Rule 10b5-1 Plans: What IR Teams Must Disclose and Say

A Rule 10b5-1 plan is a written trading plan that lets a company insider buy or sell stock on a preset schedule, and since February 27, 2023 it offers its insider trading defense only after a mandatory cooling-off period. Directors and officers wait at least 90 days, up to a maximum of 120, before the first trade. Investor relations teams need to prepare for the filings and questions that follow.

What changed under the SEC's 2022 Rule 10b5-1 amendments?

The SEC adopted amendments to Rule 10b5-1 on December 14, 2022, and they took effect on February 27, 2023. The SEC adopted them unanimously, according to a JD Supra summary, and the amendments added conditions to the rule's affirmative defense against insider trading liability.

Law firm summaries list the main additions. Directors and officers must wait through a cooling-off period before the first trade. Directors and officers must include a certification when they adopt or modify a plan. The rules restrict multiple overlapping plans and single-trade plans, according to Troutman Pepper.

The amendments did not affect plans adopted before February 27, 2023, according to Troutman. For communications teams, the practical point is that the rule governs the executive's trading, but the disclosure that follows lands on the company's own filings and press coverage.

A National Law Review summary said the SEC acted to address perceived abuses of the rule, which is why the amendments focus on timing, certification and disclosure. Communications teams should read the changes as a transparency measure: more information about executive trading now appears in public filings that reporters and analysts can search.

How long is the cooling-off period?

The cooling-off period for a director or officer lasts until the later of 90 days after the plan is adopted or two business days after the company files the Form 10-Q or 10-K covering the quarter in which the plan was adopted. It cannot exceed 120 days, according to Paul Weiss.

People other than directors, officers and the company face a 30-day cooling-off period, and the final rules set no cooling-off period for plans adopted by the issuer itself, according to Paul Weiss and the National Law Review. Modifying a plan can trigger a new cooling-off period, according to Locke Lord.

The calendar matters because the second test depends on the filing date. Davis Polk noted that the SEC concluded an earnings release alone does not satisfy the test, so for plans entered after third quarter earnings the cooling-off period may be closer to 120 days. A hypothetical shows the effect. An executive adopts a plan in early November, and the company files its Form 10-K in late February. The first trade cannot occur until two business days after that filing, and the 120-day cap then applies.

What must companies disclose about trading plans?

Companies must disclose director and officer plan adoptions and terminations each quarter, and must describe their insider trading policies each year. Troutman's summary says companies make quarterly disclosure of plans used by executive officers and directors, with a description of material terms, and annual disclosure of whether they have adopted insider trading policies, with copies filed as exhibits to the Form 10-K.

Section 16 insiders also report more. The amendments require gifts of securities to be reported on Form 4 within two business days, not annually on Form 5, according to Paul Weiss. Form 4 must also identify transactions made under a Rule 10b5-1 plan, a requirement that applied to filings from April 1, 2023.

The new company disclosures applied beginning with the first filing that covers the first full fiscal period starting on or after April 1, 2023. For calendar-year companies, that was typically the second quarter Form 10-Q in 2023, according to Troutman. Smaller reporting companies received an additional six months.

Where will reporters and analysts see the information?

Reporters and analysts will see plan information in quarterly reports, annual reports and Form 4 filings, and they can compare them with an executive's stock sales. The filings are public, and the company controls only the explanation that accompanies them.

That makes the quarterly report a communications event, even though it is a compliance document. A reporter who sees a plan adoption in a Form 10-Q and a large sale in a Form 4 will ask why the executive adopted the plan and why the sale happened when it did. The company needs one consistent answer prepared before either filing posts.

What should IR and communications teams do?

IR and communications teams should keep a trading-plan calendar, agree a short holding statement with counsel, and route every question about an individual's trades to one spokesperson. The steps below are this article's reading of the rule changes, not legal advice.

• Keep a calendar that shows each director and officer plan, its adoption date, its cooling-off end date and the filings that will disclose it.

• Draft a two-sentence statement, reviewed by counsel, that says the plan was adopted under the company's insider trading policy and refers to the filing.

• Route every reporter and analyst question about an executive's sales to one person, and avoid adding facts that are not in the filing.

• Check that earnings scripts and press releases do not mention upcoming insider trades, and keep any comment consistent with what the filings already say.

• Coordinate the date of a plan adoption with the earnings calendar, so the executive and the company both understand when the cooling-off period ends.

The selective disclosure rules in the Regulation FD guide for investor relations apply to any comment about trading plans, and the approach to follow-up conversations in the earnings call preparation guide carries over to these questions.

How can a small company handle plan questions?

A small company can handle plan questions by giving counsel and one spokesperson shared ownership of the answer. A hypothetical shows how. A founder at a small public company adopts a plan and, 95 days later, a Form 4 shows a first sale. An analyst phones to ask whether the sale signals a change in outlook. The IR lead points to the Form 10-Q disclosure of the plan, states the adoption date and says the plan follows the company's trading policy, and does not comment on outlook.

Teams that field these questions without a large staff can use the overview of small-cap investor relations programs, and the investor relations services page outlines support for public companies.

Frequently asked questions

What is a Rule 10b5-1 plan?

A Rule 10b5-1 plan is a written plan under which an insider arranges trades in advance, and adopting it in good faith can give an affirmative defense to insider trading claims. The 2022 SEC amendments added conditions that must be met to rely on that defense.

How long is the cooling-off period for directors and officers?

The cooling-off period for directors and officers is the later of 90 days after adoption or two business days after the Form 10-Q or 10-K for the quarter of adoption, capped at 120 days. For other persons, it is 30 days.

Do companies need a cooling-off period for their own plans?

Companies did not receive a cooling-off requirement for their own Rule 10b5-1 plans under the final rules, according to law firm summaries. The cooling-off periods apply to directors, officers and other individuals.

Do the new cooling-off periods apply to company share repurchases?

The new cooling-off periods do not apply to company share repurchase plans, according to a Troutman summary of the rules. They apply to directors, officers and certain other individuals who rely on Rule 10b5-1 plans.

When did the Rule 10b5-1 changes take effect?

The amendments became effective on February 27, 2023. Company disclosure requirements phased in for periods beginning on or after April 1, 2023, and smaller reporting companies had an additional six months.