Protecting Against Insider Trading During COVID-19

I have followed and dissected the nuances of insider trading policies and associated violations for years. If there’s an overall conclusion I’ve drawn in monitoring a multitude of cases, it’s that most instances of insider trading infractions are not planned out in advance, but instead are decisions made in a moment of opportunity.

Nothing in our memories feels as unprecedented as COVID-19, and one of the darker elements to a global crisis is that desperate times and changing circumstances can create the types of opportunities ripe for illegal gains. A recent article, Protecting Your Company From COVID-19 Insider Trading, (by Ghillaine A. Reid, Jay A. Dubrow, and Kaitlin L. O’Donnell of Troutman Sanders LLP), available to all in our COVID-19 Resource Center, explores how companies can protect themselves and employees from insider trading mishaps during COVID-19.

SEC 45 Day Extension on Disclosures

To allow companies relief while they assess the impact of COVID-19 on their businesses, the SEC made an exemptive order allowing a 45 day extension on disclosures that would normally be filed between March 1 and July 1 this year. While this is extension is likely welcome breathing room for many companies, those that do take advantage of the extra time to file may be inadvertently opening up opportunities for insider trading. The longer the time before the disclosure is made, this means more time that company insiders are sitting on material, non-public information.

Uncertain Times Can Lead to Desperate Actions

Unemployment numbers are soaring as non-essential businesses are at a standstill or shut down. Entire industries have been wiped out. Market volatility and economic uncertainty have decimated many portfolios. Unfortunately, these circumstances can lead to desperation. And desperation can lead to uncharacteristic actions. This, says Troutman and Sanders, creates an environment ripe for insider trading – “the temptation to trade on material, nonpublic information may prove particularly strong.”

Taking Proactive Action

Troutman Sanders reminds us that “The SEC’s Division of Enforcement has recognized the potential for individuals and companies to profit from COVID-19 insider trading and has indicated increased efforts to maintain market integrity during the pandemic. Specifically, the SEC has noted that its ‘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.’”

Companies can take immediate actions to prevent or mitigate the potential for insider trading during these adverse times, including:

• Ensure the insider trading policy clearly address the new opportunities for violations.
• Consider sending communications to employees with reminders that trading on material, non-public information is prohibited.
• Employee communications should be updated with examples of vulnerabilities in accidentally sharing information – including conversations shared or overheard by family members.

Mitigating insider trading is not only about keeping emloyees from trading on material nonpublic information. Nobody wants to think of their family members as having potential to trade on sensitive information overheard at home. Prior experience reminds us that this does happen, and, in our unprecedented 24/7 shelter with family members, I’m guessing those scenarios will increase.

The SEC is taking the climate of COVID-19 seriously, recognizing the potential for nefarious actions. Companies should take note of this and proactively address potential insider trading concerns.

-Jennifer