Stock Lawyer Insider Trading Laws 2 — Questions and Answers
Question 1: What is SEC Rule 10b5-1, and how does it protect executives from insider trading liability?
- It exempts executives from all trading restrictions
- It allows pre-planned trading programs set up when executives lack material nonpublic information (Correct answer)
- It requires executives to disclose all trades within 2 days
- It bans executives from trading during earnings seasons
Correct answer: It allows pre-planned trading programs set up when executives lack material nonpublic information
Rule 10b5-1 provides an affirmative defense for executives who adopt written trading plans specifying the amount, price, and timing of trades in advance, when they do not possess material nonpublic information.
Question 2: Under Section 16(b) of the Securities Exchange Act, what are 'short-swing profits'?
- Profits from short selling company stock
- Profits from any purchase and sale (or sale and purchase) of company equity within a 6-month period by an insider (Correct answer)
- Profits exceeding $1 million within any calendar year
- Gains from options trading by company directors
Correct answer: Profits from any purchase and sale (or sale and purchase) of company equity within a 6-month period by an insider
Section 16(b) requires insiders (officers, directors, and 10%+ shareholders) to disgorge any profits from a purchase and sale, or sale and purchase, of company equity securities within any 6-month period.
Question 3: What is the criminal penalty for insider trading conviction under federal law?
- Up to 5 years imprisonment and $1 million fine per violation
- Up to 20 years imprisonment and $5 million fine per violation (Correct answer)
- Up to 10 years imprisonment and $2.5 million fine per violation
- Up to 15 years imprisonment and $10 million fine per violation
Correct answer: Up to 20 years imprisonment and $5 million fine per violation
Under the Sarbanes-Oxley Act and the Insider Trading and Securities Fraud Enforcement Act, criminal insider trading conviction carries up to 20 years imprisonment and fines up to $5 million for individuals.
Question 4: What duty must a tippee satisfy to face liability for trading on a tip in an insider trading case?
- The tippee must work at the company
- The tippee must know or have reason to know the tipper breached a fiduciary duty for personal benefit (Correct answer)
- The tippee must have paid for the information
- The tippee must have traded more than $10,000 in securities
Correct answer: The tippee must know or have reason to know the tipper breached a fiduciary duty for personal benefit
A tippee inherits the tipper's duty and faces liability only if they knew or should have known that the tipper disclosed confidential information in breach of a fiduciary duty for personal benefit.
Question 5: Which SEC rule specifically prohibits trading on material nonpublic information obtained during a tender offer process?
- Rule 10b-5
- Rule 14e-3 (Correct answer)
- Rule 10b5-2
- Rule 144A
Correct answer: Rule 14e-3
SEC Rule 14e-3 specifically prohibits trading on material nonpublic information about a tender offer, regardless of whether the trader owed a fiduciary duty, making it broader than classical insider trading.
Question 6: What is a 'trading window' in the context of corporate insider trading policies?
- An SEC-approved period for unlimited insider trading
- A designated period when insiders are permitted to trade company securities, typically after earnings releases (Correct answer)
- A court order allowing frozen accounts to be accessed
- A FINRA-mandated blackout period for all trading
Correct answer: A designated period when insiders are permitted to trade company securities, typically after earnings releases
A trading window is a company-designated period, usually shortly after earnings releases when all material information is public, during which insiders are permitted to buy or sell company securities.
Stock Lawyer Insider Trading Laws 2
What is SEC Rule 10b5-1, and how does it protect executives from insider trading liability?