Dirks Test

AAA

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.

RELATED TERMS
  1. Insider Buying

    The purchase of shares of stock in a corporation by someone who ...
  2. Material News

    News released by a company that might affect the value of its ...
  3. Inside Director

    A board member who is an employee, officer or stakeholder in ...
  4. Insider

    A director or senior officer of a company, as well as any person ...
  5. Insider Trading

    The buying or selling of a security by someone who has access ...
  6. Insider Information

    A non-public fact regarding the plans or condition of a publicly ...
RELATED FAQS
  1. How can I profit from monitoring open interest?

    Since markets experience asymmetric information between parties, monitor whether there is an imbalance between the open interest ... Read Full Answer >>
  2. If I write a blog post about stocks I own, is that considered insider trading?

    Writing a blog post about stocks you own is not considered insider trading. The only duty of the blogger is to disclose he ... Read Full Answer >>
  3. What are the key differences between pro forma statements and GAAP statements?

    The U.S. generally accepted accounting principles (GAAP) require companies to adhere to uniform reporting standards that ... Read Full Answer >>
  4. Why is moral hazard so prevalent in the financial services industry?

    Moral hazard tends to be prevalent in the financial services industry due to the nature of the industry, temptation and greed, ... Read Full Answer >>
  5. Can you accidentally engage in insider trading?

    In 2011, an article appeared in the New York Daily News titled "Insider trading is not always high-profile or intentional; ... Read Full Answer >>
  6. How do the C-suite members work together to make a successful company?

    Corporate managers, typically chosen by a board of directors in large organizations, are ultimately responsible to stakeholders ... Read Full Answer >>
Related Articles
  1. Markets

    What Investors Can Learn From Insider Trading

    Some insider trading is actually legal - and can be extremely telling for investors.
  2. Economics

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  3. Options & Futures

    When Insiders Buy, Should Investors Join Them?

    Insider tracking can inform your investment strategy, but it requires research and a level head. Find out what to look for.
  4. Options & Futures

    Can Insiders Help You Make Better Trades?

    Find out why the trading activity of owners and executives can be a valuable trade-confirmation tool.
  5. Options & Futures

    Keeping An Eye On The Activities Of Insiders And Institutions

    These transactions reveal much about a stock. We go over what to consider and where to find it.
  6. Investing Basics

    What is a Minority Interest?

    A minority interest is an ownership or equity interest of less than 50% of an enterprise.
  7. Economics

    Explaining the Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business.
  8. Investing

    Who's Banning Facebook Now?

    Facebook may have over one billion monthly users, but there are many countries, including China, where the social media giant is banned.
  9. Investing

    Why Facebook is Banned in China

    Tight controls imposed by China have resulted in the ban of several foreign social media sites, like Facebook, but how did this come about?
  10. Investing

    REITs 101: How They're Regulated

    Here's everything you need to know about REITs in less than five minutes.

You May Also Like

Hot Definitions
  1. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  2. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  3. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  4. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
Trading Center