Insider Trading Risk During the COVID-19
On March 20, 2020, it was reportedly that 4 U.S. Senators sold millions of dollars in stock following classified briefings to the Senate on the threat of a COVID-19 outbreak. The SEC issued a statement a couple of days later reminding all market participants of their obligations regarding insider trading and MNPI and of the SEC’s commitment to market integrity. In their statement, the SEC stressed that MNPI “may hold even greater value than under normal circumstances” and a “greater number of people may have access to [MNPI] than in less challenging times.”
The agency urged insider to comply with all prohibitions on illegal securities trading and with obligations to keep MNPI confidential. Additionally, the SEC reminded all publicly traded companies and market participants to be mindful of their internal controls and procedures around insider trading prohibitions, codes of ethics, and Regulation FD policies.
With the majority of employers having moved to a remote work environment and the current market volatility, the increase in riskier behaviors by insiders is a real concern. Employees have access to confidential information and MNPI in an environment where there is no oversight or scrutiny. And, they are working in close proximity to other family members and having to handle MNPI in situations where it is impossible to secure such information due to shared working spaces.
Of the highest concern are situations involving:
- government workers with market moving information – like changes in a regulatory decision allowing a company to operate throughout the emergency
- public company employees leaking earnings information or non-public news of a major supply chain disruption or outbreak at a large factory or shut down of a factory
- health care workers involved in ongoing clinical drug trials for COVID-19 and the leaking of the results or movement with such trials – breakthroughs in Coronavirus testing, treatment, and vaccination will present trading opportunities
- employees in a state of desperation at poor performing funds trying to find any possible market edge
In anticipation of these risks, companies should focus on the following areas when evaluating existing controls and procedures to safeguard MNPI and protect against insider trading:
- Firm-wide Training. Refreshing Compliance training for employees, constantly encouraging a culture of Compliance, regular reminders about the important of keeping information confidential and obligations around insider trading/escalating MNPI
- Insider Trading Policies and Reminders. Keeping employees and policies up to date on what conduct is lawful and unlawful, and where the gray areas may lie, including with respect to what constitutes MNPI. Employees should also be reminded that non-public information from the government can be MNPI and that the STOCK Act creates a duty of confidentiality that members of Congress and other federal employees owe with respect to MNPI they receive through their positions, including potentially market-moving decisions such as the extent and timing of any government assistance to industries
- Expanding SEC Rule 10b5-1 trading plans. For employees other than officers and directors, who did not ordinarily come into possession of MNPI prior to the outbreak of COVID‑19, companies could offer, to the extent practicable, to facilitate their entry into Rule 10b5-1 trading plans in an open window
- Surveillance and Cyber Risk Management. Employees should be reminded to use only firm approved devices for conducting business and communicating with clients and partners. This will all help with data loss, inadvertent exposure and hacking of sensitive information