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 summary of the week’s key developments follows, grouped into five topic areas:
- Relief Programs
- Oversight & Enforcement
- Public Markets & Trading
- Regulatory Changes
- Assessing Market Impact
COVID-19: Weekly update for financial services clients
Must Read Developments through June 11
- The House of Representatives and Senate have approved the Paycheck Protection Program Flexibility Act, which will loosen certain requirements on PPP loans by: (i) reducing the share of funds received that must be used for payroll costs from 75% to 60%; (ii) giving borrowers up to 24 weeks to use the funds (up from the initial eight-week period); and (iii) extending the deadline to rehire workers from June 30 to December 31.
The Department of the Treasury and the Small Business Administration (SBA) announced that they will dedicate $10 billion of Round 2 PPP funding for Community Development Financial Institutions (CDFIs) to “ensure that PPP funding reaches all communities in need of relief during the pandemic. “
- The SBA also released a detailed report on the PPP’s second round of funding, which breaks down the loans approved between April 27, 2020 and May 23, 2020 by state, size and anonymized lender.
The Fed has moved to expand the scope of its Main Street Lending Program by lowering the minimum loan size to $250,000 (from $500,000) and extending the loan term to five years (up from four years). The Fed has said that it will also take on 95% of the loan risk, to incentivize lenders to offer credit.
- The program will offer three different types of loans: new, priority, and expanded. Maximum amounts for each type will be $35 million, $50 million, and $300 million, respectively (compared to the previous maximums of $25 million, $25 million, and $200 million). Loans will also face a cap based on the outstanding credit and adjusted EBITDA of the borrower.
- The loans will not be originated by the Fed but by bank lenders, who will be required only to take on 5% of the loan risk while the rest of the risk will be taken on via a facility set up jointly by the Fed and the Treasury.
- The Fed has published updated FAQs on its Money Market Mutual Fund Liquidity Facility and released its periodic report to Congress on its Primary Market and Secondary Market Corporate Credit Facilities and Term Asset-Backed Securities Loan Facility.
- The Fed also released an updated term sheet and FAQs reflecting changes to the Municipal Liquidity Facility, including new authority for governors to designate two issuers whose revenues are generally derived from operating government activities (e.g., public transit; utilities) to be eligible to use the facility.
Oversight & Enforcement
The US Department of Justice (DOJ) filed criminal charges against the president of Arrayit Corporation, a California medical technology company, in connection with alleged “schemes to mislead investors, to manipulate the company’s stock price, and to conspire to commit health care fraud” related to false and fraudulent claims for “allergy and COVID-19 testing.”
- DOJ notes that this is “the first criminal securities fraud prosecution related to the COVID-19 pandemic.”
- The SEC suspended trading in Arrayit’s securities in mid-April.
- The SEC filed a separate civil case against an equities trader who allegedly engaged in manipulative trading in Arrayit stock, including by placing “spoof” orders.
Public Markets & Trading
- The SEC issued an order extending COVID-19-related relief for transfer agents, providing temporary exemptions from certain provisions of the Exchange Act. The exemptions were scheduled to expire on May 30, 2020, which has now been pushed back to June 30, 2020.
- The CFTC extended previously authorized COVID-19-related no-action relief for a variety of commodities market participants. These forms of relief were intended to “support orderly trading and liquidity as [participants] implemented social distancing measures,” and were previously set to expire on June 30, 2020. They have been extended until September 30, 2020.
The OCC published an Interim Final Rule allowing national banks and Federal savings associations to permit telephonic and electronic participation at all board of directors, shareholder and, as applicable, member meetings. This change is intended to allow these institutions to hold such meetings “without violating social distancing restrictions imposed in response to the coronavirus disease.”
- The OCC is seeking comment on an Advanced Notice of Proposed Rulemaking on the agency’s digital activities rules and other banking issues related to digital technology or innovation, including any issues that have arisen in response to the COVID-19 pandemic. Comments are due by August 3, 2020.
- The Fed, FDIC and OCC issued FAQs on Community Reinvestment Act considerations for activities in response to COVID-19. The FAQs include information on CRA eligibility and reporting standards for the PPP and the Main Street Lending Program.
The NCUA has published an Interim Final Rule temporarily modifying regulatory requirements to help federally insured credit unions (FICUs) “remain operational and liquid during the COVID-19 crisis.”
The rule makes two changes to the NCUA’s prompt corrective action regulations:
- to temporarily enable the Board to issue an order applicable to all FICUs to waive the earnings retention requirement for any FICU that is classified as adequately capitalized; and
- to modify its regulations with respect to the specific documentation required for net worth restoration plans for FICUs that become undercapitalized. The temporary modifications were effective as of May 28, 2020 and will be in place until December 31, 2020. Comments on the rule are due June 29, 2020.
- The rule makes two changes to the NCUA’s prompt corrective action regulations:
- The CFTC approved an Interim Final Rule to grant an extension of the compliance schedule for initial margin requirements for uncleared swaps, in response to operational challenges certain entities are facing due to the COVID-19 pandemic.
The CFPB amended its remittance rule under Regulation E to address compliance challenges that insured institutions may face on the expiration of a statutory exception that allows institutions to disclose estimates instead of the exact exchange rate, fees, and other figures with respect to remittance transactions.
- The CFPB also provided temporary flexibility allowing credit card issuers to make certain disclosures electronically, where Regulation Z normally requires a written disclosure. This relief is intended to allow issuers to “quickly assist consumers,” in particular those seeking to open a new account or request a temporary rate or fee reduction, during the pandemic.
Assessing Market Impact
- Acting Comptroller of the Currency Brian Books issued a public letter to state and local leaders around the US, warning that the prolonged effects of shutdown orders could “threaten the stability and orderly functioning of the financial system” unless the country’s mayors and governors consider the banking sector in their COVID-19 plans. In addition to noting the impact of lockdowns on businesses’ ability to repay their debts, the letter highlights how commercial real estate collateral is being put at risk by: (1) local orders threatening to cut off utility service to businesses that operate in violation of lockdown orders; and (2) prolonged vacancies that invite vandalism. The letter even notes the risk that mandatory face mask orders may mean more bank robberies.
- The CFTC issued a Customer Advisory informing the public about the unique risks associated with certain trading vehicles that use futures contracts or other commodity interests as they make investment decisions during the COVID-19 pandemic.
- The MSRB has published a summary of the resources available to municipal bond investors concerning the potential effects of COVID-19.
Blogs and other materials
We’ve recently published a few items that may be of interest:
- Beyond the pandemic: the future of M&A
- The heightened need for boards to stay vigilant and keep stockholders informed as deal teams march to closing
- A bigger slice of the PIFI? Public interest in Insurtech