# Understanding SEC's Rule 10b5-1: Insider Trading Plan Explained

![Rule 10b5-1](https://www.investopedia.com/thmb/vxpXpqEDo_bXiiAC2cXUFMol5e0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Rule-10b5-1_final-d34b3f68b63d4b65b8b84dd99a043821.png)

*— Investopedia / Michela Buttignol*

## What Is Rule 10b5-1?

Rule 10b5-1 is a [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) regulation that allows insiders of public companies to set up a trading plan for selling stocks they own. Rule 10b5-1 permits major holders to sell a predetermined number of shares at a predetermined time and price to prevent insider trading, and is used by many corporate executives to avoid accusations of [insider trading](https://www.investopedia.com/terms/i/insidertrading.asp).

It is used to clarify [Rule 10b-5](https://www.investopedia.com/terms/r/rule10b5.asp), which was created under the [Securities Exchange Act of 1934](https://www.investopedia.com/terms/s/seact1934.asp), the primary vehicle for investigating securities fraud.  

### Key Takeaways

*   Rule 10b5-1 enables company insiders to set a predetermined plan for trading company stocks, allowing them to comply with insider trading laws while reducing accusations of insider trading.
*   Plans under Rule 10b5-1 must be established without any access to material nonpublic information (MNPI) and specify the price, quantity, and timing of trades in advance.
*   Recent amendments to Rule 10b5-1 have introduced increased disclosure requirements and a mandatory cooling-off period before insiders can begin trading.
*   The SEC has mandated that trades will now settle on a T+1 basis starting May 2024, meaning transactions are settled one business day after execution.
*   While not legally required, public disclosure of Rule 10b5-1 plans can benefit companies by improving transparency and preventing potential public relations issues.

## How Rule 10b5-1 Prevents Insider Trading

Rule 10b5-1 allows company insiders to plan trades in advance and follow [insider trading laws](https://www.investopedia.com/articles/02/061202.asp), and avoid accusations of insider trading. Companies should let executives adopt or amend a 10b5-1 plan when they can trade securities per the insider trading policy. Rule 10b5-1 stops any insiders from changing or adopting a plan if they are in possession of [material nonpublic information (MNPI)](https://www.investopedia.com/terms/m/materialinsiderinformation.asp).

Major [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) often sell shares at regular intervals. A director of XYZ Corporation, for example, may choose to sell 5,000 shares of stock on the second Wednesday of every month. To avoid conflict, Rule 10b5-1 plans should be set up when the individual doesn't know of any MNPI. These plans are usually contracts between the insider and their [broker](https://www.investopedia.com/terms/b/broker.asp).

Under Rule 10b5-1, directors and other major insiders in the company—large shareholders, officers, and others who have access to MNPI—can establish a written plan that details when they can buy or sell shares at a predetermined time on a scheduled basis. This setup allows them to trade when they're not in possession of MNPI. This also allows companies to utilize 10b5-1 plans in large stock [buybacks](https://www.investopedia.com/terms/b/buyback.asp).

## Establishing a Rule 10b5-1 Trading Plan: Requirements & Criteria

There is a general overview and set of planned guidelines for establishing a suitable Rule 10b5-1 plan. To be valid, the plan must follow three distinct criteria:

1.  The price and amount must be specified (this may include a set price), and certain dates of sales or purchases must be noted.
2.  There must be a formula or metrics given for determining the amount, price, and date.
3.  The broker must have the right to decide when to trade, provided they're not aware of MNPI at the time.

For insiders to enter into a Rule 10b5-1 plan, they must not have any access to MNPI regarding anything about the company, as well as the company's [securities](https://www.investopedia.com/terms/s/security.asp).

> **Important**
>
> There is nothing in the SEC laws that makes it necessary to disclose the use of Rule 10b5-1 to the public, but that doesn't mean companies shouldn't release the information anyway. Announcements that use Rule 10b5-1 are useful in warding off public relations problems and helping investors understand the logistics behind certain insider trades.

## Recent Changes to Rule 10b5-1: Key Amendments & Their Impact

The SEC adopted changes to Rule 10b5-1 that increased disclosure requirements for stock trades and gifts of securities in December 2022. These amendments require the person setting up trades to certify they are not aware of any MNPI and are acting in good faith. The changes also added new conditions to the use of the affirmative defense to insider trading [liability](https://www.investopedia.com/terms/l/liability.asp), including the establishment of a cooling-off period before any trading can commence.

SEC Chair Gary Gensler said that changes to the rule came after comments over its two decades of existence, with critics pointing out that insiders can take advantage of liability rules to trade while in possession of nonpublic information. According to Gensler, the newly adopted amendments "will help fill those potential gaps."

As of May 2024, stock trades settle on a [T+1](https://www.investopedia.com/terms/t/tplus1.asp) basis. This means that the transaction is settled one business day after it is initiated. So if an individual sells their stock on a Monday, the sale will complete on Tuesday. If the transaction is executed on a Friday, the transaction settles on the following Monday.

## What Is the Purpose of Rule 10b5-1?

Rule 10b5-1 lets company insiders sell their company's stock, provided they set up a predetermined plan and certify that they do not have access to material nonpublic information about the company or its securities.

## Who Is Affected by Rule 10b5-1?

Rule 10b5-1 applies to insiders in a publicly-traded company. These include directors and senior officers as well as entities and individuals that own more than 10% of the company's voting shares.

## What Changes Were Made to Rule 10b5-1?

In December 2022, the SEC adopted amendments to the rule that increase disclosure requirements and add conditions to the use of the affirmative defense to insider trading liability, including a cooling-off period before trading can begin. The SEC also made changes to the way trades settled for certain securities. As of May 2024, the settlement period for stock trades was shortened from two business days to one.

## The Bottom Line

Rule 10b5-1 allows insiders to sell company stock by setting up a predetermined trading plan that specifies in advance the share price, amount, and transaction date, and avoids accusations of insider trading.

These trading plans are essential for insiders selling stock, especially when they are not aware of any material nonpublic information (MNPI). Insiders and brokerages must certify that they are not aware of any MNPI.

Published insider trading plans and certification of a lack of MNPI provide transparency for investors and the public, and allow insiders a chance to buy or sell shares without accusation.

> **Article Sources**
>
> 1.  Federal Register. "[Selective Disclosure and Insider Trading](https://www.federalregister.gov/documents/2000/08/24/00-21156/selective-disclosure-and-insider-trading)."
>     
> 2.  U.S. Securities and Exchange Commission. "[SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures](https://www.sec.gov/news/press-release/2022-222)."
>     
> 3.  U.S. Securities and Exchange Commission. "[New 'T+1' Settlement Cycle - What Investors Need to Know: Investor Bulletin](https://www.sec.gov/resources-for-investors/investor-alerts-bulletins/new-t1-settlement-cycle-what-investors-need-know-investor-bulletin)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Updated Investor Bulletin: Insider Transactions and Forms 3, 4, and 5](https://www.sec.gov/oiea/investor-alerts-and-bulletins/updated-investor-bulletin-insider-transactions-and-forms-3-4-and)."