As we noted in an earlier Financial Services Alert, the Financial Industry Regulatory Authority (FINRA) recently advised broker-dealers about increased vulnerability to cybersecurity attacks and how to protect customer and firm data during the coronavirus disease 2019 (COVID-19) pandemic. However, that was only one component of FINRA’s efforts to assist broker-dealers in responding to these unprecedented circumstances. There is an array of Coronavirus resources on FINRA’s website to assist firms of all types and sizes.
One of the most important of these resources is FINRA’s Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic (FAQs). Through these FAQs, FINRA is providing temporary relief from certain rules and requirements where compliance may be affected by the pandemic. FINRA notes that it will continue to monitor the current situation to determine whether additional guidance and relief may be appropriate, and will supplement the FAQs as appropriate. The FAQs currently provide guidance and/or relief with respect to the following regulatory areas:
- Advertising regulation. The FAQs currently provide guidance regarding the steps firms should consider with respect to communicating with customers. In particular, FINRA recognizes that members may experience significantly increased customer call volumes or online account usage during the pandemic, which may cause temporary operational challenges. If registered representatives are unavailable to service their customers, members are encouraged to promptly place a notice on their websites indicating to affected customers who they may contact concerning the execution of trades, their accounts, and access to funds or securities. FINRA further noted that members are not required to file with FINRA a retail communication regarding COVID-19 that does not make any financial or investment recommendation or promote a product or service of the member.
- Annual assessment and net capital. FINRA will provide small firms (firms with up to 150 registered persons) with additional time to pay the required Gross Income Assessment and the Personnel Assessment (collectively, the “annual assessment”) by permitting them to treat invoices for the annual assessment, which usually are distributed in April with payment due on receipt, as being billed as of August 1, 2020. Small firms may also elect to pay 50 percent of the amount due on September 1, 2020, and the remaining 50 percent on December 1, 2020. The FAQs also provide guidance on how the deferred amounts should be treated for purposes of the firm’s net capital and explain that a firm terminating FINRA membership before September 1, 2020, will not have to pay the 2020 annual assessment.
- Anti-money laundering. The FAQs remind firms that they have until December 31, 2020 to perform annual independent testing of AML compliance programs.
- Best execution. FINRA advises that broker-dealers are not relieved of best execution obligations during the pandemic, but explains that the reasonable diligence required for best execution is assessed in the context of the particular characteristics of the security as well as market conditions, including price, volatility, relative liquidity, and pressure on available communications.
- Broker-dealer registration. FINRA is temporarily suspending the requirement for firms to maintain updated Form U4 information regarding office of employment address for temporarily relocated registered persons. Moreover, firms are not required to submit branch office applications for new temporary office locations or space-sharing arrangements established as a result of the pandemic. However, if a firm relocates people to a temporary location not currently registered as a branch or identified as a regular non-branch location, it should use best efforts to notify its FINRA Risk Monitoring Analyst in writing as soon as possible.
FINRA cautions that where a non-branch location or branch office is relocated or customer calls are routed to other offices, firms must be diligent in validating customers’ identities, especially when accepting orders and requests for funds disbursements, and provide heightened supervision of customer accounts.
- Business continuity plans (BCPs). The FAQs provide guidance for notifying FINRA when activating BCPs; registering and updating emergency contact persons with FINRA and communicating with FINRA generally; using remote offices or telework arrangements; and contacting FINRA for extensions for responding to inquiries, investigations, or upcoming filings. (See also Regulatory Notice 20-08.)
- Filing extensions – annual reports and FOCUS reports. Firms relying on SEC Rule 15c3-3(k) or filing Part IIA FOCUS Reports have a 30-calendar-day extension for submitting annual reports for fiscal years ending in January through March 2020. Procedures under Interpretation /01 of SEC Rule 17a-5(m)(1) are waived. Such firms also have a 10-business-day extension for submitting any FOCUS reports related to a period ending February through April 2020. The procedures required by SEC Rule 17a-5(a)(6) and related Interpretations are also waived.
- Fingerprint information. The SEC recently provided temporary relief from the fingerprinting requirements of Securities Exchange Act Section 17(f)(2) and SEC Rule 17f-2, from March 16, 2020 until May 30, 2020. As a result, FINRA, pursuant to its authority under FINRA Rule 1010(d), is temporarily extending the period for submitting fingerprint information under Rule 1010(d). Firms that have submitted or will submit an initial or transfer Form U4 between February 15, 2020 and May 30, 2020, will have until June 29, 2020 to submit fingerprint information. FINRA will consider additional extensions of time as appropriate.
- Individual registration. Subject to certain conditions, FINRA will permit firms to electronically file Forms U4 without first obtaining the applicant’s manual signature. The FAQs also remind firms that declaration of an emergency in a specified area due to COVID-19 may trigger the specific relief for persons volunteering or being called into active military duty set forth in FINRA Rule 1210.10 (see also FINRA’s Active Military Leave Guidance webpage).
FINRA recognizes that firms may encounter difficulties obtaining documents and other information needed to report timely, complete and accurate disclosure information in response to the questions on Forms U4 and U5 and therefore will consider requests for refunds or reduced late filing fees in appropriate circumstances. FINRA also advises that it is permissible to provide copies of Form U5 to terminated employees electronically.
With respect to continuing education requirements, FINRA will provide additional time to complete the required Regulatory Element. Specifically, FINRA is providing an extension to any registered person whose 120-day window for completing the Regulatory Element is expired or will expire between now and May 2020 to May 31, 2020. FINRA will consider additional extensions as appropriate. (See also FINRA’s Continuing Education page.)
- Net capital treatment of covered loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under CARES Act Section 1106, recipients of covered loans are eligible for forgiveness of indebtedness on the loan in an amount (the “Forgivable Expense Amount”) equal to the sum of certain costs and payments during the eight-week period beginning on the date of the origination of the covered loan (the “covered period”). According to the FAQs, a firm including a covered loan as a liability on its balance sheet may add the Forgivable Expense Amount back to net capital to the extent it recorded expenses for the costs and payments making up that amount; however, the add-back may not exceed the amount of the balance sheet liability for the covered loan that the firm reasonably expects to be forgiven. Since the add-back cannot exceed the balance sheet liability for the loan, the add-back cannot increase net capital by more than the balance sheet liability for the loan. Firms must retain documentation of the basis of add-backs, including records of (i) the computation of the Forgivable Expense Amount, (ii) the costs and payments making up that amount, and (iii) an estimate of any Section 1106(d) limits. The add-back must be reported on the firm’s FOCUS Report.
In addition, a firm that has included a covered loan as a liability on its balance sheet may exclude it from aggregate indebtedness during the covered period, after which the firm may exclude from aggregate indebtedness the amount of its liability for the covered loan that the firm is permitted to add back to net capital. Any part of the loan excluded from aggregate indebtedness may be included on the Statement of Financial Condition in the firm’s FOCUS Report Part II.
- Qualification exams. Test centers have been temporarily closed, and FINRA is extending expiring exam windows until May 31, 2020. FINRA will consider additional extensions as necessary.
- Rule 4530 reporting requirements. Broker-dealers must report information about written customer complaints by the 15th day of the month after the end of the calendar quarter in which the complaints are received. However, firms will have until May 31, 2020, to report complaints received in the first quarter of 2020.
- Supervision. The FAQs provide additional time for certain members to complete and submit senior management reports required under Rule 3120 detailing the firm’s supervisory controls system. Those firms with an annual submission deadline that falls between March 1 and May 1, 2020, may take through May 31, 2020, to complete and submit the report to senior management. FINRA is also providing additional time for some firms to execute Rule 3130 certifications. The deadline is generally the anniversary date of the previous year’s certification; however, firms with certification deadlines between March 1 and May 1, 2020, will have through May 31, 2020, to complete the certification. The FAQs note that virtual meetings may be used to satisfy the requirement that a firm’s CEO had one or more meetings with the CCO in the preceding 12 months.
FINRA cautions that as COVID-19-related risks decrease, firms will be expected to comply with the obligations for which relief has been provided. FINRA will announce termination dates for relief to give firms time to make necessary adjustments.
If you have any questions regarding FINRA’s Information Notice, please contact your DLA Piper relationship partner or a member of the DLA Piper financial services team.
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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.