Insider Trading Practice Questions for the SIE
These 4 free questions test insider trading, trading or tipping on material nonpublic information, including who is liable, what the penalties are, and what a rep should do when confidential information lands in their lap. It’s a short, dense set: the topic sits inside Section 3 of the SIE® outline (Understanding Trading, Customer Accounts and Prohibited Activities), which carries 31% of the exam, 23 of 75 scored questions.
Question 1 of 4
A registered representative rides an elevator with two bankers from her firm's corporate finance department who are discussing, by name, an unannounced acquisition of a public company. Later that morning, a customer who knows nothing about the deal calls and asks her opinion on that same company's stock. What should the representative do?
The questions in this set
Review all 4 questions
-
A registered representative rides an elevator with two bankers from her firm's corporate finance department who are discussing, by name, an unannounced acquisition of a public company. Later that morning, a customer who knows nothing about the deal calls and asks her opinion on that same company's stock. What should the representative do?
- Enter the customer's purchase but mark the order ticket "unsolicited," which relieves her of suitability and Regulation Best Interest obligations for the trade
- Recommend the stock, because she did not seek out the information and the customer raised the company on his own
- Decline to recommend or trade the stock, and report what she overheard to her firm's compliance department
- Tell the customer only that "something big may be coming" without naming the deal, since she will not be trading herself
Show answer and explanation
Answer: Decline to recommend or trade the stock, and report what she overheard to her firm's compliance department
Three duties collide here, and the best answer honors all of them: do not trade, do not tip, and escalate. The information is material (an unannounced acquisition reliably moves the target's stock) and nonpublic (it has not been announced), which is what matters. Choice A rests on the comforting idea that eavesdropping is innocent because she never went looking; the analysis turns on the character of the information and her knowledge of it, not on how it reached her ears, and recommending the stock while holding that knowledge would expose her regardless. Choice C is doubly wrong: tipping alone creates liability even if she never trades a share, and dressing the tip up as a vague hint does not launder it — conveying the substance of material nonpublic information in any form is tipping. Choice D borrows a rule from the wrong subject entirely; marking a ticket 'unsolicited' speaks to whether a recommendation was made and therefore whether the suitability and Regulation Best Interest obligations attach, but it has nothing to say about material nonpublic information, and the trade would still be tainted. Reporting to compliance matters beyond protecting herself: what she overheard suggests the firm's information barrier may have failed, and the firm is required to maintain procedures reasonably designed to prevent exactly this kind of leakage. Compliance will typically place the security on a watch or restricted list.
The Trap: Overheard MNPI is usable because the rep did not seek it out, or a vague hint is not tipping
- Enter the customer's purchase but mark the order ticket "unsolicited," which relieves her of suitability and Regulation Best Interest obligations for the trade: Imports the unsolicited-order exemption from the suitability rules into the insider-trading context. Marking a ticket unsolicited addresses whether a recommendation was made; it does nothing about material nonpublic information.
- Recommend the stock, because she did not seek out the information and the customer raised the company on his own: The 'I didn't go looking for it, so I can use it' misconception. How the information reached her does not matter; what matters is that it is material, nonpublic, and she knows it.
- Tell the customer only that "something big may be coming" without naming the deal, since she will not be trading herself: Combines two misconceptions: that tipping without trading is safe, and that a vague hint is not a tip. Passing the substance of material nonpublic information in any form is tipping.
Verified against: SEC Rule 10b-5 (trading and tipping on material nonpublic information); Securities Exchange Act Section 15(g) (firm procedures to prevent misuse of MNPI)
-
A corporate officer learns that her company will badly miss its earnings target. She does not trade a single share. She does tell her brother-in-law, who sells his entire position two days before the announcement. Under federal securities law:
- Only the brother-in-law is liable, because he is the only one who traded
- Only the officer is liable, because she was the source of the information
- Neither is liable, because the officer received no money in exchange for the information
- Both the officer, as tipper, and the brother-in-law, as tippee, may be held liable
Show answer and explanation
Answer: Both the officer, as tipper, and the brother-in-law, as tippee, may be held liable
Liability for insider trading does not depend on the informed person placing a trade. When an insider passes material nonpublic information to someone who then trades, the insider is the 'tipper' and the trader is the 'tippee,' and both can be held liable. The tipper's liability rests on breaching a duty by disclosing confidential information for a personal benefit; the tippee's rests on trading while knowing, or having reason to know, the information came from that breach. Choice A is the single most common error here — the officer never traded, but her tip is itself the violation. Choice C assumes the benefit must be cash; courts have long recognized that gifting confidential information to a trading relative or friend supplies the benefit, with the tipper's gain inferred from the relationship. Choice D drops the tippee, who traded with knowledge. Note both elements had to be present for the information to qualify: it was material (a bad earnings miss moves a stock) and nonpublic (not yet announced). Governed by Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
The Trap: Insider trading requires actually trading — tipping alone creates no liability
- Only the brother-in-law is liable, because he is the only one who traded: The headline misconception of this cluster: 'no trade, no liability.' Tipping alone creates exposure for the tipper.
- Only the officer is liable, because she was the source of the information: The reverse of choice A — ignores the tippee, who traded with knowledge of the breach. Both links in the chain are exposed.
- Neither is liable, because the officer received no money in exchange for the information: Misconception that the personal benefit must be cash. A gift of confidential information to a trading relative or friend supplies the benefit element.
Verified against: Securities Exchange Act of 1934 Section 10(b); SEC Rule 10b-5 (tipper/tippee liability, personal-benefit test)
-
A portfolio manager sells a stock while in possession of material nonpublic information, avoiding a $400,000 loss. The SEC brings a CIVIL enforcement action against him. The civil money penalty the SEC may seek can reach up to:
- $5,000,000 and up to 20 years in prison
- $1,200,000 — three times the loss avoided
- $25,000,000
- $400,000 — the amount of the loss avoided
Show answer and explanation
Answer: $1,200,000 — three times the loss avoided
Sorting the insider-trading penalty numbers is most of the battle, and this question turns on the civil/criminal line. In a civil action the SEC may seek a penalty of up to three times the profit gained or loss avoided — 'treble damages.' Here that is 3 × $400,000 = $1,200,000. Choice A confuses disgorgement (giving back the $400,000 he never should have kept) with the penalty; disgorgement is separate and additional. Choice C is the classic trap: $5 million and 20 years are the CRIMINAL maximums for an individual, reached only through a criminal prosecution — note also that no civil proceeding can impose imprisonment, which is a giveaway once you spot it. Choice D borrows the criminal cap for entities and pins it on a person. Keep the buckets clean: civil = up to 3x the profit gained or loss avoided; criminal = up to $5 million and 20 years for individuals, up to $25 million for entities. All of these are 'up to' maximums, not automatic amounts. Firms can face controlling-person liability as well, at the greater of $1 million or three times the profit gained or loss avoided.
The Trap: The 3x (treble) penalty is criminal, or the $5M/20-year caps are civil
- $5,000,000 and up to 20 years in prison: The documented 'civil vs criminal' swap. These are the CRIMINAL maximums for an individual, imposed in a criminal prosecution — not a civil SEC penalty, and a civil action cannot impose prison time at all.
- $25,000,000: Takes the criminal maximum that applies to ENTITIES and misapplies it to an individual in a civil case — a two-step error on both the person and the penalty type.
- $400,000 — the amount of the loss avoided: Mistakes disgorgement for the penalty. Returning the $400,000 is separate from, and in addition to, the civil penalty.
Verified against: Securities Exchange Act Section 21A (civil penalties) and Section 32(a) (criminal penalties); Insider Trading Sanctions Act of 1984
-
A broker-dealer's investment banking department is advising a client on a confidential merger. The firm maintains an information barrier separating that department from its research, trading, and retail brokerage areas. The PRIMARY purpose of this barrier is to:
- Prevent material nonpublic information from reaching people who could trade on it or pass it along
- Guarantee that the firm cannot be held liable if one of its employees trades on the information
- Allow the firm to trade the security for its own account, provided retail customers are not told about the deal
- Satisfy the firm's obligation to keep customers' personal financial information confidential
Show answer and explanation
Answer: Prevent material nonpublic information from reaching people who could trade on it or pass it along
When a firm underwrites deals and also trades and advises retail customers, it routinely learns confidential issuer information. Federal law requires broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, and the information barrier — physical, technological, and procedural separation between departments — is how firms operationalize that duty. Choice B swaps in the customer-privacy regime, which protects customers' personal financial data rather than confidential issuer information. Choice C states the belief that the wall merely hides information from customers while leaving the firm free to trade; the whole point is to stop anyone, including the firm's own desks, from acting on the information. Choice D treats the barrier as a liability shield: a barrier that exists only on paper protects no one, and a firm whose supervision failed can face controlling-person liability. Governed by Exchange Act Section 15(g), which imposes the written-procedures requirement on broker-dealers.
The Trap: An information barrier is a compliance formality or a liability shield, rather than a control on the flow of MNPI
- Guarantee that the firm cannot be held liable if one of its employees trades on the information: Treats the barrier as absolute immunity. A barrier is a required control that must actually work; firms still face controlling-person exposure where supervision failed.
- Allow the firm to trade the security for its own account, provided retail customers are not told about the deal: The 'the firm may use MNPI internally' misconception. The barrier exists to stop the information from being used, including by the firm itself — it is not a license to trade.
- Satisfy the firm's obligation to keep customers' personal financial information confidential: Conflates information barriers with customer-privacy rules. Privacy protections guard customers' personal data; an information barrier contains issuer information the firm learns in confidence.
Verified against: Securities Exchange Act Section 15(g) (policies to prevent misuse of material nonpublic information); Insider Trading and Securities Fraud Enforcement Act of 1988
What the SIE tests here
The building blocks are the liability chain, insider → tipper → tippee, and the two-part definition: the information must be both material (a reasonable investor would care) and nonpublic. Around that core, the exam tests penalties, firms’ information barriers between departments, and best-action scenarios: a rep overhears bankers in an elevator, a client CFO lets something slip, an internal deal memo arrives in the wrong inbox.
The traps that keep showing up
“No trade, no violation.” False: tipping alone creates liability. The tipper who passes material nonpublic information for a benefit and the tippee who trades on it (knowing where it came from) are both on the hook, and the chain can extend to remote tippees.
Which penalty is which. The famous treble penalty, up to three times the profit gained or loss avoided, is civil. Criminal penalties run separately: fines up to $5 million and up to 20 years for individuals, up to $25 million for entities. Questions swap the labels; keep “3× = civil” nailed down.
Half the definition. Public information, however dramatic, isn’t insider trading material; and neither is immaterial office gossip. Distractors love a scenario with one element present and the other missing.
How these questions teach it
Each explanation walks the liability chain for the scenario at hand (who owed a duty, who received a benefit, who knew) names the element the wrong answers dropped, and ends with the citation (“Verified against: SEC Rule 10b-5”). Eight questions is enough to cover every angle the public content outline gives this topic; the neighboring manipulation questions pick up from there.
Insider trading is one strand of a bigger cluster: the wider prohibited activities set covers manipulation, churning, and the “what should the rep do” scenarios, while AML handles the reporting side and Reg BI and suitability the recommendation rules. Everything in the section is indexed at the Section 3 question hub, and the 75-question SIE practice exam mixes all four sections at exam weighting, free.
