Blackout Period

A blackout period is a defined interval during which a person's normal ability to transact is suspended. The phrase carries three distinct meanings in personal finance, and the confusion between them is not the reader's fault: two are defined in federal regulations, under the same name, for different purposes, and the third is an employer's internal policy that borrowed the word.

The first is a retirement plan blackout, defined in Department of Labor regulations. The second is a securities-law blackout, defined by the Securities and Exchange Commission, which bars a public company's directors and executive officers from trading company stock while a retirement plan freeze meeting the Commission's own thresholds is running. The third is the company's own trading window, an internal rule that closes around earnings announcements and other sensitive periods. Only the first two are law, and each of the two governs a different person doing a different thing.

Sense one: the retirement plan blackout. Under 29 CFR 2520.101-3(d)(1)(i), a blackout period is "any period for which any ability of participants or beneficiaries under the plan ... to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted, if such suspension, limitation, or restriction is for any period of more than three consecutive business days". The usual causes are administrative: changing recordkeepers, changing the investment menu, merging a plan after an acquisition, or converting to a new payroll system.

The protection attached to it is the notice. The plan administrator must give affected participants written notice "at least 30 days, but not more than 60 days, in advance of the last date on which such participants and beneficiaries could exercise the affected rights", and the notice must state the reasons, what rights are suspended, and the expected start and end. There are three narrow exceptions to the 30-day requirement, covering a case where delaying the blackout would breach the plan fiduciary's duties, one where advance notice was impossible because of unforeseeable events or circumstances beyond the administrator's control, and one where the suspension applies only to people joining or leaving the plan through a merger, acquisition or divestiture. In the first two the fiduciary must make a written, signed and dated determination, and notice must still be given as soon as reasonably possible.

The definition also has four exclusions, and the first one is the key to this whole page. Paragraph (d)(1)(ii) says the term does not include a suspension "Which occurs by reason of the application of the securities laws"; nor a regularly scheduled restriction already disclosed in the plan documents; nor one arising from a qualified domestic relations order or a pending determination about one; nor one caused by an act or failure to act by an individual participant or by a claim from someone unconnected to the plan. So the Department of Labor's blackout is by definition not the corporate trading window. They are separate things that share a word.

Sense two: the securities-law blackout. The Sarbanes-Oxley Act made it unlawful for a public company's directors and executive officers to trade company stock during a pension blackout, and Regulation BTR implements it. The SEC's own quantified definition, at 17 CFR 245.100(b)(1), is a period of more than three consecutive business days during which the ability to buy, sell or otherwise acquire or transfer an interest in the issuer's equity securities held in an individual account plan is suspended for "not fewer than 50% of the participants or beneficiaries located in the United States", counted across all of the issuer's individual account plans that let participants hold its equity. Then 17 CFR 245.101(a) makes it "unlawful under section 306(a)(1) of the Sarbanes-Oxley Act of 2002" for a director or executive officer to trade issuer equity that they acquired in connection with that service, during such a period.

Two things make this narrower than it first sounds. It reaches only directors and executive officers, not employees generally. And it reaches only equity acquired in connection with their service, which is why the regulation contains a specific-identification procedure for demonstrating that particular shares came from somewhere else. The section also carries a list of exemptions, covering among other things dividend reinvestment on broad-based terms, ordinary grants and awards made under a plan with pre-set amounts or a formula, bona fide gifts, transfers under a domestic relations order, and transactions occurring by operation of law in a merger.

The bridge between the two senses is a preset trading plan. Under 17 CFR 245.101(c)(2), a purchase or sale under a contract, instruction or written plan meeting the affirmative defense conditions of Rule 10b5-1(c) is exempt from the prohibition, "provided that the director or executive officer did not enter into or modify the contract, instruction or written plan during the blackout period ... or while aware of the actual or approximate beginning or ending dates of that blackout period". The plan has to have been set up before the person knew the blackout was coming, which is the same principle the trading rules rest on everywhere else.

Sense three: the company's own trading window. Most public companies close trading to employees for a stretch around each quarter's results and at other sensitive moments, reopening it for a defined window afterwards. This is not defined anywhere in federal law and it is not the same as either of the two above. It is the employer's own policy, written to keep employees away from trading at moments when they are most likely to hold information the market does not have. The closest thing to an official hook is Item 408(b) of Regulation S-K, which requires a public company to say whether it has adopted insider trading policies and procedures and, if it has, to file them as an exhibit, so the policy itself is generally a public document. Being inside the window does not make a trade legal, and being outside it does not make one illegal: the underlying law about trading on material nonpublic information applies either way, and belongs to its own entry.

1. Something administrative triggers it. The plan changes recordkeepers, merges, or overhauls its investment menu, and the accounts have to be frozen while balances are reconciled.

2. The three-business-day test decides whether it is a blackout at all. A suspension lasting three consecutive business days or fewer is outside the definition and carries no notice requirement.

3. Notice goes out on a fixed window. At least 30 days and not more than 60 days before the last date participants could use the affected rights.

4. If the employer is a public company, a second rule may switch on. Where the freeze meets the SEC's thresholds, directors and executive officers are barred from trading company stock acquired through their service for the duration, unless an exemption applies.

A hypothetical example of the timing and the exposure. Marcus's employer is moving its 401(k) to a new recordkeeper. Exchanges, loans and distributions will be suspended for roughly three weeks, beginning after the close of business on September 12, which is far more than three consecutive business days, so it is a blackout period and notice is required.

The last date he could make an exchange is therefore September 12, and that is the date the notice window is measured against. Notice must reach him no later than August 13, which is 30 days before, and no earlier than July 14, which is 60 days before. A notice arriving on September 1 would be late, and the plan would have to explain in the notice itself why 30 days could not be given.

What is actually frozen is the part that matters to him. His account holds $180,000, of which 40%, or $72,000, sits in employer stock he had been meaning to trim. For those three weeks he cannot trim it, cannot rebalance around it, and cannot take a loan against the account. The notice period exists precisely so that a participant in that position can act before the freeze rather than discover it. All figures are illustrative.

Pros (what the rules give a participant)

• A retirement plan freeze longer than three business days cannot be sprung without written warning, and the warning has to arrive in a defined window rather than at the last minute.
• The notice must state what is suspended and how long it is expected to last, which is enough to act on beforehand.
• The securities-law version stops a company's directors and executive officers trading its stock at a moment when ordinary employees cannot, which is the fairness problem it was written to fix.
• A company's own trading policy, for a public company, is generally filed and therefore readable rather than a matter of hearsay.

Cons (what to watch)

• No amount of notice makes the freeze itself avoidable; the only remedy is acting before it starts.
• A market move during a blackout falls entirely on the participant, who has no ability to respond, and employer-stock concentration is exactly the position most exposed to that.
• The 30-day notice has exceptions, so a genuinely unforeseeable freeze can arrive with very little warning.
• Three windows share one word, so an employee told they are "in a blackout" should establish which one before drawing any conclusion about what they may or may not do.