10b5-1 Planning for Corporate Executives

Along with running a successful company and answering to shareholders, corporate executives of public companies have something else to worry about — their significant equity positions in their own companies, and generally complex compensation packages. Used properly, a 10b5-1 plan is a tool that can help executives strategically plan and execute concentrated equity position sales.


What It Is and Why You Need It

Rule 10b5-1 was established by the Securities Exchange Commission (SEC) for insiders of publicly traded corporations to sell their stock at predetermined dates and prices. If properly designed and implemented, a 10b5-1 trading plan can provide a corporate executive with an affirmative defense against insider trading as well as an opportunity to sell their stock during periods they would normally be restricted (blackout periods). These plans, available from the custodian where the stock is housed, can provide a great way for executives to diversify their holdings in a flexible manner consistent with their financial objectives.

Though 10b5-1 plans are flexible for the executive — they can be cancelled at any time — the plans can only be initiated while the executive is in an open window and is not in possession of non-public, i.e. inside, information. The plans must specify the amount, prices, and date of the shares to be sold.


Important Plan Elements

There are important elements and dates that need to be outlined in a plan:

  • Plans should be in place at least one year after adoption date and should not exceed two years. These plans can be cancelled at any time but canceling and replacing a plan should be avoided if possible.
  • The adoption date is the date the executive and the issuer sign the plan. New 10b5-1 plans need to be adopted while the executive is in an open window and is not in possession of nonpublic information.
  • The effective date is the date the first trade is initiated.
  • The termination date is typically no longer than 2 years from the adoption date. Insider trading restrictions set forth by both the SEC and individual companies have become more stringent and arduous for executives that receive a significant portion of their compensation in the form of restricted stock or stock options.



We’ve noticed the following trends that savvy companies and executives institute:

  • Cooling periods mandate a length of time during which trading is prohibited after a plan is adopted. Plans typically have a cooling period between the adoption date and the effective date. A normal cooling period is 30-90 days for a new plan. If an executive is cancelling and replacing a plan, this generally involves waiting at least 90 days from the date of cancellation, and generally involves a new cooling period after adoption. This could lead to 6 months of blocked trading.
  • Although executives can sell in an open window, it is preferable to only use the 10b5-1 plan for officers and directors to sell stock. It should also be the exclusive defense against insider trading.
  • Some companies establish plans concurrent with their initial public offering (IPO), when all information is publicly disclosed. This provides the executive with extra protection against insider trading because the cooling period needs to exceed the underwriter lock up (greater than 6 months). The longer the cooling period, the less likely it is for shareholders to make the claim that an executive has acted on inside information

Establishing a plan concurrent with an IPO is particularly important for companies with constantly evolving non-public information, such as certain life science companies involved in drug trials. In situations like this, executives might have limited windows for selling stock absent of a 10b5-1 plan.

It is important to ensure that the brokerage account registration that the stock will go into matches the title stock being sold. For instance, individual accounts need to be established for shares resulting from RSUs and options because they are in individual form when issued. This also ensures that the form 4 and 144 will match.

Because of more rigid insider trading policies, 10b5-1 plans have become a common practice for corporate executives who work with an advisory firm. 10b5-1 planning, under the umbrella of financial planning, has emerged as a way to help executives be more strategic in their planning, protect themselves against insider trading and diversify their wealth. Since the plans can be complex, most executives receive guidance from the investment advisory firm with which they work.


Important Disclaimers

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Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors.  For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.

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