Rule 10b5-1 stock trading plans

Rule 10b5-1 allows individuals associated with a public company to implement a stock trading plan. By having such a plan, a person cannot be held liable for insider trading activities, since there is no day-to-day direction of buying and selling activities. The key defense is that the plan was set up in advance and then operated without further direction. This rule is needed, because a person in a public company may regularly come into contact with material information about the company that has not yet been revealed to the public. If so, they would be engaging in illegal insider trading if they were to buy or sell company stock.

To use such a trading plan, compliance with the following issues must be affirmed:

  • The person entered into a written trading plan, to be conducted by a third party, prior to being aware of material information that had not been released to the public.
  • The plan specifies the prices at which securities will be bought or sold, or a formula for doing so, and the dates within which activities will occur. The plan does not allow for subsequent alterations to the trading instructions.
  • The person must be able to prove that all subsequent trading conducted by him or her was as specified in the trading plan.

It is possible to cancel a trading plan once it has been initiated, which means that an insider could legitimately cancel the plan if his or her inside knowledge makes it apparent that continuing with the plan could lead to losses. A series of short-duration trading plans would have a similar effect. In both cases, an insider can keep from incurring much downside risk from engaging in trading plans.

    To enter into a 10b5-1 trading plan, contact your broker. They usually have a standard plan format that can be filled out, and which forms the basis for a trading program.

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