Ballard Spahr LLP

COVID-19 has injected significant uncertainty into our daily lives and enormous volatility into our markets. In the last two weeks alone, many major domestic and international indices have experienced their largest daily point gains and losses, and the prices for stocks of individual companies have seesawed even more dramatically.

Boeing shares, for instance, had at one point in March lost more than 70 percent of its peak value, only to rebound by more than 50 percent last week. These swings are likely to continue as the longer-term impacts of the virus on company operations and the government stimulus bill come into sharper focus.

In this environment, corporate insiders have a tremendous incentive and opportunity to trade on nonpublic information that will dramatically impact share value. Indeed, there already are media reports that public officials privy to nonpublic information about the impact of the coronavirus may have traded based on this information. There is little doubt that unscrupulous insiders will seek to take advantage of material nonpublic information as some did during the 2008 financial crisis.

Despite COVID-19’s disruptions to government and business, we expect the SEC to act quickly to regulate violations of securities laws, specifically insider trading, through aggressive high-profile litigation. In fact, the SEC’s Enforcement Division already has issued a statement emphasizing the importance of “maintaining market integrity and following corporate controls and procedures.” The SEC’s statement specifically notes how COVID-19 has increased the agency’s concerns regarding insider trading:

[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.

Insider trading by dishonest employees poses a significant risk to publicly traded companies in the form of negative public attention, increased legal costs, distracting governmental investigations, and possible legal ramifications. Indeed, the SEC’s statement regarding COVID-19 notes that public companies’ “disclosure controls and procedures, insider trading prohibitions, [and] codes of ethics” as well as “Regulation FD and selective disclosure prohibitions” are particular areas of concern. As public companies adapt to virus-related challenges, they must devote adequate resources to address the heightened risks posed today by insider trading. Important steps companies can take to minimize risks from insider trading include:

  • Drafting robust disclosures and filing timely Forms 8-K: this will ensure that the market knows as much as insiders and has the added benefit of minimizing the risk of lawsuits/regulatory actions based on insufficient disclosure
  • Limiting or controlling access to market-moving information: limiting access to a few “need to know” employees and requiring them to certify that they will not trade is a tactic many companies have used in the context of significant corporate acquisitions to limit the risk of insider trading
  • Regular email warnings regarding insider trading prohibitions: at a time when many employees are working remotely, simple emails warning about abiding by the company’s insider trading policy can serve as an important preventive measure
  • Adoption/enforcement of insider trading training: drafting, creating, and obligating employees to undertake insider trader training with certification obligations serves as an important prophylactic step that sends a strong deterrence signal to employees who either are ignorant of the laws or contemplating illegal activity
  • Creation of 10b5-1 trading plans: these plans, which allow employees to trade a company’s stock only based on pre-arranged schedules, significantly minimizes the risk of insider trading
  • Pre-approval and blackout periods: like 10b5-1 plans, requiring employees to seek pre-approval before trading or enacting blackout periods around disclosures to the market will help minimize the risk of insider trading

Importantly, implementation of all of these steps, including setting up training sessions, can be accomplished remotely while employees remain out of the office.

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