Securities trading in the shadow of COVID-19: Corporate insiders must be vigilant
Executives and directors have their hands full dealing with the extraordinary impact of the COVID-19 pandemic and government-led initiatives introduced to address it. As reported in previous posts, managing information and corresponding disclosure, which can be challenging at the best of times, has become increasingly complex as a result of the disruptions to supply chains and abrupt changes to customer demand. Work-from-home imperatives elevate risks even further.
The March 23, 2020 statement from the co-directors of enforcement of the U.S. Securities and Exchange Commission (the “SEC”) emphasizes this point. The statement focuses on the need for corporate insiders to be mindful of the extended periods during which they may have material nonpublic information if disclosure reports are delayed due to the COVID-19 pandemic.
The SEC emphasized “the importance of maintaining market integrity and following corporate controls and procedures” in light of these unique challenges. As a result of delays in disclosure filings, there may be more people than usual with access to material nonpublic information, which may be particularly valuable during this unprecedented time. The statement reminds individuals with access to material nonpublic information of their obligations of confidentiality and compliance with insider trading laws. Existing policies and controls surrounding the use and disclosure of nonpublic information should be followed by public companies, brokers and investment advisors.
In the context of the Canadian capital markets, as we previously reported the Canadian Securities Administrators have granted a temporary extension of filing deadlines for capital market participants. Notably, in order to obtain conditional relief from filing certain continuous disclosure documents, the issuer must issue a news release which confirms that management and certain insiders will be subject to an insider trading blackout during the relief period. Given these extended blackout periods, corporate insiders need to be particularly cautious in their own communications with others when in possession of non-public insider information.
While public company insiders have unique and specific obligations to avoid trading activities while in possession of material information that has not been made public, anyone who seeks to trade in these unique times should carefully consider whether their access to information in this rapidly-changing environment – even if not rising to the level of material non-public information – could nonetheless cast an unwelcome light on their activities and potentially embarrass the businesses they represent. By way of example, the trading undertaken by American legislators following pandemic-related briefings has been widely reported. While the actions of these legislators may or may not have been contrary to law, they most certainly raise reputational and public confidence issues that affect the integrity and perceived fairness of the capital markets.
The news release also noted that the SEC remains committed to preserving public confidence in the integrity of the markets. To that end, the Enforcement Division has committed “substantial resources” aimed at protecting investors and investigating potential violations of securities law during the COVID-19 pandemic and the resulting uncertain economic climate. Similar messaging was communicated by the Ontario Securities Commission in its recent COVID-19 update, noting that “investor protections and regulatory requirements remain fully in place and are critical to Ontario’s capital markets functioning fairly and efficiently”.
Stay informed and evaluate risks
As the response to COVID-19 is evolving rapidly, we encourage everyone to continue to stay informed as new developments arise. We have centralized relevant content on our “Coronavirus: Navigating legal implications and business impacts” client communication page.*
*The authors thank articling student Amanda Arella for her assistance in preparing this note