It was easy for me to ignore all the news about the prediction markets for quite a while. No securities are involved, and I’m a securities lawyer. So…I don’t need to worry about this. Right? I wish that were true. But as Liz shared last week, savvy securities lawyers are thinking about whether and how their codes of conduct and insider trading policies should address prediction market insider trading.
Why? As Liz noted, Kalshi recently announced that it has been actively investigating potential insider trading activity on its platform and shared details of closed cases. And last week, the CFTC’s Division of Enforcement issued an advisory on these two cases. The press release says (case citations removed):
While Kalshi’s internal enforcement program handled these matters, under the [Commodity Exchange Act], the Commission has full authority to police illegal trading practices occurring on any [Designated Contract Market], including those described above related to prediction markets. Without limitation, these practices include:
– Misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information (commonly known as “insider trading”) pursuant to Section 6(c)(1) of the Act, and Regulation 180.1(a)(1) and (3).
– Pre-arranged, noncompetitive trading and wash sales, under Section 4c(a)(1) and (2)(A) of the Act, and Regulation 1.38(a).
– Other prohibited trading practices including disruptive trading pursuant to Section 4c(a)(5).
– Fraud and manipulation under various sections of the Act.
As this Braeden Anderson post explains, “We are accustomed to discussing insider trading in the securities context, grounded in Section 10(b) of the Exchange Act and Rule 10b-5. But the CFTC has long had parallel authority under Section 6(c)(1) and Regulation 180.1 to pursue fraud and misappropriation in commodities and derivatives markets.” Gibson Dunn notes that many public companies already prohibit employees from insider trading on prediction markets — that is, to the extent their codes of conduct forbid employees from using confidential information obtained from their employment for personal gain or engaging in conflicts of interest.
But currently, those codes — and employee training — may not further explain that prediction market trading using confidential information obtained from an employer would violate both these code provisions and federal law. (There’s a good chance most employees don’t know this?) And it wouldn’t be the greatest thing in the world if the news was suddently reporting that one of your employees was trading on an outcome based on confidential company information or an event they controlled or influenced. Read on (in today’s next blog) for recommendations that public companies might want to consider.
OK. Prediction market trading by employees can violate codes of conduct and federal law (state law, maybe, too!) if based on confidential information, and this could mean reputational damage for companies. So what should public companies do? After a deep dive on prediction markets (really helpful if you’ve been burying your head in the sand, as I have), this MoFo alert has detailed suggestions.
Because prediction markets do not involve “securities,” a company’s insider trading policy, surprisingly, may not be the best primary policy to address the risks of insider trading on prediction markets. Moreover, insider trading policies often apply to directors, officers, and certain employees that can be expected to receive traditional material non-public information, but the wide-ranging nature of prediction markets could extend to scenarios where lower-level employees could potentially misuse information.
A company’s code of conduct or ethics (the “Code”) generally applies enterprise-wide and may be a better source to primarily address prediction market activity more broadly. For instance, a Code could be revised to:
– Reinforce that employees may not use confidential information for personal gain in any form;
– Clarify that wagering, betting, trading, or engaging in any transactions based on inside information is prohibited;
– Capture misconduct that may not fall squarely within federal securities law but that still violates fiduciary duties or company policy.
[M]any insider trading policies narrowly prohibit trading in a company’s own securities and, in some cases, derivatives or hedging instruments tied to company securities. Fewer policies explicitly address event-based contracts referencing the company, markets that do not require trading in the company’s stock, or trading on platforms outside of traditional broker-dealers and exchanges.
As prediction markets expand, companies should consider clarifying that trading on the basis of MNPI is prohibited regardless of the form of the instrument used to monetize the information. To the extent a company’s Code is updated as described above, companies should consider expressly cross-referencing relevant provisions of the Code in their insider trading policy. In addition, while prediction market activity could conceivably be addressed in a Rule 10b5-1 trading plan, companies may not wish to be viewed as approving or even encouraging employee use of prediction markets. Further, the event-driven nature of prediction market contracts could also make Rule 10b5-1 coverage unworkable.
The alert also suggests that companies could consider requiring employees to disclose any prediction market or online wagering accounts — or prohibit such accounts altogether (especially in highly regulated industries). Plus annual or quarterly certifications that employees have not engaged in prohibited trades in prediction contracts might “reinforce expectations and provide a record of compliance efforts.” As always, training is your best friend. Make sure your employees know what your policies permit and prohibit and what trading activity is illegal.
While we’re on the subject, it may also be worth pointing out that the ‘prediction markets universe’ and the ‘securities markets universe’ are starting to collide. (Hey, it’s the plot of every sci-fi or superhero movie in the last 10 years!) I say that because Nasdaq MRX has asked the SEC for approval to list and trade prediction market options (Outcome-Related Options or “OROs”) on the Nasdaq-100 Index. (Cboe is considering something similar.)
There’s also the fact that NYSE announced a partnership and $2 billion investment in Polymarket last October. What this means for us securities lawyers, I don’t know. But these are things that are happening.
On Friday, the SEC adopted amendments to its rules and forms to conform them to the Holding Foreign Insiders Accountable Act (HFIAA), which requires directors and officers of foreign private issuers (FPIs) with a class of equity securities registered under Section 12 of the Exchange Act to report their holdings of and transactions in the issuer’s equity securities (electronically and in English) beginning March 18, 2026.
As expected, the SEC amended Rule 3a12-3(b), which currently exempts FPIs from all of Section 16, to limit the exemption to Section 16(b), the short-swing profit rule, and Section 16(c), the short-sale prohibition. The SEC also (1) amended Rule 16a-2, which identifies the persons and transactions subject to Section 16, to provide that ten percent owners of FPIs are not subject to Section 16(a), (2) amended General Instruction 1 to Form 3, which identifies the persons required to file Form 3, to include directors and officers of FPIs and exclude ten percent owners, and (3) amended Forms 3, 4 and 5 to allow Box 1 to include a postal code or country code rather than a zip code and add a new box following the “Issuer Name” box to allow inclusion of a foreign trading symbol. A list of country codes is available on the SEC’s website.
While Section 16 reporting persons will continue to be required to enter the issuer’s name and ticker or trading symbol in Box 3 of Form 3 and Box 2 of Forms 4 and 5, a new optional field (Box 3a. of Form 3 and Box 2a. of Forms 4 and 5) allows insiders of FPIs with securities trading in both US and non-US markets to provide a second trading symbol if they hold shares that are traded in both markets. Where securities have only a foreign trading symbol, insiders may either enter the foreign trading symbol in the first mandatory box (if space allows) or enter “none” in that box and enter the foreign trading symbol in the new second box. While the SEC has not yet posted updated versions of Forms 3, 4 or 5, we have updated our model Form 3 for directors and officers of FPIs to report their initial holdings as of March 18, 2026 (see Model Form 7a in the online version of the Forms & Filings Handbook) to reflect the amendments to Form 3.
The SEC clarified that language in Rule 16a-3(g)(1) and (f)(1) and the Instructions to Forms 4 and 5 establishing reporting requirements for transactions exempted from Section 16(b) should not be read to exempt directors and officers of FPIs from reporting transactions otherwise required by Section 16(a) based on the inapplicability of Section 16(b) to FPIs. The release also notes that directors and officers of FPIs should use the transaction codes listed in the Instructions for Forms 4 and 5, including those applicable to transactions qualifying for an exemption from Section 16(b), even though directors and officers of FPIs are not subject to Section 16(b).
Recognizing that some FPIs have a two-tier board structure — with a supervisory (non-management) board and a management board — the SEC also noted that irrespective of instructions in Form 20-F specifying that for some purposes the term “board of directors” refers only to the supervisory or non-management board, Section 3(a)(7) sets forth the definition of a “director” for purposes of the Section 16(a), and whether a person is a “director” for purposes of Section 16(a) should be determined using that definition.
Chair Atkins issued a statement indicating that the SEC is still evaluating whether to exercise the authority granted by the HFIAA to exempt persons, securities, or transactions from Section 16(a) because foreign laws already impose substantially similar requirements.
Commissioner Mark Uyeda issued a separate statement offering his views regarding why the HFIAA should not be construed to apply to ten percent owners.
We’re posting memos in our “Foreign Private Issuers” Practice Area, but for all things Section 16, you needSection16.net, where you can electronically access the “bibles” of Section 16 (Romeo & Dye’s Section 16 Forms & Filings Handbook, including the model Form 3 for D&Os of FPIs noted above, and Romeo & Dye’s Section 16 Treatise and Reporting Guide), follow and subscribe to Alan’s blog on Section 16 developments and practical tidbits, access the Q&A forum moderated by Alan, join Alan’s annual webcast and more. And for a cost-effective way to make Section 16 filings, check out the Romeo & Dye Section 16 Filer. If you are not a member of Section16.net, reach out to info@ccrcorp.com or call 1.800.737.1271 to subscribe to this essential resource.
More exciting developments from Friday! This one John shared yesterday on DealLawyers.com:
On Friday, the Delaware Supreme Court issued its decision in Rutledge v. Clearway Energy, (Del. 2/26), in which the Court unanimously concluded that SB 21’s amendments to the DGCL were constitutional.
During the contentious debate over SB 21, academic commentators raised the issue of whether the statute limited the equitable powers of the Chancery Court in a way that violated provisions of Delaware’s constitution. Shortly after the amendments were enacted, plaintiffs filed constitutional challenges to SB 21, and the Chancery Court subsequently certified the following constitutional questions to the Delaware Supreme Court:
1. Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
2. Does Section 3 of Senate Bill 21—applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?
The Court, in an opinion written by Justice Traynor, held that neither of the challenged provisions violated Delaware’s Constitution. Here’s an excerpt from Justice Traynor’s discussion of the first certified question:
SB 21 does not divest the Court of Chancery of jurisdiction of any cause of action, nor does it direct any claim or category of claims to another court. Breach of fiduciary duty claims remain within the undisputed jurisdiction of the Court of Chancery. Indeed, Rutledge’s claim itself remains within the Court of Chancery’s jurisdiction, albeit subject to a review framework he finds unfavorable.
Although the relief—equitable relief or damages—the Court of Chancery formerly would consider is now unavailable when it determines that a challenged transaction has been approved by one of the two statutorily designated cleansing mechanisms, SB 21 does not strip the court of its jurisdiction over equitable claims. Instead, SB 21 represents, in our view, a legitimate exercise of the General Assembly’s authority to enact substantive law that, in its legislative judgment, serves the interests of the citizens of our State.
The Court also concluded that SB 21 did not divest the plaintiff from a cause of action that had already accrued:
[C]ontrary to what Rutledge contends, SB 21 does not extinguish his right of action. He may yet challenge the Clearway transaction based upon allegations that Clearway’s CEO and majority stockholders breached their fiduciary duties. To be sure, the court must now review the challenged transaction under statutory standards that changed after the transaction closed but before Rutledge filed suit. It is highly questionable, however, that the statutory change effected the extinguishment of Rutledge’s vested right. His interest, to the contrary, appears to be more “an anticipated continuance of the existing law” than a vested property right.
While there are undoubtedly many battles to come over the scope and operation of the changes to the DGCL enacted in SB 21, it appears that Friday’s decision from the Delaware Supreme Court at least puts the constitutional issues to rest.
We’re posting memos in our “Delaware Law” Practice Area here on TheCorporateCounsel.net, but we’ve been covering SB 21 more heavily on DealLawyers.com given its implications for controlling stockholder transactions. If you don’t already, you should subscribe to get our daily DealLawyers.com blogs in your inbox. (The blog is free!) And if you regularly handle hostile – or friendly – M&A, the site is full of very useful & practical info that will come in handy when you’re on a tight time frame. It’s also a great training resource for new associates! If you don’t have access to DealLawyers.com, reach out to info@ccrcorp.com or call 1.800.737.1271.
Last week, Liz blogged about a new resource, our “AI Use by Lawyers” Handbook. I figured that, as we were finalizing the Handbook, some development would happen that we’d have to update for before finalizing, but I would have bet that it was some new genAI tool. Instead, it was a court case.
ICYMI, in a February 2026 bench ruling, the U.S. District Court for the Southern District of New York determined that documents outlining a defense strategy and possible legal arguments created by a client using genAI (on his own and not directed by counsel) and sent to his lawyer for review were not protected by privilege or work product doctrine. As this Husch Blackwell alert notes:
This isn’t just a litigation issue. It also applies to preparing for or responding to regulatory audits or other investigations. Feeding legal analysis, or correspondence with counsel or an expert, into an open AI system, potentially waives the attorney-client privilege, confidentiality, and trade secret protections.
This doesn’t necessarily mean any AI use waives privilege. Notably, the defendant’s chats were “with a publicly available, non-enterprise, generative AI platform,” and “not made at the request of counsel.” There’s also the fact that another federal court came out differently on this issue on the same day. As this Proskauer alert notes, in Warner v. Gilbarco, Inc., the Eastern District of Michigan denied a motion to compel discovery of “work product” after a pro se plaintiff used AI tools. What was different (besides the court)? The facts, for one. One case involved the defendant’s use of AI in a criminal trial; the other involved a civil litigant acting as her own counsel. But the courts did seem to apply the same analysis differently:
The [Eastern District of Michigan explained] that work-product waiver requires disclosure “to an adversary or in a way likely to get in an adversary’s hand.” Significantly, the court reasoned that “ChatGPT (and other generative AI programs) are tools, not persons, even if they may have administrators somewhere in the background.” This stands in notable contrast to Heppner, where Judge Rakoff treated the AI platform as a third party for privilege purposes based on its terms of service permitting data disclosure.
The alert concludes:
The Heppner and Warner decisions . . . demonstrate that courts are actively grappling with how traditional privilege and work-product doctrines apply to AI-generated materials. While Heppner reinforces the importance of using properly secured AI tools with confidential or privileged information and ensuring that AI use is directed by counsel, Warner suggests that not all AI-assisted litigation work will ultimately be subject to discovery.
Indeed, despite the seemingly opposite outcomes, both decisions appear to rely on the same basic analytical framework. The critical factors appear to be the specific contractual and technical circumstances of the specific AI platform at issue, whether counsel is involved and/or directed the AI use, whether confidential or privileged information will be entered into the tool, and whether the materials reflect litigation strategy prepared in anticipation of litigation.
Ultimately, preserving privilege may boil down to the finer details. Ensuring that AI tools operate in a closed environment, don’t retain data for training, and don’t share data with third parties is a good starting point for creating an expectation of confidentiality. However, until more courts issue rulings on the matter, AI use is risky. Lawyers would be wise to take caution when using AI in conjunction with any sensitive or privileged information.
The Husch Blackwell alert suggests actionable steps that law firms and legal departments should take in light of the decision:
– Update Your Intake: Ask clients whether they’ve discussed their legal matter with any AI tool. Don’t assume they haven’t. Revisit this warning as the matter proceeds.
– Discovery and Depositions: Add AI usage to your deposition questions and collect your client’s AI chats. Listing the chats on a privilege log triggered the issue in Heppner. Expect such scrutiny going forward.
– Educate Clients: Make it clear that using public AI tools to summarize a legal memo from counsel— or to process or brainstorm legal matters—can waive privilege, confidentiality, and trade secret protections.
– Train Your Teams: Regulatory, compliance, and operations staff should be warned that running confidential or trade secret info through public AI is a privilege and confidentiality risk is waiting to happen.
– Stick to Enterprise Tools: Company-approved, closed-universe AI tools are different, but review their terms and train users accordingly.
Be sure to subscribe to our AI Counsel Blog, where John and Zach have discussed these topics a few times and generally roll up their sleeves to address some of the more granular issues that legal and compliance personnel are confronting when trying to manage the risks of emerging technologies.
In late January in Newtyn Partners, LP v. Alliance Data Sys. Corp., (6th Cir.; 1/26), the Sixth Circuit clarified when omitted facts may cause public statements to constitute “half-truths” and affirmed the dismissal of a putative securities class action against a financial services company. The Court held that a statement cannot be a misleading half-truth when the disclosure and the omitted information operate on different “levels of generality.”
“Half-truths,” as this Katten blog explains, were defined by SCOTUS in Macquarie as “representations that state the truth only so far as it goes, while omitting critical qualifying information.” One of the issues debated but not addressed by SCOTUS in Macquarie was whether a statement could be misleading for failure to disclose a fact on the “same subject” (broadly defined) or if the omitted fact must be “like in kind in both subject matter and specificity.” The Katten blog asserts that no court had actually addressed this specific question about half-truths until Newtyn Partners.
This A&O Shearman alert describes the facts at issue in Newtyn Partners.
Plaintiff alleged that Defendants made misleading statements during the spinoff regarding the Loyalty Program’s client base despite the risk of allegedly significant client departures. The crux of Plaintiff’s claim was that Defendants’ statements about the Loyalty Program’s “stable client base” and “deep, long-standing relationships” were “half-truths” because they omitted key context about clients who were considering terminating partnerships.
The Court did not agree that Defendants’ statements were misleading half-truths, noting that a statement cannot be a misleading half-truth when “the words spoken and the facts omitted operate on different levels of generality” and “that the omitted facts must have a reasonably close fit to what defendants disclosed.” Here, Defendants made generic statements about a stable client base which the Court described as loosely optimistic, high-level remarks that would not have created inferences regarding specific contractual relationships for reasonable investors. These general optimistic statements did not require Defendants to disclose the specific contractual terms with clients who were at risk of terminating their partnerships and, therefore, the upbeat statements were not misleading half-truths.
Gibson Dunn is out with its annual update sharing observations and trends from Form 10-K disclosures so far based on annual reports they’ve reviewed for clients and other filings. It’s full of helpful discussions of trending risk factor and MD&A disclosures, common topics for comment letters, enforcement focus areas and other reminders. One suggestion that I found interesting and practical (plus universally applicable) is to tweak your typical risk factors intro. Here’s why and how (links added):
Recent securities litigation has highlighted the importance of properly characterizing the purpose of risk factor disclosures and clearly communicating the limitations of those disclosures to investors. Securities lawsuits increasingly include claims that risk factors are misleading when they describe potential risks as hypothetical when such risks have already materialized. Last year, the Supreme Court’s decision to dismiss the appeal in Facebook Inc. v. Amalgamated Bank left unanswered how securities fraud claims challenging risk factor disclosures should be analyzed, and, as a result, companies face even greater uncertainty in drafting risk factors.
To address this risk, we recommend companies update the introductory paragraph to the Risk Factors section to clarify that the risk factor disclosures reflect management’s beliefs and opinions about potential future risks and do not contain factual assertions about past events [. . .] The following is an example of language that could be included in the introductory paragraph of the Risk Factors section:
“These disclosures reflect the Company’s beliefs and opinions as to factors that could materially and adversely affect the Company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.”
Including such clarification communicates that Item 105 disclosures are inherently speculative and exclusively forward-looking. We encourage companies preparing their 2025 Form 10-Ks to incorporate similar language to strengthen their litigation protection while maintaining clarity.
Even the Newtyn Partners case that I shared in the prior blog included a claim that a risk factor that the loss of any of the company’s top ten clients would have a significant impact on revenue was misleading because it failed to add that some clients were considering terminating. The Sixth Circuit’s decision was consistent with the suggested language above — that risk disclosures are inherently prospective and should not “cause a reasonable investor to infer anything about the present.”
I fully support including this language and agree with John that alleged “hypothetical risk factors” aren’t likely to be a high priority for the SEC in the current environment. But it still behooves companies to be careful about hypothetical risk factor language since it’ll continue to be a popular topic for private securities litigation and may preclude companies from relying on the PSLRA safe harbor for forward-looking statements. (And, after Saturday, that may now mean updating risk factors concerning geopolitical risks and conflict in the Middle East to address surging oil prices and other business impacts of war against Iran.)
Last week on LinkedIn, John Reed Stark shared his perspective on the SEC Enforcement Division’s latest updates to its Enforcement Manual. I think it’s safe to say that he’s a fan. And his post is a helpful explanation for corporate attorneys who may be wondering what the changes really mean in practice. He specifically highlights Section 2.3.
[Section 2.3] directs staff, subject to confidentiality constraints, to inform Wells notice recipients of ‘salient, probative evidence’ that the staff ‘should have reason to believe may not be known to the recipient.’
Staff are further instructed to be ‘forthcoming’ about the contents of the investigative file and, on a case-by-case basis, to ‘make reasonable efforts’ to allow recipients to review relevant portions.”
He notes that the SEC Staff was operating without a formalized policy or uniform practice of sharing relevant evidence with counsel before recommending a civil action to the Commissioners. He calls this a “foundational shift.”
I blogged earlier this week about proponents taking companies to court over decisions to exclude Rule 14a-8 shareholder proposals from the company proxy statement. Two of the three cases have now settled, with the companies agreeing to include the proposal in the proxy.
The NYC Comptroller announced its settlement yesterday – and emphasized that EEO-1 diversity disclosures are still an initiative:
In 2020, the Comptroller’s Office launched the successful Diversity Disclosure Initiative, encouraging America’s largest companies to voluntarily disclose their Consolidated EEO-1 Reports. The results have been overwhelmingly positive. As of 2025, roughly 80% of S&P 100 companies publicly disclose their Consolidated EEO-1 report, a comprehensive breakdown of the company’s workforce by race, ethnicity, and gender, an increase from about 14 in July 2020. The Comptroller’s Office, on behalf of the Funds, have reached agreements with major companies including the Home Depot, McDonald’s Corporation, Netflix, Nike, and Verizon Inc.
The disclosure of a company’s Consolidated EEO-1 Report is a cost-effective and meaningful way to provide investors with consistent information that allows for comparison of one company to that of its peers. Further, this disclosure imposes few if any additional costs on a company because companies like AT&T are already required to annually submit the report to the Equal Employment Opportunity Commission.
As I noted in my earlier blog, one factor to consider in exclusion decisions is whether the company has previously agreed to do the thing the proposal asks for – that appeared to be a factor in the NYC Comptroller case, even though the macro environment has shifted in the meantime. Another factor, apparently, is whether proponents will litigate – and that risk may be elevated now that there are two settlements on the books.
