You are here: Home / News Release Archives / 2013 / January / Do Insiders Influence Insider Trading Laws?

Do Insiders Influence Insider Trading Laws?

The Securities and Exchange Commission’s Rule 10b5-1, a regulation devised to clarify existing insider trading prohibitions, gives executives a way to legally plan trades of their company’s stock when they do not possess any relevant, non-public information. But research conducted by Penn State Smeal College of Business accounting researchers shows that insiders had significant influence on the parameters of Rule 10b5-1 in favor of less stringent regulations.
January 16, 2013

The Securities and Exchange Commission’s (SEC) Rule 10b5-1, a regulation devised to clarify existing insider trading prohibitions, gives executives a way to legally plan trades of their company’s stock when they do not possess any relevant, non-public information. But research conducted by Penn State Smeal College of Business accounting researchers shows that insiders had significant influence on the parameters of Rule 10b5-1 in favor of less stringent regulations.

In a paper titled “The social constitution of regulation: The endogenization of insider trading laws,” Penn State Smeal College of Business accounting professors Mark Dirsmith and Steven Huddart as well as Ohio State’s Zahn Bozanic, former Smeal Ph.D. student, pose that, by advocating for provisions related to planned trades, executives had significant influence to devise for themselves an affirmative defense against prosecution for insider trading violations.

The regulated parties sought to socially construct a “more specific, albeit less stringent form of regulation by, for example, advocating ‘affirmative defenses’ and ‘safe harbor’ provisions within its architecture,” write Dirsmith, Huddart, and Bozanic.

A content analysis of the evolution of insider trading regulation conducted by the authors shows that the SEC was most responsive to advocacy from those regulated. In fact, the two groups who had the most effect on Rule 10b5-1 revisions were legal professionals and the securities and investment industry. This analysis showed evidence that Rule 10b5-1 was heavily influenced by and in favor of those the rule sets out to regulate.

While, positively, this suggests government responsiveness to those regulated, it also appears that the responsiveness may be differentially applied to those who stand to benefit: “Despite the rhetoric surrounding the regulation of insider trading, the SEC was quite, almost solely, responsive to the position of those regulated whose goals were survival, profits and growth, and values revolved around open markets unfettered by burdensome regulations,” write the authors.

Mark W. Dirsmith is the Deloitte & Touche Professor of Accounting and Steven Huddart is the Smeal Chair Professor in Accounting and the Department Chair of Accounting at Penn State’s Smeal College of Business. Zahn Bozanic is an assistant professor of accounting & MIS at the Ohio State University who recently earned a Smeal Ph.D. in accounting. Their paper, “The social constitution of regulation: The endogenization of insider trading laws,” appeared in the journal Accounting, Organizations and Society in 2012.

At A Glance

Mark Dirsmith, Steven Huddard, and Zahn Bozanic examined the effects that company insiders have on the insider trading rules that regulate them, specifically the Securities and Exchange Commission’s Rule 10b5-1.

Key findings include:

  • Rule 10b5-1 was proposed to clarify the definition of “insider trading” and set out ways for insiders to execute pre-planned legal trades of their own companies’ stock.
  • Legal professionals and the securities and investment industry had a significant effect on Rule 10b5-1 rule revisions.
  • Insiders were able to influence the SEC toward a “more specific” but “less stringent” Rule 10b5-1 through advocating affirmative defenses and safe harbor provisions.
Recent News
Penn State Smeal team finishes second in inaugural Smeal MBA Sustainability Case Competition 18 Dec Penn State Smeal team finishes second in inaugural Smeal MBA Sustainability Case Competition

A team of MBA students from the Penn State Smeal College of Business finished second in the inaugural Smeal MBA Sustainability Case Competition, which the college recently hosted in its Business Building on the Penn State University Park campus.

Rost Named Fall 2014 Smeal Student Marshal 15 Dec Rost Named Fall 2014 Smeal Student Marshal

The Penn State Smeal College of Business has named Daniel Rost as the student marshal for fall 2014.

Final Five Teams to Vie for $17,500 in Smeal MBA Sustainability Case Competition 01 Dec

Five teams of MBA students from programs in the U.S. will compete Dec. 5 for $17,500 in prize money in the inaugural Penn State Smeal College of Business MBA Sustainability Case Competition.

Businessweek ranks Smeal MBA Program No. 2 in ROI 17 Nov

The Penn State Smeal MBA Program ranks No. 2 in return on investment according to the latest Bloomberg Businessweek rankings.

Smeal Names Four New Members to Its Board of Visitors 31 Oct

The Penn State Smeal College of Business has named four new members to its Board of Visitors. Joining the board are Jon Grosso, ’89, executive vice president and director of stores for Kohl’s Department Stores; Ron Morgan, ’93, co-founder of MorganFranklin Consulting; Stephen Reeves, ’81, executive vice president and chief financial officer of Enviva Holdings; and Salomon “Sal” Sredni, ’87, chief executive officer of TradeStation Group, Inc.

More Recent News... More Recent News...