April 21, 2020 - Securities Group News: COVID-19 Orders and Regulatory Guidance Impacting Financial Professionals in the New England Region
By: Anthony R. Leone, Mark J. Tarallo, and Sergio E. Marin
A number of New England securities regulators have issued orders or guidance modifying key provisions of their regulations in light of the COVID-19 pandemic. New England securities regulators, in particular, have provided tailored relief to financial professionals with respect to certain filing deadlines and regulatory requirements. A careful reading of the guidance issued by these regulators also suggests that financial professionals may likely see longer term changes, as well as a continued and retrenched focus on stopping fraud affecting retail investors. This alert provides an overview and comparison of key aspects of the orders and guidance issued in Massachusetts, Vermont, New Hampshire, Maine, and Connecticut, as well as a brief analysis of the language of the guidance and public comments to offer further insight regarding likely regulatory changes prompted by the COVID-19 pandemic.
A. New England Securities Regulators Issue Orders and Guidance Modifying Key Regulatory Requirements; The SEC Moves Forward With Reg BI
In addition to the state action, there has been some activity at the Federal level as well. At the Federal level, SEC Chair Jay Clayton recently announced that the implementation of Regulation Best Interest (“Reg BI”) will go forward as planned on June 30, 2020. Reg BI establishes a new standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, to ensure that the customers’ interests are always put ahead of the interests of their advisors. In connection with Reg BI, SEC-registered investment advisors and broker-dealers will be required to file Form CRS, a brief customer or client relationship summary that provides information about the firm. In a statement on April 2, 2020, Chairman Clayton noted that in these difficult times, nothing is more important than having customers’ interests come first, and as a result indicated that firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances. Chairman Clayton further stated, “[t]o 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 us. We expect that the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”
1. Massachusetts Response Includes Extending Filing Deadlines
2. Maine Issues Broad Order For Those Financial Professionals Affected By COVID-19
• Broadly relaxes paper filing requirements for issuers, broker-dealers and investment advisors;
Interestingly, the Maine Order also sets forth a temporary exemption for non-Maine licensed investment advisors to operate in Maine without formally registering. Such relief, of course comes with strings. In particular, the investment advisor must notify the Office of its operation, be registered and in good standing with all required regulators, not be subject to any enforcement
3. Connecticut Issues Interim Guidance Encouraging Paperless Submissions
B. Short Term Changes By State Regulators Could Lead to Longer Term Regulatory Oversight Changes, Yet Continued Focus On Fraud Will Remain
The most immediate impact likely to come from the adoption of these emergency orders and guidance is a modification of examinations of investment advisors and broker-dealer firms. While many states have in the past conducted remote examinations, the COVID-19 crisis will likely lead to increased numbers of desk examinations moving forward. Desk examinations are not completely new in the regulator’s repertoire; however, they were previously disfavored in comparison to “onsite” examinations. The MSD, for example, conducted desk examinations in response to regulatory changes brought on by Dodd-Frank’s impact on SEC registration thresholds, which resulted in a significant and immediate increase in new investment advisors and investment advisor representatives subject to its oversight. New Hampshire for its part has directly provided in guidance accompanying its order that, “[f]ield examiners are conducting streamlined, desk examinations using phone and email correspondence in lieu of traditional on-site examinations during this time.” Again, as a result of COVID-19, we expect that remote examinations will become a regular fixture of the various states’ examination programs. Investment advisors and broker-dealers subject to desk inspections should take steps to ensure that they have adequate systems and resources in place so that documents and other files requested by the examining authority can be accessed electronically rather than in person.
On a more macro level, the COVID-19 pandemic likely will prompt aggressive enforcement of state antifraud provisions and increased litigation and regulatory actions. Comments by the Maryland Securities Commissioner, at the Financial Stability Oversight Council, on behalf of the North American Securities Administrators Association (“NASAA”) indicate that in addition to accommodations regarding registration, filing and form delivery requirements, “[state and provincial regulators will] remain focused on our mission to protect investors from opportunistic frauds. [State and provincial regulators] are diligently monitoring for fraudulent activities, especially those that arise when the unscrupulous work to monetize fear. Both individual states and NASAA have issued advisories to investors to be on alert for persons soliciting investments in companies offering such things as testing breakthroughs and miracle cures.” Maine’s administrator, Judith Shaw, also signaled the need for balance, commenting, “[t]he impact the coronavirus pandemic is having on the country and our state is far reaching and includes our financial professionals, in an effort to ensure financial professionals can continue to work and that investors continue to receive the level of service they expect and deserve from those professionals, I have issued an Order providing temporary relief from some regulatory requirements.” Thus, fraud, including fraud perpetrated through technical violations, will likely be an enhanced focus of securities regulators for the foreseeable future. In practice this may materialize in states charging financial professionals with fraud as an accompaniment to lesser “dishonest and unethical” counts.
We hope that you find this summary helpful. We will endeavor to update the situation as the state and federal regulators issue additional guidance. Stay safe and stay tuned for further developments.
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