Rule 10b5-1 Trading Plans: A Structured Way for Insiders to Diversify
For executives and employees with access to material nonpublic information, a pre-arranged trading plan can turn a compliance headache into a disciplined selling program.
If you are a director, officer, or employee at a public company in Silicon Valley, you likely face trading windows, blackout periods, and pre-clearance requirements that make it hard to sell company stock when you want to. Rule 10b5-1 under the Securities Exchange Act was designed to address this. It allows insiders to establish a written plan in advance, at a time when they do not possess material nonpublic information, that instructs a broker to execute trades on a set schedule or according to a formula.
How a plan works
A 10b5-1 plan specifies, in advance, the amount, price, and timing of future trades, or provides a written formula for determining them. Once the plan is adopted, the insider gives up discretion over those trades. If the plan was adopted in good faith and without knowledge of material nonpublic information, it provides an affirmative defense against insider trading claims for the trades executed under it.
The 2022 amendments changed the rules
The Securities and Exchange Commission adopted significant amendments to Rule 10b5-1 in December 2022. According to the SEC's fact sheet on the amendments, the key conditions now include:
Cooling-off periods. Directors and officers must wait until the later of 90 days after adoption or modification of a plan, or two business days after the company discloses its financial results for the quarter in which the plan was adopted, subject to a maximum of 120 days. Other persons face a 30-day cooling-off period.
Certifications. Directors and officers must represent in the plan that they are not aware of material nonpublic information and are adopting the plan in good faith.
Limits on overlapping plans. Persons other than the issuer generally may not maintain multiple overlapping plans for open-market trades.
Single-trade plans. Individuals are limited to one single-trade plan in any consecutive 12-month period.
Good faith. All participants must act in good faith with respect to the plan, not just at adoption.
The amendments also added disclosure requirements. Companies must disclose director and officer plan adoptions and terminations quarterly, and Forms 4 and 5 now include a checkbox indicating whether a transaction was made under a 10b5-1 plan.
Why plans matter for wealth planning
From a personal financial perspective, a 10b5-1 plan is less about the legal defense and more about discipline. Insiders often accumulate large concentrated positions because they cannot sell during blackouts and hesitate to sell during open windows for fear of how it looks. A plan helps remove emotion and timing pressure from the decision and allows sales to proceed regardless of what is happening at the company.
A well-constructed plan typically reflects a broader financial plan: how much company stock is appropriate to hold given salary, unvested equity, and other assets; what cash needs exist over the next one to two years; and how sales interact with the holding period rules for long-term capital gains. The Kiplinger capital gains guide lists the 2026 federal rate thresholds. Remember that California taxes capital gains as ordinary income.
Common design questions
Duration. Plans often run six to eighteen months. Longer plans reduce the number of adoption events but are harder to adjust to changing circumstances.
Price limits versus scheduled sales. Limit orders can preserve upside but may result in no sales at all if the stock declines. Scheduled sales provide certainty but no price protection.
Modifications and terminations. Under the amended rule, a modification that changes amount, price, or timing is treated as a new plan and restarts the cooling-off period. Early terminations can also raise questions about good faith.
Coordination with Rule 144. Affiliates must still comply with Rule 144 volume, manner-of-sale, and Form 144 filing requirements, described in the SEC's small entity compliance guide.
Working with counsel and your adviser
Companies generally require that plans be reviewed by the corporate legal department, and many have standardized templates. The role of a financial adviser is to help translate your personal goals into the parameters that go into that template. Nothing in this article should be considered legal advice; consult your company's securities counsel before adopting, modifying, or terminating a trading plan.
Important Disclosures
Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.
