CandleFocus

Rule 10b5-1

Insider trading has been around for centuries, but only recently has become a regulated practice in most countries. As a result, companies have had to come up with protocols to help ensure that insider trading does not occur.

The Securities and Exchange Commission (SEC) created Rule 10b5-1 in 2000 to protect against insider trading. This rule allows corporate insiders, such as executives and directors, to set up a predetermined plan to sell company shares without running afoul of insider trading laws.

Under Rule 10b5-1, company insiders are allowed to set up a plan to sell stock at periodic and regular intervals according to a determined formula, price, and amount. In order to prevent insider trading, both the seller and the broker who executes the sale must not have access to material nonpublic information (MNPI). Insider trading is illegal, and this rule helps to protect executives from passively or knowingly profiting from their company’s stock trades.

The seller must take reasonable steps to avoid trading on anything that is not publicly available and to ensure that the broker does not have MNPI. Additionally, the seller must disclose the predetermined plan to their company’s legal counsel and the SEC to ensure all regulatory guidelines have been met. If these measures are not taken, the seller could be held liable for insider trading.

Rule 10b5-1 can be beneficial to company insiders looking to sell their company shares as it allows them to trade without the fear of running afoul of insider trading laws. It also creates a level of transparency that can help protect companies and shareholders from unfair trading practices.

Glossary Index