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Difficulty: EasyInsider Trading and Misuse of Material Nonpublic Information

A registered representative receives material nonpublic information regarding an upcoming earnings surprise from a corporate insider. Although the representative does not personally trade on the information, they communicate the tip to a client, who subsequently purchases shares of the issuer prior to the public disclosure. Under federal securities laws, who may be held liable for insider trading violations?

  1. Both the registered representative who tipped the information and the client who executed the tradeAnswer
  2. B
    Only the client who executed the trade, because passing information without personally trading carries no legal liability
  3. C
    Only the registered representative, because insider trading regulations apply exclusively to licensed financial professionals
  4. D
    Neither individual, because insider trading prohibitions apply strictly to corporate officers and directors trading their own company stock

Answer

Both the registered representative who tipped the information and the client who executed the trade may be held liable for insider trading.
Both the registered representative and the client are liable under federal securities laws. Tipper liability applies to individuals who improperly disclose material nonpublic information, even if they execute no trades themselves. Tippee liability applies to individuals who receive such information and execute trades while knowing or having reason to know the information was nonpublic.

Step-by-Step Solution

1
Evaluate the liability of the tipper (registered representative).
The representative breached a fiduciary duty by conveying material nonpublic information to a third party.
Tippers are legally liable for insider trading violations even if they do not personally execute trades or directly profit.
2
Evaluate the liability of the tippee (client).
The client acted upon material nonpublic information to purchase shares prior to public announcement.
Tippees incur liability when they execute securities transactions based on information they know or should know is confidential and nonpublic.
3
Determine joint liability.
Both parties are subject to civil enforcement and criminal prosecution under federal securities acts.
Federal law establishes liability for both the source who discloses inside information and the recipient who trades on it.

Key Concept

Tipper and Tippee Liability under Federal Securities Laws
Estimated Time:1m 0s
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Topics

Insider Trading and Misuse of Material Nonpublic Information