Federal Authorities Signal Attempts to Strike Balance Between Enforcement and Flexibility During Challenges Posed by COVID-19

This month, Attorney General William Barr issued a memorandum to all U.S. Attorneys to prioritize detection, investigation, and prosecution of all criminal conduct related to the COVID-19 pandemic. The Department of Justice (DOJ) quickly made good on this directive when five days later federal authorities in Texas initiated the first enforcement action related to coronavirus-related fraud. [AGG’s coverage of the case may be accessed here.]  DOJ also made clear that it does not intend to slow its investigation and prosecution of crimes generally in spite of the unique difficulties posed by the pandemic, evidenced most publicly by the criminal charges brought by the Southern District of New York against former Venezuelan President Nicolas Maduro Moros and fourteen other current and former Venezuelan officials on March 26th.

Other federal authorities have followed suit in announcing tough stances on enforcement with a particular focus on keeping the public safe during the COVID-19 emergency.  The Co-Directors of the Securities and Exchange Commission (SEC) Division of Enforcement issued a rare public statement regarding “the importance of maintaining market integrity and following corporate controls and procedures” at this time.  Similarly, the Chairman of the Federal Trade Commission (FTC) issued a statement regarding its continuing work to protect consumers from deceptive and unfair commercial practices.

Nevertheless, these agencies have also provided practical guidance for businesses and individuals with an eye toward relaxing certain standards and other flexibility necessary for operations in difficult and unique circumstances.  Read together, the message from federal law enforcement appears to be increased scrutiny of intentionally bad actors while permitting opportunity for creative solutions to business roadblocks.

Securities and Exchange Commission

On March 23, 2020, Stephanie Avakian and Steven Peikin, Co-Directors of the SEC Division of Enforcement, issued a public statement regarding “market integrity.”  Specifically, the missive cautions that the current crisis creates an environment that raises the risk of insider trading and a related expectation that public companies and other regulated concerns will be proactive in minimizing the potential for such conduct.

The SEC describes the current circumstances as those where “corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances.”  It goes on to warn that individuals in possession of such information “should be mindful of their obligations” to keep it confidential and to refrain from activity that could run afoul of securities trading laws.  The Co-Directors also reiterate the need to comply with internal controls and policies and procedures governing disclosure as a safeguard against unlawful or improper dissemination.  This expectation for compliance extends to broker-dealers, investment advisors, and other registrants.

The statement makes explicit reference to the fact this heightened risk of securities violations is, in part, due to the relaxing of certain SEC disclosure requirements.  For example, on March 25th, the Commission issued an Order that provides public companies with a 45-day extension to file certain disclosure reports that would have been due between March 1 and July 1, 2020, subject to certain conditions.  Companies taking advantage of the disclosure relief must report a summary of why it is necessary for each periodic report that is delayed.  Other Orders provide certain investment funds and investment advisers with additional time to hold in-person board meetings and certain filing and delivery requirements.

In addition to the SEC’s recent Orders, the Division of Corporation Finance issued Disclosure Guidance Topic No. 9.   The guidance encourages timely reporting while recognizing the difficulties companies may encounter with respect to the effects of COVID-19 and their impact on industries or individual company operations.  The SEC also noted that it continues to monitor the situation, will consider additional relief from other regulatory requirements, and encourages both concerns and individuals to reach out for guidance.

Federal Trade Commission

On March 26, 2020, FTC Chairman Joe Simons issued a statement assuring that “despite the difficult circumstances” the Bureau of Consumer Protection remained “fully engaged” in its work protecting consumers from deceptive and unfair commercial practices.  In particular, the FTC “will not tolerate businesses seeking to take advantage of consumers’ concerns and fears regarding coronavirus disease, exigent circumstances, or financial distress.” To that end, the Chairman encouraged the public to make use of the FTC’s complaint hotline for reporting detected and suspected scams.

Notably, Simons also remarked upon the “enormous challenges” for businesses at work.  According to the Chairman, the FTC “will remain flexible and reasonable in enforcing compliance requirements that may hinder the provision of important goods and services to consumers.”  The statement draws an explicit distinction between “unfair advantage” and “good faith efforts” – albeit without providing concrete examples or further insight – and directs businesses to contact a dedicated email address for guidance on compliance.

Conclusions

Federal agencies have presented a unified front with respect to enforcement, taking strong stands against the potential for fraud amidst the situation created by the coronavirus.  The SEC has also doubled down on its emphasis on prosecuting insider trading.  However, these agencies have also acknowledged the particular problems, some as yet unknown, which have arisen due to the pandemic and the havoc it has wrecked on business as usual thereby necessitating some degree of flexibility and discretion related to certain compliance and enforcement issues.  The tone from the top is currently: ask for permission, not forgiveness.  Most of the currently issued guidance urges companies and individuals to seek advice from the relevant agency.