The SEC under Rule 10b5-1 has created a safe harbor for executives to manage their portfolios without fear of insider trading violations. Under this rule, the plans must be set up when the executives have no insider information and have set dates or prices of the trades in advance. http://www.law.uc.edu/CCL/34ActRls/rule10b5-1.html provides the substance of the rule.

The best part of the plan is that the planner does not have to specify the number of shares, can stop and start plans at will or run multiple plans at once. Not only that, but the plans allow execs to trade around earnings announcements and other significant events which are normally "blackout dates."

The author cites a good deal of research to show that the plans have out performed the market, and that people have use the plans judiciously in the case of Aetna’s (Gen. Custer’s life insurer), management where they got out before a major share-price correction.

This article is a veritable ‘Aladdin’s Cave’ of profitable opportunities, it would seem, and could do much to end the whole issue of insider trading, as we know it. The best course of action is to review to author’s case histories, then to future possibilities.

It seems that these plans do benefit the users. In Alan D. Jagolinzer’s study of roughly 117,000 trades in 10b5-1 plans by 3,426 executives at 1,241 companies, the plans beat the market by 6% over six months. BusinessWeek did a study on Thomson Financial data for 150 companies that had suffered a 20% stock slide in the past year, had 10b5-1 plans and where significant trading—both inside and outside plans—had taken place. The study showed that for half the companies examined sales were concentrated in the months prior to the peak and just after, with a volume increase with the highs. The first study, appears a bit stronger than the second, but that might be methodology: it is hard to tell. Of the explanations the article offers two fairly good ones:

• One, says Michael Painchaud, a Seattle executive trading tracker, is that top officials often know about a company's prospects long before the information is considered legally "material." I do like this one. People in an organization or an industry frequently know the total situation so well that the only way to stop them from profiting is to stop them trading all together. There is a good chance that managers would make better decisions than an outsider with exactly the same facts.

• Many executives follow valuation levels and institutional interest in their companies. Put another way, they are expert in applying best-practice valuation and capital cost to their operations, and have honed that knowledge with the institutions which own them. This mastery is necessary for survival in a company or an industry.

No matter the cause, the results have been very profitable for people using the plans. The companies say "prearranged trading plans" bring to mind a steady pattern of trading over a long period of time. and often right before a tumble. The concern for ‘orderly movement’ is quaint to say the least. Thirty years ago, I audited a trust that had over a million shares of a single DJI stock. To diversify, the trust sold 100,000 shares, which took Salomon Brothers the better part of a year to place. But in reality, many executives sell huge numbers of shares in a very short time: the market is much more liquid now.

This Rule gives plan members much wider trading windows than they would have had before. Despite the orderly appearance, the potential trading dates are much more numerous or potentially so. Now the question is how to make use of this information:

• In the first instance, the company may not develop any plan at all, for a variety of reasons, relating to level of insider holdings, and to the corporate culture: it might be a decision to appear as Caesar’s wife. In any event, you know more than you did about the company and its views on insider trading.

• Others may opt for limited dates which may look righteous, but just means that they will manage announcement timing. People can live with some constraints, and even if they sell away from the plan from necessity it is no problem. Remember the plan presents a safe but not necessary harbor for managers.

• Plans with specified share prices could be interesting. It would be a commitment not to take profits unless the stock reaches a given price. To trade away from the plan would signal a potential abandonment of the safe harbor. Such plans would be the equivalent of a general killing his horse before a battle.

The management has gotten some safety, but at the price of providing information. How will investors, react?

• First they will note plan details and whether the company uses it consistently. Deviations from any plan are important. Canceled investors’ meetings often presage mergers or other major news.

• Some companies might develop a number of plans to cover every date possible, say. Such activity might indicate a desire for an ever-present escape route within the safe harbor: not too reassuring for the investors.

In summary the plans will provide a lot of useful information. In the past, insiders might trade information, now they don't have to. The can use the information they have, and in using it, provide more rather than less transparency to the outsiders.