Update: Our May 21, 2020, alert provides our most recent discussion of
information and guidance issued by the SEC, FINRA, MSRB and SIFMA.
As reported in prior McGuireWoods alerts (see
March 26 and
March 17
updates), financial services regulators have been issuing guidance and
relief to assist the industry as financial services firms and public
companies continue to deal with the impact COVID-19 is having on day-to-day
business operations. As discussed below, this guidance and industrywide
relief continues (with some notable exceptions, also discussed below).
With business operating “not as usual,” cybersecurity risks and phishing
scams to exploit COVID-19 have increased, and regulators and trade
associations have provided additional guidance and reminders to be
vigilant.
U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
Regulation Best Interest (NO Delay to Implementation
Date)
While the SEC has broadly provided relief to market participants in many
areas, it also asserted, through a
statement
by Chairman Jay Clayton, that because Regulation Best Interest “will
significantly benefit Main Street investors — we believe that the June 30,
2020 compliance date for [Regulation Best Interest] and other requirements,
including the requirement to file and begin delivering Form CRS, remains
appropriate.” Clayton indicated that firms who are unable to meet the
Regulation Best Interest or other requirements because of COVID-19 can
engage with the SEC regarding such challenges, but it does not appear that
any broadly applicable relief is likely in the near term.
Two additional points of note:
- Following the June 30 compliance date, the examiners will focus on
whether there has been a “good faith effort” to comply and provide an
opportunity for firms to work with the staff on compliance and other
issues.
- Office of Compliance, Inspections & Examinations will issue two risk
alerts shortly, one providing information to broker-dealers on the scope
and content of Regulation Best Interest examinations and the other to
broker-dealers and investment advisors with similar information on Form
CRS.
Registered Investment Companies (Additional Relief)
To provide registered investment companies (RICs) with additional avenues
for liquidity, the SEC’s Division of Investment Management issued a
no-action letter
to permit certain RICs to sell debt securities to affiliates without
complying with the affiliated transaction provisions of the Investment
Company Act, as long as certain conditions are met. These conditions
include, without limitation, that the purchase price for the debt
securities is paid in cash and that, within one business day of the
purchase, the selling RIC publicly posts on its website and provides to the
SEC staff, at IM-EmergencyRelief@sec.gov,
name of the seller, name of the purchaser, debt security purchased, amount
purchased and purchase price.
The no-action relief is intended to provide RICs with additional avenues
for liquidity considering the current dislocations in the debt markets. The
relief will cease upon notice from the SEC staff.
Municipal Advisors
Annual Report (Update Relief)
- The SEC issued an
order
on March 26, 2020, providing flexibility for municipal advisors with regard
to their annual updates to Form MA if they are affected by COVID-19. The
relief extends to advisors whose Form MA updates are due between March 26,
2020, and June 30, 2020.
- Advisors are given an additional 45 days from the original due date,
provided that the advisor:
- informs SEC staff, at munis@sec.gov,
that it is relying on this order and states it cannot timely file an
update; and
- discloses on its public website that it is relying on this order and the
reasons why it is doing so.
FINRA
Cybersecurity Guidance
- On March 26, 2020, FINRA issued an
information notice
in which it discussed heightened cybersecurity risks firms may face as
their associated persons work remotely and cope with the stress and
personal challenges posed by COVID-19.
- FINRA recommended that firms consider certain measures, including:
- Secure Network Connections. Office and home networks
should use a secure network connection to access the firm’s work
environment and ensure that Wi-Fi connections use a stringent security
protocol.
- Updates and Patches. Software updates and patches to
routers and other applications should be checked and applied on a timely
basis and anti-virus and anti-malware software should be installed on
computers and mobile devices.
- Unique Usernames and Strong Passwords. Default user
names and passwords on home networking equipment should be changed.
- Training and Reminders. Provide staff with training on
connecting securely from a remote location and avoiding the scams and other
attacks described above.
- Phishing Scams, Unauthorized Access and Other Attacks.
FINRA reminded firms and associated persons to be extra vigilant
regarding increased scams and attacks that fraudsters are using to
exploit the COVID-19 crisis, including phishing scams, unsolicited
calls from a “Helpdesk” requesting passwords, and malicious links in
emails, online sites and unofficial download sites.
Podcast on COVID-19 Challenges
On March 31, 2020, FINRA released its
Unscripted Podcast, addressing business in the time of COVID-19.
Key points in the podcast are noted below.
- FINRA’s main priority during these challenging times is continuing to
protect investors and market integrity.
- The key takeaway for firms in implementing business continuity plans is
to focus on adjusting to the environment, protecting client assets, serving
clients and keeping employees safe.
- Firms are encouraged to contact the Risk Monitoring Analyst with questions or concerns.
- Firms and their employees should be aware of the increased risk of cyber
events associated with remote working.
- FINRA has been working to extend relief to firms on deadlines for reports
or in-person examinations.
- The podcast concluded by noting that firms should continue to monitor
FINRA’s COVID-19 page and should continue to raise any issues and questions
to the regulator.
Postponements of Proceedings
-
Arbitration and Mediation Proceedings.
FINRA extended the postponement of all in-person arbitration and
mediation proceedings scheduled through May 31, 2020. FINRA notes,
however, that all case deadlines will continue to apply and must be
timely met unless the parties jointly agree otherwise.
-
Disciplinary Hearings.
The Office of Hearing Officers (OHO) has postponed hearings of
disciplinary proceedings scheduled through April 30, with the exception
of pending expedited proceedings, which are not held in person. OHO
will serve and accept service of notices, pleadings and other documents
by email.
For details, visit
FINRA’s COVID-19 informational page
online.
COMMODITY FUTURES TRADING COMMISSION (CFTC) and NATIONAL FUTURES
ASSOCIATION (NFA) GUIDANCE
CFTC (Foreign Broker Relief)
- The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO)
issued a no-action letter
permitting certain foreign brokers to accept orders from U.S. persons in
the event a futures commission merchant’s (FCM) registered associated
persons are unable to handle the order flow of U.S. customers due to their
absence from normal business sites in response to the COVID-19 pandemic.
- Conditions for obtaining relief include, among other things:
- Foreign broker is an affiliate of an FCM registered with the CFTC;
- Foreign broker is appropriately licensed or registered in a jurisdiction
for which the CFTC has issued an exemptive order under Regulation 30.10;
- Foreign broker introduces on a fully disclosed basis to FCMs registered
with the CFTC only institutional customers, as defined in CFTC Regulation
1.3;
- Each FCM with which the foreign broker is affiliated files with NFA an
acknowledgement it will be jointly and severally liable for any violations
of the Commodity Exchange Act or the CFTC regulations; and
- Foreign broker provides written notice to DSIO when it begins reliance on
the relief and if it ceases to rely on this letter prior to Sept. 30, 2020.
NFA (Introducing Broker Relief)
- NFA issued self-executing relief to introducing brokers (IBs) that
provided them with a 30-day extension for filing certified financial
reports for fiscal years ending in December 2019 through March 2020.
- NFA also provided a 10-business-day extension for IBs filing the
semi-annual, quarterly or monthly reports for reporting periods ending
February through April 2020.
For details, see NFA’s
March 26 Notice to Members.
STATE REGULATORS
State regulators have also been active in issuing guidance and relief
regarding the impacts of COVID-19.
Fraud Alert.
The North American Securities Administrators Association (NASAA) released
an
alert
on March 30, 2020, warning investors to be on guard against the anticipated
increase of fraudulent investment schemes as a result of the ongoing
pandemic. In particular, NASAA warned investors to be on the lookout for
investments specifically tied to the threat of COVID-19, as these schemes
often appear legitimate because they draw upon current news, medical
reports, and social and political developments. NASAA also cautions that
scammers will seek to take advantage of concerns with the volatility in the
securities markets to promote “safe” investments with “guaranteed returns.”
NASAA urges investors to remain vigilant, and the alert provides guidelines
and additional resources to protect against potential schemes.
Aggregation of State Orders.
NASAA has also established a comprehensive
resource page
collecting COVID-19-related updates from state and provincial securities
regulators.
Additional examples of state relief include the following:
Florida Office of Financial Regulation
The Florida Office of Financial Regulation (OFR) issued an
emergency order
on March 26, 2020, providing the following extensions.
-
Division of Consumer Finance:
45-day extension for annual financial condition reports or financial
statements with deadlines in March or April 2020.
-
Division of Securities:
45-day extension for annual updating amendments or financial statements
with deadlines in March or April 2020.
-
Division of Financial Institutions
- 45-day extension for all state trust companies and registered family
trust companies to file the first quarter call or financial report.
- 45-day extension for all international branches and international bank
agencies to file the first quarter capital equivalency and asset
maintenance report.
- 30-day extension for state banks, credit unions, international branches
and international bank agencies to file the March 31 consolidated reports
of condition and income.
- 45-day extension for all state financial institutions with internal audit
completion and related reporting deadlines in March or April 2020.
- 45-day extension for state-chartered banks, trust companies and credit
unions that must hold annual or special meetings and file related reports
in March or April 2020.
- No late fees shall be assessed in connection with any deadline for action
or reporting or filing that is extended or suspended during this period.
California Department of Business Oversight
On March 30, 2020, the California Department of Business Oversight issued
guidance
for broker-dealers and investment advisors providing them 45-day extensions
to the deadlines for filing the following:
- Notices of Changes (Note: This change may affect filing due dates for the
Form BD, Form ADV, Form ADV Annual Updating Amendment, Form U4 and Form
U5.)
- Form PF for private fund advisors (Form PF is part of the Form ADV
Amendment filings to Part 1A for Exempt Reporting Advisors.)
- Annual Reports (These are otherwise due within 90 days of the investment
adviser’s or broker-dealer’s fiscal year end.)
- Interim Reports (These are otherwise due within 15 days after an
enumerated triggering event.)
The department also issued temporary relief from manual signature
requirements for Form U3 filings, subject to certain requirements.
New York Office of the Attorney General
On March 24, 2020, the New York Office of the Attorney General published a
Notice
of Coronavirus Conditional Relief and Limited Service Continuity Plan by
the Investor Protection Bureau (IPB) which provided the following:
- 90-day extension for any registration, renewal, amendment, financial
statement or NY-IAQ filing that would have been due between March 1, 2020,
and April 30, 2020.
- All filings required to be submitted directly to IPB or the Department of
Law: (i) under GBL § 359-e or GBL § 359-eee, 13 NYCRR 10 or 13 NYCRR 11
related to registration, other than real estate related filings; and (ii)
under GBL §680 et seq. or 13 NYCRR 200, shall be submitted by email in addition to the required paper and/or CD filings.
SIFMA
As noted in McGuireWoods’ earlier alert, SIFMA’s
BCP and COVID-19 site
has links to updated industry guidance, Cybersecurity and Infrastructure
Security Agency (CISA) guidance, and regulator guidance.
- Among other things, SIFMA made the following recommendation for essential
critical infrastructure workers (those who need to travel locally or
farther during state shelter-in-place orders).
- Financial firms whose essential staff may be traveling to critical
facilities during hours when shelter-in-place directives are in force
should physically carry on their persons the following four documents, the
first two of which can be printed from links on SIFMA’s webpage:
- Memorandum on Identification of Essential Critical Infrastructure Workers
During COVID-19 Response (CISA, 3/20/2020);
- Statement by Treasury Secretary Steven Mnuchin on Financial Services
Sector Essential Critical Infrastructure Workers, (Department of the
Treasury, 3/22/2020);
- Documentation, on company letterhead, detailing work-related travel and
how it aligns with the financial services sector list of essential critical
infrastructure workers; and
- A company identification card and government-issued ID.
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 else 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 or send an email to covid-19@mcguirewoods.com.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.
