Update on COVID-19 in the financial services sector

As the pandemic continues, we wanted to share a few additional issues that we’ve seen in the last week as well as some important guidance developments.

Plaintiff-side law firms are very actively looking to promote investor claims based on market announcements. Financial institutions should keep this litigation risk in mind for their own disclosures, but also where they may be advising listed companies on disclosures related to COVID-19.
Separately, directors at financial institutions should be alert to potential claims arising from alleged breaches of fiduciary duty. Shareholders may believe that the board has failed to adequately account for their interests in decisions to (for example) participate in government relief programs and / or maintain payroll in the face of public pressure.
Some global institutions, especially in the UK, have responded to regulatory pressure not to pay dividends to preserve prudential capital. The UK’s Prudential Regulation Authority has taken the strictest stance on this, effectively requiring banks not to pay dividends, engage in share buy-backs or to pay cash bonuses to senior managers, including all material risk takers. Decisions on these points require financial institutions to weigh a range of reputational and commercial considerations and require senior management to articulate a clear policy on them. There is growing evidence of executives deciding to forego bonuses or take salary cuts and donating that cash to worthwhile causes. These arrangements may require careful thought in light of tax or disclosure requirements.
Retail banks and insurers are concerned about financial scams targeting or involving retail customers and there is concern that the current environment creates a higher risk of financial crime generally. In normal circumstances, face-to-face conversations help identify potential financial crime risks, particularly in complex wholesale businesses. This risk is exacerbated by the stress placed on AML functions by remote working and illnesses. We have been having conversations about COVID-19 AML risks, relating to both: (1) laundering the proceeds of scams or frauds perpetrated on vulnerable individuals and businesses in the present crisis; and (2) the risk of failing to identify fraud in government-backed financial support programs. Finally, payment shortfalls across the economy may pressure small and medium-size enterprises, including landlords or franchisees, to submit insurance claims as policy payouts become more valuable than continuing to operate at a loss.

COVID-19: Weekly update for financial services clients

Must Read Developments through April 16

Following their initial measures, US authorities have continued to take a wide range of new actions, including publishing new guidance. Recent developments include:

US federal banking regulatory agencies announced an interim final rule “to encourage lending to small businesses” through the Paycheck Protection Program (PPP). The rule, which is open for public comment, modifies capital rules “to neutralize the regulatory capital effects of participating in [PPP] because there is no credit or market risk in association with PPP loans pledged to the facility.” The rule also “clarifies that a zero percent risk weight applies to loans covered by the PPP for capital purposes.”
- The Department of the Treasury and the Small Business Administration (SBA) published a set of FAQs to provide guidance to lenders participating in the PPP. The FAQs cover several important details on how lenders can implement PPP requirements.
- A federal judge in Maryland declined to enter a TRO that would have prohibited Bank of America from following an internal policy on issuing COVID-19 recovery loans only to certain types of existing customers. Notably, the court found that the CARES Act does not create a private right of action.
- The SBA announced on April 15 that it had approved more than 1.4 million loans valued at $315 billion, with loans continuing to be processed late in the day. In a statement issued the same day, U.S. Treasury Secretary Steven Mnuchin and SBA Administrator urged Congress to appropriate additional funds for the PPP due to high demand.
- The Department of the Treasury has started disbursing CARES Act funding to state, local, and tribal governments, with all payments to be made no later than April 24, 2020. Over 80 million Americans were due to receive Economic Impact Payments deposited directly into their bank accounts by April 15.
The Basel Committee on Banking Supervision and IOSCO announced additional COVID-19 related regulatory relief including technical clarifications of regulatory treatment of extraordinary support measures and deferment of (i) the phase in of margin requirements for non-centrally cleared derivatives and (ii) the revised G-SIB framework. These measures give internationally active banks guidance on regulatory treatment of COVID-related government support and delay implementation projects. (BCBS press release; the measures; the revised margin requirements document; BCBS/IOSCO press release).
The SEC announced that it will provide temporary, conditional exemptive relief for business development companies (BDCs) to allow them to make investments in small- and medium-sized businesses. The relief is subject to investor protection conditions and other specific requirements. The SEC noted that “BDCs were created to provide capital to smaller domestic operating companies that otherwise may not be able to readily access the capital markets,” and this relief “will provide additional flexibility for BDCs to issue and sell senior securities in order to provide capital to such companies, and to participate in investments in these companies alongside certain private funds that are affiliated with the BDC.”
The New York Stock Exchange temporarily waived its shareholder approval requirements to make it easier for NYSE-listed companies to raise capital through private placements without requiring advance shareholder approval.
The CFTC voted to extend comment periods for proposed rules regarding position limits for derivatives; swap execution facility requirements; requirements relating to swap data repositories, reporting, and recordkeeping; and public reporting requirements. The comment periods will remain open until May. Commissioners Behnam and Berkovitz both dissented, arguing that the extensions were too short in light of the current crisis.
- The CFTC has also taken a range of other actions that may be of interest in light of the virus, including proposed amendments to the regulations governing commodity broker bankruptcies and approving final rules regarding: (1) protection of consumer information; and (2) swap dealer transactions involving the European Stability Mechanism.
The DOJ’s Antitrust Division and Federal Trade Commission issued a joint statement affirming that the agencies will be enforcing antitrust laws against companies and individuals who seek to exploit the pandemic. The agencies specifically note their intent to protect essential workers and first responders from being deprived of competitive compensation.
In a statement to American Banker, the US Comptroller of the Currency emphasized that the OCC plans to proceed with a proposed overhaul to Community Reinvestment Act regulations, notwithstanding the coronavirus and pressure for delay from Congressional Democrats and the industry.
FINRA has continued to publish new FAQs on a variety of topics for registered entities and their associated persons.