COVID-19 and the SEC and FINRA: Adjusting and Fully Operational

• Posted on: Apr 1 2020

The coronavirus (“COVID-19”) has impacted the public and private sectors in so many ways – many of which are unprecedented and beyond the scope of this article. The Securities Exchange Commission (“SEC” or the “Commission”), the Financial Industry Regulatory Authority, Inc. (“FINRA”), other governmental authorities have worked to ensure that the markets have functioned and will function in an open, orderly and transparent fashion. In today’s article, we consider some of these efforts.  

The SEC: Division of Enforcement

Since the COVID-19 outbreak, the SEC has emphasized the importance of maintaining market integrity and following corporate controls and procedures. Like the rest of the agency, the Division of Enforcement (the “Division” or “Enforcement”) and the Office of Compliance Inspections and Examinations (“OCIE”) have continued to execute on their mission of protecting investors during the COVID-19 crisis. The Division is actively monitoring the markets for frauds, illicit schemes and other misconduct – and as circumstances warrant, will issue trading suspensions and use enforcement tools as appropriate.

On March 23, 2020, the Co-Directors of Enforcement released a statement (here) highlighting market participants’ obligations with respect to material non-public information, including the importance of maintaining controls and procedures to keep material nonpublic information confidential unless and until it is appropriately disclosed. The statement emphasized the need for market participants to be mindful of the prohibitions on illegal securities trading, and to follow related controls and procedures, especially during the COVID-19 outbreak where material nonpublic information may be more prevalent and arise in less common contexts. The statement also discussed the Division’s commitment to Main Street investors and its focus on those who seek to prey on them during the COVID-19 health crisis.

OCIE remains fully operational and, with adjustments to take into account health and safety measures, business continuity plans, firm-specific operational matters and other factors, continues to execute on its investor protection mission. OCIE has moved to conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site. OCIE is working with registrants to address the timing of its requests, availability of registrant personnel, and other matters to minimize disruption. 

OCIE’s statement on its operations and examinations can be found here.

The Commission is implementing numerous COVID-19 initiatives (see here) so that it can continue its regular operations. The SEC has continued to advance rulemaking initiatives, conduct risk-based inspections, bring enforcement actions, and review and comment on issuer and fund filings. In sum, the SEC has remained fully operational and committed to its tripartite mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. 

FINRA

FINRA remains fully operational, albeit remotely, and continues to carry out its regulatory responsibilities to protect investors and market integrity. In this regard, FINRA continues to perform its risk monitoring, market surveillance and enforcement programs, prioritizing matters that present the most risk during the COVID-19 crisis. In addition, FINRA is focusing on monitoring for fraud, illicit schemes, and other manipulative activities by those who seek to take advantage of the tumultuous conditions created by COVID-19 and ongoing market volatility. As such, FINRA is reviewing, investigating and addressing situations where it suspects, detects or is made aware of potential investor or market harm.

FINRA is providing temporary relief for member firms from certain rules and requirements (here). The relief provided (discussed, in part, below) does not extend beyond the rules and requirements set forth in the FINRA’s regulatory notice. As COVID-19-related risks decrease, member firms should expect to return to meeting any regulatory obligations for which relief has been provided. When appropriate, FINRA said it will publish a regulatory notice announcing a termination date for the regulatory relief that will provide member firms with time to make necessary operational adjustments.

Remote Offices or Telework Arrangements: As discussed in Regulatory Notice 20-08 (here), a member may consider employing methods such as social distancing, travel restrictions, revised sick leave policies, special pandemic leave time, or specialized seating plans for densely populated floors or buildings. These methods may also involve remote offices or telework arrangements (e.g., working from home or a backup or recovery location) for a broad range of employees. 

Since FINRA is permitting the use of remote offices or telework arrangements, members are, nonetheless, required to supervise their associated persons who change their work locations or arrangements during the pandemic. As such, members are expected to establish and maintain a supervisory system that is reasonably designed to supervise the activities of each associated person while working from an alternative or remote location, and to document any changes to their current written supervisory procedures.  With respect to oversight obligations, a member’s scheduled on-site inspections of branch offices may need to be temporarily postponed during the pandemic. If this happens, FINRA said that it would re-evaluate the member’s ability to complete its annual regulatory obligation in light of the duration and severity of the pandemic. 

Temporary Relocation:  As discussed in Regulatory Notice 20-08 (here), if a member relocates personnel to a temporary location that is not currently registered as a branch office or identified as a regular non-branch location, the firm should use its best efforts to provide written notification to its FINRA Risk Monitoring Analyst as soon as possible after establishing a new temporary office or space-sharing arrangement. The notification should also indicate whether the member’s personnel will be sharing space with another entity, and if so, the type of business in which it is engaged (e.g., an affiliated investment adviser or an organization in the securities business). While the pandemic may create exigent circumstances that result in emergency relocations, firms are reminded to take into account the risks associated with sharing office space with another entity (e.g., customer privacy, information security or recordkeeping considerations) and take steps to mitigate the risks during the emergency relocation. Notably, FINRA does not expect to receive written notification regarding each associated person’s location (e.g., the person’s home residence if working from home) or if another person (e.g., a spouse or another immediate family member) is also teleworking in the same residence as the associated person. 

In addition, where a non-branch location or branch office has been relocated, or customer calls are being rerouted to another office, members are required to exercise diligence in validating the identity of the customer (e.g., when accepting orders and request for disbursement of funds) as well as provide heightened supervision of the affected customer accounts.

Best Execution Rule: Under Rule 5310, firms must exercise “reasonable diligence” to ascertain the best market for the security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.  Evaluating a broker-dealer’s satisfaction of its duty of best execution necessarily requires a “facts and circumstances” or case-by-case analysis.  While broker-dealers are not relieved of their best execution obligations during the pandemic, the best execution obligation is being assessed in the context of the security involved and market conditions, including price, volatility, relative liquidity, and pressure on available communications.  

Inquiries and Investigations:  As discussed in Regulatory Notice 20-08, members may have difficulty making timely regulatory filings and responding to regulatory inquiries or investigations. Unless FINRA has otherwise provided relief to all member firms, members that require extra time to respond to open inquiries, investigations or upcoming filings should contact their Risk Monitoring Analysts or the relevant FINRA department to seek extensions.

FINRA said it may waive any late fees incurred by a member based on the member’s particular circumstance. In addition, if any data communications are disrupted, members should retain the relevant data until it can be transmitted to FINRA.

Arbitration and Mediation:  On March 31, 2020, FINRA administratively postponed all in-person arbitration and mediation proceedings scheduled through May 31, 2020 (here). Parties with in-person hearing or mediation sessions scheduled through this date will be contacted by FINRA staff to reschedule or discuss remote scheduling options. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise. 

Further, FINRA will waive postponement fees when parties stipulate to adjourn in-person hearing dates scheduled from June 1 through September 4, 2020. To avoid postponement fees, parties must provide written notice of the stipulation to adjourn more than 20 days prior to the first scheduled hearing date. Parties stipulating to adjourn in-person hearing dates should also consider stipulating to changing other case deadlines.

If the parties wish to proceed virtually, and the panel agrees to proceed in that manner, FINRA is providing virtual hearing services (via Zoom and teleconference). FINRA is encouraging the parties and its panels to avail themselves of these virtual technologies as an alternative to postponing existing hearing dates. 

The Blog’s Message

We understand that the operations of the SEC and FINRA are not a priority of our readers at this difficult time. But, for those who are concerned about, among other things, the integrity of the markets, the enforcement efforts of market regulators and the viability of initiating an arbitration or mediation or continuing one of these forms of dispute resolution, we hope that this article provides you with some information. 

As we noted in our last article about the operations of the New York State Courts (here), we want you to know that nothing is more important to us than the health and safety of our families, friends, readers, clients, colleagues and communities. We therefore hope that all are healthy and safe and remain so during this public health crisis.