Insider Trading And Securities Fraud Enforcement Act

A person who trades on material nonpublic information misappropriated from his employer faces SEC civil penalties of up to:

1. A.Three times the profit gained or loss avoidedCorrect. Treble damages are the statutory civil ceiling.
2. B.A flat $5,000 per violationWrong. $5,000/3 years echoes Uniform Securities Act criminal penalties, not federal insider trading.
3. C.Only forfeiture of the brokerage account involvedWrong. Account forfeiture is not the statutory measure.
4. D.Ten percent of the trader's annual salaryWrong. Penalties key off trading profits, not compensation.

Why: Under the Insider Trading Sanctions Act framework, the SEC may seek civil penalties up to three times the profit gained or loss avoided, in addition to disgorgement; criminal fines and imprisonment may also apply. Citation: Securities Exchange Act Sec. 21A. Takeaway: treble-profit civil penalty for insider trading.

A registered representative at Drayton Securities buys shares ahead of a merger announcement using information misappropriated from an advisory client of the firm. Beyond criminal exposure and disgorgement of his profits, what civil penalty may the SEC seek against him, and what is his firm's exposure?

1. A.A civil penalty capped at the amount of the profit gained, with no separate exposure for the firm.Wrong on both points. The cap is three times the profit, and controlling person liability reaches the firm.
2. B.A civil penalty of up to three times the profit gained or loss avoided, and the firm may face its own penalty as a controlling person if it knew of or recklessly disregarded the likely violation and failed to act.Correct. Treble civil penalties plus controlling person exposure for the employer.
3. C.A civil penalty of up to twice the profit gained; a firm is never liable for an employee's personal trading.Wrong. The multiplier is three, and firms can be liable as controlling persons.
4. D.No civil penalty is available, because insider trading is addressed exclusively through criminal prosecution.Wrong. The SEC has express civil penalty authority alongside criminal referral.

Why: The Insider Trading and Securities Fraud Enforcement Act authorizes the SEC to seek a civil penalty of up to three times the profit gained or the loss avoided, in addition to disgorgement and any criminal prosecution brought by the Department of Justice. The statute also reaches employers: a broker-dealer can be liable as a controlling person if it knew of or recklessly disregarded the likelihood that the violation would occur and failed to take appropriate steps to prevent it, or if it failed to establish and maintain the required policies and procedures to prevent misuse of material nonpublic information.