August 10, 2020

Volume X, Number 223

August 10, 2020

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SEC Signals Increased Investigation Activities in Light of COVID-19

While many businesses and government offices have closed or slowed as a result of the onset of COVID-19, the Securities and Exchange Commission remains open for business. On April 3, 2020, Sagar Teotia, the SEC’s Chief Accountant, made clear that the SEC “is closely monitoring the impact of issues raised by [COVID-19] on investors and global capital markets.” SEC Chairman Jay Clayton explained that some of this monitoring has been through “numerous discussions with market participants—including investor and industry groups” and identified four areas of SEC focus in response to the COVID-19 crisis:

  1. Maintaining the continuity of Commission operations;

  2. Monitoring market functions and system risks;

  3. Providing prompt, targeted regulatory relief and guidance to facilitate continuing operations and execution of business continuity plans (BCPs); and

  4. Maintaining enforcement and investor protection efforts, particularly with regard to the protection of critical market systems and the most vulnerable investors.

The fourth bullet point indicates a potential for increased SEC investigations and enforcement actions arising from the COVID-19 crisis. One area that may see increased attention from the SEC’s Division of Enforcement is insider trading. In a March 23, 2020 statement, the Co-Directors of the Division of Enforcement described the unique opportunities corporate insiders may have to engage in illegal insider trading in light of COVID-19:

“[i]n these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading. Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.”

As previously reported in another Polsinelli alert, which can be found here, the SEC also has noted that it will be scrutinizing corporate disclosure controls and procedures to protect against the improper dissemination of material nonpublic information. And as the Co-Directors explained, “the 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.”

It is imperative that individuals and corporations be especially cognizant of their use and dissemination of material nonpublic information as it relates to COVID-19’s impact on their business. Make no mistake, the SEC is paying special attention. SEC investigation and enforcement cases are expected to rise as a result.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 108

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About this Author

Paul Roshka, Polsinelli, financial securities lawyer
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Known for his thorough preparation and persistence, Paul Roshka has a national practice representing companies, their directors, officers, and employees during investigations and enforcement/disciplinary proceedings involving potential violations of the federal and state securities laws, and other financial regulatory statutes and rules. He has handled matters initiated by almost every SEC Regional Office and FINRA District Office, and their Home Offices in Washington, D.C.

He is also a recognized bet-the-company litigator. Paul has defended securities/financial...

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T.J. Mitchell Commercial Litigation Lawyer Polsinelli Law Firm
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Thomas (T.J.) Mitchell is an associate in the Commercial Litigation practice group. T.J. partners with Polsinelli’s seasoned attorneys to provide litigation solutions in complex financial and business disputes, manage clients’ risk, and allow clients to focus on driving their business or personal objectives. Drawing from his experience working in the legal department of a large technology company, T.J. understands what clients expect from their outside counsel or personal attorney and takes the time to understand their unique challenges, goals, and values. These priorities shape his work from the first client meeting through pre-litigation negotiations, preparing lawsuit or arbitration pleadings and briefs, conducting discovery, and resolving disputes either through settlement or trial.

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When a client turns to William Ezzell, they can expect an attorney keenly focused on learning who they are and what they do. He is genuinely passionate about understanding the intricacies unique to each client’s business, and how they view the world from their perspective. William combines this passion with his diverse practice history to further a collective goal: the best possible outcome. As a member of the firm’s Government Investigations and White Collar Defense Group, William devotes the majority of his practice to representing companies and individuals faced with...

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