10b5-1 Trading Plans: Safe Harbor or False Security??

Rule 10b5-1 provides traders with an “affirmative defense” against insider trading liability. Under the Exchange Act, it protects those who execute written plans to trade securities before having “material nonpublic information” in their possession.

To qualify for the Rule 10b5-1 affirmative defense, traders must “not have any material nonpublic information in his or her possession when he or she establishes or modifies the plan,” according to the SEC. Traders must also:

• Not use, or advise others to use, material nonpublic information to plan or modify a plan, and
• Not rely on material nonpublic information to execute a transaction under the plan.

The rule is intended to protect traders, and the SEC explicitly states that “trading under a plan does not provide regulatory approval.” If a trader fails to satisfy Rule 10b5-1(c), this does not “independently establish liability” under Section 10(b) or Rule 10b-5, but it does “remove the affirmative defense.” The SEC and DOJ use analytics to screen for suspicious trading patterns under executive plans, and this is one of the first things federal investigators will look for if you are under investigation.

Is Rule 10b5-1 an effective shield against insider trading charges? That is the question at the center of a multi-year investigation by the DOJ. On March 1, 2023, the DOJ announced the first-ever insider trading prosecution focused solely on a Rule 10b5-1 plan without accompanying allegations of separate or preceding insider trading. This prosecution targets Terren Peizer, former CEO of Ontrak. Peizer allegedly used a broker that required no cooling period between adoption and execution, and he sold his shares while knowing that Ontrak was about to lose its largest customer, a loss that cost the company the vast majority of its revenue.

Which Rule 10b5-1 Requirements Apply to Me?

To qualify for the Rule 10b5-1 affirmative defense, you must establish a valid plan. The Rule specifically outlines the requirements for establishing valid plans, and it requires the following of all participants.

1. Written Plan or Trading Instruction

To qualify for the affirmative defense, a trader must execute a written plan. According to SEC Release No. 34-96492, “This requirement for a written plan or trading instruction is intended to provide clarity, transparency, and evidentiary support for an affirmative defense.” This requirement applies to all trading plans, with a specific exception for a “Rule 10b5-1(c)(1)(i)(A)(2) instruction to another person,” which may be an oral instruction under the trading plan’s terms.

2. Cooling-Off Period

The “cooling-off period” refers to the length of time between the adoption or modification of a Rule 10b5-1 trading plan and the execution of the first trade. The length of the required cooling-off period varies depending on the trader’s status.

• Directors and Officers. Directors and officers are subject to two overlapping cooling-off periods. The first period is “the later of (i) 90 days after the date on which the plan is adopted, modified, or terminated, or (ii) two business days following the filing of the Form 10-Q or Form 10-K for the issuer’s fiscal quarter or fiscal year, whichever is later.” The second period is similar to this one, but it triggers after the plan is adopted, modified, or terminated. In any event, the required cooling-off period is subject to a maximum of 120 days after adoption of the plan.
• Other Employees. Employees not listed as directors or officers are subject to a shorter cooling-off period. According to the final rule, these employees are subject to a “30-day cooling-off period that begins on the day that the adoption, modification or termination of a trading plan is made by the broker or designated agent.”

3. Certification of MNPI

Directors and officers must also certify that they are not in possession of material nonpublic information (MNPI) when establishing a Rule 10b5-1 trading plan. The final rule states that a director or officer “is not allowed to adopt a trading plan unless he or she certifies (i) that he or she is not aware of material non-public information at the time the trading plan is adopted or modified, and, (ii) that he or she is adopting or modifying the trading plan in good faith.”

4. Single and Discrete Trading Plan

Non-issuer traders (such of employees who are not director or officer level) are not permitted to maintain multiple overlapping trading plans for the purposes of the affirmative defense.

As the SEC final rule states: “In order to prevent multiple open-market trading plans from being used by traders to circumvent the rule’s purpose and effectively trade on material nonpublic information, the Rule does not permit traders to adopt multiple open-market trading plans for the purpose of executing transactions during overlapping periods.”

5. Issuer Trading Plan

While Rule 10b5-1 establishes several stringent requirements for individual traders, the SEC adopted far less stringent requirements for issuer trading plans. Issuers generally do not need to comply with the rule’s cooling-off requirements to execute transactions under a valid trading plan.

What Plan Changes and Structures Can Destroy Protection?

As the SEC’s final rule clarifies, “a trading plan must be established before a trader may have any MNPI.” The final rule provides extensive guidance regarding plan changes, but this guidance applies specifically to “a modifying adoption,” which means the “modification of a plan” that results in “a new trading plan.” Under Rule 10b5-1, the following types of plan changes, or changes that qualify as “modifying adoptions,” trigger new plan requirements.

1. Trading Plan Modifications

According to the SEC’s final rule, changing the amount, price, or timing of trades under a trading plan is a modification that is deemed a termination of the existing plan and the adoption of “a new trading plan.” The final rule explicitly addresses three specific scenarios:

• Trading Plan Changes Regarding Trading Amount: If a trader changes the total amount of securities traded, this is considered a “modifying adoption” and does not qualify for the Rule 10b5-1 affirmative defense unless the trader complies with the newly established rules.
• Trading Plan Changes Regarding Trading Price: If a trader changes the price of the securities traded under his or her Rule 10b5-1 plan, this is considered a “modifying adoption” and also requires compliance with the newly established rules.
• Trading Plan Changes Regarding Trading Timing: As with the aforementioned types of modifications, changing the timing of trades under a trading plan is considered a “modifying adoption.”

The SEC final rule expressly limits traders’ ability to make plan modifications during the 30-day or 90-day cooling-off periods imposed by the rule. Traders must satisfy Rule 10b5-1’s affirmative defense requirements before making modifying adoptions. Traders qualifying as directors and officers must satisfy Rule 10b5-1’s affirmative defense requirements by waiting the duration of the required cooling-off period and certifying that they are not aware of any MNPI when their modifying adoption is made.

2. Trading Plan Cancellations, Revocations, and Terminations

While the final rule makes clear that trading plans must be established before any MNPI is obtained, it makes no mention of an “irrevocability” requirement for Rule 10b5-1 trading plans. If a trader cancels, revokes, or terminates a Rule 10b5-1 trading plan, and does so in order to prevent a trade under the plan due to their knowledge of MNPI, the trader could still be subject to insider trading liability.

3. Trading Plan Disclosures

The Rule 10b5-1 affirmative defense does not operate in isolation. Under Item 408(a), which was adopted as part of the same SEC final rule, issuers must provide the following information in their quarterly disclosures:

• Adoption date of any trading plan adopted;
• Duration of any trading plan adopted; and
• The aggregate amount of securities to be acquired or disposed of under the trading plan.

In order to provide this information, an issuer must identify each new trading plan and each “modifying adoption,” and, as noted above, under Rule 10b5-1, “modifying adoptions” effectively terminate current trading plans and establish new ones. For Form 4 reporters, the Rule 10b5-1 affirmative defense is not an affirmative defense in a vacuum, either. The rule explains that Form 4 reporters must include a checkbox on the relevant Form 4 to attest that they executed trades “pursuant to a Rule 10b5-1 trading plan.”

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

Can Canceling a Trading Plan Create Criminal Liability?

1. Bad Faith and Rule 10b5-1

Rule 10b5-1 specifies that a trader must establish his or her plan in good faith and must not use his or her good-faith plan to trade on MNPI. As clarified in the SEC’s final rule and FAQ, this means traders must establish “valid” plans in good faith and must not use these plans “in bad faith.” The SEC final rule also specifies that the good-faith requirement “applies throughout the period of the plan’s operation.” If a trader obtains MNPI after establishing a Rule 10b5-1 trading plan, but then uses his or her knowledge of MNPI to manipulate the company’s corporate disclosure timing in order to advance himself or herself or a related person financially, this also violates the good-faith requirement.

2. Canceling Rule 10b5-1 Trading Plans

Canceling a Rule 10b5-1 trading plan is often a subject of debate in federal law enforcement circles. On the one hand, canceling a trading plan does not generally involve a purchase or sale of securities. In order to establish insider trading liability under the Securities Exchange Act’s Section 10(b) and Rule 10b-5, for example, the government must prove that a defendant bought or sold a security on the basis of MNPI. If the defendant canceled a Rule 10b5-1 trading plan and there was no purchase or sale, then there is no violation. The SEC’s Division of Corporation Finance staff has clarified the government’s position on the potential liability of Rule 10b5-1 trading plan cancellations, explaining that “on its own, canceling or terminating a trading plan should not be enough to establish Rule 10b-5 liability.”

3. Alternative Securities Fraud Statutes

However, while the Rule 10b5-1 affirmative defense requires a nexus between the alleged fraud and a purchase or sale of securities, other federal securities fraud statutes do not. For example, Section 17(a) of the Securities Act of 1933, a federal statute that applies to the offer or sale of any securities, whether or not the offering is registered, extends to “any offer to sell or contract to sell” in addition to the statute’s focus on the actual offering, purchase, or sale of securities. While Section 17(a) is a pre-1934 Act statute, it is nonetheless an applicable law for many fraudulent plan actions that do not directly involve a securities transaction, and it is a statute that has seen multiple civil enforcement actions by the SEC and criminal prosecutions by the Department of Justice.

4. Non-Securities Fraud Statutes

While the Rule 10b5-1 affirmative defense has the potential to trigger scrutiny under multiple federal securities fraud statutes, it can also lead to scrutiny under various other federal fraud statutes. Unlike Section 10(b) and Rule 10b-5, these statutes do not require any nexus between the allegedly fraudulent activity and a securities transaction. For example, the federal mail and wire fraud statutes apply broadly, and they apply to the use of electronic devices to execute fraudulent schemes, commit a crime, or, as the DOJ recently has alleged in the case involving Ontrak CEO Terren Peizer, make misleading statements to investors.

How Do the 2025 SEC Interpretations Affect Common Transactions?

On April 25, 2025, the SEC released two new SEC Compliance and Disclosure Interpretations (“C&DIs”) under Rule 10b5-1. These interpretive statements explain how the SEC staff generally understands the Rule 10b5-1 affirmative defense in the context of common types of transactions, and they provide clarity on many of the rule’s substantive and procedural requirements.

1. Trading in a Self-Directed 401(k) Brokerage Window

The SEC C&DIs make clear that, “in order to obtain the Rule 10b5-1 affirmative defense in connection with a securities purchase or sale made in a self-directed 401(k) brokerage window, a trader must satisfy all of the conditions applicable to open-market trading plans.” The SEC’s FAQ also notes that “participants in self-directed brokerage windows may do have a limited window to execute a purchase or sale while not in possession of MNPI under a 401(k) brokerage-window trading plan.” The SEC FAQ clarifies that, as a result of Rule 10b5-1’s 30-day and 90-day cooling-off period requirements, the window for the execution of any trades under a 401(k) brokerage-window trading plan has likely shrunk.

2. Investing in an Employer’s 401(k) Plan

With respect to investing in an employer’s 401(k) plan, the C&DIs explain that, “qualifying enrollment in the plan provides the affirmative defense with respect to any securities purchases that occur by means of contributions deducted from the participant’s payroll.” As noted in the FAQ, the good-faith requirement also requires that these purchases be made “while not in possession of any MNPI regarding the issuer.”

3. Switching Funds in a 401(k) Plan

With respect to switching funds in a 401(k) plan, the C&DIs state that, “a fund-switching instruction made prior to the time that a participant has MNPI requires a separate Rule 10b5-1 analysis.” The SEC is suggesting that, in order to execute fund switches that qualify for the Rule 10b5-1 affirmative defense, the fund-switching instructions must satisfy the same requirements that apply to all other trading plans. Also, if the switch is a “corresponding-or-hedging-transaction,” then Rule 10b5-1’s restrictions regarding qualifying transactions may apply.

4. Selling Shares to Cover Tax Obligations

With respect to selling shares to cover a company’s tax obligations, the C&DIs make clear that, “to qualify for the affirmative defense, the trader must establish the eligible tax withholding in good faith and not use the trading plan to make any purchase or sale on the basis of any MNPI.” The C&DIs also address a different scenario involving transactions with broker-dealers: “Trading plans that meet the exception, (i) that it sells securities that the trader acquired through the sale of securities to cover an tax withholding of an award that vested in the period prior to the sell-to-cover, and (ii) it requires a written trading plan;” and, “Trading plans that do not meet the exception, (i) that does not result in a sale of securities that the trader acquired through the sale of securities to cover an tax withholding of an award that vested in the period prior to the sell-to-cover, (ii) that is not written.”

As explicitly noted by the SEC, C&DIs and the SEC’s FAQs represent only the staff’s “views,” “they do not contain or establish any binding interpretation,” and “they are not intend to serve as a replacement for legal counsel.”

Can Uncertain Bad News Count as Material Nonpublic Information?

1. Rule 10b5-1 Trading Plan Fraud in a Recent Civil and Criminal Lawsuit

In tandem with the DOJ’s criminal enforcement, the SEC filed a parallel civil enforcement action against both former CEO Terren Peizer and Acuitas Capital Management. Along with any potential insider trading charges, the SEC accused both defendants of fraud. The SEC’s complaint explains:

“On or around July 21, 2021, Terren Peizer adopted and executed a Rule 10b5-1 plan with a brokerage firm, Finra, with the intent to sell his entire stake in Ontrak, . .. On July 21, 2021, the day Peizer signed the plan and filed it with his broker, he knew that he had received notice from Ontrak’s largest customer that the customer was considering terminating its contract with Ontrak. . .. The securities broker that Peizer contacted in order to execute his plan also asked him to affirmatively state whether he had any non-public information, and Peizer again told them, ‘No, I do not have any information, non-public, that would be material to the stock price.’ In fact, as stated above, at the time he presented his information to his broker, he had already received communication from Ontrak’s largest customer that the customer was considering terminating its contract with Ontrak.”

2. Determining Materiality in Contingent Transactions

The prosecutors that prosecuted Peizer presented evidence that, while Peizer had received notice from Ontrak’s largest customer that it was “considering” terminating its contract, it does not seem like Peizer knew for certain that the customer would terminate its contract. According to the allegations in the SEC’s complaint:

• Ontrak announced its customer loss in August 2021, a few weeks after Peizer executed the Rule 10b5-1 plan.
• After the public disclosure of the customer loss, Ontrak’s shares fell approximately 44 percent.

Is it clear that Peizer’s knowledge of a threatened customer departure, even though the customer had not yet officially terminated the contract, constituted material nonpublic information? Under Basic v. Levinson, the Supreme Court’s leading securities-fraud precedent, “the materiality of a contingent event is to be determined by balancing the probability that the event will occur against the anticipated magnitude of the event if it does occur.” Because the customer that was considering terminating the contract represented a significant portion of Ontrak’s revenue, the possibility that it would cut ties constituted enough of a magnitude to offset the uncertain nature of the customer’s decision at the time Peizer was adopting and executing the Rule 10b5-1 plan.

3. Insider Trading Offenses, Securities Fraud and a Sentencing Judgment

The DOJ’s insider-trading prosecution of Terren Peizer focused on a series of events that supposedly constituted “a clear act of fraud.” The DOJ prosecutors in the case argued that Peizer adopted and executed the Rule 10b5-1 trading plan specifically to create a pretense for securities trades while already knowing of material nonpublic information, and that his use of the trading plan was “a clear attempt to use the Rule 10b5-1 plan to deceive the investing public.” As a result of this fraudulent conduct, the jury convicted Peizer on a single securities fraud charge, and on one securities fraud count and two insider trading counts. Peizer, a resident of Atlanta, Georgia, was sentenced on October 28, 2024, and was sentenced to receive 42 months in federal prison.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.