Understanding Rule 10b5-1 Plans

January 12, 2024 Chris Kawashima
We'll cover the basics of what 10b5-1 plans are, who can use them, why they were created, and some features and considerations to think about before enrolling in a 10b5-1 plan.

If you receive equity compensation from your employer, it can be difficult to navigate the complex trading rules and restrictions that revolve around trading company stock when you're considered an insider. To help employees navigate these complexities and to provide an affirmative defense against insider trading allegations by setting up company stock trades in advance, Rule 10b5-1 plans were created.

Because Rule 10b5-1 plans, also known as 10b5-1 plans, establish a predetermined process for selling company stock, they can provide participants with a consistent investing process to help them stay diversified and track toward their financial goals.

We'll cover the basics of 10b5-1 plans by addressing the following:

What are 10b5-1 plans and how do they work?

A 10b5-1 plan is a written agreement between a corporate insider and a broker (such as Schwab) that establishes predetermined trading instructions for company stock. Traditionally, officers, directors, and individuals who own more than 10% of a company's stock are considered an insider; however, some companies determine who is (and isn't) an insider based on their own company criteria that may be broader.

10b5-1 plans are established during an open trading window before the insider holds any material nonpublic information (MNPI), and the company stock trades are triggered once the plan is in place and the "cooling off" period (a period where there are no purchases or sales) has expired.

The plan lays out trading specifics for company stock like the number of company shares to be sold or purchased, the time periods during which shares will be sold or purchased, and the prices at which the shares will be sold or purchased.

Your company directs you to a broker who helps you set up a 10b5-1 plan, and the broker executes it on your behalf according to the terms of the plan. When your 10b5-1 plan is created, your broker works with you and your company's general counsel/compliance officer to establish the proper preclearance, reporting, and 10b5-1 administration protocols. Additionally, your broker and/or company's general counsel/compliance officer can help you navigate the SEC Regulations, Corporate Client requirements, broker requirements, and industry best practices. The plan that you and your broker ultimately create will include criteria like order type, share quantity, and sell date, among other details that are specific to your plan.

Why 10b5-1 plans were created

10b5-1 plans were created to help employees who hold company stock navigate the complex trading rules and restrictions around trading company stock to create an affirmative defense against allegations of insider trading violations, and to help participants pursue their short- and long-term investing goals.

In some instances, it's difficult for the SEC to determine if insider trading violations occurred, so properly executed 10b5-1 plans may give better defense for both the stock-holding employees and the companies when it comes to trading company stock, ensuring that specific trading instructions are established and followed to prevent the occurrence or potential accusations of insider trading. 10b5-1 plans promote transparency and a level playing field which is important so insiders don't have a trading advantage over outside investors due to MNPI they may receive while employed.

A substantial feature of a 10b5-1 plan is it establishes a set trading plan for participants to sell and/or buy their company stock which can aid the participant in their short and long-term investing goals. Depending on what an investor's goals are for their company stock, 10b5-1 plans can be crafted in way that helps them stay on track to pursue their financial goals.

Who can use 10b5-1 plans

10b5-1 plans are used by insiders that receive equity compensation. Insiders can include company officers, directors, and individuals who own more than 10% of the company's shares. If you qualify as an insider, your company will alert you so you can work with a broker to establish a 10b5-1 plan for your needs.

Companies may offer 10b5-1-plans to employees that are not traditionally considered insiders. Some employees are aware of MNPI that may make them subject to restrictive blackout windows for trading. To help these employees create transparency and to give them protection against allegations of insider trading, companies may offer these employees the ability to use a 10b5-1 plan.

Features and considerations for 10b5-1 plans

If you're enrolling in a 10b5-1 plan, here are some plan features for you to think about:

  • The properly created 10b5-1 plan creates an affirmative defense for the participant from insider trading allegations.
  • Clear trading instructions are established on the front-end which provide better transparency and a systematic trading strategy for insiders and certain employees who are allowed to use a 10b5-1 plan.
  • Plans allow the participants to maintain their long-term financial plan and can potentially provide steady cash flow.
  • Employees can diversify their interest in company stock.
  • The process is fairly streamlined so employees don't have to navigate complex trading rules and restrictions regarding their company stock.
  • There's potentially less negative publicity around companies and insiders with a properly developed 10b5-1 trading plan.

Other considerations for you to think about before you enroll in a 10b5-1 plan include:

  • Cooling-off periods (ranging from a minimum of 30 days up to as much as 90 days, depending on your role with the company and internal policies) are required when the plan is established before trading company stock can begin.
  • If an employee terminates the 10b5-1 plan, there may be a 30-day trading lock-up period where they aren't allowed to sell company stock. Lock-up periods, also know as back end cooling-off periods, are specific to each company and their internal policies so it's important for employees to know their company stock trading policies.
  • Be firm with your commitment to a 10b5-1 plan. If a plan is terminated, suspended, or modified before it's fully implemented, suspicions can arise about whether the plan was established in good faith.
  • If you're an insider, work with your broker and general counsel/compliance officer to understand your company's insider-trading policy along with any company obligations to hold stock.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.