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Question

Difficulty: EasyInsider Trading and Misuse of Material Nonpublic Information

A registered representative executes a purchase of stock in a biotechnology firm immediately after receiving unannounced positive clinical trial results from a family member who works as a senior researcher at that firm. Under federal securities laws governing insider trading, which of the following statements correctly describes the potential legal liability?

  1. Both the researcher (tipper) and the registered representative (tippee) can be held liable for insider trading.Answer
  2. B
    Only the registered representative can be held liable because legal liability attaches solely to the individual who executes the transaction.
  3. C
    Only the researcher can be held liable because insider trading regulations apply exclusively to corporate officers and employees.
  4. D
    Neither individual can be held liable unless the researcher received direct financial compensation in exchange for sharing the information.

Answer

Both the researcher (tipper) and the registered representative (tippee) can be held liable for insider trading.
Under federal securities regulations governing the misuse of material nonpublic information, insider trading liability extends to both tippers and tippees. The researcher acts as a tipper by breaching a duty of confidentiality, while the registered representative acts as a tippee by knowingly executing a trade based on confidential material information.

Step-by-Step Solution

1
Evaluate the nature of the shared information.
Unannounced clinical trial results are material nonpublic information because a reasonable investor would consider them significant in making an investment decision.
Trading while in possession of nonpublic material information violates federal securities rules.
2
Determine tipper liability for the researcher.
The researcher breached a fiduciary duty of confidentiality by disclosing corporate secrets to a relative.
Passing material nonpublic information without a valid corporate purpose creates tipper liability.
3
Determine tippee liability for the registered representative.
The registered representative executed a stock trade based on the nonpublic information received.
A tippee who knows or should know that the information was provided in breach of duty assumes liability upon trading.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
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Topics

Insider Trading and Misuse of Material Nonpublic Information