Weekly RoundUp
March 18, 2020

Financial Services Weekly Roundup: New Rules, Amendments and More Amid Coronavirus Outbreak

In This Issue. The ongoing global outbreak of the coronavirus (COVID-19) continues to grow in scale and scope. In response, federal financial regulators are continuing efforts to bring regulatory relief to promote stability to the financial markets. Federal banking regulators adopted an interim final rule to make automatic limitations on capital distributions in times of stress more gradual; the Board of Governors of the Federal Reserve System (Federal Reserve) announced the establishment of two new funding facilities to support the flow of credit to households and businesses; and the Securities and Exchange Commission (SEC) took targeted action to provide regulatory relief for funds and investment advisers and provided guidance to assist public companies, investment companies, shareholders and other market participants in dealing with the impact of COVID-19 on upcoming annual shareholder meetings. Unrelated to the coronavirus outbreak, the SEC adopted amendments that will streamline and simplify investor disclosures for variable annuities and variable life insurance contracts; the SEC adopted amendments that will reduce regulatory burdens and compliance costs for certain smaller issuers; and the FDIC requested comments on a proposed rule to ensure the safety and soundness of industrial banks. These and other items are covered in more detail below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center to learn how cross-industry teams at Goodwin are helping clients fully understand and assess the ramifications of COVID-19 and navigate the potential effects of the outbreak on their businesses. The Knowledge Center, which is updated regularly, currently includes thought leadership on how the outbreak could affect contractual performance and negotiations, cybersecurity, insurance and risk management considerations, Hart-Scott-Rodino filings, mergers and acquisitions, and employment matters, some of which are reproduced below.

Regulatory Developments

Federal Banking Agencies Adopt Interim Final Rule To Make Automatic Limitations on Capital Distributions More Gradual

On March 17, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) (collectively, the agencies) adopted an interim final rule that revises the definition of “eligible retained income” under the agencies’ capital rule in order to make any automatic limitations on capital distributions that could apply under the agencies’ capital rules more gradual. According to the agencies, in light of the economic disruption and market volatility caused by the coronavirus outbreak, banking organizations may realize a sudden, unanticipated drop in capital ratios, which could create a strong incentive for these banking organizations to limit their lending and other financial intermediation activities in order to avoid facing abrupt limitations on capital distributions. Thus, the current definition of eligible retained income (defined as net income for the four preceding calendar quarters, net of any distributions) could serve as a deterrent for banking organizations to continue lending to creditworthy businesses and households. To better allow a banking organization to continue lending during times of stress, the agencies are issuing the interim final rule to revise the definition of eligible retained income to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) average of a banking organization’s net income over the preceding four quarters. This definition will apply with respect to all of a banking organization’s buffer requirements, including the fixed 2.5% capital conservation buffer, and, if applicable, the countercyclical capital buffer, the GSIB surcharge and enhanced supplementary leverage ratio standards. According to the agencies, by modifying the definition of eligible retained income and therefore allowing banking organizations to more freely use their capital buffers, the interim final rule should help to promote lending activity and other financial intermediation activities by depository institutions, bank holding companies, and savings and loan holding companies and avoid compounding negative impacts on the financial markets. Comments on the interim final rule must be received no later than May 1, 2020.

Fed Announces Establishment Of New Funding Facilities

On March 17, the Federal Reserve announced that it will establish a Primary Dealer Credit Facility (PDCF) to support the credit needs of American households and businesses. The PDCF will offer overnight and term funding with maturities up to 90 days to primary dealers of the Federal Reserve Bank of New York and will become available on March 20, 2020. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. The interest rate charged will be the primary credit rate, or discount rate, at the Federal Reserve Bank of New York. In connection with the announcement, the Federal Reserve released a term sheet for the PDCF. More detailed terms and conditions and an operational calendar will be subsequently released.

On March 17, the Federal Reserve also announced the establishment of a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies. Terms and conditions of the CPFF can be found here. More detailed program terms and conditions and an operational calendar will be subsequently published.

Both the PDCF and CPFF were established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

SEC Takes Targeted Action to Assist Funds and Advisers

On March 13, the SEC issued orders providing temporary relief for certain requirements under the Investment Company Act of 1940 (1940 Act) and the Investment Advisers Act of 1940, respectively.

  • The 1940 Act order provides exemptions from certain 1940 Act filing and report delivery deadlines if the fund cannot make the deadline due to current or potential effects of COVID-19, provided notice is given to the staff.
  • The 1940 Act order provides exemptions from the in-person requirements for fund board approval where reliance “is necessary or appropriate due to circumstances related to current or potential effects of COVID-19.” No staff notification is required, and the exemption is provided to June 15.
  • The SEC takes a no-action position for prospectus delivery that cannot be made due to COVID-19, with conditions including staff notification.
  • The SEC provides exemptions from the requirements to file an amendment to ADV and delivery of Part 2 to existing clients if the adviser cannot make the filing or delivery deadline due to current or potential effects of COVID-19, provided notice is given to the staff.
  • The SEC provides exemptions from the requirements to file reports under Form PF and, for an exempt reporting adviser, on Form ADV if the adviser cannot make the filing deadline due to current or potential effects of COVID-19, provided notice is given to the staff.
  • The filing and delivery relief is available to April 30 (with one closed-end fund and business development company aspect available to June 15).

SEC Provides Guidance on Virtual Annual Meetings in View of COVID-19 Concerns

On March 13, the SEC announced that the staff of the Division of Corporation Finance and the Division of Investment Management (Staff) have published guidance to assist public companies, investment companies, shareholders and other market participants in dealing with the impact of COVID-19 on upcoming annual shareholder meetings. The guidance clarifies how the Staff will view the obligations of companies under the federal securities laws when companies decide (1) to change the date, time or location of an annual meeting or (2) to conduct a “virtual” annual meeting through the internet or other electronic means to supplement an in-person meeting, also referred to as a “hybrid” meeting, or to conduct a virtual meeting in lieu of the company’s in-person meeting. The guidance also discusses the views of the Staff on presentation of shareholder proposals when the proponent cannot attend an in-person annual meeting. For additional information, read the client alert issued by Goodwin’s Public Companies practice.

FDIC and OCC Issue Guidance Encouraging Banks to Work with Customers and Borrowers in the Wake of the Coronavirus Pandemic

On March 13, the OCC issued a bulletin encouraging banks to “take steps to meet the financial services needs of customers adversely affected by COVID-19-related issues” and asserting that the OCC “will provide appropriate regulatory assistance, as warranted, to banks affected by COVID-19-related issues.” The bulletin addresses:

  • Banks prudently working with adversely affected customers by, for example, waiving fees, offering repayment accommodations, extending payment due dates, and increasing daily withdrawal limits at automated teller machines; and
  • The OCC providing regulatory relief in a safe and sound manner to affected banks with respect to financial condition reviews and reporting requirements, among other actions.

On the same date, the FDIC issued a statement that also encouraged financial institutions to take prudent steps to assist customers and communities affected by the coronavirus. Importantly, the statement reiterated that “a financial institution's prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.”

In a separate statement, the FDIC announced that it would conduct examinations and other activities at financial institutions off-site for two weeks beginning on Monday, March 16 and had instituted mandatory telework for FDIC employees through at least March 30.

Massachusetts Division of Banks Releases Statement on Coronavirus and Regulatory Assistance for Financial Institutions

On March 16, the Massachusetts Division of Banks (Division) released a statement for financial institutions working with customers affected by the novel coronavirus. Like the statements issued by its federal counterparts, the Division’s statement encourages financial institutions to take steps to meet the financial services needs of affected customers and communities and provides that the Division will provide appropriate regulatory assistance to affected financial institutions subject to their supervision, as warranted.

FinCEN Encourages Financial Institutions to Communicate Regarding BSA Reporting and to Remain Alert to Illicit Financial Activity

On March 16, the Financial Crimes Enforcement Network (FinCEN) issued a statement reminding financial institutions affected by the COVID-19 pandemic to contact FinCEN and their functional regulator as soon as practicable if a COVID-19-affected financial institution has concern about any potential delays in its ability to file required Bank Secrecy Act (BSA) reports. In the statement, FinCEN also advised financial institutions to remain alert about malicious or fraudulent transactions similar to those that occur in the wake of natural disasters.

SEC Adopts Variable Annuity & Life Insurance Contract Summary Prospectus

On March 11, the SEC adopted, substantially as proposed, a summary prospectus approach for variable annuity and variable life insurance contracts (variable contracts). Insurance companies may now use a summary prospectus to meet prospectus delivery obligations, similar to the approach adopted in 2009 for mutual funds.

New Rule 498A under the Securities Act of 1933 (Rule 498A) permits the use of two types of summary prospectus: (1) a summary prospectus covering a variable contract offered to new investors, highlighting key terms, benefits and risks; and (2) an updating summary prospectus for existing investors, focused on contract changes during the previous year, as well as a subset of information required in the initial summary prospectus. To use the summary approach, the statutory prospectus and Statement of Addition Information must be posted online and available upon request. Companies using the summary prospectus option need not deliver prospectuses for the portfolio companies, provided that the portfolio company summary and statutory prospectuses are available online. The SEC adopted amendments to the registration forms for variable contracts (Forms N-3, N-4 and N-6) to implement the new summary prospectus requirements and to reflect industry developments, such as the use of optional benefits. Rule 498A is effective July 1, 2020.

The adopting release for Rule 498A sets forth a grandfathering approach for registration statements that are no longer updated under the Great-West line of no-action letters. In the release, not the rule, the SEC provides a no-action position for companies providing specified alternative disclosures, rather than updating their registration statements. The no-action position applies to registration statements for which updates are discontinued as of July 1, 2020.

New SEC Amendments Reduce Unnecessary Burdens on Smaller Issuers

On March 12, the SEC adopted amendments to the accelerated filer and large accelerated filer definitions to reduce unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. The amendments will:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.
  • Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and
  • Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.

The amendments will become effective 30 days after publication in the Federal Register. The final amendments will apply to annual report filings due on or after the effective date.

FDIC Seeks Comment On Proposal Regarding Industrial Banks

On March 17, the FDIC issued a proposed rule that would require certain conditions and commitments for approval or non-objection to certain filings involving an industrial bank or industrial loan company whose parent company is not subject to consolidated supervision by the Federal Reserve (Covered Parent Company). The proposed rule would effectively establish new standards for Covered Parent Companies, including the requirement that they agree to examinations, certain capital and liquidity requirements and other requirements in exchange for regulatory approval. Specifically, the proposed rule would prohibit any industrial bank from becoming a subsidiary of a Covered Parent Company unless the Covered Parent Company enters into one or more written agreements with the FDIC and its subsidiary industrial bank. In such agreements, the Covered Parent Company would be required to agree to:

  • Furnish an initial listing, with annual updates, of the Covered Parent Company’s subsidiaries;
  • Consent to the examination of the Covered Parent Company and its subsidiaries;
  • Submit an annual report on the Covered Parent Company and its subsidiaries, and such other reports as requested;
  • Maintain such records as deemed necessary;
  • Cause an independent annual audit of each industrial bank;
  • Limit the Covered Parent Company’s representation on the industrial bank’s board of directors or managers (board), as the case may be, to 25%;
  • Maintain the industrial bank’s capital and liquidity at such levels as deemed appropriate and take such other action to provide the industrial bank with a resource for additional capital or liquidity;
  • Enter into a tax allocation agreement; and
  • Depending on the facts and circumstances, provide, adopt, and implement a contingency plan that sets forth strategies for recovery actions and the orderly disposition of the industrial bank without the need for a receiver or conservator.

In addition, the proposed rule would require the FDIC’s prior written approval before an industrial bank that is a subsidiary of a Covered Parent Company may take the following actions:

  • Make a material change in its business plan after becoming a subsidiary of a Covered Parent Company;
  • Obtain the FDIC’s prior approval to add or replace a member of the board of directors or board of managers or a managing member, as the case may be;
  • Add or replace a senior executive officer;
  • Employ a senior executive officer who is associated in any manner with an affiliate of the industrial bank, such as a director, officer, employee, agent, owner, partner, or consultant of the Covered Parent Company or a subsidiary thereof; or
  • Enter into any contract for material services with the Covered Parent Company or a subsidiary thereof.

The FDIC could, on a case-by-case basis, impose additional restrictions on the Covered Parent Company or its controlling shareholder if circumstances warrant.

The FDIC also released a fact sheet summarizing the proposed rule. Comments on the proposed rule are due 60 days from publication in the Federal Register.

Enforcement & Litigation

The Implications Of Coronavirus (COVID-19) On Contractual Performance And Negotiations

COVID-19 could have a significant impact on how parties view and negotiate contractual provisions, particularly those provisions that could potentially excuse or toll performance, or terminate an agreement, including: force majeure provisions, material adverse change/material adverse effect clauses, and representations and warranties. There are also various principles at common law and under the Uniform Commercial Code that may apply when an event was not reasonably anticipated or actually “negotiated” by the parties, such as the doctrines of impossibility, impracticability and frustration of purpose. Given the uncertainty of COVID-19’s impact on businesses and industries, it is important to consider how such provisions could affect existing or future agreements. Indeed, knowing when a party’s performance may be excused or modified can help to avoid a material breach of contract or, alternatively, to know when litigation against a non-performing party is appropriate. For additional information, read the client alert issued by Goodwin’s White Collar Defense and Financial Industry Litigation practices.

Goodwin News

Insurance Considerations In Light of COVID-19

In response to the outbreak of COVID-19, Goodwin’s risk management team has identified a number of insurance-related issues that clients may be faced with. This report, focused on business-related insurance, highlights key issues that may arise from this pandemic on specific corporate policies and provides guidance on what losses may be covered, the issues that could impact coverage for such claims and negotiating and underwriting policies. For additional information, read the client alert issued by Goodwin’s Risk Management & Insurance practice.

Professional Liability Perspectives On Coronavirus

The Professional Liability Underwriting Society (PLUS) is gathering speakers in a variety of business lines to provide their perspectives and expertise on the possible effects of COVID-19 on underwriting, risk management and legal businesses. You can listen to the inaugural episode here featuring Goodwin’s Carl Metzger, a partner in the firm’s Financial Industry group and Chair of the firm’s Risk Management & Insurance practice.

HSR Filings In Light Of COVID-19

In light of the coronavirus outbreak, on March 13, the Federal Trade Commission and the Antitrust Division of the Department of Justice (the Antitrust Agencies) announced modified procedures related to Hart-Scott-Rodino (HSR) filings. Under the HSR regime, transactions that meet certain thresholds require notification to the Antitrust Agencies, and are subject to waiting periods during which the parties cannot close. According to the announcement, beginning on Tuesday, March 17, the Antitrust Agencies will accept HSR filings in an electronic-only format. Importantly, during this time, the Antitrust Agencies have stated that they will NOT issue any grants of early termination. Thus, parties will need to wait the full waiting period, which, for most transactions, is 30 calendar days. For additional information, read the client alert issued by Goodwin’s Antitrust and Competition practice.

ICI Mutual Funds and Investment Management Conference

The ICI Conference has been postponed until further notice in light of public health concerns around the spread of COVID-19. For more information and updates, please visit their website.

This week’s Roundup contributors: Mac Laban and Amanda Russo