What Is an Earnings Blackout Window?

Earnings blackout windows, otherwise known as blackout periods, are periods of time when company employees are not allowed to engage in trading. These blackout periods occur because of unique access to information within a company, which could lead to intentional or accidental illegal insider trading.

It’s important to understand what blackout periods are, who they affect, and how they work to protect your company from engaging in any sort of insider trading. Blackout periods are an important part of protecting a company from the fines and jail time that could result in the case of illegal trading. Keep reading to learn more about blackout periods and what they mean for companies.

What Are Blackout Periods?

In the context of finance, earnings blackout windows are periods of time when company insiders are not allowed to trade company stock. Blackout periods are employed in an attempt to avoid illegal insider trading.

Insider trading is when individuals within a company trade company stock with non-public information that could give them an unfair advantage, and it is illegal. Thus, blackouts are imposed at times when company employees or insiders may have access to information that’s not yet available to the public to prevent insider trading and the consequences that come with it.

Blackout periods can also apply to pensions, during which companies prohibit pension holders from changing their pension plan investment. This happens when the plan is in the process of being changed in major ways.

There are no government regulations or laws that require regular blackout periods. Blackout periods are typically an internal precaution within a company.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act mandates that people who are impacted by blackouts must be given at least a 30-day notice, alerting them that the blackout is happening. It also states that these notices must include information about why the blackout is happening, the duration of the blackout, and other information to ensure that everyone who must comply with it is aware that it’s happening.

This act also states that insider trading is not allowed during pension blackout periods.

What Kind of Internal Information Could Result in Insider Trading?

Material inside information is defined as internal, exclusive information that would impact the company stock value or provide an unfair advantage in how company employees engage in trading. Some examples of this kind of information include knowledge that predicted earnings are changing or that a change in management is happening. Changes in customers, partners, or suppliers could also be considered inside information.

The bottom line is that any company employees or executives who have inside information have the potential to engage in insider trading. This is why companies will implement a blackout period when insider information exists, to avoid any kind of illegal trading.

How Blackout Periods Work

Blackout periods usually occur before earnings statements are released, when company employees or executives have access to insider information. These time periods aim to prevent illegal insider trading that could result from company employees knowing more information than is available to the public. 

It’s important to understand that there are large fines and other penalties for businesses in the event of illegal insider trading. Whether purposeful or accidental, illegal insider trading can cost businesses hefty fines and can result in jail time for those involved.

These earnings blackout windows often happen quarterly, before financial statements are released. They can also be triggered by specific events or be connected with pensions.

Who Is Usually Impacted by Blackout Periods?

Blackout periods typically apply to company executives and employees, or anyone who has access to insider information that could give them an unfair advantage in trading stock. In the case of pension blackouts, all participants in the pension would be included in the blackout period.

Overall, anyone within the company who has the power to buy and sell shares and who has access to insider information is subject to blackout periods. If someone has internal information that could impact the way they trade stock or give them an unfair advantage, they have the potential to engage in illegal insider trading and will have to participate in the blackout window.

Different Kinds of Blackout Periods

There are a couple of different types of blackout periods, which are triggered by different factors and have different timelines. Sometimes, blackout periods are routine actions at certain times during earning periods, while other blackouts are triggered by events. There are also blackout periods associated with pensions.

Quarterly Blackouts

Quarterly blackouts happen four times a year when financial statements are being put together but are not released. This type of blackout period occurs when a quarter ends and usually lasts until earnings announcements are made. In this case, executives or other employees within a company may know more information than the public while they’re in the process of putting together announcements. 

Once the earnings statements are released and the public has had 1-2 days to review the information, it’s usually safe for a blackout period to end and for the company to start trading again.

Event-Specific Blackouts

Event-specific blackouts are less common, but they happen. Event-specific blackouts happen at the company’s discretion when they feel it’s needed. Oftentimes this type of blackout is triggered by some sort of event or announcement that the company is aware of, but which isn’t public information yet.

In these cases, only people who have knowledge of the event are notified of the blackout, as they are the only ones who could engage in insider trading because of access to nonpublic information.

Pension Blackouts

Pension blackouts specifically apply to pensions, preventing pension holders from making adjustments to their 401(k) while companies are making changes to the plan, like when a merger is happening or when a company is in the process of acquisition negotiations.

When Are Companies Allowed to Trade?

If company employees and executives are prevented from trading during earnings blackout windows, when are they able to trade stock legally? Any time that a company is not under a blackout period, it’s safe for companies to engage in trading. For instance, in the case of a quarterly blackout period, the blackout will likely last from the end of the earnings period until the earnings statements from that period are released to the public for review.

Because blackouts aren’t mandated by law, there is no set time duration for how long a blackout can go. Employees must be notified if a blackout will last more than three days, but blackouts could last much longer. The important thing to know is that blackout periods will end as soon as there is no insider information that could lead to the company being a part of insider trading. 

The whole purpose of a blackout window is to prevent this kind of illegal trading, so once there is no longer potential for that to happen, company employees and executives can go back to trading stock.

How Blackout Periods Protect Against Insider Trading

As an employee or executive, knowing something about your company that the public doesn’t is an incredibly unfair advantage to them within the stock market. Blackout windows ensure employees who could engage in insider trading, even accidentally, aren’t allowed to buy or sell company stock. If people with insider information aren’t able to trade at all, then there is no risk of illegal insider trading.

As mentioned, there are major consequences for a business that engages in illegal insider trading. Blackout periods are an essential internal protocol that protects companies from legal troubles.

Blackout periods also allow businesses to develop through events like mergers and changes in company partners. In the end, they are the most effective tool for companies to ensure that all team member trading is legal.

Invest Today

Overall, blackout periods are important parts of company trading. It’s important to know how they work, when they should be happening, and why they exist, in order to know when it’s safe to trade without putting a company at risk. It’s best to impose blackout windows when there is any risk of insider trading, as it will prevent this illegal form of trading and protect your company from its consequences.

Looking to build your investment portfolio or continue growing your wealth? The experts at Alpha Wealth Funds can guide you as you consider your options and determine which path you want to take to achieve your financial goals for the future. Reach out today to learn more about what we can do for you.

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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