6.1.8.4. Breach of Duty of Trust or Confidence: Rule 10b5-2
Rule 10b5-2 lists circumstances in which a “duty of trust or confidence” exists for purposes of an insider trading analysis under Rule 10b-5. These circumstances include:
• When a person agrees to keep information confidential
• When the communicator and recipient of material, nonpublic information have a “history, pattern, or practice of sharing confidences” (the idea being that the recipient should know that he is not expected to blab about the information)
• When a person obtains material, nonpublic information from her spouse or an immediate family member (The recipient can demonstrate in some circumstances that no duty of trust or confidence existed, but it’s simplest to assume that family relationships generally create such a duty.)
The preliminary note to the rule makes clear that the list is non-exclusive, so just because a circumstance is not listed does not mean there is no duty.
In analyzing whether a duty of trust or confidence exists, consider the relationship between the communicator and recipient and the circumstances of the communication. Company insiders and outside professionals, such as lawyers and investment bankers, will almost always be subject to a duty of confidence. Recipients of tips violate the duty, even if they have no direct duty to the original source of the information, if they know or have reason to know that the information came from someone who breached a duty of trust or confidence. However, a person who merely overhears a conversation in an elevator, for example, generally does not owe a duty of trust or confidence to the source of the information and can trade at