By Amy Leisinger, J.D.
In recent remarks, SEC Co-Director of Enforcement Steven Peikin noted that the disruption and changed work environment related to COVID-19 has had a substantial impact on the Enforcement Division activities. However, he said, the Division continues to execute its mission to protect investors, promote capital formation, and maintain fair and orderly markets. Enforcement is detecting and addressing misconduct related to the pandemic despite having to find new ways to do so, according to the co-director.
Current response. Peikin noted that, together with Enforcement Co-Director Stephanie Avakian, the Division formed a Coronavirus Steering Committee to coordinate the Division’s response to COVID-19-related enforcement issues. The committee’s mandate is to proactively identify and monitor areas of potential misconduct and risk, coordinate responses, and ensure appropriate allocation of resources, he said. In particular, Enforcement, along with other SEC offices, will focus on microcap fraud, as other emergencies have been followed by efforts to make claims of crisis treatments and response capabilities.
The COVID-19 pandemic has resulted in volatile markets conditions and changes that could lead to increased opportunities for insider trading and market manipulation, Peikin explained. To detect this type of misconduct, Enforcement will monitor trading activity around announcements made by issuers in industries particularly impacted by the coronavirus, he said. Risks involving excessive debt, extreme leverage, and possible liquidity disruptions could lead to heightened scrutiny, according to the official. The Steering Committee also is focusing on the ways in which COVID-19 may affect regulated entities and individuals, such as failures to honor fund redemption requests and issues surrounding potentially improper marketing and sale of products to retail investors, Peikin stated.
Transparency. According to Peikin, the SEC has made substantial efforts to communicate with investors and market participants regarding the effects of COVID-19 on the markets. Some insiders have increased access to material, nonpublic information, and the Commission has urged companies to follow their disclosure controls and procedures to prevent improper use of such information, the official explained. The Enforcement Division is committed to educating investors on the unique risks related to the pandemic, Peikin stated, and urges all investors to be vigilant when considering investment opportunities. Peikin noted that the Division has provided an alert laying out steps that retail investors can take to protect their investments and themselves.
Recent actions. The Commission has ordered a significant number of trading suspensions in last several months, particularly when questions about whether public information about an issuer is adequate and reliable. A recommendation that the Commission order a trading suspension often starts with FINRA referrals, investor tips, SEC staff market surveillance, according to Peikin. Since February 2020, the Commission has suspended trading in the securities of more than 30 issuers in connection with questions about the accuracy of coronavirus-related information, according to the co-director. A trading suspension is not a finding of fraud or misconduct, he explained; Enforcement will continue to investigate whether an issuer was engaged in potential misconduct and, if appropriate, may recommend charges to the Commission, Peikin said.
The Division has had to adapt in the face of new challenges, especially with regard to circumstances should staff should seek emergency relief, and the Division has taken steps to make reasonable accommodations when possible. However, the Commission cannot shut down with a "hiatus" in investigations or litigation, according to Peikin.
"Obviously, much is uncertain. We do not know how long this crisis will last or what its ultimate impact will be. But I do expect that the Division of Enforcement will continue to do its work, and its ability to function remotely and virtually will continue to improve," he concluded.