Uniform Securities Agent State Law (Series 63) Practice Exam

Who qualifies as an 'insider' in a corporation?

1. Any person with administrative access to corporate documents

2. Only the chief executive officer of a corporation

3. Anyone with non-public, material information about the corporation

4. Only audit committee members of the corporation

The correct answer is: Anyone with non-public, material information about the corporation

The definition of an "insider" in a corporation is primarily based on the possession of non-public material information. Insiders can include executives, directors, and employees who have access to sensitive information that could influence the company's stock price if made public. This includes knowledge of upcoming mergers, financial results prior to a public announcement, or strategic plans that could impact the market perception of the company's value. The rationale behind recognizing anyone with non-public, material information as an insider is rooted in the fundamental principles of fairness in securities transactions. When individuals trade based on this privileged information, it leads to an uneven playing field where non-insiders or the general public do not have access to the same critical data. Therefore, the law aims to prevent unfair advantages and to protect the integrity of the financial markets. The other options are too narrow in their definitions. Having administrative access to corporate documents does not automatically qualify someone as an insider, as there are many documents that do not contain material information. Similarly, limiting this status to only the chief executive officer or audit committee members excludes many other key personnel who may also possess significant, non-public, material information that affects shareholder interests and market decisions.