[Cheat Sheet] Rule 10b5-1 Changes to Know

As of April 1, 2023, companies have been following the SEC’s largest overhaul to Rule 10b5-1 since the rule’s inception in 2000. The rule changes have had meaningful impacts both on the level of disclosure around 10b5-1 plans and transactions as well as on insider behavior.

In this article, I’ll dive into changes to Rule 10b5-1 and examine the impacts of those changes and how they have been positive for investors.

Listen to Podcast Covering the 10b5-1 Changes & Recent Examples >>

What Is Rule 10b5-1? A Refresher

To boil it down to a simple rule, 10b5-1 plans allow insiders to enter into a pre-arranged trading plan when their trading window is open. The intent is to execute future transactions in an automated fashion, when the trading window may be closed.

Rule 10b5-1 was adopted by the Securities and Exchange Commission in 2000 as a result of years of efforts to clarify insider trading regulations related to an insider’s legal liability with regards to stock trades when they are in possession of and not in possession of material, non-public information.

To set up a 10b5-1 plan, insiders enter into a binding contract with a third party, usually a broker, with specific instructions on when to execute trades.

What 10b5-1 Rules Changed in 2023?

There were several changes around disclosure and trading rules that changed. We’ve outlined them below in broad strokes.

Insiders Must Indicate If a 10b5-1 Plan Is Being Used

On Form 4s, insiders must indicate if a 10b5-1 plan is being used and disclose the adoption date.

Old Rule: Insiders did not have to indicate if a transaction was conducted via a 10b5-1 plan. Even if they did indicate 10b5-1 plan use, they did not have to disclose when the plan was adopted.

New Rule: Insiders are required to note if a transaction was conducted via a 10b5-1 plan and are required to disclose the plan’s adoption date.

Impact

VerityData has been capturing 10b5-1 plan adoption dates wherever they were disclosed and databasing them. We have been immediately capturing all of the new data as soon as the rule change went into effect. We already use 10b5-1 adoption dates to contextualize insider activity, and mandated disclosure of plan adoption dates  remove some of the gaps that currently exist in this data set.

Companies Must Disclose 10b5-1 Plans Every Quarter

In 10-Ks/Qs, companies are providing a quarterly disclosure of 10b5-1 plans adopted or terminated during the quarter. The disclosure includes adoption date, termination date, and the number of shares to be sold.

Old Rule: Disclosure of the details of a 10b5-1 plan was not required and was very rare.

New Rule: We are getting a snapshot of key data related to 10b5-1 plans each quarter.

Impact

As noted above, VerityData was already capturing 10b5-1 plan adoption dates and other related data wherever it was disclosed and then databasing it. This new rule allows us to considerably expand the number and quality of datapoints associated with each plan. Of particular interest will be the disclosure of each plan’s duration and shares to be sold as this will give new insights into insider behavior.

90-Day Cooling-Off Period for Officers & Directors

Old Rule: Insiders could adopt a 10b5-1 plan and sell via that plan effective immediately.

New Rule: Insiders must wait 90 days from plan adoption to first sale.

Impact

The new mandatory cooling-off period brought the rule more in line with its intended purpose as quick-triggering 10b5-1 plans afforded insiders the protections of the rule without putting enough time between the decision to trade and the trade itself. 30-day waiting periods are very common under the old rule, so we saw those pushed out to 90 days. Nonetheless, under the old rule, insiders frequently embedded opportunistic selling behaviors in plans that first triggered 90 days or more after adoption.

Insiders May No Longer Use Multiple Overlapping 10b5-1 Plans

Old Rule: Insiders could have as many 10b5-1 plans running simultaneously as they wanted.

New Rule: Insiders may only have a single 10b5-1 plan running at a time (excluding tax withholding-related transactions which can be executed via a second concurrent plan).

Impact

Employing multiple Rule 10b5-1 plans gave insiders the opportunity to adjust price targets and other plan details without impacting their current plan. Insiders must now plan better, knowing they can’t easily adopt a second Rule 10b5-1 plan on the fly.

Companies Must Disclose Insider Trading Policies & Procedures

Old Rule: Because disclosure of insider trading policies and procedures was not mandated, actual disclosure of insider trading policy information was highly inconsistent.

New Rule: Companies are now required to annually disclose policies and procedures related to insider buying and selling.

Impact

Due to the incomplete and haphazard nature of this information, it has previously been difficult to make clear comparisons between companies to see if their policies deviated from one another. With this new rule, we have much greater visibility into these policies and are able to capture them and glean insights.

Companies Must Disclose Equity Awards Coinciding With Release of MNPI

Old Rule: No rule existed. This is completely new.

New Rule: Companies are now required to disclose a table quarterly listing any equity awards that closely coincided with the release of material non-public information (e.g. earnings).

Impact

The SEC has clearly been concerned that companies may be tempted to time equity awards in order to benefit from material announcements. In practice, this rule is likely scareingcompanies off from doing this, resulting in the table being rarely used.

Other Changes

• 10b5-1 plans must now include “a representation in the plan” certifying that the insider was not in possession of material non-public information when the plan was adopted and affirming that the plan is being entered into in good faith.
• Insiders must additionally pledge not to time the release of material non-public information in such a way that it would benefit sales or purchases under a 10b5-1 plan that has been previously adopted.
• Gifts are now disclosed on form 4s with a deadline of the end of the second business day after the gift. Previously, gifts could in some cases be disclosed up to over a year after they occurred.

Bottom Line

Changes to Rule 10b5-1 have resulted in more subtle and nuanced insider behavioral changes than the SEC had hoped. However, the increased level of disclosure related to Rule 10b5-1 plans and transactions has given investors important new insights into insider behavior and management’s valuation views, a powerful addition to an investment decision toolkit.