Monday, May 20, 2024

The 10b5-1 Plan: 8 Frequently Asked Questions and Recent Updates


If you’re an executive or an employee with significant equity in your company from employee stock options, restricted stock units, or other stock grants, you may have a continual need to sell stock. However, SEC regulations, company insider trading policies and fears of allegations of insider trading may prevent proper diversification of holdings.

Fortunately for executives and insiders, Rule 10b5-1 trading plans can allow flexibility to sell stock without regard to limitations imposed by company insider trading policies while complying with SEC regulations. Such plans also provide an affirmative defense to allegations of insider trading.

These plans allow for an executive or employee to enter into a pre-determined plan for the future sale of company stock during times when they may otherwise be prohibited, such as during blackout periods or while in possession of material non-public information. So long as they satisfy the rules and regulations for a properly drafted 10b5-1 plan, the trades are permitted.

Even if you’re familiar with the concept of a 10b5-1 plan, you may benefit from some of our best-practice insights. Additionally, at year-end 2022, the Securities and Exchange Commission (SEC) approved several new requirements that will affect Rule 10b-5 plans going forward.

Let’s cover eight key FAQs we often receive about current and future 10b5-1 plans.

Q1: What is a 10b5-1 plan and how do they generally work?

Big picture, 10b5-1 plans provide company owners, officers, and other key employees with a process for selling company stock, without violating insider trading restrictions. Or, in SEC jargon, it creates an affirmative defense to insider trading, allowing for the exercise and sale of options or the trading of company stock, even if you come into material non-public information (MNPI) about your company during the plan term.

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For good reason, trading based on insider information is illegal. However, this can create a dilemma if you’re an “in-the-know” executive or employee. It’s often impractical for you to not be aware of what’s going on in your company. Continued access to MNPI can leave you with scant opportunities to exercise or trade on your equity compensation, without putting yourself, your company, or your fellow shareholders at risk.

Enter the 10b5-1 plan. It establishes a process for those in leadership positions to  have a  pre-determined plan in place to sell company stock, as long as the plan is adopted at a time when the individual is not in possession of MNPI. Under a 10b5-1 plan, you detail (among other things) how many shares you’d like to sell, at what price you’ll sell them, and when you’ll do so during the plan term. Plans can be simple or complex, and may include a prescribed formula. Once the plan is implemented, the trades are placed without undue influence from the executive or employee. Since any inside information you may possess shouldn’t be influencing the transactions, the trades are deemed defensible—giving owners and executives market access during what may otherwise have been trading black-out windows.

Q2: What transactions can you include in a 10b5-1 plan?

While you may most often read about using 10b5-1 plans for selling company stock, it can also be structured to:

  • Sell or buy shares
  • Exercise and sell stock options
  • Sell RSUs (or the net shares after tax (NSAT) withholding)

A 10b-5 plan does not necessarily have to involve all of an individual’s company shares. Implementing the plan on a portion of your shares can offer flexibility on shares not in the plan and may help to better signal your belief in the long-term prospects of your company. However, an individual should be strongly discouraged from trading outside a 10b-5 plan currently in place. Trades outside a plan lose the protections available under 10b-5 and may also be hard to explain as part of a pre-planned diversification strategy.

Q3: How have the 10b5-1 plan rules evolved, especially recently?

At year-end 2022, the SEC approved new rules for establishing and managing 10b5-1 plans moving forward. The updates were approved unanimously, which means they are unlikely to be challenged before they take effect on or after April 2023. (Existing plans are generally grandfathered in, with a few exceptions.)

To understand the latest updates, consider them within historical context:

  • 1934: The Securities Exchange Act. The original Act contains Section 10(b) prohibiting insider trading.
  • August 2000: SEC Rule 10b5-1. Building on the 1934 Exchange Act, the SEC clarified a point of confusion over whether someone could be held liable for possession of MNPI, even if they did not use it to trade. The SEC codified that liability could be established based on simply possessing inside information at the time of a trade. However, the 2000 rule also carved out an affirmative defense against this liability in the form of the 10b5-1 plan.
  • December 2022: Updates to SEC Rule 10b5-1. Most recently, the SEC tightened several 10b5-1 plan requirements, to reduce suspected abuse of the affirmative defense carve-out.

As summarized in this SEC press release, NEW or REVISED rules include:

  • Replacing recommended cooling-off periods with required ones, based on your role at the company (between 90–120 days for directors and officers; 30 days for others).
  • Replacing your implied good-faith participation in the plan with your written certification of the same.
  • Replacing your implied absence of MNPI upon plan set-up, with your written certification of the same.
  • Prohibiting overlapping plans, with very limited exception.
  • Limiting single-trade plans to one every 12 months.
  • Requiring several new quarterly and annual reporting requirements as well as disclosures related to trading around public releases of MNPI.

What is a cooling-off period? It’s a set time following the authorization of an 10b5-1 plan before the first trade can be implemented. The new requirements are intended to better ensure that any knowledge an insider has at the time they establish the plan will be of diminished value in anticipating market conditions at the time of a future trade.

Q4: What are the requirements when drafting a 10b5-1 plan?

  • Trades must be implemented by another person with discretionary authority. They must act on your preliminary instructions, but without undue influence from you. Typically, this role is fulfilled by a third-party broker.
  • NEW: You must certify you possess no MNPI as the plan is being drafted. Some companies might also require set-up to occur during an open trading window. (Before April 2023, an absence of MNPI was required, but without written certification.)
  • NEW: The plan must include a cooling-off period appropriate to your role in the company, before any trading can occur, according to the plan’s trading arrangements. (Before April 2023, a cooling-off period was recommended, but not required.)
  • NEW: You must certify you are entering the plan in good faith, adhering to the letter and the spirit of the law. (Before April 2023, good faith was required, but without written certification.)
  • The plan should not include any hedging strategies.

Q5: What basic components should your 10b5-1 plan include?

Many brokerages offer plan forms or sample documents to help you start crafting your 10b5-1 plan. To serve as a binding contract, the plan must be in writing and include:

  • The number of shares to be bought or sold. This can be designated as a number of shares, a percentage of one’s holdings, or as the number of shares needed to produce a specific dollar amount.
  • The timing of the transaction, such as a specific date or when a specific event occurs
  • The price at which the shares will be bought or sold. This can be designated as a specific dollar price, a limit order price, or as the prevailing market price. A formula may also be used for the transaction.

Q6: What additional components might your 10b5-1 plan include?

Your plan can, and often should also include descriptions of the following:

  • Trade sequencing (what share lots you will sell)
  • Trading method (such as with a limit price, below which you won’t sell)
  • Timeframe when the plan starts and ends (neither too short nor too long)
  • How frequently you’ll sell during the plan period (such as one time, weekly, quarterly, etc.)

Plan Design Illustrations

Period example: “Sell X shares every month, if the price is greater than $X.”

Price-only example: “Sell all, if price equals $X.”

Event-based examples: “Sell X shares before they expire, to meet personal objective, to maximize capital gains … etc.”

Plan Timeframes

What is an ideal timeframe? Most plans run for about three months to one year, but they can be longer or shorter. Relatively short timeframes allow you to enter into a new 10b5-1 plan more quickly, based on current circumstances. However, if the timeframe is too short, it can raise suspicions about your good faith intent, suggesting you may be targeting a specific event.

Q7: What should you NOT do with a 10b5-1 plan?

While not all of the following are prohibited by the SEC, your company may prohibit them anyway. Plus, they can raise regulatory red flags, putting your affirmative defense at risk, and/or defeating the purpose of having a 10b5-1 plan to begin with:

  • NEW: The SEC now prohibits anyone other than an issuer from running more than one plan at the same time. (Before April 2023, concurrent plans were discouraged, but not prohibited.)
  • Avoid trading shares outside of the plan, where the trades would not fall under the affirmative defense provided by a 10b5-1 plan.
  • Avoid amending or canceling a plan once it’s in place.
  • Avoid hedging against a plan.

Q8: What are some best practices for establishing a 10b5-1 plan?

Beyond creating an affirmative defense, putting your owner or executive stock sales on 10b5-1 auto-pilot can help instill financial discipline, more effectively diversify your investment portfolio, and simplify a trading schedule aimed at achieving your personal financial goals.

To these ends, we suggest starting with a broad plan for how much you want to keep and how much you want to sell. With the stock you’d like to sell, ask yourself:

By when would you like to achieve each of your financial goals, and how much do you plan to spend on each?

For example, perhaps your goals include retirement or financial independence. Goals might also include upgrading your primary residence in the near-term, buying a vacation home and funding your kids’ higher education within the next decade or so, and eventually traveling the globe. By leading with financial planning, it becomes easier to resolve the questions that arise as you establish your ideal 10b5-1 plans. For example:

  • Cash flow: What cash-flow or other financial goals factor into the timing of the sales?
  • Timing: Will you sell some or all of your shares?
  • Pace: Do you want to sell a percentage within a specific timeframe; gradually decrease your position over time; or hang onto shares indefinitely, perhaps awaiting an ideal price?
  • Selection: Do you want to prioritize the sale of particular grants, shares, or share lots for tax-planning purposes (including accounting for long-term vs. short-term gains)?
  • Ownership stake: In addition to shares you own outright, would you like to account for equity compensation events that occur during the 10b5-1 plan run, such as vesting RSUs; vested but unexercised options; future vested options; or purchased ESPP shares?
  • Diversification: Are you over-concentrated in company stock, relative to your total wealth? (One rule of thumb suggests not to exceed 10-15% of your net worth in a single stock position.)
  • Risk/Return: Does your total wealth permit you to consider opportunistic pricing—only selling if the price surpasses a particular high-water mark?
  • Complexity: How can you achieve your goals as simply as possible? Overly complex plans are harder to manage, potentially more costly to run, subject to misinterpretation, and more susceptible to violating 10b5-1 requirements.

Once again, there are a lot of opportunities available and obstacles that can be avoided in building out a 10b5-1 plan program that works for you, your family, your company, and your fellow shareholders. To advise you as you proceed, we believe it’s worth engaging a financial professional who has experience in equity compensation and 10b5-1 plans. Give us a call if you’d like to learn more.

This material is intended for informational/educational purposes only and should not be construed as investment, tax, or legal advice, a solicitation, or a recommendation to buy or sell any security or investment product. The information contained herein is taken from sources believed to be reliable, however accuracy or completeness cannot be guaranteed. Please contact your financial, tax, and legal professionals for more information specific to your situation.

This written plan, adopted by an insider, must be signed and dated at a time when the insider is not aware of any material nonpublic information concerning the company or its stock in order for it to provide the insider with a safe harbor against 10b5-1 liability. It serves as a binding contract and also states that future trades in company stock must comply with certain specifications. You should consult with your companies policies when considering a 10b5-1 plan.



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