Company trading policies limit the number of days that insiders can trade their stock. As a result of these restrictions, company executives may have difficulty managing their personal holdings, which can represent a source of concentration risk within their wider investment plan. With a 10b5-1 plan, insiders can establish a trading plan that allows them to trade  their stock during blackout periods surrounding important corporate events, announcements and quarterly earnings reports as long as the plan is established in good faith at a time when the executive is not in possession of material nonpublic information; defines the price, number of shares, and dates for any transactions; and prohibits any future influence over execution by the executive. If executed properly, a 10b5-1 plan could provide an affirmative defense against insider-trading allegations.

What is Rule 10b5-1

Rule 10b5-1, established by the SEC, prohibits the purchase or sale of a security on the basis of Material Nonpublic Information, (MPNI).  It is a clarification of Rule 10b-5, created under the Securities and Exchange Act of 1934, which is the primary vehicle for investigation of securities fraud. Although the rule creates more liability by prohibiting trades made while someone is merely “aware” of MNPI (rather than “using” such information), the rule also provides the affirmative defense of a 10b5‐1 plan, which is available to any person or entity.

What is a 10b5-1 Plan

A 10b5-1 plan allows insiders to sell shares under a prearranged structure to help avoid SEC-related issues and provide more transparency for sales of their company stock. Under such plans, insider buying and selling are limited to predetermined shares at scheduled times, so that information possessed by insiders is less of an influence on their decision to trade.

Benefits of 10b5-1 Plans

The most important benefit of these plans is that a properly structured plan provides an affirmative defense for companies and those presumed to be insiders transacting in the relevant company’s securities. Other benefits include:

  • Potentially more opportunities for insiders to sell their shares, especially if the issuer’s trading policy permits trading under a plan during a trading or earnings blackout period,
  • Potentially less negative publicity associated with insider sales; and
  • Decreased burden on counsel or trading compliance officers who otherwise would have to make subjective determinations about the availability or possession of MNPI each time an insider seeks to buy or sell shares.

Best Practices

The following strategies may help maximize the flexibility and effectiveness of a 10b5-1 plan:

  • Establishment of plan: Establish Rule 10b5-1 plans only during open trading windows in a show of good faith.
  • Waiting period: Establish a waiting period between when the plan is adopted and when securities trading begins. It’s recommended to make this waiting period at least 30 days.
  • Term and form of plan: Use a pre-approved form of plan and consider the minimum and maximum terms of use for it. Review the plan once a year to make sure that it’s still relevant to your financial objectives.
  • Parameters for trading: Prohibit large sales at the initiation of the plan.
  • Do not allow modification, termination, or suspension: Limit any changes to the plan to open trading windows. Companies should also have a waiting period before trades can be reinstated in case modifications or suspension must occur.
  • Disallow multiple plans: Rule 10b5-1 plans should not overlap, as it can raise suspicions about avoiding regulatory bodies. One plan should be flexible enough and have enough room for diverse trading strategies so that multiple plans will not be necessary.
  • Limit trades outside of plans: After a plan is established, outside trades should be kept at a minimum. While an insider is allowed to trade outside of the plan, the affirmative defense of Rule 10b will not apply to outside trades

Who Can Establish a 10b5-1 Plan

Any person or entity can establish a 10b5‐1 plan to sell or buy securities at a time when the person is not aware of MNPI, so long as the plan is not part of a scheme to evade the insider trading prohibitions of the rule.

Disclaimer:

Data in this presentation is being provided for informational purposes only. Opinions and estimates constitute our judgment and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained in this report has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.