What is a Rule 10b5-1 trading plan?
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A Rule 10b5-1 trading plan is a prearranged plan for selling and/or buying company stock under SEC Rule 10b5-1 that provides an affirmative defense against charges of insider trading if you later trade stock while you know confidential, important information about your company that is not available to the investing public. A 10b5-1 plan provides for the periodic purchase and/or sale of your stock in a way that meets the requirements of the SEC rule. When properly created, these plans provide company insiders (usually executives but also any person who has stock or options) with a way to diversify their interest in company stock and, hopefully, manage the media and market reaction to executive stock sales.
Many companies now either require or strongly encourage their executives and directors to set up Rule 10b5-1 plans for trading company stock. Your company may even let you sell shares through these plans during regularly scheduled quarterly blackout periods.
Alert: As detailed in a related FAQ, the SEC has adopted additional requirements to stop suspected abuses of 10b5-1 plans. The new conditions for using Rule 10b5-1 formalize some of the best practices that have evolved.
How These Plans Work
Typically, Rule 10b5-1 trading plans specify the number of shares to be sold (or purchased) at the price and date detailed and/or have a formula or algorithm that triggers the trade and the number of shares involved. In the interpretation of experts, a simple limit order (e.g. sell 5,000 shares when the stock hits $22) does not create a Rule 10b5-1 trading plan. If its conditions are met, Rule 10b5-1(c) sets forth an "affirmative defense" in litigation over insider trading. When stock-trading occurs under one of these plans before the outset of the alleged fraud, the plan can undermine any inference of suspicious trades for assessing scienter (i.e. fraudulent intent).
These requirements include:
- your sales or purchases followed a detailed plan or arrangement that was established when you were unaware of "material" undisclosed information about the company
- your transactions were made either by an independent person who must follow your advance instructions on when to trade or by a person you granted discretion, leaving you with no subsequent influence (e.g. pursuant to a blind trust, power of attorney, or broker's discretionary account)
Example: A written one-year contract between executive and broker that instructs the broker to sell 10,000 shares on the first trading day of each month and twice as many shares (20,000) if the price has increased by 5% since the prior sale date.
Before you set up a Rule 10b5-1 trading plan, contact company counsel and your lawyer: practices under this rule, adopted in 2000, are still developing. Most companies require you to enter into plans during a particular window of time (some companies also require the first trade to be deferred into the next window), and prohibit scheduling automatic trades during regular blackout periods (e.g. two weeks before a quarterly earnings announcement). See the FAQ on the evolving best practices for Rule 10b5-1 plans.
Remember To Follow Rule 144 And Section 16
All the other requirements for stock sales, such as those for executives under Rule 144 and Section 16, still apply. Rule 10b5-1 concerns only an insider-trading defense against violations of Rule 10b-5.
Article On 10b5-1 Financial Planning
Whether you're a financial advisor or an individual wanting to use a pre-set stock-trading plan, an article elsewhere on this website explains various ideas on how best to do this: How Financial Advisors Can Craft Effective 10b5-1 Plans.