Using 10b5-1 plans to mitigate insider trading risks

Rule 10b5-1 is a Securities and Exchange Commission (SEC) rule that defines and prohibits insider trading – the purchase of a security on the basis of material nonpublic information.

Company securities trading can wedge executives and other corporate officers between restrictive transaction windows and increased Securities and Exchange Commission scrutiny of sales made by those perceived as company insiders. A Rule 10b5-1 plan can help relieve that pressure.

As company executives and others come into frequent contact with material nonpublic information about their companies, the SEC provided for the creation of these individual trading plans, which are intended to separate the decision to trade from any acquisition of material nonpublic information. Rule 10b5-1 plans provide an affirmative defense against insider trading claims for insiders wanting to trade company securities.

We can assist with 10b5-1 plan design and execution. By creating a passive investment plan, executives and other insiders can put distance between their intent to buy or sell securities and any material nonpublic information they may come to possess.

SEC regulations characterize this type of plan as an affirmative defense against an insider-trading claim. They are particularly useful for executives who need to regularly sell company equity for cash or diversification, but they can be useful for others with access to sensitive information. Creating and following a plan is not an absolute defense, however. Effective plans are made in a good faith, attempt to follow the spirit of the law, built with rigor and durability, and created without knowledge of any material nonpublic information.

We can help you set up a Rule 10b5-1 plan and provide advice about additional steps to take.