Rule 10b-5

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Rule 10b-5

Key takeaways

  • Rule 10b-5, adopted under the Securities Exchange Act of 1934, prohibits manipulative or deceptive practices in connection with the purchase or sale of securities.
  • It is the SEC’s primary rule for addressing securities fraud, including insider trading.
  • Rules 10b5-1 and 10b5-2 (adopted in 2000) clarify when trading is “on the basis of” material nonpublic information (MNPI) and when duties of trust or confidence arise.
  • Amendments effective February 27, 2023, tightened safe-harbor trading-plan requirements and added mandatory attestations and cooling-off periods for certain insiders.

What Rule 10b-5 covers

Rule 10b-5 makes it unlawful to use any device, scheme, or artifice to defraud; make untrue statements of material fact or omit material facts; or engage in practices that deceive investors in connection with securities transactions. Typical violations include:
* Executives making false statements to inflate—or deflate—stock prices.
* Concealing poor financial results through misleading accounting.
* Using confidential information to trade for personal gain (insider trading).
* Manipulative schemes intended to alter shareholder composition.

Rules 10b5-1 and 10b5-2 — clarifying insider trading

  • Rule 10b5-1: A person trades “on the basis of” MNPI if they are aware of that information when buying or selling securities. It also provides for an affirmative defense when trades occur under preexisting, binding plans or contracts established in good faith that do not permit influence by MNPI.
  • Rule 10b5-2: Addresses misappropriation theory and defines circumstances in which duties of trust or confidence arise even outside formal business relationships, making misuse of MNPI actionable.

Affirmative defense and 10b5-1 trading plans

A 10b5-1 trading plan allows insiders to set predetermined instructions for buying or selling company stock (amounts, dates, prices). Properly structured plans provide an affirmative defense against insider-trading allegations by demonstrating that trades were prearranged and not based on contemporaneous MNPI. To serve that purpose, plans should be:
* Adopted in good faith and documented.
* Specific about timing, amounts, and pricing.
* Free from manipulation or coordination to take advantage of MNPI.

2023 changes to trading-plan rules (summary)

Recent SEC amendments tightened when and how insiders can rely on 10b5-1 safe harbors:

  1. Cooling-off periods (Rule 10b5-1(c)(1))
  2. Directors and Section 16 officers: a mandatory cooling-off period. Trading under a newly adopted plan may not begin until the later of (a) 90 days after plan adoption, or (b) two business days after the issuer’s periodic report disclosing financial results for the quarter in which the plan was adopted.
  3. Other persons: a 30-day cooling-off period applies.

  4. Purpose: reduce the appearance that a plan was adopted when MNPI was already known.

  5. Overlapping-plan restriction (Rule 10b5-1(c)(2))

  6. Insiders cannot adopt an additional 10b5-1 plan that covers the same time period as an existing plan, preventing hedging or simultaneous conflicting strategies.

  7. Single-trade plans (Rule 10b5-1(c)(3))

  8. Non-issuer persons may use a single-transaction plan (one purchase or sale) once per 12 months to claim the affirmative defense, with limited exceptions (e.g., qualified sell-to-cover for tax obligations).

  9. Officer and director certifications (Rule 10b5-1(c)(4))

  10. Directors and Section 16 officers must certify when adopting a plan that they do not possess MNPI and that the plan is adopted in good faith—not as a scheme to evade Rule 10b-5.

  11. Good-faith condition (Rule 10b5-1(c)(5))

  12. All plan holders must act in good faith during the plan’s term. Bad-faith conduct (e.g., manipulating disclosures to benefit the plan) forfeits the affirmative defense and can lead to enforcement action.

Practical FAQs

Q: How can senior officers trade without violating insider-trading rules?
A: By adopting a documented 10b5-1 trading plan in advance (observing the applicable cooling-off period) that specifies amounts, timing, and prices, and by certifying lack of MNPI and good faith where required.

Q: What if I receive MNPI but am not a company employee?
A: Persons who obtain MNPI owe a duty not to trade on it in many circumstances; trading on such information can expose them to insider-trading liability under misappropriation and related theories.

Q: How long before a 10b5-1 plan can be acted upon?
A: After the 2023 amendments, insiders (directors and Section 16 officers) face a 90-day cooling-off period (or two business days after the issuer’s relevant periodic disclosure, whichever is later); other persons generally face a 30-day cooling-off period.

Bottom line

Rule 10b-5 is central to preventing securities fraud and insider trading. Rules 10b5-1 and 10b5-2 define when trading is based on MNPI and when duties of trust exist. The 2023 amendments strengthen conditions for relying on 10b5-1 safe harbors—adding cooling-off periods, limiting overlapping plans, imposing certifications, and requiring demonstrable good faith—to reduce abuse and preserve market integrity.