A lockout period is a time when access to something is denied or an action is prohibited. In finance, it marks a time when investors cannot alter their investment plans. Businesses schedule blackout periods to prevent insider trading before sensitive financial information is publicly disclosed. Insider trading is illegal, and exchange regulators have rules to prevent it. The US has rules in place to prohibit insider trading during blackout periods. There are also blackout periods in the US for people receiving Social Security benefits.
In general, a lockout period is any period in which access to something is denied or an action is prohibited. With regard to finances, for example, a lock-up period marks a time when investors cannot alter their investment plans, such as retirement plans or stocks in trading companies. These periods typically occur when there is a change within a company that affects the way investment plans are managed, or before sensitive financial information is publicly disclosed. In the United States (US), for example, the US Securities and Exchange Commission (SEC) has rules in place to prohibit insider trading during blackout periods. Outside of finance, a blackout period can also refer to a period of time in which a political party is not allowed to run ads.
Businesses often schedule blackout periods on a regular basis, such as quarterly or semi-annually; These periods can last from three to 60 days. Scheduling is typically done to give employees fair notice of upcoming outages and sometimes to coincide with the release of financial gain information. Before earnings reports are released, company members often have access to information that is not accessible to employees, which can give certain people an unfair advantage with stocks or investment packages. Therefore, blackout periods are scheduled in conjunction with information release periods to help prevent insider trading.
As a general rule, insider trading is illegal in the investment world. Exchange regulators around the world have rules and committees to help prevent insider trading. For example, the Securities and Exchange Surveillance Commission is the regulatory arm of the Japan Financial Services Agency (FSA) and is in charge of investigating misconduct. In the US, the 2002 Sarbanes-Oxley Act enacted new rules in response to the Enron scandal, in which Enron filed for bankruptcy after years of corporate fraud perpetrated by its top executives. The law stipulates that a company must give employees at least 30 days’ notice before a blackout period, or offer an explanation if notice is delayed. Under the law, if a business does not comply with these rules, it can be fined $100 per participant for each day of a blackout period. Although the regulations don’t exactly address what happened inside Enron, the spirit of the legislation is to protect employees from corporate investment fraud.
There are also blackout periods in the US for people receiving Social Security benefits. These are periods when no benefits are received. These periods can last up to several years. For example, a surviving spouse with children receiving Social Security survivor benefits may only be eligible for benefits until the youngest child turns 16. Thereafter, a lock-in period may occur until age 60, when benefits resume.
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