If you are in possession of material non-public information about a stock, the SEC’s Rule 10b5-1 allows you to plan trades in advance so that you can sell shares without worrying about insider trading allegations. Rule 10b5-1 plans also create a path for employees to sell shares during blackout periods. Generally speaking, anyone can use these plans, but there are a handful of considerations to keep in mind.
How do 10b5-1 plans work?
A 10b5-1 plan details how an individual will sell shares of a company in a systemic way. You must file a 10b5-1 plan in advance—usually 60-90 days before it will go into effect. Typically, the plans remain in effect for a year.Â
The exact system you use for selling shares doesn’t matter as much as the idea that it’s a preset method a computer can execute on. For instance, you might say:
- I’m going to sell 1,000 shares a week, regardless of share price.
- I’m going to sell 10,000 shares if the price hits X and another 10,000 shares if the price hits Y.
- I’m going to sell X numbers of shares if the trading volume is Y.
The important thing is that these are rules, not subjective decisions, and they are filed with regulators, in writing, ahead of time.
Who should consider 10b5-1 plans?
If you’re subject to Section 16 or Rule 144, Rule 10b5-1 may allow you to sell shares while remaining compliant. This is particularly important if you’re an executive with a highly-concentrated position in your company that you may want to diversify in accordance with a broader financial plan.
If you’re in charge of clinical trials at a biotech company, for instance, you’d likely never be able to sell shares without a 10b5-1 plan, as you’d nearly always be in possession of material non-public information, which could generate scrutiny on any trades you place.
You don’t need to be subject to Section 16 or Rule 144 to use these plans, however. Anyone subject to lockups or blackout periods may benefit. 10b5-1 plans can help you proactively take advantage of big market moves in your company shares, as well, without having to worry about potential insider trading allegations.
If, for instance, your company shares surge in value ahead of earnings (when most employees are subject to a blackout period for trading), but your 10b5-1 plan is set to execute when shares cross $X, you would be able to take advantage of that move.
Can I pause or stop a 10b5-1 plan?
You can cancel a 10b5-1 plan at any time, but this creates an audit risk. The IRS or the SEC may flag your trades or tax returns as suspicious.
Remember: The point of a 10b5-1 plan is to allow you to execute trades without regulators worrying that you are using material non-public information to inform your decisions. If you suddenly decide to stop executing trades, the natural follow-up question is: Why?
Regulators may want to know whether you made the decision to stop executing your plan based on material non-public information.
How do I file a 10b5-1 plan?
This usually depends on your employer. Some companies have systems set up for managing complex compensation, such as restricted stock units (RSUs) and equity stock options (ESOs). These platforms often have a 10b5-1 plan template built in, allowing you to simply set the terms you want to use to execute. The general counsel at your company will need to sign off on the plan before you file it.
If your company doesn’t offer this option, your financial advisor may be able to help. Keep in mind, not all financial advisors are familiar with complex compensation models. At Quorum, we work with clients to provide their companies with a sample 10b5-1 plan. Our templates are approved by the majority of Fortune 500 companies. From there, we can work with a client’s general counsel to get the plan approved.
