10b5-1 Plan: Planned Insider Purchases and Sales


While following insiders is a tremendous benefit to the investors, filtering out truly interesting companies from “noise” can get tricky. Luckily, Form4Oracle’s Insider Sentiment Rating cuts through most of the noise by analyzing a number of indicators to evaluate insider sentiment into a simple buy/sell/hold-based rating. Some indicators, however, are less clear cut and are subject to the investors’s judgement and investment style.

Today we will review one of such indicators: planned purchases and sales. The tough SEC insider trading regulations and company established blackout periods sometimes make it difficult for insiders to routinely diversify their shares. To avoid these complications, insiders can adopt a 10b5-1 trading plan.

The SEC adopted Rule10b5-1 to protect executives from charges of insider trading by allowing them to legally buy or sell shares in their company even if they are aware of material non-public information so long as the trade was specifically laid out in a plan before the executive became aware of the information. A 10b5-1 plan needs to predetermine the number of shares to be traded, at what price and on what date. For example, a plan might say: “Sell 10,000 shares on the first day of each quarter, at a price no lower than $50 per share.”

A 10b5-1 plan must be established through a third party, but does not need to be filed with the SEC. The only way we get to learn that a transaction is planned is by examining footnotes on the Form 4 filings for references to 10b5-1. Here is a sample Form4 filing, note the following text in the footnote of the filing: “Open market purchase pursuant to a 10b5-1 trading plan adopted by the Reporting Person in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.”

Form4Oracle makes it much easier to spot such transactions by automatically analyzing the footnotes and marking corresponding transactions as “planned”. This happens immediately in real-time, so that you are able to make an informed investment decision right on the spot.

For example, if you look at the 2009 open market purchases of Thomas Lynch, the CEO of Frederick’s of Hollywood Group, Inc. (FOH), you’ll find a pattern of planned buying of 2200 shares a day. Basically a wise strategy to ensure that your buying does not move the market price.

Note, however that planned sales (or purchases) are not binding and insiders can cancel them for any reason, even if they have non-public material knowledge.

So what can you make of it if you see some insider purchases or sales marked as “planned”?

One thing is to completely ignore the fact that they are planned and treat them as simply purchases or sales, especially given the fact that 10b5-1 plans are non-binding, hence insiders can basically do whatever they like.

On the other hand, you can view these transactions as carrying a lot less informational value, since there is no element of spontaneity in them and either assign them no value or significantly discount their significance.

The obvious question here is: “Would it be possible to find out when an insider skips a planned purchase or sale and does nothing?” The answer is “No”. 10b5-1 plans are not required to be filed with the SEC and as such are not public knowledge.

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One Comment

  1. Posted March 9, 2013 at 6:35 pm | Permalink

    This blog was… how do I say it? Relevant!! Finally
    I have found something which helped me. Appreciate it!

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