Unit 8.7 Insider Trading & Securities Fraud Enforcement Act of 1988 (Series 65)
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who buys securities with material, privileged, nonpublic information may be subject to a civil penalty of: A) up to three times the amount of gain or prevention of loss. B) $20,000.00 C) an amount equal to the amount of violation. D) the amount paid or saved on the securities trade.
Answer: A Trading on inside information is prohibited under the Securities Exchange Act of 1934, and, under the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC is empowered to seek the greater of $1 million or treble damages through the courts for violations of the inside trading rules. The damages can amount to up to three times the profit gained or three times the loss avoided on the transaction. All persons who controlled the insider are also subject to these damages if improper supervision is proven. Reference: 8.7 in the License Exam Manual.
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of: A) twice the amount of the profit gained or loss avoided on the transaction. B) 10 times the amount of the profit gained or loss avoided on the transaction. C) 3 times the amount of the profit gained or loss avoided on the transaction. D) the amount of the profit gained or loss avoided on the transaction.
Answer: C The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek triple damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information. Reference: 8.7 in the License Exam Manual.
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I. Attorney who writes an offering circular for a company. II. An investor holding 4% of the company's stock. III. The next-door neighbor of a board member of a company. IV. Brother of a company's president. A) II and III. B) II and IV. C) I and IV. D) I and III.
Answer: C The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not automatically classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information. Reference: 8.7 in the License Exam Manual.
During your training, you overhear your manager discussing the Chinese wall. This is probably referring to A) the increasingly high percentage of US government bonds held by the Chinese B) a leading tourist attraction in China C) internal provisions enacted to prevent material, nonpublic information from leaking from one department of the firm to another D) takeout for lunch
Answer: C The term "Chinese wall" is used to describe the separation of divisions within the firm, protecting sensitive information from leaking to the wrong people. For example, the investment banking arm of the company may be working with a client company on a merger. This information cannot be shared with the trading or sales department until it is public knowledge. Reference: 8.7.2 in the License Exam Manual.
