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
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, including with respect to key extended deadlines for
compliance with supervisory and other obligations.
The regulators seem to be considering the implications of COVID-19, not
only for their registrants but also the downstream impacts. For example, in
connection with the relief issued to business development companies (BDCs)
discussed below, SEC Chairman Jay Clayton noted, “Many small and
medium-sized businesses across the country are struggling due to the effect
of COVID-19, and today’s temporary, targeted action will enable BDCs to
provide their businesses with additional financial support during these
U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
Custody Rule Relief
On April 2, 2020, the staff of the SEC’s Division of Investment Management
responses to questions about the Custody Rule
to address COVID-19-related compliance challenges with respect to the
requirement under Rule 206(4)-2 under the Investment Advisers Act of 1940
(the Custody Rule) that physical certificates for privately issued
securities be maintained at a qualified custodian.
The staff stated that, where newly acquired physical certificates cannot be
placed immediately with a qualified custodian due to COVID-19-related
closures and restrictions, enforcement action would not be recommended for
failure to maintain the physical certificate by a qualified custodian,
provided certain conditions are met, including the following:
- Physical certificates are used only to effect a transfer or to otherwise
facilitate a change in beneficial ownership of the security with the prior
consent of the issuer or holder of the outstanding securities.
- Physical certificates are appropriately safeguarded.
- The adviser keeps a record of the custodian’s COVID-19-related closure.
BDC Relief to Support Portfolio Companies
On April 8, 2020, the SEC issued a
temporary exemptive order
to permit BDCs to (i) issue and sell senior securities in order to provide
capital to the small and medium-sized companies in which they invest that
may be struggling with the impacts of COVID-19 and related market impacts,
and (ii) participate in investments in these companies alongside certain
private funds that are affiliated with the BDC, in each case beyond what
normally would be permitted under the Investment Company Act of 1940 (ICA).
The relief under the exemptive order is available until the earlier of (i)
Dec. 31, 2020, and (ii) the date by which the BDC ceases to rely on the
- Issuance of Senior Securities. The SEC recognized that BDCs may be limited in their ability to issue
senior securities if they use the current valuation of their portfolio
companies facing financial challenges due to the minimum asset coverage
requirements to which the BDCs are subject under the ICA. Under the
order, the SEC is permitting BDCs to use an “adjusted asset coverage
ratio,” which uses portfolio companies’ Dec. 31, 2019, valuations
rather than their most recent quarter valuations in determining whether
it may issue senior securities, provided that, among other things:
- the adjusted asset coverage ratio and adjusted portfolio value are
calculated in accordance with the order;
- the BDC makes an election to rely on the order by filing on Form 8-K; and
- the board of the BDC has determined the issuance of the senior securities
is in the best interest of the BDC after taking into account certain
factors, including, without limitation, advice from an “independent
- Co-Investments. Rule 17d-1 and other provisions
under the ICA impose limitations on a BDC’s ability to enter into
co-investment transactions with its affiliates. Under the order, a BDC
that previously received an order from the SEC permitting co-investment
transactions in portfolio companies with certain affiliated persons may
make follow-on investments with such affiliated persons, provided that,
among other things:
- any such transaction is otherwise effected in accordance with the terms
and conditions of the existing co-investment order; and
- the board and a required majority review the proposed follow-on
investment, both on a standalone basis and in relation to the total
economic exposure of the BDC to the issue.
Relief From Certain Paper Submission Requirements
On April 2, 2020, staff of the Division of Trading and Markets issued a
temporary staff statement
providing relief with respect to certain paper submission requirements.
Among other things, the staff provided relief to broker-dealers with
respect to the paper filing of a notarized annual report pursuant to Securities Exchange Act of 1934 Rule 17a-5(d)(1)(i)(C).
For the period March 16, 2020, to June 30, 2020, the staff will not
recommend enforcement action for failure to comply with the paper format
requirements and manual signature requirements provided that, among other
- the filer or submitter of the impacted paper submission contacts division
staff by emailing firstname.lastname@example.org to
discuss the appropriate means of filing or submitting; and
- the signatory of an impacted paper submission retains a manually signed
signature page or other document that adopts the typed signature on the
Further, the staff will not recommend enforcement action for failure to
comply with the notarization requirement for any of the impacted paper
submissions or in the electronic filings of broker-dealers’ annual reports
required under paragraph (d) or Rule 17a-5 due to the SEC no later than
June 30, 2020, provided that:
- the filer indicates on the document that it is relying on this relief and
difficulties from COVID-19; and
- the filer notifies division staff at
or if the filer is a broker-dealer, notifies its designated examining
authority in writing that it was unable to obtain notarization because of
Sweep Program Relief
The staff of the Division of Trading and Markets of the SEC issued a
no action letter
on March 30, 2020, to the Capital Steering Committee of the Securities
Industry and Financial Markets Association (SIFMA). This letter provides
broker-dealers flexibility to treat unsecured receivables from bank sweep
accounts as an allowable asset that is not deducted from net worth for
purposes of SEC Rule 15c3-1.
In instances when a broker-dealer has established a sweep program and there
is a one-day lag in funds transferring between a customer’s bank account
and its securities account, the staff will not recommend action under Rule
15c3-1 if the broker-dealer treats a receivable from a bank account
established as part of a sweep program as an allowable asset that is not
deducted from net worth for net capital purposes under 15c3-1 for one
business day from the date the receivable is created. It must, however,
meet certain other conditions:
- The net receivable is created through the pre-funding of a customer’s
brokerage account as part of an FDIC-insured bank sweep program
- The net receivable comes from an FDIC-insured bank in which a sweep
program deposit account has been established.
- The broker-dealer has a legally enforceable right to demand and receive
payment of the receivable.
- The customer cannot access the FDIC-insured bank sweep account directly
or without going through the broker-dealer.
SEC Requests that Advisers and Funds Email Hearing Requests
The SEC’s Division of Investment Management issued an
asking that interested persons seeking to be heard with respect to ICA
applications email the SEC at Secretarys-Office@sec.gov
rather than following the typical procedures, which include writing to the
SEC at its physical mailing address.
FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)
U4 Disclosure Events
On April 13, 2020, FINRA posted a new
frequently asked questions
section to its COVID-19 resource page regarding Paycheck Protection Program
(PPP) loans. The PPP allows eligible individuals and small businesses to obtain loans
for use during the COVID-19 crisis, which are then eligible for forgiveness
if certain terms are satisfied.
If a registered person or a business he or she controls obtains a PPP loan
and all or part of the loan is forgiven, the question is whether the
registered person will be required to report that forgiveness in response
to Question 14K on a Form U4 as a "compromise with a creditor."
FINRA’s response: Forgiveness of the loan is not disclosable as a
compromise with creditors, provided the loan forgiveness is consistent with
the original terms of the loan. FINRA's guidance on Question 14K explains
that a "compromise with creditors" occurs when a creditor agrees to accept
less than the full amount owed, "unless such an agreement is included in
the original terms of the loan (e.g., forgivable loan...)." Because a PPP
loan contemplates forgiveness as part of the loan, such forgiveness would
be consistent with the loan's original terms, and therefore would not
constitute a "compromise with creditors" for purposes of Form U4 Question
However, FINRA cautions that any forgiveness beyond the original terms of
the loan would be considered a "compromise with creditors" and would have
to be reported.
MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB)
On April 9, 2020, the MSRB issued Notice 2020-09, MSRB Amends Certain Rules
to Provide Regulatory Relief During COVID-19 Pandemic. The notice announced
the following relief:
- Suspension of late fees owed for March 1, 2020, through July 31, 2020
(Rule A-11, fee assessments for municipal adviser professionals, for annual
fees owed for MSRB FY 2020; and Rule A-12(d), late fees related to
assessments under the rule; and for fees assessed under Rule A-13 on
underwriting and transaction assessments).
- Extension of time to complete certain supervisory functions for a
temporary period, specifically, certain annual supervisory obligations
under Rule G-27 and certain supervisory and compliance obligations of
municipal advisers under Rule G-44, provided that such supervisory
functions are completed on or before March 31, 2021.
- Extension of time to complete certain professional qualification
- Extension of the compliance date of certain rule changes that have yet to
be implemented. Specifically, the Nov. 30, 2020, compliance date for the
amended and restated guidance regarding the fair dealing obligations
underwriters owe to issuers of municipal securities under MSRB Rule G-17,
was proposed to be extended until March 31, 2021. Further, the compliance
date of Nov. 30, 2020, for amendments to Form G-32 (designed to collect new
data elements from underwriters related to primary offerings of municipal
securities through the MSRB’s Electronic Municipal Market Access, or EMMA®,
Dataport system), is proposed to be extended until March 31, 2021.
On April 2, 2020, the MSRB began publishing a
to assist market participants, policymakers and the general public with
identifying disclosures submitted to EMMA by issuers of municipal
securities that reference COVID-19. The disclosures provide information on
how states and municipalities are grappling with the impact of COVID-19 on
their revenues and ability to finance essential public services. According
to the MSRB, from Jan. 1, 2020, through March 30, 2020, the EMMA system
- 506 COVID-19-related continuing disclosures out of a total of 43,667
continuing disclosures, and
- 125 COVID-19-related primary market disclosures out of 2,548 total
primary market disclosures.
Issuers in the state of California submitted the highest number of
disclosures across all states, with a total of 97 COVID-19-related primary
market and continuing disclosures.
The North American Securities Administrators Association (NASAA) has
established a COVID-19 working group to help coordinate responses to
COVID-19-related issues and engage with other regulators. Please refer to
NASAA COVID-19 page
for updates on specific relief issued by state and provincial securities
As noted in McGuireWoods’ earlier alert, SIFMA’s
BCP and COVID-19 site
has links to updated regulatory guidance, industry guidance, and
Cybersecurity and Infrastructure Security Agency (CISA) guidance.
SIFMA President and CEO Ken Bentsen has started a series of podcasts with
different guests on the COVID-19 pandemic. On March 18, he discussed
business continuity planning efforts
to protect personnel and maintain operational resiliency during the
COVID-19 pandemic, and on April 6, he discussed the
passed by Congress.
Additionally, SIFMA has recently taken the following actions in response to
the COVID-19 pandemic.
On March 25, 2020, SIFMA submitted a
to the SEC outlining a non-exhaustive list of issues raised by the industry
- Wet signatures
- DTCC processing of physical securities
- Regulation SHO
- Brokers relying on Rule 15c3-3(k)(2)
- Quarterly box count requirements
- Medallion processing
- Transfer agent exemptions
On March 25, 2020, SIFMA submitted
for deadline extensions on behalf of its member firms to the U.S.
Department of Treasury and Internal Revenue Service:
- Information returns and other filing extensions
- Form 990-T penalty and filing relief
- Responsible officer certification, qualified intermediary, withholding
foreign partnership and withholding foreign trust agreements
- Temporary postponement of IRS automatic notices
- Flexibility regarding documentation requirements
- Impact on regulatory rulemaking
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.
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