10b5-1 Plans for Executives

A 10b5-1 plan is a pre-arranged trading plan that provides an affirmative defense against insider-trading allegations when executives sell company stock. For public-company officers, directors, and 10% shareholders, these plans are essentially mandatory for any meaningful stock sale activity.

Who needs one

• Named Executive Officers (NEOs) in the proxy
• Directors
• Section 16 filers (10%+ shareholders)
• Anyone with regular access to material non-public information (CFO, Controller, General Counsel, etc.)

The 2022-2023 SEC amendments

In December 2022, the SEC significantly tightened 10b5-1 rules. Key changes now in effect:

• Cooling-off periods. Directors and officers must wait the later of (a) 90 days after plan adoption, or (b) 2 business days after the company files its quarterly report covering the adoption quarter. Capped at 120 days.
• Non-executives: 30-day cooling-off.
• Single-plan rule. Generally only one active plan at a time, with narrow exceptions.
• Certification at adoption. Directors/officers must certify in writing that they're not aware of MNPI and adopting in good faith.
• Proxy disclosure. Companies must disclose plan adoption/termination in 10-Qs and 10-Ks.
• No overlapping single-trade plans. Restriction on opportunistic single-trade plans that circumvent the good-faith requirement.

How to design one well

Design dimensions to specify in the plan:

• Duration. 12-24 months typical. Longer plans allow more price averaging.
• Total volume. Balance between meaningful diversification and locking yourself in.
• Timing schedule. Monthly, quarterly, or price-conditional triggers.
• Price conditions. "Sell X shares if stock is above $Y" can preserve upside while ensuring eventual diversification.
• Integration with RSU vest cycles. Automatic sell-at-vest on a fixed portion, or separate schedule.

Tax coordination

A well-designed 10b5-1 plan coordinates with:

• NQDC distributions — avoid stacking sell proceeds and NQDC distributions in same year
• ISO exercises — AMT implications of exercise + sale timing
• Charitable giving — donating appreciated shares via DAF reduces capital gains tax
• State residency — if you're considering moving to a no-income-tax state, time sales accordingly

Common mistakes

• Adopting during a blackout. Plan must be adopted during an open trading window.
• Thinking the plan is advisory. Trades must occur as specified. You can't override based on market conditions.
• Terminating early. Terminating a 10b5-1 plan before completion can invalidate the affirmative defense for past trades and looks bad in SEC investigations.
• Under-documenting certification. Keep a paper trail of MNPI awareness checks at adoption.
• Inadequate firm clearance. Your company's compliance team must approve the plan. Don't sign before getting sign-off.

The modification process

Under post-2023 rules, modifications to an existing plan effectively require terminating and adopting a new plan, with a new cooling-off period. This means you can't react to market changes by adjusting your plan. Design with foresight.