A compliance officer is evaluating a potential insider trading violation. A software developer at a publicly traded pharmaceutical firm discloses unannounced FDA approval news to a personal trainer, expecting discounted training sessions in exchange for the tip. The personal trainer purchases shares before the public announcement and also passes the information to a family member, who buys shares as well. Which of the following statements regarding tipper and tippee liability under federal securities regulations are correct?
- The software developer can be held liable as a tipper even if the developer did not personally buy or sell stock.Answer
- The personal trainer can be held liable as a tippee even though the trainer is not an employee or insider of the company.Answer
- CThe family member is completely exempt from tippee liability because they did not provide direct financial compensation to the original insider.
- DInsider trading prohibitions apply exclusively to corporate officers and directors, protecting non-executive employees and outside tippees from prosecution.
Answer
The statements confirming that the software developer can be liable as a tipper without trading and that the personal trainer can be liable as a tippee without being a company insider are both correct.
Under federal insider trading regulations, tipper liability is established when an insider breaches a duty by sharing material nonpublic information for a personal benefit, regardless of whether the tipper personally executes any securities transactions. Tippee liability attaches when an individual trades while possessing material nonpublic information, knowing or having reason to know that the information was communicated in breach of a fiduciary duty. Employment with the issuing company is not required to establish tippee status.
Step-by-Step Solution
Key Concept
Elements of Tipper and Tippee Liability under Federal Insider Trading Rules
Estimated Time:1m 30s