Insider Trading Windows Bring New Risks During Crisis

By Therese Pritchard, LaDawn Naegle and Vicki Westerhaus
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Law360 (May 14, 2020, 5:33 PM EDT) --
Therese Pritchard
Therese Pritchard
LaDawn Naegle
LaDawn Naegle
Vicki Westerhaus
Vicki Westerhaus
Toward the end of the first quarter of 2020, many public companies imposed a blackout period during which directors and specific employees deemed insiders could not trade the company's stock.

The purpose of these blackout periods was to prevent insiders from trading at a time when they were likely to have material nonpublic information about the soon-to-be-completed quarter. This year, insiders were also likely to have material nonpublic information about the early impact of the coronavirus on their business, including demand, supply chain, canceled orders, liquidity needs, the costs of complying with stay-at-home orders, and business reopening plans and costs.

In late March, the co-directors of the U.S. Securities and Exchange Commission's Division of Enforcement issued a statement focused on market integrity, noting that trading while in possession of early visibility into the impact of the coronavirus on the business could be deemed insider trading.

Specifically, the co-directors noted that as a result of the unique circumstances surrounding the COVID-19 pandemic, "corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances" and more people may have access to more material nonpublic information "than in less challenging times."

In the statement, the co-directors urged that persons with such access, including officers, directors and other insiders, be vigilant about keeping the information confidential and complying with prohibitions on illegal insider trading.  

Typically, public companies plan to open the trading window to permit insiders to trade within a day or two of issuing their earnings release for the quarter. It may be, however, that the SEC was signaling a belief that because insiders are "regularly learning new material nonpublic information," circumstances are changing too rapidly, and companies should delay permitting insiders to trade and not reopen the window at this time.

As SEC Chairman Jay Clayton acknowledged last week, "the decisions of today will need to be changed as we learn more tomorrow," and "we all should recognize that these matters are evolving and subject to change."

Insiders who have access to daily information about demand, the supply chain, pricing, employee health and other information may be better able to assess the trend of the business, and may therefore be better able to predict how well the company will be able to withstand and bounce back from the pandemic. As noted by the SEC, although this daily information might not ordinarily be deemed material nonpublic information for insider trading purposes, in the current uncertain environment and with the benefit of hindsight, the SEC could take a different position. 

Some public companies may still be considering whether they are able to maintain normal protocols and reopen the trading window. As they consider this issue, public companies should be sure that they have provided sufficient disclosure around the impact of coronavirus on the business and management's expectations of the impact going forward.

In a joint statement issued early in April, Clayton and Division of Corporation Finance Director William Hinman requested that companies disclose how operations and financial condition could change as the COVID-19 situation unfolds and explicitly noted that "[h]istorical information may be relatively less significant" to investors.

Clayton and Hinman urged companies to make forward-looking statements, even while acknowledging that providing any level of detailed information would be "challenging, including because our [COVID-19] response strategies are in their incipient stages (and are likely to change)." They suggested that companies making such forward-looking statements could rely on the safe harbor and that the SEC would not second-guess good faith attempts.

Notwithstanding such assurances, many companies may be understandably reluctant to provide guidance when circumstances are changing so rapidly and the future is unpredictable.

Given the SEC's statements, however, a company wanting to open its trading window for insiders should ensure that the company's disclosures at the end of the quarter are robust and complete with management's expectations for the ongoing implications of the pandemic on the business and its financial condition. This might need to include discussion of the company's current and expected liquidity positions and expected financial needs, as well as mitigation efforts instituted by the company to protect workers and customers.

Finally, especially given the recent public focus on public company receipt of funds under the Paycheck Protection Program, companies should disclose the nature, amount and effect of any federal or state aid. Because only those companies who could certify to a real need are eligible to receive PPP funds, by definition a PPP loan is likely material to the company. Finally, consistent with SEC and exchange guidance, public companies are strongly encouraged to avoid generic or boilerplate disclosures and to tailor disclosures to their particular financial considerations and challenges.

For some companies, such robust and complete disclosure will not be fully provided until the Form 10-Q is filed. For others, including an expanded earnings release that provides more fulsome analysis to the market about the coronavirus's impact and then setting out updated risk factors, and potentially a minisection on management discussion and analysis, in the Item 2.02 Form 8-K could suffice.

Whether in an expanded earnings release and Form 8-K or in the Form 10-Q, if a company is considering opening the trading window, management should be sure to disclose all material "known trends and uncertainties" and provide robust and specific risk factors to complete the picture for investors.

Although companies need only disclose what is known or reasonably available, it can be challenging to comfortably determine what elements of the current state of affairs will, with hindsight, be viewed as both "known" and material to investors. As a result, while there may be a path for some companies to follow regular protocols and open the trading window, many companies may conclude that in this especially challenging and unpredictable time, trading by company insiders should just wait.



Therese D. Pritchard is a partner and co-chair emeritus, and LaDawn Naegle and Vicki Westerhaus are partners, at Bryan Cave Leighton Paisner LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.

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