10b5-1 Plans: Why Some Insider Trades Mean Nothing

Not every Form 4 filing reflects real conviction. Some of them are pre-scheduled trades that were locked in months ago, with no information about the current state of the business. These are called 10b5-1 plans. Understanding why they exist, how they've been abused, and how regulators are responding is essential to reading insider data correctly.

What Is a 10b5-1 Plan?

Rule 10b5-1 was adopted by the SEC in August 2000 to create a legal safe harbor for corporate insiders who want to trade their own company's stock without running afoul of insider trading rules. The logic is reasonable: executives and directors own significant equity and need to diversify over time, but they're nearly always in possession of some material information. Without a safe harbor, they'd almost never be able to sell legally.

The mechanism: an insider sets up a written plan when they have no material non-public information. The plan specifies future trades (dates, amounts, prices, or a formula) and executes automatically. Because the trading decisions were made at a time of no MNPI, the trades are protected from insider trading liability even if material information emerges later.

The Abuse Pattern

It didn't take long for the safe harbor to be exploited. Academic researchers and journalists documented the pattern: insiders were setting up 10b5-1 plans and then trading almost immediately, sometimes within days, after establishing them. This meant the "separation" between decision and trade was illusory.

The plan was supposed to pre-date the information. In practice, the information often came first.

Worse, insiders were maintaining multiple simultaneous plans, a practice that allowed them to cancel or pause whichever plan was inconvenient while letting the profitable ones execute. Research by Davidson et al. found statistically abnormal returns from 10b5-1 plan trades that would be nearly impossible to explain by chance.

A common pattern: an insider sets up a plan to sell, then the company announces strong earnings, the plan was already active and the sale proceeds, but the timing looks suspicious. Or the plan is cancelled right before bad news, with the insider later claiming the cancellation was unrelated.

The 2023 SEC Reforms

After years of criticism, the SEC adopted significant reforms to Rule 10b5-1 in December 2022, effective February 2023. The key changes:

• Cooling-off periods: for officers and directors, the plan must sit dormant for 120 days before any trades can execute. For other insiders, 90 days or the next quarterly earnings date, whichever is later.
• Single-plan limitation: insiders can only maintain one active 10b5-1 plan at a time (with narrow exceptions).
• One single-trade plan per year: limits the use of one-off plan structures that were used to circumvent the cooling-off rules.
• CEO and CFO certification: they must certify at plan adoption that they have no MNPI and are adopting the plan in good faith.
• Enhanced disclosure: companies must now disclose 10b5-1 plan adoptions, modifications, and terminations in quarterly filings.

What the Transaction Code Tells You

On Form 4, trades executed under a 10b5-1 plan are marked with a footnote referencing the plan, and the transaction code is typically S for sales or P for purchases, but with a plan indicator. Some filings also use code I to denote a discretionary 10b5-1 plan transaction explicitly.

The practical takeaway: check the footnotes. A transaction coded P that was executed under a pre-set plan is not the same as a discretionary open-market purchase driven by current conviction. The 2023 reforms help, but they don't eliminate the issue.

Why We Filter Them Out

At Verity Signals, 10b5-1 plan trades are excluded from signal generation. The scoring model is built around conviction: trades that reflect an insider's current assessment of the business. A pre-scheduled trade, however well-intentioned, doesn't tell you what the insider thinks today. It tells you what the insider thought months ago.

Filtering these out meaningfully improves signal quality. The remaining open-market purchases are cleaner, more informative, and more consistent with what the academic research shows generates abnormal returns.