What Is a Rule 10b5-1 Plan?
Rule 10b5 is one of the most important acts put forth by the SEC. It prohibits fraud, misrepresentation, and deceit in the sale and purchase of securities on national exchanges.
A Rule 10b5-1 plan is a pre-scheduled plan for the buying or selling of securities that is designed in accordance with the requirements of Rule 10b5-1(c). A Rule 10b5-1 plan established in good faith, in advance at a time when the particular insider did not possess material, non-public information constitutes an affirmative defense to an illegal insider trading charge, even if actual buying or selling according to the plan is done at a time then the insider may hold material, non-public information that would otherwise constitute liability under Section 10(b) of the Exchange Act or Rule 10b5-1. A 10b5-1 plan typically takes the form of a written contract between the insider and their broker.
The insider must specify the amount, price, and timing of the transactions in the plan. As an alternative to this, the plan can use a written set of conditions to determine the price, amounts, and dates, or give instructions to another person to execute sales or purchases without any subsequent influence of the insider.
Benefits of a Rule 10b5-1 Plan
There are several benefits of Rule 10b5-1 plans for both insiders and individual investors:
- An affirmative defense to insider trading allegations for persons trading pursuant to the plan;
- Potentially more opportunities for insiders to sell their shares, especially if the insider's company permits trading under a plan during a trading or earnings blackout period;
- No necessity to bunch sales during open trading windows;
- Access to secondary markets and liquidity during blackout periods;
- A better appearance and less negative publicity associated with insider sales as the possession of insider information becomes practically irrelevant;
- Mitigation of interpretation issues associated with insider sales - regular insider transactions make the investor community aware of the plan. When such plan is in place, investors should be able to see the insider's intentions more clearly - regular selling of shares at consistent points according to the plan is most likely to mean that the insider is diversifying their holdings, while the remaining portion of stock in the company implies their confidence in it;
- Convenience and predictability of the sale program for insiders;
- Greater certainty to insiders in planning securities transactions;
- Reduction of legal and compliance burden on counsel or trading compliance officers required to determine the materiality of non-public information for each trade.
Rule 10b5-1 creates more liability for insiders by adopting a broader "awareness" standard in relation to material, non-public information. Rule 10b5-1 plans give insiders greater ability to exercise trades by providing an affirmative defense against insider trading all criteria are met.