David Lynn, Morrison Foerster

The COVID-19 coronavirus pandemic means in-house counsel need to keep an eye on potential insider trading by employees at all levels who may gain access to material, nonpublic information about supply chain or other disruptions that could affect a company's bottom line, or its financial outlook.

Inside counsel also need to consider whether and how to handle public disclosure about disruptions or related matters in U.S. Securities and Exchange Commission filings and reports, lawyers say.

Those concerns are among a host of others that corporate executives and their in-house lawyers are calling law firms about in the midst of outbreak anxiety in boardrooms, c-suites and on Wall Street. News of the global spread of the novel coronavirus first identified in Wuhan, China, has spurred a couple of weeks of extreme volatility in financial markets.

"Company counsel for all public and private companies right now should be considering coronavirus-related insider trading. Federal securities laws prohibit buying or selling securities on MNPI," said Haima Marlier, a securities litigation partner who joined Morrison & Foerster last month from the enforcement division of the SEC in New York. 

"This is a really important time right now for organizations to take active steps to mitigate the risks that their employees trade on coronavirus MNPI or disseminate that information to others who may trade," she said.

Counsel at public and nonpublic companies need to identify groups within their organizations that have access to insider information related to the novel coronavirus. They should distribute the organization's insider trading policies to all employees and require them to acknowledge review and receipt electronically. Further measures also may be necessary, such as imposing blackout periods, heightened preclearance procedures and undertaking additional training, she said.

Companies need to have an effective insider trading policy that goes to everyone in an organization, as well as family members and independent contractors, because securities allow the organizations to be held liable if people they control engage in insider trading and they haven't taken steps to prevent it.

Publicly traded companies and private equity companies planning to acquire them also need to consider public disclosure requirements under securities laws, said David Lynn, who is co-chair of Morrison & Foerster's corporate finance and capital markets practice in Washington, D.C.

Lynn, who represents public companies at the SEC and advises them on public disclosures, has been fielding many calls from clients in the last two weeks asking about how to handle their disclosure requirements in a fast-moving crisis. "It's a hot topic among public companies," he said.

Asked which companies have been calling, Lynn said, "All, but probably the most frequent issues are clients focused on manufacturing who have facilities in mainland China and Europe and particularly Italy. To date that has been the bulk of the reason for questions because they either have productive facilities or logistics or other things within the highly infected areas."

Lynn said, "Companies have to have disclosure controls and procedures around decision making, [and] many times there are legal, financial, accounting, investor relations and other public communications people in the room to make these decisions; and often they will contact outside counsel to decide if they have an obligation to disclose and whether the information is material to an investment decision."

The novel coronavirus pandemic's known and unknown impact on supply chains, earnings and company customers could be material for some companies and require disclosure, the lawyers said. This could be in Forms 10-K, 10-Q and 8-K and certain material corporate events, earnings releases, annual and current reports, and securities offering documents. 

"Most companies have an insider trading policy that restricts the time period of when the company's insiders can trade in the company's securities, and for many companies that window period is open right now because they just recently put out earnings information and they haven't reached the end of the quarter yet. For that reason, people have to be particularly careful now as we come to the end of that window period as coronavirus could have a very real impact on timing of trades," Lynn said.

On Jan. 30, SEC chairman Jay Clayton issued a statement in which he said he had asked staff to monitor and provide guidance or other assistance to issuers and market participants regarding disclosures related to effects of the novel coronavirus.

"This is an uncertain issue where actual effects will depend on many factors beyond the control and knowledge of issuers. However, how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision," Clayton said. Clayton also issued another public statement about financial reporting with respect to COVID-19 on Feb. 19, and on March 4 the SEC extended filing deadlines for companies affected by the COVID-19 virus.

COVID-19 impacts also may be required in voluntary disclosures and earnings releases, the lawyers said, similar to requirements for disclosing data breaches before filing SEC reports, statements need to be accurate and complete.

David Newman, a Morrison & Foerster partner who advises clients on global risk and crisis management, compared coronavirus risk to cyber breach risk. "You have a crisis situation in which people less accustomed to the rules regarding material nonpublic information could become aware of a significant setback on their company that has not been public, and in a volatile period in which people are looking to sell stocks, this is a step that could easily get missed. Companies really need to look out for this." 

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