markets; trading; securities; personal benefit


In 1983, the U.S. Supreme Court adopted the “personal benefit” requirement as an objective test for insider trading to help determine when confidential information is tipped for an improper purpose. Under this test, a tipper acts improperly by receiving a personal benefit for sharing confidential, nonpublic information, even if the tipper does not trade using the information. For instance, when a tipper leaks confidential information to a trading friend or relative, the tipper benefits personally because this amounts to trading on the confidential information and then gifting the profits. The personal benefit requirement is applied differently among the circuits, however, and the Second Circuit has changed its interpretation of the personal benefit test three times since 2014. Currently, it requires prosecutors to show a meaningfully close personal relationship between tipper and tippee using evidence suggesting either a quid pro quo relationship or the tipper’s intention to benefit the tippee. This Note argues that personal benefit tests that evaluate the closeness of a tipper-tippee relationship detracts from the Supreme Court’s goal of separating tips leaked for proper and improper purposes. Instead, this Note proposes two distinct tests for nonpecuniary personal benefits: one test for gifts of confidential information and another test for a tipper’s intention to benefit a particular recipient. The new test for gifts would apply to anyone, not just close friends or family members, but would require prosecutors to prove the tipper’s intent to gift the information. The new test for determining whether a tipper intended to benefit a particular recipient would establish a rebuttable presumption that the tipper disclosed information for a proper purpose. The prosecution could overcome this presumption with evidence of an improper purpose for the disclosure. These two tests would help to implement the goals of securities regulation to increase the accuracy of prices, protect investors from harm, and maintain fairness and confidence in securities markets.