Material Non-Public Information in the Time of COVID-19: SEC Warning on Insider Trading

On March 23, 2020 the SEC issued a statement warning about the risks of insider trading posed by the COVID-19 pandemic. The statement (available https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity, from Enforcement Co-Directors Stephanie Avakian and Steven Peikin, makes clear the Commission’s concerns about the need for public companies and regulated entities to do everything possible to minimize the potential for improper trading during the COVID-19 crisis. This warning comes on the heels of reports that a number of individuals had sold millions of dollars in stock in the weeks after a private briefing on the coronavirus before the U.S. Senate, including Senator Richard Burr, Senator Kelly Loeffler, and her husband, NYSE CEO Jeff Sprecher. Senator Burr was the subject of an insider trading lawsuit filed days after the SEC statement.

Swiftly Moving Markets and Information Flow Increases Insider Trading Risk
Given the constantly evolving nature of the crisis and the endless flow of information regarding new products, operations and earnings, “corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances,” the statement notes. This “may particularly be the case” if COVID-19 impacts the timely filing of earnings reports or other SEC disclosures—which would provide additional opportunities for insiders to profit from non-public material information about an issuer’s operations and financial condition. Hence, the Co-Directors observe, “a greater number of people may have access to material nonpublic information than in less challenging times[,]” including “directors, officers, employees and consultants and other outside professionals[.]”

Existing Controls and Procedures Must Be Followed
The authors also “urge public companies to be mindful” of their established disclosure controls and procedures governing disclosure, insider trading prohibitions, codes of ethics, and prohibitions against selective disclosure of material non-public information, including Regulation FD, in order to ensure “to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information[.]” The statement also notes that broker-dealers, investment advisers, and other registrants are likewise subject to this expectation.

The Three R’s of Compliance Success
The Co-Directors’ statement makes it clear that Enforcement intends to prioritize insider trading in the context of COVID-19. Typically the Commission will bring civil cases shortly after a statement of this sort to emphasize the seriousness of the subject matter. Now is the time to ensure that you and your company are engaged in practices best suited to avoid running afoul of the Commission.

Public companies and regulated entities should also be alert to the possibility of criminal exposure that is inherent in insider trading cases. The U.S. Department of Justice routinely works together with the SEC in insider trading investigations, particularly where the evidence of egregious conduct is compelling. It would not be surprising if the government takes the view that, when insider trading exploits the COVID-19 crisis, the matter rises to the criminal level. For an example, imagine a drug test on a COVID-19 vaccine, and how powerful the non-public information around the success/failure of that test could be in the marketplace if used improperly.

In addition, companies, broker-dealers and registered investment advisers must have internal controls sufficient to address the unusual risks posed by this crisis. They should:

- Review their existing policies, procedures and codes of ethics to ensure that each effectively addresses insider trading specifically, is tailored to the current nature of the business, and includes all categories of individuals identified in the statement, including consultants and “other outside professionals[.]” This is particularly important given that many individuals are working remotely, beyond the ability of in-person and other conventional modes of supervision. Does the existing policy cover such decentralized workplaces?

- Re-emphasize the importance of existing insider trading policies and procedures, along with the individuals’ obligations to familiarize themselves with and adhere to them. Provide supplemental written guidance to employees, officers and directors, consultants and contractors. Additional training and education should be considered that specifically addresses the unique situation presented by the COVID-19 crisis, and documentation should be retained of anyone receiving such training.

- Revisit and test the effectiveness of their existing policies and procedures on a continuing basis and modify them proactively and “in real time” as often as necessary. The Commission will have zero patience for a lack of controls around this issue or a system of supervision that is not robust, adaptable and ongoing. As the Co-Directors note at the end of their statement, “[t]the Enforcement Division is committed to protecting investors and maintaining confidence in the fairness and integrity of our markets[.]” Corporate insiders and registrants alike should heed those words and behave accordingly.