SEC Rule 10b5-1 is a provision under the Securities Exchange Act of 1934. The rule allows company insiders to prearrange trades of company stock without running afoul of insider trading laws, so long as certain conditions are met. It provides an affirmative defense against accusations of insider trading if trades are made under a properly established 10b5-1 trading plan.
In addition, directors, officers, and certain large shareholders may benefit from reporting transactions made under a 10b5-1 plan on SEC Form 4 or Form 5, which are Section 16 filings. These forms publicly disclose insider trades and, since the SEC’s 2022 amendments, now include a checkbox to indicate whether a transaction was made pursuant to a 10b5-1 plan.
Before examining how these plans are put together, let’s clarify a couple of preconditions.
First, individuals who are more likely to have access to material nonpublic information (MNPI) — such as directors, company executives, and some employees — often rely on 10b5-1 trading plans when selling company stock. While not mandatory, these plans provide a safeguard for insiders who otherwise risk accusations of trading on privileged information.
Second, a trading plan must be created at a time when these individuals do not possess MNPI. In other words, insiders cannot leverage company secrets that have not yet been made public to set up or modify their trades. Doing so would constitute insider trading.
Third, Rule 10b5-1 applies only to publicly traded companies, including business development companies.
Rule 10b5-1 was introduced in 2000 as part of the SEC’s broader commitment to transparent markets. It clarifies the scope of insider trading under Rule 10b-5, the Exchange Act’s general anti-fraud provision. By requiring that trades be scheduled in advance — at a time when insiders are “clean” of MNPI — the rule helps assure investors that no insider advantage is at play. Together with the disclosure obligations of Forms 4 and 5, this framework was designed to give the public confidence in the fairness of insider stock transactions.
How Do 10b5-1 Plans Work?
A 10b5-1 plan includes the following elements:
- Duration: How long the plan is in effect for; a common practice is 6 to 18 months
- Amounts: The number of shares to be offered
- Prices: Which price will be used for shares: market or limit price
- Responsible person: Commonly, brokerage firms will assign someone who does not act in an advisor role to the company insider to place 10b5-1 trades, to avoid claims of insider influence
While shares may wind up being sold at a time the insider has nonpublic information, because the plan was created at an earlier time, those transactions are permissible. Once the plan is set up, it lasts for the agreed-upon duration.
For companies, the final rule means they must spend more time preparing and filing disclosures with the SEC to faithfully comply with disclosure rules. Companies that are found to be in noncompliance with SEC regulations face fines and penalties if they are caught.
For investors, the new rule adds a measure of protection. Just as insiders cannot profit from insider information, investors will not be taken advantage of by insiders acting unethically.
2023 Amendments to Rule 10b5-1
On February 27, 2023, the SEC adopted a new disclosure requirement that impacts Rule 10b5. The new rule changes include the following:
- For officers and directors, required cooling-off periods are in place of 90 to 120 days between the creating of a Rule 10b5-1 plan and the start of trading
- Certifications from company officers and directors that they were not in possession of MNPI when the plan was created
- Ban on overlapping plans, such as having multiple 10b5-1 trading plans in existence at the same time
- Limitation on using the insider trading policy for single trades more frequently than once per 12-month period
- Mandatory SEC disclosure following Regulation S-K, including Item 408(a) and Item 402(x) disclosures around insider trading and executive compensation
- Quarterly disclosures of Rule 10b5 plan creation, modification, or conclusion
- Inline XBRL tags required in SEC filings
The SEC approved these amendments to the insider trading policy to increase investor confidence in the markets, by providing additional assurances that company insiders were acting ethically when selling company shares.
10b5-1 Plan Disclosure Requirements
Companies or individuals preparing a 10b5-1 trading plan may make quarterly filings with the SEC, depending on company policies and reporting requirements. These filings include Forms 10-K, 10-Q, and 8-K, when adoption, modification, or termination of a plan is relevant. If applicable, they must also file proxy statements and disclose whether specific trades that took place fall under a 10b5-1 plan or not.
For any disclosures related to Rule 10b5-1, SEC filings must be marked using inline XBRL.
With this being a time-consuming task, it is important for individuals and companies to understand which forms they are required to file if they have an active Rule 10b5-1 plan, the deadlines or trigger events for making these filings, and who oversees preparing and filing of the SEC forms.
Advantages and Compliance for 10b5-1 Plans
There are a few minor risks associated with Rule 10b5-1 plans. The new rule barring overlapping plans means that companies must carefully consider the timing. Improper timing can nullify the protection offered by a 10b5-1 trading plan.
Once a plan is finalized, it can be modified only if amendments that are subject to a cooling-off period are made. Otherwise, share amounts, prices and other plan aspects cannot be changed.
However, the benefits of making this kind of plan outweigh any possible downsides. Companies and individuals do not want to be accused of insider trading or unethical behavior. Adherence to rules designed to prevent insider trading, such as this one, avoids the perception of impropriety and instills trust and accountability. Ultimately, this helps protect the company's reputation.
Support for Regulatory Compliance
Compliance with the SEC regulation is time-consuming and challenging, which is why we’re here to help. DFIN ActiveDisclosure supports companies at every stage of the SEC filing process, from preparing documents to error checking and validation to making SEC filings. This includes help with the reporting requirements listed in the official documentation, the Rule 10b5-1 SEC fact sheet: Forms 10-K, 8-K, and 10-Q.
ActiveDisclosure provides integrated XBRL tagging, which helps with making the required tags. Workflow tools make it easy to compile supporting documentation for third parties, like proxy statements and director and officer certification. For complex matters, such as Section 16 filings, integrated legal and compliance experts are on hand to provide individualized advice.
Keeping up with changing SEC regulations is time-consuming, yet necessary to avoid fines associated with noncompliance. Explore how ActiveDisclosure can help streamline SEC filings by schedule a demo today.