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Difficulty: HardInsider Trading and Misuse of Material Nonpublic Information

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a broker-dealer firm acting as a controlling person over an employee who engaged in insider trading can be subject to civil monetary penalties up to three times the profit gained or loss avoided by the employee if the firm recklessly failed to establish and enforce written supervisory procedures to prevent insider trading.

Answer: Answer

Answer

True
The statement is true because ITSFEA explicitly holds broker-dealers liable as controlling persons for employee insider trading if the firm recklessly failed to establish, maintain, or enforce written supervisory policies. Civil monetary penalties can be levied up to three times the profit gained or loss avoided (or $1 million, whichever is greater).

Step-by-Step Solution

1
Identify the legal framework governing broker-dealer supervisory liability for insider trading.
The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) defines controlling person liability for financial intermediaries.
Broker-dealers are required to establish, maintain, and enforce written supervisory policies reasonably designed to prevent the misuse of material nonpublic information.
2
Evaluate the statutory standard of fault required to impose civil penalties on a controlling person.
Civil liability attaches if the controlling person recklessly failed to establish or enforce written supervisory procedures to prevent insider trading.
Actual knowledge or direct participation in the illegal trading by firm executives is not required if reckless failure to supervise is proven.
3
Verify the maximum monetary penalties applicable under ITSFEA for controlling persons.
Civil monetary penalties can reach up to the greater of $1 million or three times the profit gained or loss avoided.
Treble civil damages serve as a major regulatory deterrent against lax compliance controls in broker-dealer operations.

Key Concept

Controlling Person Liability and Treble Penalties under ITSFEA
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Topics

Insider Trading and Misuse of Material Nonpublic Information