A 10b5-1 plan is a prearranged trading arrangement established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. The rule provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5 for trades executed according to a qualifying contract, instruction, or written plan that was entered into before the person became aware of material nonpublic information (MNPI).
A 10b5-1 plan does not authorize trading itself. Instead, it defines conditions under which trades executed according to the plan are not treated as being made “on the basis of” MNPI, provided all regulatory requirements are satisfied.
Regulatory Context
Rule 10b5-1 clarifies when a purchase or sale of a security is considered to be made “on the basis of” MNPI. Under the rule, a person is deemed to trade on the basis of MNPI if the person is aware of MNPI at the time of the trade, subject to specified affirmative defenses (17 CFR § 240.10b5-1).
One such affirmative defense applies when trades are made pursuant to a binding contract, instruction to another person, or written plan that:
- Was entered into before the person became aware of MNPI;
- Specifies the amount, price, and timing of trades, or provides a written formula or algorithm for determining those elements;
- Does not permit the person to exercise subsequent influence over how, when, or whether trades occur;
- Is entered into and operated in good faith.
These conditions are set out in Rule 10b5-1(c) (https://www.law.cornell.edu/cfr/text/17/240.10b5-1).
Amendments and Conditions
The SEC has adopted amendments to Rule 10b5-1 that impose additional conditions on the availability of the affirmative defense for certain persons. These include:
- Mandatory cooling-off periods between plan adoption or modification and the first permitted trade;
- Limitations on overlapping trading arrangements;
- Representations by directors and officers that they are not aware of MNPI at the time of plan adoption and that the plan is entered into in good faith;
- Issuer disclosure requirements regarding the adoption and termination of Rule 10b5-1 plans by directors and officers.
These requirements are described in SEC compliance guidance and rulemaking materials addressing insider trading arrangements and related disclosures (https://www.sec.gov/files/33-11138-fact-sheet.pdf).
Relationship to Insider Reporting
The use of a 10b5-1 plan does not eliminate other securities law obligations. Transactions executed pursuant to a plan may still be subject to insider reporting requirements under Section 16, including disclosure on Form 4 where applicable. The existence of a plan affects how insider trading liability is evaluated under Rule 10b5-1, but it does not alter the reporting framework governing the transaction itself.
Sources
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17 CFR § 240.10b5-1 — Definition of trading “on the basis of” material nonpublic information and affirmative defenses
https://www.law.cornell.edu/cfr/text/17/240.10b5-1 -
SEC Fact Sheet: Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Amendments)
https://www.sec.gov/files/33-11138-fact-sheet.pdf -
SEC Small Business Compliance Guide — Insider Trading Arrangements and Related Disclosures
https://www.sec.gov/resources-small-businesses/small-business-compliance-guides/insider-trading-arrangements-and-related-disclosures -
SEC Final Rule Release No. 33-11138 — Amendments to Rule 10b5-1
https://www.sec.gov/files/rules/final/2022/33-11138.pdf