A Rule 10b5-1 trading plan is a pre-arranged, written instruction for buying or selling a company's stock, set up before the person has any material nonpublic information, that lets trades carried out under it be defended as not being made "on the basis of" inside information.
The rule, 17 CFR 240.10b5-1, treats a trade as made "on the basis of" material nonpublic information whenever the trader was aware of that information at the time. The plan structure in paragraph (c) is an affirmative defense to that standard, commonly used by executives who sell shares on a set schedule.
Full guide: How to Read SEC Form 4: Insider Buying and Selling Explained
To qualify, the contract, instruction, or plan must be adopted before the person learns the information and must either fix the amount, price, and date of the trades, set them by a written formula or algorithm, or leave the person with no later influence over how, when, or whether trades happen. The trades must actually follow the plan: changing the amount, price, or timing counts as ending the plan and adopting a new one, and hedging around it defeats the defense.
The rule builds in waiting periods. A director or officer may not trade under a new plan 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, with the wait capped at 120 days. Other persons, apart from the company itself, wait 30 days. Directors and officers must also certify in the plan that they are unaware of material nonpublic information and are acting in good faith. Overlapping plans are generally barred, and a plan designed to execute as one single trade can be used only once in any 12-month period.
Forms 4 and 5 have a check box for transactions made under a plan intended to meet Rule 10b5-1(c), and filers give the plan's adoption date in the explanation section. A sale under a plan adopted months earlier says less about the insider's current view than a discretionary sale does, though a plan adopted shortly before bad news is worth a closer look.
A: For directors and officers, trading cannot begin until the later of 90 days after adoption or two business days after the company reports results for the quarter of adoption, up to a maximum of 120 days. For other persons, apart from the company itself, the cooling-off period is 30 days.
A: Look for the Rule 10b5-1(c) check box on the Form 4 or Form 5, and for the plan's adoption date in the explanation of responses.
A: Any change to the amount, price, or timing of trades is treated as terminating the old plan and adopting a new one. The new plan must meet every condition again, including a fresh cooling-off period.
A: The rule sets no maximum length. The plan's own terms decide how long it runs, and it ends when its scheduled trades are complete or it is terminated. A replacement plan must meet every condition again, including a new cooling-off period.
A: Anyone who trades a company's securities can adopt one, including the company itself for share buybacks. They are used mostly by directors, officers, and employees who regularly have access to inside information and want a defense for scheduled sales.
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