Under the leadership of U.S. Securities and Exchange Commission Chairman Jay Clayton, the SEC’s Division of Enforcement has made the protection of Main Street investors its overarching priority. On March 23, 2020, Division of Enforcement Co-Directors Stephanie Avakian and Steven Peikin issued a statement to financial market participants re-emphasizing the SEC’s commitment to safeguard the integrity of the nation’s financial markets given the market disruption caused by the 2019 coronavirus disease (COVID-19).
In their Statement Regarding Market Integrity (found here: Statement Regarding Market Integrity) Co-Directors Avakian and Peikin reminded market participants – corporate issuers, broker-dealers, investment advisers, and other registrants – of the importance of controlling for the potential receipt and misuse of material nonpublic information (MNPI) in light of the unprecedented market and economic conditions caused by COVID-19. They further cautioned that trading in a company’s securities on the basis of inside information (insider trading), or the improper dissemination of MNPI, may violate the antifraud provisions of the federal securities laws.
To start, the Co-Directors noted that in the current dynamic climate, corporate insiders are continually learning new MNPI that may be even more valuable than under normal circumstances particularly if a company’s earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given the unique circumstances, a greater number of persons may have access to MNPI, and companies would be wise to revisit corporate controls and remind those with access to keep this information confidential and comply with insider trading prohibitions.
Further, they urged companies to be mindful of, among other things, established disclosure controls and procedures, insider trading prohibitions, and codes of ethics, to ensure that companies are protecting against improper use and dissemination of MNPI. Safeguarding confidential corporate information is particularly critical given the current work environment where many employees are forced to work remotely, corporate emergencies are hashed out from unsecure locations, and relaxed controls over confidential information could lead to its potential downstream misuse.
Finally, Co-Directors Avakian and Peikin reminded broker-dealers and investment advisers to adhere to policies and procedures designed to prevent the misuse of MNPI. As the industry has seen in prior government enforcement investigations and actions involving market moving information related to congressional, legislative, and governmental agency actions, controlling the rapid flow of information concerning COVID-19 and its potential impact on market sectors and public issuers will be critical to financial services firms and other market participants using such information to inform investment decisions for themselves and investors. Congressional, executive branch, and government agency information can be deemed confidential or MNPI, and financial firms and other market participants monitoring government information and actions need to be aware that each of the executive and legislative branches as well as government agencies have rules and guidance in place governing confidential and nonpublic information. Now more than ever, market participants interacting with government employees should make clear that their firms and employees do not wish to receive confidential information or MNPI concerning congressional, legislative, and executive branch or other government agency actions, and firms would be well served to double down on policies designed to control for the possible receipt and misuse of confidential information or MNPI arising from those interactions.
In these challenging times, we recommend that market participants heed the Co-Directors’ reminder of the need to comply with the prohibitions on illegal securities trading. Companies and financial institutions should take a fresh look at policies and procedures governing the potential receipt and misuse of confidential information or MNPI and remind/retrain their employees accordingly. The SEC has made clear that it remains committed to maintaining the integrity of the financial markets and ensuring the protection of Main Street investors during these unprecedented times.
McGuireWoods Securities Enforcement and Litigation Team
The firm’s SEC and DOJ enforcement lawyers have extensive experience counseling clients on compliance with insider trading rules and regulations as well as defending government investigations and litigation involving allegations of insider trading. If you have any questions regarding these matters, please contact the authors of this alert. Additional information regarding McGuireWoods’ Securities Enforcement and Litigation Team is available here.
McGuireWoods Securities and Compliance Team
The firm’s securities compliance lawyers assist registrants with their reporting obligations under the Securities Exchange Act of 1934, including forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider trading policies, develop training programs, and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.