Update No. 5: Financial Regulators, SROs Continue Providing COVID-19-Related Relief

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 April 15, April 6, 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.

Regulators generally continue to convey a tone of cooperation and responsiveness with respect to the challenges facing industry participants. As noted in a recent statement by the SEC’s Office of Compliance Inspections and Examinations and reiterated in the IM FAQs (defined and discussed below), regulators recognize “health and other measures necessitated by COVID-19 may significantly alter the operations of registrants in the securities markets” and “encourage registrants to utilize available regulatory relief as needed.”

U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

Division of Investment Management COVID-19 Response FAQs

On April 14, 2020, the Staff of the Division of Investment Management posted a series of questions and answers (IM FAQs) related to its response to COVID-19. Among other things, the IM FAQs summarized certain previously issued relief and guidance applicable to funds, investment advisers and broker-dealers (see McGuireWoods’ March 26 update). The IM FAQs also addressed, among other things, new questions regarding (i) the ability of closed-end funds to rely on the previously issued relief and (ii) Form N-2 compliance.

Closed-End Fund Short-Term Funding – The Staff clarified that the temporary borrowing and lending flexibility it granted in its March 23, 2020, relief (see the March 26 update) does not extend to closed-end funds. The Staff encouraged closed-end funds seeking relief to contact the Division of Investment Management.
Closed-End Fund NAV Decline Disclosure – Form N-2 generally requires a closed-end fund to suspend its prospectus if the fund’s net asset value declines more than 10 percent from the fund’s net asset value as of the effective date of its registration statement until an amendment to the registration statement has been filed. The Staff stated that, if a closed-end fund’s net asset value declines more than 10 percent due to COVID-19-related market conditions, it can satisfy this disclosure requirement by filing a prospectus supplement rather than an amendment to its registration statement. The Staff noted that it would appreciate prior notice of such supplement to its Disclosure Review and Accounting Office at least one business day in advance of filing the prospectus supplement. The Staff also suggested some potential disclosures for the funds to consider, including, among other things, an explanation of why the net asset value has fallen.

Statement on Timely Delivery of Information to Mutual Fund Shareholders

On April 14, 2020, the Staff of the Division of Investment Management issued a statement on the importance of providing timely and material information to registered investment company (RIC) investors.

Disclosure Updates – The Staff encouraged RICs to consider risk disclosure updates and prospectus supplements to reflect the impacts of COVID-19.
Prospectus Delivery to New Investors – The Staff reiterated that previously granted relief relating to prospectus delivery (see March 26 update) is limited to delivery to existing investors. With respect to the sales of investment company shares to new purchasers, RICS are still required to deliver the company’s prospectus or prospectus summary in a timely manner based upon the delivery preferences expressed by the investor.

CAT Broker-Dealer Exemptive Relief

On April 20, 2020, the SEC issued two Exemptive Orders in connection with its Consolidated Audit Trail (CAT) implementation. The SEC noted the challenges posed by COVID-19 but also emphasized the importance of the CAT initiative.

Reporting Timeline – In the first Order, the SEC established an extended phased CAT reporting timeline for broker-dealers, provided that broker-dealers comply with certain testing and other conditions. The updated phase-in schedule is as follows: June 22, 2020: Initial equities reporting for large broker-dealers and small broker-dealers that currently report to Financial Industry Regulatory Authority Order Audit Trail System (OATS);July 20, 2020: Initial options reporting for large broker-dealers;Dec. 13, 2021: Full equities and options reporting for large and small broker-dealers; andJuly 11, 2022: Full customer and account reporting for large and small broker-dealers.
June 22, 2020: Initial equities reporting for large broker-dealers and small broker-dealers that currently report to Financial Industry Regulatory Authority Order Audit Trail System (OATS);
July 20, 2020: Initial options reporting for large broker-dealers;
Dec. 13, 2021: Full equities and options reporting for large and small broker-dealers; and
July 11, 2022: Full customer and account reporting for large and small broker-dealers.
Introducing Brokers – In the second Order, the SEC provided relief permitting introducing brokers that fail to qualify as small broker-dealers under the CAT NMS Plan, but meet the net capital requirements for small broker-dealers under Rule 0-10(c)(1) under the Securities Exchange Act of 1934, to follow the CAT reporting timeline for small broker-dealers.

FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

Updates to FAQS

On April 16, 2020, FINRA posted two new FAQs to its COVID-19 resource page.

Advertising FINRA advised that live meetings with customers via video or audio conferencing platforms must be supervised in a manner reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.Unless required to record pursuant to FINRA Rule 3170 or otherwise, members generally are not required to record live video or audio conferences with customers. However, if a registered representative uses the chat or messaging feature or presents slides or other written communications, the member must keep records of these written communications in accordance with Securities Exchange Act Rule 17a-4 and FINRA Rules 3110.09 and 4511, and their content must be consistent with applicable standards such as FINRA Rule 2210 and 3110(b).Finally, if a member chooses to record live video or audio conversations with customers, the member may be required to produce the recording in connection with a regulatory request. If a firm permits public appearances through video or audio conferencing platforms, the member must ensure compliance with FINRA Rule 2210(f).
FINRA advised that live meetings with customers via video or audio conferencing platforms must be supervised in a manner reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.
Unless required to record pursuant to FINRA Rule 3170 or otherwise, members generally are not required to record live video or audio conferences with customers. However, if a registered representative uses the chat or messaging feature or presents slides or other written communications, the member must keep records of these written communications in accordance with Securities Exchange Act Rule 17a-4 and FINRA Rules 3110.09 and 4511, and their content must be consistent with applicable standards such as FINRA Rule 2210 and 3110(b).
Finally, if a member chooses to record live video or audio conversations with customers, the member may be required to produce the recording in connection with a regulatory request. If a firm permits public appearances through video or audio conferencing platforms, the member must ensure compliance with FINRA Rule 2210(f).

Supervision FINRA confirmed that firm mail that would ordinarily be delivered to the branch can be directed to an associated person’s residence.Because a principal is responsible for reviewing and handling certain communications, FINRA expects a firm to direct or forward the mail from a branch office to a principal’s residence. If this is not possible, and the firm elects to have the mail forwarded to the residence of an associated person who is not a principal (e.g., a registered representative), the firm must ensure that it has implemented a supervisory structure reasonably designed to supervise the activities of its associated persons, including implementing controls for the handling of customer correspondences received so a principal may complete the appropriate reviews. The firm should document any new procedures that vary from its current written supervisory procedures and should take into consideration the additional risks associated with forwarding firm correspondence (including checks) to a personal residence.FINRA also notes that depending upon the activities conducted at a person’s residence, the residence may qualify as a “branch office” under FINRA Rule 3110(f)(2). However, as provided in Regulatory Notice 20-08, a firm is not required to file a Form BR to register a temporary branch office resulting from an emergency relocation due to the pandemic.
FINRA confirmed that firm mail that would ordinarily be delivered to the branch can be directed to an associated person’s residence.
Because a principal is responsible for reviewing and handling certain communications, FINRA expects a firm to direct or forward the mail from a branch office to a principal’s residence. If this is not possible, and the firm elects to have the mail forwarded to the residence of an associated person who is not a principal (e.g., a registered representative), the firm must ensure that it has implemented a supervisory structure reasonably designed to supervise the activities of its associated persons, including implementing controls for the handling of customer correspondences received so a principal may complete the appropriate reviews. The firm should document any new procedures that vary from its current written supervisory procedures and should take into consideration the additional risks associated with forwarding firm correspondence (including checks) to a personal residence.
FINRA also notes that depending upon the activities conducted at a person’s residence, the residence may qualify as a “branch office” under FINRA Rule 3110(f)(2). However, as provided in Regulatory Notice 20-08, a firm is not required to file a Form BR to register a temporary branch office resulting from an emergency relocation due to the pandemic.

Further Postponement of Arbitration and Mediation Proceedings

FINRA extended the postponement of all in-person arbitration and mediation proceedings scheduled through July 3, 2020 (previously May 31, 2020 – see the McGuireWoods April 6 update). Additionally, FINRA stated that it offers virtual hearing services (via Zoom and teleconference) to parties in all cases by joint agreement or by panel order. Parties that are interested in exploring this option are encouraged to contact their FINRA Case Administrator for details.

STATE REGULATORS

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 the NASAA COVID-19 page for updates on specific relief issued by state and provincial securities regulators.

NASAA also confirmed that the FINRA Paycheck Protection Program (PPP) guidance that a registered person who receives a PPP loan will not have to disclose a “compromise with a creditor” in response to Question 14K on Form U4 if the loan is wholly or partially forgiven under the terms of the PPP (see April 15 alert) would also apply to apply to Question 14k on Form U4 for an investment adviser representative who obtains a PPP loan.

SIFMA

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’s series of podcasts on the COVID-19 pandemic continued with a discussion, released April 9, 2020, about the actions taken by the Federal Reserve, the Department of the Treasury and Congress in response to the COVID-19 pandemic.

Also, on April 15, 2020, SIFMA requested that the SEC’s Division of Trading & Markets extend the guidance issued by the Divisions of Corporation Finance and Investment Management regarding shareholder meetings in light of COVID-19 to other types of mailed regulatory communications during the COVID-19 pandemic. Specifically, the SIFMA letter addressed the following:

RIC shareholder reports and annual prospectuses
First-dollar prospectus delivery and related confirmation statements
Other disclosures, confirmations and account statements, including paper trade confirmations required by Rule 10b-10 under the Securities Exchange Act of 1934 and account statements sent in lieu of confirmations as permitted under Rule 10b-10 for periodic investment plans or sent in compliance with the free credit reporting requirements of Rule 15c3-3(j)

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 [email protected].

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.