Dirks Test

Definition of 'Dirks Test'


A standard used by the Securities and Exchange Commission (SEC) to determine whether someone who receives and acts on insider information (a tippee) is guilty of insider trading. The Dirks Test looks for two criteria

1. Whether the individual breached the company's trust
2. Whether the individual did so knowingly

Tippees can be found guilty of insider trading if they know or should know that the tipper has committed a breach of fiduciary duty.

Investopedia explains 'Dirks Test'


The test is named after the 1984 Supreme Court case Dirks v. SEC, which established the conditions under which tippees can be held liable for insider trading. An individual does not actually have to engage in a trade to be guilty of illegal insider trading; merely facilitating an inside trade by disclosing material nonpublic information about a company is sufficient to be liable for illegal insider trading. It is also not necessary to be a manager or employee of the company; friends and family who have access to such information and disclose it when they shouldn't can also get into trouble.



comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
Trading Center