Insider activity
Insider trading rules: what insiders can legally do
Updated
“Insider trading” covers two very different things. The illegal kind, trading on material non-public information in breach of a duty, is prosecuted under Rule 10b-5. But most insider trading is entirely legal: executives and directors buy and sell their own companies’ stock constantly, inside a framework of disclosure and timing rules built to keep it honest. Understanding that framework is what makes insider filings readable as a signal.
Section 16: disclosure and disgorgement
Section 16 of the Exchange Act applies to officers, directors, and holders of more than 10% of a company’s equity. Section 16(a) is the disclosure half: every change in ownership must be reported on a Form 4 within two business days. Section 16(b) is the teeth: any profit an insider makes from a purchase and sale (in either order) within a six-month window, the “short-swing” rule, must be disgorged to the company, regardless of intent. No fraud needs to be proven; the math alone decides.
Rule 10b5-1 plans
Because executives are almost always aware of something non-public, Rule 10b5-1 offers a safe harbor: adopt a written trading plan while unaware of material non-public information, put the trades on autopilot, and later executions are defended even if news has since developed. For years the rule was criticized as too easy to game, with plans adopted and traded days later, or canceled opportunistically.
Amendments adopted in December 2022, effective in 2023, closed much of that gap. Directors and officers now face a cooling-off period before the first trade: the later of 90 days after plan adoption or two business days after the next 10-Q or 10-K is filed, capped at 120 days. Other insiders wait 30 days. Overlapping plans are barred, single-trade plans are limited to one per twelve months, and officers must certify good faith when adopting a plan. Trades under a plan are now flagged with a checkbox on the Form 4 itself.
Company-imposed rules
On top of federal law, nearly all public companies enforce blackout windows, typically closing trading from quarter end until a day or two after earnings, and require pre-clearance from the general counsel. This is why insider trades cluster in the days following earnings releases. The same 2022 rulemaking also added disclosure at the company level: firms must now describe their insider trading policies in annual filings and disclose option grants made close in time to the release of material non-public information.
Gifts closed a loophole of their own. Stock gifts by insiders, once reportable on the annual Form 5 and sometimes disclosed more than a year after the fact, must now be reported on Form 4 within two business days, after research showed some large charitable gifts were suspiciously well timed to price peaks.
Reading legal insider activity
The rules shape the signal. An open-market buy outside any plan is an executive volunteering their own cash under a two-day disclosure clock, the strongest form of conviction the framework allows. A 10b5-1 sale scheduled a year ago says little. Watch the distinction in practice on Microsoft’s insider trading page or Apple’s, and scan the latest insider trades across the market to see how plan trades and discretionary trades mix in the live feed.