Rule 10b5-1 Trading Plans Explained

What a Rule 10b5-1 plan is, how the 2023 rule changes (cooling-off periods, certifications) work, and how to read the 10b5-1 checkbox on an insider's Form 4.

If you read insider filings for long, you will see sales footnoted with "pursuant to a Rule 10b5-1 trading plan". The phrase matters because it changes what a sale can tell you.

What is a 10b5-1 plan?

Insiders often hold material information the public does not have, and trading on it is illegal (see legal vs. illegal insider trading). Rule 10b5-1 gives them a way to trade regularly without that risk: they can set up a written plan while they are not aware of material nonpublic information, specifying how much to trade and when (or by a formula). Trades that follow the plan qualify for an affirmative defense against insider-trading charges.

A typical plan: "sell 5,000 shares on the 15th of each month" or "sell if the price is above a set level".

What changed in 2023

SEC amendments that took effect in February 2023 tightened the rule after criticism that plans were being abused. The main points:

• Cooling-off period. For directors and officers, trading under a new plan cannot begin until the later of 90 days after adoption or two business days after the company discloses financial results for the quarter in which the plan was adopted, capped at 120 days. For other individuals the wait is 30 days.
• Certification. Directors and officers must certify when adopting a plan that they are not aware of material nonpublic information and that the plan is adopted in good faith.
• No overlapping plans, with limited exceptions, and a limit of one single-trade plan per 12 months.
• More disclosure. Companies must disclose directors' and officers' plan adoptions and terminations in their quarterly and annual reports.

The checkbox on Form 4

Since April 2023, Form 4 has a checkbox that tells you whether a transaction was made under a Rule 10b5-1 plan. Often a footnote also gives the date the plan was adopted.

What it means when reading filings

• A planned sale says little about current sentiment. The decision was made months earlier. The insider may not even be choosing the date. See what insider selling really tells you.
• A planned purchase is rarer, and still reflects a decision made earlier.
• Timing of adoption can matter. A plan adopted shortly before bad news, or a plan terminated before good news, is something regulators and researchers pay attention to. A single filing will not prove anything.
• Unplanned open-market purchases are the cleanest signal. An insider buying with cash and no plan is making a fresh decision today.

A quick check

When you see an insider sale: look for the checkbox, read the footnote, find the adoption date, and compare the size with the insider's total holding. Then decide how much weight it deserves, usually not much on its own.

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