10b5-1 Plan Changes: What You Should Know

As an executive, a significant portion of your compensation may be tied to your company equity. And because of your status, you may be privy to material non-public information (MNPI) about the company’s business that could potentially expose you to insider trading liability. A Rule 10b5-1 plan can provide executives with an affirmative defense against insider trading liability as long as the requirements under Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended are adhered to.  

In December 2022, the Security Exchange Commission (SEC) released the final rule modifying Rule 10b5-1 of the Exchange Act to include, among other items, minimum cooling-off periods, overlapping-plan restrictions, single trade plan limitations, and certification requirements for directors and officers. The amendments, which went into effect for plans adopted or amended after February 27, 2023, aim to increase transparency and reduce the possibility of transactions being influenced by MNPI. Below are some key Rule 10b5-1 changes that you should be aware of:

Cooling-Off Periods

The SEC amendment now imposes mandatory minimum “cooling-off periods” before any trading can commence after the plan is adopted (or modified, and such modification impacts the amount, price, or timing of trades under the plan).

The length of the cooling-off period depends on if you are a director or officer of the company.

• For non-directors/officers, the cooling-off period is 30 days after the plan adoption date or amendment date.

 

• For directors/officers, the cooling-off period is the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or amended (but not to exceed 120 days following plan adoption or modification).¹

 

Take Note:  

An amendment to an existing plan that modifies the amount, price, or timing of trades under the plan is considered a termination of the existing plan and will trigger a new cooling-off period.

New Required Certifications

Directors and officers must include a series of representations in their 10b5-1 plans. The certifications are intended to reinforce directors’ and officers’ awareness of their obligation as corporate insiders.¹ The directors and officers must certify that they are:

• Not aware of MNPI about the issuer or its securities, and

 

• Adopting the plan in good faith and not as part of a scheme to evade the prohibitions of Rule 10b5-1.

 

Take Note:

Certifications must be kept accurate throughout the duration of the 10b5-1 plan. 

Overlapping Plans and Single-Trade Plans

Overlapping plans, defined as multiple plans during the same time period, are prohibited by executives, directors, and officers. This modification prevents insiders from setting up pre-existing hedged trading programs and then canceling execution of the unfavorable side of the hedge, while executing on the favorable transaction.¹

The only exceptions to the overlapping plans restriction are:

• Eligible sell-to-cover plans—the sale of securities to satisfy tax withholding obligations arising from applicable vesting award transactions (excluding options).

 

• Plans with other brokers provided certain requirements are met, which may be treated as a single plan (although a modification or termination of any one plan would constitute a modification/termination of all plans).

 

• Plans adopted while an existing plan is in place, so long as trades under the subsequent plan start after all trades under the existing plan are completed or expire without execution.

 

Take Note:

For single-trade plans, executives, directors, and officers may only enter into one plan “designed to effect” a single-trade plan in any twelve-month period. 

Acting in Continuous Good Faith

Previously, 10b5-1 plan participants were required to enter the plan in good faith. The SEC amendment   broadens the requirement to include acting in good faith as a continuous condition throughout the duration of the plan. This revision, which applies to executives, directors, and officers, serves as a deterrent to fraudulent conduct during the life of the trading arrangement.

Take Note:

This requirement also includes the efforts of an insider to direct, influence or manipulate the activities of others. 

Quarterly Issuer Disclosures

In addition to a company’s annual disclosure of insider trading policies and procedures, the SEC amendment calls for quarterly company disclosure of 10b5-1 plans by an issuer on Forms 10-Q/10-K when officers and directors have adopted or terminated a plan. Issuers are also required to include a description of the material terms of the plan, such as name and title of the director or officer, date of adoption or termination, duration of the plan, and number of securities to be sold or purchased.

Take Note:

The director’s/officer’s plan may be requested by the issuer to assist in compliance with company disclosure requirements.¹

More on the Amendments

While this is a high-level look at key changes to Rule10b5-1, it is not intended to be a complete summary of the amendments. For more detailed information on the amendments visit sec.gov(opens in a new tab). You should also consult your own advisors on these changes and talk with your Executive Relationship Manager on how they apply to your specific situation.

Footnotes:

¹ SEC. Securities and Exchange Commission Final Rule(opens in a new tab). Accessed May 16, 2023