Financial Services Regulators and SROs Continue to React to COVID-19 Developments

As reported in prior McGuireWoods alerts, 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.

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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