Wednesday, 15 April 2020

FSB addresses financial stability and COVID-19

By Amy Leisinger, J.D.

The Financial Stability Board has published a report that it delivered to the G20 on international cooperation and coordination to address the potential effects of COVID-19 on global financial stability. The financial system faces a challenge in sustaining credit flow while battling declining growth and managing risks, according to the FSB. Among other things, the board is monitoring the ability of financial institutions and markets to move funds to the real economy and the ability of financial intermediaries to manage liquidity risk, the organization noted.

FSB response. In a letter, FSB Chair Randal Quarles noted the two challenges that the global financial system must respond to in the face of COVID-19: (1) an increased need for credit around the world; and (2) uncertainty regarding the value of assets, which complicates market operations. The FSB is assessing vulnerabilities in the financial system and is considering the ability of the financial system to finance businesses and meet liquidity demands while managing counterparty risks, according to the organization. The FSB is also engaged in policy work to support a strong recovery after the pandemic, the letter explained.

Global cooperation. In its report, the FSB set out principles that support the response to help the real economy, maintain financial stability, and minimize the risk of market fragmentation. According to the report, the organization is sharing information on evolving financial stability threats and the measures that financial authorities are considering to address these issues. The FSB also is assessing potential vulnerabilities in individual jurisdictions around the world, and its members are coordinating their responses to provide flexibility and/or reduce operational burdens.

“The pandemic constitutes an unprecedented global macro-economic shock, pushing the global economy into a recession of uncertain magnitude and duration,” the FSB noted.

According to the FSB, providers of funding are increasingly preferring short-term safe assets, and credit risks are rising. As such, demands on capital and liquidity are growing, but operational risks are adding to potential vulnerabilities. Downward revisions of growth expectations and heightened risk aversion, coupled with high uncertainty regarding the magnitude and duration of the pandemic, have led to volatility in equity, the FSB explained.

The organization stated that the most critical issues include the ability: (1) to channel funds to the real economy; (2) to ensure that market participants can obtain U.S. dollar funding; (3) to effectively manage liquidity risk; and (4) to manage counterparty risks.

Authorities will continue share information to assess financial stability risks from COVID-19 to maximize the potential benefits of a global response, as well as to support market functioning and to accommodate robust business continuity planning, according to the FSB. Jurisdictions around the world also will work to delay implementation deadlines, provide flexibility, and reprioritize initiatives to support the financial system, the organization said. To address concerns, jurisdictions around the world have taken steps to provide macroprudential support, and central banks are working to provide liquidity to banks and markets. For example, the Federal Reserve has established facilities to provide liquidity and support credit needs, and the Basel Committee on Banking Supervision extended by one year the implementation of outstanding standards.

“The financial system is more resilient and better placed to sustain financing to the real economy as a result of the G20 regulatory reforms in the aftermath of the financial crisis,” the FSB noted. “However, financial intermediaries and markets face growing challenges in lending and funding,” the organization stated.

CFTC votes on bankruptcy, Form CPO-PQR, and EU margin rules

By Jay Fishman, J.D.

CFTC Chairman Heath Tarbert and Commissioners Rostin Behnam, Dan Berkovitz, Brian Quintenz, and Dawn Stump, on Tuesday April 14, 2020, held an opening meeting virtually in light of the COVID-19 pandemic to discuss and vote on proposed rules pertaining to commodity broker-dealer bankruptcies; Form CPO-PQR revisions; and swap clearing requirement exemptions, along with voting on final rules permitting margin relief for the European Stability Mechanism and protecting consumer financial privacy information. The commissioners unanimously approved all five rules and set a 90-day public comment period for the three proposals. The commissioners emphasized that comments submitted after the deadline would most likely be considered because of current coronavirus disruptions.

Chairman Tarbert and commissioners Behnam, Berkovitz, Quintenz, and Stump each acknowledged in their opening statements the hard work and number of hours their staff has devoted amid the coronavirus, as well as wished this meeting’s virtual attendees, market participants, and their families around the world good health during this difficult time. They also emphasized that they would devote the rest of 2020 to simply following through on the commodities matters undertaken in 2019, which include the three proposed rules discussed and voted on at this meeting. The commissioners also remarked upon their ongoing intentions to: (1) monitor the financial markets and their market participants’ activities; (2) clarify rules (even rules that are substantively okay) to remove ambiguous language to avoid future complications; and (3) continue to work as a team not only with each other but with other U.S. and international financial regulators, as well as with Congress, the importance of which has been brought to light by the COVID-19 pandemic.

Final rules. Margin relief for the European Stability Mechanism. This approved final rule relieves the European Stability Mechanism (ESM) from having to comply with the Commodity Exchange Act’s (CEA) Regulation 23.151 (the Margin Rule), which requires the posting of initial and variation margin for uncleared swaps that certain swap dealers, major swap participants, and financial end users enter into. The approved rule amends the definition of a “financial end user” to exclude the ESM.

While the five Commissioners had approved the final rule, Commissioner Quintenz said that his support came only after COVID-19. Before the coronavirus, Quintenz was against the Margin Rule revision because the European Union (EU) failed to honor the international Central Counterparty (CCP), which allowed each individual country member to oversee and regulate its respective market participants’ activities that occurred in a foreign country. But while he found the EU to have, in the past, overreached its authority by interfering with the CFTC’s ability to regulate its U.S. participants’ oversees commodity operations, he voted for the amendment out of faith that COVID-19 would bring out each financial regulator’s desire to cooperate with each other for the greater good.

Consumer financial privacy regulation. The commissioners, without any discussion, voted to approve this proposed regulation because of its importance in today’s world, to help protect consumers confidential personal and account information from cybersecurity incidents and identity theft. The final rule specifically restores certain requirements regarding the privacy of consumer financial information that were inadvertently deleted in a 2011 rulemaking. According to the 2019 rule proposal, CFTC regulation §160.30 requires every futures commission merchant (FCM), registered foreign exchange dealer (RFED), commodity trading advisor (CTA), commodity pool operator (CPO), introducing broker (IB), major swap participant (MSP), or swap dealer (SD) subject to the jurisdiction of the Commission to have policies and procedures to safeguard customer records and information. However, when the regulation was revised in 2011 to add SDs and MSPs to the list of covered entities, some requirements were inadvertently deleted. The final rule amends §160.30 to restore the deleted requirements. A statement of support for the final rule was issued by Chairman Tarbert.

Proposed rules. Updates to CFTC’s bankruptcy regime. Chairman Tarbert and Commissioners Behnam, Berkovitz, Quintenz, and Stump unanimously voted in favor of the proposed amendments to the bankruptcy regime but admitted that CFTC’s Part 190 was pretty much fine as initially adopted in 1983. Specifically, during Part 190’s 37-year history, very few CFTC bankruptcies occurred because market participants abided by the rules. There were, of course, some large bankruptcies in more recent times, namely MF Global’s in 2011 and Peregrine’s in 2012. But overall, presenter Bob Wasserman from the Division of Clearing and Risk said that amending the initially well-written rules at this juncture would clarify ambiguous language and replace outdated cross references to help resolve matters quickly in bankruptcy court that might otherwise result in a long, expensive court process. But, moreover, he said that the new rules are necessary to stem systemic disruptions that can arise much faster because of persistent market fluctuations in today’s global economy.

As Wasserman explained, the proposed amendments to Part 190 would comprise model rules pertaining to bankruptcy proceedings for commodity broker-dealers, composed of both FCMs and derivatives clearing organizations (DCOs). He proclaimed that the proposed model rules would substantively protect both customers and the financial system in the following ways:
  1. When an FCM or DCO is on the verge of bankruptcy, instead of liquidating the FCM, the customer funds’ would be ported (or transferred) to a stable FCM or DCO, thereby allowing the customers’ to quickly retrieve at least 60 or 70 percent of the money they would have otherwise lost in the bankrupt FCM’s or DCO’s liquidation.
  2. The FCM’s or DCO’s trustee would have much more discretion over the FCM’s or DCO’s liquidation, thereby permitting the trustee authority to administer the liquidation in a way better befitting the customers’ ability to recover their lost funds, as long as the trustee abides by the federal bankruptcy regulations while doing so. Also, Wasserman emphasized that while the trustee would be independent, the trustee would work closely with the CFTC in bankruptcy court.
  3. Treating customers as a class instead of individuals and distribution funds to them pro rata would allow each customer to retrieve at least lost money rather than certain individual customers receiving a lot of it while others receive nothing. Also, by treating the customers as a class for a pro rata distribution, the funds could be processed and distributed faster than if having to be processed separately for each victim. Lastly, pro rata distribution gives the money back first to the people who need it the most. 
Commissioner Quintenz asked whether the above distributions would include virtual currencies, to which Wasserman answered “yes” because the FCM’s or DCO’s assets and property would be separately classified as physical or nonphysical deliverables, with nonphysical deliverables comprising virtual currencies.
Commissioner Stump asked how DCOs particularly would be treated under the model rules, to which Wasserman declared that the trustee would take action under the DCO bankruptcy rules to the extent practical but subject to the trustee’s discretion.

Commissioner Berkovitz asked whether the proposal’s objectives would be contradictory, to which Wasserman replied “no,” specifically stating the objectives: (1) to protect customers; (2) protect financial systems; and (3) protect the confidence in the markets so that customers do not panic or fear a run on the bank before investing. And the model rules would “make the creditor no worse off than the credit would be in liquidation.” Wasserman further asserted that ensuring these objectives would bolster U.S. markets’ competitiveness in the current global economy.

Amendments to compliance requirements for commodity pool operators on Form CPO-PQR. Chairman Tarbert expressed support for the proposed Form CPO-PQR revisions, along with Commissioners Behnam and Quintenz. Joshua Sterling and Amanda Olear from the Division of Swap Dealer and Intermediary Oversight (DSIO) presented on the proposed amendments to Form CPO-PQR, declaring that the proposal’s dual purpose is to eliminate duplicative and non-useful information requirements from the form but add requirements for information that would be useful to the CFTC. Commissioners Berkovitz and Stump were glad that all of Schedule C and most of Schedule B (except for providing a CPO’s investment-type such as gold or platinum) would be eliminated.

The item that particularly caught the commissioners’ attention was the proposed requirement for CPOs to provide legal entity identifier (LEI) information on the form. Sterling said that LEIs would help regulators to better oversee CPO transactions and track the exposure and risk from the CPO to the swap dealer, namely both sides of the transaction. He also did not believe that providing LEI information on the form would have a negative effect on consumers. Regarding Sterling’s major point that LEIs apply only to swap transactions, Commissioner Berkovitz requested that a future requirement be for the form to mandate LEIs for non-swaps, i.e., exchange-traded commodities. Olear said that it’s too late for mid- and small-size CPOs to extend their filings due in March but that because of COVID-19, these CPOs will get a 90-day extension on their next quarterly filing.

The other important points made during this discussion included the following:
  • Commissioner Quintenz proclaimed the difficulty of aggregating Form CPO-PQR information in real time so that by the time the CFTC obtains it for review, the information is already 60 days old. Sterling acknowledged that the information provided on the form is just a snapshot in time, and also that it is difficult to aggregate the submitted form information because that information varies so much by CPO type and size.
  • The Financial Stability Oversight Council (FSOC) created from the Dodd-Frank Act did not mandate that Form CPO-PQR be revised. Furthermore, Olear stated that the FSOC has never requested information about a particular CPO’s activities.
  • Mention was made about CPOs having to quarterly file Form NAF-PQR. But Sterling and Olear pointed out that there would be no duplicative filing burden because CPOs could file either Form NAF-PQR or the proposed amended Form CPO-PQR.
  • Mention was also made about the need to file Form PF with the SEC. Sterling and Olear said that before proposing the Form CPO-PQR revisions, they asked SEC staff whether the staff had any concerns about the CFTC’s proposed changes, and the staff expressed no concerns. Moreover, Sterling and Olear said that filing revised Form CPO-PQR with the CFTC would not interfere with the SEC-filing of Form PF. 
Part 50 clearing requirement. Simultaneously approved with the above final Margin Rule revision was a proposed amendment to the CFTC’s Part 50 rules pertaining to the CEA’s Section 2(h)(1) on swap clearing agreements. As proposed, new regulations 50.75 and 50.76 would codify existing exemptions from the clearing requirement for swaps entered into with certain central banks, sovereign entities, and international financial institutions. The major reason for approving the proposal, as stated by Commissioner Berkovitz, is twofold: (1) the proposed new rules would basically be a mere codification of exemptions that the abovementioned central banks, sovereign entities and international financial institutions have been successfully relying for years; and (2) the number of swaps that would fall within the exemptions would be relatively small compared to the swaps requiring CFTC clearance.

Tuesday, 14 April 2020

Urban Outfitters CEO urges SEC to reinstate uptick rule for short selling

By Amanda Maine, J.D.

Writing on behalf of his company, Urban Outfitters Chairman and CEO Richard A. Hayne submitted a petition to the SEC requesting that the Commission consider reinstitute former rule 10a-1 relating to short selling in response to the market impact of COVID-19. While returning to the original uptick rule would not prevent further market volatility, it would limit the ability of short sellers to sell into negative market trends, according to Hayne.

Original and alternative uptick rule. Short selling involves a sale of a security that the seller does not own or a sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. Short selling, in addition to being used to provide liquidity in response to unanticipated demand or to hedge the risk of an economic long position in the same security or in a related security, can be used to profit from an expected downward price movement.

In 1938, the SEC adopted Rule 10a-1 to restrict short selling in a declining market, and the rule remained mostly unchanged for nearly 70 years. After implementing a pilot program in 2004 that temporarily suspended the Rule 10a-1 tick test, the SEC found little empirical justification for maintaining short sale price test restrictions, especially for actively traded securities.

In 2007, after reviewing comment letters and the results of the pilot, as well as and taking into account the market developments that had occurred in the securities industry, the SEC eliminated former Rule 10a-1 and added Rule 201 of Regulation SHO, prohibiting any SRO from having a short sale price test.

In light of the financial crisis of 2008 and the market volatility that followed, the SEC in 2010 adopted an "alternative uptick rule," which imposed restrictions on short selling only when a stock has triggered a circuit breaker by experiencing a price decline of at least 10 percent in one day. At that point, short selling would be permitted if the price of the security is above the current national best bid.

Urban Outfitters petition. Hayne’s petition to the SEC recommends that the Commission reinstitute the original uptick rule as provided in former Rule 10a-1. The original rule stated that a listed security may be sold short: (1) at a price above the price at which the immediately preceding sale was effected (plus tick); or (2) at the last sale price if it is higher than the last different price (zero-plus tick). According to the petition, reinstituting the rule would mean that short sales are not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.

Hayne stressed that his company does not think the practice of short selling itself should be banned but expressed that reinstituting the Rule 10a-1 uptick rule would improve the regulation of short selling. While Rule 10a-1 would not, by itself, prevent further market volatility, certain safeguards should be put in place during these uncertain times, he wrote.

Financial regulators on short selling. SEC Chairman Jay Clayton, in an interview with CNBC last month, said that the agency would not ban short selling, advising that short selling can be used "to facilitate ordinary market trading." In the same interview, Clayton voiced support for the 2010 alternative uptick rule, which "closely matches the electronic trading environment of today."

The European Securities and Markets Authority (ESMA) in March temporarily required the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1 percent (down from the earlier threshold of 0.2 percent) of the issued share capital after the entry into force of the decision. ESMA stated that lowering the reporting threshold is a precautionary action due to the "exceptional circumstances" linked to the COVID-19 pandemic. The U.K.’s Financial Conduct Authority (FCA) confirmed that ESMA’s decision applied to the U.K. during the Brexit transition period. The FCA also confirmed that the required changes to its systems have been made to comply with the decision.

ESMA also approved a ban on short selling by the French securities regulator, the Autorite des marches financiers (AMF). The French emergency prohibition is set to expire on April 16.

Monday, 13 April 2020

CFTC grants brief extensions for rule comments in response to COVID-19 disruptions

By Brad Rosen, J.D.

The CFTC voted 3-2 to extend certain currently open comment periods in light of disruptions brought about by the COVID-19 (coronavirus) pandemic. The extensions address five separate rules proposed by the Division of Market Oversight (DMO) for which the current comment periods had started earlier in 2020. Commissioners Dan Berkovitz and Rostin Behnam issued sharp dissenting statements which asserted that the extensions were inappropriate and so short in duration so as to lack meaning.

Certain comment periods extended. The CFTC’s press release, issued late on the Friday afternoon before the Easter holiday, provides details for each rulemaking and its respective extension as follows:
  • Position Limits for Derivatives extended 16 days until May 15, 2020;
  • SEF Requirements and Real-Time Reporting Requirements extended 32 days until May 22, 2020;
  • Certain SDR and Data Reporting Requirements extended two days until May 22, 2020;
  • Amendments to the Real-Time Public Reporting Requirements extended two days until May 22, 2020; and
  • Amendments to the SDR Reporting Requirements extended two days until May 22, 2020.
Chairman claims extensions strike the right balance. Chairman Heath Tarbert declared, "I respectfully disagree with those who insist our important policy work could or should be put on pause." In support of the appropriateness of the extensions, he stated, "These extensions reflect my commitment to providing market participants with additional flexibility during this pandemic. Commenters on recently proposed rules will now have at least 90 days, and in many cases more, to provide feedback that we value tremendously as we seek to finalize rules."

Dr. Tarbert also noted that the swap data reporting proposals would give the Commission a more panoramic view into systemic risk by requiring for the first time the reporting of uncleared margin data and that the position limits proposal could help prevent corners and squeezes. In the chairman’s view, the subject extensions strike the right balance to address the current circumstances.

Commissioner Berkovitz asserts extensions reflect bad public policy. Commissioner Berkovitz zeroed in on the inconsistency underlying the CFTC’s extensions in his dissenting statement. He also observed that market participants and the public need more time to be able to provide high-quality comments on pending CFTC rulemakings in light of the disruptions resulting from the novel coronavirus pandemic. Moreover, he stated, "Not providing the public sufficient time to obtain additional perspective and develop meaningful comments in these extraordinary times is bad public policy."

Berkovitz also pointed to the COVID-19 related regulatory relief previously granted by the CFTC as clear evidence that the pandemic has disrupted normal operations of market participants. He also noted that many functions cannot be performed in a timely manner due to physical displacements and other extraordinary demands on market participants.

In a harsh criticism of the Commission’s action, Berkovitz observed "The Commission’s refusal to grant meaningful rulemaking comment period extensions stands in contrast to its swift recognition of requests by market participants for relief from the Commission’s reporting and registration regulations." The commissioner added, "It is not clear why the Commission believes that market participants who state that it is difficult to comply with fundamental reporting or registration requirements nonetheless will be able to evaluate proposed rules and prepare comments with minimal delay." At a minimum, Berkovitz advocated that the Commission should extend all pending comment periods by 60 days, noting that the two-week and two-day extensions granted by the Commission today are inadequate.

Commissioner Behnam claims extensions are illusory. Commissioner Behnam, in his dissenting statement, observed for the three rules where the comment periods are extended for a mere two days, "That is not an extension at all. Instead, it is essentially an announcement that the Commission will not be extending these deadlines." He added, "For two of these rules, the comment period opened on February 20, so the entire comment period has essentially spanned the COVID-19 pandemic."

With respect to the comment period for the high-profile position limits rule which was extended by 16 days, Behnam observed, "Prior position limits proposals have garnered hundreds of public comments totaling thousands of pages. Producing these comments presumably takes months of work and careful thought by market participants and other stakeholders. Extending the deadline to May 15 as market and public health uncertainty continues is not sufficient."

Behnam has previously advocated for the CFTC to temporarily table all non-critical policy work and to shift its efforts and resources towards monitoring market and institutional stability and resiliency, and to consider necessary agency action that will alleviate market disruptions and support stable financial markets. Notwithstanding, the commissioner concluded by indicating his readiness to work with the chairman and fellow commissioners to reach agreement on meaningful extensions for the subject comment periods.

Senators urge Fed to end capital distributions during coronavirus pandemic

By J. Preston Carter, J.D., LL.M.

Senators Sherrod Brown (D-Ohio), Brian Schatz (D-Hawaii), and Elizabeth Warren (D-Mass) sent a letter to Federal Reserve Board Chairman Jerome Powell calling for the Fed to prohibit banks with more than $50 billion in assets from making further capital distributions, such as stock buybacks and dividends, as the economy recovers from the coronavirus pandemic. The senators urged the Fed "to do more to help small business owners and hardworking families instead of allowing Wall Street to take advantage of the crisis to skirt important financial protections." The senators wrote, "Ending capital distributions now will refocus these banks on their core mission: lending into their communities, a critical goal during these difficult economic times."

According to the senators, higher capital requirements support increased lending activity, as capital is the critical funding mechanism for all banking activity. "The evidence is clear," they wrote, "banks with greater amounts of loss-absorbing capital lend more, in good times and in bad, and well-capitalized banks are far more likely to survive in a stressed environment without requiring a government bailout."

Therefore, the senators found it "hard to understand" recent actions of the Fed. For example, they wrote, as recently as March, in the midst of the pandemic, the Board took steps to reduce capital standards when it proposed eliminating the requirement that banks pre-fund buybacks and dividends. Also, the Fed has given large banks "far too long" to adopt reforms for recognizing expected losses under the current expected credit loss methodology.

"Perhaps most concerning," the senators stated, "the Board has rolled back one of the most important capital standards for the biggest, riskiest banks in the country." The supplementary leverage ratio is a simple rule based on direct experience from the financial crisis. More equity capital means safer banks and a more stable financial system. "The Board’s decision to reduce this capital requirement by two thirds at banks with more than $250 billion in assets further harms our financial system," the letter states.

Brookings blog. A Brookings Institution blog post says that banks’ higher capital and liquidity positions now than in 2007 is allowing banking regulators to encourage banks to use their capital and liquidity buffers to support new lending, and to work with borrowers to modify existing loans. The blog post notes that the Fed reduced the leverage ratio capital requirement, which should promote more lending, and added that "Banks should collectively agree now to suspend share repurchases for at least as long as the leverage ratio is eased."

New lawsuits zero in on Zoom’s alleged data security failures

By John M. Jascob, J.D., LL.M.

Two new shareholder suits have charged Zoom Video Communications, Inc. with misrepresenting the data security of its video conferencing services. In separate class action complaints filed in federal court in San Francisco, investors allege that the company violated Exchange Act Section 10(b) and Rule 10b-5 by significantly overstating the degree to which its video communication software was encrypted. Once the company’s obfuscations about its encryption became clear following the increasing reliance on video conferencing during the COVID-19 pandemic, the complaints allege, businesses prohibited employees from using Zoom’s platform, causing the company’s share price to plummet (Drieu v. Zoom Communications, Inc., April 7, 2020; Brams v. Zoom Video Communications, Inc., April 8, 2020).

Zoom. Founded in 2011 and headquartered in Silicon Valley, Zoom provides a cloud-based communications application that allows users to interact with each other by means of face-to-face video, audio, and chat. On April 17, 2019, the registration statement for Zoom’s initial public offering (IPO) was declared effective by the SEC.

According to the complaints, Zoom, CEO Eric Yuan, and CFO Kelly Steckelberg made materially false and misleading statements regarding the company’s business, operational, and compliance policies, both in connection with the IPO and in subsequent filings with the SEC. Contrary to Zoom’s assertions, the shareholders claim, Zoom’s video communications service was not end-to-end encrypted, thus putting users at an increased risk of having their personal information accessed by unauthorized parties. A decline in the use of Zoom’s video communications services was foreseeably likely when these facts came to light, the complaints allege, making Zoom’s SEC filings and public statements materially false and misleading at all relevant times.

Pomerantz lawsuit. The complaint filed by the Pomerantz law firm alleges that the truth began to emerge on July 8, 2019, when security researcher Jonathan Leitschuh posted on Twitter a link to an article he had published, which allegedly exposed a flaw allowing hackers to take over Zoom webcams. Just three days later, the Electronic Privacy Information Center (EPIC) filed a complaint against Zoom with the Federal Trade Commission, alleging that Zoom had intentionally designed their web conferencing service to bypass browser security settings for webcams, exposing users to the "risk of remote surveillance, unwanted videocalls, and denial-of-service attacks." Despite these disclosures, however, Zoom’s stock continued to trade at artificially inflated levels, the complaint alleges.

The Pomerantz complaint alleges that the truth fully emerged, however, as businesses increasingly turned to Zoom’s video communication software to facilitate remote work activity in the midst of the COVID-19 pandemic and shelter-in-place orders from state and local governments. For example, the New York Times reported on March 30, 2020, that Zoom was under scrutiny by the New York attorney general for its data privacy and security practices. According to the article, the attorney general's investigation cited, among other things, Leitschuh’s findings regarding webcam security issues, the complaint filed with the FTC, and revelations from an article by Vice Media’s Motherboard segment that the iOS version of the Zoom app was sending some analytics data to Facebook, even if Zoom users didn’t have a Facebook account. The New York Times article also reported that "trolls have exploited a Zoom screen-sharing feature to hijack meetings and do things like interrupt educational sessions or post white supremacist messages to a webinar on anti-Semitism—a phenomenon called ‘Zoombombing.’"

After additional negative news, the Pomerantz complaint states, New York City’s Department of Education announced on April 6, 2020, that it had banned the use of Zoom in the city’s classrooms. Instead, the Department recommended Google or Microsoft Teams for classroom communications purposes during New York State’s shelter-in-place order. That same day, a Yahoo! Finance article reported that someone on a popular dark web forum had posted a link to a collection of 352 compromised Zoom accounts. According to a spokesperson for the cybersecurity firm Sixgill who was quoted in the article, "these links included email addresses, passwords, meeting IDs, host keys and names, and the type of Zoom account," and that, "given that many are using Zoom for business purposes, confidential information could be compromised."

As a result of the defendants’ wrongful acts and omissions, the complaints assert, the plaintiffs and other class members have suffered significant losses and damages.

The cases are No. 20-cv-02353 (Drieu) and No. 20-cv-02396 (Brams).

Friday, 10 April 2020

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Scam artists target Main Street investors in midst of the COVID-19 pandemic

By Brad Rosen, J.D.

The SEC’s Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force issued an alert to educate and inform Main Street investors about current investment frauds, including those scams related to the Coronavirus (COVID-19) pandemic. In the alert, the SEC noted how fraudulent actors often exploit national crises and periods of uncertainty to lure investors into various scams.  These scam artists frequently play off investors’ hopes and fears, as well as their charity and kindness, in attempts to exploit confusion or rumors in the marketplace. 

Enforcement remains on the beat. Despite the prevalence of social distancing measures and work-at-home mandates, the alert makes it clear the SEC’s Division of Enforcement continues to execute on its mission of protecting investors and remains fully operational during this time of crisis. Specifically, the alert advises that that SEC continues to actively monitor the markets for frauds, illicit schemes and other misconduct affecting U.S. investors relating to COVID-19. Moreover, as circumstances warrant, the agency is prepared to issue trading suspensions and use tools in its enforcement arsenal as appropriate.  

Keep the guard up. The alert also advises investors not to let their guard down when it comes to spotting fraudulent investment schemes, including those masquerading as charities or targeting certain affinity groups. Additionally, the alert urges people to exercise good investment hygiene such as verifying that the seller is currently registered or licensed by using search tools available on Investor.gov. As always, potential investors should be on the lookout for promises of guaranteed high investment returns and be wary of unsolicited investment offers.

If you see something, say something. The alert also urges members of the public to report possible securities fraud or nefarious activity to the SEC.  Potential fraud can be reported to the SEC by completing a complaint form at the SEC’s online tip, complaint, and referral (TCR) system.

Thursday, 9 April 2020

SEC provides relief for BDCs affected by COVID-19

By Amanda Maine, J.D.

Business development companies (BDCs) have been granted temporary conditional relief to help enable them to make investments in small and medium-sized businesses, the SEC announced. Under the exemptive relief, BDCs will be permitted to issue and sell senior securities in order to provide capital to these companies. According to the Commission, many BDCs face challenges in the current environment in providing capital to their portfolio companies due to the impact of COVID-19 on the financial and credit markets. The relief includes the method for calculating permitted financing and applies conditions designed to protect investors (Order Under Sections 6(c), 17(d), 38(a), and 57(i) of the Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, Release No. IC-33837, April 8, 2020).

In a statement announcing the relief, SEC Chairman Jay Clayton said, “Many small and medium-sized businesses across the country are struggling due to the effects of COVID-19.” The exemptive relief “will enable BDCs to provide their businesses with additional financial support” in light of the challenges arising from the pandemic, Clayton advised.

BDCs and COVID-19. The Commission’s order notes that BDCs were created to provide capital to smaller domestic operating companies (“portfolio companies”) that otherwise may not be able to readily access the capital markets. Under the challenges posed by the effects of COVID-19, BDCs may be unable to satisfy the asset coverage requirements under the Investment Company Act due to temporary markdowns in the value of loans to its portfolio companies. Certain affiliates may also be prohibited from participating in additional investments in the BDC’s portfolio companies due to restrictions on an existing exemptive order permitting co-investments.

Issuance and sale of senior securities by BDCs. The exemptive order provides that during the exemption period, a BDC may issue or sell a senior security that represents an indebtedness or that is a stock (“covered senior securities”) notwithstanding the Investment Company Act’s asset coverage requirement, subject to several conditions. A BDC may use values calculated as of December 31, 2019 (“Adjusted Portfolio Value”) to meet an Adjusted Asset Coverage Ratio. The order outlines how to calculate the Adjusted Asset Coverage Ratio.

A BDC that elects to rely on this exemption must disclose it on Form 8-K and may not for 90 days make an initial investment in any portfolio company in which the BDC was not already invested as of the date of the order, unless its asset coverage ratio complies with Investment Company Act Section 18.

The order also requires that the BDC’s election to rely on the exemption be approved by the BDC’s board of directors or trustees, which must also determine that each issuance of senior securities is in the best interests of the BDC and its shareholders. To make this determination, the BDC’s investment adviser must certify the recommendation and the investment adviser’s reasons for certifying that it is in the best interests of the BDC and its shareholders. The board must also review reports prepared by the BDC’s investment adviser at least monthly to determine efforts the BDC has made towards achieving compliance with Section 18 asset coverage requirements.

In addition, the order imposes certain recordkeeping requirements, including preserving the minutes of board meetings and the investment adviser’s reports to the board. Finally, the order states that no affiliated person of the BDC shall receive transaction fees or other renumeration from an issuer in which the BDC invests during the Exemption Period. The order provides relief only to issue or sell senior securities representing an indebtedness or that is a stock, and does not provide relief in connection with dividends or other distributions.

Expansion of relief for BDCs with existing co-investment orders. BDCs that currently have an existing co-investment order from the Commission permitting co-investment transactions in portfolio companies with certain affiliated persons may participate in a follow-up investment provided that: (1) it has previously participated in a co-investment transaction with the BDC with respect to the issuer (if the participant is a regulated fund); or (2) it either previously participated in a co-investment transaction with the BDC with respect to the issuer or is not invested in the issuer (if the participant is an affiliate fund). This exemption is also conditioned on the oversight of and the review by the board of directors or trustees.

Exemption period. The relief provided is limited to the period from the date of the order to the earlier of: (1) December 31, 2020; or (2) the date by which the BDC ceases to rely on the order. The Commission may extend the exemptive relief as it deems appropriate.

The release is No. IC-33837.

Wednesday, 8 April 2020

SEC approves offering and communication reforms for BDCs and closed-end funds

By John M. Jascob, J.D., LL.M.

By a three-to-one vote, the SEC has approved rule and form amendments modifying the registration, communications, and offering processes available to business development companies (BDCs) and registered closed-end funds. The amendments, which implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act, seek to increase the availability of funding to small- and mid-sized private companies and harmonize the treatment of BDCs and most registered closed-end funds with that of operating companies. Among other things, the new rules permit eligible funds to engage in a more streamlined registration process and use communications and prospectus delivery rules currently available to operating companies while providing for new reporting and structured data requirements (Securities Offering Reform for Closed-End Investment Companies, Release No. 33–10771, April 8, 2020).

“The amendments we are adopting will modernize the offering process for eligible funds in a way that, as borne out by our experience with operating companies, will benefit both investors in these funds and the companies in which they invest,” said SEC Chairman Jay Clayton in a news release. “This is another example of our staff’s laudable efforts to modernize our rules in a manner that furthers all aspects of our mission."

Commissioner Allison Herren Lee was the lone dissenter, expressing concerns over both the timing and the substance of the rule amendments. In her view, the amendments drop important investor protection features that had been included in the SEC’s original proposal in 2019 while also reducing the Commission’s oversight of material changes to existing funds.

Shelf offerings and new short-form registration statement. Under the amended rules, eligible BDCs and closed-end funds (“affected funds”) will be able to engage in a streamlined registration process, allowing them to sell securities “off the shelf” more quickly and efficiently in order to take advantage of market opportunities. Similar to operating companies, affected funds will generally be eligible to use the new short-form registration statement if they meet certain filing and reporting history requirements and have a public float of $75 million or more.

WKSI status. Like operating companies, eligible affected funds will now be able to qualify as Well-Known Seasoned Issuers (WKSIs) in order to benefit from a more flexible registration process and greater latitude to communicate with the market. Affected funds will qualify as WKSIs if they meet certain filing and reporting history requirements and have a public float of $700 million or more

Communications and reporting. In further measures to harmonize the communication rules applicable to BDCs and closed-end funds with those that apply to operating companies, the amendments allow affected funds to use a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. Also like operating companies, affected funds will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the SEC.

To support the short-form registration statement framework, affected funds filing a short-form registration statement will be required to include certain key prospectus disclosures in their annual reports. In addition, affected funds filing a short-form registration statement will be required to disclose material unresolved staff comments. Registered closed-end funds also will be required to provide management’s discussion of fund performance (MDFP) in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and BDCs.

Effective dates. Most of the rule and form amendments will become effective on August 1, 2020. The amendments related to registration fee payments by interval funds and certain exchange-traded products, which will become effective on August 1, 2021.

Virtual open meeting. The session marked the first time that the SEC has ever held an open meeting using a virtual format and was the first open meeting held by the Commission in any form since the onset of the crisis resulting from the rapid spread of the coronavirus in the United States. Each of the four commissioners thanked the SEC staff for their dedication and commitment despite the uncertainties caused by COVID-19, which has resulted in staff working in a largely teleworking environment for the past month. “In the face of the uncertainties caused by COVID-19 and circumstances in which we all must prioritize health and safety, they have remained committed to our mission, focusing on the interests of our long-term Main Street investors and the integrity of our markets,” said Chairman Clayton.

The release is No. 33–10771.

Cryptocurrency mining company extracts investors’ money by falsely promising COVID-19 benefit

By Jay Fishman, J.D.

The Alabama Securities Commission and Texas State Securities Board separately ordered a mining company and its agent to stop operating a fraudulent cryptocurrency scheme generated partly from a promise that the Alabama and Texas resident investors’ funds would be donated to UNICEF for medical equipment to help COVID-19 pandemic victims around the world. The company additionally promised the residents that the remainder of the raised funds would be invested in computing power to mine cryptocurrencies, which would yield large returns.

Texas investigation uncovers cryptocurrency scheme. The Texas State Securities Board discovered that the mining company operated a fraudulent cryptocurrency scheme from information the State Securities Board obtained during its investigation. The State Securities Board subsequently passed the following information onto the Alabama Securities Commission:
  • The mining company, through its agent, continuously promised investors that it would donate their funds to UNICEF to help the COVID-19 victims but refused to provide any information verifying the donation.
  • The company promised investors “eye-opening” returns; for example, a $10,000 investment in computing power would return nearly $10,500 per year.
  • The company runs a recession special by offering investors an extra 30 percent of purchased cryptocurrency mining power for an initial $10,000 deposit.
  • The company runs an affiliate program that pays commissions to individuals who recruit new investors, permitting the affiliates to receive 5 percent of the new investors’ deposits.
  • The company and agent failed to disclose the principals or financials of the cryptocurrency mining operation.
  • The mining company is a “dealer” under the Texas Securities Act; the agent is an “agent of a dealer” under the Act; and the cryptocurrency is a “security” under the Act yet none were registered as required by the Act to sell the cryptocurrency in Texas.
  • The mining company has already raised $18 million from Texas resident investors. 
These administrative orders are Nos. CD-2020-0007 and ENF-20-CDO-1801.

IOSCO redirects resources to address COVID-19 matters

By John Filar Atwood

The Board of the International Organization of Securities Commissions (IOSCO) is redeploying its resources to focus primarily on COVID-19 matters, including addressing areas of market-based finance which are most exposed to greater volatility, constrained liquidity and the potential for pro-cyclicality. The decision means that the work on the priorities outlined in its 2020 work program will be delayed.

IOSCO’s new focus will include examining investment funds, as well as margin and other risk management aspects of central clearing for financial derivatives and other securities. IOSCO said that it will continue a limited number of work streams that are close to completion, and will continue its efforts on G-20 deliverables.

In deciding on which priorities to delay, the board considered several factors, including that a delay would relieve untoward pressure on IOSCO members who are addressing core crisis challenges. The board also recognized that operational constraints on financial institutions would likely impede their ability to contribute to IOSCO projects and follow up on final reports.

Overtaken by events. A third factor IOSCO considered was that it may be inappropriate to issue reports during the crisis given that they may be overtaken by events and would need to be modified to take account of lessons learned or factor in a substantially changed financial landscape as a result of the crisis. Finally, the board said that it recognized that the standard-setting bodies with which it collaborates are busy focusing on helping to address the crisis.

The work that IOSCO is placing on the back burner includes its analysis of the use of artificial intelligence and machine learning by market intermediaries and asset managers. The board also will pause its study of the impact of the growth of passive investing and potential conduct-related issues in index provision, issues around market data, outsourcing, and implementation monitoring.

The 2020 annual work program also includes among its five focus areas cryptoassets and retail distribution and digitalization. The program indicates that IOSCO also was planning, based on its 2020 risk outlook, to study the rising levels of corporate debt and the potential resulting risks in capital markets.

Work continues. IOSCO plans to proceed with its work on good practices for deference, as well as other projects near completion that will not burden limited regulatory or industry resources. In addition, the board intends to examine specific investor protection issues, market integrity, or conduct risks that may arise in the context of the crisis.

Tuesday, 7 April 2020

OCIE issues Risk Alerts for compliance with Regulation BI, Form CRS

By Amanda Maine, J.D.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has published two Risk Alerts that provide information to firms for compliance with Regulation Best Interest (Reg BI) and Form CRS, which were adopted in June of last year and have a compliance date of June 30, 2020. The Alerts are intended to provide broker-dealers and investment advisers with information about the scope and content of first examinations to be conducted under the new rules.

According to OCIE Director Pete Driscoll, “Based on conversations we have had with the industry, we know firms have made substantial progress in implementing these new rules.” Driscoll added that OCIE staff’s “focus will be on firms continuing good faith and reasonable efforts, including taking into account firm-specific effects from disruptions caused by COVID-19.”

Regulation Best Interest compliance. When OCIE begins its initial examinations for compliance with Reg BI, the staff will primarily evaluate whether firms have established policies and procedures reasonably designed to comply with the new regulation, according to the Alert. Reg BI requires broker-dealers to act in the best interest of the retail customer without placing its own financial or other interest ahead of the customer’s interest. The Risk Alert outlines four component obligations of this general obligation: disclosure, care, conflicts of interest, and compliance obligations.

Under the disclosure obligation, the firm must provide in writing to a retail customer all material facts relating to the scope and terms of its relationship with the customer and all material facts related to conflicts of interest that are associated with the broker’s recommendation. During an examination, the staff may review the contents of these disclosures and other firm records to assess compliance. These documents may include schedules of fees, the broker-dealer’s compensation methods, disclosures related to the monitoring of customer accounts, and lists of proprietary products sold to customers.

The care obligation requires a broker-dealer to understand and consider the risks, rewards, and costs associated with the obligation in light of the customer’s investment profile. Documents reviewed under this obligation may include new account forms, the process undertaken by the broker-dealer to assess its decision that a recommendation was in the customer’s best interest, and how risky, complex, or expensive product recommendations were made.

Under the conflicts of interest obligation, the staff may review documents concerning material limitations, such as a limited product menu offering only proprietary products. The staff may also review policies and procedures relating to the elimination of sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities within a limited period of time.

Finally, under the compliance obligation, may review the broker-dealer’s policies and procedures and evaluate any controls, remediation of noncompliance, training, and periodic review and testing of its policies and procedures.

Form CRS. Form CRS requires SEC-registered broker-dealers and investment advisers (firms) to deliver to retail investors a brief customer or client relationship summary that provides information about the firm and to file their initial relationship summaries with the Commission. According to the Form CRS Risk Alert, areas of focus for the staff regarding compliance with Form CRS include issues relating to delivery and filing of the form, the content of the form itself, and issues such as formatting, updates, and recordkeeping.

Specifically relating to the delivery and filing of Form CRS, the Alert states that the staff may review records of the dates that each relationship summary was provided to investors and validate that the firm complied with delivery obligations pertaining to existing retail investors and new retail investors.

The staff may also review the content of the relationship summary to assess whether it includes all required information and to assess that the information it contains is accurate and true. The Alert gives several examples of what the staff may assess in reviewing the relationship summary’s content, including how it describes its services, how it describes fees and costs, how it describes how the firm’s professionals are compensated, how it describes conflicts of interest, and whether legal or disciplinary history is accurately disclosed.

Both Alerts note that OCIE will work with firms and the Division of Trading and Markets on challenges that COVID-19 has created for firms. The Reg BI Alert also contains an appendix listing samples of information that OCIE may request during an examination.

Monday, 6 April 2020

SEC issues new C&DIs to clarify certain COVID-19 filing extensions

By Lene Powell, J.D.

The SEC’s Division of Corporation Finance has issued two new Compliance & Disclosure Interpretations (C&DIs) explaining how filing extensions related to the COVID-19 crisis apply in certain instances. Question 104.18 clarifies the application of COVID-19 relief to a 120-day deadline for Part III of Form 10-K, while Question 112.02 addresses the filing of Form 40-F by users of the U.S.-Canada Multi-Jurisdictional Disclosure System (MJDS).

The new C&DIs were issued April 6, 2020.

Form 10-K. As explained in Question 104.18, Form 10-K allows Part III information to be incorporated by reference from a registrant’s definitive proxy or information statement, or, under certain circumstances, filed as an amendment to the Form 10-K, not later than 120 days after the end of the related fiscal year.

Regarding the interaction of the 120-day deadline with relief provided in the COVID-19 Order issued March 25, 2020 (Release No. 34-88465), the SEC said:
  • Q: May a registrant that is unable to file the Part III information by the 120-day deadline avail itself of the relief provided by the March 25 Order for the filing of the Part III information?
  • A: Yes, provided the 120-day deadline falls within the relief period specified in the Order and the registrant meets the conditions of the Order. Conditions are explained in detail. 
Form 40-F. As explained in Question 112.02, an MJDS filer must file its Form 40-F on the same day the information included therein is due to be filed with any securities commission or equivalent regulatory authority in Canada.

Regarding the interaction of the March 25 COVID-19 Order with applicable Canadian relief, the SEC said:
  • Q: If an MJDS filer properly relies on any applicable Canadian COVID-19-related relief for extension of its filing deadline with the securities commission or equivalent regulatory authority, does the MJDS filer need to comply with the conditions for exemptive relief in the March 25 COVID-19 Order on the date the Form 40-F would have been due in the U.S.?
  • A: No. Under these facts, compliance with the conditions of the SEC’s COVID-19 Order on the original due date of the Form 40-F is not required. MJDS filers should also consider promptly disclosing their reliance on the Canadian COVID-19-related relief.

More state securities regulators issue COVID-19-related orders

By Jay Fishman, J.D.

State securities regulators continue to issue emergency orders extending filing deadlines or allowing issuers or industry professionals to temporarily forego providing certain form items because of business disruptions caused by COVID-19. The North American Securities Administrators Association, Inc. (NASAA) is continuously updating on its website a list of those orders.

Orders. Below is a summary of the orders as of April 3, 2020. Important Note: Some of the states issuing temporary relief orders below are requiring financial professionals to keep a copy of the order in their records to demonstrate their reliance on the order—because any activities not meeting an order’s conditions may later be treated by the respective state securities regulators as non-exempt, unregistered securities activity, thereby subjecting the financial professional to state enforcement action. A best practice would be to keep a copy of the orders issued by all states whether or not required.

Arizona. Licensing staff are continuing to process licensing/registration applications through the CRD/IARD systems. Requests for supplemental information may be submitted via email. Field examiners are conducting streamlined, remote examinations using phone and email correspondence in lieu of traditional on-site examinations during this time. Enforcement staff also are limiting in-person contacts with witnesses and regulatory partners, taking advantage of phone, email, and other forms of telecommunications technology to complete their work in a virtual environment.

Arkansas. In accordance with the governor’s executive order issued March 17, 2020, it will be the position of the Arkansas Securities Commissioner that statutes and rules administered by the commissioner that have specific time constraints be relaxed when it is shown that the need is related to COVID-19. This period of time constraint relaxation will extend through April 16, 2020. Some statutes and rules that may need to be subject to relaxation include: Arkansas Code Sections 23-42-503(a)(7),(8), 23-42-504(a)(9), 23-42-509, 23-39-506, 23-39-510, 23-55-603, and 25-19-105; and Rules of the Arkansas Securities Commissioner 302.01 and 302.02, 302.01(c), 302.02(f), 509, and 607.

California. Effective immediately, the due dates for the following filings are extended to 45 days after the original due date: (1) Notice of Changes by Broker-Dealers and Investment Advisers (Rule 260.241.4(a)-(f)); (2) Form PF for private fund advisers (Rule 260.204.9(b)(2)(A)-(B)); (3) Annual Report (Rule 260.241.2(a)(4)); and (4) Interim Report (Rule 260.241.2(d)(1)-(3)). Note: This guidance only changes the due date for the above-mentioned filing requirements. It does not alter the method of submitting the filing requirements. Licensees should submit these filing requirements under existing procedures. For example, licensees filing Form ADV amendments should continue submitting the filing through the Investment Adviser Registration Depository (IARD).

The manual signature requirement has also been temporarily relieved. Effective immediately, licensees may electronically file an initial or transfer Form U4 without obtaining individual applicant’s manual (wet) signature if the firm: (1) provides the applicant with a copy of the completed Form U4 prior to filing; (2) obtains the applicant’s written acknowledgment (which may be electronic) before filing that the information has been received and reviewed, and that the applicant agrees that the content is accurate and complete; (3) retains the written acknowledgment in accordance with SEC Rule 17a-4(e)(1); (4) makes it available promptly upon regulatory request; and (5) obtains the applicant’s manual signature as soon as practicable.

Connecticut. For non-monetary filings relating to mutual funds (e.g., terminations, name changes, and correspondent changes), scanned submissions may be submitted via email to dob.sec-reg@ct.gov in lieu of a mailed paper filing.

For initial filings and renewal filings (with electronic payment) relating to mutual funds, closed-end funds, unit investment trusts and face-amount certificate companies, e-mail a copy of the Form NF to: (1) dob.sec-reg@ct.gov; and (2) dob.ar@ct.gov.

Delaware. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; and extended the investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Florida. The state has temporarily relieved any holder of a Florida Securities Act registration with an annual updating amendment or financial statement filing deadline occurring in the month of March or April 2020. The existing deadline is suspended and tolled for a period of 45 days from the existing filing deadline, unless extended by subsequent order.

Registration staff are continuing to process registration applications through the CRD, IARD, and Regulatory Enforcement and Licensing (REAL) systems. Requests for supplemental information may be submitted via email. Examination staff are conducting streamlined, remote examinations using phone and email correspondence in lieu of traditional on-site examinations during this time.

Georgia. Issuers filing a notice under Georgia Securities Act Section 10-5-21 (investment company and Rule 506 issuers), Section 10-5-22 (issuers registering securities by coordination) or Section 10-5-23 (issuers registering securities by qualification) must file the notice or registration using NASAA’s Electronic Filing Depository (EFD) or SeamlessDocs. Issuers unable to file using the above methods must contact the commissioner at registrations@sos.ga.gov explaining why the issuer cannot use these methods.

Idaho. The state has temporarily relieved financial professionals displaced by COVID-19 and extended investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Indiana. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; extended investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Investment adviser representative applicants now have until June 30, 2020, to submit fingerprints.

Kentucky. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; and extended investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Maine. Out-of-state financial professionals who are displaced due to the pandemic to operate in Maine may temporarily service existing clients if they meet certain conditions. The state's order also: allows an investment adviser that may no longer be able to service a client to transfer or reassign the client to another firm with the client's verbal consent; allows investment advisory firms flexibility in the deadline to provide updated firm information annually to clients; suspends onsite training requirements for new licensees and the requirement that broker-dealer firms conduct on-site audits of branch offices located in Maine; waives late fees for issuers of securities who miss a filing deadline because of the pandemic; and permits filing by email.

Minnesota. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; extended the investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Securities registration staff are continuing to process licensing/registration applications through the CRD/IARD systems. Requests for supplemental information may be submitted via email. Field examiner staff are conducting streamlined, remote examinations using phone and email correspondence in lieu of traditional on-site examinations during this time, and enforcement staff are limiting in-person contacts with witnesses and regulatory partners.

New Jersey. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; and extended the investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

New Mexico. The state has temporarily relieved financial professionals displaced by COVID-19; relieved the requirement to obtain physical signatures on Form U-4; and extended the investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

New York.
  1. Any registration renewal, amendment, financial statement or NY-IAQ filing that would have been due between March 1, 2020, and April 30, 2020 is extended for 90 days from the end of the relief period. The availability of this relief may be revoked by the Department of Law by posting the revocation to its website. Any party eligible to rely on this relief will be given 90 days from the date of the revocation to make the required filing.
  2. All filings required to be submitted directly to Investor Protection Bureau (IPB) or the Department of Law: (1) under General Business Law Section 359-e or 359-eee, 13 NYCRR 10 or 13 NYCRR 11 related to registration, other than real estate related filings; and (2) under General Business Law Section 680 et seq. or 13 NYCRR 200, must be submitted by email in addition to the required paper or CD filings. Electronic copies may be redacted to include only the last four digits of any person's social security number, or other sensitive personal identification number, if the number is required in the filing. Note: These procedures do not apply to FINRA member broker-dealer filings submitted through the CRD system, Form ADV submitted through IARD, or filings submitted through Blue Express.
  3. Each email submission requiring any payment, must also contain: (1) a copy of the front and back of the check to be mailed to the Department of Law; and (2) a signed statement from the applicant (electronic or by hand) stating, in substance, that “I will cause this filing and payment to be mailed to the Department of Law forthwith.”
  4. Each paper filing should also include a printout of the cover email to Department of Law.
  5. Brokers, Dealers, Issuers, Salespersons, Commodities:
    • Filings on Form 99 (IPB), M-1, M-2, M-3, M-4, M-11, CBD, CM-2, CM-3, CM-4,CI-1, CM-ADV, paper form NF and Form BD for non-FINRA members should be submitted to ipbbd@ag.ny.gov. The Office of the Attorney General expects to continue to accept electronic Form NF filings through Blue Express. All FINRA member filings and payments must continue to be made through CRD.
    • Exemption and No Action requests should be submitted to ipbexna@ag.ny.gov. Note that the Notice of Appearance Form must be scanned in a separate PDF from the rest of the application.
  6. Investment Adviser, NY-IAQ and Financial Statements:
    • New NY-IAQs for each investment adviser representative and financial statements accompanying any new Form ADV should be submitted to ipbia@ag.ny.gov. (All Form ADVs will continue to be submitted through IARD). All fees due will continue to be accepted through IARD.
    • Investment Adviser literature should be submitted to ipbialit@ag.ny.gov. (No paper filing is required for investment adviser literature.)
  7. All theatrical filings should be submitted to ipbtheatricals@ag.ny.gov. 
Note that processing of paper filings not also submitted via email per these procedures may not be processed until normal working conditions resume.

Oklahoma. Field examiners are conducting streamlined, remote examinations using phone and email correspondence in lieu of traditional on-site examinations during this time. Personnel are continuing to process registration applications through the CRD/IARD systems. Requests for supplemental information may be submitted via email. Enforcement staff also are limiting in-person contacts with witnesses and regulatory partners, and taking advantage of phone, email, and other forms of telecommunications technology.

South Carolina. The state has temporarily relieved financial professionals displaced by COVID-19 and extended investment adviser annual update amendment filing deadline for up to 30 days from the normally required date.

Tennessee. Registration staff are continuing to process registration applications through the CRD/IARD systems. Requests for supplemental information may be submitted via email. Field examiner staff are conducting streamlined, remote examinations using phone and email correspondence in lieu of traditional on-site examinations during this time. Enforcement staff are limiting in-person contacts with witnesses and regulatory partners by utilizing phone, email, and other forms of telecommunications technology.

Washington. The order temporarily relieves financial professionals displaced by COVID-19; relieves the requirement to obtain physical signatures on Form U-4; and extends investment adviser annual update amendment filing deadline for up to 45 days from the normally required date.

Friday, 3 April 2020

Clayton addresses resource allocation, rulemaking, and Reg. BI implementation

By Amy Leisinger, J.D. 

SEC Chairman Jay Clayton recently addressed the Commission’s efforts to respond to changes related to the COVID-19 pandemic. The chairman noted that the agency has been helping market participants continue their business operations in the face of the challenges presented by the virus, including facilitating a shift to business continuity plans consistent with health directives and guidance. In particular, he said, the SEC has assisted in the move by securities exchanges to an all-electronic trading environment, as well as provided targeted, conditional relief related to filing deadlines. The SEC also has extended proposal comment periods to offer more time to submit positions, according to the chairman.

“We do not expect to move forward on any of those proposed actions before May 1, 2020,” Clayton said.

Resources. The SEC is putting health and safety first, but Clayton stresses that “the law continues to apply.” The Commission must allocate resources in the best interests of both investors and the capital markets, he explained. The agency is focused on ensuring that registrants continue to provide material information promptly to investors, particularly regarding the impact and expected effects of COVID-19, according to Clayton. The SEC staff also has provided guidance to assist in the consideration of disclosure obligations in relation to companies’ assessments of the potential operational effects of COVID-19, the chairman noted.

Regulation BI. Financial professionals must not put their interests ahead of the customers’ interests, Clayton stressed, and this approach is particularly crucial in these times of economic uncertainty. Adopted in June 2019, Regulation BI created a new standard of conduct for broker-dealers when making recommendations to retail customers and a requirement for brokers and investment advisers to disclose relationship summaries to retail investors. Firms have made considerable progress in adjusting their business practices and policies and procedures to prepare for the requirements of Regulation BI and related Form CRS obligations, Clayton stated. Because of continued implementation progress, the Commission believes that the June 30, 2020, compliance date remains appropriate, he said. The chairman urged companies to continue to make good faith efforts to ensure compliance by that date and devote resources as appropriate in light of current circumstances.

“To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us,” Clayton said.

Following the compliance date, according to the chairman, SEC examiners will focus on whether firms have made a good faith effort to implement compliance. The SEC and its staff have provided several resources to assist firms in working toward implementation of these significant regulatory enhancements for the benefit of investors, he noted.

“It is my intent to continue to apply this pragmatic, flexible, facts-and-circumstances approach to our allocation of resources and actions during this uncertain period, taking into account the advice and expertise of my fellow Commissioners and our staff, as well as the views of market participants. we continue to encourage engagement from market participants, including, in particular, investors,” Clayton concluded.

Advisory committee explores COVID-19 issues, including fraud and operational problems

By Amanda Maine, J.D.

The SEC’s Investor Advisory Committee (IAC), in a meeting held remotely by its members and witnesses, heard about the impact of the COVID-19 pandemic on investors. Testifying before the IAC included the president of NASAA and the senior vice president of FINRA on how regulators are approaching the crisis, as well as perspectives on how the broker-dealer industry is coping with its own challenges.

Clayton’s statement. Chairman Jay Clayton praised Commission staff and assured that the Commission is functioning well, although remotely. He stated that the SEC’s approach is premised on putting health and safety first, and it will continue to assist market participants in their efforts to continue business operations, including investor service operations, in the face of challenges caused by COVID-19.

Clayton also said that businesses face an unprecedented earnings period due to the economic shock and uncertainty caused by the coronavirus crisis. Some issuers will be able to file their quarterly reports on time, but that does not prevent issuers from putting out earnings releases and filing Forms 8-K, Clayton added. He also drew attention to guidance issued by the Division of Corporation Finance, which clarifies that issuers can provide prompt information addressing the effects of COVID-19 regardless of formal filing deadlines.

View from financial professionals. Penny Pennington, managing partner at financial services company Edward Jones, offered an industry view regarding the coronavirus pandemic. She noted that investment firms thrive on face-to-face relationships with clients, but in the wake of COVID-19, advisers have been working from home and serving clients through virtual relationships.

She added that in a “normal cycle of ebb and flow,” there is an initiating event for a downturn, then buying, then investor fatigue, followed by investor confidence. The coronavirus effect on the market is different, though. As Pennington distinguished, the event did not start out as an economic crisis, but as a health crisis. The difficult part is trying to get people’s heads around the concept that the economy may come to a complete stop because it is a public health crisis, Pennington said.

NASAA view. Chris Gerold, chief of the New Jersey Bureau of Securities and the president of the North American Securities Administrators Association (NASAA), discussed how COVID-19 is impacting state securities regulators and enforcement actions. Like the SEC, staffs are working remotely, and NASAA and state administrators continue to share information with regulators and investors. State regulators are still available via regular and virtual communication channels, and enforcement proceedings are still going on, he assured.

Regarding examinations, Gerold said that they have shifted from on-site examinations to remote examinations and which may be delayed if necessary. He also noted that nearly all states are providing COVID-19-related relief. NASAA has developed a webpage regarding coronavirus that includes resources for industry professionals, as well as resources for states as the they contemplate types of relief provide by registrants.

Gerold also said that he anticipates concerns about market volatility in coming weeks, as well as an increase in complaints related to investor suitability. Another concern relates to broker-dealer operations and trading delays that might result in system crashes, he advised. Broker-dealer systems must be sufficiently robust to deal with a prolonged increase in engagement. Other related problems include call center volumes with frustrated or confused clients who cannot access their brokers, delays in trade executions, and delays in fund transfers, Gerold said.

FINRA. Gerri Walsh, senior vice president of Investor Education at FINRA, assured the committee that FINRA remains fully operational during the coronavirus crisis. FINRA maintains a website for coronavirus issues, including regulatory guidance and relief, FAQs, state stay-at-home orders, a compilation of SEC guidance, and other critical information that FINRA will post as it becomes available. She drew attention to FINRA’s cybersecurity guidance on strengthening cyber controls and guidance on business continuity plans. Walsh also said that FINRA has postponed all in-person arbitration proceedings up to May 31 but added that it can reschedule and is also open to remote options.

Walsh said FINRA has fielded many investor concerns, but despite the focus on coronavirus scams highlighted by many regulatory agencies, FINRA has mostly heard about issues related to market volatility and operational issues, such as difficulties in contacting one’s broker. She also noted that she has heard about best execution issues, including those relating to 401(k) accounts, but added that these issues may have resulted from restrictions on plans that had been imposed by the employer.

Committee member comments. Rick Fleming, the SEC’s Investor Advocate and a member of the IAC, said that his office has been hearing from retail investors, including some who want to ban short-selling or reinstate the uptick rule. Fleming stated that research shows that this would not be a be a good idea, but he wanted to note this concern from investors.

He also noted that one of the most common complaints from investors involves leveraged and inverse ETFs. According to Fleming, there is a widespread lack of understanding about how ETFs are supposed to operate, which is only compounded by the current market volatility.

Fleming, along with other committee members, addressed COVID-related scams that have become a concern. In particular, he cited the touting of small-cap companies that claim they have a cure for the coronavirus or some other product. Gerold also mentioned this in his comments to the IAC, noting that scammers will act to pump up the stock price of a company (usually a microcap company) supposedly manufacturing a COVID-19 vaccine or personal protective equipment (PPE).

Human impact. The impact of COVID-19 beyond just investing was also discussed by the witnesses and members of the IAC. Walsh advised that many who are victimized by coronavirus-related investment schemes are lonely and are more likely to be defrauded by fraudsters.

Committee member Nancy LeaMond of AARP was particularly forceful in her concern for vulnerable elderly persons, not just in relations to scams but to the pandemic itself. “People are scared to death,” she said. They hear every night on the news that if they get the coronavirus, they will die. In addition to the health concerns, LeaMond said that people aged 50-64 years old are also anxious about the labor market and if they could get their job back.

LeaMond also said that studies have shown that older women are more anxious than men about the crisis. Women tend to have less income than men later in life, and they also tend to be caregivers, LeaMond said. She also drew attention to an AARP Fraud Watch Network which tracks coronavirus-related fraud.

Thursday, 2 April 2020

Advisory committee shares how COVID-19 is affecting small businesses

By Anne Sherry, J.D.

At a remote meeting also attended by SEC Chairman Jay Clayton and Commissioners Hester Peirce and Allison Herren Lee, members of the Small Business Capital Formation Advisory Committee shared a mostly grim outlook on the effects of the coronavirus outbreak on small businesses. In her comments, Commissioner Peirce reiterated her support for a micro-offering exemption as a way for entrepreneurs to raise capital. Several committee members welcomed the idea and offered additional ideas for the SEC to consider or pass along to its sister agencies.

Committee members spoke about the immediate effects of the economic crisis such as a pause in M&A deals and the rapid depletion of cash reserves. Karen Mills (MMP Group, Inc.) said that Main Street small businesses have 27 days of cash on hand, on average. Sara Hanks (CrowdCheck, Inc.) said that for restaurants specifically this number is 16 days. There seemed to be widespread agreement that government aid would be critical during the initial phase of the crisis, but committee members reported that their portfolio companies and clients are confused about how to apply for government programs. For example, Mills said that with Small Business Association disaster loans rolling out tomorrow, banks still need to figure out answers to questions such as who is eligible under the affiliate rules.

Sapna Mehta (Rise of the Rest Seed Fund; Revolution) encouraged regulators to offer flexibility. For example, some people have asked about taking equity in lieu of salary, but she sees this as invoking murky issues of deferred compensation. She acknowledged that this may be more on the IRS side than the SEC. Mills observed that large companies tend to hoard their cash in a crisis because the markets are looking at their cash balances, but this can hurt smaller businesses along the supply chain if they don’t get paid on time. She asked larger companies, including the government, to pay their bills quickly, warning that it will be very hard to restart the economy if the small businesses don’t survive.

Youngro Lee (NextSeed) brought up the idea of reducing the requirements for GAAP financial statements for smaller offerings. Hanks agreed, suggesting that the threshold should be raised to $500,000 on a temporary basis and that the SEC should try to let companies take the money as soon as they hit their offering target rather than having to wait 21 days for disbursement. Hanks stressed that for some companies in this crisis, historical financial statements—whether reviewed or not—are useless. These companies may have raised a lot of money or produced a lot of revenue before, but that’s in the past, she said. She concluded, “This is terrible. We will get through it, but it’s going to take longer than anyone thinks. Sorry.”

Stephen Graham (Fenwick & West LLP) struck a more optimistic tone, saying that for the most part he sees business happening. The crisis presents an opportunity to be creative with respect to ideas such as crowdfunding and micro offerings, Graham said. Brian Levey (Upwork Inc.) also saw potential opportunity in the crisis. He said that regulators should keep in mind that this may be the new normal and analyze how behavior is changing. One example is, as Commissioner Peirce mentioned, the increasing acceptance of remote communication. Online reputation will become more important, Levey said, whereas business previously built trust through face-to-face relationships.

Clayton’s take. Chairman Clayton stepped in towards the end of the meeting to address the feedback that members had raised. He acknowledged Mehta’s comments on the affiliate issues and equity compensation and assured that SEC staff is in regular contact with counterparts at other agencies, including the SBA and Treasury. Clayton said that he will bring up the issues raised at the meeting. He also agreed with the suggestion that historical financial statements are not as relevant now as they used to be. Instead, investors will need to look at cash flows and projections of business operations.

Clayton then disclaimed his next remarks as representing only his personal views. He acknowledged Hanks’s warnings about the severity of the situation and how important it is to help businesses, workers, and everyone else through the crisis. “People do not invest unless they have visibility into the future,” Clayton said, which is why he supports the CARES Act, because currently visibility is very limited. While he is not an epidemiologist and cannot predict the timing of the crisis, he opined that small businesses are already struggling to operate under closures as short as 30 days. As an economic regulator, he stressed the need to think and help people communicate in those terms to help move towards the sort of certainty that promotes investment and credit.

Small business advocate. Finally, Martha Legg Miller, Director of the Office of the Advocate for Small Business Capital Formation, discussed the responses that the SEC broadly and her office specifically have taken to help small businesses. The SEC granted emergency relief extending the filing deadline for crowdfunding and Regulation A issuers and extended the comment period for various rules. As for her office, Miller said that they were gearing up to conducting outreach events, including at SXSW, when the crisis hit. They have now begun putting resources online and have shifted to a virtual outreach strategy, the highlight of which are “virtual coffee breaks” that provide a two-way opportunity for engagement. The first of these will be held Friday, April 3, on the topic of online investment capital raising. Additional sessions will follow next week and the week after.

Securities Regulation Daily’s top 10 developments for March 2020

By Brad Rosen, J.D.

March 2020 has been like no other month in history as the deadly COVID-19 pandemic firmly established itself on U.S. shores sending shockwaves through the healthcare system, the financial markets and the whole of society as millions of people around the world have been directed to shelter in place and adopt the most stringent of social distancing practices. These mandates infused and informed the relief provided across the financial industry landscape by the SEC, the CFTC and other regulatory bodies.

For its part, Securities Regulation Daily captured the full sweep of the remarkable and unprecedented regulatory and legislative developments which culminated with the passage of The Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislation, a $2 trillion economic aid package for businesses and workers, is intended to sustain the economy during the pandemic. The historic legislation was assembled against a backdrop of financial industry associations and self-regulatory organization imploring federal regulators to keep the financial markets open, warning of the devasting consequences for the economy if they were closed.

For their parts, the SEC and CFTC focused their resources on the orderly functioning of the securities markets and derivative markets, respectively, which involved providing granular regulatory relief across a wide spectrum of regulated activities. In particular, the SEC relaxed shareholder meeting requirements, provided exemptive relief to transfer agents, extended the deadline for issuer filings under Regulations A and Crowdfunding, and advised certain registrants that its Office of Compliance, Investigations and Examinations (OCIE) would conduct its business remotely except under the most extraordinary of circumstances. Meanwhile, the CFTC and the National Futures Association worked in tandem to address a plethora of supervisory requirements in connection with branch offices and working from remote locations.

While the COVID-19 crisis prompted state and federal courts to re-work their upcoming schedules in order to protect court personnel, litigants, and the public, two important court opinions addressing securities law matters were issued during March. In Salzberg v. Blue Apron Holdings, Inc., the Delaware Supreme Court held that a company’s charter provisions requiring Securities Act claims to be brought in federal court were facially valid under Delaware law.

In the second case, the SEC scored a significant victory in its ongoing litigation against the Telegram Group as the Southern District of New York court granted the agency’s request for a preliminary injunction thereby prohibiting the delivery of Telegram’s tokens to initial purchasers. The court ruled that the company violated the registration provisions of the federal securities law with the sale of those tokens to U.S. persons.

March 2020 was an extraordinary month by any measure as the financial markets and the world confronted the massive disruptions and dislocations stemming from the COVID-19 pandemic. The absence of normalcy is likely to continue in the months ahead as market participants, regulators and the global community maintain an ongoing battle against this unprecedented pandemic and its consequences. Stay tuned…but more importantly, stay safe!

1. LEGISLATIVE ACTIVITY

What the $2T CARES Act means for the securities industry


Congress passed a massive economic aid package for businesses and workers that is intended to sustain the economy during the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) includes provisions on a variety of topics that can touch upon securities markets, including executive compensation limits and restrictions on share buybacks and the payment of dividends. The Senate passed the aid bill by a vote of 96-0 while the House approved the bill by voice vote. The White House announced that President Trump had signed the bill. See our full coverage.

2. REGULATORY ACTIVITY

Industry groups, SROs to regulators: Keep markets open during COVID-19 outbreak

A number of securities industry groups and self-regulatory organizations including SIFMA, ICI, ISDA, FIA, MFA, and Nasdaq sent a joint letter to regulators urging them to keep the financial markets open during the coronavirus outbreak. In the letter to Steven Mnuchin, Jerome Powell, Heath Tarbert, and Jay Clayton, the groups stressed the "devastating impact" that closing the markets would have on the economy and warned that even rumors about market closures are causing market participants to take steps they otherwise would not. See our full coverage.

3. CORPORATE GOVERANCE

SEC relaxes shareholder meeting requirements in light of COVID-19


SEC staff published guidance on the upcoming proxy season given coronavirus-related issues that may make in-person meetings impracticable and preclude travel by participants, including shareholder proponents. The guidance allows public companies and investment companies more flexibility to reschedule their upcoming meetings and to conduct virtual or part-virtual meetings. It also encourages issuers to allow shareholder proponents to present their proposals by phone or other remote means.

SEC Chairman Jay Clayton encouraged market participants to reach out to the agency with requests for guidance or relief. He added that the SEC itself remains fully operational after having moved to teleworking and virtual meetings. See our full coverage.

4. REGULATORY ACTIVITY

SEC issues temporary exemptive relief for transfer agents affected by COVID-19

In its latest effort to extend relief to market participants affected by the coronavirus (COVID-19), the SEC has provided conditional regulatory relief for registered transfer agents. The Commission recognized that the need to comply with Exchange Act regulations pertaining to transfer agents under Section 17A and Section 17(f) may present compliance issues by those affected by COVID-19 (Order Under Section 17A and Section 36 of the Securities Exchange Act of 1934 Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, Release No. 34-88448, March 20, 2020). See our full coverage.

5. ACCOUNTING AND AUDITING

COVID-19 sparks more SEC, PCAOB regulatory updates


The SEC’s Divisions of Enforcement and Investment Management and the Office of Compliance Inspections and Examinations (OCIE) provided updates on the impact of the coronavirus (COVID-19) on their operations. Enforcement reminded insiders of their duty not to communicate or trade on material nonpublic information, while OCIE assured that registrants that use relief provided by the SEC will not be targeted for examinations. IM provided conditional regulatory relief to affiliates of money market funds related to a short-term dislocation in the market for money market securities due to the coronavirus. In addition, the PCAOB stated that it will be conducting its domestic firm inspections remotely while suspending international travel for inspections of overseas firms. See our full coverage.

6. PUBLIC COMPANY REPORTING AND DISCLOSURE

SEC grants COVID-19 relief to small offering issuers, muni advisers, and new EDGAR filers


The SEC has announced the granting of additional temporary relief to market participants whose operations may be affected by the rapid spreading of the coronavirus disease (COVID-19). The Commission adopted temporary final rules that extend the filing deadlines for specified reports and forms that companies must file under Regulation A and Regulation Crowdfunding and lift the notarization requirement for new EDGAR filers. In a separate order, the SEC provided municipal advisers with an additional 45 days to file their annual updates on Form MA (Relief for Form ID Filers and Regulation Crowdfunding and Regulation A Issuers Related to Coronavirus Disease 2019 (COVID-19), Release No. 33-10768; Order Under Section 15B of the Securities Exchange Act of 1934 Granting an Exemption for Municipal Advisors from Specified Provisions of the Securities Exchange Act and Rule 15Ba1-5(A)(1) Thereunder, Release No. 34-88491, March 26, 2020). See our full coverage

7. COMMODITY FUTURES

Business Not as Usual: regulators and top attorneys provide guidance on COVID-19 related issues

Long-time futures industry attorney Gary DeWaal recently moderated a webinar titled Business Not as Usual: Practical and Regulatory Responses to COVID-19 for the US Financial Services Industry. DeWaal was joined by Carol Wooding, Senior Vice President, General Counsel, National Futures Association (NFA) and Bill Wollman, Executive Vice President, Office of Financial and Operational Risk Policy, Financial Industry Regulatory Authority (FINRA), together with Katten Muchin Rosenman subject area specialists, Carl Kennedy (futures and derivatives), Susan Light (securities), and Julie Gottshall (labor and employment). The panel discussed and explored a number of timely and urgent issues related to the COVID-19 crisis and its impact on regulated companies. See our full coverage.

8. SEC NEWS AND SPEECHES

Regulators, courts adapt to the challenges of COVID-19

The global spread of the novel coronavirus (COVID-19) has already prompted securities regulators to issue significant relief focused on filing deadlines and in-person meetings. Some of these same regulators have followed-up that relief with their own COVID-19 webpages and courts have begun to re-work their upcoming schedules in order to protect court personnel, litigants, and the public. See our full coverage.

9. LITIGATION AND ENFORCEMENT

Delaware corporations may restrict ’33 Act claims to federal court

Reversing the Court of Chancery, the Delaware Supreme Court held that charter provisions requiring that Securities Act claims be brought in federal court are facially valid under Delaware law. While mindful of concerns that other states may not enforce the decision, the court rejected chancery’s construction of a dichotomy between internal and external affairs. Instead, federal-forum provisions lie between these extremes on a continuum (Salzberg v. Blue Apron Holdings, Inc., March 18, 2020, Valihura, K.). See full coverage.

10. ENFORCEMENT

SEC’s request for injunction against Telegram granted


The Southern District of New York has granted the SEC’s request for a preliminary injunction again Telegram Group prohibiting the delivery of its tokens (Grams) to initial purchasers in violation of registration provisions of the federal securities laws. According to the court, Gram purchasers possessed a reasonable expectation of profit based upon the efforts of Telegram in terms of gains from the resale of the tokens in the post-launch period. Under the test set forth in SEC v. W.J. Howey Co., the SEC has sufficiently alleged that the series of contracts and understandings related to Grams are securities, the court found (SEC v. Telegram Group Inc., March 24, 2020, Castel, K.). See our full coverage.