Understanding 10b5-1 Trading Plans

Your company may either require or strongly encourage its executives and directors to set up 10b5-1 trading plans for trading company stock. 10b5-1 trading plans are executed between a broker and an individual and must be created while individuals are unaware of any MNPI about the company. A 10b5-1 trading plan can potentially provide individuals with more opportunities to purchase or sell shares especially if the company allows trading through blackout periods if a plan is in place (check with your company to see if this option is available to you).

Requirements for all plans:

A 10b5-1 trading plan must meet the following requirements:

• All persons adopting a Rule 10b5-1 plan must adopt and act in good faith with respect to that trading plan;

 

• The 10b5-1 trading plan is adopted while the individual is unaware of MNPI about the issuing company;

 

• The terms of the 10b5-1 trading plan must identify the amount of shares to be sold or purchased, the price and the date of transaction(s) or specify a formula, algorithm or computer program for determining such amount, price, and date;

 

• Only one 10b5-1 plan designed to effect the open-market purchase or sale of all of the securities covered by such plan in a single transaction may be adopted during any consecutive 12-month period, but there is an exception for eligible sell-to-cover (STC) transactions;

 

• Multiple overlapping plans for any class of securities of an issuer are not permitted, with limited exceptions:
  • Eligible transactions (excluding option exercises);

   

  • 10b5-1 plans with other brokers may be treated as a single plan (although a modification or termination of any one plan would constitute a modification or termination of all plans); and

   

  • Traders may maintain two separate plans at the same time if trading under the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or expire;

   

 

• Any modification or change to the amount, price or timing of the sale of shares under the 10b5-1 trading plan will constitute a termination of the Plan;

 

• After the 10b5-1 trading plan is effective, the individual cannot exercise any subsequent influence over the how, when or whether to make purchases or sales of shares; and

 

• The sale or purchase of shares is executed in accordance with the instructions of the 10b5-1 trading plan.

 

Minimum Cooling-Off Periods:

Rule 10b5-1 requires a waiting period between the date an individual adopts the 10b5-1 trading plan and the date of first trade, as described below:

• Directors and officers (as defined in Section 16 of the Exchange Act): The later of:
  • 90 days following plan adoption or modification; or

   

  • Two business days following the disclosure in a Form 10-K or 10-Q (or, for foreign private issuers, a Form 20-F or 6-K) of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified.

   

  • Subject to a 120-day maximum regardless of timing of financial results

   

 

• Non-directors/officers: 30 days following the plan adoption date

 

Additional Requirement for Officers and Directors:

Rule 10b5-1 requires directors and officers to certify their 10b5-1 trading plan, at the time of the adoption of a new or modified plan, that: (1) they are not aware of MNPI about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1.

Things to know before you get started

Rule 10b5-1 prohibits individuals from trading securities while aware of MNPI. As a result, the terms of the 10b5-1 trading plan may prohibit (1) amending or adopting a 10b5-1 trading plan except during an open trading window, or (2) trading outside of the 10b5-1 trading plan.

Company involvement:

While companies are not parties to 10b5-1 trading plans, it is common practice for companies to acknowledge that the 10b5-1 trading plan terms, entered into between the individual and a broker, accurately reflect the company’s insider trading policy. Companies may also be required to notify the broker of the earliest possible sell date for 10b5-1 trading plans entered into by their director and officers.

The amendment, suspension, or termination of a 10b5-1 trading plan could affect the availability of the affirmative defense for prior plan transactions if such an event calls into question whether the 10b5-1 trading plan was originally entered in good faith and not as part of a plan or scheme to evade compliance with federal or state securities laws. Laws governing insider trading are fact-specific and there is no guarantee that any transaction that is executed pursuant to the 10b5-1 trading plan will be deemed covered by the protections of Rule 10b5-1.

As always, please refer to your company’s insider trading policy for additional information and guidance on plan parameters, eligibility, structure, and other things to consider when determining whether or not to enter into a plan.

Keep in mind, all other applicable securities laws reporting requirements for stock transactions, including those set forth in Rule 144 and Section 16, must still be met.

Individuals executing a 10b5-1 trading plan should keep the following important considerations in mind:

(1) 10b5-1 trading plans should be reviewed and approved by the legal and compliance department of the individual’s company.

(2) Most companies will permit 10b5-1 trading plans to be entered into only during open window periods.

(3) Recent rule changes will require a mandatory cooling-off period between the execution of a 10b5-1 trading plan (or a modification) and the first sale pursuant to the plan (or the first sale following such modification).

(4) 10b5-1 trading plans do not alter the nature of restricted and/or control stock or regulatory requirements that may otherwise be applicable (e.g., Section 16, Section 13).

(5) 10b5-1 trading plans that are terminated early may weaken or cause the individual to lose the benefit of the affirmative defense.

(6) 10b5-1 trading plans may require a cessation of trading activities at times when lockups may be required at the company (e.g., secondary offerings).

(7) Recent rule changes will require companies to publicly disclose material terms of Section 16 director and officer 10b5-1 trading plans, and the early termination of such plans.