10b5-1 Plans: How to Set One Up Before You Need One

If you have material non-public information about your employer, selling stock creates legal exposure. Rule 10b-5 under the Securities Exchange Act makes it illegal to trade on MNPI. Rule 10b5-1 provides an affirmative defense: if you set up a written trading plan when you did not possess MNPI, and the plan mechanically directs the trades, you are protected even if you later learn something material before a scheduled sale executes.

A 10b5-1 plan is how insiders, officers, directors, and senior employees at public companies actually sell stock. Without one, blackout periods (earnings windows, material-event holds) make it operationally impossible to dispose of concentrated positions on any predictable schedule. With one, sales execute on autopilot during blackouts because the plan was entered into during a clean window.

The SEC updated the rules significantly in December 2022, with the new regime effective for plans entered into on or after February 27, 2023. Cooling-off periods lengthened, one-plan-at-a-time rules tightened, and company-level disclosures expanded. This guide walks through the current rules, the mechanical steps to set up a plan, and the pitfalls that disable the defense.

What the rule actually says

Rule 10b5-1(c)(1) provides an affirmative defense against insider-trading claims if a person establishes, at a time when they do not have MNPI, either (a) a binding contract to purchase or sell securities, (b) an instruction to another person to execute the trade, or (c) a written plan that either specifies the amount, price, and date of trades or uses a formula or algorithm to determine them.

The plan must be entered into in good faith, the insider must not exercise subsequent discretion over how, when, or whether the trades execute, and the insider must not hedge or otherwise circumvent the plan.

The SEC’s 2022 amendments added several mandatory elements:

• Cooling-off period for officers and directors: the later of 90 days after plan adoption or two business days after the filing of the financial statements covering the quarter in which the plan was adopted, but in no event more than 120 days after adoption.
• Cooling-off period for non-officer, non-director insiders: 30 days after plan adoption.
• Good-faith representation required in the plan document, including a certification that the insider is not aware of MNPI and is entering the plan in good faith.
• Limit on overlapping plans: generally one 10b5-1 plan at a time, with narrow exceptions for sell-to-cover plans and non-Rule 10b5-1 sales.
• Limit on single-trade plans: no more than one single-trade plan in any consecutive 12-month period.
• Mandatory disclosure on Forms 10-Q and 10-K of plan adoptions, modifications, and terminations by directors and officers.

Mechanical structure of a plan

A working 10b5-1 plan specifies, in writing and in advance, the amount, timing, and pricing of sales. The three common structures:

Fixed-share-per-period. “Sell 5,000 shares on the 15th of every month for 24 months.” Simple. Predictable. Indifferent to price, which is a feature for diversification and a drawback for return maximization.

Fixed-dollar-per-period. “Sell $50,000 of shares on the 15th of every month.” Adjusts share count inversely to price. Smooths the cash-flow side.

Limit-price and algorithmic. “Sell up to X shares on any trading day the price is above $Y.” Built to capture upside moves. Requires specifying the price threshold, share cap, and any time-of-day constraint.

Most advanced plans combine elements: a base schedule of regular sales, plus price-conditional top-ups, plus a cap on total shares per quarter. The key constraint is that everything is defined at plan adoption. The insider cannot call the broker and adjust mid-quarter.

A plan is typically brokered by a major bank or an equity-specialist broker (Morgan Stanley, Fidelity Stock Plan, Schwab Executive Services). The broker executes the trades mechanically and documents each sale. Plan modifications are rare and count as a new plan for cooling-off purposes.

Who can use one, and when to set it up

Any person who might come into possession of MNPI about a public company can benefit from a 10b5-1 plan. In practice, the people who use them are Section 16 officers, directors, and senior employees with routine access to material financial data.

Timing matters. The plan must be entered into when the insider does not have MNPI. That means during an open trading window, after earnings release, before the next quiet period. The cooling-off period then runs from adoption, so a plan adopted the day after Q1 earnings might not start executing trades until three months later.

The 2023 rules effectively mean that officers and directors need to plan at least four to six months ahead. An insider who wants to sell shares to fund a January tax payment should adopt the plan the prior summer, during an open window, with sales scheduled to begin in Q4 or Q1.

The blackout problem and why plans solve it

Most public companies impose quarterly blackout periods from roughly two weeks before quarter-end through two business days after earnings release. That is 8-10 weeks per year of no-trading windows. Add event-based blackouts (announcements, M&A activity, major product launches) and the open-window days in a typical year are limited, often 100-140 days out of 252 trading days.

For a senior executive with a large concentrated position, managing the exit is almost impossible without a plan. Earnings seasons come and go. Material events pop up. Each blackout cycle delays further diversification. A 10b5-1 plan executes through blackouts because the trades were scheduled before MNPI existed.

This is why 10b5-1 plans are effectively mandatory for Section 16 officers and directors who intend to sell meaningful amounts of stock. The alternative is trying to thread open-window selling, which frequently ends with the insider still holding the position years later.

Disclosure and plan-amendment rules

Under the 2022 amendments, public companies must disclose on Form 10-Q or 10-K any adoption, modification, or termination of a 10b5-1 plan by a director or Section 16 officer during the quarter, including material terms of the plan (name, date of adoption, duration, aggregate number of shares).

Forms 4 filings of actual trades under the plan must also indicate the Rule 10b5-1 status of the sale.

Insiders who amend a plan reset the cooling-off clock. An amendment is treated as a new plan adoption for purposes of the 90/120-day rule. Minor amendments (changing the broker, updating a notice address) typically do not trigger the reset, but substantive changes to share count, price, or schedule do.

Terminating a plan early is permitted but strongly discouraged by SEC guidance. If the insider terminates a plan while in possession of MNPI and the early termination allowed the insider to avoid selling at a loss, the SEC may view the termination itself as an act of insider trading.

Layering plans with other selling mechanisms

A 10b5-1 plan does not cover everything. Mandatory sell-to-cover on RSU vests is typically a separate, non-10b5-1 program that is pre-exempted under 10b5-1(c)(1)(i)(A) because it is a binding obligation set at grant. Most companies run the sell-to-cover as a standing authorization.

Option exercises under a 10b5-1 plan are permitted. The plan can specify “exercise and sell all vested options on date X” or “exercise shares when price is above $Y.” The tax treatment flows through normally (NSO exercise triggers ordinary income; ISO exercise triggers AMT or, if same-day sale, disqualifying disposition).

Hedging transactions during the plan are restricted. Many companies’ insider-trading policies prohibit any hedging of company stock (collars, prepaid forwards, short sales). The 10b5-1 plan itself cannot contain hedging instructions under the 2023 rules’ good-faith requirement.

Frequently asked

Can I have a 10b5-1 plan if I am not an officer or director? Yes. Any employee who might come into MNPI can benefit from one. The cooling-off period is shorter (30 days instead of 90/120) for non-Section 16 insiders, but the other rules apply.

What happens if I get MNPI before a scheduled sale? The sale proceeds on schedule as long as the plan was entered in good faith and you did not amend it after learning the MNPI. That is the core protection the rule provides. If you amend or terminate the plan after learning MNPI, the defense can be lost.

How long do plans typically run? Six to 24 months is common. Longer plans allow more sales to execute but reduce flexibility to react to changing circumstances. Shorter plans are easier to replace with a refreshed plan after earnings.

Can my spouse or trust use the plan? Yes. Plans can cover any accounts where the insider has beneficial ownership, including spouse accounts, trusts, and controlled entities. All holdings aggregate for the one-plan-at-a-time rule.

Is a “dribble-out” plan different from a 10b5-1 plan? “Dribble-out” colloquially refers to plans that sell small amounts continuously. Those are 10b5-1 plans structurally. The term is marketing shorthand.

Next step

Setting up a 10b5-1 plan requires coordination with your employer’s legal department, your broker, and usually outside counsel. The 10b5-1 eligibility checklist walks through the decision points: whether you need a plan, when to adopt, what structure fits your tax profile. For executives with concentrated public-company stock, skipping this is not a tax-planning oversight; it is an execution risk that leaves you stuck in the position.