Update on COVID-19 in the financial services sector
As global businesses navigate the shifting terrain arising from the COVID-19 pandemic, financial institutions find themselves under pressure – from regulators and enforcement agencies as well as from clients. This is in addition to the personal challenges their employees are facing as everyone adjusts to the “new normal.”
In this context, some of the issues that have cropped up in our client conversations and work are outlined below. The financial institutions group at Freshfields continues to monitor the situation and is happy to discuss these and other concerns you face in light of the COVID-19 outbreak.
- Attempts by several investment funds to forestall close outs with group-wide forbearance agreements and implicit threats of litigation have not enjoyed success across the board. Although some dealers have elected to forbear, others have proceeded to close out. We note, however, that close outs in turbulent markets generated significant disputes during the financial crisis; your litigation teams may need to be more closely involved in close out exercises than they would during “business as usual.”
- Fixed-income markets remain under pressure, with asset pricing having recovered slightly from recent lows. As a result, the equity cushions in trades with numerous counterparties remain relatively thin.
- The US government has created several programs to mitigate the economic impact of the coronavirus, including the Paycheck Protection Program (PPP). PPP authorizes up to $349B in forgivable loans to small businesses to pay their employees during the crisis. These loans are available through existing Small Business Administration (SBA) lenders and other lenders who are approved and enrolled in PPP. Although there is widespread interest in the PPP from small businesses, it is being implemented slowly and with widespread confusion among borrowers. SBA lenders have imposed limits on usage, in many cases requiring a pre-existing relationship to those seeking to participate in PPP. Separately, private equity and venture capital funds are likely to find that small size standards are difficult for their portfolio companies to meet given SBA affiliation rules.
- The US Department of Justice, the SEC, and other enforcement authorities appear to be prioritizing COVID-19 related investigations. Moments of crisis often lead to misconduct – people are making decisions faster, under more pressure, and without as much information as they normally would. Bad actors can (and do) exploit that uncertainty, and pressure may push employees to ignore or shortcut rules that they think interfere with keeping the business afloat. For financial institutions, this may require increased attention to: (1) insider trading and other forms of market misconduct by employees and counterparties; and (2) relationships with customers who may be exposed to pandemic-related fraud.
- There is political and regulatory pressure on financial institutions to support the economy through the crisis by (for example) working with borrowers to modify existing loans and extending new small-dollar loans. We have been discussing with our clients’ difficult questions as to whether (and how) this pressure should affect commercial decisions. Senior managers need to be able to articulate their institution’s approach consistently and work to embed it into day-to-day decision making.
- Financial institutions are grappling with serving clients and maintaining operational resilience while also facilitating working from home arrangements, limiting the number of key workers required to come to the office, and potentially unusual rates of employee absence due to illness and / or family care. Balancing their responsibilities to employees and clients means that financial institutions have a lot to think about. Equally, maintaining a focus on culture and compliance may be a greater challenge when working arrangements are disrupted.
- A number of clients are interested in collaborating or simply exchanging information on the common challenges that face the financial services industry at this time. Institutions are giving thought to the guardrails required to avoid potential exposure arising from collaboration.
COVID-19: Weekly update for financial services clients
Must Read Developments up to April 8
Following their initial measures, US regulators (and their counterparts in other countries) continue to publish materials. Key developments include:
- The SEC has published a statement on upcoming filings by public companies, urging these companies to disclose as much information as possible on their current financial and operating status, as well as their future operational and financial planning in light of the COVID-19 pandemic. In particular, the SEC states that “[d]etailed discussions of current liquidated positions and expected financial resource needs would be particularly helpful” to investors and markets.
- The Fed has published a statement on adjustments to its supervisory approach to help firms deploy resources efficiently in the current environment. With this in mind, supervisors will focus on treatment of customers and operational resilience, but some assessments will be postponed and firms are granted additional time to complete remediation work.
- Banking regulators have jointly put out a pair of interagency statements:
- The Fed, FDIC, NCUA, OCC, and CFPB recently published a revised Interagency Statement encouraging financial institutions to “work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.” The joint statement provides that the agencies will “not criticize institutions for working with borrowers in a safe and sound manner,” nor will they ”criticize prudent efforts to modify the terms on existing loans to affected customers.”
- The Fed, CFPB, FDIC, NCUA, and OCC published a Joint Statement to “specifically encourage financial institutions to offer responsible small-dollar loans to both consumers and small businesses” and to “consider workout strategies to designed to help enable the borrower to repay the principal of the loan while mitigating the need to re-borrow.”
- Enforcement authorities are focused on COVID-19. US Attorney General William Barr has directed “[e]very U.S. Attorney’s Office … to prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.” The SEC’s Division of Enforcement has highlighted increased insider trading risks during the crisis and has taken enforcement actions, including trading suspensions, relating to the pandemic. Other agencies and authorities, including the CFTC, FinCEN, and state Attorneys General, have similarly publicized the elevated risks of pandemic-related misconduct. Finally, FATF has warned regulators and firms about increased fraud and exploitation scams during the coronavirus outbreak and highlighted AML measures that can be taken in an environment where face-to-face contact with clients is not possible.
- Several agencies have been providing a wide variety of temporary relief from ordinary-course regulatory obligations; we would be happy to discuss any particular concerns you may have about rules that affect your business. For example:
- SEC Chairman Jay Clayton and Commissioner Allison Herren Lee have each issued statements indicating that they intend to focus the SEC’s resources on responding to the COVID-19 crisis, rather than proceeding with non-COVID-related regulatory actions (including by effectively extending notice-and-comment periods). Chairman Clayton’s statement is here; Commissioner Lee’s is here.
- The New York Division of Financial Services has granted temporary relief from state-law requirements for closing bank branches, extended filing deadlines, and permitted virtual board meetings; and
- FinCEN “recognizes that certain regulatory timing requirements with regard to [Bank Secrecy Act, or BSA] filings may be challenging during the COVID-19 pandemic and that there may be some reasonable delays in compliance.” FinCEN has invited financial institutions to communicate with FinCEN about “COVID-19-related concerns while adhering to their BSA obligations.” FinCEN has set up a new online mechanism for institutions to share these concerns.
- FINRA has extended filing deadlines and provided other forms of relief.
Our offices are tracking regulatory developments globally, including guidance on financial-sector industry collaboration, changes in prudential oversight approaches in the UK, and guidance from EU banking authorities. Please let us know if you would like to be connected with our teams outside the United States.
Blogs and other materials
We have recently published a few items that may be of interest:
- Impact of COVID-19 – checklist for financial services firms
- COVID-19 and Close-Out Litigations: Risks and Practical Tips
- COVID-19 and Compliance Risks for Financial Institutions
- Global Antitrust Considerations and Talking to Competitors in the Financial Sector During the Coronavirus Crisis
- Cybersecurity in the time of COVID-19
- Compliance Risks Arising from the Coronavirus – Lessons from Prior Crises