Good-Faith Adoption of a 10b5-1 Plan: The SEC's New Certification Requirement

Before 2023, adopting a 10b5-1 plan required good-faith absence of MNPI as an element of the affirmative defense, but there was no requirement to document or certify that the good-faith standard had been met. Executives signed plan documents, general counsel confirmed the adoption timing, and the process moved on. If an SEC enforcement action later alleged the plan was adopted in possession of MNPI, the defense would turn on contemporaneous evidence, and often there wasn’t much beyond the plan document itself.

The 2023 amendments added Rule 10b5-1(c)(1)(ii)(C), which requires officers and directors to certify in writing, at the time of adoption, that:

They are not aware of material non-public information about the issuer or its securities; and
They are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.

The certification must be retained in the plan documents. This creates contemporaneous evidence the SEC can examine and, critically, evidence that is self-incriminating if false. This article walks through what the certification means, the diligence process that should precede signing, and the traps that most executives and general counsel have adjusted their processes to avoid.

What the certification requires

No awareness of MNPI

MNPI is material non-public information: information that a reasonable investor would consider important in making an investment decision and that has not been released to the public. For an officer or director, MNPI typically includes:

Unreleased financial results
Unannounced M&A activity
Material product, customer, or partnership developments
Regulatory actions or investigations
Senior-leadership changes not yet announced
Significant litigation outcomes
Material cybersecurity incidents

The standard is awareness, not knowledge in a technical sense. An executive who has seen preliminary financial numbers that materially deviate from prior guidance cannot claim absence of awareness even if they have not fully absorbed them.

Good-faith adoption

The plan is adopted for legitimate personal financial reasons (diversification, liquidity, tax planning, charitable giving), not as a vehicle to trade on information the executive would otherwise not be able to trade on.

Not a scheme to evade

The plan is not structured to capture MNPI-driven trades with a thin veneer of pre-set terms. Setting up a plan that will certainly execute in the two days after an expected bad earnings announcement is the paradigmatic scheme to evade.

The diligence process

A defensible certification process includes the following steps, usually orchestrated by general counsel:

Step 1: timing check

Adoption must occur during an open trading window. General counsel confirms the current window status and any upcoming blackouts.

Step 2: MNPI interview

The executive meets with general counsel and walks through known information categories:

Financial results: “What do you know about upcoming results?”
M&A: “Are there any pending or discussed transactions?”
Operations: “Are there significant customer, product, or partnership changes you’re aware of?”
Regulatory: “Any government actions, investigations, or compliance matters?”
Personnel: “Any senior-level changes in the pipeline?”

The executive’s answers are documented in a file memo.

Step 3: company-wide MNPI review

General counsel separately reviews the company’s MNPI log (if maintained) and current known-issues list. Cross-check against the executive’s stated knowledge.

Step 4: certification drafted and signed

The written certification, incorporated into the plan document, is signed by the executive. Typical language tracks the Rule 10b5-1(c)(1)(ii)(C) requirements verbatim.

Step 5: plan document retained

The plan document (including certification) is retained by the issuer and the executive. It is available for audit, litigation, or enforcement inquiry.

Step 6: board committee notification (for large plans)

For plans covering significant dollar amounts or by senior leadership, some companies notify the audit committee or compensation committee of plan adoption. This provides independent oversight and an additional layer of good-faith documentation.

What MNPI looks like in practice

Clearly MNPI

Board-approved but not yet announced M&A transaction
Preliminary quarterly results showing 20% miss to guidance
Knowledge of an imminent FDA rejection for a key product

Clearly not MNPI

General bullishness about the company’s prospects
Knowledge of widely-reported industry trends
Personal views on the stock price

Gray areas

Rough preliminary numbers that suggest a miss but are unreliable
Early-stage M&A discussions that may not materialize
Knowledge of a senior-executive health issue that has not been disclosed
Awareness of a competitor’s actions not yet public

Gray areas are where counsel earns their keep. The conservative call is to treat gray areas as MNPI and delay plan adoption until the information has been disclosed or confirmed immaterial.

Certifying while on the board

Directors receive a stream of MNPI. Board meetings, committee briefings, and ongoing oversight mean directors often have some information that, viewed strictly, is MNPI. The certification standard does not require absolute absence of any information touching the company; it requires absence of information that would be material to an investor’s decision.

In practice:

After a regular board meeting: wait 4-8 business days before plan adoption to let material items disclose or become stale
After an extraordinary meeting (M&A, crisis): wait longer, often 30+ days, until disclosures occur
Post-10-Q/10-K filing: good adoption window, since recent MNPI has been disclosed

The audit-committee cleansing window

Many public companies maintain an explicit “cleansing window” policy: a period shortly after 10-Q/10-K filings when executives and directors can adopt plans with highest confidence of clean MNPI. Windows typically run for 2-3 weeks post-filing, ending when the company starts building the next quarter’s results.

Adopting within a formal cleansing window is the strongest posture. It combines:

Recent public disclosure
Documented company-wide confirmation of no outstanding MNPI
Compliance-committee review of adoption

Consequences of false certification

SEC enforcement

A materially false certification is itself a violation of SEC rules. The executive can face enforcement action, fines, and disgorgement. The certification-related violation can be charged alongside the underlying insider-trading allegation.

Private litigation

Shareholders and class-action plaintiffs can use the certification as evidence in derivative suits. A false certification materially strengthens plaintiff cases.

Company reputation

Public disclosure of plan adoption (Item 408(a)) means that the fact of a plan is in the public record. If the plan later becomes problematic, the company’s governance processes will be scrutinized.

Personal liability

Executives signing false certifications face personal liability that is separate from company-level exposure. Corporate indemnification may not apply to certification-related violations.

Practical tips

Schedule adoption in the cleansing window

Plan adoption 10-14 days after 10-Q/10-K filing is typically the cleanest window. The company has just disclosed; MNPI from the quarter is now public; executives are least likely to have undisclosed material information.

Do the MNPI interview properly

General counsel should walk through all categories and document the executive’s answers. Skipping the interview or doing it cursorily weakens the certification later.

Document the reasoning

If the executive knows some information but counsel concludes it is not material, document the reasoning. Contemporaneous analysis carries weight later.

Avoid adoption near disclosures

If the company is about to disclose results, a pending deal, or material operational news, delay adoption until after the disclosure.

Coordinate with internal audit

If the company has an internal audit function or ethics-compliance group, loop them in. Having a third-party stakeholder document the process strengthens the good-faith case.

Frequently asked

Do non-officers need to certify?

The certification requirement is limited to officers and directors under Rule 10b5-1(c)(1)(ii)(C). Non-officers do not sign the certification, but they still need to adopt in good faith without MNPI to invoke the affirmative defense.

Can general counsel certify on my behalf?

No. The certification must be signed by the officer or director personally.

What if MNPI emerges after I’ve certified but before the cooling-off ends?

The certification covers the time of adoption. Emerging MNPI does not invalidate a properly signed certification. However, if executing trades after the cooling-off while still in possession of the MNPI could be problematic, plans are usually structured to continue executing on schedule regardless.

Is a verbal assurance enough?

No. The rule requires a written certification incorporated into the plan documents.

What if I realize after signing that I had MNPI?

Discuss immediately with general counsel. Options include amending the certification (which may be insufficient), terminating the plan before any trades execute, or other remedial steps. Do not execute trades under the plan if the certification was materially inaccurate.

Can I amend a plan to add certification if adopted before 2023?

Pre-2023 plans are grandfathered under the old rules. Adding a certification does not bring them under the new framework. A modification to a grandfathered plan generally does.

Next step

If you are planning to adopt a 10b5-1 plan, schedule the adoption in the cleansing window following your next 10-Q or 10-K filing. Work with general counsel to schedule the MNPI-interview process at least 10 business days before intended adoption. Document everything. The certification is a single signed document; the diligence behind it is what protects you if the plan ever comes under scrutiny.