Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkHard
A publicly traded company is preparing to release its quarterly earnings report. Before the official announcement, an executive at the company informs her brother, who then trades on this non-public information. This action is a clear violation of which federal act?
- AThe Trust Indenture Act of 1939.
- BThe Securities Exchange Act of 1934.
- CThe Securities Act of 1933.
- DThe Investment Company Act of 1940.
Show answer & explanationAnswer & explanation
Correct answer: B. The Securities Exchange Act of 1934.
The Securities Exchange Act of 1934 broadly prohibits fraudulent activities in the secondary market, including insider trading. It is the primary federal law that addresses the misuse of material non-public information for personal gain.
Why the other options are wrong
- A. The Trust Indenture Act of 1939 applies to corporate bond issues and the protection of bondholders.
- C. The Securities Act of 1933 governs the primary market (new issues) and prospectus requirements, not insider trading in existing shares.
- D. The Investment Company Act of 1940 regulates investment companies like mutual funds.
Insider Trading & Securities Exchange Act of 1934
The Securities Exchange Act of 1934 prohibits insider trading—the illegal practice of using material, non-public information to make investment decisions, or tipping others to do so.
- 1934 Act governs secondary market.
- Prohibits fraud, including insider trading.
- Applies to material non-public information.
- Aims for fair and orderly markets.
Memory trick: The '34 Act: 'Second-hand Secrets' are a no-go.