COVID-19: FINRA and SEC Relief and Guidance for Broker-Dealers

Morgan Lewis

The US Securities and Exchange Commission and the Financial Industry Regulatory Authority recognize the significant impact of the coronavirus (COVID-19) pandemic on broker-dealers, investors, and other stakeholders, and have provided important guidance and relief to broker-dealers on how to meet some of these challenges.

This LawFlash addresses guidance issued prior to 5:00 pm on March 24. We will update this LawFlash to address relief and guidance published later on March 24 and in the days to come as additional relief and guidance is published.[1]

FINRA and SEC Status

Both the Financial Industry Regulatory Authority (FINRA) and the US Securities and Exchange Commission (SEC) are operating entirely remotely, but for “essential personnel.” Based on our direct experience to date, both organizations remain extremely responsive to email and telephone communications, including inquiries regarding COVID-19-related guidance and relief and also currently active matters (exams, membership applications, etc.).

FINRA has, however, adjusted its operational focus in recognition of the significant adjustments firms are making to comply with governmental restrictions on travel or to otherwise move staff to remote work in order to protect their health and safety. For example, FINRA will

  • continue its risk monitoring, market surveillance, and enforcement programs, but is prioritizing the highest-risk matters, focusing in particular on monitoring for fraud, illicit schemes, and other manipulative activities seeking to take advantage of the conditions created by COVID-19 and ongoing market volatility;
  • continue to engage in regular communications with many firms, and in some cases will make targeted requests for information regarding financial and operational capabilities, among other matters; and
  • temporarily limit new routine requests for information, including in connection with cycle exams, in recognition that the resources of firms are being redirected to focus on employee safety, client service, and critical operational issues.[2]

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has also shifted focus. For example, OCIE will

  • conduct exams offsite through correspondence, unless it is necessary to be onsite;
  • work with firms to address the timing of its requests, availability of firm personnel, and other matters to minimize disruption, with health and safety measures in mind;
  • ·not consider reliance on regulatory relief to be a risk factor utilized in determining whether to commence an exam (OCIE encourages firms to utilize available regulatory relief as needed); and
  • actively engage in ongoing outreach and other efforts with many firms to assess the impacts of COVID-19 and to gather information, including challenges with operational resiliency and implementation and effectiveness of firms’ business continuity plans (BCPs).

Business Continuity Planning     

FINRA issued Regulatory Notice 20-08 (RN 20-08) on March 9, 2020, to encourage broker-dealers to review their BCPs for preparedness for pandemic-related disruptions (such as absenteeism, teleworking, travel limitations, and technological problems) and to provide relief from certain regulatory obligations, as described further below. Among other things, FINRA encourages firms to prepare for pandemic-related disruptions by

  • evaluating whether a pandemic constitutes an “emergency or significant business disruption” requiring BCP activation;
  • ensuring supervisory systems are adequately designed to provide reasonable supervision of employees’ activities (regardless of their functions) while temporarily working from alternative or remote locations; and
  • taking steps to reduce the increased risk of cyber events posed by remote offices or telework arrangements, such as by: (1) ensuring that virtual private networks (VPNs) and other remote access systems are properly patched with available security updates; (2) checking that system entitlements are current; (3) employing the use of multifactor authentication to gain remote access to systems; and (4) reminding associated persons of cyber risks through education and other exercises that promote heightened vigilance.

FINRA Relief and Guidance

To date, FINRA has provided the COVID-19-related regulatory relief and additional guidance to firms as set forth below, through RN 20-08, published Frequently Asked Questions (FAQs), and otherwise on its COVID-19 web resource (FINRA COVID-19 Resource). FINRA continues to work on additional relief and guidance in coordination with other regulators and is expected to provide additional relief and guidance as the nature and impact of the COVID-19 pandemic evolves. Current relief and guidance includes the following:

Internal Inspections

  • FINRA stated in RN 20-08 that firms “may” need to temporarily postpone onsite internal inspections “of branch offices” during the pandemic and that the ability to complete this “annual regulatory obligation” in 2020 may need to be re-evaluated depending on the duration and severity of COVID-19. Although not explicit relief, we expect that FINRA’s reference to annual branch exams refers to exams of OSJs and branch offices that supervise one or more non-branch locations, as such exams must be conducted on a calendar-year basis.

Form U4

  • FINRA stated in RN 20-08 that registered representatives who temporarily relocate due to COVID-19 are not required to update their office of employment addresses on their Forms U4; and
  • Pursuant to an FAQ, firms may electronically file an initial or transfer Form U4 without obtaining the individual applicant’s manual (wet) signature if the firm
    • provides the applicant with a copy of the completed Form U4 prior to filing;
    • obtains the applicant’s written acknowledgment (which may be electronic) prior to filing that the information has been received and reviewed, and that the applicant agrees that the content is accurate and complete;
    • retains the written acknowledgment in accordance with Rule 17a-4(e)(1) under the Securities Exchange Act of 1934 (Exchange Act) and makes it available promptly upon regulatory request; and
    • obtains the applicant’s manual signature as soon as practicable. 

Fingerprints

  • In an FAQ, FINRA confirmed that it is temporarily extending the period for submitting fingerprint information under FINRA Rule 1010(d), which otherwise requires firms to submit fingerprint information for individual applicants no later than 30 days after FINRA receives the applicant’s Form U4. Specifically, firms that submitted, or will submit, an applicant’s initial or transfer Form U4 between February 15, 2020, and April 29, 2020, will have until May 30, 2020, to submit the necessary fingerprint information. This relief follows an exemptive order the SEC recently issued, described further below, providing temporary relief from the fingerprinting requirements of Section 17(f)(2) of the Exchange Act and Rule 17f-2 thereunder for the period of March 16, 2020, until May 30, 2020.

Form BR

  • FINRA stated in RN 20-08 that firms are not required to submit Forms BR for newly opened temporary office locations or space-sharing arrangements “established as a result of recent events.”

Emergency Office Relocations

  • Notwithstanding the Form U4 and Form BR relief noted above, FINRA advises firms to use best efforts to notify their Risk Monitoring Analysts as soon as possible after establishing new temporary office spaces or office-sharing arrangements if the locations are not currently registered as branch offices or identified as regular non-branch locations.
  • The notices should include the following, at a minimum:
    • The temporary office address
    • The names of each member firm that is using the location
    • The names of registered personnel at the location
    • A contact telephone number for the location[3]
    • The expected duration, if known
    • Whether the location will be shared with any other entities, and if so, the type(s) of business in which each of the other entities are engaged (e.g., but not limited to, an affiliated investment adviser or an organization in the securities business).

Regulatory Filings and Responses to FINRA Inquiries, Matters, and Investigations

  • In FAQs, FINRA, based on discussions with the SEC staff, informed firms that they would have additional time to file their annual reports and certain FOCUS Reports with FINRA. In particular, any member that (1) meets the exemptive provisions in Rule 15c3-3(k) under the Exchange Act or (2) files a Part IIA FOCUS Report, is being provided a
    • 30-calendar day extension for submitting its annual report, as specified under Rule 17a-5 under the Exchange Act, related to fiscal years ending in January 2020 through March 2020[4]; and
    • 10-business day extension for submitting any FOCUS Report related to a period ending in February 2020 through April 2020.[5]
  • Firms otherwise having difficulty making timely regulatory filings and responding to regulatory inquiries or investigations should contact their Risk Monitoring Analysts or the relevant FINRA department to seek extensions.
  • FINRA may waive applicable late fees incurred by a firm based on the firm’s particular circumstance.
  • If data communications are disrupted, firms should retain the relevant data until it can be transmitted to FINRA. 

Qualification Exams and Continuing Education

  • In RN 20-08, FINRA encouraged individuals with upcoming qualification exams or continuing education windows that are due to expire to contact FINRA to request courtesy cancellations or extensions. FINRA has since stated on the FINRA COVID-19 Resource, however, that
    • Prometric testing centers are closed in the United States and Canada for a period of 30 days, starting March 18, 2020, and that candidates who have an existing appointment will receive an email from Prometric with instructions on how to reschedule their appointment to a future date with no rescheduling fees applied. To change an existing appointment scheduled for April 16 or later, or to schedule a new appointment, FINRA advises candidates to access the Prometric website.
    • it “will extend all enrollment windows that are currently open and scheduled to expire by the end of May. Each FINRA-administered exam enrollment end date will be extended through the same end date of May 31, 2020.”
  • In an FAQ, FINRA also confirmed that individuals who were designated to function as principals under FINRA Rule 1210.04 prior to February 2, 2020, will be given until May 31, 2020, to pass the appropriate exam(s). Rule 1210.04 allows eligible individuals to function in a principal capacity for 120 calendar days before having to pass the appropriate examination(s).

Membership Proceedings

  • FINRA will grant extensions on new or continuing membership applications, if needed. 

SEC and SEC Staff Relief and Guidance

Like FINRA, the SEC and its staff have been working diligently to provide COVID-19-related relief from certain broker-dealer regulatory obligations.

Consolidated Audit Trail (CAT)

  • On March 16, 2020, the SEC staff issued a no-action letter related to CAT implementation, stating that it would not recommend enforcement action against participants (national securities exchanges and national securities associations)[6] that do not enforce implementation deadlines for the CAT against Industry Members.[7] Absent relief, reporting was to begin April 20, 2020, for Large Industry Members (and later for Small Industry Members). The purpose of the relief is to “allow firms to maintain focus on operational readiness and reduce operational risk” during the COVID-19 outbreak. The relief applies until May 20, 2020, although the SEC staff may extend it at a later time. 

Rule 17f-2 Fingerprinting

  • As noted above, on March 20, 2020, the SEC issued a conditional exemptive order temporarily exempting (i) transfer agents (TAs) from the requirements of Sections 17A and 17(f)(1) of the Exchange Act, as well as Rules 17Ad-1 through 17Ad-11, 17Ad-13 through 17Ad-20, and 17f-1 thereunder, and (ii) TAs “and other persons subject to such requirements, from the [fingerprinting] requirements of Section 17(f)(2) of the Exchange Act and Rule 17f-2 thereunder… ” (together, the Exempted Provisions). Because broker-dealers and their partners, directors, officers, and employees are subject to Rule 17f-2, the order applies to broker-dealers and their personnel, and firms relying on the order should email written notice to the SEC at tradingandmarkets@sec.gov by May 30, 2020, with the following:
    • Notice that the registrant or other person is relying on the order
    • A description of the specific Exempted Provisions the registrant or other person is unable to comply with and a statement of the reasons why, in good faith, the registrant or other person is unable to comply with such Exempted Provisions.
  • Additional conditions apply to TAs seeking to rely on this relief. We will address the TA relief in more detail in a separate LawFlash.

The Co-Directors of the SEC’s Division of Enforcement have also emphasized in a public statement the importance of maintaining market integrity and following corporate controls and procedures. For example, they noted that, given the unique circumstances COVID-19 is presenting:

  • material nonpublic information (MNPI) may hold even greater value than under normal circumstances, particularly if earnings reports or SEC disclosure filings are delayed due to COVID-19;
  • greater numbers of people may have access to MNPI, and that those with such access (such as directors, officers, employees, consultants, and other outside professionals) should be mindful of their obligations to keep this information confidential and to avoid violating the antifraud provisions of the federal securities laws (e.g., insider trading);
  • public companies should be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD, and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of MNPI; and
  • broker-dealers, investment advisers, and other registrants must comply with policies and procedures that are designed to prevent the misuse of MNPI.

Past Guidance on Pandemic and Disaster Preparedness

FINRA has previously provided guidance in connection with pandemics and other significant broad-based business disruptions, and has observed the following as key points firms might also consider[8]:

  • BCP “Triggers” – Firms might consider defining BCP activation “triggers,” such as linking activation to World Health Organization (WHO) declarations, Centers for Disease Control and Prevention (CDC) guidance, or events such as employees or their family members contracting the virus, infections in the vicinity of the firm, actions by local governments, schools, or health agencies, or directions from the firm’s parent company. Firms might also consider updating their plans to reflect the latest COVID-19 developments.
  • Partnering with Health Organizations – Partnering with federal, state, and local health organizations to obtain better information and priority access to medications and vaccines can aid in effective pandemic planning and response.
  • Institutional knowledge – Increased absenteeism can present unique vulnerabilities where vital institutional knowledge is vested in specific personnel. Firms might consider cross-training employees or creating step-by-step instructions so that other employees can fulfill the functions of absent ones.
  • Key Dependencies – Firms might consider identifying key dependencies and critical relationships (both internal and external) and the risks a pandemic poses to these relationships (e.g., dependencies on clearing firms, telecommunications networks, outsourcing/offshore providers, internal departments, mail service, utilities, or other counterparties), and possibly updating service-level agreements with vendors.
  • Customer Funds and Securities – Where offices have been relocated or customer calls are rerouted to another office, firms may need to deviate from standard operating procedures to accommodate customers who need to access their funds, but firms should exercise as much due diligence as possible in validating the identity of the customer as well as provide heightened supervision of these accounts. 

In response to Hurricane Katrina and the 2007 California wildfires, FINRA also noted the following, although FINRA has not yet provided similar guidance since the COVID-19 pandemic began:

  • Introducing Firms Unable to Conduct Business – Firms that cleared for introducing firms unable to conduct business were encouraged to accept liquidating orders from customers so that customers’ access to funds was not restricted. 
  • Margin – FINRA noted that it would accept margin extensions on a case-by-case basis for reason code “Acts of God,” for customers located in places affected by the disasters.

Other Developments Impacting Broker-Dealers

Federal guidelines have been issued and a growing list of states and local governments have imposed restrictions that seek to limit movement and gathering of people in an effort to slow the spread of COVID-19. We are following these developments on a state-by-state basis as they change daily and, in some cases, hourly. For more detailed information, and jurisdiction-by-jurisdiction analysis, please consult our Coronavirus COVID-19 resource page for contacts on our Financial Services COVID-19 Task Force.

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have launched a resource page to help keep you on top of developments as they unfold. Please check this resource page for additional information and the latest updates on the SEC’s response to COVID-19, as well as guidance from our lawyers relating to employment matters, data privacy concerns, supply chain disruption, immigration status requirements, remote work opportunities and challenges, and ongoing federal and state updates. 


[1] While this LawFlash discusses actions taken that address broker-dealers’ concerns specifically, Morgan Lewis has published LawFlashes regarding all regulatory action and will continue to do so. Please see our Coronavirus COVID-19 resource page for our LawFlashes addressing SEC, CFTC, and other relief. The resource page will be updated as additional regulatory actions are taken.

[2] For any pending requests relating to an ongoing routine cycle examination, FINRA advises firms to contact the assigned FINRA exam staff for guidance.

[3] We note that cellular telephone numbers should be acceptable contact telephone numbers, but firms may want to consider requesting landline telephone numbers from their personnel, to the extent available, in the unlikely event that the cellular system were to become overwhelmed or fail for a period of time, which has happened in the past.

[4] Rule 17a-5(d)(5) under the Exchange Act requires members to submit their annual reports to FINRA no later than 60 calendar days after the date of the member’s fiscal year end. The procedures set forth under Interpretation /01 under Rule 17a-5(m)(1) are waived for purposes of this extension.

[5] Every member is required to file a Financial and Operational Combined Uniform Single (FOCUS) Report as specified under Rule 17a-5 under the Exchange Act. Rule 17a-5(a) requires members to submit their FOCUS Reports no later than 17 business days after month-end. The written application and procedures required pursuant to Rule 17a-5(a)(6) under the Exchange Act, and the related Interpretations, are waived for purposes of this extension.

[6] “Participants” currently include the BOX Exchange LLC; Cboe BYX Exchange, Inc.; Cboe BZX Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Cboe Exchange, Inc.; FINRA; Investors Exchange LLC; Long Term Stock Exchange, Inc.; Miami International Securities Exchange LLC; MIAX Emerald, LLC; MIAX PEARL, LLC; Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; Nasdaq PHLX LLC; The Nasdaq Stock Market LLC; New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE American LLC; NYSE Chicago, Inc.; and NYSE National, Inc. The list of “Participants” is subject to change.

[7] “Industry Members” include any member of a national securities exchange or a member of a national securities association.

[8] See FINRA Provides Guidance on Pandemic Preparedness, FINRA Regulatory Notice 09-59; Guidance for Members Affected by Hurricane Katrina, NASD Notice to Members 05-57; Guidance for Firms Affected by the California Wildfires, FINRA Regulatory Notice 07-49; Guidance to Members Affected by Hurricane Sandy, FINRA Regulatory Notice 12-45.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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