Insider trading risks during COVID-19
Wednesday, July 15, 2020 @ 8:44 AM | By Jennifer Campbell
The public market landscape, much like the world itself, is a significantly different place than it was a mere four months ago. And while regulatory exemptive relief measures have eased some of the burden, both the future of the virus itself and the entirety of its impact remain uncertain.
In this rapidly changing environment, it is imperative that insiders and public companies be mindful of insider trading and reporting responsibilities and take an overly conservative approach to compliance.
In the U.S., four senators came under fire relating to claims they used insider knowledge of the impending COVID-19 crisis to sell shares worth millions of dollars before the stock market crash. A statement subsequently issued by the co-directors of the U.S. Securities and Exchange Commission (SEC) Division of Enforcement, emphasized the SEC’s commitment to ensuring market integrity during this time and reminded market participants of their obligation not to trade while in possession of material undisclosed information. Speculation of a successful COVID-19 vaccine that may be near, as well as the antiviral drug remdesivir may also fuel market speculation and volatility.
In Canada, anyone in a “special relationship” with an issuer is prohibited from trading or “tipping” others while in possession of material undisclosed information. The definition of special relationship is broad, and encompasses not just insiders, but also includes affiliates, associates, professional advisers and employees, as well as anyone else who knows of a material change that was acquired from any such person who he or she knew or ought reasonably to have known was in such a special relationship.
Any person breaching these provisions is liable to compensate the party on the other side of the trade for any damages and, if they are an insider, affiliate or associate of the company, to compensate the company in the amount of any benefit received.
Insider trading also triggers a breach of s. 76 of the Securities Act (Ontario), which can entail fines of not more than the greater of $5 million and triple the profit made or loss avoided, and up to five years imprisonment.
SEC warns against inside trading during COVID-19
While Canadian regulators have not yet published any specific guidance related to insider trading in the context of COVID-19, the SEC statement is instructive for participants on both sides of the border. In particular, the SEC noted that undisclosed material information during the COVID-19 crisis “may hold even greater value than under normal circumstances.”
For example, although both mining and mineral exploration and development have been deemed essential services in Ontario, other provinces such as Quebec have adopted narrower definitions which may require cessation of operations. The impact of curtailed operations could, in turn, have an exponential effect on future financial conditions as a result of seasonal changes, future availability of skilled labour and permit expiration among other matters. These indirect consequences of COVID-19 may ultimately require adjustments to exploration and development plans which would necessarily heighten the value of the undisclosed material information in the present.
In addition to the potentially enhanced value of material undisclosed information, the SEC memorandum also noted that a greater number of people may have access to it during this period than in normal times.
For example, the increase in employees working from home raises concerns about accessibility by family members and others sharing remote working environments. In addition, material undisclosed information may need to be secured for a much longer period than usual for Canadian companies availing themselves of exemptive relief measures to extend the filing deadlines for their financial statements and management discussion and analysis (MD&A), further increasing the risk of inadvertent disclosure.
How to mitigate insider trading risks
With these heightened risks in mind, companies and insiders alike should consider the following in order to better secure material undisclosed information and avoid inadvertent insider trading:
- Review and update insider trading policies, codes of ethics and disclosure controls and procedures as necessary;
- Impose management/insider blackouts on trading for companies availing themselves of emergency extensions to file financial statements and MD&A, in accordance with Ontario Instrument 51-502 - Temporary Exemption from Certain Corporate Finance Requirements;
- Cease purchases under normal course issuer bids if applicable;
- Ensure that employees and others are aware of insider trading restrictions, including a review of what constitutes undisclosed material information and the broad definition of “special relationship” which can encompass spouses and others who come into possession of material undisclosed information inadvertently through remote working environments; and
- Remind employees to be aware of cybersecurity issues to protect against hacking.
Jennifer Campbell is a partner in the securities and business law groups with more than 20 years of experience at Cassels.
Photo credit / iQoncept ISTOCKPHOTO.COM
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