| name | design-insider-trading-policy |
| description | Use when a public company is establishing or reviewing its insider trading compliance policy — defining blackout periods around material non-public information, requiring pre-cleared Rule 10b5-1 trading plans for executives who want to trade on a schedule, and applying restrictions company-wide rather than relying on individual employees' personal judgment about what counts as material information. |
| source | SEC Rule 10b-5; SEC Rule 10b5-1 (amended 2022); SEC Regulation FD |
| tags | ["law","corporate","insider-trading","rule-10b5-1","securities-compliance","blackout-period"] |
| related | ["design-audit-committee-charter","design-compensation-clawback-policy","apply-say-on-pay-governance"] |
Design Insider Trading Policy
Establish a company-wide insider trading compliance policy defining blackout periods around material non-public information and requiring pre-cleared Rule 10b5-1 trading plans for executives who want to trade on a set schedule — rather than relying on individual employees' personal judgment about what counts as material, non-public information.
Why This Is Best Practice
Adopted by: SEC Rule 10b-5 establishes the general prohibition on trading based on material non-public information, and Rule 10b5-1 (as amended in 2022) provides the specific safe-harbor mechanism — an advance-adopted trading plan with a mandatory cooling-off period — that public company executives and directors routinely use to trade without individually re-litigating materiality judgments on each transaction.
Impact: Company-wide blackout periods and mandatory pre-clearance procedures are documented to substantially reduce inadvertent insider trading violations compared to relying on individual employee judgment, since a formal policy removes the burden of each individual correctly identifying, in the moment, whether they possess material non-public information — a judgment prone to error given the ambiguity around what qualifies as material.
Why best: Individual employees, even well-intentioned ones, are poorly positioned to reliably judge in real time whether information they possess is material and non-public — a company-wide policy with defined blackout windows and mandatory pre-clearance removes this individual judgment burden and instead applies a consistent, predictable rule, which is what the SEC's own 10b5-1 safe harbor framework is specifically designed to formalize.
Sources: SEC Rule 10b-5, general anti-fraud provision; SEC Rule 10b5-1, amended December 2022; SEC Regulation FD (Fair Disclosure)
Steps
Step 1: Define who the policy covers and what constitutes a blackout period
Define the policy's coverage (typically all employees, officers, and directors, sometimes extended to their immediate family members) and define the standard quarterly blackout period (commonly from a set point before quarter-end through a set period after earnings release) during which trading is prohibited absent a pre-existing 10b5-1 plan.
Step 2: Require pre-clearance for trades outside a 10b5-1 plan
Require designated executives and directors to obtain pre-clearance from the company's compliance officer or general counsel before any trade made outside a pre-established 10b5-1 plan, even outside the standard blackout window, since material non-public information can exist at any time, not only around earnings.
Step 3: Structure 10b5-1 plans to meet the current mandatory cooling-off period
Structure any Rule 10b5-1 trading plan to satisfy the SEC's 2022-amended mandatory cooling-off period (a minimum waiting period between plan adoption and the first trade, varying by insider category) and require plans to be adopted only during an open trading window, when the adopting individual doesn't possess material non-public information.
Step 4: Prohibit overlapping or frequently modified trading plans
Prohibit maintaining multiple overlapping 10b5-1 plans for the same class of securities, and restrict how frequently an existing plan can be modified or terminated, consistent with the 2022 amendments specifically designed to prevent these practices from being used to circumvent the safe harbor's protective intent.
Step 5: Establish specific ad hoc blackout authority for unscheduled material events
Establish the company's authority to impose an ad hoc blackout period outside the standard quarterly window when a specific unscheduled material event arises (a pending acquisition, an unannounced significant development), and communicate this restriction promptly to affected individuals.
Rules
- Define blackout periods and pre-clearance requirements company-wide, not left to individual employee discretion about materiality.
- Require any Rule 10b5-1 plan to satisfy the current mandatory cooling-off period and be adopted only during an open trading window.
- Prohibit overlapping 10b5-1 plans for the same securities class and restrict frequent plan modification.
- Maintain the authority to impose ad hoc blackout periods for unscheduled material events, communicated promptly when invoked.
Examples
10b5-1 plan providing a genuine safe harbor: An executive adopts a 10b5-1 trading plan during an open window, satisfying the mandatory cooling-off period, with no subsequent modifications. Trades executed under this plan proceed on schedule even during a later blackout period, since the plan was properly established in advance of any material non-public information — exactly the protection the safe harbor is designed to provide when structured correctly.
Ad hoc blackout preventing an inadvertent violation: A company imposes an unscheduled blackout period upon learning of a significant, undisclosed acquisition target, promptly communicating the restriction to relevant executives — preventing a trade that would otherwise have occurred during the standard open window but before the acquisition news became public.
Common Mistakes
- Relying on individual employee judgment about materiality rather than a defined, company-wide policy — this judgment is difficult to reliably apply in the moment, and formal policy removes the burden entirely.
- Failing to structure 10b5-1 plans to satisfy the current mandatory cooling-off period — plans not meeting the 2022-amended requirements don't receive the intended safe-harbor protection.
- Allowing overlapping or frequently modified 10b5-1 plans — this practice is specifically what the 2022 amendments were designed to restrict, since it can be used to circumvent the safe harbor's protective purpose.
- Failing to impose an ad hoc blackout for a significant unscheduled event — material non-public information can arise outside the standard quarterly cycle, and the policy must account for this.
When NOT to Use
- For a private company with no publicly traded securities — insider trading rules under the federal securities laws apply specifically to trading in public company securities.
- As a substitute for the company's broader material non-public information handling and disclosure controls — insider trading policy governs individual trading; Regulation FD compliance and disclosure controls are separate, related practices.
- For determining whether specific historical trading activity violated insider trading law — that is a legal determination requiring case-specific analysis, not something this policy design practice resolves retroactively.
Legal disclaimer: This skill encodes professional best practices for educational purposes. It is not legal advice. Insider trading compliance carries significant civil and criminal liability exposure — consult licensed securities counsel before finalizing an insider trading policy or any specific trading plan.
