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In the wake of market disruptions triggered by COVID-19, major U.S. government and regulatory enforcement agencies—including the Department of Justice (DOJ), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC)—have begun highlighting potential legal risks to public companies and traders surrounding major shifts to our working landscape, including the temporary "new normal" of remote working. Current social distancing realities mean employees are working from home and, therefore, outside the traditional modes of oversight and supervision.

Once (and possibly even before) working conditions revert back to their "normal" state, it is likely that regulatory inquiries and investigations into potential misconduct during the days of remote working will emerge. Publicly-listed U.S. companies and traders should take steps today in preparation for the regulatory scrutiny of tomorrow.

A Window Into Potential Regulatory Investigations

Recent communications from enforcers and regulators provide insight into what kinds of investigations they may pursue in the coming months. On March 16, U.S. Attorney General William Barr directed all U.S. Attorneys "to prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic." Already there have been investigations and prosecutions stemming from fraudulent provision of goods and services related to COVID-19, and the numbers will only grow as massive amounts of money are distributed by governments, development banks, and NGOs in response to this health and economic crisis.

The SEC released a statement in March reminding public companies to stay vigilant about insider trading as the pandemic continues to impact markets in unprecedented ways. Corporate insiders are gaining access to material nonpublic information of potentially much greater value than is typical, related to government relief and other COVID-19 impacts, and this information may be shared with a far broader audience, extending to lower level employees as well as consultants and outside professionals, in a company's efforts to respond quickly. The risks increase with the SEC extending the time for companies to file their financial disclosures, while the challenges of overseeing dissemination of such information are compounded by the remote working environment.

Insider trading is not the only concern. The SEC recently suspended trading for 11 companies, citing concerns of fraud related to COVID-19, and posted an investor alert about COVID-19 related scams. Indeed, public companies should expect any public announcements related to COVID to receive increased scrutiny from regulatory enforcers. Similarly, regulators can be expected to carefully examine financial statements, given the pressures facing companies during economic downturns, to demonstrate financial well-being.

Traders also face regulatory impacts from COVID. To accommodate mandatory telework, the CFTC has issued a series of "no action" letters designed to provide relief for futures commission merchants, swap dealers, floor brokers, and retail foreign exchange dealers from recording requirements for communications related to voice trading and time-stamp requirements. The CFTC has also issued 30-day extensions of filing deadlines for swap dealers and futures commission merchants to furnish annual compliance reports. While the relaxing of certain controls may suggest a more permissive regulatory environment, traders should be aware that the CFTC has made clear it is on high alert for those seeking to profit from market volatility related to COVID-19.

The DOJ is acting quickly to arrest COVID fraud perpetrators on criminal complaints, while physical convening of grand juries is largely on hold. Despite temporary suspension of onsite visits, the SEC and CFTC are continuing their examination and inspection programs, requiring prompt production of records and written responses, and actively conducting telephonic and video interviews. And with an anticipated surge in company layoffs due to the COVID-triggered downturn, conditions are ripe for a corresponding increase in whistleblower actions as terminated employees seek to benefit from the SEC and CFTC whistleblower programs.

Developing Defenses Today for Tomorrow's Investigations

Given the circumstances described above, companies, traders, and their counsel should anticipate an uptick in regulatory inquiries over the coming months. Companies and traders will want to take the following steps to mitigate possible risks and prepare for possible visits by regulators and law enforcement.

(1) Undertake an immediate comprehensive risk assessment. Corporations should accelerate the timing of their next risk assessment, including:

• Identifying the company's risk profile with an eye toward the current, COVID-influenced regulatory environment.

• Augmenting controls and training to respond to those risks. To be effective, this risk assessment should involve executives and business function leaders to weigh in and understand possible resulting dangers.

(2) Leverage technology to address risks. Especially with most employees working remotely by computer, technology can be used in service of compliance. For example:

• Computer-delivered training can be updated to address key risks (like insider trading) and sent to targeted audiences. Technology can also be used to better track attendance.

• Controls can be further automated to capture possible violations, especially as many employees now must complete deals and transactions by computer.

• Whistleblower portals should be enhanced to ensure that all employees have online access to report possible violations easily and anonymously.

• Now might be the time for companies to seriously consider the use of predictive analytics. Online systems used to gather and aggregate data enable early flagging of suspicious expenses, irregular patterns, and other indicia of potentially fraudulent activities.

(3) Prepare for regulators/investigators. Corporations should also get ready to respond if regulators come knocking by:

• Tracking and being able to demonstrate all of their steps to mitigate against fraud, insider trading, and other risks posed by the pandemic. Exploiting technology as described above will support this effort.

• Updating protocols so that employees understand how to respond, including involving in-house attorneys at the soonest possible opportunity.

• Considering creative strategies to respond. While quick and comprehensive cooperation is often the preferred path, in certain circumstances overly aggressive enforcement tactics—for instance, subpoenas arising out of legally questionable allegations of market manipulation—may warrant more adversarial, aggressive, and innovative responses.

• Engaging outside counsel with U.S. prosecutorial and enforcement experience who are willing and able to take aggressive positions against regulators, should that be in the company's best interest.

While the exact scope of inquiries and investigations from U.S. regulators in the wake of the COVID-19 pandemic remains to be seen, public companies and traders can and should take proactive steps to mitigate the risks of attracting the wrong kind of regulatory attention.

 

Scott Hulsey is a lawyer with Kobre & Kim in Washington, D.C. He is a former high-ranking Department of Justice official and corporate Chief Compliance Officer who serves as counsel in white-collar criminal and regulatory enforcement matters. William F. McGovern is a lawyer with Kobre & Kim in New York. His practice focuses on high-stakes cross-border government enforcement and investigation matters, with a particular emphasis on matters with an Asia nexus. Benjamin Sauter is a lawyer with Kobre & Kim in New York. He focuses on cutting-edge financial products and services disputes. Hartley M.K. West is a lawyer with Kobre & Kim in San Francisco. She's a trial lawyer with extensive experience in white-collar criminal and asset forfeiture matters.