The COVID-19 pandemic has had an unprecedented impact on global securities markets. Following some stark public examples of the potential misuse of material nonpublic information (“MNPI”) when trading securities, the leaders of the US Securities and Exchange Commission (“SEC”) Division of Enforcement issued a strong warning yesterday against violating US insider trading laws. The SEC Enforcement Division Co-Directors, Stephanie Avakian and Steven Peikin, invoked the Coronavirus when bluntly admonishing:

[I]n these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading. Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.

This unusual warning comes amid several highly public examples of questionable securities trades that could indicate unlawful trading while in possession of MNPI, in other words, insider trading. These examples include the allegations over the past few days that several United States Senators, including the Chairman of the Senate Select Committee on Intelligence, sold investments in companies particularly vulnerable to the COVID-19 pandemic after receiving classified intelligence briefings about the global health crisis. Additionally, the US dollar pared gains just seconds before the announcement by the Federal Reserve regarding dollar funding for the nine central banks. These examples, along with scores of companies delaying earnings announcements in light of the Coronavirus’ material effects on business, led to the SEC’s sharp reminder to companies to protect MNPI from misuse.

The Co-Directors followed their reminder about insider trading by focusing businesses on their obligations to comply with their own policies and procedures to prevent the misuse of MNPI, even in these unique times. The SEC

urge[d] public companies to be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information. Likewise, broker-dealers, investment advisers, and other registrants must comply with policies and procedures that are designed to prevent the misuse of material nonpublic information.

This admonition, along with high-profile, public examples of potential trading while in possession of MNPI, highlights the need for businesses to be especially diligent about insider trading and compliance protocols in times of crisis. The disruption caused by the COVID-19 outbreak makes it particularly important for businesses to maintain a proper tone at the top and follow their policies and procedures to prevent insider trading and other misuse of MNPI. Those policies and procedures typically include:

  • Monitoring for insider trading;
  • Preclearance of trades made by senior personnel;
  • Blackout periods;
  • Use of properly implemented 10b5-1 plans; and
  • Use of electronic information barriers.

Even as an increasing number of employees must work remotely, such MNPI compliance linchpins must continue. The news of the past few weeks highlights the continued need to stress to employees at all levels that insider trading policies and procedures must be maintained, understood, and followed. There may be no more important time than now to remind employees of their insider trading compliance obligations.

In light of the COVID-19 disruptions to business, protecting MNPI may not be top of mind, but that is exactly why the SEC is watching. The Division of Enforcement Co-Directors reminded the business community not only to comply with insider trading laws, but also to implement, train, and enforce confidentiality and eyes-only policies that are part of an effective compliance program. The pandemic does not change these requirements. At a time when much of the economy is moving rapidly towards shelter in place work spaces, it is essential that employees take with them, and have readily accessible, the insider trading policies that already exist as part of a good compliance program. Companies also must consider whether additional protections are required in a remote work environment to prevent insider trading and misuse of MNPI.

Some of the main points to remember at this time are:

  • Companies must continue to identify MNPI and implement proper confidentiality protocols as well as electronic information barriers when appropriate;
  • Employees should be reminded to continue to report to legal and/or compliance (or supervisors) if they believe they may have received MNPI;
  • In a predominantly remote work environment, the electronic separation of employees who “need to know,” along with proper electronic information barrier policies and procedures and documentation demonstrating compliance with those policies and procedures, will be subject to particularly intense after-the-fact scrutiny;
  • The requirements of Regulation FD remain in effect;
  • Prior to trading a company’s stock, every employee should pause and consider whether it is appropriate, and likely should consult with Legal and Compliance, following the required policies and procedures;
  • In times of stress, it is especially important to send electronic reminders of insider trading requirements and policies to all employees, as well as reminders regarding the protection of MNPI;
  • Because SEC filing deadlines have, in some cases, been extended due to COVID-19 related business disruption, employees should be advised that blackout periods may similarly be extended as internal information must remain confidential for a longer period of time before becoming publicly available;
  • Trading activity should continue to be reviewed in accordance with policies and procedures;
  • Monitoring of electronic communication should be prioritized due to the dramatic increase in remote work;
  • Legal and Compliance should take extra care to remind employees that they are available to assist and answer questions.

When the pandemic has passed and the inevitable enforcement scrutiny begins, the primary answer to questions about insider trading will be strong compliance policies and procedures and the ability to demonstrate that those policies and procedures were followed diligently.

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