Friday, April 03, 2020

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

By Amy Leisinger, J.D. 

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

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

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

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

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

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

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

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

By Amanda Maine, J.D.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, April 02, 2020

Advisory committee shares how COVID-19 is affecting small businesses

By Anne Sherry, J.D.

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

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

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

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

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

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

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

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

Securities Regulation Daily’s top 10 developments for March 2020

By Brad Rosen, J.D.

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

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

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

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

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

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

1. LEGISLATIVE ACTIVITY

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


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

2. REGULATORY ACTIVITY

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

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

3. CORPORATE GOVERANCE

SEC relaxes shareholder meeting requirements in light of COVID-19


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

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

4. REGULATORY ACTIVITY

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

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

5. ACCOUNTING AND AUDITING

COVID-19 sparks more SEC, PCAOB regulatory updates


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

6. PUBLIC COMPANY REPORTING AND DISCLOSURE

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


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

7. COMMODITY FUTURES

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

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

8. SEC NEWS AND SPEECHES

Regulators, courts adapt to the challenges of COVID-19

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

9. LITIGATION AND ENFORCEMENT

Delaware corporations may restrict ’33 Act claims to federal court

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

10. ENFORCEMENT

SEC’s request for injunction against Telegram granted


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


Wednesday, April 01, 2020

EpiPen maker cannot use loophole-closing law as shield

By Anne Sherry, J.D.

An opt-out lawsuit over Mylan N.V.’s alleged misstatements about the EpiPen only partially withstood Mylan’s motion to dismiss. The Southern District of New York dismissed the plaintiff’s claims of anticompetitive conduct and misstatements about disclosure protocols and regulatory risk. However, the court rejected Mylan’s attempt to dismiss claims that it misrepresented the “risk of errors” in its Medicaid rebate calculations while at the time of those statements it was allegedly manipulating EpiPen’s rebate eligibility (MYL Litigation Recovery I LLC v. Mylan N.V., March 30, 2020, Oetken, J.).

The plaintiff opted out of the class action currently pending against Mylan over EpiPen-related and other issues. That class action alleges that Mylan unlawfully misclassified the EpiPen as a generic drug and offered it at a rebate to third parties who promised to decline to reimburse for a competitor’s product. The opt-out suit concerns these allegations and adds another claim based on Mylan’s statements that it had effective disclosure protocols and procedures.

“Risks of errors.” Although it granted much of Mylan’s motion to dismiss, the court allowed to proceed a claim that Mylan misled investors by stating that its Medicaid rebate calculations carried “risks of errors.” According to the plaintiff, these statements implied that the calculations could be correct; in fact, Mylan was deliberately misclassifying the EpiPen as a generic drug at the time. Mylan unsuccessfully argued that the Medicaid Drug Rebate Program was ambiguous at the time, as evidenced by the enactment of an intervening statute, the Right Rebate Act, to resolve the ambiguity.

In rejecting the argument, the court noted that the statute was expressly enacted to prevent Mylan and others from misclassifying the EpiPen and other drugs: “It beggars belief that Mylan would be able to hide behind the RRA in order to defeat [plaintiff’s] allegations regarding the ‘risk of error’ statements—statements that have already survived a motion to dismiss in one of this Court’s prior opinions in the Class Action.” Furthermore, whether or not Congress thought there was an ambiguity, the plaintiff pleaded that the Centers for Medicare & Medicaid Services had explicitly told Mylan that EpiPen was misclassified.

American Pipe tolling. The court also held that the plaintiff’s Section 18 claims were not time-barred and that the plaintiff adequately pleaded reliance. Because the claims rested on the same facts as the class action, the two-year statute of limitations was tolled under American Pipe.

Other claims dismissed. Mylan successfully defeated several of the plaintiff’s Section 10(b) claims. Allegations of anticompetitive conduct based on Mylan’s market dominance and offer of rebates were not pleaded with the requisite particularity—they were “so conclusory that they do not meet the standard that those in the Class Action complaint cleared,” the court wrote. The court also dismissed claims relating to Mylan’s certifications that it had effective disclosure protocols. Here, the complaint merely pointed to the fact that Mylan had entered into a Control Integrity Agreement intended to improve its compliance procedures. The plaintiff failed to allege a link between this agreement and Mylan’s disclosure protocols or to allege how the disclosure protocols were inadequate. Finally, the plaintiff waived its position on statements regarding regulatory risk because it failed to address Mylan’s argument when responding to the motion to dismiss.

The case is No. 19-cv-1799.

Tuesday, March 31, 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, March 30, 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, March 27, 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, March 26, 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, March 25, 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, March 24, 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.”