Update on COVID-19 in the financial services sector
We continue to monitor the key COVID-19-related developments in financial services regulation and litigation.
Our thinking, and a summary of last week’s key developments, follows.
- The political profile of COVID-19 relief remains high, with policymakers on both sides of the aisle focused on ensuring that funding and other aid is distributed quickly and equitably.
- As we’ve flagged in previous updates, the crisis may give financial institutions a new reason to consider engaging with regulators and other authorities. Opportunities afforded by normal processes, including notice-and-comment rulemaking and advisory committee meetings, offer a chance for institutions to gain clarity or to provide input into the changing landscape.
We’re experimenting with a new format this week. We’ve sorted the week’s news into a few themes, so you can focus on what most interests you:
- Oversight & Enforcement
- Relief Programs
- Public Markets and Trading
- Regulatory Changes
- Assessing Market Impacts
COVID-19: Weekly update for financial services clients
Must Read Developments through May 19
Oversight & Enforcement
- Congress continues to scrutinize the federal government’s administration of COVID-19 relief programs. Prominent members of the Senate Banking Committee critiqued officials from the Federal Reserve (the Fed), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Small Business Administration (SBA), and National Credit Union Administration (NCUA) for a variety of issues. For example, Committee Chairman Mike Crapo indicated concern with the time it is taking for the Fed to set up the Municipal Liquidity Facility, and Senator Bob Menendez highlighted reports indicating that minority-owned businesses are struggling to access relief funds.
- The US Department of Justice (DOJ) has reportedly sent grand jury subpoenas to several major financial institutions seeking records related to wrongdoing by Paycheck Protection Program (PPP) borrowers. Although details of the grand jury proceedings remain confidential, this news indicates that financial institutions may play a key role in enforcement efforts. As we have noted in a previous update, DOJ’s first PPP fraud charges resulted from an investigation in which “an FBI undercover agent pos[ed] as a bank compliance officer.”
- The Congressional Oversight Commission published its first monthly report assessing the Federal Reserve and Treasury Department’s administration of emergency bailout funds provided under the CARES Act. The Commission notes that, although it is difficult to define success or failure in these circumstances, much of the money provided under CARES Act has not yet been lent out to businesses. The report lays out a series of general questions for the agencies charged with implementing the relief generally (e.g., about how loan disbursement is affected by the Bank Secrecy Act) as well as questions about specific facilities.
- DOJ filed PPP fraud-related criminal charges against borrowers in Texas and Georgia, alleging that the borrowers in question inflated the number of employees on their applications to obtain increased funding and used PPP funds for personal use.
- Likewise, the SEC filed two COVID-19-related enforcement actions in federal courts in Florida and New York, alleging that the businesses made false and misleading claims regarding COVID-19 testing and treatment products.
- Meanwhile, a Michigan-based nanotechnology company has brought an administrative proceeding seeking to lift the trading ban on its securities imposed by the SEC for allegedly making false statements describing the company’s role in fighting COVID-19. This appears to be the first proceeding contesting one of the more than 20 such trading bans that the SEC has filed related to COVID-19. The company claims that the SEC wrongfully attributed the allegedly false statements to the company’s management.
- FinCEN Director Ken Blanco gave a public speech this week emphasizing his agency’s focus on COVID-19-related criminal activity and noting that FinCEN plans to release advisories on combating COVID-19-related criminal activity.
- The SBA revised its PPP FAQs on May 13. The key update is a clarification that borrowers who “received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith” and thus will not be subject to the previously announced mandatory audit of all loans over $2 million.
- On Friday, the SBA published a loan forgiveness application form for PPP borrowers.
- The SBA released a detailed report on the PPP’s second round of funding, which breaks down the loans approved between April 27 and May 8 by state, size, and (anonymized) lender.
- The SBA also published an Interim Final Rule providing guidance on non-discrimination obligations and additional eligibility requirements, including whether student workers count toward eligibility requirements, in relation to the PPP. The rule took effect on May 8, 2020, and applies to applications submitted under the PPP through June 30, 2020, or until PPP funds are exhausted. Comments on the rule are due by June 8, 2020.
- The NY Fed issued updated FAQs in relation to its Primary Dealer Credit Facility (PDCF), which is available to the New York Fed’s trading counterparties. According to the FAQ, PDCF “is a loan facility that will provide credit to primary dealers in exchange for a broad range of collateral for term funding with maturities up to 90 days” and “is intended to support the credit needs of American households and businesses by fostering the functioning of financial markets more generally and to expand the ability of primary dealers to gain access to term funding.”
- The Fed also updated the FAQs for its PPP Liquidity Facility (PPPLF) and for the Money Market Mutual Fund Liquidity Facility, released FAQs and an updated term sheet for the Term Asset-Backed Loan Facility, and published a Notice of Interest for eligible issuers to express interest in selling notes to the Municipal Liquidity Facility special-purpose vehicle.
Public Markets & Trading
- The SEC approved the NYSE’s interim change in rules relating to stockholder approval for the issuance of common stock over 20% in certain instances. Nasdaq already has a similar rule in effect.
- Apparently in reaction to the well-publicized negative prices in oil futures at the end of last month, the Commodity Futures Trading Commission (CFTC) issued a “Staff Advisory on Risk Management and Market Integrity under Current Market Conditions” to remind regulated entities that “they are expected to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity, and possibly negative pricing.”
- Relatedly, FINRA reminded certain firms of their sales practice obligations in connection with oil-linked exchange-traded products.
- In response to a request from the New York Fed, the SEC granted a conditional exemption from s.11(d)(1) of the Securities Exchange Act to permit brokers and dealers to participate in the Fed’s Term Asset-Backed Securities Loan Facility by extending non-recourse credit on behalf of the special-purpose vehicle set up under the facility. To qualify for the relief, a broker or dealer must be: (1) registered with the Commission; and (2) designated by the NY Fed as a “TALF Agent."
- The New York Attorney General extended deadlines for securities and investment business-related filing requirements under the Martin Act, New York General Business Law, and other laws and regulations.
- In an Interim Final Rule, the Fed, FDIC, and OCC announced temporary changes to their supplementary leverage ratio rule to give certain depository institutions flexibility to expand their balance sheets so they can provide credit to households and businesses. Under the interim rule, depository institutions may exclude US Treasury securities and deposits at Federal Reserve Banks from the calculation of their supplementary leverage ratio. The Fed’s press release provides additional information.
- The FDIC approved a notice of proposed rulemaking that would mitigate the deposit insurance assessment effects of participating in the PPP, the PPPLF, and the Market Mutual Fund Liquidity Facility. The proposed rule is intended to ensure that banks will not be subject to significantly higher deposit insurance assessments for participating in these programs. The FDIC also released a memorandum discussing the proposal.
- The OCC released a Dear CEO letter drawing attention to a recent Interim Final Rule requiring banking organizations to neutralize the effect of participating in the Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility under the Liquidity Coverage Ratio rule.
- The Public Company Accounting Oversight Board (PCAOB) confirmed that its previously announced 45-day relief period, which gave registered auditors the opportunity to pause inspections activity, ended on Monday. The statement confirms that the PCAOB’s enforcement and investigative efforts continue to the maximum extent possible.
- The Consumer Financial Protection Bureau (CFPB) issued a Final Rule on remittance transfers mandating that remittance transfer providers generally must disclose to consumers the exact exchange rate, the amount of certain fees, and the amount expected to be delivered to the recipient. In light of the pandemic, the CFPB confirmed in a statement that it will not initiate enforcement action against covered institutions for failure to disclose exact fees and exchange rates under the Remittance Rule for transfers that occur between July 21, 2020 and January 1, 2021.
- FINRA filed a proposed rule change with the SEC that would temporarily provide FINRA with relief from requirements in the FINRA rules regarding timing, service, and other procedural issues during the COVID-19 outbreak. The proposed changes are intended to adjust FINRA’s regular operations to meet the needs of a work-from-home environment, and will allow FINRA and applicants to serve certain documents by email and conduct oral arguments via videoconference, as well as provide extensions in connection with certain adjudicatory and review processes.
Assessing Market Impacts
- A report from the Municipal Securities Rulemaking Board indicates a substantial increase in COVID-19-related disclosures by state and municipal bond issuers in recent weeks (4,500 in the week ending May 10, up from 630 in the week ending April 2).
- Fed released its Financial Stability Report, which assesses the US financial system in light of shocks associated with COVID-19. The report notes that while post-2008 regulatory reforms improved the system’s resilience, vulnerabilities are likely to be significant in the near term.
- On May 8, the Fed published its May Supervision and Regulation Report, which summarizes current banking system conditions, regulatory updates, and supervisory developments.
- The NCUA informed regulated entities that it would be seeking information on how the COVID-19 crisis is affecting credit unions around the country. The NCUA’s letter links to a list of questions its examiners will ask, covering everything from changes in deposit activity to whether credit unions’ lobbies are open for customer activity.
- The CFTC also announced that its Global Markets Advisory Committee will meet on May 19 to hear a presentation about international coordination in the commodities markets during the pandemic, among other agenda items. The meeting will be open to the public via a dial-in line.
- Finally, the SEC’s Small Business Capital Formation Advisory Committee met to discuss the second round of PPP funding and the SEC’s crowdfunding relief and capital formation proposal. The SEC released the agenda and other materials from the meeting and Commissioner Peirce’s opening statement.
Blogs and other materials
We’ve recently published a few items that may be of interest:
- Disclosures in the time of corona: avoiding liability under the securities laws during a global pandemic
- What Comes Next: Key litigation risks emerging from the global coronavirus pandemic
- Joint ventures in a crisis – maintaining the balance