Knowledge is power. It can move public markets and cause individual stock prices to rise and fall. Because equal access to information is such an important underpinning to a fair marketplace, various government agencies, such as the U.S. Securities and Exchange Commission (SEC), have established rules governing its dissemination. One of those rules — establishing a close period — aims to maintain the integrity of the public exchanges by restricting both insider trading and discussing a company’s financial results with outsiders before the numbers are released to the public at large. Public companies have a duty to manage and enforce close periods. The following discussion dives more deeply into the details and provides best practices to help overcome the challenges.

As a point of clarification, a close period should not be confused with the financial close process, which includes all of the financial and accounting processes that regularly occur in a business leading up to, and including, closing the books on the preceding month, quarter or year.

What Is the Close Period?

The close period is the time between when a company closes the books at the end of an accounting cycle and when those results are formally disseminated to the public. During the close period, company insiders are privy to nonpublic, or “inside,” information that could affect the business’s future stock price when the information is released. This access to information gives insiders an unfair advantage over the general public. For example, if a business loses its largest customer to a competitor, its share price may decline when that information becomes public knowledge. Company employees who are aware of the situation and sell their shares in advance of the information’s release to the general public would be subject to penalties, fines and even jail time because they violated insider trading rules.

This is just one scenario that makes clear why company insiders are forbidden to trade their company’s stock or share financial results with others during the close period. Public companies have a duty to manage a fair and balanced close period, which ends when financial information is shared with the public, such as filing the annual Form 10-K with the SEC.

Key Takeaways

  • The close period is the time between when a company finalizes its financial results and when it releases those results to the public.
  • During this time frame, key management personnel who have access to material nonpublic information are restricted from trading the company’s stock or tipping off others.
  • Public companies must administer and monitor their own close periods, a duty that comes with significant challenges.

Close Period Explained

A close period is the time during which designated insiders have access to material nonpublic information. Unpacking those related terms of art is important to understand the close period.

  • A designated insider

    is a company employee who, by virtue of their role, has knowledge about the business that could affect its share price. Executives, directors, accounting and finance staff and other managers are typically considered designated insiders.

  • Material nonpublic information

    is a broad term for any type of data that could affect the market price of a company’s stock — whether an increase or decrease in share price — or that a reasonable investor would consider important when deciding to buy, hold or sell stock. Common examples of material nonpublic information are profits or losses for the period, signing or losing a large customer and a potential merger or acquisition.

It is customary for a close period to be initiated 30 days prior to releasing quarterly information and 60 days prior to annual results. Public release can take many forms, such as when a company files an annual 10-K or quarterly 10-Q form with the SEC or when sending out press releases about its financial results.

What’s the Difference Between Close Period and Close Process?

A close period and a close process are related, but not interchangeable, concepts. The close process comprises all of the accounting activities that typically culminate in the creation of a company’s financial statements and subsequent reset of the books for the next period, be it a month, quarter or year.

It’s common for a public company to take some time after its results are settled in the close process to do some post-closing work, such as account reconciliations and audits, before sharing those results with the public. A close period, also known as a blackout period, accounts for this time lag, which typically lasts for 30 to 60 days. During this time, internal personnel have knowledge of sensitive information that the public doesn’t. Any trading in the company’s stock or tipping off of others could be considered insider trading, which is illegal and subject to fines, penalties and possibly jail time.

A classic example of this type of insider trading is a 2019 case involving an executive at Apple. Over a period of five years, this senior corporate director bought and sold shares of Apple stock in advance of quarterly releases of iPhone sales. When he knew sales for the quarter had been sluggish, he sold his stock before share prices declined due to market reaction; when he knew sales had been better than expected he bought more shares before the share prices increased on the public release of good news. It’s estimated that this executive avoided $377,000 in losses and made $220,000 in gains by violating his company’s close period. He was fired and faces up to 120 years in prison and $30 million in fines. His sentencing is scheduled for November 2022.

Why Companies Go Silent During a Close Period

Another practice similar to a close period is a quiet period, though this is elected by a company rather than required by an SEC rule. During a quiet period, a company’s press relations department, officers and agents are barred from discussing or promoting any news about the company, such as a new product launch or organizational restructuring. This silence is an intense approach to achieving the same goal as a close period — to maintain the integrity and fairness of information that affects investors’ decisions. Companies go silent as a way to avoid any speculation of impropriety or misinterpretation of what might constitute material nonpublic information.

A specific type of quiet period occurs prior to a company’s initial public offering (IPO), beginning with the company registration and ending a short time after the new shares begin trading. In this instance, the SEC requires an IPO quiet period and enforces violations when they are deemed to have caused an unfair advantage to select parties.

Ironically, going silent can signal to savvy market watchers and a company’s business partners that “something is up.”

Close Period Best Practices

It’s in a public company’s best interests to ensure that during a close period nonpublic information does not leak out and create the appearance of impropriety, as well as to minimize the potential for insider trading. Close periods preceding the formal release of periodic financial results are the most common, though a company may establish special blackout periods at any time. Best practices for managing close periods include:

  • Appointing an insider trading compliance officer.

    This person is charged with overseeing company policies and procedures related to the fair disclosure of information and insider trading compliance policies. The insider trading compliance officer is typically a senior executive, such as general counsel.

  • Authorizing communication channels.

    Large companies tend to have a corporate communications or investor relations team who controls the flow of information out of a company according to company policies. For a business without a formal department, it’s important to authorize specific employees to speak on its behalf and establish procedures that achieve broad dissemination of information immediately upon release. Typical communication channels include written, verbal and electronic forms, such as a press release, conference call and online video.

  • Notifying designated individuals.

    While all employees are subject to close period policies, certain roles are privy to more material nonpublic information than others. These individuals should be designated and notified that they are considered as such.

  • Establishing close period guidelines.

    A company should establish clear guidelines on what it expects from its employees during the close period. Most times these guidelines are restrictions prohibiting trading company stock and external communication, like posting on social media or talking with press or investment firms or investors. It’s also a best practice to identify and define the types of material information that may be subject to close period restrictions unique to the company. Examples include financial results, projected financial results, financial liquidity problems, dividend payments and new equity or debt offerings.

  • Sending close period reminders.

    It’s helpful to send reminders to designated employees with specific dates surrounding each close period. Include the beginning and ending dates of the close period, as well as the anticipated earnings release dates. Send updates in case of changes.

  • Preclearing employee trades.

    Set up a process to review all company stock trading by designated employees. Preclearing allowable trades that can occur outside of close periods is often done by compliance, human resources or legal officers who are tasked with ensuring adherence to close periods and blackout periods.

Close Period Challenges

Public companies often encounter significant challenges related to close periods because regulations are typically not as clearly defined as they are for IPO quiet periods. Responsibility for establishing and monitoring close periods rests with the company itself. Some common close period challenges include:

  • Determining the close period schedule.

    When a close period begins is well-established. However, there are no strict rules about the exact number of days. Some companies use 30 days while others might use four weeks, and some might count calendar days while others use business days.

  • Choosing and conveying what constitutes material nonpublic information.

    Determining what constitutes “material information” is difficult because it can be almost anything. In fact, the litmus test to determine whether leaked information during a close period is “material” is to look at what happened as a result after the fact. Further, it can be difficult to convey such an amorphous description to employees.

  • Family trades.

    Prohibited trading during a close period extends to close family and friends of designated individuals. However, it’s difficult for a company to actively enforce this restriction.

  • Tipping off others.

    Insider trading restrictions include tipping off others during a close period. Tipping can be overt, such as an interview with a journalist, or unintentional, like a casual slip of the tongue at the water cooler or soccer field. As a result, tipping is usually tricky to trace.

  • Balancing company culture.

    If the company’s culture is one of openness, the number of employees who have to stay silent during close periods may expand. This also increases the risk of leaks and the burden on the company for enforcement. Companies that keep sensitive information in the hands of a few have less to manage, though it may run counter to company philosophy.

Release Financial Results to the Public Faster With NetSuite

Public companies are responsible for administering their own close periods, a duty that carries significant burdens. The longer the time between when internal management has access to sensitive information and when that information is released to the public, the more challenging the administration of close periods can become. In contrast, the faster a company can close its books and perform all the post-closing procedures, the more quickly it can release its results to the public, potentially shortening the close period. Modern cloud-based business accounting software, such as NetSuite Financial Management, can reduce the amount of time it takes to complete the financial close cycle, culminating in filing public financial statements faster.

The close period is the time after key management personnel are in possession of a public company’s financial results and before those results are made public. It’s a critical device for reducing insider stock trading and tipping others off, helping to keep the public exchanges fairer for all investors. Companies are responsible for managing their own close period processes and several best practices can help overcome the significant challenges they may face.

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Close Period FAQs

Why do companies stop making statements during a close period?

Companies stop making statements during a close period as a way to avoid any speculation of impropriety or misinterpretation of what might constitute material nonpublic information. This is a customary practice established by a company, but it’s not an SEC rule.

How long does a close period take?

The close period is the time between when a company finalizes its financial results and then releases those results to the public. It is customary for a close period to be initiated 30 days prior to releasing quarterly information and 60 days prior to annual results. Public release can take many forms, such as filing a 10-K or 10-Q form with the SEC or sending press releases.

How does close period relate to GAAP?

A close period, or blackout period, exists because of the time lag between when the accounting close process is completed and when the financial results are shared with the public. The financial results of public companies must be prepared in accordance with Generally Accepted Accounting Principles (GAAP).

What is insider trading?

The act of buying or selling stock based on material nonpublic information is called insider trading. Tipping off others is another form of insider trading and extends the definition of an “insider” to the person acting on the tip. Insider trading is illegal and punishable by fines and jail time.

How long is a close period?

In the U.S., it is customary for a close period to be initiated 30 days prior to releasing quarterly information and 60 days prior to annual results. Public release can take many forms, such as filing a 10-K or 10-Q form with the SEC or sending press releases.

What is a closed period MAR?

The Market Abuse Regulation (MAR) is mostly applicable to European Union markets but can have global reach because it also includes nonequity financial instruments traded on an organized trading facility (OTF), such as trade bonds, derivatives and structured finance products. A closed period under MAR is 30 calendar days prior to the public announcement of an interim or year-end report.

What is a period in the stock market?

A period in the stock market has several meanings. It can refer to the session times of trading on the New York Stock Exchange, which is 9:30 a.m. to 4 p.m. Eastern Time. It can also refer to a time frame for measuring the financial results of a company, such as a fiscal quarter or year. Another definition of period related to trading is any standardized length of time for measuring an asset.