What Is a Blackout Period?
A blackout period in financial markets is a period of time when certain people—either executives, employees, or both—are prohibited from buying or selling shares in their company or making changes to their pension plan investments. With company stock, a blackout period usually comes before earnings announcements. For pensions, it comes at a time when major changes are being made.
- 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.
What Are the Rules on Stock Trades?
The Securities and Exchange Commission (SEC) doesn't actually prohibit executives from buying or selling stock ahead of earnings announcements, so long as the company's legally required disclosures are up to date.
However, most listed companies do prohibit directors and specific employees who might have important insider information from trading in the weeks ahead of earnings releases. 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. This could include changes in management personnel, a corporate merger or acquisitions, implementation of alternative investments, or even a change in record-keepers.
Under the Sarbanes-Oxley Act of 2002, it is illegal for any director or executive officer of an issuer of any equity security (unless the security is exempt) from buying, selling or otherwise acquiring or transferring securities during a pension plan blackout period, if they acquired the security in connection with their employment. That includes securities not held within the pension plan itself.
These rules are also intended to prevent insider trading that could otherwise occur during the period when changes are being made.
Stock Analysts and Blackout Periods
Stock analysts are also subject to blackout periods around the launch of an initial public offering. Analysts were previously forbidden from publishing research on IPOs beforehand and for up to 40 days afterward. But those rules were loosened in 2015. Now only analysts with firms that were involved as an underwriter or dealer are prohibited from publishing research or making public appearances in relation to an IPO, and for only 10 days after the offering is completed.