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.
BREAKING DOWN '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.