What is a Rule 10b5-1 plan, and how does it show up on Form 4?

Open the Form 4 filings for almost any large company and you will see executives selling shares on a regular schedule. Many of those sales carry a footnote or a checked box saying they were made under a Rule 10b5-1 trading plan. Understanding these plans, and the 2023 rule changes that tightened them, is the key to reading insider-sale headlines calmly.

What problem does Rule 10b5-1 solve?

Corporate insiders routinely know things the market does not. Trading while aware of material non-public information can be illegal insider trading. Rule 10b5-1 under the Securities Exchange Act provides an affirmative defense: a person can show a trade was not made “on the basis of” inside information if it was executed under a binding contract, instruction or written plan adopted before the person became aware of such information, and that plan specified the amount, price and date of trades, or a formula for setting them, without later influence by the person.

The practical effect is that a director can schedule sales months ahead, for example to pay taxes on vesting stock or to diversify, and have them executed even during a quiet period when the company is sitting on undisclosed news.

What changed in 2023?

Concerns that plans were being adopted, cancelled or overlapped opportunistically led the SEC to adopt amendments in December 2022 (Release No. 33-11138), effective February 27, 2023. The main conditions now include:

• Cooling-off periods. Directors and officers must wait the later of 90 days after adoption or modification, or two business days after the company discloses financial results in its 10-Q or 10-K for the fiscal quarter in which the plan was adopted, subject to a maximum of 120 days. Other persons, except the issuer itself, must wait 30 days.
• Director and officer certifications. When adopting a plan, directors and officers must certify that they are not aware of material non-public information and are adopting the plan in good faith, not as part of a scheme to evade the rule.
• Limits on overlapping plans. The defense is generally not available for a person who has more than one plan in effect for open-market trades during the same period, with limited exceptions such as sell-to-cover arrangements for tax withholding on vesting awards.
• Single-trade plans. A plan designed to execute a single trade can rely on the defense only once in any 12-month period.
• Good-faith operation. The person must have acted in good faith with respect to the plan throughout its life, not only at adoption.

How do you spot a 10b5-1 trade on Form 4?

Form 4 reports changes in a director’s, officer’s or 10% owner’s holdings and is generally due within two business days of the transaction. The 2022 amendments added a checkbox to Forms 4 and 5 to indicate whether a reported transaction was made pursuant to a contract, instruction or written plan intended to satisfy the affirmative defense of Rule 10b5-1(c). Filers also give the plan adoption date, often in a footnote.

When reading a Form 4:

1. Check the transaction code. “S” is an open-market or private sale, “P” a purchase, “M” an option exercise, “F” shares withheld to pay tax, “G” a gift.
2. Check the 10b5-1 box and footnotes. If checked, the trade was pre-scheduled; the footnote gives the plan date.
3. Look at the holdings column. Column 5 shows shares owned after the transaction. A sale of 2% of holdings reads differently from a sale of 80%.

Where do companies disclose plan adoptions?

The same amendments added Item 408 of Regulation S-K. Each quarter, a company must disclose whether any director or officer adopted or terminated a Rule 10b5-1 plan (or a non-Rule 10b5-1 trading arrangement), with the person’s name and title, the date, the plan duration and the aggregate number of securities covered. Look in Part II, Item 5 of the 10-Q and Item 9B of the 10-K. Companies also disclose their insider trading policies under Item 408(b).

Does an insider sale tell you anything?

Some general cautions, without drawing conclusions about any particular trade:

• Scheduled sales reflect a past decision. The relevant moment is the adoption date, at least 90 days earlier for officers.
• Many sales are mechanical. Tax withholding on restricted stock (“F” code) and sell-to-cover arrangements happen whether or not the insider has a view.
• Open-market purchases are rarer. Purchases with code “P” outside a plan involve the insider’s own money at a discretionary time.
• Context lives elsewhere. The proxy statement (DEF 14A) shows each officer’s total holdings and ownership guidelines; Schedule 13D/G shows large outside holders.

Nothing in a Form 4 is a recommendation, and our docket does not rank insider trades as signals.

Gifts and Form 144

Two related changes are worth knowing. The 2022 amendments require gifts of securities by insiders to be reported on Form 4 within two business days, rather than deferred to an annual Form 5. Separately, affiliates selling restricted or control securities under Rule 144 file Form 144, which has been filed electronically on EDGAR since April 2023. A Form 144 is a notice of a proposed sale, not proof the sale happened; the Form 4 confirms execution.

The Form 4 explainer walks through every column of the form, and the home page docket lists the week’s Form 4 filings for the 100 companies we track.