The Trading Plan Is the Alibi

Corporate insiders know things the market does not. That is not a scandal. It is the nature of running a company.

It becomes a problem the moment an insider wants to sell, because any sale can be read afterwards as a decision taken on information nobody else had.

The rule on trading plans is the answer securities law settled on, and it works by moving the decision away from the moment of the trade.

An insider who adopts a written plan while unaware of material non-public information, and then lets it run, has an affirmative defence against a charge of trading on inside information.

The plan fixes the amount, the price and the dates, or a formula for them, or hands the decision to someone with no access to what the insider knows.

The logic is sound. If the choice was made when the insider knew nothing special, the later trade cannot have been driven by what they learned afterwards.

The weakness was always the space between those two moments, and for two decades the rule said almost nothing about it.

An insider could adopt a plan and trade under it the next day. Plans could run in parallel, with the inconvenient one cancelled. A single-trade plan could be set up to execute one well-timed sale.

None of that was forbidden, and research on plan trading repeatedly found that sales under plans tended to come before falls in the share price more often than a schedule chosen in ignorance should.

The amendments the SEC adopted in December 2022 closed most of that space.

Directors and officers must now wait before the first trade under a new plan: the later of ninety days after adoption or two business days after the company reports its results for that quarter, to a maximum of 120 days.

Other insiders wait thirty days. Directors and officers must certify, when they adopt a plan, that they are not aware of material non-public information.

Overlapping plans are largely prohibited, and a single-trade plan may be used only once in any twelve months.

A change to the amount, price or timing counts as a new plan and restarts the wait.

The defence also now requires that the insider act in good faith with respect to the plan for as long as it runs, not only on the day it is signed.

That last condition does the most work, and it is the one the market finds hardest to observe.

A plan can lawfully be terminated. Cancelling one is not a trade, and securities law has never treated a decision not to sell as a decision to sell.

But a pattern of adopting plans and abandoning them whenever the price moves the wrong way is exactly the conduct the good-faith requirement was written to reach.

The second half of the reform is disclosure, and it changes what a plan is for.

The disclosure item requires a company to report each quarter whether any director or officer adopted or terminated a plan, with its duration and the number of shares it covers.

Before that, plans were largely private. The market saw trades on Form 4 filings as they happened and had to guess whether they had been scheduled.

Now the market sees the plan itself, often weeks before any sale, and forms a view of it.

That is a gain for transparency and a complication for the theory. A plan was meant to make the timing of a sale carry no information. A plan disclosed in advance carries information of its own, about how much stock an insider expects to want to sell and over what period.

The rule as published spends much of its length on that tension: where a legitimate schedule ends and a convenient one begins.

The alibi in the title is not an accusation. Most plans are exactly what they appear to be: an executive paid largely in stock, diversifying on a timetable, with no particular view of the next quarter.

It is a description of the legal function. A plan's value to the insider is that it answers, in advance, a question a prosecutor would otherwise ask afterwards.

The gap that remains is one no waiting period can close. An insider decides when to adopt a plan, and what shapes that decision is not always the kind of knowledge a certification captures.

A general sense that next year will be harder than this one is not material non-public information. It is also precisely the kind of view that makes someone want to sell.

The rule can govern the gap between the plan and the trade. It cannot govern the gap between what an insider knows and what they merely expect, and that is where its presumption is thinnest.