The COVID-19 pandemic has caused significant disruption to businesses and the global economy. Financial regulators around the world are closely monitoring the situation and many have published information for firms focused on maintaining market integrity and providing guidance on the challenges currently facing firms. While the situation continues to evolve, firms are reminded of the continuing need to comply with their regulatory and compliance obligations. As with the Global Financial Crisis, looking back in some years’ time, authorities, courts and juries are unlikely to accept a “COVID-19 defence.”
We focus here on the regulatory regime and recent pronouncements in the United Kingdom (UK), United States (US), and Hong Kong (HK) on market abuse risks in response to COVID-19 which firms should be thinking of at this time.
Further to the UK Financial Conduct Authority’s (FCA) short statement on 4 March 2020 setting out its high-level expectations for firms following the COVID-19 outbreak,2 the FCA is continuing to update its response to COVID-19 and provide additional information for firms and consumers on its website.3
As part of the FCA’s COVID-19 response, the FCA announced that the regulator is reviewing its work plans so that it can seek to delay and postpone activities which are not critical to protecting consumers and market integrity in the short-term.4 Importantly, the FCA has made plain that it expects firms to take all reasonable steps to continue to meet their regulatory obligations5 and notify the FCA if they anticipate experiencing any difficulties during these turbulent times.
Market abuse risks
The FCA has specifically reminded companies that the Market Abuse Regulation (MAR) remains in full force and listed companies are still required to fulfil their disclosure obligations concerning inside information as soon as possible unless a valid reason to delay disclosure under MAR exists. The FCA has stated that companies must carefully assess what information constitutes inside information at this time, recognising that the global pandemic and policy responses to the outbreak may alter the nature of information that is material to companies’ business prospects.6
The FCA has confirmed that:7
- It remains vigilant and will continue to monitor for any indications of market abuse, taking action where necessary.
- Firms should continue to take all steps to prevent such risks, and has suggested that this could include enhanced monitoring or retrospective reviews.
- It is actively reviewing the contingency plans of a wide range of firms, which it expects firms to have in place to deal with major events. The FCA has stated its high-level expectations are that contingency plans addressing COVID-19 should include assessments of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.8
In early February, the United States Securities and Exchange Commission (“SEC”) began assembling what was characterized as a cross-divisional working group to prepare for the possible effects of COVID-19. According to the SEC statement, “the initial focus of these efforts was on monitoring the real and potential effects of COVID-19 on public companies, including with respect to potential reporting challenges and the importance of prompt, public disclosures by issuers concerning the effects and risks of COVID-19 on their businesses.”9
Throughout the crisis, the SEC has remained active in monitoring actual and anticipated impacts of COVID-19. The SEC has also been vigilant in addressing regulatory issues and concerns in real time; including, for example, to provide relief from certain delivery and filing obligations for financial services companies.10 In granting such relief, the SEC noted that the orders were issued “while also considering the importance of markets and investors receiving materially accurate and timely information” and admonished that any entity “seeking to rely upon an order, attention is directed to the various conditions, including, as applicable, the requirements to notify Commission staff of the intention to rely upon the order and to disclose information on its website about its reliance upon the order.”11 Indeed, notwithstanding the relief, assistance and guidance provided by the SEC to financial services companies struggling to deal with the various and volatile impacts of COVID-19, the SEC remains vigilant in its efforts to protect investors and maintain fair, orderly and efficient markets. In a statement on March 26, 2020, SEC Chairman Jay Clayton made very clear: “I also want any bad actor who would seek to use this challenging time to take advantage of our investors or our markets to know: the women and the men of the SEC are watching.”12
Market abuse risks
On March 23, 2020, Stephanie Avakian and Steven Peikin, co-directors of the SEC’s Division of Enforcement issued a public statement regarding market integrity.13 Of particular note, the co-directors emphasized “the importance of maintaining market integrity and following corporate controls and procedures” in these volatile times. They also cautioned that “corporate insiders are regularly learning new material nonpublic information [MNPI] that may hold an even greater value than under normal circumstances,” highlighting specifically the case where earnings reports or required SEC disclosure filings are delayed due to COVID-19. The co-directors warned that persons with access to such MNPI, including 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.” The co-directors similarly cautioned that public companies should be mindful of their established internal controls and policies and procedures including, among other things, Regulation FD and selective disclosure prohibitions. The co-directors also specifically referenced investment advisers, broker-dealers and other registrants cautioning that they “must comply with policies and procedures that are designed to prevent the misuse of material nonpublic information.”
Market abuse risk: Failure and delay disclosing inside and financial information
In February and March 2020, the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong Limited (SEHK) specifically reminded public companies of their disclosure obligations and stressed that pursuant to the Securities and Futures Ordinance, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public.14 If a public company’s business operations, reporting controls, systems, processes or procedures are materially disrupted by the COVID-19 outbreak and/or travel-related restrictions, the management should assess whether any inside information has arisen and, if so, make a separate announcement as soon as reasonably practicable, independent of any applicable Listing Rule requirement. In addition, public companies are subject to the continuing obligation of disclosing their financial information.15
However, the SFC and SEHK recognized that due to the current COVID-19 outbreak, some auditors may not be able to complete their audits in time for the public companies to publish their audited preliminary financial results before the statutory deadline. Hence, they have issued a series of joint statements and FAQs16 in February and March 2020 providing guidance in relation to the disclosure of financial information due to travel and other restrictions imposed as a response to the COVID-19 situation. Of particular note is that the SFC and SEHK now allow public companies to publish their preliminary results on an unaudited basis provided that other requirements are met.17 Furthermore, under normal circumstances, following the publication of the preliminary financial results, public companies are required to publish their annual report and audited financial statements within 4 months after the end of its financial year. In this regard, the SEHK and SFC in their joint statements granted a blanket extension for up to 60 days to all public companies, subject to other conditions being fulfilled.18
In light of the volatility in local and international markets caused by the COVID-19 outbreak, the SFC released a circular19 to management companies, trustees and custodians of SFC-authorized funds on 27 March 2020 stating that it has stepped up the monitoring of the funds and that managers are expected to fully cooperate with the SFC on the heightened reporting requirements.
The circular further reminded all managers of their obligations to ensure that the liquidity of the funds are properly managed and that all assets of the funds are fairly and accurately valued in good faith and in the best interests of investors. In addition, the circular also reminded the managers of their disclosure obligations to keep investors informed at all times and immediately report to the SFC any untoward circumstances relating to the funds under their management, including the use of liquidity risk management tools. Similarly, trustees and custodians of SFC-authorized funds are reminded that they have a duty to safeguard fund assets and provide independent oversight of the management of the funds, which includes the valuation of the funds and use of liquidity risk management tools.
Business continuity and compliance in challenging times
Firms’ business continuity plans should include active steps to mitigate the risk of Coronavirus-related insider dealing by its employees and the unlawful disclosure of inside information to other individuals. Such measures to be considered include:
- Reviewing a firm’s internal market abuse policies to ensure they are sufficient to cover the specific risks covered by COVID-19 and the firm’s current working arrangements, and issuing supplemental written guidance to directors, officers and employees where necessary.
- Ensuring and testing that a firm’s market abuse surveillance systems and controls are effective for monitoring the decision-making and trading activities of staff working remotely. These controls must also be recorded and evidenced.
- Ensuring regular and effective outreach by compliance teams to staff and management throughout the outbreak period.
- Keeping insider lists up to date and the receipt of non-public information under careful review in light of the challenges of working remotely.
- Reminding directors, officers and employees of the firm’s market abuse policies and their obligations to comply with these policies, requesting these individuals to acknowledge their review and receipt of these policies electronically.
- Conducting additional mandatory market abuse training electronically (in particular for individuals on a firm’s insider list) covering the specific risks posed by the COVID-19 outbreak.
- In light of firms’ increased exposure to market abuse risks, ensuring that a firm continues to make suspicious transaction reports to the FCA under the suspicious transaction and order report (STOR) regime and to the National Crime Agency (NCA) under the suspicious activity report (SAR) regime, where required.
- The FCA’s COVID-19 response states that firms should continue to record calls, but accepts that some scenarios may emerge where this is not possible, in which case firms should inform the FCA: https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response#operational-resilience
- https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response and https://www.fca.org.uk/coronavirus
- Ibid. For further information on the FCA Handbook provision governing “emergencies”, please see COVID-19: Facing a Global Challenge: Key Considerations for Fund Managers dated 26 March 2020 (https://www.dechert.com/knowledge/onpoint/2020/3/covid-19--facing-a-global-challenge--key-considerations-for-fund.html)
- https://www.fca.org.uk/news/statements/joint-statement-fca-frc-pra and https://www.fca.org.uk/news/statements/delaying-annual-company-accounts-coronavirus
- SEC Coronavirus (COVID-19) Response, available at https://www.sec.gov/sec-coronavirus-covid-19-response
- Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery, SEC Rel. No. IC-33817 (Mar. 13, 2020) (1940 Act Order), available at https://www.sec.gov/rules/other/2020/ic-33824.pdf; Order Under Section 206A of the Investment Advisers Act of 1940 Granting Exemptions from Specified Provisions of the Investment Advisers Act and Certain Rules Thereunder, SEC Rel. No. IA-5463 (Mar. 13, 2020) (Advisers Act Order), available at https://www.sec.gov/rules/other/2020/ia-5469.pdf.
- 4 February 2020 Joint Statement: https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/js-travel-restrictions-related-to-severe-respiratory-disease-associated-with-novel-infectious-agent.html; see also 16 March 2020 Joint Statement: https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/further-guidance-joint-statement-covid-19-pandemic.html
- For preliminary results: Main Board Rule 13.49; GEM Rule 18.49; for annual report: Main Board Rule 13.46; for GEM, it is within 3 months: GEM Rule 18.03
- See FAQ
- See March Joint Statement