COVID-19

COVID-19 Coverage: Part 9 of 1940 Act Issues to Consider During the Pandemic

Stradley’s Coronavirus Task Force will be updating this high-level overview of coronavirus disease 2019 (COVID-19) related issues for registered investment companies and fund managers as developments warrant.

NEW ISSUES:

  • Term Asset-Backed Securities Loan Facility: The Federal Reserve Bank of New York has established the Term Asset-Backed Securities Loan Facility (TALF), which will provide non-recourse funding to eligible borrowers owning eligible collateral in the form of AAA-rated asset-backed securities backed by newly and recently originated consumer and small business loans.1 A TALF borrower must have significant operations in and a majority of its employees based in the United States. The New York Fed has provided guidance that, for a borrower organized as an investment fund, this test will be applied to the borrower’s investment manager.The facility initially will make up to $100 billion of loans available, and each loan provided under the facility will have a maturity of three years. Unless the program is extended, no new credit extensions will be made after Sept. 30, 2020. The staff of the Securities and Exchange Commission in 2009 provided no-action guidance to allow registered funds to participate in a similar facility established in 2008.3 As the master loan and security agreement for the TALF has not been released, it is not yet clear whether the guidance needs to be updated to permit registered funds to participate in TALF. (New 5/15/2020)
  • Paycheck Protection Program: The Paycheck Protection Program authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis.4 Borrowers submitting a PPP application must certify that current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. The Small Business Administration, which implements the program, has announced that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification in good faith. In addition, a borrower that repays the loan in full by May 18, 2020 (extended from May 14), will be deemed to have made the required certification in good faith and will not be subject to audit.5 Hedge funds and private equity funds are not eligible for PPP loans, but their portfolio companies may be able to qualify.The SEC staff has provided guidance that an advisory firm that receives a PPP loan may be required to disclose the loan and its financial condition to clients.(New 5/15/2020)

UPDATED ISSUES:

  • Market Closures and Market Restrictions: A list of securities market closures and market restrictions is available here. (Updated 5/15/2020)
  • Exchange-Traded Funds:
    • The New York Fed has established the Secondary Market Corporate Credit Facility (SMCCF), which will purchase in the secondary market corporate bonds issued by U.S. companies and shares of U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.The New York Fed has retained BlackRock Financial Markets Advisory as a third-party vendor to serve as the investment manager for this facility.9 The SMCCF will cease making such purchases no later than Sept. 30, 2020, unless extended. The Federal Reserve Board announced on April 9 that the SMCCF had been expanded and, together with the Primary Market Corporate Credit Facility, will have a combined size of up to $750 billion.10 The SMCCF may purchase any U.S.-listed ETF whose investment objective is to provide broad exposure to the market for U.S. corporate bonds, although the preponderance of ETF holdings will be ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The SMCCF will not purchase shares of an ETF if it then would own more than 20% of the ETF’s shares. The facility began making purchases on May 12, 2020, and is transacting initially with primary dealers that deal directly with the New York Fed. (Updated 5/15/2020)
    • For an ETF that invests in foreign markets that close, the ETF may wish to consider whether to invest in alternative instruments, such as ADRs, in order to achieve the desired exposure to the foreign securities. In circumstances where there is no ability to make additional investments in appropriate alternative instruments, an ETF may wish to stop accepting creation unit purchases. The SEC previously has noted that ETFs generally may suspend the issuance of creation units only for a limited time and only due to extraordinary circumstances, such as when the markets on which the ETF’s portfolio holdings are traded are closed for a limited period of time.11 ETF issuers should be aware that any decision to suspend creations could have an impact on the arbitrage efficiency of the ETF and could lead to greater deviations between the market price of the ETF shares and the NAV of the shares. Like other open-end funds, ETFs cannot suspend redemptions unless the New York Stock Exchange is closed or there is appropriate guidance from the SEC. ETFs are permitted to charge transaction fees of up to 2% on redemptions. Such fees are designed to offset the costs of redemptions to the ETF. Some fixed-income ETFs that deliver cash redemptions instead of in-kind redemptions reportedly have increased their transaction fees on redemptions in light of increased transaction costs in the bond market. (Updated 3/23/2020)
  • Money Market Mutual Funds:
    • Liquidity Facility: The Federal Reserve Board has announced a Money Market Mutual Fund Liquidity Facility (MMLF) that is intended to assist money market funds in meeting demands for redemptions.12 Under the MMLF, the Federal Reserve Bank of Boston will lend to depository institutions and bank holding companies, taking as collateral assets purchased by the borrower from prime money market funds (i) concurrently with the borrowing or (ii) or on or after March 18, but before the opening of the facility. The facility is similar to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility that operated from late 2008 to early 2010 but will purchase a broader range of assets. The Federal Reserve Board expanded the facility to cover certain assets purchased from tax-exempt municipal money market funds.13 The Federal Reserve Board has announced that the facility opened March 23, and full documentation and additional guidance are available.14 As of April 14, 2020, the total outstanding amount of the loans under the facility was approximately $51.1 billion. (Updated 5/15/2020)
    • Form N-CR: Several money market funds filed on Form N-CR in March to report financial support, and one money market fund filed on Form N-CR in March to report downward deviations of its shadow price by more than ¼ of 1%. An amended report is required to be filed within four business days of the provision of financial support or downward deviation that describes the reason for the support and terms of the support or the reason for the deviation, as applicable. (Updated 3/23/2020)
    • Purchases by Affiliated Banks: The Federal Reserve Board has issued a template exemptive letter allowing banks to purchase assets from affiliated money market funds, subject to certain conditions, including that the assets must be investment grade and purchased at fair market value.15 In addition, the SEC staff has granted no-action relief to permit certain bank affiliates of money market funds to purchase securities from the funds in accordance with the Federal Reserve Board guidance, but otherwise pursuant to rule 17a-9, subject to certain conditions.16 The SEC no-action letter does not affect the ability of other money market fund affiliates to purchase assets from the fund in accordance with rule 17a-9. (Updated 3/23/2020)
    • Guaranty: The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted into law on March 27, suspends the existing prohibition on the use of the Exchange Stabilization Fund for the establishment of any guaranty programs for the money market fund industry.17 Any such guarantee shall be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee and terminate not later than Dec. 31, 2020. This provision allows the Department of the Treasury to establish a Money Market Funds Guaranty Program but does not require it to do so. (Updated 3/31/2020)

ISSUES:

  • Division of Investment Management Statement: The SEC’s Division of Investment Management has issued a statement emphasizing the ongoing importance of updating and delivering the required information to fund investors in a timely manner, even during this period of operational challenge.18 The statement reminds funds of the obligation to update prospectuses and deliver them to new investors,19 and it encourages funds to consider whether disclosures should be revised based on how COVID-19-related events may affect the fund and its investors. (New 4/20/2020)
  • Closed-End Funds: A closed-end fund is required to suspend its offering of shares until it amends its prospectus if the fund’s net asset value declines more than 10% from the NAV as of the effective date of the registration statement. The SEC staff has released guidance allowing the use of a prospectus supplement, with notice to the SEC staff, rather than an amendment to the registration statement.20 (New 4/20/2020)
  • Shareholder Meetings: The SEC staff has provided guidance to both operating companies and funds that is intended to provide regulatory flexibility to companies seeking to change the date and location of shareholders meetings and to use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.21 The guidance notes that the ability to conduct a “virtual” meeting is governed by state law, where permitted, and the issuer’s governing documents. Note that companies seeking to conduct a virtual meeting may, under state law, need to have an appropriate process for shareholders to vote at the meeting. The guidance has been revised to extend to special meetings as well as annual meetings and to provide further guidance on notice requirements. (Updated 4/20/2020)
  • Business Development Companies: The SEC has provided limited and conditional exemptive relief for business development companies that provides additional flexibility to BDCs to issue and sell senior securities.22 In addition, for BDCs with an SEC order permitting co-investment transactions with certain affiliates, the SEC relief allows the BDC to participate in certain follow-on investments with regulated funds and affiliated funds. The relief is available until Dec. 31, 2020. (New 4/13/2020)
  • Regulation BI/Form CRS: SEC Chairman Jay Clayton has announced that the SEC believes that the June 30, 2020, compliance date for Regulation Best Interest and other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate.23 To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with the SEC. The SEC’s Office of Compliance Inspections and Examinations has issued two Risk Alerts that provide broker-dealers and investment advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation BI and Form CRS,24 and FINRA has provided guidance on best practices in preparing for Regulation BI.25 The SEC staff has announced that it is now accepting filings on Form CRS.26 (Updated 4/13/2020)
  • Paper Submissions: Although most SEC filings are now made electronically via EDGAR, there are still some submissions that normally must be submitted in paper form.
    • The SEC’s Division of Trading and Markets has announced relief for certain submissions that are required to be filed in paper format with a manual signature and for related notarization requirements.27 The affected filings include audited annual reports submitted by broker-dealers. Filers should contact Division staff to discuss the appropriate process for filing. The staff statement covers submissions for the period from and including March 16, 2020, to June 30, 2020. (New 4/7/2020)
    • The SEC’s Division of Corporation Finance has announced that notices of proposed sales of securities on Form 144 may be filed via email and, subject to certain conditions, may have a typed form of signature rather than a manual signature.28 (New 4/13/2020)
    • The SEC’s Division of Investment Management has announced that requests for hearing applications on notices of applications for exemptive orders under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 must be submitted by email.29 (New 4/13/2020)
  • Accounting Issues: SEC Chief Accountant Sagar Teotia has announced that the SEC’s Office of the Chief Accountant recognizes that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates in a number of accounting areas, including fair value and impairment considerations.30 The OCA has consistently not objected to well-reasoned judgments that entities have made, and it will continue to apply this perspective. The OCA remains available for consultation and encourages stakeholders to contact it with questions they encounter as a result of COVID-19. (New 4/7/2020)
  • Affiliated Purchases of Debt Securities: The SEC staff has issued no-action relief to affiliates of open-end funds, other than exchange-traded funds and money market funds, to allow them to purchase debt securities from the funds.31 The relief is subject to conditions, including that the price must be the security’s fair market value per Section 2(a)(41) of the 1940 Act, provided that this price is not materially different from the value indicated by a reliable third-party pricing service, and that the fund must publicly disclose the purchase on its website and inform the staff. In addition, if the purchaser thereafter sells the security for a higher price, it must promptly pay the difference to the fund, unless the purchaser is a bank or bank affiliate and this condition would conflict with Sections 23A and 23B of the Federal Reserve Act. The relief will be in effect until further notice from the staff. (New 3/31/2020)
  • SEC Lending and Borrowing Relief: The SEC has issued an order providing additional flexibility for open-end funds (other than money market funds) and insurance company separate accounts registered as unit investment trusts to obtain short-term funding.32 The relief is available until a notice terminating it is issued, which will be at least two weeks from the date of the notice and no earlier than June 30, 2020. Prior to relying on any of the relief, the fund would have to notify SEC staff. In addition, interfund lending requires notification on a fund’s public website.
    • Fund affiliates may lend money to the fund on a collateralized basis, provided the board makes determinations that the borrowing is in the best interest of the fund and its shareholders and that it will be for the purposes of satisfying shareholder redemptions.
    • For fund families with an SEC order permitting an interfund lending and borrowing facility, a lending fund may lend up to 25% of its current net assets and the term may be for any period that does not extend beyond the expiration of the relief, notwithstanding the terms of the order, provided, among other conditions, that the board reasonably determines that the maximum term for interfund loans is appropriate. (Recent orders typically limit lending funds to 15% of current net assets and the term to seven days.)
    • For fund families without an interfund lending order, funds may lend and borrow in accordance with the terms of any such order issued within the past twelve months, with the same modifications.33
    • Funds are not required to seek shareholder approval if lending under the relief would violate a fundamental policy, provided that the board reasonably determines that the lending or borrowing is in the best interests of the fund and its shareholders. (New 3/27/2020)
  • OCIE Statement: The SEC’s Office of Compliance Inspections and Examinations has issued a statement that it has moved to conduct examinations off-site through correspondence unless it is absolutely necessary to be on-site, and that it will work with registrants to ensure that its work can be conducted in a manner consistent with maintaining normal operations and with necessary or appropriate health and safety measures.34 OCIE also stated that reliance on regulatory relief would not be a risk factor utilized in determining whether OCIE commences an examination, and it encourages registrants to utilize available regulatory relief as needed. (New 3/27/2020)
  • Signatures on EDGAR Filings: The SEC staff has issued a statement on the manual signature and record requirements for documents filed electronically with the SEC.35 The staff will not recommend enforcement action if a signatory retains a document adopting the signature and provides the document to the filer for retention, with the time and date executed, and the filer establishes and maintains policies and procedures governing this process. (New 3/27/2020)
  • FINRA Guidance: FINRA has issued guidance that provides temporary relief and guidance with respect to a number of requirements, including filings that would otherwise be required for temporary relocations and the timing of FOCUS reports and certain other filings.36 The guidance will be available until FINRA publishes a Regulatory Notice announcing a termination date. (New 3/27/2020)
  • Blue Sky Guidance: A number of state and provincial securities regulators have published guidance that provides relief or other COVID-19-related updates. The North American Securities Administrators Association has established a resource page to collect these updates.37 (Updated 3/27/2020)
  • SEC Filings: The SEC has updated its previous orders under both the 1940 Act and the Investment Advisers Act to extend the time periods of the relief.38 Entities must notify the SEC staff and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur. The 1940 Act Orders provide relief from the timeliness requirements of Form N-CEN, Form N-PORT, and Form N-23C-2 when a fund is unable to meet a deadline due to circumstances related to current or potential effects of COVID-19. The relief for Forms N-CEN and N-PORT applies to filing obligations for which the original due date is on or after March 13 but on or prior to June 30, 2020, while the relief for Form N-23C-2 extends to Aug. 15, 2020. The Advisers Act Orders provide timeliness relief for Form ADV and Form PF filings and for Form ADV Part 2 client delivery obligations for 45 days from the original due date, when the original due date is on or after March 13 but on or prior to June 30, 2020. The SEC previously posted staff guidance that Form ADV does not have to be updated to reflect temporary teleworking locations.39 The SEC has also provided relief from timeliness requirements for certain filings under the Securities Exchange Act of 1934.40 Note that filings not covered by the orders continue to be required on a timely basis, including filings on Form N-LIQUID, Form N-CR, and Form N-MFP, although it is possible that the SEC will consider issues with these forms on an individualized basis. The SEC provided information on contacting the staff with issues, including issues with these filings, in press releases announcing the actions.41 (Updated 3/27/2020)
  • In-Person Board Meetings: The 1940 Act Orders allow fund boards to meet telephonically or by video conference to consider and vote on matters that would otherwise require an in-person vote. The relief applies whenever reliance upon it is necessary or appropriate due to circumstances related to current or potential effects of COVID-19 and is available until Aug. 15, 2020. The SEC’s Division of Investment Management previously provided no-action relief for the period from March 4 to June 15.42 (Updated 3/27/2020)
  • Delivery of Prospectuses and Shareholder Reports: The 1940 Act Orders also provide relief from the obligations to timely transmit annual and semiannual reports to shareholders and to file them with the SEC. The relief applies when the original due date is on or after March 13 but on or prior to June 30, 2020, and the fund is unable to prepare or transmit the report due to circumstances related to current or potential effects of COVID-19. In addition, the SEC announced that it would not provide a basis for an SEC enforcement action if a fund does not timely deliver a current prospectus because of circumstances related to COVID-19 when delivery was originally required during this period. The position is not available to an initial purchase by the investor of the fund’s shares. (Updated 3/27/2020)
  • State and Local Closures: Many states, counties and cities have announced business closures in connection with “shelter-in-place” public health efforts to slow the spread of COVID-19. Some of the orders may contain broad exceptions for the financial services industry, while others may not. Beyond the direct impact on firms in those localities, review the location of service providers and the terms of these orders carefully to determine whether necessary support functions will remain available. FINRA has posted a resource page with links to state “shelter-in-place” and “stay-at-home” orders.43 (Updated 3/27/2020)
  • Transfer Agents: The SEC has provided a broad exemption for the period from March 16 to May 30 from requirements applicable to transfer agents except for the safeguarding requirement.44 Transfer agents relying on the relief must provide notice to the SEC by May 30. The SEC encourages transfer agents and the issuers for whom they act to inform affected security holders. (New 3/23/2020)
  • Tax Implications for Funds with Institutional Shareholders: For institutional funds with few shareholders, beware that the fund could fall into personal holding company status if at any time during the last half of the taxable year more than 50% in value of the fund’s shares are owned, directly or indirectly, by or for not more than 5 “individuals.” For purposes of this rule, employee pension trusts, private foundations, trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits, and a trust, a portion of which is permanently set aside or to be used exclusively for charitable purposes, are considered individuals. (New 3/23/2020)
  • CPO NFA Filings: The CFTC staff has provided no-action relief to commodity pool operators that extends certain filing deadlines.45 With respect to Form CPO-PQR filings under CFTC Regulation 4.27, Small and Mid-Sized CPOs have until May 15, 2020, to submit their annual filings for 2019, while Large CPOs have until July 15, 2020, to submit their filings for Q1 2020. For pool annual reports under CFTC Regulations 4.7(b)(3) or 4.22(c) that are due on or before April 30, 2020, the deadline for filing and distributing the report, which must include certified financial statements, has been extended until 45 days after the due date specified in the regulations. For monthly or quarterly reports to pool participants under CFTC Regulation 4.7(b)(2) or 4.22(b) for all reporting periods ending on or before April 30, 2020, the deadline for distribution to participants has been extended to 45 days after the end of the reporting period (instead of 30 days as stated in the regulations). The National Futures Association has issued similar relief for CPO Members and has provided Commodity Trading Advisor Members with similar relief for NFA Form PR filings.46 (Updated 3/23/2020)
  • Liquidity Risk Management: Current developments raise a number of issues for the management of funds’ liquidity risk:
    • Assessment, management, and periodic review of liquidity risk: Funds should review fund liquidity risk in light of current and reasonably expected market events and redemption patterns and may need to consider appropriate mitigating steps for strengthening the fund’s ability to meet redemptions, including readying borrowing and other liquidity facilities. Some fund managers may wish to consider use of the relief provided by the SEC and its staff for affiliated transactions.
    • Classification of portfolio investments: Rule 22e-4 requires funds to review their portfolio investments’ liquidity classifications more frequently than monthly if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect classifications. Such reviews should focus especially on holdings that could be considered illiquid investments as a result of these developments or that could fall out of highly liquid investment status. An important consideration will be a review of the reasonably anticipated trading sizes in light of redemption expectations. Funds should be alert to the possibility that vendor classifications may be based on historical rather than current data.
    • Highly liquid investment minimum: For funds that currently hold primarily highly liquid assets, and therefore are not required to have an HLIM, the program administrator may need to examine whether the fund can still qualify for that status. For HLIM funds, the HLIM may need to be reviewed under the required factors in light of current market and redemption developments and, if a shortfall is reasonably anticipated, a shortfall response plan should be developed, which must include a plan for reporting shortfalls to the fund’s board.
    • Illiquid investments: During this period of extreme market volatility, the fund should monitor closely whether there is a need to reclassify holdings as illiquid investments. Funds should be prepared to file Form N-LIQUID if the fund’s illiquid assets exceed 15% of its net assets. The program administrator should have guidance designed to prevent purchases that would violate the prohibition on acquiring illiquid investments when over the 15% limit. We do not yet know if the SEC will provide guidance relieving funds from filing Form N-LIQUID in the event of foreign or other market closings that are beyond the scope of existing guidance on extended foreign holidays.
    • Redemptions in kind: Funds may wish to consider whether redemptions in kind would be an appropriate tool for large redemption requests, including whether operational logistics are in place to accommodate any such redemption requests. (Updated 3/19/2020)
  • MiFID II Reporting: Under the MiFID II delegated regulation, investment firms providing the service of portfolio management and subject to MiFID II must inform the client where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.47 (New 3/19/2020)
  • Fund Boards: Fund directors should stay up to speed on current market events so they can properly apply their business judgment as necessary from a governance standpoint. In many cases, fund boards are receiving periodic status reports or attending status updates from fund advisers. Examples of areas for directors to consider include, for funds, fund flows, liquidity levels, valuation, and performance; and for fund advisers, status of operations under business continuity plans, market assessments, and the assessment of critical fund service providers. Board reporting from fund advisers is particularly important during times of market stress. To strike an appropriate balance between staying apprised and being efficient and respectful of fund advisory personnel time, boards may seek to channel questions or communications through independent counsel or the board chair/lead independent director. (New 3/19/2020)
  • Business Continuity Plans: Business continuity at the current time is key. In most cases, those plans already are in effect. Consideration should be given to contingency planning in the event that fund managers, transfer agents, pricing services, or other service providers are unable to provide services because of employee absences. Funds and fund managers should make and communicate revisions to their plans as they adjust to the developing environment.
  • Valuation: Funds should examine whether they are able to obtain valid prices for their investments, especially in markets that may be closed or have limited availability. Experience from the 2008 financial crisis shows that vendor reassurances as to the quality of their pricing information may provide false comfort, so vendor prices should be checked for reliability. At this time, we do not expect the SEC to provide relief from the daily pricing requirement.
  • Redemptions: Under Section 22(e) of the 1940 Act, open-end funds generally may not suspend the right of redemption unless the New York Stock Exchange is closed, or the SEC provides guidance that daily redemptions are not required because trading is restricted or an emergency exists. At this point, funds should assume that they must continue to provide daily redemptions. Funds should review any borrowing arrangements that may need to be utilized. We are closely monitoring for any relevant guidance from the SEC or its staff on this topic.
  • Cybersecurity: Firms are at increased risk of cyberattacks, particularly with the use of remote offices and telework. Anxious employees may be more vulnerable to email phishing attacks. Employees should be reminded of the continued need for vigilance.

Please do not hesitate to reach out to your Stradley Ronon contact, or to any member of Stradley’s Coronavirus Task Force, with any questions and concerns you may have during this period. You can reach Sara Crovitz at 202.507.6414 or scrovitz@stradley.com, or John Baker at 202.419.8413 or jbaker@stradley.com.

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1 Policy Tools: Term Asset-Backed Securities Loan Facility, https://www.federalreserve.gov/monetarypolicy/talf.htm.

2 FAQs: Term Asset-Backed Securities Loan Facility (May 12, 2020), https://www.newyorkfed.org/markets/term-asset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-faq.

3 Franklin Templeton Investments, SEC No-Action Letter (June 19, 2009), https://www.sec.gov/divisions/investment/noaction/2009/franklintempleton061909.htm. Stradley Ronon acted as counsel for this no-action request. See also T. Rowe Price Associates, Inc., SEC No-Action Letter (Oct. 8, 2009), https://www.sec.gov/divisions/investment/noaction/2009/troweprice100809.htm (relief under 1940 Act § 17(d) and Rule 17d-1 for registered funds and certain other accounts to participate in TALF through a special purpose vehicle).

4 Paycheck Protection Program, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.

5 Paycheck Protection Program Loans: Frequently Asked Questions (FAQs) #46, 47 (May 13, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.

6 Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450, 23451 (Apr. 28, 2020), https://www.federalregister.gov/d/2020-09098.

7 Division of Investment Management Coronavirus (COVID-19) Response FAQs, Q&A II.4, https://www.sec.gov/investment/covid-19-response-faq.

8 Policy Tools: Secondary Market Corporate Credit Facility, https://www.federalreserve.gov/monetarypolicy/smccf.htm.

9 Secondary Market Corporate Credit Facility, https://www.newyorkfed.org/markets/secondary-market-corporate-credit-facility.

10 Press Release, Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy (Apr. 8, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm.

11 Release Nos. 33-10695, IC-33646 (Sept. 25, 2019), 84 Fed. Reg. 57162, 57178 (Oct. 24, 2019), https://www.federalregister.gov/d/2019-21250.

12 Press Release, Federal Reserve Board broadens program of support for the flow of credit to households and businesses by establishing a Money Market Mutual Fund Liquidity Facility (MMLF) (Mar. 18, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm.

13 Press Release, Federal Reserve Board expands its program of support for the flow of credit to the economy by taking steps to enhance liquidity and functioning of crucial state and municipal money markets (Mar. 20, 2020) https://www.federalreserve.gov/newsevents/pressreleases/monetary20200320b.htm.

14 Policy Tools: Money Market Mutual Fund Liquidity Facility, https://www.federalreserve.gov/monetarypolicy/mmlf.htm.

15 Money Market Mutual Funds Template Letter (Mar. 17, 2020), https://www.federalreserve.gov/supervisionreg/legalinterpretations/fedreserseactint20200317.pdf.

16 Investment Company Institute, SEC No-Action Letter (Mar. 19, 2020), https://www.sec.gov/investment/investment-company-institute-031920-17a.

17 H.R. 748, § 4015, 116th Cong. (2020), https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf.

18 SEC Division of Investment Management, Importance of Delivering Timely and Material Information to Investment Company Investors (Apr. 14, 2020), https://www.sec.gov/investment/delivering-timely-material-information.

19 As discussed below, the SEC has provided limited conditional relief from the obligation to timely deliver prospectuses to existing shareholders. See infra Delivery of Prospectuses and Shareholder Reports.

20 Division of Investment Management Coronavirus (COVID-19) Response FAQs, Q&A III.5, https://www.sec.gov/investment/covid-19-response-faq.

21 Staff Guidance for Conducting Annual Meetings in Light of COVID-19 Concerns (Apr. 7, 2020), https://www.sec.gov/ocr/staff-guidance-conducting-annual-meetings-light-covid-19-concerns.

22 Release No. IC-33837 (Apr. 8, 2020), https://www.sec.gov/rules/exorders/2020/ic-33837.pdf.

23 SEC Chairman Jay Clayton, Investors Remain Front of Mind at the SEC: Approach to Allocation of Resources, Oversight and Rulemaking; Implementation of Regulation Best Interest and Form CRS (Apr. 2, 2020), https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs.

24 OCIE, Risk Alert: Examinations that Focus on Compliance with Regulation Best Interest (Apr. 7, 2020), https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf; OCIE, Risk Alert: Examinations that Focus on Compliance with Form CRS (Apr. 7, 2020), https://www.sec.gov/files/Risk%20Alert%20-%20Form%20CRS%20Exams.pdf.

25 FINRA Highlights Firm Practices from Regulation Best Interest Preparedness Reviews (Apr. 8, 2020), https://www.finra.org/rules-guidance/key-topics/regulation-best-interest/preparedness.

26 Frequently Asked Questions on Form CRS, https://www.sec.gov/investment/form-crs-faq#filing.

27 Division of Trading and Markets Staff Statement Regarding Requirements for Certain Paper Submissions in Light of COVID-19 Concerns (Apr. 2, 2020), https://www.sec.gov/tm/paper-submission-requirements-covid-19.

28 SEC Division of Corporation Finance, Statement Regarding Requirements for Form 144 Paper Filings in Light of COVID-19 Concerns (Apr. 10, 2020), https://www.sec.gov/corpfin/announcement/form-144-paper-filings-email-option.

29 IM Information Update IM-INFO-2020-03 (Apr. 8, 2020), https://www.sec.gov/files/im-info-2020-03.pdf.

30 SEC Chief Accountant Sagar Teotia, Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020), https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

31 Investment Company Institute, SEC No-Action Letter (Mar. 26, 2020), https://www.sec.gov/investment/investment-company-institute-032620-17a.

32 Release No. IC-33821 (Mar. 23, 2020), https://www.sec.gov/rules/other/2020/ic-33821.pdf.

33 Recent interfund lending orders are available at https://www.sec.gov/rules/icreleases.shtml#interfundlending.

34 OCIE Statement on Operations and Exams – Health, Safety, Investor Protection and Continued Operations are our Priorities (Mar. 20, 2020), https://www.sec.gov/ocie/announcement/ocie-statement-operations-health-safety-investor-protection-and-continued.

35 Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (Mar. 24, 2020), https://www.sec.gov/corpfin/announcement/staff-statement-regarding-rule-302b-regulation-s-t-light-covid-19-concerns.

36 Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic (Mar. 24, 2020), https://www.finra.org/rules-guidance/guidance/faqs/coronavirus. FINRA guidance, updates, and other information on COVID-19 are available at https://www.finra.org/rules-guidance/key-topics/covid-19. Other self-regulatory organizations are also providing relief and guidance. See, e.g., Cboe Regulatory Circular 20-021 (Mar. 25, 2020), http://cdn.cboe.com/resources/regulation/circulars/regulatory/RC20-021-Filing-Extensions-for-Annual-Reports-and-FOCUS-Reports.pdf; Cboe Regulatory Circular 20-022 (Mar. 25, 2020), http://cdn.cboe.com/resources/regulation/circulars/regulatory/RC20-022-Extension-of-Time-for-Certain-Filings-Currently-Due-April-1-2020.pdf.

37 Novel Coronavirus COVID-19 Updates, https://www.nasaa.org/industry-resources/covid-19-updates/.

38 For the 1940 Act Orders, see Release No. IC-33824 (Mar. 25, 2020), https://www.sec.gov/rules/other/2020/ic-33824.pdf; Release No. IC-33817 (Mar. 13, 2020), https://www.sec.gov/rules/other/2020/ic-33817.pdf. For the Advisers Act Orders, see IA-5469 (Mar. 25, 2020), https://www.sec.gov/rules/other/2020/ia-5469.pdf; Release No. IA-5463 (Mar. 13, 2020), https://www.sec.gov/rules/other/2020/ia-5463.pdf. The various forms of relief provided by the SEC are subject to conditions that are set out in the respective orders, such as subsequent ratification of votes, notice to the SEC of filing delays, and website disclosure of issues with the delivery of shareholder reports, prospectuses, and Form ADV client brochures.

39 Using IARD, Form ADV: Item 1.F, https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#item1f.

40 Release No. 34-88465(Mar. 25, 2020), https://www.sec.gov/rules/exorders/2020/34-88465.pdf; Release No. 34-88318 (Mar. 4, 2020), https://www.sec.gov/rules/other/2020/34-88318.pdf.

41 Press Release 2020-73, SEC Extends Conditional Exemptions from Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected by Coronavirus Disease 2019 (COVID-19) (Mar. 25, 2020), https://www.sec.gov/news/press-release/2020-73; Press Release 2020-63, SEC Takes Targeted Action to Assist Funds and Advisers, Permits Virtual Board Meetings and Provides Conditional Relief from Certain Filing Procedures (Mar. 13, 2020), https://www.sec.gov/news/press-release/2020-63.

42 SEC Division of Investment Management, Staff Statement on Fund Board Meetings and Unforeseen or Emergency Circumstances Related to Coronavirus Disease 2019 (COVID-19) (Mar. 4, 2020), https://www.sec.gov/investment/staff-statement-im-covid-19.

43 State “Shelter-in-Place” and “Stay-at-Home” Orders, https://www.finra.org/rules-guidance/key-topics/covid-19/shelter-in-place.

44 Release No. 34-8844 (Mar. 20, 2020), https://www.sec.gov/rules/exorders/2020/34-88448.pdf.

45 Press Release No. 8136-20, CFTC Issues Third Wave of Relief to Market Participants in Response to COVID-19 (Mar. 20, 2020), https://www.cftc.gov/PressRoom/PressReleases/8136-20.

46 Notice to Members I-20-15 (Mar. 23, 2020), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5218.

47 European Commission Delegated Regulation art. 62, https://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1.PDF.

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COVID-19 Disaster Relief Arrives for Private-Sector Retirement Plan Sponsors and Administrators

The Department of Labor (DOL) released guidance for sponsors and administrators of employee benefit plans subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA) in response to the COVID-19 outbreak in the United States. EBSA Disaster Relief Notice 2020-01 provides important relief in a various areas over which the DOL has jurisdiction, including, but not limited to, those described below. The guidance reflects the DOL recognition that COVID-19, and the ensuing government response, is likely impairing most, if not all, plan sponsors’ and administrators’ ability to comply with certain requirements and deadlines under ERISA. Here are some of the high-level takeaways, particularly as they relate to retirement plans:

  • The guidance retroactively applies from March 1, 2020, the date President Trump technically declared the COVID-19 National Emergency, and expires 60 days after the cessation of the National Emergency or such other date as the DOL determines. The DOL leaves open the possibility of revising the expiration date of the guidance based on region, a nod to state regional pacts and the White House’s Guidelines for Opening Up America Again.
  • Technical non-compliance with the verification procedures related to plan loans and distributions under the terms of the plan are not considered violations if the failure is solely attributable to the COVID-19 outbreak, the plan administrator makes a good faith diligent effort (under the circumstances) to comply with the required procedures, and the plan administrator makes a reasonable attempt to correct any procedural deficiencies as soon as administratively practicable. This relief would not apply to statutory or regulatory requirements enforced by the U.S. Internal Revenue Service.
  • As we recently described, certain limitations related to participant loans were liberalized under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Under the DOL’s new guidance, the prohibited transaction relief provided in Section 408(b)(1) of ERISA will not be lost solely because the person made a plan loan to a qualified individual during the loan relief period in compliance with the CARES Act and the provisions of any related IRS notice or other published guidance, or because a qualified individual delayed making a plan loan repayment in compliance with the CARES Act and the provisions of any related IRS notice or other published guidance.
  • The DOL will not, solely on the basis of a failure attributable to the COVID-19 outbreak, take enforcement action with respect to a temporary delay in forwarding contributions or repayments of loans to a plan, provided the employer or service provider, as the case may be, acts reasonably, prudently, and in the interest of employees to end such delay as soon as administratively practicable under the circumstances. These amounts must ordinarily be forwarded to the plan on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer.
  • Under existing regulations, the administrator of an individual account plan is required to provide 30 days’ advance notice to participants and beneficiaries whose rights under the plan will be temporarily suspended, limited, or restricted by a blackout period. Under certain circumstances, these notice requirements are not required due to events beyond the reasonable control of the plan administrator, and a fiduciary makes such a determination in writing. In response to COVID-19, the new guidance provides that the administrator will not violate such requirements if the plan and responsible fiduciary act in good faith and furnish the notice as soon as administratively practicable under the circumstances. For these purposes, “good faith” acts include the use of electronic alternative means of communicating with plan participants (and beneficiaries) who the plan fiduciary reasonably believes have effective access to electronic means of communication, including email, text messages, and continuous access websites. Moreover, the requirement that the fiduciary makes a written determination that such delay is due to events beyond the reasonable control of the plan administrator will not be required, “as pandemics are by definition beyond the plan administrator’s control.”
  • This relief is broad and flexible. Disclosure and notice requirements, including the provision of benefit statements, may be satisfied electronically, as described above.
  • The DOL clearly recognizes that the primary goal at this point is for plans to take reasonable measures to prevent the loss or undue delay in benefits to participants and beneficiaries. Moreover, the guidance acknowledged that service providers are themselves facing headwinds from COVID-19, namely, the various state and local shutdown orders on businesses. To that end, the guidance signals that DOL enforcement in this area will emphasize compliance assistance. The DOL did not rule out additional relief in the future.
  • The DOL separately released COVID-19 FAQs for Participants and Beneficiaries. Also, the DOL and Department of Treasury published a joint notice to address coverage issues under COBRA and to announce an extension for certain deadlines related to health and retirement plans, including additional time to file claims, resulting from the COVID-19 outbreak.

COVID-19 Coverage: Part 8 of 1940 Act Issues to Consider During the Pandemic

Stradley’s Coronavirus Task Force will be updating this high-level overview of coronavirus disease 2019 (COVID-19) related issues for registered investment companies and fund managers as developments warrant.

NEW ISSUES:

  • Division of Investment Management Statement: The Securities and Exchange Commission’s Division of Investment Management has issued a statement emphasizing the ongoing importance of updating and delivering required information to fund investors in a timely manner, even during this period of operational challenge.1 The statement reminds funds of the obligation to update prospectuses and deliver them to new investors,2 and it encourages funds to consider whether disclosures should be revised based on how COVID-19-related events may affect the fund and its investors. (New 4/20/2020)
  • Closed-End Funds: A closed-end fund is required to suspend its offering of shares until it amends its prospectus if the fund’s net asset value declines more than 10% from the NAV as of the effective date of the registration statement. The SEC staff has released guidance allowing the use of a prospectus supplement, with notice to the SEC staff, rather than an amendment to the registration statement.3 (New 4/20/2020)

UPDATED ISSUES:

  • Market Closures and Market Restrictions: A list of securities market closures and market restrictions is available here(Updated 4/20/2020)
  • Shareholder Meetings: The SEC staff has provided guidance to both operating companies and funds that is intended to provide regulatory flexibility to companies seeking to change the date and location of shareholders meetings and to use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.4 The guidance notes that the ability to conduct a “virtual” meeting is governed by state law, where permitted, and the issuer’s governing documents. Note that companies seeking to conduct a virtual meeting may, under state law, need to have an appropriate process for shareholders to vote at the meeting. The guidance has been revised to extend to special meetings as well as annual meetings and to provide further guidance on notice requirements. (Updated 4/20/2020)

ISSUES:

  • Business Development Companies: The SEC has provided limited and conditional exemptive relief for business development companies that provides additional flexibility to BDCs to issue and sell senior securities.5 In addition, for BDCs with an SEC order permitting co-investment transactions with certain affiliates, the SEC relief allows the BDC to participate in certain follow-on investments with regulated funds and affiliated funds. The relief is available until Dec. 31, 2020. (New 4/13/2020)
  • Exchange-Traded Funds:
    • For an ETF that invests in foreign markets that close, the ETF may wish to consider whether to invest in alternative instruments, such as ADRs, in order to achieve the desired exposure to the foreign securities. In circumstances where there is no ability to make additional investments in appropriate alternative instruments, an ETF may wish to stop accepting creation unit purchases. The Commission previously has noted that ETFs generally may suspend the issuance of creation units only for a limited time and only due to extraordinary circumstances, such as when the markets on which the ETF’s portfolio holdings are traded are closed for a limited period of time.6 ETF issuers should be aware that any decision to suspend creations could have an impact on the arbitrage efficiency of the ETF and could lead to greater deviations between the market price of the ETF shares and the NAV of the shares. Like other open-end funds, ETFs cannot suspend redemptions unless the New York Stock Exchange is closed or there is appropriate guidance from the SEC. ETFs are permitted to charge transaction fees of up to 2% on redemptions. Such fees are designed to offset the costs of redemptions to the ETF. Some fixed-income ETFs that deliver cash redemptions instead of in-kind redemptions reportedly have increased their transaction fees on redemptions in light of increased transaction costs in the bond market. (Updated 3/23/2020)
    • On March 23, 2020, the Federal Reserve Bank of New York established the Secondary Market Corporate Credit Facility (SMCCF), which will purchase in the secondary market corporate bonds issued by U.S. companies and shares of U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.7 The New York Fed has retained BlackRock Financial Markets Advisory as a third-party vendor to serve as the investment manager for this facility.8 The SMCCF will cease making such purchases no later than Sept. 30, 2020, unless extended. The Federal Reserve Board announced on April 9 that the SMCCF has been expanded and, together with the Primary Market Corporate Credit Facility, will have a combined size of up to $750 billion.9 The SMCCF may purchase any U.S.-listed ETF whose investment objective is to provide broad exposure to the market for U.S. corporate bonds, although the preponderance of ETF holdings will be ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The SMCCF will not purchase shares of an ETF if it then would own more than 20% of the ETF’s shares. (Updated 4/13/2020)
  • Regulation BI/Form CRS: SEC Chairman Jay Clayton has announced that the SEC believes that the June 30, 2020, compliance date for Regulation Best Interest and other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate.10 To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with the SEC. The SEC’s Office of Compliance Inspections and Examinations has issued two Risk Alerts that provide broker-dealers and investment advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation BI and Form CRS,11 and FINRA has provided guidance on best practices in preparing for Regulation BI.12 The SEC staff has announced that it is now accepting filings on Form CRS.13 (Updated 4/13/2020)
  • Paper Submissions: Although most SEC filings are now made electronically via EDGAR, there are still some submissions that normally must be submitted in paper form.
    • The SEC’s Division of Trading and Markets has announced relief for certain submissions that are required to be filed in paper format with a manual signature and for related notarization requirements.14 The affected filings include audited annual reports submitted by broker-dealers. Filers should contact Division staff to discuss the appropriate process for filing. The staff statement covers submissions for the period from and including March 16, 2020, to June 30, 2020. (New 4/7/2020)
    • The SEC’s Division of Corporation Finance has announced that notices of proposed sales of securities on Form 144 may be filed via email and, subject to certain conditions, may have a typed form of signature rather than a manual signature.15 (New 4/13/2020)
    • The SEC’s Division of Investment Management has announced that requests for hearing applications on notices of applications for exemptive orders under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 must be submitted by email.16 (New 4/13/2020)
  • Accounting Issues: SEC Chief Accountant Sagar Teotia has announced that the SEC’s Office of the Chief Accountant recognizes that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates in a number of accounting areas, including fair value and impairment considerations.17 The OCA has consistently not objected to well-reasoned judgments that entities have made, and it will continue to apply this perspective. The OCA remains available for consultation and encourages stakeholders to contact it with questions they encounter as a result of COVID-19. (New 4/7/2020)
  • SEC Comment Periods: The SEC has issued a statement noting that the Commission and staff have historically considered comments submitted after a comment period closes but before adoption of a final rule or order.18 For certain pending rule proposals, including proposals concerning auditor independence, the accredited investor definition, and fund investments in derivatives, the SEC does not expect action to be taken before May 1 In addition, the SEC and other regulators have announced that they will consider comments submitted before May 1 on their pending proposal with respect to the Volcker Rule.19 Updated 4/7/2020)
  • Money Market Mutual Funds:
    • Form N-CR: Several money market funds filed on Form N-CR in March to report financial support, and one money market fund filed on Form N-CR in March to report downward deviations of its shadow price by more than ¼ of 1%. An amended report is required to be filed within four business days of the provision of financial support or downward deviation that describes the reason for the support and terms of the support or the reason for the deviation, as applicable. (Updated 3/23/2020)
    • Purchases by Affiliated Banks: The Federal Reserve Board has issued a template exemptive letter allowing banks to purchase assets from affiliated money market funds, subject to certain conditions, including that the assets must be investment grade and purchased at fair market value.20 In addition, the SEC staff has granted no-action relief to permit certain bank affiliates of money market funds to purchase securities from the funds in accordance with the Federal Reserve Board guidance, but otherwise pursuant to rule 17a-9, subject to certain conditions.21 The SEC no-action letter does not affect the ability of other money market fund affiliates to purchase assets from the fund in accordance with rule 17a-9. (Updated 3/23/2020)
    • Liquidity Facility: The Federal Reserve Board has announced a Money Market Mutual Fund Liquidity Facility (MMLF) that is intended to assist money market funds in meeting demands for redemptions.22 Under the MMLF, the Federal Reserve Bank of Boston will lend to depository institutions and bank holding companies, taking as collateral assets purchased by the borrower from prime money market funds (i) concurrently with the borrowing or (ii) or on or after March 18, but before the opening of the facility. The facility is similar to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility that operated from late 2008 to early 2010 but will purchase a broader range of assets. The Federal Reserve Board expanded the facility to cover certain assets purchased from tax-exempt municipal money market funds.23 The Federal Reserve Board has announced that the facility opened March 23, and full documentation and additional guidance are available.24 (Updated 3/23/2020)
    • Guaranty: The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted into law on March 27, suspends the existing prohibition on the use of the Exchange Stabilization Fund for the establishment of any guaranty programs for the money market fund industry.25 Any such guarantee shall be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee and terminate not later than Dec. 31, 2020. This provision allows the Department of the Treasury to establish a Money Market Funds Guaranty Program, but does not require it to do so. (Updated 3/31/2020)
  • Affiliated Purchases of Debt Securities: The SEC staff has issued no-action relief to affiliates of open-end funds, other than exchange-traded funds and money market funds, to allow them to purchase debt securities from the funds.26 The relief is subject to conditions, including that the price must be the security’s fair market value per Section 2(a)(41) of the 1940 Act, provided that this price is not materially different from the value indicated by a reliable third-party pricing service, and that the fund must publicly disclose the purchase on its website and inform the staff. In addition, if the purchaser thereafter sells the security for a higher price, it must promptly pay the difference to the fund, unless the purchaser is a bank or bank affiliate and this condition would conflict with Sections 23A and 23B of the Federal Reserve Act. The relief will be in effect until further notice from the staff. (New 3/31/2020)
  • SEC Lending and Borrowing Relief: The SEC has issued an order providing additional flexibility for open-end funds (other than money market funds) and insurance company separate accounts registered as unit investment trusts to obtain short-term funding.27 The relief is available until a notice terminating it is issued, which will be at least two weeks from the date of the notice and no earlier than June 30, 2020. Prior to relying on any of the relief, the fund would have to notify SEC staff. In addition, interfund lending requires notification on a fund’s public website.
    • Fund affiliates may lend money to the fund on a collateralized basis, provided the board makes determinations that the borrowing is in the best interest of the fund and its shareholders and that it will be for the purposes of satisfying shareholder redemptions.
    • For fund families with an SEC order permitting an interfund lending and borrowing facility, a lending fund may lend up to 25% of its current net assets and the term may be for any period that does not extend beyond the expiration of the relief, notwithstanding the terms of the order, provided, among other conditions, that the board reasonably determines that the maximum term for interfund loans is appropriate. (Recent orders typically limit lending funds to 15% of current net assets and the term to seven days.)
    • For fund families without an interfund lending order, funds may lend and borrow in accordance with the terms of any such order issued within the past twelve months, with the same modifications.28
    • Funds are not required to seek shareholder approval if lending under the relief would violate a fundamental policy, provided that the board reasonably determines that the lending or borrowing is in the best interests of the fund and its shareholders. (New 3/27/2020)
  • OCIE Statement: The SEC’s Office of Compliance Inspections and Examinations has issued a statement that it has moved to conducting examinations off-site through correspondence unless it is absolutely necessary to be on-site, and that it will work with registrants to ensure that its work can be conducted in a manner consistent with maintaining normal operations and with necessary or appropriate health and safety measures.29 OCIE also stated that reliance on regulatory relief will not be a risk factor utilized in determining whether OCIE commences an examination, and it encourages registrants to utilize available regulatory relief as needed. (New 3/27/2020)
  • Signatures on EDGAR Filings: The SEC staff has issued a statement on the manual signature and record requirements for documents filed electronically with the SEC.30 The staff will not recommend enforcement action if a signatory retains a document adopting the signature and provides the document to the filer for retention, with the time and date executed, and the filer establishes and maintains policies and procedures governing this process. (New 3/27/2020)
  • FINRA Guidance: FINRA has issued guidance that provides temporary relief and guidance with respect to a number of requirements, including filings that would otherwise be required for temporary relocations and the timing of FOCUS reports and certain other filings.31 The guidance will be available until FINRA publishes a Regulatory Notice announcing a termination date. (New 3/27/2020)
  • Blue Sky Guidance: A number of state and provincial securities regulators have published guidance that provides relief or other COVID-19-related updates. The North American Securities Administrators Association has established a resource page to collect these updates.32 (Updated 3/27/2020)
  • SEC Filings: The SEC has updated its previous orders under both the 1940 Act and the Investment Advisers Act to extend the time periods of the relief.33 Entities must notify the SEC staff and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur. The 1940 Act Orders provide relief from the timeliness requirements of Form N-CEN, Form N-PORT, and Form N-23C-2 when a fund is unable to meet a deadline due to circumstances related to current or potential effects of COVID-19. The relief for Forms N-CEN and N-PORT applies to filing obligations for which the original due date is on or after March 13 but on or prior to June 30, 2020, while the relief for Form N-23C-2 extends to Aug. 15, 2020. The Advisers Act Orders provide timeliness relief for Form ADV and Form PF filings and for Form ADV Part 2 client delivery obligations for 45 days from the original due date, when the original due date is on or after March 13 but on or prior to June 30, 2020. The SEC previously posted staff guidance that Form ADV does not have to be updated to reflect temporary teleworking locations.34 The SEC has also provided relief from timeliness requirements for certain filings under the Securities Exchange Act of 1934.35 Note that filings not covered by the orders continue to be required on a timely basis, including filings on Form N-LIQUID, Form N-CR, and Form N-MFP, although it is possible that the SEC will consider issues with these forms on an individualized basis. The SEC provided information on contacting the staff with issues, including issues with these filings, in press releases announcing the actions.36 (Updated 3/27/2020)
  • In-Person Board Meetings: The 1940 Act Orders allow fund boards to meet telephonically or by video conference to consider and vote on matters that would otherwise require an in-person vote. The relief applies whenever reliance upon it is necessary or appropriate due to circumstances related to current or potential effects of COVID-19 and is available until Aug. 15, 2020. The SEC’s Division of Investment Management previously provided no-action relief for the period from March 4 to June 15.37 (Updated 3/27/2020)
  • Delivery of Prospectuses and Shareholder Reports: The 1940 Act Orders also provide relief from the obligations to timely transmit annual and semiannual reports to shareholders and to file them with the SEC. The relief applies when the original due date is on or after March 13 but on or prior to June 30, 2020, and the fund is unable to prepare or transmit the report due to circumstances related to current or potential effects of COVID-19. In addition, the SEC announced that it would not provide a basis for an SEC enforcement action if a fund does not timely deliver a current prospectus because of circumstances related to COVID-19 when delivery was originally required during this period. The position is not available to an initial purchase by the investor of the fund’s shares. (Updated 3/27/2020)
  • State and Local Closures: Many states, counties and cities have announced business closures in connection with “shelter-in-place” public health efforts to slow the spread of COVID-19. Some of the orders may contain broad exceptions for the financial services industry, while others may not. Beyond the direct impact on firms in those localities, review the location of service providers and the terms of these orders carefully to determine whether necessary support functions will remain available. FINRA has posted a resource page with links to state “shelter-in-place” and “stay-at-home” orders.38 (Updated 3/27/2020)
  • Transfer Agents: The SEC has provided a broad exemption for the period from March 16 to May 30 from requirements applicable to transfer agents except for the safeguarding requirement.39 Transfer agents relying on the relief must provide notice to the SEC by May 30. The SEC encourages transfer agents and the issuers for whom they act to inform affected security holders. (New 3/23/2020)
  • Tax Implications for Funds with Institutional Shareholders: For institutional funds with few shareholders, beware that the fund could fall into personal holding company status if at any time during the last half of the taxable year more than 50% in value of the fund’s shares are owned, directly or indirectly, by or for not more than 5 “individuals.” For purposes of this rule, employee pension trusts, private foundations, trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits, and a trust, a portion of which is permanently set aside or to be used exclusively for charitable purposes, are considered individuals. (New 3/23/2020)
  • CPO NFA Filings: The CFTC staff has provided no-action relief to commodity pool operators that extends certain filing deadlines.40 With respect to Form CPO-PQR filings under CFTC Regulation 4.27, Small and Mid-Sized CPOs have until May 15, 2020, to submit their annual filings for 2019, while Large CPOs have until July 15, 2020, to submit their filings for Q1 2020. For pool annual reports under CFTC Regulations 4.7(b)(3) or 4.22(c) that are due on or before April 30, 2020, the deadline for filing and distributing the report, which must include certified financial statements, has been extended until 45 days after the due date specified in the regulations. For monthly or quarterly reports to pool participants under CFTC Regulation 4.7(b)(2) or 4.22(b) for all reporting periods ending on or before April 30, 2020, the deadline for distribution to participants has been extended to 45 days after the end of the reporting period (instead of 30 days as stated in the regulations). The National Futures Association has issued similar relief for CPO Members and has provided Commodity Trading Advisor Members with similar relief for NFA Form PR filings.41 (Updated 3/23/2020)
  • Liquidity Risk Management: Current developments raise a number of issues for the management of funds’ liquidity risk:
  • Assessment, management, and periodic review of liquidity risk: Funds should review fund liquidity risk in light of current and reasonably expected market events and redemption patterns and may need to consider appropriate mitigating steps for strengthening the fund’s ability to meet redemptions, including readying borrowing and other liquidity facilities. Some fund managers may wish to consider use of the relief provided by the SEC and its staff for affiliated transactions.
  • Classification of portfolio investments: Rule 22e-4 requires funds to review their portfolio investments’ liquidity classifications more frequently than monthly if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect classifications. Such reviews should focus especially on holdings that could be considered illiquid investments as a result of these developments or that could fall out of highly liquid investment status. An important consideration will be a review of the reasonably anticipated trading sizes in light of redemption expectations. Funds should be alert to the possibility that vendor classifications may be based on historical rather than current data.
  • Highly liquid investment minimum: For funds that currently hold primarily highly liquid assets, and therefore are not required to have an HLIM, the program administrator may need to examine whether the fund can still qualify for that status. For HLIM funds, the HLIM may need to be reviewed under the required factors in light of current market and redemption developments and, if a shortfall is reasonably anticipated, a shortfall response plan should be developed, which must include a plan for reporting shortfalls to the fund’s board.
  • Illiquid investments: During this period of extreme market volatility, the fund should monitor closely whether there is a need to reclassify holdings as illiquid investments. Funds should be prepared to file Form N-LIQUID if the fund’s illiquid assets exceed 15% of its net assets. The program administrator should have guidance designed to prevent purchases that would violate the prohibition on acquiring illiquid investments when over the 15% limit. We do not yet know if the SEC will provide guidance relieving funds from filing Form N-LIQUID in the event of foreign or other market closings that are beyond the scope of existing guidance on extended foreign holidays.
  • Redemptions in kind: Funds may wish to consider whether redemptions in kind would be an appropriate tool for large redemption requests, including whether operational logistics are in place to accommodate any such redemption requests. (Updated 3/19/2020)
  • MiFID II Reporting: Under the MiFID II delegated regulation, investment firms providing the service of portfolio management and subject to MiFID II must inform the client where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.42 (New 3/19/2020)
  • Fund Boards: Fund directors should stay up to speed on current market events so they can properly apply their business judgment as necessary from a governance standpoint. In many cases, fund boards are receiving periodic status reports or attending status updates from fund advisers. Examples of areas for directors to consider include, for funds, fund flows, liquidity levels, valuation, and performance; and for fund advisers, status of operations under business continuity plans, market assessments, and the assessment of critical fund service providers. Board reporting from fund advisers is particularly important during times of market stress. To strike an appropriate balance between staying apprised and being efficient and respectful of fund advisory personnel time, boards may seek to channel questions or communications through independent counsel or the board chair/lead independent director. (New 3/19/2020)
  • Business Continuity Plans: Business continuity at the current time is key. In most cases, those plans already are in effect. Consideration should be given to contingency planning in the event that fund managers, transfer agents, pricing services, or other service providers are unable to provide services because of employee absences. Funds and fund managers should make and communicate revisions to their plans as they adjust to the developing environment.
  • Valuation: Funds should examine whether they are able to obtain valid prices for their investments, especially in markets that may be closed or have limited availability. Experience from the 2008 financial crisis shows that vendor reassurances as to the quality of their pricing information may provide false comfort, so vendor prices should be checked for reliability. At this time, we do not expect the SEC to provide relief from the daily pricing requirement.
  • Redemptions: Under Section 22(e) of the 1940 Act, open-end funds generally may not suspend the right of redemption unless the New York Stock Exchange is closed, or the SEC provides guidance that daily redemptions are not required because trading is restricted or an emergency exists. At this point, funds should assume that they must continue to provide daily redemptions. Funds should review any borrowing arrangements that may need to be utilized. We are closely monitoring for any relevant guidance from the SEC or its staff on this topic.
  • Cybersecurity: Firms are at increased risk of cyberattacks, particularly with the use of remote offices and telework. Anxious employees may be more vulnerable to email phishing attacks. Employees should be reminded of the continued need for vigilance.
  • Prospectus Disclosures: Funds should review their prospectus disclosures, and particularly their risk disclosures. It may be appropriate to add a pandemic risk factor if this risk is not already addressed. However, funds have different risk profiles, and there is no one-size-fits-all solution for the necessary disclosures.

Please do not hesitate to reach out to your Stradley Ronon contact, or to any member of Stradley’s Coronavirus Task Force, with any questions and concerns you may have during this period. You can reach Crovitz Sara at 202.507.6414 or scrovitz@stradley.com, or John Baker at 202.419.8413 or jbaker@stradley.com.

__________________

1 SEC Division of Investment Management, Importance of Delivering Timely and Material Information to Investment Company Investors (Apr. 14, 2020), https://www.sec.gov/investment/delivering-timely-material-information.

2 As discussed below, the SEC has provided limited conditional relief from the obligation to timely deliver prospectuses to existing shareholders. See infra Delivery of Prospectuses and Shareholder Reports.

3 Division of Investment Management Coronavirus (COVID-19) Response FAQs, Q&A III.5, https://www.sec.gov/investment/covid-19-response-faq.

4 Staff Guidance for Conducting Annual Meetings in Light of COVID-19 Concerns (Apr. 7, 2020), https://www.sec.gov/ocr/staff-guidance-conducting-annual-meetings-light-covid-19-concerns.

5 Release No. IC-33837 (Apr. 8, 2020), https://www.sec.gov/rules/exorders/2020/ic-33837.pdf.

6 Release Nos. 33-10695, IC-33646 (Sept. 25, 2019), 84 Fed. Reg. 57162, 57178 (Oct. 24, 2019), https://www.federalregister.gov/d/2019-21250.

7 Policy Tools: Secondary Market Corporate Credit Facility, https://www.federalreserve.gov/monetarypolicy/smccf.htm.

8 Secondary Market Corporate Credit Facility, https://www.newyorkfed.org/markets/secondary-market-corporate-credit-facility.

9 Press Release, Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy (Apr. 8, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm.

10 SEC Chairman Jay Clayton, Investors Remain Front of Mind at the SEC: Approach to Allocation of Resources, Oversight and Rulemaking; Implementation of Regulation Best Interest and Form CRS (Apr. 2, 2020), https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs.

11 OCIE, Risk Alert: Examinations that Focus on Compliance with Regulation Best Interest (Apr. 7, 2020), https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf; OCIE, Risk Alert: Examinations that Focus on Compliance with Form CRS (Apr. 7, 2020), https://www.sec.gov/files/Risk%20Alert%20-%20Form%20CRS%20Exams.pdf.

12 FINRA Highlights Firm Practices from Regulation Best Interest Preparedness Reviews (Apr. 8, 2020), https://www.finra.org/rules-guidance/key-topics/regulation-best-interest/preparedness.

13 Frequently Asked Questions on Form CRS, https://www.sec.gov/investment/form-crs-faq#filing.

14 Division of Trading and Markets Staff Statement Regarding Requirements for Certain Paper Submissions in Light of COVID-19 Concerns (Apr. 2, 2020), https://www.sec.gov/tm/paper-submission-requirements-covid-19.

15 SEC Division of Corporation Finance, Statement Regarding Requirements for Form 144 Paper Filings in Light of COVID-19 Concerns (Apr. 10, 2020), https://www.sec.gov/corpfin/announcement/form-144-paper-filings-email-option.

16 IM Information Update IM-INFO-2020-03 (Apr. 8, 2020), https://www.sec.gov/files/im-info-2020-03.pdf.

17 SEC Chief Accountant Sagar Teotia, Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020), https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

18 Comment Periods for Certain Pending Actions, https://www.sec.gov/rules/proposed.shtml.

19 Press Release 2020-79, Agencies Will Consider Comments on Volcker Rule Modifications Following Expiration of Comment Period (Apr. 2, 2020), https://www.sec.gov/news/press-release/2020-79.

20 Money Market Mutual Funds Template Letter (Mar. 17, 2020), https://www.federalreserve.gov/supervisionreg/legalinterpretations/fedreserseactint20200317.pdf.

21 Investment Company Institute, SEC No-Action Letter (Mar. 19, 2020), https://www.sec.gov/investment/investment-company-institute-031920-17a.

22 Press Release, Federal Reserve Board broadens program of support for the flow of credit to households and businesses by establishing a Money Market Mutual Fund Liquidity Facility (MMLF) (Mar. 18, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm.

23 Press Release, Federal Reserve Board expands its program of support for flow of credit to the economy by taking steps to enhance liquidity and functioning of crucial state and municipal money markets (Mar. 20, 2020) https://www.federalreserve.gov/newsevents/pressreleases/monetary20200320b.htm.

24 Policy Tools: Money Market Mutual Fund Liquidity Facility, https://www.federalreserve.gov/monetarypolicy/mmlf.htm.

25 H.R. 748, § 4015, 116th Cong. (2020), https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf.

26 Investment Company Institute, SEC No-Action Letter (Mar. 26, 2020), https://www.sec.gov/investment/investment-company-institute-032620-17a.

27 Release No. IC-33821 (Mar. 23, 2020), https://www.sec.gov/rules/other/2020/ic-33821.pdf.

28 Recent interfund lending orders are available at https://www.sec.gov/rules/icreleases.shtml#interfundlending.

29 OCIE Statement on Operations and Exams – Health, Safety, Investor Protection and Continued Operations are our Priorities (Mar. 20, 2020), https://www.sec.gov/ocie/announcement/ocie-statement-operations-health-safety-investor-protection-and-continued.

30 Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (Mar. 24, 2020), https://www.sec.gov/corpfin/announcement/staff-statement-regarding-rule-302b-regulation-s-t-light-covid-19-concerns.

31 Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic (Mar. 24, 2020), https://www.finra.org/rules-guidance/guidance/faqs/coronavirus. FINRA guidance, updates, and other information on COVID-19 are available at https://www.finra.org/rules-guidance/key-topics/covid-19. Other self-regulatory organizations are also providing relief and guidance. See, e.g., Cboe Regulatory Circular 20-021 (Mar. 25, 2020), http://cdn.cboe.com/resources/regulation/circulars/regulatory/RC20-021-Filing-Extensions-for-Annual-Reports-and-FOCUS-Reports.pdf; Cboe Regulatory Circular 20-022 (Mar. 25, 2020), http://cdn.cboe.com/resources/regulation/circulars/regulatory/RC20-022-Extension-of-Time-for-Certain-Filings-Currently-Due-April-1-2020.pdf.

32 Novel Coronavirus COVID-19 Updates, https://www.nasaa.org/industry-resources/covid-19-updates/.

33 For the 1940 Act Orders, see Release No. IC-33824 (Mar. 25, 2020), https://www.sec.gov/rules/other/2020/ic-33824.pdf; Release No. IC-33817 (Mar. 13, 2020), https://www.sec.gov/rules/other/2020/ic-33817.pdf. For the Advisers Act Orders, see IA-5469 (Mar. 25, 2020), https://www.sec.gov/rules/other/2020/ia-5469.pdf; Release No. IA-5463 (Mar. 13, 2020), https://www.sec.gov/rules/other/2020/ia-5463.pdf. The various forms of relief provided by the SEC are subject to conditions that are set out in the respective orders, such as subsequent ratification of votes, notice to the SEC of filing delays, and website disclosure of issues with the delivery of shareholder reports, prospectuses, and Form ADV client brochures.

34 Using IARD, Form ADV: Item 1.F, https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#item1f.

35 Release No. 34-88465(Mar. 25, 2020), https://www.sec.gov/rules/exorders/2020/34-88465.pdf; Release No. 34-88318 (Mar. 4, 2020), https://www.sec.gov/rules/other/2020/34-88318.pdf.

36 Press Release 2020-73, SEC Extends Conditional Exemptions from Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected by Coronavirus Disease 2019 (COVID-19) (Mar. 25, 2020), https://www.sec.gov/news/press-release/2020-73; Press Release 2020-63, SEC Takes Targeted Action to Assist Funds and Advisers, Permits Virtual Board Meetings and Provides Conditional Relief from Certain Filing Procedures (Mar. 13, 2020), https://www.sec.gov/news/press-release/2020-63.

37 SEC Division of Investment Management, Staff Statement on Fund Board Meetings and Unforeseen or Emergency Circumstances Related to Coronavirus Disease 2019 (COVID-19) (Mar. 4, 2020), https://www.sec.gov/investment/staff-statement-im-covid-19.

38 State “Shelter-in-Place” and “Stay-at-Home” Orders, https://www.finra.org/rules-guidance/key-topics/covid-19/shelter-in-place.

39 Release No. 34-8844 (Mar. 20, 2020), https://www.sec.gov/rules/exorders/2020/34-88448.pdf.

40 Press Release No. 8136-20, CFTC Issues Third Wave of Relief to Market Participants in Response to COVID-19 (Mar. 20, 2020), https://www.cftc.gov/PressRoom/PressReleases/8136-20.

41 Notice to Members I-20-15 (Mar. 23, 2020), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5218.

42 European Commission Delegated Regulation art. 62, https://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1.PDF.

COVID-19 Coverage: Market Closures and Restrictions (as of April 19, 2020 @ 9 am EDT)

USA

  • Electronic trading. Starting March 23, 2020, the New York Stock Exchange will temporarily close its trading floor and move fully to electronic trading. The facilities to be closed are the NYSE equities trading floor and NYSE American Options trading floor in New York, and the NYSE Arca Options trading floor in San Francisco. The CME Group temporarily closed its Chicago trading floor as of the close of business on March 13, 2020. Cboe temporarily moved to electronic trading effective on March 16, 2020.

Austria

  • Restrictions on short selling. The Austrian Financial Market Authority (FMA) temporarily prohibited the short selling of certain financial
    instruments on the Vienna stock exchange until April 18, 2020. The ban includes creating or increasing net short positions via derivatives or other financial instruments which confer a financial advantage in the event of a decrease in the price of covered stocks. Short sales of equity indices or baskets are covered by the ban if the restricted securities account for 50% or more of their composition.
  • On April 15, 2020, the FMA extended the temporary prohibition of short selling of certain financial instruments listed on the Vienna Stock Exchange until May 18, 2020. Additionally, the new ban now also relates to establishing net short positions and to increasing existing net short positions.

Australia

  • Restrictions on trading. Australian Securities & Investments Commission (ASIC) has issued directions under the ASIC Market Integrity Rules to a number of large equity market participants, requiring those participants to limit the number of trades executed each day until further notice. These directions require those firms to reduce their number of executed trades by up to 25% from the levels executed on Friday.

Belgium

  • Restrictions on short selling. The Belgian regulator, the Financial Services and Markets Authority (FSMA), announced a ban on shorts for a basket of stocks during Tuesday’s (March 17, 2020) trade in order to avoid what it termed a “disorderly decline” in markets. The ban applies until April 17, 2020.
  • On April 15, 2020, the FSMA extended the ban on entering into a short sale which might constitute or increase a net short position on stocks admitted to trading to Belgian trading venues until May 18, 2020.

Colombia

  • Contingency measures. Direccion de Impuestos y Aduanas Nacionales (DIAN), the Colombian tax authority, has activated contingency measures due to the Covid-19 crisis allowing market traders to work from their homes. As a result, there may be delays in account opening, name change, and account closing requests while the contingency measures are in effect.

EU

  • Restrictions on short selling. The European Securities and Markets Authority (ESMA), on Tuesday, March 17, 2020 began forcing greater transparency of short positions by halving the threshold at which they must be disclosed. The revised rules are expected to be in place for a duration of three months.
  • ESMA issues a positive opinion on the extended short selling bans in Austria, Belgium, France, Greece and Spain on April 15, 2020.

France

  • Restrictions on short selling. France’s Autorité des Marchés Financiers (AMF) banned short selling in 92 shares, those most impacted during Monday’s (March 16, 2020) sell-off, until the end of Tuesday’s (March 17, 20202) trading session.
  • The AMF expanded that ban to cover all shares admitted to trading on French trading venues until the close of business on April 16, 2020. The ban prohibits creation or increase of net-short positions, meaning that all forms of shorting, including through derivatives and depositary receipts are covered.
  • On April 15, 2020, the AMF announced the extension of the ban on short selling until May 18, 2020.

Greece

  • Restrictions on short selling. The ban covers shares admitted to trading on the Athens Stock Exchange until April 24, 2020. It prohibits creation or increase of net-short positions (including on an intra-day basis). Certain exemptions exist for market makers performing market-making activities and the creation or increase of net short positions through index derivatives, provided that the index composite does not include shares covered by the decision in a percentage over 50% of the index weight.
  • The Athens Stock Exchange extended this ban until May 18, 2020, although the measure may be lifted prior to that date if market conditions change.

India

  • Restrictions on short selling. Sebi announced restrictions on March 20, 2020 that halved position limits for certain stock futures, restricted short selling of index derivatives and raised margin rates for some shares in a bid to curb “abnormally high” volatility. The restrictions come in effect on March 23, 2020, and will continue for one month.
  • The Reserve Bank of India cut trading hours for certain markets, including bonds and foreign currency to four hours from April 7, 2020 to April 17, 2020. These measures were subsequently extended until April 30, 2020.

Indonesia

  • Trading safeguards. The Indonesia Stock Exchange tightened its trading halt mechanisms to trigger a cessation of the main stock index more quickly effective March 11, 2020. Additionally, on March 26, 2020, the Indonesia Stock Exchange reduced its trading hours.

Italy

  • Restrictions on short selling. Financial market authority Consob has prohibited short sales on 20 stocks for the trading session of March 17, 2020.
  • Consob expanded the ban to cover a larger number of stocks and to continue until June 18, 2020, though restrictions could be lifted earlier according to market conditions. The ban prohibits creation or increase of net-short positions, including through derivatives and depositary receipts, except: (i) delta-neutral positions used to cover a long position in a convertible bond; or (ii) positions used to cover long positions in subscription rights. Net-short positions held through indices are covered if the restricted securities represent more than 20% of the index.

Jordan

  • Market closure. Jordan’s government suspended trading in the Amman Stock Exchange from Tuesday, March 17, 2020 until further notice.

Kuwait

  • Market closure. Trading closed on March 12, 2020 and resumed on March 15, 2020 to address the fast-paced changes and turbulence facing the local exchange market, as well as regional and international exchanges, as a result of the Covid-19 outbreak.
  • Trading safeguards. The transfer of ownership, mandatory execution, off market trade, and over the counter (OTC) trading will all be postponed for a week. Boursa Kuwait also announced the reduction of price limits and security circuit breaker (CB) triggers, applying a 10% upper limit and CB trigger, and -5% lower limit and CB trigger.

Malaysia

  • Restrictions on short selling. The Securities Commission Malaysia and the Bursa Malaysia Berhad announced March 23, 2020, that short selling will be temporarily suspended until April 30, 2020.

Philippines

  • Market closure. Philippine Stock Exchange closed Tuesday, March 17, 2020. Trading resumed on Thursday, March 19, 2020 with shortened trading hours.
  • Trading of foreign exchange and bonds resumed on Wednesday, March 18, 2020.
  • Trading safeguards. On March 21, 2020, the Philippine Stock Exchange announced that starting March 24, 2020, the lower static threshold of individual stock prices will be reduced from 50% to 30% from its previous closing price.

South Africa

  • Restrictions on short selling and trading safeguards. The Johannesburg Stock Exchange (“JSE”) decided against shortening trading hours, but its head said JSE would strictly enforce rules prohibiting uncovered, or naked short-selling and lengthen the mandatory halts to trading circuit breakers.

South Korea

  • Restrictions on short selling. South Korea’s financial regulator banned short selling in listed shares on the Kospi and Kosdaq starting on March 16, 2020 for six months.

Spain

  • Restrictions on short selling. Comisión Nacional del Mercado de Valores (“CNMV”) has forbidden market players to build new net short positions in all Spanish shares or to increase existing ones for one month, effective March 17, 2020. This ban can be renewed for threemonths periods if necessary. In addition to Spanish stocks, the ban also applies to index-linked products, spots, derivatives as well as over-the-counter transactions.
  • On April 15, 2020, the CNMV agreed to extend the short selling ban until May 18, 2020.

Sri Lanka

  • Market closure. Colombo Stock Exchange closed Tuesday, March 17, 2020 and remained closed through March 19, 2020. The Government declared a holiday asking all non-essential businesses not to operate on March 17-19, 2020.
  • Trading resumed on March 20, 2020, but then was suspended again at noon local time the same day in view of the curfew imposed by the government to allow staff to travel to their homes.
  • On March 22, 2020, the Colombo Stock Exchange announced that the market would be closed on March 23 and 24, 2020, as those days have been declared market holidays. On April 1, 2020, it was announced that the market will remain closed until curfew in the country has been lifted.

Taiwan

  • Restrictions on short selling. The Financial Supervisory Commission announced a short selling ban on the Taiwan Stock Exchange and the Taipei Exchange starting March 20, 2020. The ban applies to stocks that showed a decline of 3.5% or more a day earlier.

Thailand

  • Restrictions on short selling and trading safeguards. The Stock Exchange of Thailand (“SET”) restricted short selling to trade only the price higher than the last trading price (uptick) effective since the afternoon trading session of March 13, 2020. Additionally, the SET announced further tightening of trading measures by adjusting ceiling and floor criteria and circuit breaker rules, effective from March 18, 2020, which are set to extend no further than June 30, 2020.

Turkey

  • Restrictions on short selling and trading safeguards. Restrictions on short selling were initially imposed in February 2020 following an airstrike. As a result of current market conditions, the bans on short selling will be kept in force until further notice. Additionally, circuit breakers were tightened effective March 13, 2020 in the equities and derivatives market.

UAE

  • Trading safeguards. Effective March 18, 2020 until further notice, a limit of 5% will apply to all securities trading on Nasdaq Dubai markets.

UK

  • Restrictions on short selling. The U.K.’s Financial Conduct Authority (FCA) also issued a temporary ban on the shorting of 37 Belgian and Italian stocks following moves from respective regulators in both countries. The ban was effective March 17, 2020 until the end of the day March 17, 2020.

‘Social Washing’ is affecting ESG investment decisions