How SEC Rule 10b5-1 Lets Executives Trade Their Own Stock Legally

Corporate executives are barred from trading their company's stock while holding material information the public doesn't have. But executives also hold most of their wealth in that stock and need to sell shares to pay taxes, diversify or simply live on the proceeds. SEC Rule 10b5-1, adopted in August 2000, resolves that tension by letting insiders set up a trading plan in advance, when they are not aware of nonpublic information, and let it execute automatically later.

If the plan meets the rule's conditions, trades made under it are protected by an affirmative defense against insider-trading liability, even if the executive later learns something material before a scheduled trade goes through. In December 2022, the Securities and Exchange Commission tightened those conditions after concerns arose that some insiders were using the plans to trade opportunistically rather than to diversify on a schedule.

What a 10b5-1 Plan Legally Requires

Under Rule 10b5-1(c), an insider gets the affirmative defense only if the trading instructions or written plan were adopted in good faith, at a time when the person was not aware of material nonpublic information, and the person did not later exercise discretion over whether or how to trade. The plan must either specify the amount, price and date of trades in advance, provide a written formula for determining them, or hand trading discretion entirely to a third party who has no access to the inside information.

The SEC's final rule, published as Release No. 33-11138 on December 14, 2022, added conditions on top of that framework. Directors and officers must now sign written certifications stating they are not aware of material nonpublic information and are adopting or modifying the plan in good faith, not as part of a scheme to evade the rule's prohibitions, according to the SEC's fact sheet on the rule.

The New Cooling-Off Periods

The 2022 amendments require a waiting period between when a plan is adopted or modified and when the first trade can occur. For directors and officers, that period runs until the later of 90 days after adoption or modification, or two business days after the company files the Form 10-Q or Form 10-K covering the quarter in which the plan was adopted, up to a maximum of 120 days, per the SEC's fact sheet.

For insiders who are not directors or officers, the cooling-off period is shorter: 30 days after adoption, according to the same SEC fact sheet. The amendments also generally limit each person to one open-market trading plan at a time, with narrow exceptions, and restrict non-issuer insiders to a single "single-trade" plan, one designed to execute the entire covered amount in one transaction, in any 12-month period, according to a client alert from law firm Skadden, Arps, Slate, Meagher & Flom describing the final rule. Sell-to-cover arrangements tied to tax withholding on vesting equity are exempt from that limit, the firm's alert notes.

What Companies and Insiders Now Have to Disclose

The amendments created Item 408 of Regulation S-K, which requires companies to disclose in their quarterly and annual reports whenever a director or officer adopts or terminates a Rule 10b5-1 plan or a similar non-Rule 10b5-1 trading arrangement, according to the rule's text as codified at 17 C.F.R. 229.408 and reviewed via Cornell Law School's Legal Information Institute. Required disclosures include the person's name and title, the adoption or termination date, the plan's duration and the total number of securities to be bought or sold, though not the price at which trades will occur.

Item 408 also requires companies to disclose annually whether they have adopted insider trading policies and procedures, and to file those policies as an exhibit if so, or explain why not if they haven't. Separately, Forms 4 and 5, the SEC filings insiders use to report their own trades, now include a checkbox showing whether a given transaction was made under a Rule 10b5-1 plan, and gifts of securities must be reported on Form 4 within two business days rather than on the annual Form 5, according to Skadden's summary of the rule.

The final rule took effect February 27, 2023. Companies had to begin complying with the new disclosure requirements in the first periodic report covering a full fiscal period that began on or after April 1, 2023, per the SEC's fact sheet on the rule.

When the Defense Has Failed

The affirmative defense only protects trades made under a plan that was properly adopted; it does not immunize a plan set up while an insider already possessed material nonpublic information. In June 2024, a federal jury convicted Terren Peizer, former chairman and chief executive of Ontrak Inc., on one count of securities fraud and two counts of insider trading, in what the Department of Justice described as its first insider-trading prosecution based exclusively on trades made under Rule 10b5-1 plans.

According to the DOJ's press release, Peizer set up two trading plans in 2021 after learning that Ontrak's largest customer was likely to end a contract, and he rejected recommended cooling-off periods so trades could begin almost immediately. Six days after he adopted one of the plans, the customer's contract termination became public and Ontrak's stock fell more than 44%. He was sentenced on June 23, 2025, to 42 months in prison, ordered to pay a $5.25 million fine and to forfeit more than $12.7 million in gains the government said he avoided by selling before the news broke.

Whether the Amendments Are Working

It is too early to say definitively whether the tighter rules have curbed opportunistic trading. A study of 158,000 executive stock sales from 2016 to 2025, conducted by researchers at the University of Bergen and summarized by insider-trading analytics firm Verity, found that trades occurring within 90 days of a plan's adoption fell from 35% of sales to under 3% after the new cooling-off requirement took effect. But the study also found that selling activity shifted toward the 90-to-120-day window right after the cooling-off period ends, rising from about 11% to nearly 30% of trades, and that abnormal gains associated with trades in that window rose from roughly $23 million to nearly $89 million a year.

The researchers described this as insiders adapting their timing to the new boundaries rather than a clear reduction in opportunistic trading overall.