As a part of our ongoing coverage of actions taken by the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) in response to COVID-19 (“coronavirus”), we provide a further update of the agencies’ recent statements and orders relating to the impact of the current crisis. SEC Chairman Jay Clayton emphasized the SEC’s preparation and commitment to ensure 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.” The co-directors of the SEC Division of Enforcement also issued a statement to “emphasize the importance of maintaining market integrity and following corporate controls and procedures.” Likewise, CFTC Chairman Heath Tarbert discussed the period of historic market volatility, emphasizing that the Commission is “actively monitoring derivatives markets and their participants,” using its regulatory framework to “promote orderly and liquid markets,” “responding swiftly to changing conditions by granting practical, targeted relief,” and “maintaining clear and frequent communications with all relevant stakeholders.”
- Relief for Registered Transfer Agents
On March 20, 2020, the SEC announced that it is providing temporary conditional regulatory relief for registered transfer agents and certain other persons with regulatory obligations under the federal securities laws. The SEC’s order grants exemptions from specified provisions of the Exchange Act, temporarily exempting transfer agents from the requirements of §§ 17A and 17(f)(1) of the Exchange Act, and the rules promulgated thereunder. These provisions include requirements for registered transfer agents and other regulated persons relating to processing securities transfers, safekeeping of investor and issuer funds and securities, and maintenance of records of investor ownership. The order excuses non-compliance for registered transfer agents for which the coronavirus might make compliance difficult, provided that they meet certain enumerated conditions, including provision of written notification to the SEC by May 30, 2020.
- Exemptions and Extensions of Exemptions from Specified Provisions of the Investment Company Act
On March 23, 2020, the SEC issued an order providing exemptions from certain requirements of the Investment Company Act, to provide additional flexibility for (1) registered open-end management investment companies other than money market funds (“open-end funds”) and (2) insurance company separate accounts registered as unit investment trusts (“separate accounts”) to obtain short-term funding. For additional details regarding issues facing registered investment companies and investment advisers, please see our earlier client alert.
The SEC also issued a March 25, 2020 order amending an earlier March 13, 2020 order, which granted exemptions from certain provisions of the Investment Company Act, as we previously reported. The subsequent order extends, until June 30, 2020 (in some instances August 15, 2020), certain exemptions, including with respect to requirements for in-person board meetings for registered management investment companies and business development companies (“BDCs”) and transmittal of annual and semi-annual reports to investors, subject to certain conditions. The March 25 order also includes other modifications of the requirements set forth in the earlier order. For additional details regarding issues facing BDCs, please see our earlier client alert.
- Permitting Registered Funds to Use Additional Funding to Manage Portfolios and Benefit Investors
On March 23, 2020, the SEC announced temporary flexibility for registered funds affected by recent market events to borrow funds from certain affiliates and to enter into other lending arrangements. The relief is designed to provide funds with tools to manage their portfolios for the benefit of all shareholders, as investors may seek to rebalance their investments.
- Extension of Exemptions from Exchange Act Reporting and Proxy Delivery Requirements for Public Companies
On March 25, 2020, the SEC issued an order modifying the reporting and proxy delivery requirements for public companies under the Exchange Act, in response to compliance difficulties associated with the coronavirus. The new order extends prior exemptions provided by an earlier March 4, 2020 order (which extended to April 30, 2020) to cover filings due on or before July 1, 2020. The SEC also previously released guidance to address market participants’ upcoming annual shareholder meetings, as we previously reported.
- Guidance Regarding Disclosure and Securities Law Obligations
Also on March 25, 2020, the SEC Division of Corporation Finance offered guidance concerning disclosure and securities obligations that companies should consider with respect to coronavirus and related business and market disruptions. The Division suggests that companies assess coronavirus-related effects and consider their disclosure obligations, e.g., the impact on the company’s overall economic outlook and whether the cost of or access to capital and funding sources, such as revolving credit facilities or other sources, has changed or is reasonably likely to change. The guidance also instructs companies and related personnel to consider market activities, including the issuance or purchase of securities, in light of obligations under federal securities laws. The coronavirus impact might require a company to make certain material disclosures to investors, for example. Companies should be careful to avoid selective disclosures and may need to revisit, refresh, or update previous disclosures to the extent that the information in them has since become materially inaccurate. Finally, although not required, companies should consider proactively addressing financial reporting matters earlier than usual, particularly if they will need to consult with outside third parties to determine how the evolving coronavirus situation may impact assets, including impairment of goodwill. For additional details regarding other SEC guidance concerning coronavirus-related disclosure issues, please see our earlier articles on this issue, available here and here.
- Unforeseen and Uncertain Demands on Information Technology and Other Resources
On March 25, 2020, the SEC ordered temporary exemptive relief from certain requirements of Rule 606 of Regulation NMS under the Exchange Act, including (1) exempting broker dealers from the requirement to provide the public report covering the first quarter of 2020 until May 29, 2020; and (2) exempting broker-dealers engaging in outsourced routing activity from (a) the requirement to collect monthly customer-specific data for such activity until June 1, 2020, and (b) until July 29, 2020, the requirement to provide a customer-specific report of June 2020 outsourced routing data within seven business days for customer requests for such customer-specific reports made before July 17, 2020.
- Regulatory Relief and Assistance to Market Participants
On March 26, 2020, the SEC announced that it is providing additional temporary regulatory relief to market participants in response to the coronavirus, issuing a temporary final rule that (1) provides relief from the notarization requirement required to gain access to the EDGAR system; (2) extends, by 45 days, filing deadlines for certain reports and forms that companies must file pursuant to Regulation A and Regulation Crowdfunding, for reports that otherwise would have been due between March 26 and May 31, 2020; and (3) provides affected municipal advisors another 45 days to file annual updates to Form MA that otherwise would have been due between March 26 and June 30, 2020—all subject to certain conditions.
- Proposed Rules
In light of the temporary closure of the New York Stock Exchange (“NYSE”) trading floor and move to fully electronic trading commencing March 23, 2020, the NYSE filed several proposed rulemakings with the SEC to address coronavirus-related business disruptions, on which the SEC has requested public comments. These include the following:
- Halt Auction Trading. On March 18, 2020, the SEC published a notice of a proposed rule change to provide temporarily, until May 15, 2020, the NYSE with discretion to facilitate a trading halt following a market-wide circuit breaker halt.The proposed rule change is designed to provide the NYSE with more flexibility to respond to market volatility and the unprecedented market-wide declines that have resulted from both the ongoing spread of the coronavirus and an over 30% decline in oil prices before the beginning of trading on March 9, 2020.
- Suspension of Listing Requirement. On March 20, 2020, the SEC filed a notice of a proposed rule change to suspend, until June 30, 2020, the application of the NYSE’s continued listing requirement with respect to global market capitalization.
- Modification or Suspension of Certain Parameters. On March 20, 2020, the SEC issued a proposed rule proposing the following for a temporary period beginning March 23, 2020, and ending on the earlier of the reopening of the NYSE trading floor or after the NYSE closes on May 15, 2020: suspension of certain current price and volume parameters; widening of percentage price parameters; and suspension of the requirement to publish pre-opening indications.
- Publication of Trader Updates with Auction Imbalance Information for IPO Auctions. On March 26, 2020, the SEC published a proposal to amend NYSE rules relating to IPO Auctions for a temporary period from March 26-May 15, 2020.Current rules provide that the NYSE does not disseminate Auction Imbalance Information if a security is an IPO and has not had its IPO Auction, but given the absence of floor brokers in light of the NYSE trading floor closure, the NYSE proposes to disseminate specified Auction Imbalance Information via Trader Update e-mail for these auctions.
Throughout March 2020, the CFTC issued a series of temporary and conditional relief measures for market registrants to respond to the impacts of the coronavirus pandemic on the derivatives markets. In particular, the CFTC issued a number of no-action relief measures in response to specific requests from certain (1) Swap Execution Facilities (“SEFs”), (2) Designated Contract Markets (“DCMs”), (3) Insured Depository Institutions (“IDIs”), (4) Commodity Pool Operators (“CPOs”), and (5) Introducing Brokers (“IBs”). The CFTC also proactively issued a number of broader no-action relief measures applicable to various market participants, including (1) DCMs and SEFs, (2) Floor Brokers (“FBs”), (3) Futures Commission Merchants (“FCMs”) and IBs, (4) Retail Foreign Exchange Dealers (“RFEDs”), and (5) Swap Dealers (“SDs”).
- Relief Measures in Response to Specific Requests
- Temporary Relief for Swap Execution Facilities
The CFTC issued two separate relief letters in response to requests from SEFs. The first letter grants relief from the timing requirements for the Chief Compliance Officer (“CCO”) of an SEF to submit annual compliance reports (“ACRs”) and for submitting fourth-quarter financial reports. Specifically, the Division of Market Oversight (“DMO”) will not recommend that the Commission take enforcement action against any SEF or SEF CCO for failure to submit an ACR or a fourth-quarter financial report within the prescribed 60-day period, provided that (1) the initial ACR or fourth-quarter financial report was required to be submitted to the Commission prior to September 1, 2020; and (2) the ACR or fourth-quarter financial report is submitted to the Commission not later than 120 days after the end of the SEF’s fiscal year.
The second letter grants additional no-action relief for SEFs and provides that until June 30, 2020, the DMO will not recommend that the Commission take enforcement action against any SEF for failure to comply with certain regulations to record voice communications, to the extent the failure is attributable to the coronavirus pandemic. This relief is subject to several conditions, including but not limited to the following: (1) the SEF continues to record voice communications at its regular business sites; (2) the SEF makes reasonable efforts to demonstrate compliance by having its voice trading personnel not located at the SEF’s normal business sites create written or electronic records; (3) the terms of all transactions executed on the SEFs continue to be captured and recorded on the SEF systems; (4) orders entered into the SEF’s trading facility or platform by voice trading personnel, regardless of location, will be retained in the SEF system’s normal electronic audit trail and subject to existing credit and risk filters; (5) certain other swap-data reporting requirements will continue to apply, except for the requirements related to maintaining a complete audit trail; and (6) record retention requirements will continue to apply to all trading activity records created during the duration of the no-action relief. This relief is limited to instances in which the SEF cannot conduct in-person, real-time monitoring of voice trading personnel and thus is unable to reconstruct all trading because the SEF lacks the voice recordings of voice trading personnel.
- Temporary Relief for Designated Contract Markets
The CFTC issued a no-action relief letter setting forth relief for DCMs, which provides that the DMO will not recommend enforcement action against any DCM for failure to comply with certain audit trail and related requirements, including certain voice recording requirements, attributable to the coronavirus pandemic. This relief is subject to the following conditions: (1) the DCMs will require affected market participants to continue to conduct customer business in accordance with the same exchange rules applicable to the trading conducted on the trading floor, including the preparation of a written record of oral communications; (2) customer orders entered into the trading platform by affected market participants will be retained in the DCM system’s normal electronic audit trail and subject to existing credit and risk filters; and (3) all other exchange rules, including those relating to the handling of customer orders and trade practices, will continue to apply to affected market participant trading activity during the duration of any no-action relief.
- Temporary Relief for IDIs Permitting Certain Commodity Swaps to be Excluded from the Major Swap Participant Registration Threshold Calculation
In response to a request from an unidentified IDI, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued a conditional no-action relief letter from the requirement to include certain swaps when calculating the major swap participant (“MSP”) registration threshold. Until September 30, 2020 (and possibly longer, depending on prevailing market conditions), the DSIO will not recommend that the Commission take enforcement against the requesting IDI if it fails to include any swap in its aggregate uncollateralized outward exposure (“AUOE”) calculation that meets the following conditions (the “Excluded Swaps”): (1) the swap is excluded from counting towards the swap dealer de minimis threshold or from being considered swap dealing activity; and (2) the commodity underlying the swap is crude oil, natural gas, or natural gas liquids. The relief provided also is subject to the condition that the IDI provide the DSIO with its AUOE calculation including and excluding the Excluded Swaps: (1) as of the end of each calendar quarter during the period of relief until its quarter-end AUOE, including the Excluded Swaps, exceeds the MSP registration threshold, if ever; and (2) as of the end of each calendar month thereafter for the remainder of relief period.
- Temporary Relief for Commodity Pool Operators
On March 20, 2020, the CFTC issued a no-action relief letter for CPOs, outlining the following exemptions from:
Temporary Relief for Exempt Foreign Brokers to Handle U.S. Futures Market Orders
- Filing of Form CPO-PQR. Any requirement that a Small or Mid-Sized CPO file an annual report on Form CPO-PQR, provided that such filing is made by May 15, 2020; or any requirement that a Large CPO file a quarterly report on Form CPO-PQR for Q1 2020, provided that such filing is made by July 15, 2020.
- Pool Annual Reports. Any requirement that a CPO with a pool annual report due on or before April 30, 2020 file such report, provided that the annual certified financial statements for its operated commodity pools are filed with the National Futures Association (“NFA”) and distributed to pool participants no later than 45 days after the due date for such report. This relief does not foreclose a CPO from requesting an additional extension of time not to exceed a total of 180 days from the end of the pool’s fiscal year.
- Pool Periodic Account Statements. Any requirement that a CPO distribute periodic account statements to pool participants on either a monthly or quarterly basis, provided that such statements are distributed to participants within 45 days of the end of the reporting period for all reporting periods ending on or before April 30, 2020.
On March 31, 2020, the Futures Industry Association (“FIA”) submitted a request on behalf of certain entities (foreign brokers) that are exempt from registering with the Commission as IBs. Until September 30, 2020, the DSIO will not recommend that the Commission take enforcement action against such brokers for failure to register as an IB, subject to the following conditions: (1) the foreign broker is an affiliate of an FCM registered with the Commission; (2) the foreign broker is appropriately licensed or registered in a jurisdiction for which the Commission has issued an exemptive order; (3) the foreign broker introduces on a fully disclosed basis to FCMs registered with the Commission only institutional customers, for the purpose of trading on a DCM; (4) the foreign broker accepts, but does not solicit, orders from, and does not handle the customer funds of, any person located in the U.S. for trading on a DCM; (5) the foreign broker creates and maintains the records with respect to its brokerage activities with U.S. persons, including providing prompt access thereto to representatives of the Commission and the U.S. Department of Justice upon request; (6) each FCM with which the foreign broker is affiliated files with the NFA an acknowledgment it will be jointly and severally liable for any violations of the Commodity Exchange Act (“CEA”) or the Commission’s regulations by the foreign broker in connection with its introducing activities in which it engages in reliance on the letter; and (7) the foreign broker provides written notice to the DSIO both when it begins reliance on the relief provided and, if it ceases to rely on the letter prior to September 30, 2020, when it ceases to do so.
Broader No-Action Relief Letters
On March 17, 2020, the CFTC issued a series of additional temporary relief measures stating that no enforcement action will be taken against certain market participants for failure to comply with specified Commission regulations as a result of the coronavirus pandemic, including those governing (1) time-stamps, (2) recording of oral communications, (3) annual report filing, (4) physical location, and (5) introducing broker registration for certain FBs, subject to compliance with certain conditions. The letters are applicable to the following market participants:
- DCMs or SEFs, available here
- FBs, available here
- FCMs or IBs, available here
- RFEDs, available here
- SDs, available here
The nature of the relief provided varies by type of market participant, and the CFTC tailored the relief based on the scope of the market participant’s obligations under the CEA and Commission regulations. The below narrative affords general descriptions of the types of relief offered, and to which market participants it applies.
- Time-Stamps.The March 17, 2020 no-action letters generally release, until June 30, 2020, covered entities (including members of DCMs or SEFs, FBs, FCMs, IBs, RFEDs, and SDs) from certain requirements to record the date and time by time-stamp or other timing devices, if the personnel responsible for making such records are required to be absent from their normal business site, provided that a record of the date and time, to the nearest minute, is otherwise created and maintained.
- Recording of Oral Communications.The no-action letters generally release, until June 30, 2020, covered entities (including FBs, FCMs, IBs, RFEDs, and SDs) from certain requirements to make and keep records of oral communications if the personnel required to use recorded lines are required by the registrant’s written business continuity plan to be absent from their normal business site, provided that (1) a written record of the oral communication, including date, time, identifying information of the persons participating, and subject matter of the communication, is created and maintained; and (2) the registrant takes affirmative steps to collect any written materials created by any affected personnel pertaining to the content of the oral communication, including handwritten notes or other contemporaneous or subsequently created transcripts or summaries, and maintains them in its required books and records.
- Furnishing of Chief Compliance Officer Annual Report to the Commission. The no-action letters grant FCMs, IBs, and SDs an extension to furnish their annual reports to the Commission, provided that (1) the annual report was required to be furnished prior to September 1, 2020; and (2) the annual report is furnished to the Commission no more than 30 calendar days after its original due date.
- Additional Relief for FBs.The no-action letter applicable to FBs affords two additional types of relief until June 30, 2020:
- Physical Location. The letter grants FBs relief from any requirement to be physically located in a pit, ring, post, or other place provided by a contract market pursuant to the definition of “floor broker” if the FB is required by the written business continuity plan of any DCM to be absent from such place.
- Introducing Broker Registration. The letter grants FBs relief from any requirement to be registered as an IB solely due to a failure of the FB to be physically located in any pit, ring, post, or other place provided by a contract market pursuant to the definition of “floor broker” if the FB is required by the written business continuity plan of any DCM to be absent from such place.
 Public Statement, SEC, Chairman Jay Clayton, Statement on the SEC’s Coronavirus Response Efforts – Facilitating the Continued Orderly Operation of Our Capital Markets Consistent with Health and Safety Directives and Other Measures (Mar. 20, 2020), https://www.sec.gov/news/public-statement/clayton-covid-19-2020-03-20.
 Public Statement, SEC, Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity (Mar. 23, 2020), https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.
 Public Statement, CFTC, Statement of CFTC Chairman Heath P. Tarbert Regarding COVID-19 Before the FSOC Principals Meeting (Mar. 26, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement032620.