aware of the regulations under under the statutory diversification rules of Code 401(a)(35), but have not considered how relevant they are to my question.

Any thoughts are welcome!

[ESOP Guy]

This isn’t a 100% direct response to your question, but I believe the following warning is relevant. Sorry if this is a little long, but the best way I know to explain the concept is to tell the story.

I am assuming this is a traded stock as it wouldn’t seem likely one is going to get an appraisal of a closely held stock every few months.

However, if this was a widely traded stock I don’t see the issue of a daily limit.

I did once work with a client that had a publically traded stock on one of the smaller NASDAQ type of listings. So while traded it was a very thinly traded stock. A buy/sell of 5000+ shares could move the market for a day or two.

One of the employees in the KSOP slowly moved all his money into the stock fund. The fund would buy or sell for internal accounting purposes at the closing price of the day the request was made.

After this employee had accumulated a large balance in the stock found he started a scam. This employee would sell 100% of the stock in his account on day 1. His stock was sold from his account and put into cash at that day’s closing price. His account was so large that the stock fund had to actually sell shares to get the cash needed to have enough cash in the cash fund. In fact it would be a large enough of a sale it would move the market down on day 2. The employee would put in a request to buy stock on day 2. His account was credited with the stock purchase with the ending day 2 price. He got the price his own sale had just suppressed. The next day however, the stock fund would have to buy stock to have as much stock as the sum of everyone’s accounts said they had. So on day 3 the fund would buy stock and the buy was often large enough to move the market up. He typically wasn’t so bold as to sell on day 3.

The employee would wait a while and start the process over. The general effect of this was he was stealing his fellow employees’ money.

The employee got caught, fired and they even got him to disgorge his ill gotten gains. But if this is a thinly traded stock think through people trying to game the price if you allow a buy/sell daily.

[Guest ENT]

Thanks ESOP Guy. That's an interesting situation. We are interested in restricting activity over a longer period, such as 30 or even 60 days. Has anyone implemented such a period?

[Belgarath]

Since I don't know much about these types of plans, I'm just curious. Was this employee either a fiduciary, or someone whose position at the company placed him in a position to have more information about the plan workings than other employees? If not, ignoring the ETHICS of the situation, was there anything illegal about his activity?