Uniform Securities Agent State Law (Series 63) Practice Exam

What defines 'inside information' in the context of securities trading?

1. Public information known to industry professionals

2. Confidential corporate strategies shared with stakeholders

3. Material and non-public information used for trading

4. All information available through public records

The correct answer is: Material and non-public information used for trading

The concept of 'inside information' in securities trading is specifically defined as material and non-public information that can significantly influence an investor's decision to buy or sell a security. This type of information is confidential and not available to the general public, which is crucial as its possession by an insider or related parties could lead to an unfair advantage in the market. Material information is any information that a reasonable investor would consider important in making an investment decision, which has the potential to affect a company's stock price. Notably, when this information is non-public, it raises legal concerns, particularly regarding insider trading laws, which prohibit trading based on information that has not been disclosed to the public. In contrast, public information known to industry professionals or available through public records does not meet the criteria for inside information, as it can be accessed by all market participants, ensuring a level playing field. Similarly, while confidential corporate strategies private to the company can be material, unless they are non-public and specifically impact financial performance or market perception, they wouldn't qualify as 'inside information.' Understanding these distinctions clarifies why the definition of inside information centers on its materiality and non-public status.