Update on COVID-19 in the financial services sector

As the COVID-19 relief mechanisms mature and government aid flows into the economy, we have continued to see new issues come up. We’ve provided some observations below, followed by key developments from the past week.

Questions are being raised about algorithmic decision making and the use of smart contracts in lending, trends that have developed in recent years. Plaintiffs have begun challenging banks’ policies for prioritizing loan applications, and it appears that regulators may be paying attention to those complaints. Institutions may need to incorporate additional factors in light of the crisis, and possibly may need to involve more human decision makers.
Relatedly, in the past, regulators have imposed heavy penalties when software upgrades at financial institutions have not gone according to plan. With that in mind, and despite the pressure to upgrade software and processes quickly, care should be given in adapting processes, testing system changes and allowing for increased escalation to decision makers before updates go live.
Senior management, particularly those who have not been through a major crisis like this one, may need additional support from legal teams. In particular, fintech companies (or leaders of fintech units at large institutions) may be led by executives who were not in high-level roles during the 2008 financial crisis and dealing for the first time with crisis conditions. Indeed, some fintech companies already have a high profile in the COVID response efforts: the federal government approved three fintechs (Intuit, Square, and PayPal) as nonbank lenders eligible for participation in the Paycheck Protection Program (PPP).

COVID-19: Weekly update for financial services clients

Must Read Developments through 23 April

Recent developments include:

The Senate has approved an additional $480B in virus relief funds, with approval by the House and the President expected in the coming days. This latest package includes more than $300B in additional funding for the PPP, as well as other funding for Small Business Association disaster loans, grants, and other expenses.
The Federal Reserve published an Interim Final Rule permitting bank directors and shareholders to apply for Paycheck Protection Program (PPP) loans for their own small businesses in certain circumstances. Specifically, the rule (which is accompanied by a request for public comment) notes that “PPP loans pose minimal risk” under section 22(h) of the Federal Reserve Act and the corresponding provisions of the Fed’s Regulation O.
US plaintiffs have sued several major financial institutions, accusing the banks of improperly giving PPP loans to comparatively larger eligible borrowers, so that smaller businesses seeking lower-dollar amount loans were shut out of the relief program.
The Federal Financial Institutions Examination Council updated the Bank Secrecy Act / Anti-Money Laundering Examination Manual in light of the crisis – although the revisions do not create new obligations, they are intended to emphasize the importance of a tailored “risk-focused approach to BSA/AML supervision.” For example, the FFIEC stated that the updates instruct examiners “that there is no particular method or format a bank must use for their [BSA/AML] risk assessment and that risk categories can vary based on a bank’s size, complexity, or organizational structure.”
The US Treasury Department’s Office of Foreign Assets Control (OFAC) stated that it “understands” the challenges that COVID-19 is presenting to companies’ compliance functions, and that some businesses may “temporarily reallocat[e] sanctions compliance resources” as a result. OFAC will “evaluate this as a factor in determining the appropriate administrative response to an apparent violation” of US sanctions that occurs during this period of uncertainty. The agency has encouraged entities to engage with OFAC about these issues.
NASDAQ has temporarily relaxed certain listing requirements until June 30, 2020, due to the current market situation, including the requirements to maintain: (1) a minimum closing bid price of $1 for at least 30 consecutive business days; and (2) a market value of publicly held securities of $1M (on the Nasdaq Capital Market) or $15M (on the Nasdaq Global Market) for at least 30 consecutive business days.
US Treasury Secretary Steven Mnuchin issued a press release stating that Congress has authorized $3 billion to the World Bank’s Nineteenth Replenishment of International Development Association (IDA-19) and support for a $5.5 billion capital increase to the International Finance Corporation (IFC) in the CARES Act.
The Cybersecurity and Infrastructure Security Agency in the Department of Homeland Security updated its existing guidance on how companies can protect their critical workers, including financial services sector employees, such as workers who are “needed to provide, process, and maintain systems for processing, verification, and recording of financial transactions and services … insurance services; consumer and commercial lending; public accounting; and capital markets activities.” The update includes “[c]learer guidance that sick workers should avoid the job site.”
The New York State Department of Financial Services (NYDFS) will allow New York-chartered financial institutions to hold required meetings virtually throughout the emergency and for 60 days thereafter. NYDFS has also extended deadlines for annual stockholder meetings for certain institutions.
The Department of Justice (DOJ) has frozen its collection of civil penalty payments until at least May 31 due to Covid-19’s impact. The policy does not apply to criminal penalties.
Authorities across the US are continuing to take action against alleged coronavirus-related misconduct. For example, the US FTC charged a company with making false claims to be an SBA-affiliated lender and marketing itself as a PPP-approved lender; the SEC has halted trading in about twenty stocks for coronavirus-related claims; and the Texas State Securities board has filed a cease-and-desist order against an individual promising to help individuals profit off of the pandemic.