When the United States began grappling with COVID-19 in March 2020, the US Securities and Exchange Commission (SEC) Division of Enforcement acted swiftly to make clear to market participants that it was ramping up its efforts to identify and prevent fraud in the wake of the pandemic. Approximately seven months later, statistics released by the SEC bear this out.
Maintaining market integrity throughout pandemic
The SEC has actively communicated with market participants during the pandemic. On 23 March 2020 the then co-directors of the Division of Enforcement issued a statement that warned market participants about the importance of maintaining market integrity.(1) They noted that corporate insiders might more routinely have access to new material non-public information in light of rapidly changing market conditions. They urged public companies to be mindful of their insider-trading prohibitions and Regulation FD to avoid improper dissemination of material non-public information. They also cautioned public companies to be cognisant of their established disclosure controls and procedures.
During a 12 May 2020 virtual keynote address at the Securities Enforcement Forum West 2020, former Division of Enforcement Co-Director Steve Peiken stated that the division had formed the Coronavirus Steering Commitee in late March 2020.(2) The steering committee, which comprises approximately 24 managers from within the Division of Enforcement, was formed to "proactively identify and monitor areas of potential misconduct, ensure appropriate allocation of… resources, avoid duplication of efforts, coordinate responses as appropriate with other state and federal agencies" and ensure consistency in the division's approach to COVID-19-related matters.(3)
Peiken highlighted several areas on which the Division of Enforcement is focusing, including insider trading, market manipulation, false or misleading issuer disclosures (eg, disclosures that downplay COVID-19's impact on the business or citing COVID-19 as a pretext for previously undisclosed financial issues that existed before COVID-19) and improper marketing and sales of complex structured products to retail investors by regulated entities such as investment advisers and investment companies.
To carry out its mandate, the steering committee developed a process to review public filings from issuers in highly affected industries, recognising that COVID-19 might affect some industries (eg, transportation, hospitality and leisure facilities) more than others. The SEC is specifically looking at whether an issuer's disclosures are inconsistent with other issuers in the same industry and looking for "disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses" by casting them as issues related to the pandemic. The SEC's efforts to prevent false or misleading disclosures extend beyond the Division of Enforcement. The SEC Division of Corporation Finance issued disclosure guidance encouraging companies "to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change".(4)
The SEC recently released financial year-end 2020 statistics which illustrate the Division of Enforcement's ramped-up efforts since March 2020. In a speech on 8 October 2020, SEC Chair Jay Clayton stated that during the pandemic the Division of Enforcement had brought 36 trading suspensions, six COVID-19-related fraud actions and more than 150 newly opened COVID-19-related investigations and inquiries, which stemmed from the Coronavirus Steering Committee's efforts.(5) Clayton also stated that the SEC had awarded a record 39 individual whistleblowers approximately $175 million in financial year 2020 (by comparison, the SEC awarded approximately $60 million to eight whistleblowers in financial year 2019).(6) This comes after the SEC recently voted to adopt amendments to the rules governing its whistleblower programme to increase whistleblower awards and to improve the programme's efficiency.(7)
These statistics, coupled with the rise of tips, complaints and referrals (TCRs) in the few months since the COVID-19 outbreak in the United States – Peiken reported that the SEC had received more than 4,000 TCRs between mid-March and early May 2020, a 35% increase over the same period in 2019 – suggest that market participants should expect to see a continued uptick in Division of Enforcement inquiries and investigations in the coming months, including for companies not directly involved in developing COVID-19 products.(8)
Now is a good time for public companies to review their disclosure controls and procedures, including their policies prohibiting insider trading. Companies should ensure that employee certifications regarding those policies are up to date and should take steps to ensure that employees with access to material non-public information understand and adhere to these policies and procedures. Companies should also be mindful of potential Regulation FD exposure; if a company learns that it inadvertently disclosed material non-public information to a limited group of individuals, it should act promptly to disclose the information to the public.
Public companies should also carefully review their forward-looking statements to ensure that these statements are accurate and that the companies have a reasonable basis for making any such statements. The SEC has stated that it is actively reviewing companies' disclosures for instances of using COVID-19 to hide previously undisclosed weaknesses. Companies should be mindful of this when preparing disclosures, adhere to their established disclosure controls and procedures, and exercise the same good judgement that they have used in the past.
Endnotes
(1) US Securities and Exchange Commission, Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC's Division of Enforcement, Regarding Market Integrity (23 March 2020).
(2) Steven Peikin, US Securities and Exchange Commission, Keynote Address: Securities Enforcement Forum West 2020 (12 May 2020).
(4) Division of Corporation Finance, US Securities and Exchange Commission, Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources (23 June 2020).
(5) US Securities and Exchange Commission, An Update on FY 2020 Results – Remarks at SEC Speaks (9 October 2020); Protecting Everyday Investors and Preserving Market Integrity: The SEC's Division of Enforcement (17 September 2020).
(6) US Securities and Exchange Commission, An Update on FY 2020 Results – Remarks at SEC Speaks (9 October 2020); 2019 Annual Report to Congress: Whistleblower Program (15 November 2019).
(7) US Securities and Exchange Commission, SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program (23 September 2020).
