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
In recent weeks, regulators have issued guidance regarding the implication
of the Paycheck Protection Program (PPP) and the loans issued thereunder
April 21 update). The Commodity Futures Trading Commission (CFTC) and National Futures
Association (NFA) continued the trend this week, as discussed further
Regulators also continue to try to balance investor protection interests
with the need for flexibility in this unusual environment. For example, in
a new FAQ, the Financial Industry Regulatory Authority (FINRA) emphasized
the need for firms to pay close attention to their policies and procedures
governing markup disclosures and trade confirmation reporting for trades in
fixed income securities given the current market conditions. Also, in a
discussing the Net Capital Letter (defined below), the director of the
CFTC’s Division of Swap Dealer and Intermediary Oversight emphasized that
it “is a key priority for the CFTC to ensure that markets remain orderly
and liquid in the current environment” and highlighted the importance of
ensuring that intermediaries are able to continue trading activities.
Similarly, in announcing the
formation of the U.S. Securities and Exchange Commission (SEC)
cross-divisional COVID-19 team, Chairman Jay Clayton observed that the SEC
“often must take into account complexities, interconnections and
continually evolving dynamics of our markets.” The cross-divisional team
will be a senior-level group dedicated to assisting the SEC in (1) SEC and
Staff actions and analysis related to the effects of COVID-19 on markets,
issuers and investors — including “Main Street investors”; and (2)
responding to information, analysis and assistance requests from other
regulators and the public sector.
U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
SEC Division of Trading and Markets Broker-Dealer Financial
Responsibility Rules FAQs
On April 22, 2020, the Staff of the Division of Trading and Markets of the
SEC released two
about certain provisions of the broker-dealer financial responsibility
rules and their application during the COVID-19 pandemic.
- Check Transmission - The Staff will not recommend enforcement action against
broker-dealers that cannot access their offices during April, May or
June and that are therefore unable to promptly transmit customer checks
as required by Rule 15c3-3 under the Securities and Exchange Act of
1934, provided that the broker-dealer:
- transmits the checks as soon as is practicable;
- takes reasonable steps to notify customers of alternate ways to fund
their accounts and that the processing of checks may be delayed because of
- notifies the SEC’s Office of Compliance Inspections and Examinations at
OCIE-COVID@sec.gov and its FINRA
Risk Monitoring Analyst of the nature of the problem in forwarding checks
and the steps being taken to notify customers.
- Physical Certificate Counts - The Staff will not recommend enforcement action against companies
that do not conduct their quarterly securities count of physical
certificates due to the inability to access them during the months of
April, May or June, provided that the broker-dealer:
- notifies the SEC’s Office of Compliance Inspections and Examinations at
OCIE-COVID@sec.gov and its FINRA
Risk Monitoring Analyst of its problem in counting physical certificates
and provides an estimate of the number and value of the certificates that
cannot be counted; and
- makes and retains records of the movements of physical certificates that
are received or delivered and were not counted during the impacted period.
FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)
Fixed Income Disclosure
On April 24, 2020, FINRA issued a
addressing firms’ obligations to provide customers with fixed income markup
disclosure under FINRA Rule 2232 in light of the volatile market conditions
due to the COVID-19 pandemic.
- FINRA noted that “where customer trades are not tied to immediately
offsetting principal trades, it may be more difficult for a firm to
evaluate whether its offsetting principal trades remain reasonably
indicative of [Prevailing Market Price (PMP)], based on the factors
identified in Rule 2121 and applicable guidance … and that firms may
generate a higher number of exceptions that they evaluate as part of their
supervisory review process.”
- FINRA cited to existing guidance, including FAQs 3.5.1 (price and confirmation corrections) and 3.8.1 (PMP
determinations), and the importance of documenting reviews and corrections,
- “While FAQ 3.8.1 states that FINRA expects it will be rare for the PMP of
a security to be corrected based on exception reporting, FINRA understands
that volatile market conditions resulting from the COVID-19 pandemic may
impact the rate at which such corrections occur. Firms that perform an
exception review process after they issue confirmations with markup
disclosure should continue to follow existing guidance, including FAQs
3.5.1 and 3.8.1, on providing corrected confirmations when needed.”
- “In all cases, firms should take particular care to document the basis
for correcting a PMP and to apply their policies and procedures
consistently, in line with applicable guidance.”
Funding Portals - Gross Income Assessments
On April 23, 2020, FINRA issued two FAQs addressing Funding Portal Gross
Income Assessments (FPGIA).
- FINRA provided relief similar to the allowances extended to small
firms. FINRA is permitting funding portal members to treat the invoices,
distributed at the end of April and due in 30 days, as billed as of Aug. 1,
2020, rather than as due in full within 30 days of the invoice. Further,
funding portal members that choose to do so may pay 50 percent of the
amount due on Sept. 1, 2020, and the remaining 50 percent on Dec. 1, 2020.
- The second FAQ addressed payment of the FPGIA if a firm terminates its
membership, stating that if a funding portal member terminates FINRA
membership before Sept. 1, 2020, it will not be expected to pay the FPGIA
CFTC AND NFA GUIDANCE
On April 23, 2020, the CFTC’s Division of Swap Dealer and Intermediary
Oversight (DISO) issued a no-action letter
(the Net Capital Letter) providing relief to futures commission merchants
(FCMs) and introducing brokers (IBs) to address net capital treatment in
regard to the net capital treatment of loans obtained by FCMs and IBs under
the PPP (PPP loans). The Net Capital Letter provides that, in calculations
for compliance with the CFTC net capital requirements, FCMs and IBs can add
back to their capital the eligible forgivable expense amount under the PPP
loan. Among other things, the relief is conditioned on the FCM/IB:
- ensuring that the amount of the add-back does not exceed the balance
sheet liability for the PPP loan; and
- reporting the add-back on line 3070 of the applicable Form 1-FR-IB or
Form 1-FR-FCM (provided that IBs and FCMs that are SEC-registered
broker-dealers may continue to file a FOCUS Report in lieu of a Form
1-FR-IB or Form 1-FR-FCM).
The Net Capital Letter also permits any FCM or IB that is an SEC-registered
broker-dealer and a small firm (as defined by the FINRA by-laws) to add
back to its capital any accrued and unpaid FINRA 2020 annual assessments
that FINRA is permitting small firms to add back in accordance with the
April 2, 2020, FINRA FAQ.
The National Futures Association (NFA) separately issued a notice
confirming that FCMs and IBs in compliance with the Net Capital Letter will
be deemed in compliance with the NFA’s related net capital requirements for
FCMs and IBs.
On April 24, 2020, the CFTC’s DISO issued another no-action letter
providing relief, in light of the difficulties of obtaining or processing
fingerprints during COVID-19, from the fingerprinting requirements for
principals and associated persons (APs) of CFTC registrants. The no-action
relief will be in effect for 90 days from the date of the letter or until
such earlier date as NFA notifies the public that it has resumed the
processing of fingerprints. Among other things, principals and APs of
registrants and applicants for registration relying upon the relief
provided herein must submit their fingerprints to NFA within 30 days of
NFA’s public announcement of its resumption of fingerprint processing.
On April 16, 2020, the North American Securities Administrators Association
(NASAA) released its
NASAA Member COVID-19 Regulatory Response Overview Chart
outlining the operational status of state securities regulators and any
regulatory relief granted in response to the ongoing COVID-19 crisis. In
releasing the chart, Christopher Gerold, NASAA president and chief of the
New Jersey Bureau of Securities, stated that “the most important message
we’re hearing is that state securities regulators are maintaining essential
NASAA also reported that virtually all states continue to process licensing
applications via CRD/IARD systems with little or no disruptions, and nearly
all states are providing regulatory relief to licensees and registrants
adversely impacted by COVID-19.
NASAA and FINRA Remote Licensing Exam Update
On April 27, 2020, NASAA announced that it is working with FINRA, with
input from industry regulators, to accelerate the delivery of online
licensing testing services that will be administered remotely by test
delivery provider Prometric. NASAA is currently conducting a pilot of the
online testing service, and expects to launch the service on a limited
basis in the near future, starting with SIE, Series 6, Series 7, Series 63,
and Series 66. Additional details will be available on FINRA’s COVID-19
page, starting May 1, 2020.
Prometric also announced its intention to open select test centers in
limited geographic locations as early as May 1. Updates on test center
availability and COVID-19 impacts are available on the
Prometric COVID-19 page.
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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