Tuesday, 31 March 2020

Massachusetts and Texas COVID-19-related orders relax filing deadlines

By Jay Fishman, J.D.

The Massachusetts Securities Division and Texas State Securities Board are the latest state securities regulatory agencies to extend filing deadlines from anticipated filing disruptions caused by the coronavirus.

To access the orders issued by other state regulators, along with the list of state legislatures that have postponed their legislative sessions, please click here.

Massachusetts. The Massachusetts Securities Division issued an emergency notice extending the filing deadline for securities registrations, exemption notices, consents to service of process, corporate resolutions, broker-dealers, agents, investment advisers, and investment adviser representatives.

A March 24, 2020 issued emergency order by the Massachusetts Secretary of the Commonwealth authorized the Securities Division to issue an emergency notice. The order emphasized that financial professionals must keep a copy of the emergency order and emergency notice in their records to document their reliance on the emergency order and emergency notice because any activities not meeting the order’s or notice’s conditions may later be treated by the Securities Commissioner and Staff as non-exempt, unregistered securities activity, thereby subjecting the financial professionals to state enforcement action.

Emergency order. The emergency order, effective until April 30, 2020 unless extended or rescinded, authorized the Securities Division to do the following:
  1. Pertaining to securities registration applications, exemption filings, securities notice filings, consent to service of process forms and related corporate resolutions—waives or modifies the Massachusetts Securities Act and rule signature and notarization requirements;
  2. Pertaining to individual agents and investment adviser representatives—waives or modifies their registration application signature;
  3. Pertaining to investment adviser representative applicants—waives or modifies the requirement to include the Criminal Offender Record Information (CORI) acknowledgment form with their registration application; and
  4. Pertaining to investment advisers—waives or modifies the Form ADV update and delivery requirement. 
Emergency notice. The emergency notice, effective until April 30, 2020 unless extended or rescinded, does the following with the emergency order’s four abovementioned points: 
  1. (A) Pertaining to securities registration applications, exemption filings, securities notice filings, consent to service of process forms, and related corporate resolutions—waives the manual signature requirement. When signatures are required, the Securities Division will accept: (i) evidence of electronic signatures or copies of signed documents including pdf copies; or (ii) any recognized showing that a document is signed (at the Securities Division’s discretion); and (B) Pertaining to forms used for securities registration applications, exemption filings, securities notice filings, consent to service of process forms, and related corporate resolutions—including Forms U-1, U-2 and U-2A—waives the notarization requirement.
  2. Pertaining to individual agents and investment adviser representatives—allows submitting Form U-4 electronically without first obtaining the agent’s or investment adviser representative’s physical signature, as long as the firm: (i) before filing Form U-4, provides the individual agent or investment adviser representative with a copy of the completed form; (ii) before filing the Form, obtains the individual agent’s or investment adviser representative’s written agreement that the U-4 content is complete and accurate; (iii) retains the written acknowledgment in accordance with Massachusetts’ laws and regulations; and (iv) obtains the applicant’s physical signature as soon as practicable.
  3. Pertaining to investment adviser representative applicants who are unable to submit a notarized Criminal Offender Record Information (CORI) acknowledgment form with their registration application—allows submitting an affidavit (available on the Securities Division’s COVID19 response page on the Massachusetts Commonwealth website) but the completed form must contain the following statements: (i) that the applicant has submitted all of the application’s components except for the notarized CORI form; (ii) that the applicant will, within 10 days after the March 24, 2020-issued emergency order’s end date, submit a notarized CORI form to the Securities Division; (iii) that the applicant understands that when the Securities Division receives the CORI form, it will use it to obtain the Applicant’s Criminal Offender Record Information; and (iv) that the applicant understands that the Securities Division, as authorized by the Massachusetts Securities Act, may suspend, revoke, or take other appropriate action with the applicant’s registration based on the Criminal Offender Record Information findings.
  4. Pertaining to investment advisers’ annual filing update and document delivery requirements—they may perform their Form ADV filing, updating and customer delivery requirements up to 45 days after the performance due date for these filing updates and delivery requirements. Important note: this relief is unavailable for persons or entities not registered as investment advisers in Massachusetts. 
Texas. The Texas order pertains to only investment advisers. The Texas State Securities Board issued an order in the wake of the SEC’s March 13, 2020 order extending the time periods for SEC-registered investment advisers to file a Form ADV amendment and deliver Form ADV, Part 2 to existing clients, and for exempt reporting advisers to file Form PF.

A Texas-registered investment adviser or exempt reporting adviser unable to meet a filing deadline or delivery requirement due on or after March 13, 2020 because of COVID-19 will have until the end of April 30, 2020 to provide the Texas Securities Commissioner via email at submissions@ssb.texas.gov (mailto:submissions@ssb.texas.gov), as well as disclose on its public website (or absent a public website, promptly notify its clients and/or private fund investors) that it is relying on this Texas-issued waiver (the order). The Texas-registered investment adviser or exempt reporting adviser must also:
  1. Briefly provide the reasons why it could not timely file its Texas-required Form ADV or Form PF, and/or deliver its disclosure statements/brochures;
  2. Provide the estimated date when it expects to file the Form ADV or Form PF, and/or deliver the disclosure statements/brochures; and
  3. File the Form ADV or Form PF and/or deliver the disclosure statement/brochure as soon as practicable, but not later than 45 days after the filing’s and/or the disclosure statement’s/brochure’s original due date. 
Note that the Securities Commissioner will continue to monitor the COVID-19 situation and, if necessary, extend the order or impose additional conditions on it.

New C&DIs clarify application of COVID-19 order to late filing notices

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

The staff of the SEC’s Division of Corporation Finance has issued two new Compliance & Disclosure Interpretations (C&DIs) that address questions involving the inability of reporting companies to timely file certain reports due to the COVID-19 pandemic. Specifically, the new C&DIs address the interplay of the Commission’s recent COVID-19 order and the filings that would otherwise be required under Exchange Act Rule 12b-25 from issuers who are unable to timely file certain reports with the SEC.

Rule 12b-25(a) requires registrants who have failed to timely file Form 10-K (or Forms 10-Q, 20-F, 11-K, N-CSR or N-CEN) to file, within one business day after the due date, a Form 12b-25 disclosing the registrant's inability to file the report and the reasons why this occurred. Rule 12b-25(d) prohibits registrants from using any Securities Act registration statement that is predicated on timely filed reports until the delayed report has been actually filed.

New Question 135.12 concerns the case where a registrant expects due to COVID-19 that it: (1) will be unable to timely file a report covered by Rule 12b-25 without unreasonable effort or expense; and (2) may not be able to file the report within the period specified under Rule 12b-25(b)(2)(ii). The response states that in this case, the registration should instead file a report on Form 8-K or 6-K, as applicable, relying on the COVID-19 order. If the registrant only files a Form 12b-25 by the report’s original due date, the registrant will have not met the condition of the COVID-19 order. Consequently, the 45-day relief period provided in the order will not be available.

New Question 135.13 asks whether a registrant that has already filed a Form 12b-25 can subsequently rely on the COVID-19 order to avail itself of the order’s 45-day filing extension. The C&DI answers “yes,” but notes that the registrant must also fulfill the requirements upon which the relief is conditioned. Under the order, registrants must furnish certain specified statements on Form 8-K or Form 6-K by the later of March 16, 2020, or the original due date of the required report. Unless this condition is met, the 45-day relief period will not be available.

Each of the new C&DIs state that registrants that are unable to rely on the COVID-19 order are encouraged to contact the Division staff to discuss collateral consequences of late filings.

Monday, 30 March 2020

Coronavirus spreads and the SEC jumps into triage mode; filers do their best to explain challenges

By Amy Leisinger, J.D.

As COVID-19 continues to change the world and daily activities, life is no different for the SEC. As the agency notes, federal securities regulations, particularly those regarding disclosure, are designed to protect the public and promote informed decision-making. The Commission is continually working to ease reporting and filing deadlines and other requirements in the wake of the pandemic. However, in the process of filing, the SEC urges registrants to consider disclosing all material changes, not only for big business but for firms directly connected with the health care system. The SEC urges market participants facing operational or reporting hardships relating to the effects of COVID-19 to find solutions that meet the SEC’s mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

Wolters Kluwer’s Amy Leisinger surveys the changes to “business as usual” in SEC filings in connection with RBsourceFilings® as the path forward remains uncertain.

To read the entire article, click here.

Friday, 27 March 2020

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

By Mark S. Nelson, J.D.

Congress passed a massive economic aid package for businesses and workers that is intended to sustain the economy during the 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.

Executive compensation limits. Section 4003 within Subtitle A of Title IV of Division A of the aid bill, also called the Coronavirus Economic Stabilization Act of 2020, establishes a $500 billion fund from which the Treasury Secretary can extend loans and other guarantees to eligible businesses, states, and municipalities. A subset of these funds is dedicated to the airline industry, subject to limits on these companies’ executive compensation.

For example, Section 4004 of the aid bill imposes limits on executive compensation of officers and other employees regarding loans and guarantees extended to passenger air carriers, cargo air carriers, and businesses critical to national security. Specifically, the Treasury Secretary can extend a loan or guarantee if, as of the date an agreement is executed and a date one year after the loan or guarantee is no longer outstanding if:
  • No officer or employee with total compensation greater than $425,000 in 2019 (other than under an existing collective bargaining agreement) will receive (1) compensation in excess of total compensation received in 2019; or (2) severance or other termination benefits exceeding two times the maximum total compensation received in 2019.
  • No officer or employee with 2019 total compensation over $3 million will receive more than: (1) $3 million; and (2) 50 percent of the excess over $3 million of total compensation received in 2019. 
The provision defines “total compensation” to include salary, bonuses, stock awards, and other financial benefits. Subtitle B of Title IV, titled Air Carrier Worker Support, contains a related executive compensation provision in Section 4116 that mirrors Section 4003. The provision in Section 4116 applies for the two-year period beginning March 24, 2020 and ending March 24, 2022.

With respect to the $454 billion in Federal Reserve Board facilities authorized under Section 4003(b)(4), there are a number of limits, including compliance with the executive compensation limits contained in Section 4004. However, Section 4003 allows the Treasury Secretary to waive these limits to protect the interests of the federal government. The Treasury Secretary must testify to Congress about any waivers.

No buybacks or capital distributions. Section 4003 of the Coronavirus Economic Stabilization Act of 2020 sets forth a lengthy list of terms and conditions for loans and other guarantees made to passenger air carriers, cargo air carriers, and businesses critical to national security, including limits on share buybacks, dividends, and other capital distributions. Eligible businesses, for example, may not repurchase their equity shares until 12 months after the loan or guarantee is no longer outstanding. The provision, however, does not apply to buybacks subject to a contractual obligation that was in effect as of the date of enactment. Similarly, an eligible business may not pay dividends or make other capital distributions regarding its common stock until 12 months after the loan or guarantee is no longer outstanding.

Moreover, similar requirements regarding buybacks and dividends and other capital distributions apply to eligible businesses receiving aid under Fed facilities. However, the Treasury Secretary can waive such requirements for these entities if “necessary to protect the interests of the Federal Government.” Although this description is focused on buybacks and dividends provisions in the aid package, the relevant provision granting the Treasury Secretary authority to waive certain requirements also addresses compliance with the executive compensation provisions contained in Section 4004, which also could be waived. The Treasury Secretary must be available to testify to Congress about the reasons for granting any waiver.

Security for loans. Under Section 4003, loans and guarantees extended to passenger air carriers, cargo air carriers, and businesses critical to national security must be made to companies that are listed on a national securities exchange and which provide Treasury with a warrant or equity interest in the business. Other eligible businesses that receive loans or guarantees must provide Treasury with either warrants or equity interests in the business or with a senior debt instrument.

Conflicts of interest. Section 4019 of the Coronavirus Economic Stabilization Act of 2020 addresses conflicts of interest related to relief that can be granted under Title IV of Division A of the aid bill. Specifically, an entity seeking to engage in a transaction under Section 4003 must, before the transaction has been approved, have its principal executive officer and its principal financial officer certify to the Treasury Secretary and the Fed that the entity is eligible for the transaction and that the entity is not a covered entity.

“Covered entity” means an entity in which a covered individual has a controlling interest (the provision states that securities held by two or more related persons are to be aggregated). “Controlling interest” means owning, controlling, or holding 20 percent of the vote or value of the outstanding amount of any class of equity interest. “Covered individual” means the president, vice president, executive department heads, members of Congress, and these individuals’ spouses, children, and sons- or daughters-in-law. Members of Congress also include members of the Senate, the House, Delegate to the House, and the Resident Commissioner of Puerto Rico.

Troubled debt restructurings. Section 4013 within the Coronavirus Economic Stabilization Act of 2020 addresses troubled debt restructurings (TDRs). Specifically, a financial institution may elect to: (1) suspend U.S. GAAP requirements for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as TDRs; and (2) suspend any determination of a loan modification due to the COVID-19 pandemic as a TDR, including impairment for accounting purposes.

The suspension provision applies to modifications of loans that are not more than 30-days past due as of December 31, 2019. But the provision does not apply to the adverse impact on a borrower’s credit that is not related to the COVID-19 pandemic.

Moreover, the provision states that an appropriate federal banking agency of a financial institution must defer to the financial institution’s determination regarding suspension. Financial institutions should keep records regarding the volume of affected loans, and federal banking agencies may collect data on loans for supervisory purposes.

The “applicable period” for the provision is March 1, 2020 until the earlier of December 31, 2020, or the date that is 60 days after the end of the of March 13, 2020 presidential declaration of a national emergency.

Credit losses. Section 4014 within the Coronavirus Economic Stabilization Act of 2020 provides that insured depository institutions, bank holding companies, and their affiliates need not comply with the Financial Accounting Standards Board’s new standard regarding current expected credit losses (CECL) contained in FASB Update No. 2016–13 (Measurement of Credit Losses on Financial Instruments). FASB extended the compliance dates for some types of entities in October 2019. The relief contained in the aid bill begins on the date of enactment and continues until the earlier of December 31, 2020, or the date the March 13, 2020 presidential declaration of a national emergency ends.

Fed meetings. Section 4009 within the Coronavirus Economic Stabilization Act of 2020 provides the Federal Reserve Board with relief from the requirements of the Government in the Sunshine Act. Specifically, the Fed may conduct meetings without satisfying 5 U.S.C. §552b if the Fed’s chairman determines in writing that unusual and exigent circumstances exist. The provision applies beginning from the date of enactment until the earlier of the end of the of March 13, 2020 presidential declaration of a national emergency or December 31, 2020. The Fed must keep records of votes and the reasons therefor during this period.

Congressional oversight of Title IV. Section 4020 within the Coronavirus Economic Stabilization Act of 2020 establishes the Congressional Oversight Commission to provide accountability for implementation of Title IV of Subtitle A of the aid bill by Treasury and the Fed, including efforts to achieve economic stability due to the COVID-19 pandemic. The Congressional Oversight Commission must report at 30-day intervals on: (1) the use of authorities; (2) the impact of loans on the well-being of people in the U.S., the U.S. economy, financial markets, and financial institutions; (3) the extent to which information about transactions under the subtitle contributed to market transparency; and (4) the effectiveness of loans of minimizing long-term costs to and maximizing benefits for taxpayers.

Retirement funds. Internal Revenue Code (IRC) Section 72(t) imposes an additional 10-percent tax on early distributions from qualified retirement plans. The provision also contains a number of exceptions that do not apply the additional tax to certain distributions such as distributions made on or after the date on which an employee attains age 59.5.

Section 2202 within Subtitle B of Title II of Division A of the aid bill provides that IRC Section 72(t) is inapplicable to coronavirus-related distributions of up to $100,000 in any taxable year. Repayments can be made during the 3-year period starting one day after receipt of a distribution up to the amount of the distribution. A distribution from a non-IRA is treated as an eligible rollover distribution and as having been made within 60 days of the distribution.

“Coronavirus-related distribution” means a distribution from an eligible retirement plan: (1) made on or after January 1, 2020 and before December 31, 2020; (2) to an individual diagnosed with COVID-19 by a CDC-approved test or whose spouse or dependent was similarly diagnosed; or (3) who experiences adverse financial consequences from COVID-19 (e.g., being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to a lack of child care, the closing of or reduced hours of a business owned or operated by the individual, or other factors determined by the Treasury Secretary).

Section 2203 further provides for a temporary waiver of the minimum required distribution requirement contained in IRC Section 401(a)(9).

Business interest deduction. IRC Section 163(j) allows a business interest deduction in a taxable year in an amount not exceeding the sum of: (1) the taxpayer's business interest income; (2) 30 percent of the taxpayer's adjusted taxable income; and (3) the taxpayer's floor plan financing interest. “Business interest” means interest paid or accrued for a trade or business debt but does not include investment interest.

Section 2306 within Subtitle C of Title II of Division A of the aid bill adds IRC Section 163(j)(10) to provide for a special rule for taxable years beginning in 2019 and 2020. Specifically, the 30-percent limit is raised to 50 percent. Special rules apply to partnerships. A taxpayer can elect out of the new provision, but the decision to elect out can be revoked only with the consent of the Treasury Secretary. The provision is effective to taxable years beginning after December 31, 2018.

Bankruptcy. Title I of the aid bill, the Keeping American Workers Paid and Employed Act, contains a key definition for purposes of the Bankruptcy Code. Specifically, Section 1113 temporarily modifies the definition of “debtor” contained in 11 U.S.C. §1182(1) such that “debtor” means a person engaged in commercial or business activity with aggregated noncontingent liquidated secured or unsecured debts as of filing a petition (or the date of an order of relief) of up to $7.5 million of which at least 50 percent arose from the debtor’s commercial or business activities. However, “debtor” does not include: (1) Exchange Act reporting companies; (2) affiliates of issuers as defined in Exchange Act Section 3; or (3) certain groups of affiliated debtors.

With respect to the reference to Exchange Act Section 3 and the definition of “affiliate of an issuer,” Exchange Act Section 3(a)(8) defines “issuer” and although affiliates are mentioned in numerous other Exchange Act Section 3 definitions, there is no specific statutory definition of “affiliate of an issuer” as referenced in the aid bill. However, Securities Act Rules 144(a)(1) and 405 do contain definitions of “affiliate of an issuer” and use similar language to refer to “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer.”

Section 1113 applies only to cases under the bankruptcy code commenced on or after enactment. The provision sunsets one year after enactment and will then revert to is current definition of “debtor,” which means “small business debtor.”

Criminal justice provisions. Section 15002 in Division B of the CARES Act provides that certain federal criminal proceedings may be conducted via video teleconferencing or via telephone conferencing if video teleconferencing is not reasonably available. Proceedings that could be impacted include: (1) detention hearings; (2) initial appearances; (3) preliminary hearings; (4) waivers of indictment; (5) arraignments; (6) probation and supervised release revocation; (7) pretrial release revocation; (8) appearances under Federal Rule of Criminal Procedure 40; and (9) misdemeanor pleas and sentences. Likewise, video teleconferencing or telephone conferencing may be used to conduct felony pleas and sentencings under Federal Rules of Criminal Procedure 11 and 32, respectively.

The provision also includes requirements about the findings to be made before courts use video teleconferencing or telephone conferencing. A cornerstone of the provision is that a defendant must, after consultation with counsel, consent to the use of video teleconferencing or telephone conferencing.

The authorization for the use of video teleconferencing or telephone conferencing terminates on the earliest of 30 days after the presidential emergency declaration ends or when the U.S. Judicial Conference finds that emergency conditions no longer materially affect the functioning of federal courts or a particular district court.

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

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

The SEC has announced the granting of additional temporary relief to market participants whose operations may be affected by the rapidly 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).

Filings under Regulations A and Crowdfunding. The Commission notes that the current outbreak of COVID-19 may present challenges to entities and their representatives in timely meeting certain filing obligations under the federal securities laws. Accordingly, the agency’s temporary final rules provide Regulation A and Regulation Crowdfunding issuers with an additional 45 days to file certain disclosure reports that would have been due between March 26, 2020, and May 31, 2020, subject to certain conditions. Companies relying on this relief must promptly disclose this reliance to investors. Moreover, when the company does make the required filing, it must disclose its reliance on the temporary rules and state the good faith reasons why it could not file the report or form on a timely basis.

For Regulation Crowdfunding, the temporary relief applies to annual reports on Form C-AR, progress updates on Form C-U, and termination of reporting on Form C-TR. For Regulation A, the relief applies to post-qualification amendments required at least every 12 months after the qualification date to include updated financial statements, annual reports on Form 1-K, semi-annual reports on Form 1-SA, special financial reports on Forms 1-K or 1-SA, current reports on Form 1-U, and exit reports on Form 1-Z.

Notarization on Form ID. In order to use the SEC’s EDGAR system to make filings, an applicant must submit a Form ID online and then upload a manually signed and notarized copy of the form as a PDF. Several filers, however, have informed the Commission that they are encountering difficulty in obtaining the required notarization because their employees are telecommuting or are otherwise unable to access a notary public due to conditions created by COVID-19.

To address this situation, the SEC’s temporary rule that provides relief from the notarization requirement from March 26, 2020 through July 1, 2020. To obtain the temporary relief, the filer must indicate on its manually signed Form ID that it could not provide the required notarization due to circumstances relating to COVID-19. The filer must then a PDF copy of the notarized, manually signed document within 90 days of obtaining an EDGAR account.

Annual updates for municipal advisers. To help remedy potential COVID-19-related compliance issues faced by municipal advisers, the SEC has issued a temporary exemptive order that grants affected municipal advisers with an additional 45 days to file their annual updates to Form MA. The order applies to Form MA filings that would have otherwise been due between March 26, 2020 and June 30, 2020. To obtain the exemptive relief, the municipal adviser must: (1) be unable to meet the filing deadline due to circumstances related to current or potential effects of COVID-19; and (2) provide a brief description of the reasons why it could not timely file the update to Form MA.

The releases are No. 33-10768 and No. 34-88491.

Thursday, 26 March 2020

Poison pills may be worth considering in current market conditions, according to Kirkland & Ellis experts

By David B. Feirstein, Sarkis Jebejian, Shaun J. Mathew, Dean S. Shulman, Daniel E. Wolf, and Sara B. Zablotney, Kirkland & Ellis, LLP

A team of Kirkland & Ellis attorneys discusses the value of poison pills at a time when the unprecedented market disruption caused by the coronavirus pandemic has driven stock prices down precipitously. In their view, all companies should be paying closer attention to the composition of their shareholder base and trading activity and be ready to act quickly against opportunistic stock accumulations. They note that shareholder rights plans can guard against a takeover bid, creeping control or an activist campaign, as well as protect a company’s valuable net operating loss carryforwards.

To read the entire article, click here.

Wednesday, 25 March 2020

SEC extends COVID-19 exemptions, CorpFin issues views on disclosure considerations

By Rodney F. Tonkovic, J.D.

The SEC has extended earlier exemptive orders providing relief from reporting and proxy delivery requirements for those affected by the COVID-19 outbreak. Earlier conditional reporting relief from the reporting and proxy delivery requirements for public companies has been expanded by one month. Relief with respect to holding in-person board meetings and meeting certain filing and delivery requirements under the Investment Company and Investment Advisers Acts has also been extended by one month. Finally, the Division of Corporation Finance has issued guidance setting forth its views on disclosure obligations during the current disruption.

The press release announcing the extensions notes that the agency will continue to monitor developments and could further extend the time periods and/or issue additional relief.

Topic No. 9. The Division of Corporation Finance issued Disclosure Guidance Topic No. 9: Coronavirus (COVID-19), providing the Division's views on disclosure and other securities law obligations that companies should consider with respect to the coronavirus outbreak and related business and market disruptions. In sum, the guidance encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Health and safety, the Division stresses, should not be compromised to meet reporting requirements.

According to the guidance, assessing the risks and effects of COVID-19 will be a facts and circumstances analysis, and disclosures should be specific to a company's situation. The guidance includes a number of questions that companies should consider, including: how COVID-19 has impacted financial conditions and results of operations; the effect of COVID-19 on capital and financial resources and assets on balance sheets; and, travel restrictions and constraints on human capital resources. The Division encourages disclosure that is tailored to provide material information and to allow investors to evaluate the expected impact through the eyes of management.

The guidance also addresses the reporting of earnings and financial results. Here, the Division encourages companies to proactively address financial reporting matters earlier than usual. This is due to potential difficulties associated with companies and their auditors completing the required work in the face of COVID-19. Turning to the presentation of non-GAAP financial measures adjusting for or explaining the impact of COVID-19, the guidance says that it would be appropriate to highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. And, if a company is considering presenting metrics related to COVID-19, or changing the method by which it calculates a metric as a result of COVID-19, the guidance offers a reminder of the principles explained in recent Commission guidance on metrics.

The guidance also emphasizes the necessity of refraining from trading prior to disseminating material non-public information. The company and its executives who are aware material risks related to COVID-19 should refrain from trading in the company's securities until such information is disclosed to the public, the guidance says.

Public companies. The SEC has extended an exemptive order providing public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. Among other conditions, for each delayed report, companies must still convey through a current report (on Form 8-K or Form 6-K) a summary of why the relief is needed in their particular circumstances. Relief for companies whose ability to deliver proxy and information statements has been affected also remains in place. This order supersedes the original order (Release No. 34-88318), which covered March 1, 2020 to April 30, 2020.

Investment Funds and advisers. The Commission has also extended the relief giving certain investment funds and investment advisers additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements. The order providing exemptions from the Investment Company Act offers the same relief as the previous order, but extends the period for which the relief is available by one month and updates the associated notice requirements. To that end, the relief for in-person board meetings and for filing Form N-23C-2 is limited to the period from and including March 13, 2020 to August 15, 2020. The relief for Forms N-CEN and N-PORT filing requirements and from annual and semi-annual report transmittal deadlines is limited to filing or transmittal obligations, as applicable, for which the original due date is on or after March 13, 2020 but on or prior to June 30, 2020. Regarding the exemptions for Forms N-CEN, N-PORT and the transmission of annual and semi-annual reports, the Commission has removed the original order's conditions that a fund relying on the relief describe why it is relying on the Order and estimate a date by which the required report would be filed.

The Commission continues to take the position that it would not provide a basis for an enforcement action if a registered fund does not deliver to investors the current prospectus where timely delivery is not possible because of circumstances related to COVID-19.

Finally, the Commission extended previously-issued exemptions from certain requirements of the Advisers Act limited to filing or delivery obligations, as applicable, for which the original due date is on or after March 13, 2020 but on or prior to June 30, 2020. The original order covered until April 30, 2020.

The relief applies to:
  • registered investment advisers and exempt reporting advisers affected by the coronavirus outbreak to file an amendment to Form ADV or file reports on Form ADV part 1A, respectively;
  • registered investment advisers affected by the coronavirus outbreak from requirements to deliver amended brochures, brochure supplements or summary of material changes to clients where the disclosures are not able to be timely delivered because of circumstances related to coronavirus; and
  • private fund advisers affected by the coronavirus outbreak from Form PF filing requirements. 
Filing or delivery must still be made as soon as practicable but no later than 45 days after the original due date.

CFTC’s Energy and Environmental Markets Advisory Committee focuses on COVID-19 related wreckage in world oil markets

By Brad Rosen, J.D.

Noting the unprecedented and historic activity in the financial markets resulting from the COVID-19 outbreak, CFTC Commissioner Dan Berkovitz, who is the sponsor of CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC), led off the committee’s recent remote meeting underscoring the importance of understanding the latest developments and volatility in the derivatives markets.  Towards that end, Berkovitz tabled a scheduled discussion of the CFTC’s position limits proposal in favor of an exclusive presentation by the CFTC’s Division of Market Oversight Market Intelligence Branch (MIB) focusing on many of the recent dislocations in the financial and energy derivative markets. The commissioner also noted that a discussion of the proposed position limit proposal would be rescheduled for a later meeting.

The central role of market intelligence. In his opening remarks, Commissioner Berkovitz observed that in times of market stress, it is critical that the markets are transparent and that participants have accurate and up-to-date information. He also noted that to date, the derivatives markets have been functioning effectively, but that continued vigilance will be required as conditions evolve. In particular, Berkovitz recognized the vital role played by the CFTC’s MIB, which has been leading daily briefings over the past few weeks to apprise commissioners and staff of market developments.  As a result of these briefings, various CFTC operating divisions continue to share key market data and consider potential areas of risk. 

MIB analysts survey a battered market landscape. MIB Chief Market Intelligence Officer Mel Gunewardena and Market Analysts Chris Goodenow and Mike Nouri concluded that while economic threats remain elevated, the derivative markets have appeared resilient in face of lower liquidity and historic volatility and volume. Some of their specific observations included:
  • The velocity of the COVID-19 market sell-off is one of the most extreme in the equity markets in the past 100 years. Moreover, equity volatility during the crisis has been the highest observed in the past 30 years.
  • U.S. government bond yields reached their lowest levels in history as domestic and international investors seek safety, as the whipsaw price action registered the largest down move in history and the steepest climb of yields within a seven-day period.
  • Futures liquidity and top-of-book-depth declined, and spreads have widened. Likewise, swap and credit derivatives spreads have expanded, and liquidity has diminished.
  • On March 9, 2020, West Texas Intermediate (WTI) and global oil prices had the largest single day drop in percentage terms since the Gulf War in 1991.
  • COVID-19 and the global lockdown have all but removed demand for oil in the short term as price volatility has moved oil prices by almost $22.50 per barrel during the month.
  • Supply and demand forecasts showed an oversupply market even before OPEC+ failed to reach an agreement. Additional barrels from Saudi Arabia and other OPEC+ members in the second quarter will only exacerbate the global supply glut.
  • Asia’s largest oil importers (China, India, Japan, and South Korea) are recovering from COVID-19, and their demand is expected to be lower next quarter.
  • In the U.S., tight oil wells have high decline rates requiring new drilling to keep overall production up. Average breakeven costs for new wells in many tight oil basins are well above current market prices. Absent price appreciation, domestic production may fall significantly in the coming months. 
Other commissioners weigh-in. In her remarks, Commissioner Dawn Stump focused on the Commission’s role in promoting resilience of the derivative markets through sound regulation. She noted that the commodity production and distribution business is inherently risky and recognized the nation’s gratefulness to those who are willing to take on such endeavors in order that the rest of us might eat and power our modern lives. She stated, “resilience is everyone’s shared responsibility, and at the CFTC it is a part of our mission.” 

For his part, Chairman Heath Tarbert recognized the hard work CFTC staff and market participants in the face of immense economic and personal difficulties around the country.  Tarbert also underscored that the American derivatives markets are so far showing resilience and underscored that margin calls are being met by the major clearing members, and “sellers can find buyers, and buyers can find sellers.”  

Unity and discord at Commission. An interesting dynamic appears to shaping up at the CFTC. While a sense of unity and we’re all in this together seemed to prevail at the EEMAC meeting, a rift among commissioners is also apparent. Despite the COVID-19 crisis, Chairman Tarbert has favored a “full steam ahead” approach when it comes to moving forward with his goals and strategic objectives. In his prepared remarks, the Chairman has been clear, “[W]hile we are laser focused on the turbulence in our market, the agency must continue pursuing its broader mandate.  The current turbulence in the markets will eventually subside and we will take stock of the system’s resiliency.  In the meantime, we must push forward with all the vital issues we were called to address even during normal times.”

In stark contrast, Commissioner Behnam recently stated, “[F]or the immediate future, and until financial markets demonstrate signs of stability and normalcy again, I believe the CFTC should temporarily table all non-critical policy work, shifting all our efforts and resources towards monitoring market and institutional stability and resiliency, prioritizing surveillance and enforcement, working with other regulators, and exhaustively engaging with market participants to consider necessary agency action that will alleviate market disruptions and support stable financial markets.”

Meanwhile, Commissioner Berkovitz has indicated that the EEMAC intends to schedule a meeting where the position limits proposal will be discussed in early May. That comment period is scheduled to close on April 29, 2020. 

Tuesday, 24 March 2020

State legislatures postpone sessions, securities regulators issue orders amid COVID-19

By Jay Fishman, J.D.

Across the United States, a number of state legislatures have postponed their sessions and various state securities regulators have issued orders to deal with the coronavirus (COVID-19).

State legislatures. Postponements. As of March 20, 2020, the following 21 legislatures have postponed their legislative session (with more states likely to do so):
Alabama, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Nebraska, New Hampshire, New York, Rhode Island, Vermont, Virgin Islands and Wisconsin.
Four additional chambers postponed. The following four additional chambers have also postponed their legislative session:
Missouri Senate, New Jersey Assembly, Ohio House and Oklahoma Senate.
State securities regulators. The North American Securities Administrators Association, Inc. (NASAA) is continuously updating on its website a list of orders various states securities regulators have issued and other measures the jurisdictions are taking amid COVID-19.

Orders. Below is a summary of the orders as of March 24, 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.

Alabama: temporarily relieves financial professionals displaced by COVID-19; relieves the requirement to obtain physical signatures on Form U-4.

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

Florida: extends license renewal deadline for 30 days from the existing renewal deadline; no late fee assessed for eligible renewals during extension period.

Georgia: extends investment adviser annual update amendment filing deadline until 5:00 p.m. on April 30, 2020; relieves registrants of fingerprint requirement until June, 30, 2020.

Nebraska: all notices must be filed electronically—file Rule 506 offerings through NASAA’s electronic filing depository (EFD) and email all other notices including Nebraska’s limited offering exemption at Nebraska Securities Act, Section 8-1111; Regulation A, Tier 2 offerings; and mutual fund and unit investment trust offerings to DOB.securitiesfilings@nebraska.gov; temporarily relieves financial professionals displaced by COVID-19; extends investment adviser annual update amendment filing deadline for up to 45 days from the normally required date; relieves the requirement to obtain physical signatures on Form U-4.

Vermont: extends investment adviser annual update amendment filing deadline until April 30, 2020.

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

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

Other measures taken. State securities regulators have also taken the following measures:

Connecticut: took no-action position allowing individuals who work for Consumer Credit Licensees currently licensed in Connecticut to temporarily work from home.
Florida: issued guidance for Florida securities professionals. 

Hawaii: encourages use of online services; offices will be closed from Friday, March 20th through Friday, April 3rd. Unless otherwise noticed, the Department of Commerce and Consumer Affairs offices will reopen on Monday, April 6th.

Michigan: issued lobby closures.

Nebraska: issued guidance for broker-dealers, agents, investment advisers and investment adviser representatives.

New Mexico: recommends online transactions.

Ohio: many staff members telecommuting from home.

Pennsylvania: issued information and guidance on securities licensing and enforcement/compliance.

Vermont: until March 31, 2020, staff ordered to work from home except for some persons at office to coordinate COVID-19 response, receive mail and process checks, though this directive may change after its March 16th issuance.

Virginia: changed normal business operations—as of March 20, 2020, business entity filings should be made electronically; U.S. mail and private delivery service remain as an alternative to the online Clerk’s Information System (CIS); the 100-page limit for electronic filing of case documents has been modified: enlarged case documents may be submitted electronically in logically separated parts of 100 pages or less.

Washington: reduced onsite staff at the Department of Financial Institution’s offices.

Please continue to check NASAA’s website because the organization adds orders and other measures when the state securities regulators release them.

COVID-19 sparks more SEC, PCAOB regulatory updates

By Amanda Maine, J.D.

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.

Enforcement. Division of Enforcement Co-Directors Stephane Avakian and Steven Peikin issued a statement outlining enforcement issues related to the coronavirus. They noted that corporate insiders such as directors, officers, employees, and consultants are learning material nonpublic information that may hold an even greater value than under normal circumstances. The co-directors highlighted the fact that earnings reports and SEC disclosure filings may be delayed due to COVID-19, which may give more people access to material nonpublic information than under normal circumstances. Those in possession of this information should be mindful of their obligations to keep it confidential and not trade on it, they advised.

They also urged public companies to protect against the improper dissemination and use of material nonpublic information by reviewing their disclosure controls and procedures, insider trading prohibitions, codes of ethics, Regulation FD, and selective disclosure prohibitions. Likewise, broker-dealers, investment advisers, and other registrants should ensure their compliance with policies and procedures designed to prevent the misuse of material nonpublic information.

The co-directors warned that the Enforcement Division remains committed to ensuring that Main Street investors are not victims of fraud related to COVID-19. In early February, the SEC issued an Investor Alert on coronavirus-related scams, which cautioned investors to be wary of promotions claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus.

OCIE. OCIE also provided an update on its operations in light of COVID-19. Due to health and safety concerns, OCIE will now be conducting examinations off-site through correspondence, unless it is “absolutely necessary” for the staff to be on-site. OCIE assured that it remains fully operational nationwide and will continue to execute its investor protection mission.

OCIE stressed that it is fully aware of the regulatory relief provided to registrants and encouraged registrants to take advantage of any relief as needed. OCIE emphasized that reliance on regulatory relief will not be a risk factor taken into consideration when determining whether OCIE commences an examination.

In addition, OCIE said that it is actively engaged in outreach with registrants to assess the impacts and challenges related to COVID-19. OCIE encouraged registrants to contact its staff with any questions or concerns.

Investment companies. The Division of Investment Management granted no-action relief based on a request from the Investment Company Institute (ICI) for affiliates of money market funds. Investment Company Act Rule 17a-9 provides a registered open-end investment company regulated as a money market fund an exemption from prohibitions under Section 17(a) to permit affiliated persons of a money market fund to purchase distressed and non-distressed securities from the fund subject to certain conditions. In its letter, ICI notes that Rule 17a-9 was amended in 2010 to “enable advisers to address acute credit or liquidity problems in a money market fund portfolio by purchasing securities from the fund that would be difficult or impossible to sell on the open market at or near their amortized cost.”

According to ICI, there is a short-term dislocation in the market for money market securities due to the COVID-19 outbreak, but because of conflicting regulations, affiliated persons who want to purchase securities from the funds to enhance the funds’ liquidity or stability are unable to do so. ICI requested relief from the regulations, which the staff granted, subject to the following conditions as outlined by ICI in its request: 
  • The purchase price of the purchased security would be its fair market value as determined by a reliable third-party pricing service.
  • The affiliated purchases must satisfy the conditions of Rule 17a-9 except to the extent that the terms of such affiliated purchases would otherwise conflict with applicable banking and Federal Reserve regulations.
  • The fund must timely file Form N-CR reporting the transaction.
  • The relief shall be in effect on a temporary basis in response to the national emergency concerning the COVID-19 outbreak. 
PCAOB. The PCAOB provided an update on its current operations in light of COVID-19. The PCAOB will be conducting its domestic firm inspections remotely to the extent possible and is coordinating with audit firms, while it is suspending international travel for non-U.S. firm inspections for March and April.

The comment period for the Board’s concept release on revisions to its quality control standards ended March 16. However, the PCAOB said that comments received “within a reasonable timeframe” will be treated in the same manner as comments posted by the deadline.

The PCAOB will continue its registration activities, including the processing of applications and responding to questions on application matters. The Board will also continue to meet and vote on pending items remotely. While the PCAOB has cancelled in-person events, such as audit committee and preparer roundtables and the PCAOB/AAA annual meeting, it is committed to staying connected virtually and plans to hold webinars and other virtual meetings.

Clayton’s statement. In a statement posted to the SEC’s website, Chairman Jay Clayton assured that the Commission is “focused on ensuring that the business continuity plans of market participants are adjusted, as necessary or appropriate, to comply with health and safety measures, and that they also facilitate the continuing operation of our markets, market integrity and investor protection.”

Lawsuit says Sen. Burr violated securities laws by selling stocks ahead of COVID-19 market decline

By Mark S. Nelson, J.D.

According to a lawsuit filed on behalf of Alan Jacobson, Sen. Richard Burr (R-NC) violated the antifraud provisions of the federal securities laws by selling large amounts of his assets after having been briefed by Trump Administration officials about the likely impact of COVID-19 on the U.S. economy while he also allegedly told a private group the pandemic would be significant but continued to publicly state that the U.S. was prepared for the pandemic. The complaint was filed in the U.S. District Court for the District of Columbia and claims that Sen. Burr’s stock sales in mid-February 2020 ran afoul of Exchange Act Sections 10(b) and 20A and Rule 10b-5 as well as the Stop Trading on Congressional Knowledge (STOCK) Act of 2012 (Jacobson v. Burr, March 23, 2020).

Conflicting public and private statements. The complaint alleged that Sen. Burr sold numerous stocks, including the stock of Wyndham Hotels & Resorts, Inc., within weeks of receiving a private briefing regarding COVID-19 on January 24, 2020 by Trump Administration officials for Senators on the Senate Committee on Health, Education, Labor, and Pensions, of which Sen. Burr is a member (Sen. Burr also is chairman of the Senate Select Committee on Intelligence). The complaint alleged on information and belief that Sen. Burr would have received material, nonpublic information about the spread of COVID-19 at that meeting. Senator Burr on February 7, 2020 allegedly made a media appearance during which he suggested the U.S. was prepared for a pandemic.

The complaint asserted that Sen. Burr’s public comments contrasted with those he made to a private meeting of the Tar Heel Circle on February 27, 2020 where the senator stated that “COVID-19 ‘is much more aggressive in its transmission than anything we have seen in recent history,’ comparing it to the 1918 flu pandemic.” The complaint again cited media reports of what Sen. Burr said and noted that the senator also told the meeting that “[e]very company should be cognizant of the fact that you may have to alter your travel. You may have to look at your employees and judge whether the trip they’re making to Europe is essential or whether it can be done on video conference. Why risk it?” The complaint also cited reports that Sen. Burr had made other remarks about the potential for school closures and the need for military tent hospitals.

Senator sold hospitality stock. Plaintiff Jacobson alleged that he owned shares of Wyndham at the same time that Sen. Burr owned and sold shares in the same company. Specifically, Jacobson’s complaint alleged that Sen. Burr and the senator’s wife engaged in a total of 33 stock sales transactions on February 13, 2020. The complaint cited a public transaction report filed by Sen. Burr on February 27, 2020 showing that the senator sold his stock in 18 companies, including Wyndham stock. Senator Burr’s wife also sold stocks in 15 transactions, including Wyndham stock.

The companies whose stocks the Burrs held appeared to be a diversified group of companies spanning multiple sectors of the economy, including banking and finance, pharmaceuticals, transportation, hospitality, and manufacturing. The complaint further noted that Wyndham’s stock price had fallen from $59.37 on February 13, 2020 to $20.61 as of March 19, 2020, a decline of 65 percent. In about that same time frame, said the complaint, the Dow Jones Industrial Average had peaked at a record level of over 29,551 but had lost one-third of its value as of the time the complaint was filed.

The complaint cited media reports suggesting that Sen. Burr’s net worth was roughly $1.7 million. According to transaction records detailed in the complaint, Sen. Burr’s Wyndham stock sales amounted to between $15,001 and $50,000 and the senator’s wife’s Wyndham stock sales amounted to between $50,001 and $100,000. The senator’s and his wife’s combined Wyndham stock sales totaled between $628,033 and $1.72 million.

Sen. Burr response. Senator Burr has responded publicly to the numerous media reports about his recent stock sales by tweeting a letter he wrote to the chairman and vice chairman of the Senate Select Committee on Ethics. In the letter, Sen. Burr wrote, in part: "While I relied solely on public reporting to guide my decision to sell the stock, it is my belief that an independent review is warranted to ensure full and complete transparency."

In addition to the letter, Sen. Burr also tweeted that he had followed CNBC's health and science reports from Asia and reiterated that he relied only on “public news reports” in making the decision to sell many of the stocks he owned. The senator added with respect to his letter to the Senate ethics committee: “Understanding the assumption many could make in hindsight however, I spoke this morning with the chairman of the Senate Ethics Committee and asked him to open a complete review of the matter with full transparency.”

Previously, Sen. Burr joined Senate Health Committee Chairman Lamar Alexander (R-Tenn) in a February 7, 2020 op-ed in which they cited U.S. preparedness. Upon the confirmation of North Carolina’s first COVID-19 case, Sen. Burr stated on March 3, 2020: “The U.S. is in a better position than any other nation to handle a public health emergency like coronavirus. But Congress must continue working to make sure first responders have the resources they need and the federal government is using all the tools at its disposal to stem the problem.”

Senator Burr, who authored the Pandemic and All-Hazards Preparedness Act (PAHPA), has supported federal legislation to respond to the COVID-19 pandemic, including the Families First Coronavirus Response Act. The PAHPA became law in 2006 under the sponsorship of Sen. Burr and Sen. Edward Kennedy (D-Mass) and was reauthorized in 2019.

The case is No. 20-cv-00799.

Exemptions ease restrictions on funds' ability to borrow and lend

By Rodney F. Tonkovic, J.D.

The SEC has provided funds with the temporary flexibility to borrow funds from certain affiliates and to enter into certain other lending arrangements. Subject to various conditions, the order provides exemptive relief allowing: registered open-end funds and insurance company separate accounts to borrow money from certain affiliates; more flexibility under existing interfund arrangements; and, lending arrangements that deviate from policies recited in an investment company's registration statement (Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) AND 38(a) 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-33821, March 23, 2020).

The announcement notes that this relief is the latest in a series of steps taken by the Commission to assist financial market participants in addressing the impact of the coronavirus. Chairman Jay Clayton said: "Today's temporary action will provide an additional tool that funds can use to manage their portfolios for the benefit of their investors in the current market environment." And, "This action provides funds with additional flexibility to navigate volatile markets while meeting their obligations to investor." Firms and financial professionals affected by the coronavirus are encouraged to contact the staff with questions and concerns. 

Exemptive relief. The order provides the following temporary relief: 
  • Open-end fund or insurance company separate accounts may borrow from certain affiliates. The exemptions from sections 12(d)(3) and 18(f)(1) permit an open-end fund to borrow money from any affiliated person, or affiliated person of such affiliated person, that is not a bank and/or registered investment company. An exemption from section 17(a) allows that affiliate to make collateralized loans to the open end-fund or separate account;
  • Additional flexibility under existing interfund lending arrangements. Any registered investment company currently able to rely on a Commission order permitting an interfund lending and borrowing facility has been given more flexibility to make loans or borrow, notwithstanding limitations in the existing orders, provided that the loans are otherwise in accordance with the terms and conditions of the orders;
  • The extension of the ability to use interfund lending arrangements to funds that do not currently have exemptive relief. Any registered management investment company that is not currently able to rely on an order permitting an interfund lending and borrowing facility may establish and participate in such a facility as set forth in an exemptive order issued by the Commission within the twelve months preceding March 23, 2020. Money market funds, however, may not participate as borrowers in the interfund facility; and 
Registered open-end funds may enter into lending arrangements or borrowings that deviate from fundamental policies, subject to prior board approval. An open-end fund is provided with an exemption from sections 13(a)(2) and 13(a)(3) to permit entry into otherwise lawful lending or borrowing transactions that deviate from relevant policies in its registration statement without prior shareholder approval; provided that the board determines that this action is in the company's best interest and that shareholders are promptly notified.

The relief is effective from the date of the order (March 23, 2020) until at least two weeks from the date to be specified in a public notice from Commission staff, but no earlier than June 30, 2020. Entities seeking to rely on the order are subject to certain conditions, including notifying Commission staff that they are relying on this order.

The release is No. IC-33821.

Monday, 23 March 2020

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

By Amanda Maine, J.D.

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).

The order granting temporary exemptive relief cites two categories of regulatory provisions: (1) Transfer Agent Exempted Provisions (encompassing Sections 17A and 17(f)(1) of the Exchange Act, as well as Rules 17Ad-1 through 17Ad-11, 17Ad-13 through 17Ad-20, and 17f-1); and (2) Fingerprinting Exempted Provisions (encompassing Exchange Act Section 17(f)(2) and Rule 17f-2); collectively, the “Exempted Provisions.”

Any registered transfer agent that is unable to comply with the Exempted Provisions due to COVID-19 is temporarily exempted from complying with those provisions subject to the following conditions: (1) written notification to the Commission that such person is taking advantage of the relief; (2) a description of the specific regulatory obligations that the person is unable to comply with; and (3) a statement of the reasons the person is unable to comply with such obligations.

The Commission emphasized that, despite the exemptions, transfer agents must still comply with the requirements of Exchange Act Rule 17Ad-12, which requires transfer agents to ensure that they adequately safeguard securities and funds in their possession or custody. If a transfer agent’s operations, facilities, or systems are significantly affected as a result of COVID-19 such that the transfer agent believes its compliance with Rule 17Ad-12 could be negatively affected, to the extent possible, all security holder or issuer funds that remain in the custody of the transfer agent should be maintained in a separate bank account held for the exclusive benefit of security holders until such funds are properly processed, transferred, or remitted, the order states.

In a press release announcing the exemptive relief, SEC Division of Trading and Markets Director Brett Redfearn said, “The health and safety of all participants in our markets is of paramount importance. This temporary relief recognizes that circumstances related to COVID-19 may prevent certain transfer agents and other persons from complying with all requirements within required timeframes.”

The Commission encouraged transfer agents and other regulated entities and financial professionals to contact the TM staff if they have questions relating to the effects of COVID-19 on their operations. If feasible, the Commission recommended that issuers and their transfer agents place a notice on their websites or provide toll free phone numbers to respond to inquiries.

The release is No. 34-88448.

CFTC grants further relief as agendas shift in light of the COVID-19 crisis

By Brad Rosen, J.D.

In further response to the coronavirus/COVID-19 pandemic, the CFTC’s Division of Swap and Intermediary Oversight (DSIO) issued two additional no-action letters which provide temporary, targeted relief to various market participants. One of those no-action letters was issued to a large U.S. bank involved in providing finance to oil and gas sector customers, while the other was directed to registered commodity pool operators (CFTC Letter 20-10 and CFTC Letter 20-11 both dated March 20, 2020).

The CFTC’s most recent pandemic-related relief follows on the heels of five no-action letters issued by DSIO on March 17, 2020 and three no-action letters issued by the agency’s Division of Market Oversight (DMO) on March 18th. Separately, but also in response to market turbulence related to the COVID-19 crisis, the CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC) amended its agenda for a public meeting on Tuesday, March 24, 2020. The EEMAC meeting will explore recent developments in the financial markets, with a focus on the energy derivatives markets.

A summary of the relief provided in the no-action letters includes the following:

Relief for a large bank from major swap participant registration in connection with threshold calculation. In CFTC Letter 20-10, DSIO granted no-action relief to a major insured depository institution (IDI) from considering energy-related commodity swaps in determining whether that institution must register with the CFTC as a major swap participant (MSP) as a result of unprecedented drops in the demand and price of crude oil. The no action letter issued to the IDI, which is referred to as “X” in the letter states, “The unprecedented drop in global demand for crude oil as a result of the COVID-19 pandemic followed closely by the OPEC + supply cut disagreement have resulted in the price of crude oil decreasing by approximately 48 [percent] year to date.”

The letter further notes that given the nature of “X’s” lending and risk management business with oil exploration and production customers, the volatility and low oil prices associated with the extraordinary market events, it is highly likely “X” will exceed the MSP registration threshold by the end of the next calendar quarter. Accordingly, relief from the applicable registration requirement was granted.

Relief for Commodity Pool Operators. In CFTC Letter 20-11, DSIO granted no-action relief to (Commodity Pool Operators) CPOs from certain reporting requirements. The relief issued by DSIO pertains to the filing deadlines for Form CPO-PQR, Pool Annual Reports, and Pool Periodic Account Statements.

The chairman speaks. In connection with the latest round of no-action relief, CFTC Chairman Heath P. Tarbert observed, “End users involved in energy exploration and production are facing unique challenges, and the CFTC is committed to providing targeted relief, where appropriate, that helps these companies weather volatile market conditions. ” The chairman added, “We are also taking additional steps to provide flexibility for investment funds by granting temporary relief from certain reporting requirements that have become challenging to meet under the present circumstances.”

EEMAC to focus on recent energy market developments. EEMAC sponsor, CFTC Commissioner Dan Berkovitz, recently announced amendments to the agenda for the committee’s public meeting on Tuesday, March 24th. Under the revised agenda, the CFTC’s DMO Market Intelligence Branch (MIB) will present on recent developments in the financial markets, with a focus on the energy derivatives markets.

Berkovitz stated, “MIB’s presentation will provide our market participants with information and perspective on recent historic market activity.” He added, “MIB has been closely following developments in these markets and their analyses have been of great benefit to the Commission’s heightened oversight of the financial markets in the current conditions.” In an effort to accommodate immediate attention to recent market events, Berkovitz indicated that the originally scheduled discussion on the CFTC’s 2020 position limits proposal will be rescheduled for a later meeting.

The no-action letters are CFTC Letter 20-10 and CFTC Letter 20-11.

NYSE shuts down trading floor, gets SEC relief for electronic auctions

By John Filar Atwood

The NYSE closed its trading floor starting today as a precautionary measure during the COVID-19 outbreak and received temporary relief from the SEC to facilitate electronic auctions during the shutdown. The relief came in the form of the approval of an NYSE rule change that relaxes certain restrictions placed on NYSE designated market makers (DMMs) for the conduct of electronic actions. The changes will remain in place until May 15, or until the trading floor reopens.

NYSE rules currently set price and volume limits beyond which DMMs cannot electronically facilitate an auction, according to an SEC news release. However, NYSE rules allow for these restrictions to be waived or modified on an as-needed basis. The approved rule filing provides for temporary modifications that clarify when DMMs can electronically facilitate auctions, and that align the price and volume parameters with the price collars that would apply during an auction facilitated by the exchange’s own systems.

Modifications. The SEC agreed to suspend the existing price and volume parameters restricting DMMs from effecting a core open auction, trading halt auction, or closing auction. It also approved the NYSE’s plan to widen to ten percent the percentage price parameters for when a DMM may electronically effect a core open auction, trading halt auction, or closing auction.

Under existing NYSE rules, the price parameters are four percent for opening auctions under normal market conditions, and eight percent under volatile conditions. The limits are from two percent to five percent for closing auctions, depending on a security’s price.

The SEC approved a third modification that suspends the requirement for DMMs to publish pre-opening indications before a core open or trading halt auction, which is a floor-based manual action. A fourth adjustment to current rules establishes the auction collars for an exchange-facilitated trading halt auction following a Level 1 or Level 2 market-wide circuit breaker halt at the greater of ten percent or $0.15.

Testing. The SEC noted that the NYSE conducted a full test of the modifications on March 21, as well as tests earlier in the month. On March 7, the NYSE tested a scenario where the trading floor was unavailable and DMMs electronically facilitated auctions in their assigned securities. The NYSE facilitated any auctions that were not facilitated electronically by the DMM.

On March 19, two DMM firms implemented their own business continuity plans and removed staff from the trading floor. For auctions on March 19 and March 20 in the securities assigned to those DMMs, the NYSE provided the DMMs with the opportunity to electronically facilitate both the core open and closing auctions before an exchange-facilitated auction. For the 16 core open auctions and 19 closing auctions that the NYSE facilitated on March 19, all interest was able to participate within the auction collars and no orders were cancelled after the auctions.

Oil traders urge justices to reject Second Circuit’s CEA extraterritoriality decision

By Mark S. Nelson, J.D.

Oil traders who alleged that BP P.L.C. manipulated Brent crude futures and derivatives in violation of the Commodity Exchange Act (CEA) have asked the justices to clarify that the Second Circuit’s conduct and effects test was rejected by the Supreme Court in Morrison. The petition asserts a split between the Second and Ninth Circuits and posits that a decision upholding the Second Circuit’s view could preclude future CFTC and DOJ enforcement actions against international manipulations under the CEA. The Supreme Court recently denied certiorari in a Ninth Circuit case that declined to apply the relevant Second Circuit precedent and the latest petition for certiorari on this issue relies heavily on another Ninth Circuit case that also declined to follow the Second Circuit (Atlantic Trading USA, LLC v. BP P.L.C., March 13, 2020).

Alleged oil price manipulation. The plaintiff futures and derivatives traders alleged that BP manipulated the underlying Brent crude markets in violation of the CEA and that the effects of those manipulations were reported to multiple entities that inform the benchmark index for Brent crude on the Intercontinental Exchange Futures Europe and the New York Mercantile Exchange.

The Second Circuit applied a two-step test to determine whether the plaintiffs’ claims were impermissibly extraterritorial under the CEA: (1) does the relevant statue clearly allow extraterritorial application? and (2) was the domestic activity alleged the "focus of Congressional concern?" The court augmented the second part of this test by explaining that its Parkcentral opinion had held that a domestic transaction was necessary but not sufficient because a plaintiff also must allege a substantive statutory violation.

Based on this analytical framework, the court held that the traders’ suit was impermissibly extraterritorial. First, the traders had waived any argument regarding the one CEA provision added by the Dodd-Frank Act that does make a clear expression about extraterritoriality. Second, the traders’ allegations under CEA Section 22 were insufficient because the "ripple effect" theory urged was too attenuated to show domestic conduct in violation of the CEA. Moreover, the Second Circuit found allegations under CEA Sections 6(c)(1) and 9(a)(2) likewise involved conduct that occurred overseas.

The Second Circuit, in affirming dismissal of the case, summed up its opinion thus: "We do not lightly dismiss Plaintiffs’ troubling allegations against Defendants, which include serious claims premised on manipulation, fraud, and deceit. Nonetheless, ‘the sole function of the courts is to enforce [the CEA] according to its terms,’ not to reinvent it" (citation omitted).

Petition says Second Circuit view wrong. The petition filed on behalf of the oil traders noted the split between the Second and Ninth Circuits over Parkcentral. According to the oil traders, the Supreme Court’s Morrison opinion, which interpreted the extraterritorial application of Exchange Act Section 10(b), rejected the conduct and effects test, which the traders argue the Second Circuit tried to resurrect via Parkcentral.

Specifically, the petition explained that Morrison found that the focus of Exchange Act Section 10(b) was to protect U.S. exchanges and transactions. As a result, the location of the manipulated transaction was key, not the manipulation itself. The petition further posited that much of the Second Circuit’s analysis was correct. For example, the Second Circuit referred to Absolute Activist’s test of where a transaction occurs (irrevocable liability or transfer of title) and to Loginovskaya’s conclusion that the focus of the CEA, like Exchange Act Section 10(b), is transactional and, thus, Morrison applies to the CEA.

The petition, however, said the Second Circuit departs from other courts when it applies its Parkcentral precedent, which looks to whether a transaction is predominantly foreign. The petition observed that the CFTC had argued as amicus in the Second Circuit that the oil traders’ claims were within the territorial reach of the CEA. The petition explained that the CFTC had argued that it would be odd if the manipulation of a U.S. trading facility was beyond the CEA’s reach merely because the manipulation occurred offshore. The petition also noted that the government in the Ninth‘s Toshiba case had urged denial of certiorari in that case because the Ninth Circuit had correctly applied Morrison.

The case is No. 19-1141.

Friday, 20 March 2020

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

By Amanda Maine, J.D.

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.

The letter also emphasized that essential personnel of member firms should have access to market, clearing, and settlement operations sites. Noting that several states and localities either have or are considering restricting the ability of personnel to access these sites, the organizations urged regulators to engage with state and local leaders to exempt essential personnel from any such restrictions.

Finally, the letter requested that the Financial Stability Oversight Council, on which the heads of the Treasury Department, SEC, Fed, and CFTC serve, signal that U.S. markets will continue to operate, as it will be essential to build market confidence and to emphasize the special role of markets during times of economic uncertainty.

CME Group also urged Secretary Mnuchin not to shorten trading hours, an idea that he had floated at a news conference on March 17. CME Group CEO Terry Duffy expressed surprise that Mnuchin had suggested the idea without reaching out to all cash equity and futures markets including CME Group and Nasdaq. According to Duffy, shorter trading hours in the U.S., rather than decreasing volatility, would actually increase volatility at a rapid pace as investors turn to other venues outside the U.S. when developments occur.

As an alternative to shortening trading hours on U.S. markets, CME suggested the following:
  • Circuit breakers in U.S. equity markets could be adjusted to include only 7 percent and 13 percent downside limits, rather than the current 7 percent, 13 percent, and 20 percent levels. This would help ensure that markets do not fall as far and as fast as they can today by halting trading sooner amid an escalating decline, according to CME.
  • Exchange-traded funds (ETFs) should be required to follow the same guidelines as other markets and to abide by these same circuit breaker rules. Since many ETFs are highly illiquid and are able to trade without being subject to the same standards as equity futures and cash markets, bringing ETFs in line with all other markets will reduce price gaps and soften market spikes at the beginning of each trading day, CME stated. 
Markets must remain open, “especially during this unprecedented crisis when news, information, and events are changing at such a rapid pace,” Duffy implored.

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

By Amanda Maine, J.D.

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.

The letter also emphasized that essential personnel of member firms should have access to market, clearing, and settlement operations sites. Noting that several states and localities either have or are considering restricting the ability of personnel to access these sites, the organizations urged regulators to engage with state and local leaders to exempt essential personnel from any such restrictions.

Finally, the letter requested that the Financial Stability Oversight Council, on which the heads of the Treasury Department, SEC, Fed, and CFTC serve, signal that U.S. markets will continue to operate, as it will be essential to build market confidence and to emphasize the special role of markets during times of economic uncertainty.

CME Group also urged Secretary Mnuchin not to shorten trading hours, an idea that he had floated at a news conference on March 17. CME Group CEO Terry Duffy expressed surprise that Mnuchin had suggested the idea without reaching out to all cash equity and futures markets including CME Group and Nasdaq. According to Duffy, shorter trading hours in the U.S., rather than decreasing volatility, would actually increase volatility at a rapid pace as investors turn to other venues outside the U.S. when developments occur.

As an alternative to shortening trading hours on U.S. markets, CME suggested the following:
  • Circuit breakers in U.S. equity markets could be adjusted to include only 7 percent and 13 percent downside limits, rather than the current 7 percent, 13 percent, and 20 percent levels. This would help ensure that markets do not fall as far and as fast as they can today by halting trading sooner amid an escalating decline, according to CME.
  • Exchange-traded funds (ETFs) should be required to follow the same guidelines as other markets and to abide by these same circuit breaker rules. Since many ETFs are highly illiquid and are able to trade without being subject to the same standards as equity futures and cash markets, bringing ETFs in line with all other markets will reduce price gaps and soften market spikes at the beginning of each trading day, CME stated. 
Markets must remain open, “especially during this unprecedented crisis when news, information, and events are changing at such a rapid pace,” Duffy implored.

Shareholder goes after purported COVID-19 vaccine provider

By Amy Leisinger, J.D.

A shareholder in a biotechnology company has filed a complaint alleging that the company capitalized on coronavirus/COVID-19 fears by falsely claiming that it had developed a vaccine. When the truth came to light, according to the complaint, the company’s stock price fell by 71 percent (McDermid v. Inovio Pharmaceuticals, Inc., March 12, 2020).

Fraudulent activity. Inovio Pharmaceuticals is a biotechnology company that focuses on bringing to market medicines to treat and/or protect people from infectious diseases. According to the shareholder, Inovio’s CEO appeared on television stating that Inovio had developed a COVID-19 vaccine “in a matter of about three hours once we had the DNA sequence from the virus,” and Inovio’s stock price jumped more than 10 percent over the next few days. Two weeks later, Inovio’s CEO reiterated the claim, and the company’s stock price continued to increase. Amidst the hype, Inovio entered into an agreement to sell an aggregate $50 million of its shares of common stock on the open market.

However, the shareholder alleges, Inovio had not developed a COVID-19 vaccine, and Citron Research exposed the defendants’ misstatements and called for an SEC investigation. Inovio’s stock price plummeted, wiping out approximately $643 million in market capitalization for the company. According to the complaint, Inovio attempted to stave off the problem by admitting that it had not “developed” a COVID-19 vaccine but rather had merely “designed a vaccine construct.”

The shareholder alleges that Inovio and its CEO knew of, and were deliberately reckless as to, the falsity of their claims that the company had rapidly developed a vaccine for the virus. Specifically, they falsely described the product as “a fully completed vaccine when it was nothing of the sort” and falsely stated that trials would begin in April 2020, the complaint states.

Relief. By this conduct, the plaintiff alleges, Inovio violated the antifraud provisions of the federal securities laws and the company’s CEO violated Exchange Act Section 20(a) as a controlling person. The plaintiff requests class certification on behalf of Inovio stock purchasers from February 14, 2020, and March 9, 2020, and status as class representative. The complaint seeks compensatory and punitive damages and costs and expenses.

The case is No. 2:20-cv-01402-GJP.