A corporate custodian at a publicly traded company discovers a discarded document detailing an unannounced acquisition while cleaning executive offices. The custodian shares this confidential information with a roommate, who subsequently purchases shares of the target company prior to the public announcement. The custodian does not place any trades nor receive direct financial compensation. Which of the following statements regarding tipper and tippee liability under federal insider trading regulations are correct?
- The roommate can be held liable as a tippee for trading while in possession of material nonpublic information.Answer
- BThe custodian is exempt from tipper liability because they did not execute any securities transactions themselves.
- The custodian can be held liable as a tipper for breaching a duty of confidentiality by passing material nonpublic information.Answer
- DTippee liability applies exclusively to corporate insiders and employees of the issuer.
Answer
The statement that the roommate can be held liable as a tippee for trading on material nonpublic information and the statement that the custodian can be held liable as a tipper for breaching a duty of confidentiality are both correct.
Under federal insider trading regulations, tipper liability attaches when an individual breaches a duty of confidentiality by disclosing material nonpublic information, regardless of whether they execute trades themselves. Tippee liability attaches when an individual trades on material nonpublic information knowing or having reason to know that it was disclosed in breach of a duty.
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Key Concept
Tipper and Tippee Liability under Insider Trading Regulations
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