The 10b5-1 Plan: What Officers, Directors and Insiders Should Know

Woman executive walking in office

The rules surrounding insider trading are amongst the trickiest for executives to navigate. Officers, directors, and insiders have fiduciary responsibilities to both their companies and their companies’ shareholders. For insiders who have access to material nonpublic information, extensive planning is necessary to abide by these fiduciary duties and to comply with insider trading rules and regulations. 

One popular tool to help navigate these intricacies is the 10b5-1 trading plan, which can offer a safer way for executives to trade shares of their company’s stock. Let’s explore the 10b5-1 trading strategy and how it could bring more predictability to your financial future

Rule 10b5-1 Explained

The SEC introduced Rule 10b5-1 in 2000. This rule was adopted pursuant to Section 10(b) of the Securities Exchange Act of 1934 and in connection with Rule 10b-5, which prohibits trading a company’s shares based on material insider information. Under the statute, any directors, officers, or insiders in possession of material nonpublic information face significant restrictions on their ability to sell or purchase securities issued by their company. 

Rule 10b5-1 serves as the basis for prosecuting nearly all insider trading violations. It can, however, also restrict an executive’s ability to effectively manage their equity, which has increasingly become a key component of most executive compensation packages

This is where the 10b5-1 trading plan can help your financial picture as this rule has established a straightforward way for insiders to trade safely. When used properly, the 10b5-1 trading plan offers significant flexibility to executives who often acquire insider information. This is especially true for those seeking to liquidate some of their equity to cover other financial goals, such as paying for a child’s education or the purchase of a family vacation home. 

Establishing a 10b5-1 Trading Plan

To establish and maintain the affirmative defense a 10b5-1 trading plan provides, an officer must meet several requirements:

  1. Enter the plan before becoming aware of any material nonpublic information.
  2. Refrain from exercising any subsequent control over (or deviate from) the purchases and sales outlined in the plan.  
  3. Enter the plan in good faith, not as a strategy to evade Rule 10b5-1 prohibitions.

In addition to these three requirements, a properly devised 10b5-1 trading plan must also abide by one of the following arrangements. It can:

  1. Specify the amounts, prices, and dates for the securities to be sold or purchased.
  2. Be based on a written formula that determines the amounts, prices, and dates for securities to be sold or purchased.
  3. Delegate all trading discretion and decisions to a person who does not possess material nonpublic information (e.g. your Abacus advisor).

It’s critical to understand that all purchases and sales under the 10b5-1 trading plan must be made in accordance with the terms of the plan. Any deviation or alteration of the plan by the officer can call into question the validity of your defense.

10b5-1 Trading Plan Benefits

There are many ways a properly crafted 10b5-1 plan can help an executive navigate their financial journey. These benefits include:

  • Providing a defense against claims of insider trading.
  • Having access to public markets while under a corporate blackout period.
  • Minimizing the risk associated with high concentrated equity positions.
  • Predictability in constructing your financial plan.

Financial Planning Predictability

As financial planners, we promote your successful financial wellbeing by mitigating and minimizing roadblocks. Using a 10b5-1 trading plan lets us more accurately identify the range of outcomes in your financial model and bring more predictability to your financial future. We can do our best planning work to help reach your goals when there is little doubt in expected future income, such as income generated from selling company shares via a 10b5-1 trading plan. We relish these opportunities because it gives us more confidence in your financial model and how you ultimately may measure up to reaching your financial goals. 

Exhibit 1 shows an example of a normal trading calendar someone could expect at their company.

Graphic of example corporate blackout or open window trading program

When company personnel possess material nonpublic information, this predictable schedule becomes complicated. Exhibit 2 illustrates how company events may cause trading windows to close for extended periods of time.

Graphic showing how company events can cause trading windows

Officers, directors, and other insiders can gain valuable flexibility and protection with a 10b5-1 trading plan by making their future more predictable. Exhibit 3 offers an example of how this could play out.

graphic of trading under a 10b5-1 plan

A portfolio weighted heavily in one security can represent the majority of an executive’s net worth. For example, insiders granted stock to complement cash compensation as part of an equity compensation package can liquidate holdings to meet salary needs. Purchasing a new home, paying for a child’s college education, planning for retirement, or exercising options are also reasons insiders may need to sell assets. However, market access can be hampered by trading windows, vesting schedules, insider trading policy limits, and market optics at the time of the trade. 

A properly designed 10b5-1 trading plan can support officers, directors, and other insiders in managing their equity compensation and financial goals while providing an affirmative defense against insider trading allegations. 

Crafting Your 10b5-1 Plan

Need help understanding if a 10b5-1 trading plan is right for your financial situation? We would love to help! Schedule a 15-minute call with an Abacus advisor today to understand how a 10b5-1 trading strategy may help you expand what is possible with your money.


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