Skip to main content

Articles

"SEC flexes regulatory and enforcement muscles in pandemic markets" by Thomas A. Sporkin and Timothy J. Coley

Buckley Commentary & Analysis

Thomas A. Sporkin, Timothy J. Coley

The Securities and Exchange Commission is sticking to its three-fold mission of protecting investors, maintaining fair and orderly markets, and encouraging capital formation as it responds to the Covid-19 pandemic by issuing regulatory guidance on crisis-relevant market and capital issues, ramping up enforcement in investor protection areas and ensuring efficiency in its multidisciplinary approach by creating a cross divisional Covid-19 task force. It also appears to be looking past the immediate crisis and continuing to invest in its whistleblower program, presumably to counter the fraud that will inevitably emerge from the pandemic.

Adopting regulatory and filing requirements to changing needs

The SEC’s operating divisions have focused on trying to stabilize the markets by assisting public companies in working through disclosure obligations and logistical challenges. For instance, the division of trading and markets announced that it will be working with constituents to accommodate operational challenges resulting from the pandemic. To date, the division has issued at least seven releases with Covid-19-related guidance, including temporarily relaxing Rule 302(b) of Regulation S-T (requiring certain physical signatures), extending deadlines governing transfer agents, and even putting the Consolidated Audit Trail implementation deadlines on hold for the time being.

The division of corporation finance has also started issuing its own guidance related to Covid-19. Although CorpFin has not been as active as trading and markets, it has, so far, issued pandemic-related disclosure guidance, and granted a temporary reprieve on shareholder meeting requirements and other filing requirements for market participants.

Increased enforcement activity to ensure investor protection

At least anecdotally, the division of enforcement is signaling that it intends to be aggressive in policing the pandemic and post-pandemic marketplace. Co-directors Stephanie Avakian and Stephen Peiken recently issued a strongly worded warning that they will be paying especially close scrutiny to market integrity issues, focusing on insider trading, securities fraud, and other misconduct likely to arise in disordered marketplaces with potentially less internal compliance oversight. They cautioned that they are “committed to protecting investors and maintaining confidence in the fairness and integrity of our markets,” and the division will be dedicating “substantial resources” to prevent investors from being “victims of fraud or illegal practices in these unprecedented market and economic conditions.”

Enforcement has already taken the virtually unprecedented step of halting trading on 20 different stocks that it believed created investor confusion, or due to other Covid-19-related concerns in the marketplace. Insider trading investigations may also take an unprecedented turn as the SEC follows up on the widely reported stock trades made by several U.S. senators (and the CEO of the New York Stock Exchange) following nonpublic briefings on the potential impact of the pandemic. Prosecuting legislators under the fairly new STOCK Act is uncharted territory, but the SEC may take this opportunity to test the statute’s reach and send a message to other legislators who may be tempted to use informational advantage to their economic benefit.

SEC’s stepped up focus on whistleblowers

At the same time, the SEC appears to have learned a lesson from the 2008 financial crisis about the importance of whistleblowers in detecting significant fraud. The SEC was roundly criticized for missing the Madoff Ponzi scheme during the last financial crisis despite efforts of whistleblowers to expose it. The SEC’s Office of the Whistleblower was established in the aftermath of that scandal.

While whistleblower awards have steadily increased over time, the volume and pace of the whistleblower awards issued since the Covid-19 outbreak suggests that the SEC may be sending a message about the benefits of exposing fraud. Since Feb. 28, the commission has awarded over $37 million to whistleblowers, including a single $27 million award. The awards represent a significant uptick, with award volume over the past two months of roughly four times the awards issued in the entire second half of 2019.

But beyond the monetary awards, the language the SEC has used in announcing whistleblower awards suggests that the SEC is focusing on areas that may recur during the current crisis. Generally, the SEC refrains from providing any information that might identify whistleblowers. One recent whistleblower award release, though, emphasized that while “the whistleblower made reasonable efforts to work within the company’s compliance structure,” the whistleblower still “suffered unique hardships as a result,” and only went outside and provided assistance to the SEC’s investigation and subsequent enforcement action after feeling ignored and rebuffed by the company. The implication is that the SEC is paying attention to companies whose internal compliance functions are not appropriately reacting to whistleblowers’ reports. That situation is going to become more frequent as companies face the challenge of carrying out compliance activities remotely, and as the pandemic and its after-effects continue to work their way through the marketplace.

Share page with AddThis
GET IN TOUCH