Crisis management and the heightened risk of insider trading and tipping

A. Market integrity during the ongoing crisis: enhanced regulatory scrutiny is expected 

The circumstances arising from the COVID-19 pandemic are giving rise to unprecedented consequences in global securities markets. The unfolding crisis will likely give rise to material impacts to the business operations of many public issuers. Since most public issuers have deployed rapidly evolving internal crisis management operations, this dynamic situation may lead to greater dissemination of and greater access to material non-public information by internal and external employees and advisors. This makes it all the more important to establish and implement robust internal corporate controls and procedures. 

Indeed, it is reasonable to anticipate greater scrutiny and vigilance by regulatory authorities in this regard. For example, on March 23, 2020, the SEC’s Division of Enforcement published a statement regarding market integrity and the importance of following corporate controls and procedures.¹ 

The SEC issued a general warning about insider trading and other fraudulent conduct, stating that “in these dynamic circumstances, corporate insiders are regularly learning new material non-public information that may hold an even greater value than under normal circumstances”. The SEC also warns public companies — as well as broker-dealers, investment advisers, and other registrants — about the importance of establishing and/or reinforcing adequate disclosure controls and procedures, as well as codes of ethics, internal regulations and trading prohibitions in order to strengthen protection against improper dissemination and use of material non-public information. 

B. Impact of COVID-19 on a public issuer: material information?

Thus, it is important that reporting issuers across Canada comply with their continuous disclosure obligations and requirements contained in National Instrument 51-102. Indeed, public issuers, under securities laws, must immediately issue and file a news release disclosing any material change, and must, within ten days of the date the material change, file the appropriate Material Change Report. 

This notion generally covers: a change in the business, operations or capital of the public issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer; or a material change that is likely to have a significant influence on the value or the market price of the securities of a reporting issuer and is not generally known to the market.  

The current COVID-19 crisis and the unprecedented provincial and federal government responses might have material impacts on the business and operations of many public issuers. Public issuers should be vigilant and review the impact of the COVID-19 crisis on their specific operations and businesses in light of their industry and of the information that has already been disclosed and provided to investors and the market at large. 

C. Enhanced vigilance by issuers and insiders – insider trading and tipping 

In the context of this crisis, insiders such as officers, directors and significant shareholders must be especially mindful of their securities law obligations with respect to insider trading and tipping. Moreover, under most securities laws in Canada, a person who has (a) acquired privileged non-public information in the course of his relations with a public issuer, (b) acquired privileged non-public information that he or she knows to be such, or (c) acquired that information from an insider, might be deemed an insider as well. 

The volatility of present market conditions may present opportunities to purchase securities at lower prices. In times of crisis, such volatility is frequently unrelated to the operations, businesses, future projects and prospects of the public issuer. Such volatility is also frequently not related to the information disclosed to the market by the public issuers themselves. 

Nevertheless, insiders should take reasonable steps to ensure that they are not in possession of material non-public information before trading in securities of the public issuer and before discussing, encouraging or recommending that other persons purchase or sell securities of the issuer. 

Issuers should consider offering virtual training to employees who are not ordinarily in possession of material non-public information but might come into possession of such information because of their role and involvement in crisis management activities. Moreover, regular reminders about the importance of safeguarding confidential information and not trading while in possession of confidential information are also recommended. 

Issuers should also monitor and consider imposing further restrictions on securities trading by insiders who might have in their possession material non-public information concerning how COVID-19 is affecting or will affect the issuer.