Rule 10b5-1 allows insiders to create pre-arranged trading plans as a way to remain compliant when managing their stock compensation. When structured properly, a 10b5-1 trading plan can provide corporate insiders an affirmative defense against insider trading allegations. This serves to balance the executives’ need to diversify with adequate measures to protect investors.
Although 10b5-1 plans were first introduced by The Securities and Exchange Commission (SEC) in 2000, the agency made significant changes to the rules in 2022.
What is a 10b5-1 trading plan?
A 10b5-1 plan is a written agreement between a public company corporate insider and a broker which details the insider’s potential future stock sales over a specified period of time. The plan includes the number of shares, as well as the price and timing of trades, though these inputs can be variable/relative, formula-based, or fixed.
Demonstrating trades were planned when the individual was not in possession of material nonpublic information (MNPI) is a key part of a 10b5-1 plan. Examples of MNPI include unannounced earnings reports, pending mergers or acquisitions, unreleased results of a clinical trial, or major legal developments.
Important disclosure: The material in this article is for informational purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific investment product, financial, legal or tax strategy.
Key Rules and Requirements for 10b5-1 Trading Plans
- No Material Nonpublic Information (MNPI): The insider must adopt the plan during an approved window and when they do not possess MNPI about the issuer at that time.
- Good Faith Requirement: The plan must be adopted in good faith.
- Trading Plan: The plan must be a binding written agreement that expressly specifies the amount, price, and date of the trades, or includes a formula or algorithm for determining these details.
- No Subsequent Influence: Once the plan is adopted, the insider cannot exercise any subsequent influence over how, when, or whether the trades are made.
- Modifications Treated As Terminations: Once the plan is in place any attempt to modify the price, timing, or amount of shares under the plan will be considered a termination of the plan. A new plan can be adopted, subject to the same rules as any new trading plan (no MNPI, open window, cooling period, etc.).
Other rules, such as no overlapping plans and single trade plans (with exceptions) and disclosure requirements also exist, so speak with your company’s legal and finance department.
Mandatory Cooling-Off Periods
A mandatory waiting period is required between the date the plan is adopted and the date of the first trade.
Directors and Officers (defined in Section 16 of the Exchange Act):
The later of:
(a) 90 days after plan adoption/modification, or
(b) two business days following the filing of the 10-K/Q for the fiscal quarter in which the plan is adopted, or
(c) a maximum of 120 days
Non-Directors/Non-Officers: A 30-day cooling-off period following plan adoption or modification.
Setting Up a 10b5-1 Plan
Creating a compliant and effective 10b5-1 trading plan requires careful planning, legal guidance, and adherence to both regulatory requirements and internal company policies.
Setting Up Trading Plans: Timing and Best Practices
Although not an open trading window, it’s possible for executives to set up a trading plan during the lockup period after a company goes public (IPO, direct listing, SPAC). Be sure to check with your company first.
Whether you work for a newly public company or a seasoned member of the S&P 500 index, discuss issuer-specific rules with the CFO or equivalent. Having an internal review of a 10b5-1 plan prior to adoption is a best practice and may also be required by some companies. Also consider engaging experienced legal counsel to ensure the plan’s structure complies with all aspects of Rule 10b5-1 and the recent amendments.
Broker Selection and Wealth Management
The plan should be administered by a reputable broker who understands the rules and has a robust trading department. Some companies let executives choose their own broker. Others require a specific broker. This can make it harder for executives who want an independent wealth advisor and full-time fiduciary.
Trading Plan Strategy and Setting Price Targets
A central component of any 10b5-1 plan is the trading strategy. As explained above, 10b5-1 plans must clearly specify the terms of future trades, but there’s still a lot of flexibility for insiders to customize their approach.
Talk to your financial advisor about your cash needs, financial goals, diversification plan, and how to spread out your investments across multiple goals. Here are some considerations and options for structuring your trading plan.
Price Targets
- Market order: an order to sell at the current market price
- Limit order (floor): an order to sell at a certain price (typically an average price) or better (example: sell 10,000 shares at $20 per share or better)
- Accelerated selling: a limit order strategy to sell more shares at different stock prices (example: sell 10,000 shares at $20 or better, sell an additional 5,000 shares at $25 or better)
Quantity
- Each share of stock can have different tax implications and economic value. So consider all your holdings: vested unexercised stock options, common stock, vesting shares, even shares held by trusts or family members
- Be aware of any minimum holding requirements by the company
- Quantity limits can restrict sales. Limits can be set up in a number of ways, using time or trading volume for example
- Consider trading volume. Insiders will also have volume limitations
Duration and Trading Frequency
- The optimal duration for a 10b5-1 plan is typically 12 months
- Consider how often the plan should open for trading. For example, monthly or quarterly, and for how many trading days. Keep in mind the broker may have their own limits and the company’s insider trading policy will often still impose blackout periods around earnings releases
- Given the general limitation of only having one active trading plan and compliance risks associated with early terminations or modifications, finding the optimal plan length is important
Example: Stock Options with a Low Strike Price
An individual trading plan needs to match the specific financial needs of the executive and align with the company’s insider trading policy, the broker’s rules, and securities laws.
To illustrate some of the tradeoffs and complexities when developing a trading plan, consider the following pros and cons. For simplicity, the list below only considers a situation with unexercised stock options at a low strike price.
- Likely to yield greater cash proceeds when sold versus an option with a higher strike price. However, the low exercise price will generate more taxable income.
- May require selling a fewer number of shares to generate a given level of net proceeds.
- Shares with low exercise prices or cost basis are more likely to hold value if the stock price sinks. So you could make an argument to include them in the current trading plan, to allow diversification to continue even with a market order or low limit price, or opt to save these shares for later, as options with a higher strike price may be underwater in that situation.
- With incentive stock options, in this example, because of the inexpensive exercise cost and no requirement for employer federal tax withholding, it’s possible to consider monetary exercises (cash) outside of the plan under AMT limits. The shares should be held (not sold) until they can be added to a successor 10b5-1 plan and then later sold with the benefit of long-term capital gains tax treatment.
This is not an exhaustive list, either. For example, longtime executives with unexercised options also need to consider their grant’s expiration date. Considering all aspects of the situation requires careful planning, so it’s important to work with your financial advisor and tax advisor when drafting a plan.
Managing Concentration Risk
Most public company executives are heavily concentrated in their employer’s stock. Although a 10b5-1 plan won’t change that, one of the reasons to adopt a plan is to further diversification efforts. If you have few liquid assets outside company stock, you might want to diversify more than others who have already taken profits.
Planning Trades for Cash Needs
Aside from cash compensation, your trading plan can be a major source of liquidity. Understand your regular expenses and any new or one-time costs and major purchase goals. While some lifestyle goals may take years to achieve, other costs, perhaps college tuition, may have a definitive deadline.
If you haven’t already saved for these items, at a minimum, consider structuring a 10b5-1 plan to ensure sufficient liquidity. For example, this may mean selling a certain number of shares each month with an achievable limit price or even a market order.
Managing Investment Needs for Retirement Planning
With so many aspects to consider and the desire to fund near-term lifestyle goals, investing for retirement can get overlooked. Don’t let that happen. There may be a lot of cash coming in (and going out for taxes) but that doesn’t mean the balance should be spent. It won’t help diversification efforts, either.
To prevent lifestyle creep, prioritize allocating funds to investments before deciding on lifestyle upgrades. Speak with your wealth advisor to learn more about how much you may need to maintain your lifestyle in retirement. To illustrate, this article contains more on what retirement may look like between $2M and $15M.
Single stocks don’t move like the market so there’s always going to be great uncertainty when you have a large stock holding. Diversification helps reduce this risk, but it won’t eliminate it. Given the unpredictability of future stock prices, it’s crucial for investors to save significantly more from their trading proceeds than they spend.
Tax Considerations for Your Plan
The tax implications will determine how much cash is left for lifestyle goals and investments. The type of equity compensation you have is a key driver. If you have multiple stock grants and/or a mix of common stock, you’ll want to consider the optimal shares to include to balance tax implications, quantity restrictions, price targets, cash needs, and future stock moves.
Make sure your tax advisor is aware of trading activity in your plan. Even when employer withholding is required, it typically isn’t enough. Quarterly tax payments are usually needed in addition to a large balance due in April. Every month (or trading interval, if different), set aside funds for taxes. Treasurys can be a great tool for matching the timing of future tax payments.
Common Questions About 10b5-1 Trading Plans
Do I need a 10b5-1 plan? Can I set up a 10b5-1 plan if I’m not an insider?
Ask if your company requires you to have a trading plan. And learn more about the rules and classification of material nonpublic information (MNPI). Even if the company does not require it, executives and insiders should strongly consider the pros and cons. A plan may be less crucial for non-insider employees (non-director, non-officer), depending on their function and role. Anyone can set up a 10b5-1 plan, not just corporate insiders.
My company’s insider trading policy conflicts with the broker’s policy. What do I do?
Conflicts in corporate policy do exist. After all, companies need to manage their risk and potential legal liability, just like executives do. Some firms will take a more conservative position or interpretation of securities law than their peers. When conflicts exist between the broker and the issuer, the executive will likely need to adhere to the most conservative reading. Or they can consider switching brokers, if that’s an option.
Can you trade outside of a 10b5-1 plan?
Technically, yes. But trades made outside the plan will not benefit from the 10b5-1 plan’s affirmative defense against insider trading allegations. The 10b5-1 plan and corporate insider trading policy may prohibit trades outside of the trading plan. As a best practice, insiders should refrain from transacting outside the plan before consulting their legal counsel.
Learn more about how we work with individuals with stock compensation or schedule a phone consultation with an advisor.
[Last reviewed October 2025]
Important disclosure: The material in this article is informational purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific investment product, financial, legal or tax strategy. This is a general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision. Darrow Wealth Management does not provide legal, accounting, or tax advice.
