What does one mean by affirmative defense in Insider trading as per SEC in USA?

In the context of the U.S. Securities and Exchange Commission (SEC), an affirmative defense in insider trading is a legal strategy used by a person to argue that a securities trade was not illegal, even if it was executed while they were in possession of material non-public information (MNPI). The most significant affirmative defense is provided under SEC Rule 10b5-1.

The core principle of this defense is to demonstrate that the insider's trading decision was made before they became aware of the MNPI, and therefore the information was not a factor in the trade.

To qualify for this defense, an insider (like a corporate executive or director) must prove that their trades were made pursuant to a pre-established written plan that meets specific conditions:

• Established in good faith: The plan must be adopted at a time when the person was not aware of any MNPI about the company or its securities.
• Binding contract or plan: The plan must be a binding contract, an instruction to a third party to trade on their behalf, or a written plan.
• Predetermined and non-discretionary: The plan must specify the exact amount, price, and date of the trades, or provide a formula for determining them. The person setting up the plan cannot have any later influence over how, when, or whether the trades occur.
• Cooling-off period: Recent amendments to Rule 10b5-1, effective in 2023, require a mandatory cooling-off period between the adoption of the plan and the first trade. This period is a minimum of 90 days for directors and officers.
• No multiple or overlapping plans: The SEC has also restricted the use of multiple overlapping trading plans to prevent insiders from opportunistically selecting a plan that benefits from newly acquired MNPI.

Instead of proving whether the insider was aware of MNPI at the time of the trade, the defense hinges on whether they were aware of the MNPI at the time the trading plan was established. If the plan was created while the insider was "in the clear," they can go forward with the trades as per the plan, even if they later acquire MNPI.