Rule 10b5-1 Plans: Cooling-Off Periods and Form 4 Clues

A large share of executive stock sales are not decided on the day they happen. They run under a Rule 10b5-1 trading plan: written instructions, set up months earlier, that tell a broker what to sell (or buy) and when. Knowing whether a trade came from a plan changes how much it can tell you, and since 2023 the filings make that much easier to check.

The Short Answer

• What it is: a contract, instruction or written plan to buy or sell a company's stock, adopted before the person knew any material nonpublic information.
• What it does: it gives the insider an affirmative defense if they are later accused of trading on inside information. It is not a permission slip and not a separate filing.
• Since February 27, 2023: directors and officers must wait a cooling-off period of at least 90 days before the first trade, may not run overlapping plans, and must certify they had no inside information when they adopted the plan.
• Since April 1, 2023: Form 4 and Form 5 have a checkbox for trades made under a plan meant to meet Rule 10b5-1(c), and the filer must give the plan's adoption date.

Why the Rule Exists

Rule 10b5-1 sits under Section 10(b) of the Securities Exchange Act of 1934, the general anti-fraud provision used in insider trading cases. Executives are almost always aware of something that has not been made public yet, so without a safe route they could rarely sell shares they receive as pay.

The rule's answer: if you lock in your trades while you are not aware of material nonpublic information, and then let the plan run, later trades are not treated as made "on the basis of" what you learned in between.

To qualify, the plan must do one of three things:

1. specify the amount, the price and the date of the trades;
2. include a written formula, algorithm or computer program that sets the amount, price and date; or
3. leave the person with no further influence over how, when or whether trades happen (for example, a broker decides), as long as whoever does decide is not aware of inside information.

The trades then have to actually follow the plan. Changing the amount, price or timing, or hedging around the plan, takes the trade outside it.

The 2023 Amendments

The SEC adopted the changes on December 14, 2022, after years of criticism that plans were being set up or cancelled at convenient moments. They took effect on February 27, 2023. The main conditions for everyone other than the company itself:

A few details that matter when you read filings:

• A change counts as a new plan. Modifying the amount, price or timing of trades is treated as terminating the old plan and adopting a new one, and the cooling-off clock starts again.
• Overlap exceptions. A person may have one later plan waiting in line, as long as it cannot start trading until the earlier plan's trades are done or have expired. Several brokers can together count as one plan. A plan that only sells enough shares to cover tax withholding when stock awards vest (sell-to-cover) does not count against the limit.
• Companies themselves must act in good faith too, but the cooling-off period and certification rules do not apply to issuer buyback plans.

Where Plans Show Up in Filings

On Form 4 (and Form 5)

Since April 1, 2023, the top of Form 4 has a checkbox saying the transaction was made under a contract, instruction or written plan intended to satisfy Rule 10b5-1(c). When it is checked, the filer must also give the date the plan was adopted, usually in a footnote ("The sales reported were effected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person on ...").

That date is useful on its own. With a 90-day minimum cooling-off for directors and officers, you can see how long before the sale the decision was locked in.

On InsiderAction.io, trades from filings with the box checked are marked 10b5-1 on ticker pages, insider pages and in the transaction database.

Older filings (before April 2023) have no checkbox. Many of them still mention a plan in a footnote, but it was voluntary, so absence of a footnote proves nothing.

In the Company's 10-Q and 10-K

Item 408(a) of Regulation S-K requires companies to say, each quarter, whether any director or officer adopted or terminated a Rule 10b5-1 plan (or a similar written arrangement that does not rely on the rule). The disclosure must give:

• the person's name and title,
• the date of adoption or termination,
• how long the plan runs, and
• the total number of shares to be bought or sold.

It does not include the price limits. In a 10-Q this usually appears near the end, under "Other Information" (Part II, Item 5); in a 10-K under Item 9B. It is often the earliest public sign that a large sale is coming, because it can come out before the first trade.

The annual report must also say whether the company has an insider trading policy and file it as an exhibit (or explain why it has none).

On Form 144

Form 144, the notice that an affiliate plans to sell, also asks whether the seller is relying on a Rule 10b5-1 plan and when it was adopted. See Form 144 vs Form 4.

How to Read a Planned Trade

A sale under a 10b5-1 plan is, by design, a decision made months earlier. That is why many analysts give plan sales less weight than a sale the insider chose on the day. Some patterns are still worth noticing in the filings:

• Plan adopted shortly before bad news and sales starting right after the cooling-off period ends. The 90-day minimum makes this harder than before 2023, but not impossible.
• Plans terminated early, which the 10-Q/10-K must now report. A cancelled sale plan is the one move an insider can make without trading at all.
• Sales outside the plan by someone who also has a plan running. Watch for a Form 4 with the checkbox empty, or a filing where the checkbox is ticked but the footnotes say only some of the transactions were made under the plan. The checkbox covers the whole filing, so the footnotes are where planned and unplanned trades are told apart.
• Size relative to holdings. The 10-Q gives the plan's total shares; compare it with the holdings shown on the latest Form 4.

Purchases under 10b5-1 plans exist but are rare. Most plans are for selling stock received as compensation.

None of these patterns proves anything. They are reasons to read the filings more closely, not trading signals. For how plan sales fit into insider selling more broadly, see insider selling explained.

Sources

• 17 CFR 240.10b5-1 (Rule 10b5-1), current text on eCFR
• 17 CFR 229.408 (Regulation S-K Item 408)
• SEC press release 2022-222, "SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures" (December 14, 2022)
• Final rule, Release No. 33-11138, Insider Trading Arrangements and Related Disclosures, 87 FR 80362 (December 29, 2022)

This page explains SEC rules for general information. It is not legal or investment advice.