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THE SEC’S DIVISION OF ENFORCEMENT AND COVID-19
April 03, 2020


All articles in this COVID-19 Response Resource issue are effective as of April 3, 2020.

Like many of us, the U.S. Securities and Exchange Commission (SEC) has been working from home since March 10, 2020. But it is still very much on the watch. Among other reasons, COVID-19 has created the perfect moment for fraud.   

Coronavirus-related investment scams 

Con men read the news. They wait and watch for opportunities to exploit the national angst by touting cures, protective devices and new technology. The SEC has issued multiple alerts about the need to be extremely watchful for the growing Coronavirus-related investment scams. A current Investor Alert from the SEC's Office of Investor Education and Advocacy warns of Internet promotions, including promotions on social media, claiming that the products or services of publicly traded companies can avert, detect or cure coronavirus and that the stock of these companies will dramatically increase in value as a result. The alert asks investors to be mindful because these promotions often take the form of so-called "research reports" and make predictions of a specific "target price." The SEC urges investors to be wary of these promotions and to be aware of the substantial potential for fraud at this time.  https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_coronavirus. The Financial Industry Regulatory Association (FINRA) has also issued similar alerts.

Insider Trading 

One type of securities fraud is trading on inside information. The markets are systemically reacting with large swings and significant volatility. These market swings have been staggering.  While the capital markets do not comprise the entire U.S. economy, they are perhaps the biggest driver and reflect economic anxiety. Someone may have special information within a company and may give in to the impulse to engage in insider trading. “A hypothetical example could be inventory clerks working for a manufacturing company that notice that an essential input to their company’s key product, normally delivered weekly, has in fact not been delivered for weeks.”  https://www.marketplace.org/2020/03/23/covid-19-sec-insider-trading/.

The SEC Chair issued a harsh warning against insider trading during a recent day of coronavirus-induced market volatility only days after the chief executive of the New York Stock Exchange and his wife, a U.S. senator, were accused having sold off millions in stock holdings since January, based on information received in confidential governmental hearing and investigations. The COVID-19 virus creates specific difficulty in guarding material non-public information. Officers, directors and others who are in a position to receive updates regularly on the fast pace of COVID-19 research increases the value of material non-public information. 

The SEC has already suspended trading in the stock of two companies (listed below) due to concerns about the accuracy of coronavirus-related information on the internet. The SEC staff is still vigilant, albeit from their homes for now, and certain types of conduct could merit a visit from the SEC’s Division of Enforcement.

Disclosure Relief 

The SEC’s Division of Enforcement often shoehorns disclosure. The SEC publicly stated that it will relax certain timelines and disclosure deadlines to enable market participants the ability to weather the exceptional challenges associated with the impact of COVID-19. 

The SEC appears to be more willing to accept technology-enhanced corporate governance for actions like annual meetings, shareholder meetings and other board of director’s meetings may be permissible.  https://www.sec.gov/news/press-release/2020-53, https://www.sec.gov/rules/other/2020/34-88318.pdf.  Again, this relief will likely require prior written request and approval. 

Lest you wealth managers - Investment Companies or Registered Investment Advisors feel left out, here is the SEC’s position/statement for your industry.  https://www.sec.gov/investment/staff-statement-im-covid-19.

We are seeing the staff willing to conduct interviews or investigative testimony via videoconference. While we applaud the staff for following the advice of the Centers for Disease Control and Prevention (CDC), the logistics of having the staff in one location, the client in another and the lawyer in a third location is completely unacceptable and potentially erodes several constitutional privileges. 

A final issue that tends to sneak up on many businesses is compliance with the Anti-Money Laundering Provisions in the Bank Secrecy Act. Do COVID-19 related monetary transactions trigger requirements to file Suspicious Activity Reports (SARs) with FinCEN? This topic will be the subject of a separate client alert in the near term.

Finally, remember: crisis + social media = a great breeding ground for misinformation and disinformation unless you understand its reliability. Is this SEC staff guidance the law? Can participants in our capital markets rely on this guidance? Market participants need to understand that alerts, FAQs, orders and staff statements, while helpful, are not the law and cannot alone be relied on as a guide or defense. 

For more information on this or other related issues, contact Brent R. Baker (801) 536-6988 or send an email to bbaker@parsonsbehle.com, Aaron LeBenta at (801) 536-6987 or email alebenta@parsonsbehle.com or Jonathan Bletzacker at (801) 536-6989 or send an email to jbletzacker@parsonsbehle.com.