How Are 10b5-1 Plan Rules Changing?: Insider Trading Rules Just Got Tougher
In case you missed it, there are some new rules around insider trading. They’re meant to discourage shady stock trades that allow execs to avoid major losses. That’s obviously a good thing, but there may be implications for regular rank-and-file employees who have no ulterior motives. We’re talking about folks who just want to sell their stock shares and cash in on that liquidity without tripping over insider trading laws. Here’s what you need to know to stay on the SEC’s good side.
What is a 10b5-1 plan?
10b5-1 plans aren’t new. Since the early 2000s, they’ve provided guardrails to prevent insider training. The gist is that company employees (typically executives and those in the C-suites) usually know things that the general public doesn’t. Some may get wind of an upcoming acquisition or negative earnings report. Others might have insider knowledge related to other big news that could cause stock prices to drop—like the business losing a major client. Whatever it is, employees in this boat might be tempted to dump their company stock shares before shit hits the fan.
10b5-1s are supposed to prevent this. If there’s a chance you have material information about your company, you’re required to tell the SEC about the trades you plan on making in the future. This is to ensure that you’re not profiting based on nonpublic information. Once everything is filed, you can only trade those shares within the 10b5-1 plan. If everything is kosher, the corporate insider is shielded from liability.
Listen to AJ and Shane discuss one of the most infamous 10b5-1 trades on the Liquidity Event Podcast.
Lots of regular employees literally can’t trade stock without a 10b5-1 plan—it’s the only way to sell their vesting RSUs or vesting non-qualified options. Folks who work on people teams or in marketing, for example, might fall into this camp. 10b5-1 plans provide protection and allow employees to sell their shares on the up and up. I honestly love these plans, which is why we set them up for our clients all the time.
So, what’s the problem?
Over the last couple decades, it looks like some corporate executives found loopholes that may have allowed them to carry out insider trading. (Shocker, right?) As reported by Reuters, the Wall Street Journal looked at 75,000 scheduled stock sales made by corporate insiders. Roughly one-fifth were executed within just 60 days of their adoption. Not surprisingly, these trades were often followed by a drop in share price.
Those who offloaded their shares within that 60-day window increased their profits by hundreds of millions of dollars. Stanford University research also found that 10b5-1 plans usually performed better when they:
Had shorter cooling-off periods (this is the time between planning trades and when the trades are actually executed)
Only covered a single transaction
Were established and carried out just prior to a company announcing its quarterly earnings
In a nutshell, it looks like the old way of doing things left some room for insider trading. That kind of erodes the integrity of the market. If people are profiting off of insider information, and it happens enough, it’s easy for regular folks to lose faith in the market. It also sucks for the people who buy up shares not knowing that the value is about to tank.
What are the new 10b5-1 rules?
The suspicious timing and profitability of some stock trades suggest that corporate insiders knew things that the public didn’t know. New 10b5-1 rules went into effect in April 2023. They’re supposed to make it harder for folks to leverage nonpublic information to their advantage. There are now mandatory, longer cooling-off periods. This ranges anywhere from 30 to 120 days, depending on your job title.
Corporate insiders also have to personally certify that they are not aware of any material nonpublic information—and that they’re adopting the 10b5-1 plan in good faith. In many cases, the rules also prohibit people from having overlapping plans. On top of that, you can now have just one single-trade plan per 12-month period.
If you’re a corporate insider, and you’re trading with a clear conscience, you probably won’t have too much to worry about. You just want to make sure you meet all the requirements before selling your shares. We can help out here.