Regulators Respond to COVID-19

The ongoing COVID-19 crisis continues to cause significant impact to people’s lives, businesses, and the wider economy. It is first and foremost a global health and safety issue but its recent impact on global financial markets has been substantial. Financial regulators themselves have also not been immune from its impacts and some have taken certain direct actions linked to the crisis.

Before considering the actions of the various regulators to COVID-19, there are two interesting areas of regulatory scrutiny that have come to light as a result of the extremely volatile market conditions.

First, fund liquidity was already a significant area of regulatory focus as we entered 2020, thanks to a number of high-profile fund suspensions last year. But despite the huge market volatility created by the coronavirus, and other factors such as unstable oil price fluctuations, for now at least it seems like most funds across the globe have managed to handle the redemption demands of their underlying clients. Either way, fund liquidity is an issue that will continue to be tested in the coming months as the recent bout of volatility may have some staying power.  

The other interesting regulatory test that appears to have been passed with flying colors relates to the previously untested stock exchange circuit breakers. The circuit breaker rule, which was approved by the Securities and Exchange Commission (SEC), is aimed to curb panic-selling on US stock exchanges in instances of very high market volatility to avoid so called “flash crashes.” The circuit breaker rule applies to both broad market indices such as the S&P 500 as well as to individual securities. The circuit breakers are designed to temporarily halt trading when prices hit predefined levels, such as a “level 1” 7% intraday drop for the S&P 500. Last Monday and Thursday, and again today, the system-wide circuit breakers kicked in after the S&P 500 dropped by more than 7%, resulting in a 15-minute trading halt of all stocks. These automatic trading halts are aimed at preventing the market from entering a complete free fall. It appears to be a regulatory intervention that worked as intended.     

Global Regulatory Responses

SEC – US

Interestingly, the Securities and Exchange Commission (SEC) has probably been the most proactive global regulator in communicating measures related to COVID-19, releasing two updates in the past week. In the updates, the SEC has provided market participants some pragmatic exemptive relief in acknowledgment of the logistical difficulties that this specific emergency has on physical meetings.

Date of statements: March 7, 2020 and March 13, 2020

Key points:

  • In the first release, on March 7, the SEC said it would grant some latitude (45-day extension) for required filings for public companies company filing obligations under the federal securities laws.
  • Relief for “in person” approvals: citing travel concerns, the SEC stated there was no issue with fund directors approving or renewing any contracts, plans, or other arrangements subject to in-person requirements and such approvals may be done via telephone or video conference instead.
  • Additionally, on Friday, March 13, the SEC granted exemptions from certain provisions of the Investment Company Act of 1940, recognizing that funds may face challenges meeting filing deadlines. Some of the exemptions include relief for:
    • Form N-CEN and Form N-PORT filing deadlines
    • Preparing or transmitting annual and semi-annual shareholder reports
    • Timely delivery of registered fund prospectuses
  • The SEC said it may extend the time period for relief, stating, “with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.”

SEC full document – March 7

SEC full document – March 13

In the US, other self-regulating bodies such as the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA) also gave their member firms notice of the importance of having robust business continuity program and to consider pandemic preparedness.

ESMA – Europe

The European Securities and Markets Authority (ESMA) have been engaged with the various EU national competent authorities across Europe in recent weeks and last week published a statement for all entities under their supervision after their board of supervisors meeting. It is likely that the overarching ESMA themes are further instructed to regulated firms across the EU27 member states by national regulators. 

Date of statement: March 11, 2020

Key points:

  • Business Continuity Planning – All financial market participants, including asset managers and market infrastructures, should be ready to apply their contingency plans in line with regulatory obligations.
  • Disclosures – Under the EU Market Abuse Directive, ESMA remind of their obligation to disclose any material impacts of COVID-19 on their fundamentals and prospects. 
  • Financial Reporting – Issuers are explicitly requested by ESMA to address the impacts of COVID-19 in their 2019 year-end financial report if these have not yet been finalized or otherwise in their interim financial reporting disclosures.
  • Fund Management – asset managers should continue to apply the requirements on risk management and react accordingly.

ESMA full response

CSSF Luxembourg

One of the first formal statements released by a national regulator was in Luxembourg where the Commission de Surveillance du Sector Financier (CSSF) issued a statement in a press release.  

Date of statement: March 5, 2020

Key points:

  • Firms must take reasonable and appropriate security measures for the safety of their staff members and an expectation that staff can work remotely under certain conditions.
  • A demand that remote work is conducted, subject to satisfactory IT security conditions.
  • If required, professionals must activate their business continuity plan and use other production facilities in or outside Luxembourg.
  • For efficient and effective implementation of these measures, prior authorization by the CSSF is not required.

CSSF full response

CBI – Ireland

The Central Bank of Ireland’s (CBI) statement is not detailed but does highlight the expectation that firms should have appropriate contingency plans in place to be able to deal with major operational events, should they occur. 

Date of statement: March 5, 2020

Key points:

  • BCP plans should be in place and tested and/or implemented as required.

CBI full response

Financial Conduct Authority (FCA) – United Kingdom

Date of statement: March 5, 2020

Key points:

  • BCP plans should be in place and firms must take all reasonable steps to continue to meet their regulatory obligations.
  • FCA are actively reviewing the contingency plans of a wide range of firms.
  • Such reviews are focusing on areas such as operational risks, ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.
  • They state no objection to undertaking regulatory based activities from backup sites or with staff working from home.

FCA full response

SFC – Hong Kong

Hong Kong is geographically close to Wuhan where the first coronavirus cases arose. The Securities and Futures Commission (SFC) have been managing the situation through enaction of BCP plans longer than EU and US regions, but activity has generally continued through the saga.   

Date of statement: March 5, 2020

Key points:

  • SFC themselves have taken precautions to protect their staff whilst continuing to function through remote working.
  • Concede response times naturally might be slower than usual.
  • Acknowledge some firms might experience operational issues during the period of the crisis, but also set out an expectation that firms are expected to make all reasonable efforts to maintain “business as usual” regarding regulatory filings, reporting and other deadlines.

SFC full response

Bottom line

Global regulators will no doubt continue to roll out statements, press releases and, regulatory relief announcements on various areas as the crisis continues. We will continue to provide updates here as new developments emerge.