As reported in prior McGuireWoods alerts, financial services regulators have been issuing guidance and relief to assist the industry as financial services firms and public companies continue to deal with the impact COVID-19 is having on day-to-day business operations.
In recent weeks, regulators have issued guidance regarding the implication of the Paycheck Protection Program (PPP) and the loans issued thereunder (see April 21 update). The Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) continued the trend this week, as discussed further below.
Regulators also continue to try to balance investor protection interests with the need for flexibility in this unusual environment. For example, in a new FAQ, the Financial Industry Regulatory Authority (FINRA) emphasized the need for firms to pay close attention to their policies and procedures governing markup disclosures and trade confirmation reporting for trades in fixed income securities given the current market conditions. Also, in a press release discussing the Net Capital Letter (defined below), the director of the CFTC’s Division of Swap Dealer and Intermediary Oversight emphasized that it “is a key priority for the CFTC to ensure that markets remain orderly and liquid in the current environment” and highlighted the importance of ensuring that intermediaries are able to continue trading activities.
Similarly, in announcing the formation of the U.S. Securities and Exchange Commission (SEC) cross-divisional COVID-19 team, Chairman Jay Clayton observed that the SEC “often must take into account complexities, interconnections and continually evolving dynamics of our markets.” The cross-divisional team will be a senior-level group dedicated to assisting the SEC in (1) SEC and Staff actions and analysis related to the effects of COVID-19 on markets, issuers and investors — including “Main Street investors”; and (2) responding to information, analysis and assistance requests from other regulators and the public sector.
U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
SEC Division of Trading and Markets Broker-Dealer Financial Responsibility Rules FAQs
On April 22, 2020, the Staff of the Division of Trading and Markets of the SEC released two FAQs about certain provisions of the broker-dealer financial responsibility rules and their application during the COVID-19 pandemic.
- Check Transmission - The Staff will not recommend enforcement action against broker-dealers that cannot access their offices during April, May or June and that are therefore unable to promptly transmit customer checks as required by Rule 15c3-3 under the Securities and Exchange Act of 1934, provided that the broker-dealer:
- transmits the checks as soon as is practicable;
- takes reasonable steps to notify customers of alternate ways to fund their accounts and that the processing of checks may be delayed because of COVID-19; and
- notifies the SEC’s Office of Compliance Inspections and Examinations at OCIE-COVID@sec.gov and its FINRA Risk Monitoring Analyst of the nature of the problem in forwarding checks and the steps being taken to notify customers.
- Physical Certificate Counts - The Staff will not recommend enforcement action against companies that do not conduct their quarterly securities count of physical certificates due to the inability to access them during the months of April, May or June, provided that the broker-dealer:
- notifies the SEC’s Office of Compliance Inspections and Examinations at OCIE-COVID@sec.gov and its FINRA Risk Monitoring Analyst of its problem in counting physical certificates and provides an estimate of the number and value of the certificates that cannot be counted; and
- makes and retains records of the movements of physical certificates that are received or delivered and were not counted during the impacted period.
FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)
Fixed Income Disclosure
On April 24, 2020, FINRA issued a FAQ addressing firms’ obligations to provide customers with fixed income markup disclosure under FINRA Rule 2232 in light of the volatile market conditions due to the COVID-19 pandemic.
- FINRA noted that “where customer trades are not tied to immediately offsetting principal trades, it may be more difficult for a firm to evaluate whether its offsetting principal trades remain reasonably indicative of [Prevailing Market Price (PMP)], based on the factors identified in Rule 2121 and applicable guidance … and that firms may generate a higher number of exceptions that they evaluate as part of their supervisory review process.”
- FINRA cited to existing guidance, including FAQs 3.5.1 (price and confirmation corrections) and 3.8.1 (PMP determinations), and the importance of documenting reviews and corrections, stating:
- “While FAQ 3.8.1 states that FINRA expects it will be rare for the PMP of a security to be corrected based on exception reporting, FINRA understands that volatile market conditions resulting from the COVID-19 pandemic may impact the rate at which such corrections occur. Firms that perform an exception review process after they issue confirmations with markup disclosure should continue to follow existing guidance, including FAQs 3.5.1 and 3.8.1, on providing corrected confirmations when needed.”
- “In all cases, firms should take particular care to document the basis for correcting a PMP and to apply their policies and procedures consistently, in line with applicable guidance.”
Funding Portals - Gross Income Assessments
On April 23, 2020, FINRA issued two FAQs addressing Funding Portal Gross Income Assessments (FPGIA).
- FINRA provided relief similar to the allowances extended to small firms. FINRA is permitting funding portal members to treat the invoices, distributed at the end of April and due in 30 days, as billed as of Aug. 1, 2020, rather than as due in full within 30 days of the invoice. Further, funding portal members that choose to do so may pay 50 percent of the amount due on Sept. 1, 2020, and the remaining 50 percent on Dec. 1, 2020.
- The second FAQ addressed payment of the FPGIA if a firm terminates its membership, stating that if a funding portal member terminates FINRA membership before Sept. 1, 2020, it will not be expected to pay the FPGIA for 2020.
CFTC AND NFA GUIDANCE
PPP-Related Relief
On April 23, 2020, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DISO) issued a no-action letter (the Net Capital Letter) providing relief to futures commission merchants (FCMs) and introducing brokers (IBs) to address net capital treatment in regard to the net capital treatment of loans obtained by FCMs and IBs under the PPP (PPP loans). The Net Capital Letter provides that, in calculations for compliance with the CFTC net capital requirements, FCMs and IBs can add back to their capital the eligible forgivable expense amount under the PPP loan. Among other things, the relief is conditioned on the FCM/IB:
- ensuring that the amount of the add-back does not exceed the balance sheet liability for the PPP loan; and
- reporting the add-back on line 3070 of the applicable Form 1-FR-IB or Form 1-FR-FCM (provided that IBs and FCMs that are SEC-registered broker-dealers may continue to file a FOCUS Report in lieu of a Form 1-FR-IB or Form 1-FR-FCM).
The Net Capital Letter also permits any FCM or IB that is an SEC-registered broker-dealer and a small firm (as defined by the FINRA by-laws) to add back to its capital any accrued and unpaid FINRA 2020 annual assessments that FINRA is permitting small firms to add back in accordance with the related April 2, 2020, FINRA FAQ.
The National Futures Association (NFA) separately issued a notice confirming that FCMs and IBs in compliance with the Net Capital Letter will be deemed in compliance with the NFA’s related net capital requirements for FCMs and IBs.
Fingerprinting Relief
On April 24, 2020, the CFTC’s DISO issued another no-action letter providing relief, in light of the difficulties of obtaining or processing fingerprints during COVID-19, from the fingerprinting requirements for principals and associated persons (APs) of CFTC registrants. The no-action relief will be in effect for 90 days from the date of the letter or until such earlier date as NFA notifies the public that it has resumed the processing of fingerprints. Among other things, principals and APs of registrants and applicants for registration relying upon the relief provided herein must submit their fingerprints to NFA within 30 days of NFA’s public announcement of its resumption of fingerprint processing.
STATE REGULATORS
On April 16, 2020, the North American Securities Administrators Association (NASAA) released its NASAA Member COVID-19 Regulatory Response Overview Chart outlining the operational status of state securities regulators and any regulatory relief granted in response to the ongoing COVID-19 crisis. In releasing the chart, Christopher Gerold, NASAA president and chief of the New Jersey Bureau of Securities, stated that “the most important message we’re hearing is that state securities regulators are maintaining essential regulatory operations.”
NASAA also reported that virtually all states continue to process licensing applications via CRD/IARD systems with little or no disruptions, and nearly all states are providing regulatory relief to licensees and registrants adversely impacted by COVID-19.
NASAA and FINRA Remote Licensing Exam Update
On April 27, 2020, NASAA announced that it is working with FINRA, with input from industry regulators, to accelerate the delivery of online licensing testing services that will be administered remotely by test delivery provider Prometric. NASAA is currently conducting a pilot of the online testing service, and expects to launch the service on a limited basis in the near future, starting with SIE, Series 6, Series 7, Series 63, and Series 66. Additional details will be available on FINRA’s COVID-19 page, starting May 1, 2020.
Prometric also announced its intention to open select test centers in limited geographic locations as early as May 1. Updates on test center availability and COVID-19 impacts are available on the Prometric COVID-19 page.
MOVING FORWARD
Expect regulators to continue to issue new guidance and additional relief. Deadlines in the current relief issued may need to be extended further. McGuireWoods is monitoring the developments and will provide updates to clients as information becomes available. Please let us know if you have any questions or if there is anything else we can do to support you during this challenging time.
