10b5-1 plans

In short

I once watched a friend of mine, an executive at a mid sized company, lose sleep over one question. When could he sell his own shares without landing in trouble? If you hold company stock and know things the public does not, you may feel the same worry. A 10b5 1 plan is a written schedule, set up ahead of time, that tells a broker when to sell for you. You sign it while you are free to trade, and the trades run later even if you come to hold private news. The plan must be made in good faith and not to dodge the law. Newer rules add a waiting period before the first sale, and they limit how many overlapping plans you can hold. Read the plan twice, keep every copy, and ask your company's legal counsel about it before you sign.

The whole of it

What it is

A neighbor of mine once said the hardest part of owning your employer's stock is that you always seem to know a little too much. You might hear about a big contract, a weak quarter, or a coming merger. Trading while you hold that kind of private news is called insider trading, and the federal securities laws forbid it. Rule 10b5 1 offers a way through. It comes from the Securities and Exchange Commission, the agency that oversees the stock markets. If you set up a plan before you held the private news, your later trades can be defended.

Think of it as a promise you make to yourself on a calm day. On that day you decide how many shares to sell and when. You write it down and hand it to a broker. Then the plan runs on its own, the way a sprinkler runs on a timer. You are not choosing each sale in the moment. That is the point.

If you are an officer, a director, or another person close to your company, you may face extra limits on when you can trade. Many companies close a trading window around earnings. A 10b5 1 plan can let sales go on during those closed times, because the choice was made earlier. Still, your company may have its own policy on top of the federal rule. Ask what yours says.

How it works

You have probably signed a standing order at a bank, where the same payment goes out each month. A 10b5 1 plan works in a similar spirit. You and your broker agree on the terms in writing. The terms can be a set number of shares on set dates. They can also be a formula, such as selling when the price reaches a level you pick. Once the plan is in place, you may not steer the trades. If you change the amount, the price, or the timing, that can count as a new plan, and the waiting period may start again.

The SEC adopted amendments to Rule 10b5 1 that took effect in 2023. You can read them in the SEC's adopting release on insider trading arrangements. Directors and officers now face a cooling off period before the first trade. This is a wait between the day the plan is adopted and the day the first sale can happen. For other people, the wait is shorter. The exact lengths are in the rule, and I will point you to where to check them in a moment.

Those same amendments add other requirements. Directors and officers must certify, in writing, that they hold no private news when they adopt the plan. They must also certify that they are acting in good faith. The rule also limits overlapping plans for open market sales. It has some exceptions, and it limits single trade plans too. The rule text spells out who qualifies and how often, so read it, and ask counsel how it applies to you. Companies also have new reporting duties about these plans, which show up in their public filings. Good faith matters most. A plan made just to cover a sale you already meant to make ahead of bad news would not stand up.

The numbers, and where to find yours

I like to tell people that a rule is only as useful as the number you can actually check. So here is where to look. The cooling off period for a director or officer is set in the rule. Your waiting time for that group is the current figure, which the official source publishes each year. For other people who are not directors or officers, the waiting time is the current figure, which the official source publishes each year. The site fills in the verified figures, with the source and date.

Those are the legal minimums. Your company may ask for more. Your own plan document will state its start date and its first trade date, so read both lines. Look for the SEC's final rule on insider trading arrangements and related disclosures. The rule text lives at 17 CFR 240.10b5 1, and the SEC posts its amendments on its website, sec.gov. Your company's insider trading policy is the third place to look. It is often stricter than the law.

There is also the tax side. Selling shares can create a gain that you owe tax on. Sales of shares you were granted, such as restricted stock, may be taxed as pay. Your plan does not change the tax rules. It only sets the timing. Check the IRS website, irs.gov, and talk with a tax professional about your own case.

A worked example

Let me tell you about a woman named Dana. Dana is a vice president at a public company. She owns 20,000 shares. She wants to sell 5,000 of them over the coming year to pay for a home addition. She would rather not guess at the timing, so she sets up a 10b5 1 plan.

On the day she signs, Dana holds no private news. She certifies that in writing. She tells her broker to sell 1,250 shares at the start of each quarter, which means four sales in a year. The math is easy to check. Five thousand shares divided by four quarters is 1,250 shares per quarter. Suppose the share price on a sale day is 40 dollars. Then one quarterly sale is 1,250 shares times 40 dollars, which is 50,000 dollars before any tax or fees.

Now the waiting period. Dana is an officer, so she cannot sell on day one. She must wait out the cooling off period from the rule before the first sale runs. That wait might push her first sale into the next quarter. She would still have time to plan around it. That is a reason to start early. Her cash need is next year, so she has room.

Dana keeps only this one plan for those open market sales. She does not tweak it every month. A quarter later, the company reports weak news. Dana feels a tug to cancel. She does not. A plan changed in the face of news could look like cheating. So the plan simply runs as written.

Where it goes wrong

I have seen good people stumble here, and it is rarely from bad intent. It is usually from hurry. The first trap is signing a plan when you already hold private news. The date you adopt the plan matters more than any other date. If you know something the public does not, wait.

The second trap is fiddling. You set the plan, then you cancel it, restart it, or tweak the terms. Each change can look like you used the plan to trade on what you know. Keep changes rare. Talk with counsel before you make any.

A third trap is forgetting the rest of the rules. Officers and directors often file forms with the SEC when they trade, and some sales trigger other rules. A plan does not remove those duties. It also does not cover trades outside the plan. If you sell shares on the side, that sale stands alone.

The last trap is assuming the plan is a shield. It is a defense, not a wall. If you did not act in good faith, the plan will not save you. Be honest with yourself about why you are signing.

Questions to answer before you leave this page

Do you know what your company's insider trading policy says, and have you read it end to end? Are you free of private news on the day you plan to sign, and can you say so in writing? What is your cooling off period, and does your first sale fall after it ends? Have you written down each trade, its size, and its trigger, so a stranger could follow it? Do you hold only one plan for open market sales, and have you asked counsel about any others? What will the sales cost you in tax, and have you asked a tax professional to look at it? Who will hold your copies, and where will you find them a year from now?