Blackout Period in Securities Law: 10b5-1 Plans and Penalties

A blackout period in securities law is a stretch of time during which a public company forbids its directors, officers, and other designated insiders from trading in the company’s stock, usually because those individuals are likely to hold material non-public information. The restriction is set by company policy, but it exists to keep insiders on the right side of federal anti-fraud rules. Most public companies close their trading window partway through the last month of each fiscal quarter and reopen it one to two full trading days after earnings are announced, though exact timing is set firm-by-firm.

Why Companies Impose Blackouts

No federal statute orders companies to adopt blackout periods. The obligation is indirect. SEC Rule 10b-5, issued under the Securities Exchange Act of 1934, makes it unlawful to use any deceptive device in connection with the purchase or sale of a security, and an insider who trades while holding material non-public information violates that rule.¹²

Regulation Fair Disclosure sits alongside 10b-5. If a company intentionally shares material non-public information with select outsiders, it must simultaneously release that information to the public; unintentional leaks must be disclosed promptly.³ A blackout is the practical mechanism companies use to shrink the risk that either rule gets tripped in the run-up to earnings.

Who Is Covered and When the Window Closes

Blackouts do not apply to every employee. They target “covered persons,” a group that ordinarily includes all directors, all executive officers, and employees in departments that routinely handle sensitive financial data: finance, accounting, legal, and investor relations. Most company policies extend the restriction to household family members and to entities the insider controls, such as trusts or personal investment vehicles. A spouse who trades on information the insider brought home is treated as the insider’s own violation.

The routine trigger is the preparation of quarterly or annual earnings. Companies typically close the window partway through the last month of a fiscal quarter and keep it closed until earnings have been public long enough for the market to absorb them. Exact start dates and reopening windows sit in each company’s insider trading policy rather than in an SEC rule.

Event-driven blackouts are less predictable. Pending mergers or acquisitions, major product launches, significant litigation developments, and large debt or equity offerings can all prompt one. The general counsel may quietly notify affected individuals that they cannot trade, sometimes without explaining why, because the reason itself might be material inside information.⁴

What You Cannot Do During a Blackout

Covered persons cannot buy, sell, or otherwise transfer the company’s common stock during an active blackout. The prohibition extends to derivative instruments whose value tracks the stock, including stock options, warrants, and convertible debt. Short sales are also off limits.

Gifts of company stock catch people off guard. No cash changes hands, but a gift can still be treated as a disposition under insider trading rules. Most company policies either ban gifts outright during the window or require pre-clearance from the compliance officer.

Insiders subject to Section 16 of the Exchange Act (directors, officers, and shareholders holding more than 10 percent of any class of the company’s stock) also face a reporting obligation. Every transaction in company securities must be reported on SEC Form 4 within two business days.⁵ That filing is public, so a violation becomes visible to regulators and investors almost immediately.

Rule 10b5-1 Plans: The Pre-Arranged Trading Exception

The main way an insider can lawfully trade during a blackout is under a valid Rule 10b5-1 plan. This is a written, pre-arranged trading schedule adopted while the insider does not possess material non-public information. Because trading instructions are locked in before any sensitive information exists, the insider is not exercising discretion at the moment of execution.⁶

The SEC tightened these plans effective February 2023. Directors and officers now face a cooling-off period before the first trade under a new or modified plan can execute. That period is the later of 90 days after adoption or two business days after the company files the quarterly or annual report covering the fiscal quarter in which the plan was adopted. For other insiders, the cooling-off period is 30 days.⁶

Several other guardrails apply. Directors and officers must certify in writing that they are not aware of material non-public information when adopting or modifying a plan. Only the company itself may maintain multiple overlapping plans. A single-trade plan, designed to execute one transaction, may be used only once in any 12-month period. Critically, the plan itself cannot be created, modified, or canceled during a blackout or while the insider holds inside information. If any of these conditions fails, the plan loses its safe harbor.

Stock Options When Expiration Falls Inside a Window

Stock options create trouble during blackouts, especially near expiration. Whether an exercise is permitted often turns on how the transaction settles.

An “exercise and hold,” where the insider pays cash out of pocket to exercise and keeps the resulting shares, does not usually involve a market sale. Many company policies exempt this type of transaction from the blackout because no shares hit the open market.⁷ The same logic covers routine vesting of restricted stock units and the surrender of shares to satisfy tax withholding, as long as those transactions stay off the public market.

A “cashless exercise” is different. It involves a broker selling shares on the market to fund the exercise price, and that market sale is exactly the transaction a blackout is designed to prevent. It is typically prohibited during a restricted period.⁷ If an expiring option can only be exercised on a cashless basis and the blackout covers the expiration date, the option may lapse. Some equity plan documents extend the expiration date in that situation, but that is a plan-level decision rather than a legal right. Check your equity plan documents well before any option approaches expiration.

Hardship Exemptions Are Narrow

Some insider trading policies include a narrow hardship provision. An insider who is not a Section 16 filer may request permission to trade outside the normal window on account of a genuine financial emergency. The request must be in writing, describe the transaction and the circumstances, and include a certification that the insider does not possess material non-public information.⁸

Two limits matter. The compliance officer has no obligation to approve the request, and hardship exemptions are almost never granted during an event-driven “special” blackout. A hardship exemption might unlock a trade during a routine closed window if you can show you hold no inside information; it will not override a blackout imposed because of a pending deal or material event.

Retirement Plan Blackouts Are a Different Rule

The word “blackout” also refers to something separate: a suspension of participant activity in a company-sponsored retirement plan like a 401(k). These restrictions are governed by the Employee Retirement Income Security Act, not securities law, and their purpose is administrative. A plan blackout typically happens when a company switches recordkeepers, restructures its investment menu, or migrates to new plan administration software.

During the window, participants temporarily lose the ability to redirect their investments, take plan loans, or request distributions. Any suspension lasting more than three consecutive business days qualifies as a blackout period under ERISA and triggers notice requirements.⁹

The plan administrator must send participants written notice at least 30 and no more than 60 days before the blackout begins. The notice must explain the reasons for the blackout, describe which rights are being suspended, state the expected start and end dates, and provide contact information for the plan administrator or fiduciary. If the dates change after the initial notice, an updated notice must go out as soon as reasonably possible.⁹

Where the Two Regimes Meet: Sarbanes-Oxley Section 306

Sarbanes-Oxley links the two. Under Section 306(a), directors and executive officers of a public company are prohibited from buying, selling, or otherwise transferring company stock acquired through their service during any pension plan blackout that blocks at least 50 percent of plan participants from transacting in company stock for more than three consecutive business days.¹⁰ When this restriction is triggered, the company must file a Form 8-K disclosing the blackout period, with an updated 8-K following as soon as reasonably practicable if the dates change.¹¹

Any profit a director or officer realizes on a trade that violates this prohibition is recoverable by the company. If the company does not sue within 60 days of a shareholder’s written demand, any shareholder can bring the action on the company’s behalf. The suit must be filed within two years of the profit’s realization, and the executive’s intent is irrelevant; the profit is recoverable whether the trade was deliberate or inadvertent.¹⁰

Penalties for Trading Through a Blackout

The consequences come from several directions and can stack.

SEC Civil Enforcement

The SEC can seek disgorgement of profits gained or losses avoided, plus a civil penalty of up to three times that amount. A person who controlled the violator, such as a supervisor, faces a separate penalty of up to $1,000,000 or three times the controlled person’s illegal gain, whichever is greater.¹²

Criminal Prosecution

The Department of Justice can pursue criminal charges for willful violations. An individual faces up to $5 million in fines and up to 20 years in prison. A corporation or other non-natural-person entity faces fines up to $25 million.¹³ Courts may also bar convicted individuals from serving as officers or directors of public companies.

ERISA Notice Penalties

Failing to give the required advance notice for a retirement plan blackout carries its own exposure. The Department of Labor can impose a civil penalty of up to $169 per day for each participant or beneficiary who did not receive timely notice, an amount adjusted upward from the original $100 statutory figure to account for inflation.¹⁴¹⁵ Each missed participant counts as a separate violation, so a company with a few thousand plan participants that skips the notice can face six-figure liability within weeks.

Private Suits and Internal Consequences

Shareholders can bring private actions against insiders who traded during a blackout, and under the Sarbanes-Oxley profit recovery provision above they can do so on the company’s behalf if the company itself declines. Beyond litigation, a blackout violation frequently ends in termination, forfeiture of unvested equity, and clawback of incentive compensation. Since October 2023, all major U.S. stock exchanges have required listed companies to maintain a clawback policy for excess incentive compensation paid to executives in the event of a financial restatement, and many companies have voluntarily broadened those policies to reach misconduct even without a restatement.

1
Cornell Law School. Securities Exchange Act of 1934
2
eCFR. 17 CFR 240.10b-5 – Employment of Manipulative and Deceptive Devices
3
eCFR. 17 CFR 243.100 – General Rule Regarding Selective Disclosure
4
SEC.gov. Insider Trading Policy
5
U.S. Securities and Exchange Commission. Insider Transactions and Forms 3, 4, and 5
6
U.S. Securities and Exchange Commission. Rule 10b5-1 – Insider Trading Arrangements and Related Disclosure
7
SEC.gov. DIH Holding US, Inc. Insider Trading Compliance Policy
8
SEC.gov. Insider Trading Policy
9
eCFR. 29 CFR 2520.101-3 – Notice of Blackout Periods Under Individual Account Plans
10
Office of the Law Revision Counsel. 15 USC 7244 – Insider Trades During Pension Fund Blackout Periods
11
eCFR. 17 CFR 245.104 – Notice
12
Office of the Law Revision Counsel. 15 USC 78u-1 – Civil Penalties for Insider Trading
13
Office of the Law Revision Counsel. 15 USC 78ff – Penalties
14
U.S. Department of Labor. Enforcement Manual – Civil Penalties
15
U.S. Department of Labor. Fact Sheet – Adjusting ERISA Civil Monetary Penalties for Inflation