Loyola University Chicago School of Law, Weekend JD 2023
Coronavirus (COVID-19) has shaken the world economy, not the least of which the financial industry. As the financial industry has adapted to work-from-home life under the coronavirus pandemic, industry regulators such as the SEC and the Financial Industry Regulatory Authority (FINRA) have been forced to adapt rules to changing circumstances and shift their enforcement priorities to pandemic related fraud.
Guidance and regulatory relief
While regulators worked to address pandemic-related frauds and scams, they were also quick to amend their rules to ensure that industry participants could adapt. FINRA has provided the financial industry an abundance of COVID-19 resources to assist its member firms in maintaining compliance under unprecedented circumstances. Among the resources provided to Broker-Dealers was Regulatory Notice 20-08, issued on March 9, 2020, that indicated the specific guidance and relief issued related to the pandemic and a continuously maintained Frequently Asked Questions page that has addressed specific member concerns.
In order for Broker-Dealers to maintain compliance during the pandemic, FINRA indicated in its Regulatory Notice 20-08 that it expects member firms “to establish and maintain reasonable supervisory systems designed to supervise the activities of each associated person while working from an alternative or remote location during the pandemic.” Broker-Dealers are subject to numerous oversight obligations towards its associated persons, such as requirements to retain internal communications and correspondence of associated persons with investors, which was made more complicated by home offices. Broker-Dealers have needed to be diligent in their supervision of employees under these conditions to ensure compliance.
Similarly, the SEC provided resources to Investment Advisers on their SEC Coronavirus (COVID-19) Response page and a Frequently Asked Questions page of their own. Of note, the SEC has indicated that they will not recommend enforcement action regarding Form ADV requirements to list places of business outside of the principal office as related to temporary teleworking situations. Additionally, the SEC issued Investment Advisers Act Release No. 5469 on March 25, 2020 that provided temporary relief for filing deadlines.
Fraud and coronavirus
The SEC issued an Investor Alert early on as the pandemic began receiving media attention on February 4, 2020 and has continually updated it as more information becomes available. Although the SEC ensured investors that they would still be ensuring compliance with non-coronavirus enforcement, like other regulators they have undoubtedly had to shift resources towards actively targeting coronavirus scams. Recent enforcement actions include the SEC charging Praxsyn and its CEO for issuing false and misleading press releases claiming the company acquired large quantities of N95 masks in a pump-and-dump scheme. In other cases, the SEC has temporarily suspended the trading of securities for firms such as Wellness Matrix Group, Inc., which sold at-home test kits for COVID-19 without FDA authorization.
In order to more effectively combat these frauds, FINRA formed the COVID Fraud Task Force. The task force is headed by Greg Ruppert, who had worked for the FBI investigating financial schemes and cybercrime for nearly two decades prior to joining FINRA. As of May 2020, the task force had referred >50 instances of potentially fraudulent claims to the SEC, who suspended trading in shares of more than 20 public companies in response. Their job appears far from over, as according to the FTC as of August 11, 2020, Americans have lost $106 million to coronavirus-related fraud and they continue to be targets.
The new normal
Regulators have been impressively agile in their willingness to adapt to current circumstances, and the industry has been better off for it. However, the pandemic has lasted for months, and the industry has had adequate time to adjust to the new normal. Some regulatory relief will have to be in effect for far longer than regulators likely anticipated, such as adjustments made for the supervision of employees working from home. But the industry no longer needs relief from its reporting obligations, and the case for granted extensions on regulatory filings has gotten thinner.
Most of the temporary amendments to FINRA rules have been effective since May 8, 2020 and will continue to be effective until FINRA provides public notice. FINRA noted per their Coronavirus Resources, that they will issue their notice at least two weeks prior to ending the relief, and the notice will be no later than December 31, 2020, pending any future extensions. No notices have yet been issued rescinding relief, but instead FINRA issued Regulatory Notice 20-16 on May 28, 2020 to provide further guidance to the industry by highlighting the approaches other firms had taken to adjust.
The SEC, on the other hand, issued a Public Statement on June 26, 2020, indicating that while some relief is likely to continue to be extended, such as relief to ensure continued remote operations, other relief will not be extended. The SEC noted that as “market participants have worked to implement business continuity plans and adjusted in many cases to a more remote and distributed workforce,” there is no longer an adequate need for continued extended regulatory deadlines.