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Difficulty: MediumInsider Trading and Misuse of Material Nonpublic Information

A registered representative receives unannounced material nonpublic merger details from a friend who is an executive at a publicly traded corporation. Although the representative does not purchase any stock for their own account, they pass this information to a retail client, who subsequently purchases 1,000 shares of the target company and realizes a significant financial gain upon public announcement. Under federal securities laws governing insider trading, which of the following statements is correct?

  1. Both the registered representative (as tipper) and the client (as tippee) can be held liable for insider trading violations.Answer
  2. B
    The client cannot be held liable for insider trading because the client is not an officer, director, or employee of the target corporation.
  3. C
    Only the client can be held liable because insider trading penalties require an actual securities transaction to have been executed by that specific individual.
  4. D
    Neither the representative nor the client can be held liable because the information originated from a casual conversation between personal friends.

Answer

Both the registered representative (as tipper) and the client (as tippee) can be held liable for insider trading violations.
Under federal insider trading regulations, liability extends to both the person who discloses material nonpublic information (the tipper) and the person who trades on it (the tippee). The registered representative is liable for tipping the client, and the client is liable for executing trades based on the nonpublic information.

Step-by-Step Solution

1
Evaluate the registered representative's conduct under insider trading rules.
The representative disclosed material nonpublic information to a third party.
Passing material nonpublic information constitutes a breach of duty and establishes tipper liability, regardless of whether the tipper profits or trades.
2
Evaluate the retail client's conduct under insider trading rules.
The client executed stock purchases based on the nonpublic tip.
Trading on material nonpublic information received from a tipper establishes tippee liability once the information is acted upon.
3
Determine joint liability status under federal securities regulation.
Both parties are subject to civil and criminal penalties under federal law.
Insider trading enforcement applies to both the source/conveyer of nonpublic information and the party executing trades.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
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Topics

Insider Trading and Misuse of Material Nonpublic Information