A Rule 10b5-1 plan is a written, pre-set schedule for buying or selling a company’s securities, adopted by a corporate insider at a time when that person has no material nonpublic information, which provides an affirmative defense against insider-trading liability for trades the plan later executes.
In plain terms
An executive who wants to sell vested stock faces a problem: trading while holding inside information is illegal, but executives are often sitting on inside information almost by definition. A 10b5-1 plan solves this by separating the decision from the execution — the insider commits, in advance and in writing, to a trading schedule or formula, and a broker then carries it out mechanically on later dates, regardless of what the insider happens to know by then. Properly adopted, the plan lets the trades go forward without a case-by-case judgment call each time.
How it works
Under U.S. securities law, the rule — 17 CFR § 240.10b5-1 — requires that the plan be entered into in good faith, before the insider is aware of material nonpublic information, and that it either specify the amount, price, and dates of trades or provide a formula for determining them, with no further discretion left to the insider afterward.
Following amendments the SEC adopted in December 2022, a new or modified plan does not take effect immediately. Directors and officers face a cooling-off period running until the later of 90 days after adoption or two business days after the company files the periodic report covering the quarter in which the plan was adopted — capped at 120 days in any case. Everyone else covered by the rule faces a flat 30-day cooling-off period; the issuer itself faces none. Directors and officers must also certify, within the plan itself, that they are not aware of material nonpublic information and are not using the plan to evade the rule, and any insider is limited to one single-trade plan in any 12-month period.
The numbers
- Officer/director cooling-off period: the later of 90 days after adoption or 2 business days after the next periodic report, capped at 120 days.
- Other-insider cooling-off period: 30 days after adoption.
- Single-trade plan limit: one per 12-month period per insider.
- Effective date: amendments applied to Form 4/5 filings from April 1, 2023, with a 6-month deferral for smaller reporting companies.
What people get wrong
That adopting a plan is itself the protection. It is not — the affirmative defense only holds if the plan was genuinely entered into in good faith and without then-existing inside information, which is exactly what the SEC’s 2022 amendments were written to test more rigorously, after years of examples where executives timed plan adoption suspiciously close to news they already knew was coming. A plan adopted the morning before bad news breaks, modified repeatedly, or layered with overlapping plans now draws scrutiny rather than protection — the cooling-off periods and the one-single-trade-plan limit exist specifically to close the gap between “technically compliant” and “actually insulated from inside information.”
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