Understanding SEC Rule 10b5-1

What is Rule 10b5-1?

Rule 10b5-1 is an SEC regulation that allows insiders of public companies to establish prearranged trading plans for buying or selling company securities. When properly adopted, these plans provide an affirmative defense against insider trading allegations by showing trades were scheduled in advance, without regard to material nonpublic information (MNPI).

Purpose

The rule clarifies how insiders can lawfully trade while minimizing the risk—or the appearance—of insider trading. It enables predictable, rule‑based transactions by executives, directors, and large shareholders.

Who is covered?

Rule 10b5-1 applies to:
* Officers and directors of public companies
* Large shareholders (including those owning more than 10% of voting shares)
* Other insiders who may have access to MNPI

How it prevents insider trading

Insiders must set up plans at times when they are not aware of MNPI. Plans specify trades in advance (price, amount, timing or a deterministic formula), preventing ad hoc decisions based on nonpublic information. Because the trades follow a preexisting contract or algorithm, the insider can argue they did not trade while aware of MNPI.

Requirements for a valid 10b5-1 plan

To qualify for the Rule 10b5-1 affirmative defense, a plan generally must:
* Specify the amount, price (or a pricing mechanism), and timing of trades—or provide a written formula/metric to determine them.
* Be adopted when the insider is not aware of MNPI.
* Allow a broker or third party to execute trades pursuant to the plan without using MNPI.

Plans are typically written agreements between the insider and a broker or agent.

Recent amendments and practical changes

Key regulatory updates affecting 10b5-1:
* December 2022 amendments: Increased disclosure requirements and added conditions to the affirmative defense. Insiders who adopt plans must certify they are unaware of MNPI and are acting in good faith. Rules introduced mandatory cooling‑off periods before trading under a new plan may begin.
* Settlement cycle change (May 2024): Most equity trades now settle on a T+1 basis (one business day after execution), which affects the timing of transactions and recordkeeping.

These changes were intended to close perceived gaps where insiders could misuse plans while possessing MNPI.

Practical considerations

• Cooling-off periods: New rules may require a delay between plan adoption and the first trade to prevent adopting plans while aware of MNPI.
• Public disclosure: The SEC does not require public disclosure of 10b5-1 plans, but companies often disclose them to increase transparency and reduce reputational risk.
• Amendments and cancellations: Modifying or cancelling plans while aware of MNPI can undermine the defense.
• Use in buybacks: Corporations can use 10b5-1 frameworks to conduct scheduled share repurchases.

Example

An officer establishes a plan to sell 5,000 shares on the second Wednesday of every month at pre-specified price bands. If the plan was adopted while the officer lacked MNPI and the broker executes under the plan, those sales may be shielded from insider trading allegations.

Key takeaways

• Rule 10b5-1 enables insiders to trade under preplanned arrangements that can provide an affirmative defense to insider trading claims.
• Valid plans must be adopted without MNPI and must specify or provide a formula for price, amount, and timing.
• Recent SEC amendments increased disclosure, added certification and cooling‑off requirements, and tightened conditions for the affirmative defense.
• Public disclosure of plans is optional but can improve transparency and investor confidence.

Sources

• U.S. Securities and Exchange Commission — amendments to Rule 10b5-1
• Federal Register — Selective Disclosure and Insider Trading