Shearman And Sterling

Litigation, Columns

Apr 01, 2020

Co-Directors Of SEC’s Division Of Enforcement Issue Statement On Market Integrity In Wake Of COVID-19 Emergency

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On March 23, 2020, Stephanie Avakian and Steven Peikin, co-directors of the Securities & Exchange Commission’s (“SEC”) Division of Enforcement, issued a statement reminding public companies, officers, and directors of their responsibilities related to material, non-public information in connection to the COVID-19 public health emergency.

Noting that COVID-19 has affected the securities markets in “unprecedented ways,” the SEC reminded market participants that corporate insiders may be in a position to learn non-public information that has a higher value than it would under normal circumstances.  The SEC warned that the COVID-19 outbreak could delay public companies’ earnings reports or other required SEC disclosures, which would allow more people than usual to access non-public information before it becomes widely disseminated.  The statement reminds market participants that “[t]rading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities law.”

With an increased risk of insider trading, the SEC urged public companies to enforce their compliance programs, including disclosure controls, insider trading prohibitions, ethical codes, and Regulation FD and selective disclosure prohibitions to protect against the improper release of non-public information.  The SEC further extended this warning to investment advisors, broker-dealers, and other registrants who may also be in a position to learn non-public information.

The SEC’s statement also carried the hint that it would increase scrutiny of those taking advantage of the chaotic state of affairs.  The SEC concluded its statement by noting that the “Enforcement Division is committing substantial resources to ensuring that our Main Street investors are not victims of fraud or illegal practices in these unprecedented market and economic conditions.”  In this period of uncertainty, public companies would be well-advised to review their risk management and disclosure policies and procedures.  The risks of failing to keep proper policies and procedures was detailed in our prior post, Options Clearing Corporation Enters Into Settlements With SEC and CFTC Over Risk Management Policies.  These disclosure policies and procedures will take on increased importance if the SEC does increase scrutiny in response to the COVID-19 emergency.

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Adam Hakki

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Agnès Dunogué

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Stephen Fishbein

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