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Financial Services Regulators Continue to Roll Out COVID-19 Guidance and Relief

March 26, 2020

Update: Our May 21, 2020, alert provides our most recent discussion of information and guidance issued by the SEC, FINRA, MSRB and SIFMA.

As McGuireWoods reported in a March 17, 2020, alert, “COVID-19: Securities Regulators and Industry Associations Issue Coronavirus Guidance and Relief,” financial services regulators have been issuing guidance and relief in real time to assist the industry as the novel coronavirus (COVID-19) continues to spread in the United States. This post provides an update on regulator announcements issued since that date.

Regulators continue to recognize the unprecedented uncertainty, disruption and strain industry participants are facing from COVID-19 and emphasize the importance of prioritizing health and safety. U.S. Securities and Exchange Commission Chairman Jay Clayton recently reflected on this and the role of regulators, saying:

“An immediate, effective response to COVID-19 requires substantial portions of our economy to function at full throttle, other sectors to function in different ways (e.g., telework) and more moderately, and some sectors to stand down. Our markets, and our policies, should support this tailored, multi-faceted, time-limited approach. And, just as COVID-19 has caused us to alter our economic activity by industry and region, we must, consistent with a continuing commitment to health and safety, prepare to thoughtfully and incrementally increase economic activity by industry and region. When that time comes — and here we should take our cues from health authorities and local and national leaders — we will benefit from maintaining the continuing function of our financial markets, and preserving the interconnections among of our industries and our workers, throughout this period of shared responsibility.”
See Also – Public Statement of SEC Chairman Jay Clayton for FSOC Open Meeting (March 26, 2020)

To assist regulated firms in carrying out their responsibilities and to serve customers, regulators are reviewing questions and requests for relief from the industry and associations. In many instances, the relief needs to be coordinated among regulators and those discussions are happening. In situations where firms confront new and unforeseen issues, they should contact their regulator.

Firms should not fear contacting their regulator because they think that a regulator will view their business continuity plans (BCPs) as deficient and consequently penalize the firm. The current situation of a global pandemic is unprecedented. If a firm had in place a reasonable BCP, as required under Financial Industry Regulatory Authority (FINRA) Rule 4370, subsequent questions or requests for relief from a regulator will not create a “gotcha situation.” If a firm is facing an unforeseen issue, chances are that many other industry participants are facing similar issues.

To be sure, regulators are balancing the need to protect investors, maintain market integrity and maintain orderly and fair markets. While meeting those goals, there is no question that regulators understand the magnitude of the challenges the industry is facing and are working hard to provide necessary guidance and relief, to the extent that doing so does not compromise those goals.

U.S. SECURITIES & EXCHANGE COMMISSION (SEC)

Additional Relief for Registered Investment Companies

On March 23, 2020, the SEC announced temporary borrowing and lending flexibility for registered investment companies (RICs) and insurance company separate accounts registered as unit investment trusts (UITs) affected by COVID-19 and its impact on the markets. The relief will be in place until at least June 30, 2020.

  • Borrowing From Affiliates – To provide RICs and UITs with additional avenues for liquidity, the SEC is permitting them to borrow from their affiliates beyond what would ordinarily be permitted under Sections 17(a) and 18(f) of the Investment Company Act of 1940, as amended (ICA). This relief is subject to certain conditions: The Board of Directors of the RIC, including a majority of the independent directors, or the insurance company on behalf of the UIT, reasonably determines that such borrowing: (i) is in the best interests of the RIC/UIT and its shareholders or unit holders; and (ii) will be for the purpose of satisfying shareholder redemptions. Notification to the SEC staff via email at [email protected].
  • The Board of Directors of the RIC, including a majority of the independent directors, or the insurance company on behalf of the UIT, reasonably determines that such borrowing: (i) is in the best interests of the RIC/UIT and its shareholders or unit holders; and (ii) will be for the purpose of satisfying shareholder redemptions.
  • Notification to the SEC staff via email at [email protected].
  • RICs With Interfund Lending Orders – Many RICS have obtained exemptive orders from the SEC that permit them to establish an interfund lending (IFL) facility, subject to specified limitations. The SEC is now extending the relief under these IFL orders to loosen some of these limitations. This relief is subject to certain conditions including: Any loan under the facility is made in accordance with the terms and conditions of the existing IFL order except as explicitly provided by this relief; Notification to the SEC staff via email at [email protected]; and Disclosure on its public website that it is relying on the relief.
  • Any loan under the facility is made in accordance with the terms and conditions of the existing IFL order except as explicitly provided by this relief;
  • Notification to the SEC staff via email at [email protected]; and
  • Disclosure on its public website that it is relying on the relief.
  • RICs Without Interfund Lending Orders – For RICs that do not currently have an IFL order, the SEC is permitting such RICs to establish and participate in such a facility on the terms and conditions of a “recent IFL precedent” order. This relief is subject to certain conditions including: The RIC must comply with the terms of the IFL precedent order except as explicitly provided in the relief; Notification to the SEC staff via email at [email protected]; Disclosure on its public website that it is relying on the relief; and To the extent it files a prospectus supplement, or a new or amended registration statement or shareholder report, while it is relying on this relief, disclosure regarding the material facts about its participation or intended participation in the facility.
  • The RIC must comply with the terms of the IFL precedent order except as explicitly provided in the relief;
  • Notification to the SEC staff via email at [email protected];
  • Disclosure on its public website that it is relying on the relief; and
  • To the extent it files a prospectus supplement, or a new or amended registration statement or shareholder report, while it is relying on this relief, disclosure regarding the material facts about its participation or intended participation in the facility.
  • Deviation From Fundamental Investment Policies – The SEC is permitting RICs to enter into otherwise lawful lending or borrowing transactions that deviate from the RICs’ fundamental investment policies (without the typically required shareholder approval), provided certain conditions are met, including: The Board of Directors of the open-end fund, including a majority of the directors who are not interested persons of the investment company, reasonably determines that such lending or borrowing is in the best interests of the registered investment company and its shareholders; Prompt notification to its shareholders of the deviation by filing a prospectus supplement and including a statement on the applicable public website; and Notification to the SEC staff via email at [email protected].
  • The Board of Directors of the open-end fund, including a majority of the directors who are not interested persons of the investment company, reasonably determines that such lending or borrowing is in the best interests of the registered investment company and its shareholders;
  • Prompt notification to its shareholders of the deviation by filing a prospectus supplement and including a statement on the applicable public website; and
  • Notification to the SEC staff via email at [email protected].

Money Market Fund Relief

The SEC Staff has also issued a no-action letter to the Investment Company Institute to permit money market funds (MMFs) to sell their securities to affiliates beyond what would typically be permitted by the ICA, provided that:

  • The purchase price of the purchased security would be its fair market value as determined by a reliable third-party pricing service;
  • The purchases satisfy the conditions of Rule 17a-9 under the ICA except to the extent that the terms of such purchases would otherwise conflict with (i) applicable banking regulations or (ii) the exemption issued by the Board of Governors of the Federal Reserve System on March 17, 2020, defining “covered transaction” for purposes of section 23A of the Federal Reserve Act to not include the purchase of assets from an affiliated money market fund; and
  • The money market fund timely files Form N-CR reporting the purchases under Part C of such form, and reports in Part H of such form that the purchase was conducted in reliance on the MMF letter.

The MMF letter relief will continue in effect until the SEC provides notice that it is not.

Extended RIC, BDC and Adviser Relief

The SEC also issued an order on March 25, 2020, that, among other things, extended the time period of the previously provided relief for RICs and BDCs regarding in-person board voting, Form N-23 and Form N-CEN filing and shareholder report delivery. Each of the previously extended deadlines were generally extended an additional two months.

The SEC similarly extended the previously provided relief permitting investment advisers additional flexibility in the timing of their Form ADV and Form PF filings and deliveries.

Finally, the SEC issued a third order on March 25, 2020, that extended the relief it issued providing an extension to public companies for filing certain reports with the SEC. This relief has been extended to July 1, 2020.

Please refer to McGuireWoods’ March 17 alert for more discussion of the relief discussed in this section.

FINRA
Relief and Guidance

FINRA continues to update its “Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic.” The areas currently addressed on this page are:

  • Advertising Regulation
  • Anti-Money Laundering (AML)
  • Best Execution
  • Broker-Dealer Registration
  • Business Continuity Planning (BCP)
  • Filing Extensions – Annual Reports and FOCUS Reports
  • Fingerprint Information
  • Individual Registration
  • Qualification Examinations
  • Rule 4530 Reporting Requirements
  • Supervision

Per its most recent updates, FINRA is now providing the following temporary additional relief and reminders:

  • Filing Extension/Annual Reports — 30-day extension for submitting annual reports for fiscal years ending in January 2020 through March 2020.
  • Filing Extension/FOCUS Filings — Each firm that (1) meets the exemptive provisions in Exchange Rule 15c3-3(k) or (2) files a Part IIA FOCUS Report is provided 10-business-day extension for submitting FOCUS reports, which are normally required to be filed within 17 days after the end of the month.
  • Broker-Dealer Registration — Temporary suspension of requirements to maintain updated Form U4 information regarding office of employment address for registered persons who temporarily relocate due to COVID-19. Further, firms are not required to submit branch office applications on Form BR for any newly opened temporary office locations or space-sharing arrangements established as a result of recent events.
  • U4s — Allowing firms to file Form U4 electronically without the individual applicant’s manual (wet) signature, subject to certain conditions.
  • Qualification Examinations — Extension of the qualification examination window on expiring qualifications until May 31, 2020, due to the closing of Prometric testing centers.
  • 4530 Filings — For Q1 2020, firms have until May 31, 2020, to report to FINRA statistical and summary information regarding written customer complaints received by the member in the first quarter of 2020.
  • Best Execution — Evaluating a broker-dealer’s satisfaction of its duty of best execution necessarily requires a “facts and circumstances” analysis. While broker-dealers are not relieved of their best-execution obligations in these circumstances, FINRA notes that the reasonable diligence required for best execution is assessed in the context of the characteristics of the security and market conditions, including price, volatility, relative liquidity and pressure on available communications.
  • Fingerprinting — FINRA is temporarily extending the time period for submitting fingerprint information under Rule 1010(d). Rather than 30 days from the date of the U4 filing, firms that have submitted, or will submit, an applicant’s initial or transfer Form U4 between Feb. 15, 2020, and May 30, 2020, will have until June 29, 2020, to submit the necessary fingerprint information. FINRA will continue to assess this situation and consider any additional extensions of time as appropriate.

COMMODITY FUTURES TRADING COMMISSION (CFTC) and NATIONAL FUTURES ASSOCIATION (NFA) GUIDANCE

The CFTC has also been active in issuing relief to market participants impacted by COVID-19. In a series of letters, the CFTC has, among other things and subject to certain conditions:

  • extended the deadlines for filing Form CPO-PQR and Pool Annual Reports and distributing Pool Periodic Account Statements;
  • provided relief from time-stamp and timing requirements under CFTC Rule 1.35 that would otherwise be applicable to swap dealers, futures commission merchants, introducing brokers and certain other registrants;
  • provided relief from requirements relating to the recording of oral communications applicable to dealers, futures commission merchants, introducing brokers and certain other registrants; and
  • provided relief from the requirements applicable to swap dealers and futures commission merchants to furnish an annual Chief Compliance Officer Report.

The NFA separately issued guidance and relief to its members, including providing relief for members to permit their associated persons to work from home without treating such home office as a branch office.

MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB)

On March 25, the MSRB announced it would publish daily analysis of trade activity to assist market participants, policymakers and the general public with understanding the impact of COVID-19 on the liquidity of the $4 trillion municipal securities market.

STATE REGULATORS

State regulators have also been active in issuing guidance and relief regarding the impacts of COVID-19. Highlighted below are a few of the most relevant state regulatory developments. The North American Securities Administrators Association (NASAA) has established a comprehensive resource page collecting COVID-19 related updates from state and provincial securities regulators.

New Jersey Bureau of Securities

The New Jersey Bureau of Securities issued an emergency order that will remain in effect until April 30, 2020, unless extended or rescinded. The emergency order provides:

  • Temporary exemptions for displaced broker-dealers, investment advisers and their registered agents or representatives from certain registration and filing requirements of the New Jersey Uniform Securities Law; and
  • Deadline extensions for updating and delivering Forms ADV for financial professionals registered in New Jersey, and waiver of requirements for physical signatures on some forms.

The Bureau also reminded investors to beware of fraudsters seeking to capitalize on market uncertainty and public concerns related to the global pandemic.

Florida Office of Financial Regulation

On March 20, 2020, the Florida Office of Financial Regulation (OFR) issued an emergency order extending OFR license renewal deadlines occurring in March and April 2020 for a period of 30 days. The OFR also issued guidance to Florida’s consumer finance businesses and professionals.

Massachusetts Securities Division

The Massachusetts Securities Division issued an emergency notice providing the following relief:

  • Corporate Finance Filings The Division will not require manual signatures or notarizations for securities registration applications, exemption filings, securities notice filings, and consent to service of process forms and related corporate resolutions. Where signatures are required, the Division will accept evidence of electronic signatures or copies of signed documents, including .pdf copies. The Division will accept any recognized means of showing that a document is signed, as determined by the Division. The Division waives the notarization of forms used in connection with securities registration applications, exemption filings, securities notice filings and consent to service of process forms and related corporate resolutions, including Forms U-1, U-2, and U-2A.
  • The Division will not require manual signatures or notarizations for securities registration applications, exemption filings, securities notice filings, and consent to service of process forms and related corporate resolutions. Where signatures are required, the Division will accept evidence of electronic signatures or copies of signed documents, including .pdf copies. The Division will accept any recognized means of showing that a document is signed, as determined by the Division.
  • The Division waives the notarization of forms used in connection with securities registration applications, exemption filings, securities notice filings and consent to service of process forms and related corporate resolutions, including Forms U-1, U-2, and U-2A.
  • Registration of Finance Professionals Relief from requirements to obtain physical signatures on Forms U4. Relief from requirements to submit CORI Form in connection with an application for registration by submitting an affidavit stating certain requirements are met. 45-day extension for investment advisers registered in Massachusetts to perform any of the Form ADV filings, updating and customer delivery requirements set forth by Massachusetts Uniform Securities Act and related regulations.
  • Relief from requirements to obtain physical signatures on Forms U4.
  • Relief from requirements to submit CORI Form in connection with an application for registration by submitting an affidavit stating certain requirements are met.
  • 45-day extension for investment advisers registered in Massachusetts to perform any of the Form ADV filings, updating and customer delivery requirements set forth by Massachusetts Uniform Securities Act and related regulations.

Potential Blue Sky Issues

As noted below, McGuireWoods is separately providing updates with respect to relief provided to public companies in connection with the impacts of COVID-19. Broker-dealers should be aware, however, that the extended filing deadlines for public company reporting may raise questions regarding blue sky compliance with regard to certain securities transactions. For example, issuers who are public companies trading on a designated exchange who are current on their public reporting would be deemed to be exempt issuers for blue sky purposes. While public companies relying on the various COVID-19-related filing extensions will not be out of compliance with their reporting obligations if they comply with the conditions for relief, this may be an area where further inquiry is necessary by firms recommending such issuers’ securities to their customers.

MOVING FORWARD

Expect regulators to continue to issue new guidance and additional relief. Deadlines in the current relief issued may need to be extended further. McGuireWoods is monitoring the developments and will provide updates to clients as information becomes available. Please let us know if you have any questions or if there is anything we can do to support you during this challenging time.

McGuireWoods’ COVID-19 Response Team helps clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic. Lawyers in the firm’s 21 offices are ready to assist quickly on questions involving healthcare, labor and employment, education, real estate and more. For assistance, contact a team member listed or send an email to [email protected].

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.

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