Insider Trading

Insider trading is prohibited under the:

1. A.Investment Company Act of 1940The 1940 Act governs how mutual funds and other investment companies are organized and run. It has nothing to say about trading on inside information.
2. B.Trust Indenture ActThe Trust Indenture Act deals with the terms of corporate bond indentures and the role of the trustee protecting bondholders. It is a debt-documentation statute, not a trading-conduct one.
3. C.Securities Exchange Act of 1934Correct - the 1934 Act governs insider trading.
4. D.Securities Act of 1933The 1933 Act does carry antifraud provisions, which makes this a reasonable guess, but its reach is the offering process itself. Trading on material nonpublic information in the open market is addressed by the 1934 Act.

Why: The Securities Exchange Act of 1934 (and later insider-trading acts) prohibits trading on material nonpublic information.

Trading on material nonpublic information is:

1. A.Allowed with disclosureInsider trading is not a conflict that disclosure can cure. The wrong is trading on information the market does not have, and announcing that you intend to do it neither levels the field nor makes the trade lawful.
2. B.Permitted for advisersRegistration confers no exemption from the securities laws; if anything it heightens the obligation. Advisers must maintain policies specifically to prevent the misuse of material nonpublic information by anyone at the firm.
3. C.Encouraged researchDiligent research is encouraged, and analysts may assemble a mosaic from public and non-material pieces, which is where the confusion arises. The line falls at material nonpublic information: gathering public data is research, while acting on confidential inside information is a securities violation.
4. D.Insider trading, which is prohibitedCorrect - MNPI trading is illegal.

Why: Using material nonpublic information to trade is insider trading, which is prohibited.

An institutional investor who was not on the call believes she traded at a disadvantage because an issuer selectively disclosed material nonpublic information to other investors in violation of Regulation FD. Can she bring a private lawsuit against the issuer directly under Regulation FD for this selective disclosure?

1. A.Yes, because any violation of Regulation FD creates an implied private right of action for disadvantaged investors.Wrong. Regulation FD creates no private right of action; enforcement is exclusively through the SEC.
2. B.No, because Regulation FD does not create a private right of action; it is enforced only by the SEC.Correct. A disadvantaged investor has no independent private claim arising directly from Regulation FD.
3. C.Yes, but only if she can show she was a customer of the placement agent involved.Wrong. This invents a customer-relationship condition for a private right of action that does not exist under Regulation FD.
4. D.No, because Regulation FD only applies to registered offerings, and this was a private placement.Wrong. This misdiagnoses the reason; the absence of a private right of action, not an offering-type exclusion, is why no lawsuit lies here.

Why: Regulation FD does not create a private right of action. It is enforced exclusively by the SEC, so an investor who believes a violation disadvantaged her has no independent claim of her own arising directly from the regulation. Whatever recourse exists runs through the SEC's own enforcement process rather than a private lawsuit grounded in Regulation FD itself.

An agent trades on material nonpublic information about a pending merger. This is:

1. A.Permitted with disclosureMentioning where the information came from does not legitimize the trade. The wrong is exploiting an informational advantage the investing public does not have.
2. B.Smart researchResearch means assembling public information into insight. Acting on material nonpublic details of a pending merger is not analysis, it is an unfair advantage the law strips away.
3. C.An exempt transactionExemptions relieve registration requirements and nothing more. No exemption has ever licensed trading on material nonpublic information.
4. D.Prohibited insider tradingCorrect - insider trading is illegal.

Why: Trading on material nonpublic information is illegal insider trading.