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Another Look at Rule 10b5-1 Trading Plans
By establishing a prearranged plan to trade their companies' stock in compliance with SEC Rule 10b5-1, corporate executives avail themselves of the only formally codified affirmative defense against a charge of insider trading. However, statistical evidence demonstrating that executives in trading plans outperform their peers by 6% to 10% have twice brought trading plans under academic and journalistic scrutiny. Each time ultimately voices the recurring fear the rest of us have that executives who use such plans are getting away with insider trading.
Background
There is no consensus as to why these enhanced profits exist. Elementary logic shows that properly designed and implemented trading plans, in and of themselves, cannot confer any additional informational advantage to their trading executives. Stock trades in a Rule 10b5-1 trading plan can only reflect what knowledge an executive had when he or she adopted the plan. Therefore, any informational advantage that a plan might exploit must have existed when it was adopted, typically during a conventional “open trading window.”
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