Regulators Watch for Insider Trading in Chaotic COVID-19 Market
The SEC’s Enforcement Division recently issued a statement emphasizing the “importance of maintaining market integrity and following corporate controls” during the stock market volatility caused by the COVID-19 outbreak.1 The statement, from Co-Directors Stephanie Avakian and Steven Peikin, pointed out that in the current economic climate, “corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances.”2
The issue of insider trading was thrust into the national spotlight when, on March 19, 2020, news outlets reported that several U.S. senators appear to have traded millions of dollars in stock based on information they learned about COVID-19 through confidential intelligence briefings.3 There have been calls for the senators’ resignations, and the DOJ and SEC have reportedly opened an investigation into the transactions.4 The senators involved have denied the allegations.
The SEC’s statement and the allegations against the senators serve as signals to corporations, and their officers and directors, that U.S. regulators will be paying close attention to potential insider trading during these turbulent times. Even before COVID-19 emerged, Congress was focused on insider trading as the House of Representatives passed a bill, as reported here, which would have explicitly banned insider trading, making it easier to prosecute.5 To mitigate the increased risk of insider trading, companies should consider taking the following steps:
- Ensure employees are trained on insider trading. Companies should have a robust training program that explains what insider trading is, how it can happen, and the serious penalties involved. Such programs help demonstrate to regulators that the company takes insider trading seriously and that employees who engage in it are not following the company’s directives.
- Adopt policies to prevent certain risky trading activity. Many companies implement “blackout” periods around certain disclosures to the market to help prevent trading on information before it becomes public. Additionally, companies could consider creating 10b5-1 trading plans, under which plan holders relinquish direct control over transactions, thus providing an affirmative defense to allegations of insider trading. Companies can also require employees to pre-clear trades of certain securities with an appointed company representative. These efforts demonstrate that a company is taking pro-active steps to prevent insider trading, rather than taking a reactive approach.
- Limit access to material non-public information. Companies should take efforts to limit the number of people who are privy to non-public information which could have a material effect on a company’s stock price. This is especially important now, as remote work makes sensitive information much more difficult to secure.
- Proactively investigate insider trading. If an employee is suspected of insider trading, it is imperative to quickly investigate those suspicions to determine whether insider trading has occurred. Experienced outside counsel can help conduct such internal investigations and interface with government regulators as necessary.
- Make timely and complete disclosures. Trading based on public information is perfectly legitimate. Therefore, companies should seek to make full and timely disclosures in order to minimize the amount of information that is not public, which in turn will reduce the risk of insider trading.
With increased stay-at-home orders, travel restrictions, and business shutdowns, the COVID-19 pandemic has severely strained the U.S. economy. Given this volatility, information is at a premium and corporate insiders have an even greater incentive to trade on confidential non-public information. Companies should do all they can to guard against it.
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1 Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity, U.S. Securities and Exchange Comm’n (Mar. 23, 2020), https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.
3 Robert Faturechi & Derek Willis, Senator Dumped Up to $1.7 Million of Stock After Reassuring Public About Coronavirus Preparedness, ProPublica (March 19, 2020), https://www.propublica.org/article/senator-dumped-up-to-1-7-million-of-stock-after-reassuring-public-about-coronavirus-preparedness.
4 Devlin Barrett, Justice Dept. investigates at least one lawmaker’s stock trades before coronavirus spike in U.S., The Washington Post (March 30, 2020), https://www.washingtonpost.com/world/national-security/senator-richard-burr-stock-trades-coronavirus-investigation/2020/03/30/36487df8-7298-11ea-87da-77a8136c1a6d_story.html.
5 In December 2019, the U.S. House of Representatives approved the Insider Trading Prohibition Act, H.R. 2534, 116th Cong. (2019), which would amend the Securities Exchange Act of 1934 by explicitly prohibiting insider trading and adding clarity to the laws regarding insider trading that have developed over the past 50-60 years. The bill is now in the Senate and has been referred to the Committee on Banking, Housing, and Urban Affairs.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.