SEC Staff Highlights Insider Trading Risks During Coronavirus Pandemic

Mary Mulligan and Timothy Haggerty
March 30, 2020

On March 23, 2020, the Co-Directors of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement issued a warning highlighting the need for heightened vigilance against insider trading amidst the market volatility caused by the novel coronavirus (COVID-19) pandemic.

In their rare public statement, Co-Directors Stephanie Avakian and Steven Peikin “urge[d] public companies to be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information [‘MNPI’].”

Significantly, they stressed that during this crisis, companies must be vigilant “of their obligations to keep [MNPI] confidential and to comply with the prohibition on illegal insider trading.”

The SEC Staff’s statement suggests that the Commission remains committed to investigating securities fraud, even during the worldwide pandemic.  Indeed, just days later, SEC Chairman Jay Clayton underscored this same point in his public remarks to the Financial Stability Oversight Council on March 26:  “I also want any bad actor who would seek to use this challenging time to take advantage of our investors or our markets to know:  the women and the men of the SEC are watching.”

Taken together, these statements offer a blunt reminder that the SEC will be scrutinizing trading activities conducted during this period to identify insider trading and other fraudulent or manipulative conduct. 

Even while its resources are presently stretched thin as nearly its entire staff is working remotely and it is focusing on maintaining the orderly functioning of the securities markets, the SEC already has identified and suspended trading in the shares of a number of companies that have made allegedly misleading statements relating to the impact on their operations of the coronavirus.  For example, on March 25, the SEC suspended trading in securities of Praxsyn Corporation based on questions regarding the accuracy of the company’s statements “about having, and being able to obtain, large quantities of N95 masks used to protect wearers from COVID-19.”  This action followed two earlier suspensions of trading in securities of companies that made potentially inaccurate statements about their marketing rights to a coronavirus treatment and the viability of their product to treat the coronavirus.

In the months to come, and as the present crisis abates, market participants should expect that the SEC will bring all of its analytical tools to bear as it seeks to identify any actors who sought to take advantage of this precarious moment.  These include advanced analytical systems that can identify patterns, relationships, and potential abnormalities across billions of trades, and have been used to charge a variety of alleged insider traders in recent cases. 

Finally, the SEC’s warnings about the unique risks posed by the disruptions and uncertainty caused by the coronavirus serve as a reminder of the importance of insider trading compliance and disclosure controls.  As the SEC Staff observed, in “these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times,” and this information “may hold an even greater value than under normal circumstances.”

What This Means Now:  These new circumstances create a near perfect storm of insider trading risks. 

  • More people, including employees and outside consultants, might have access to MNPI during the crisis than before. Some of these individuals may not have been trained in how to handle such information properly.
  • Employees and others are able to access MNPI—some of which was previously accessible only inside the office—from remote locations using telework facilities. Not all companies have given full consideration to these and other data security challenges posed by remote operations on a company-wide basis.
  • Markets are historically volatile, and announcements that would be unlikely to cause much market movement during ordinary times may produce significant reactions. As the SEC Staff observed, MNPI can be unusually valuable in these extraordinary times.
  • Desperate times can lead people to take desperate actions. Many employees and others are facing mounting financial pressure and job uncertainty, and may think—wrongly—that regulators would not notice a “small fish” trading a relatively small amount of stock amidst the massive volume of activity in these turbulent markets.  In fact, the SEC’s analytical tools are designed to identify exactly this sort of unusual activity.

These risks mean that companies must act smartly and swiftly to protect against the risk of insider trading or other fraudulent or manipulative trading in their securities.  Such conduct can expose a company not only to SEC enforcement activity and potential criminal charges, but to private shareholder and other litigation as well.  See, e.g., 15 U.S.C. § 78t-1.

Practical steps companies should consider in light of the SEC’s recent statements:

  1. Companies should review and update their insider trading policies, codes of ethics and conduct, and their Regulation FD and selective disclosure prohibitions. They should be sure that the policies are up-to-date and reflect the current state of the law, which continues to evolve.
  2. Companies should disseminate these policies broadly, including to all employees and consultants who might have access to MNPI. Prior distributions might have focused on the employees who were likely to have MNPI in normal times.  The distribution list should be updated to take into account the present reality, and companies should continuously evaluate whether new groups of employees or consultants need to receive these materials.
  3. Companies should arrange for remote, online training for their employees and consultants. During these busy, hectic times, companies that ask their employees to set everything to the side and focus on these important rules and policies for a brief, focused training will send a strong message about their culture of compliance.
  4. Companies should update and expand their compliance surveillance activities and data security protocols to prevent issues where possible, and where complete prevention is not possible, to monitor and detect potential violations in real-time. The expansion of teleworking has made this more important than ever before, and companies that fail to act promptly and comprehensively may find themselves responding to the consequences of problematic conduct rather than preventing it in the first place.


The SEC Staff’s recent comments provide a clear warning about the types of violations that the Enforcement Division is on the lookout for.  For prudent managers, this is a moment of opportunity to appraise, update, and tighten policies and practices where appropriate.

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This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.