SEC Enforcement Issues Statement

SEC Enforcement Issues Statement on Market Integrity

SEC Enforcement Directors reemphasize focus on market integrity, insider trading, and disclosure controls.

While the Securities and Exchange Commission ("SEC") is currently focused on maintaining orderly markets, and extending exemptions from reporting and delivery requirements for entities affected by the coronavirus (COVID-19), the agency is also closely following virus-related events with an eye toward maintaining market integrity. The Co-Directors of Enforcement at the SEC issued a statement March 23, 2020, outlining their main areas of concern.

First, they reminded issuers to continue to maintain and follow corporate controls and procedures, including disclosure controls and compliance with Regulation FD. Relatedly, the Co-Directors advised, in these uncertain times, of the greater potential for issuers to have more material non-public information, for dissemination of the information to be delayed, and for a larger number of people to be aware of this non-public information. These factors increase the risk that trading while in possession of this information could be a violation of insider trading prohibitions.

Next, regulated entities were reminded of their obligations to comply with policies and procedures regarding misuse of material non-public information. And last, the SEC will focus on virus-related frauds taking advantage of main street investors.

While the SEC may be making accommodations regarding timing of reporting and delivery, the Co-Directors seem to clearly be signaling that there will be no leeway for allegations of the anti-fraud violations or insider trading. Issuers and individuals should not expect any relaxation of the standards to which they are held in terms of what they knew at the time of any trades, the clarity of their disclosure, or failure to follow procedures and controls surrounding disclosure.

In light of this guidance, issuers need to:

  • Carefully follow their policies and procedures regarding disclosure, including Reg FD, which was singled out by the Co-Directors;
  • Recognize that any decisions to buy or trade securities could later be judged with the benefit of hindsight, notwithstanding the constantly evolving risks and issues facing companies today; and
  • Be able to demonstrate-where companies claim that the virus created issues such as lost markets or financial reverses-that those issues were indeed related to the virus and not already endemic to the entity.

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