Presented by the Securities and Investments Professional Liability Practice Group

FINRA and the SEC Respond to COVID-19

As New York City became the epicenter of the United States coronavirus outbreak in March, financial market turmoil ensued. The market crash on March 16th included the Dow’s largest point drop on record and the worst day ever for both the Nasdaq and Russell 2,000. Then, two floor traders tested positive for COVID-19, and the New York Stock Exchange trading floor closed for the first time ever. As these unprecedented times unfolded, industry regulators, FINRA and the SEC were forced to adapt.

The SEC has offered relief to the uncertainties and challenges faced by market participants while maintaining order and enforcing its rules. Guidance, statements and rules are issued almost daily by the Commission for the purpose of providing market participants with the ability to adapt to the operational uncertainties of the times. Across all of its divisions, the SEC has taken action in response to COVID-19.

Disclosure obligations remain of primary concern for the Commission’s Division of Corporate Finance. On March 25th, guidance was provided on the division’s view of continuing disclosure obligations in light of the pandemic. Specifically, the SEC made clear that the coronavirus’s current impact and potential future impact on a company may be material information for investors. On April 8th, SEC Chairman Jay Clayton and the director of the Division of Corporate Finance issued additional guidance regarding future outlook disclosures when they announced that honest, forward-looking disclosures would not be scrutinized. In addition, the Commission reminded companies to take advantage of safe harbor rules when possible.

Meanwhile, the SEC Office of Compliance Inspections and Examinations has been able to continue its normal operations. However, all oversight is currently being conducted remotely. Firms are being reminded that relying on COVID-19-based regulatory relief will not be considered a risk factor for future examinations.

The Division of Enforcement is carefully monitoring the market for COVID-related scams, and a coronavirus committee was formed within the division to coordinate its response to enforcement matters. To that end, the SEC has halted trading for more than 20 publicly-traded stocks related to concerns surrounding the accuracy of press releases regarding coronavirus testing, treatments and vaccines. At least three cases have been brought pursuant to the antifraud provisions of the federal securities laws for alleged false statements.

FINRA has followed suit. Specifically, FINRA formed a “COVID Fraud Task Force” in March in order to better respond across the organization to potential coronavirus-related fraud in the broker-dealer industry. The task force was set up to manage a centralized repository of intelligence gathered across the organization to help ensure coordinated efforts. FINRA also released Regulatory Notice 20-08, which addresses business continuity planning, cybersecurity and communications with customers in light of COVID-19.

Finally, FINRA Dispute Resolution has taken action in response to the global pandemic. The largest securities dispute resolution forum in the U.S. has postponed all in-person arbitration hearings and mediations through at least July 31, 2020, although the postponement of hearings does not postpone other case deadlines except by agreement of the parties. In cases where all parties agree or by panel order, virtual hearings are proceeding via Zoom and teleconference and FINRA mediations are proceeding via a combination of Zoom and telephone conference.


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