Quick Answer
SEC rules bar anyone with material, nonpublic tender-offer information from trading the target's securities or tipping others, except the bidder itself, and separately bar short tendering more shares than you actually own. Broker-dealers must also forward annual reports and corporate-action notices to beneficial owners holding shares in street name.
Before moving from company-level analysis to market-level analysis, you need to understand the rules governing how information is used. These SEC rules create boundaries that all securities professionals must follow.
What Does the Tender-Offer Trading Prohibition Bar?
The SEC's tender-offer antifraud rule specifically addresses trading on material, nonpublic information related to tender offers.
- Prohibits any person who possesses material, nonpublic information relating to a tender offer from trading in the target company's securities
- Applies when the person knows (or has reason to know) the information:
- Is nonpublic
- Was acquired directly or indirectly from the offering person, the target, or their insiders
- Also prohibits insiders of the bidder and target from tipping (communicating confidential tender offer information to others)
- Creates a "disclose or abstain" obligation: you must either make the information public or refrain from trading
- Exception: The offering person itself may purchase the target's securities (the bidder can buy shares of the target)
Exam Tip: Gotchas
- This tender-offer prohibition applies specifically to TENDER OFFERS, not all insider trading situations.
- The bidder (offering person) CAN buy target company shares. Everyone else who possesses material, nonpublic information about the tender offer cannot trade on it.
What Does the Short-Tendering Prohibition Bar?
- Prohibits tendering more shares than the person actually owns or has a net long position in
- Prevents manipulation of partial tender offers through short tendering (tendering borrowed shares)
- Protects the integrity of the tender offer process
Exam Tip: Gotchas
- Short tendering (tendering more shares than you own) is prohibited. The rule requires a net long position in the shares being tendered.
What Must Broker-Dealers Deliver to Beneficial Owners?
Broker-dealers have an obligation to keep customers informed about securities they hold:
- Must deliver annual reports and other corporate communications to beneficial owners of securities held in street name
- Customers must be notified of corporate actions including:
- Dividend declarations (cash, stock, property)
- Stock splits (forward and reverse)
- Odd lot tender offers
- Mergers and acquisitions
- Rights offerings and warrants
Exam Tip: Gotchas
- Broker-dealers must forward corporate communications to beneficial owners even when shares are held in street name. The firm holding the securities acts as a conduit for all issuer communications.
What Should You Check on Exam Day?
- The tender-offer trading prohibition applies specifically to tender offers, not insider trading generally, and creates a disclose-or-abstain duty.
- The bidder (offering person) is the one exception: it can buy the target's shares.
- The short-tendering prohibition requires a net long position before tendering; short tendering is prohibited.
- Broker-dealers must forward annual reports and notify customers of dividend declarations, splits, odd lot tender offers, mergers, and rights offerings for shares held in street name.