Rule 10b5-1 Plans Explained: How 10b51 Plans Work
Getting paid in company stock is a powerful wealth-building opportunity, but it also comes with red tape. If you’re a key decision-maker at your company, there are strict limits on when you can buy or sell shares. That means you need to plan carefully to manage your wealth responsibly.
Rule 10b5-1 plans offer a clear, compliant way to create a selling strategy in advance, helping you manage risk, liquidity, and diversification with confidence. Read on to learn more about these structured trading strategies and how they work.
What Are Rule 10b5-1 Plans?
Rule 10b5-1 plans are trading plans established under SEC Rule 10b5-1 that allow company insiders to schedule stock trades in advance. It’s a way of helping you manage liquidity and diversification while reducing the risk of insider trading violations.
Company insiders are those who possess material nonpublic information (MNPI) that could influence a company’s stock price, such as executives, board members, and certain high-level employees. Examples of MNPI might include upcoming earnings results that haven’t been publicly released, a planned merger or acquisition, or pending litigation.
10b5-1 plans establish predetermined instructions for trades, such as timing, price, and the number of shares to be sold. Trades are then executed automatically on your behalf. This protects against insider trading allegations, as you have a documented basis for showing trades were not influenced by MNPI.
How 10b5-1 Plans Work
To set up a 10b5-1 plan, you’ll work with your financial advisor to define a divestment strategy that supports your financial goals. Your company’s legal or compliance team will typically review the plan to confirm it meets insider trading policies.
The plan establishes predetermined instructions for trades, such as timing, share quantities, or price triggers. After a cooling-off period has passed, your broker will automatically execute trades according to the plan’s terms.
Rules & Eligibility Requirements for 10b5-1 Plans
To qualify for protections under Rule 10b5-1, your plan must meet the following requirements:
Good faith: You must adopt the plan when you are not aware of material nonpublic information, and act in good faith thereafter.
Pre-defined parameters: Your plan must specify in advance the terms of trading, including timing, price, and quantity.
Cooling-off periods: SEC rules require a waiting period before trades can begin, the length of which depends on your role at the company.
Limit changes to active plans: After adoption, you cannot alter trade instructions without jeopardizing the plan’s protections. Modifying or canceling a plan may affect its compliance protections.
Limits on multiple plans: You generally cannot maintain multiple active plans for open-market trades, and only one single-trade plan may typically be adopted per 12 months (excluding certain sell-to-cover transactions).
Company compliance: Many companies require legal or compliance approval prior to plan adoption, and may impose additional restrictions beyond SEC rules.
Key Elements of a 10b5-1 Plan
Your Rule 10b5-1 plan will define the structure of how trades will be carried out when the plan is active, including:
Scope of shares covered: Which equity awards the plan applies to (e.g., RSUs, stock options, or direct share holdings).
Start date: The date trading can commence once the required cooling-off period has passed.
Date or price triggers: The specific dates trades will occur, or price thresholds that automatically trigger transactions.
Quantities: The number of shares to buy or sell in each trade.
Plan duration: How long the plan will remain in effect
Execution instructions: The rules your broker will follow when executing trades, such as fixed schedules or formula-based triggers.
Coordination with vesting schedules: Trades may be structured around RSU vesting dates or option exercise timing.
Modification and termination terms: How and when the plan may be changed or canceled.
How Does the 10b5-1 Cooling-Off Period Work?
The cooling-off period is the required waiting time between when a Rule 10b5-1 trading plan is adopted and when the first trade can occur. This delay helps demonstrate that trades were not scheduled in response to MNPI. Under SEC rules, the length of the cooling-off period depends on the insider’s role.
For directors and officers, the cooling-off period is the later of 90 days after plan adoption or two business days after the company discloses its financial results for the quarter in which the plan was adopted (up to a maximum of 120 days). For other employees, the cooling-off period is a flat 30 days. Notably, current SEC rules do not require a cooling-off period for issuer (company) plans, though many companies voluntarily adopt a 30-day waiting period as a best practice.
Once this period has passed, you may begin trading under the plan, provided no additional company-specific trading restrictions apply.
Who Typically Uses 10b5-1 Plans?
Rule 10b5-1 trading plans are most commonly used by individuals who hold significant amounts of company equity and may periodically possess MNPI. This includes:
Company executives (CEO, CFO, and other senior leaders)
Founders and early employees
Board members
Employees with substantial RSU or stock option grants
Professionals whose compensation is heavily equity-based
These individuals frequently have a large portion of their net worth concentrated in company stock, making diversification and liquidity planning especially important.
Benefits and Limitations of 10b5-1 Plans
10b5-1 plans are useful for managing company equity, particularly if you have significant assets tied up in employer stock. A structured trading strategy allows you to liquidate and diversify without running afoul of insider trading laws. That said, these plans also come with certain constraints, and it’s important to be aware of their limitations.
10b5-1 Plan Benefits
If you hold significant stock-based compensation and are privy to material nonpublic knowledge, it may be worth consulting a financial advisor about getting set up with a 10b5-1 plan. Speaking to a professional helps:
Create a disciplined liquidity strategy by aligning sales with cash flow needs, tax obligations, or long-term planning goals
Support diversification by gradually reducing concentrated exposure to company stock
Remove pressure to time trades, as shares are sold according to a plan rather than short-term market movements
Reduce the risk of insider trading allegations
Provide a structured framework for compliance that aligns with company policies and regulatory expectations
10b5-1 Plan Limitations
While 10b5-1 plans can provide structure and compliance benefits, they also involve certain tradeoffs, such as:
Reduced flexibility once the plan is active, as trades must follow predetermined instructions
Requiring planning before MNPI is known
Including mandatory cooling-off periods that may delay the ability to begin selling shares
Executing trades automatically regardless of current market conditions
Being unnecessary for those who do not regularly possess MNPI
If you decide that a 10b5-1 might not be right for your situation, note that there are still ways to manage company equity without violating SEC rules and regulations.
Work With Citrine Capital to Build a Strategic Trading Plan
Managing equity compensation means balancing diversification, liquidity needs, tax considerations, and compliance requirements with your broader financial goals. For Bay Area professionals with complex assets, this often requires the dedicated expertise of a wealth advisor experienced in equity compensation planning.
At Citrine Capital, we work closely with founders and tech professionals to develop personalized strategies for managing financial complexity. If you’re seeking guidance on equity compensation, diversification, and structured trading strategies, we can help. To get started, request a meeting today.
Frequently Asked Questions
What’s the purpose of Rule 10b5-1?
Rule 10b5-1 is an SEC provision that allows company insiders to trade stock according to a pre-established plan adopted when they are not in possession of MNPI. It helps reduce the risk of insider trading allegations by showing trades were scheduled in advance.
How do I set up a 10b5-1 plan?
You can set up a 10b5-1 plan by working with your financial advisor, company legal or compliance team, and broker to define predetermined trading instructions, such as timing and share amounts. After approval and the required cooling-off period, trades execute automatically according to the plan.
Can you trade outside of a 10b5-1 plan?
Yes, you can trade outside of a 10b5-1 plan if you are not in possession of MNPI and are trading during an approved company trading window. Some individuals use open windows and pre-clearance instead of a formal trading plan.
What changes were made to Rule 10b5-1?
The SEC’s 2022 updates added cooling-off periods, limits on overlapping and single-trade plans, and new good-faith certification requirements. These changes were intended to strengthen compliance and reduce potential misuse of trading plans.
About The Author
Kiersten Peshek, CFP® is a Lead Wealth Advisor at Citrine Capital, a San Francisco-based wealth management and tax preparation firm serving tech professionals, founders, and business owners. They specialize in equity compensation, LGBTQ+ financial planning, and FIRE (Financial Independence, Retire Early) strategies.
As a career changer, Kiersten brings a unique blend of analytical insight and empathy to client relationships. Since joining the financial planning profession in 2020, they’ve been passionate about helping clients align their finances with their values to create more fulfilling, purpose-driven lives.