Covid-19: The enforcement, exam and rulemaking impact

While the SEC has offered up regulatory relief and guidance to the financial services industry (see related story) in light of the evolving coronavirus, many are left wondering what the true impact will be on the Commission’s enforcement, examination and rulemaking efforts.

Despite the SEC’s Washington, DC headquarters commencing teleworking on March 10, the agency has stated that it remains “fully operational,” including its Divisions of Enforcement and OCIE. The SEC confirmed that it is “actively monitoring our markets for frauds, illicit schemes and other misconduct affecting US investors relating to covid-19, and as circumstances warrant, will issue trading suspensions, and use enforcement tools as appropriate.”

Bottom line: the Commission has continued to advance rulemaking initiatives, conduct inspections, bring enforcement actions and review and comment on issuer and fund filings.

Final action delayed

However, the SEC acknowledged that challenges associated with covid-19 may delay the completion and submission of some comment letters. For five pending items, the Commission stated that it will not take final action before April 24 to allow commenters additional time to weigh in.

Among the pending items being granted a comment extension are:

• A proposed rule to amend the “accredited investor” definition (original March 16 comment period close).
• A proposal concerning the use of derivatives by registered investment companies and business development companies; required due diligence by broker-dealers and registered investment advisors regarding retail customers’ transactions in certain leveraged/inverse investment vehicles (original March 24 comment period close).

Both proposals already have generated hundreds of comments.

CAT ‘no-action’

The SEC March 17 also moved to provide a temporary “no-action” letter to certain compliance rules affixed to the consolidated audit trail in response to covid-19’s impact on market participants. The move recognizes that a number of broker-dealers are actively testing and refining their ability to report to CAT and that personnel working on CAT issues also are “important to maintaining critical operations and implementing business continuity plans.”

Coronavirus response

As a general premise, the SEC stated that as a part of its coronavirus response, the Commission is focused on:

• Maintaining the continuity of Commission operations;
• Monitoring market functions and system risks;
• Providing prompt, targeted regulatory relief and guidance to issuers, exchanges and other registrants impacted by covid-19, including in connection with their business continuity plans; and
• Maintaining its enforcement and investor protection efforts.

Communications is also a key component of the SEC’s efforts. The agency noted that it is conducting outreach to the asset management industry, particularly advisers and funds with material exposures in markets and asset classes most affected by recent events. It is further monitoring and communicating with the largest broker-dealers to keep abreast of their activities and operations, including BCP matters and capital and liquidity.

The SEC is also coordinating with other domestic regulators, along with regulators in Asia and Europe and engaging with Congress.

Other regulators are also reaching out to the public. The CFTC March 18 issued a customer advisory cautioning the public to be wary of frauds seeking to profit from recent market volatility tied to the coronavirus pandemic.

CFTC commissioners unanimously March 17 approved a final rule delaying by one year the expansion of the agency’s initial margin deadline for smaller entities. The move was done in concert with global regulators and the covid-19 crisis played a role.

“We face difficult and uncertain times,” said CFTC Chairman Heath Tarbert. “But I believe the CFTC, and the financial community more broadly, are equal to the challenge. No matter what the world throws at us, the CFTC will continue to focus on its unique and important mission.”