[co-author: Ghillaine Reid]*

The Securities and Exchange Commission (SEC) has advised that it will actively pursue COVID-19 related insider trading and antifraud violations in light of the unique opportunities the pandemic has created for individuals and companies to profit from material, nonpublic information. As a result, it is vital that companies evaluate and reassess their insider trading policies to minimize the likelihood of an ensuing SEC investigation or enforcement action regarding either insider trading itself or allegedly insufficient insider trading corporate policies.

Businesses around the globe are struggling with the economic effects of COVID-19, as companies are forced to shut down or drastically alter their business models in response to government regulations aimed at decreasing the virus’s spread. To provide relief for companies as they attempt to determine what material impact COVID-19 may have on their financial statements and public disclosures, the SEC has issued an exemptive order offering public companies a 45-day extension to file disclosure reports, such as Forms 10-K and 10-Q, which would typically be filed between March 1 and July 1 of this year.

Though undoubtedly helpful for many companies, the SEC’s 45-day filing extension, combined with the significant impact COVID-19 has had on most businesses, creates an environment ripe for insider trading and other antifraud violations. For public companies that choose to take advantage of the SEC’s filing extension, their insiders will have access to — and the ability to trade on — material corporate information for an extended time before that information is made available to investors. Further, company insiders are likely to have nonpublic information regarding both how COVID-19 might impact their own companies’ financials as well as how the pandemic might impact the financials of other entities, including customers, vendors and third parties. Given the severe impact that COVID-19 has had on all industries, much of the nonpublic information regarding its impact is likely to be material and, therefore, subject to mandatory disclosure in SEC filings. Together, these factors create unique and unprecedented opportunities for insider trading.

In addition to fostering opportunities for insider trading, the COVID-19 pandemic has created an environment where, unfortunately, individuals may have a heightened motive to benefit from material, nonpublic information. As states continue to impose more and more stringent restrictions on businesses — including mandating the closure of many “nonessential” businesses — companies and individuals are feeling the economic strain. Entire industries have been shut down, and unemployment filings have reached unprecedented levels. Indeed, while the scope of the pandemic’s impact on the global economy remains unclear, many portfolios and retirement accounts are likely to be decimated. Given this adverse and uncertain economic environment, the temptation to trade on material, nonpublic information may prove particularly strong.

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.” Accordingly, while the SEC has been sensitive to the needs of public companies during this crisis, the risk of being the target of an SEC investigation or enforcement action appears to have increased.

To protect themselves from the threat of an SEC insider trading investigation or enforcement action, companies should take this opportunity to evaluate their insider trading policies. Companies should ensure that these policies clearly prohibit trading on material, nonpublic information and adequately address the increased opportunities for such trading that have been created by the current pandemic. Companies must also monitor their employees’ compliance with these policies, making sure that all employees are both aware of and abiding by the company’s insider trading guidelines. Companies should consider disseminating to their workforce clear advisory communications to remind employees of their obligation to refrain from sharing or trading on material, nonpublic information that they learn of through their employment.

The COVID-19 pandemic will inevitably lead to economic losses, both personal and corporate. Individuals who have access to material information about their own or other companies may not, however, sell stock in these companies to make up for losses without first disclosing this material information to the investing public. Further, when preparing their disclosure documents, companies should review and follow the COVID-19 disclosure guidance recently issued by the SEC’s Division of Corporation Finance. Companies should carefully assess the impact that COVID-19 and related government restrictions will have on their business before making their required disclosures and should remind directors, officers and employees to refrain from trading on material information before these disclosures are filed.

Pepper Hamilton LLP and Troutman Sanders LLP are actively working with companies on COVID-19 disclosure issues, as well as in evaluating and monitoring insider trading policies.

* Troutman Sanders