Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Is the scenario where a corporate officer informs his son of an upcoming earnings report a violation of the Insider Trading Act?

1. No, it is acceptable for family members to share information

2. Yes, both parties have violated the Insider Trading Act

3. Only the officer is liable, not the son

4. It depends on the timing of the trade

The correct answer is: Yes, both parties have violated the Insider Trading Act

The scenario where a corporate officer shares information about an upcoming earnings report with his son could indeed represent a violation of the Insider Trading Act because it involves the dissemination of material, non-public information. The Insider Trading Act prohibits individuals who possess non-public information about a company from trading on that information or sharing it with others who may trade, known as "tippees." In this case, the corporate officer, who possesses insider information, has provided that information to his son. If the son acts on this information — such as by buying or selling the company’s stock before the earnings report is made public — both the officer and the son could be held liable for insider trading. The law is designed to ensure a level playing field in the securities markets, and sharing material non-public information breaches this principle. It's important to note that while personal relationships often involve sharing information, securities laws restrict the sharing of material non-public information with anyone who might trade on that information, regardless of their relationship. Therefore, both parties engaged in the insider trading violation because the son, as a tippee, would also be presumed to have violated the Act when he acted on the knowledge provided by his father.