Regulatory Developments
Fed Adopts Extraordinary New Measures To Support Economy
On March 23, the Federal Reserve announced three new programs and the expansion of two recently-announced programs to provide up to $300 billion in new financing to employers, consumers, and businesses. The Department of the Treasury, using the Exchange Stabilization Fund, will provide $30 billion in equity to the following facilities:
- Primary Market Corporate Credit Facility (PMCCF) – The Federal Reserve Bank of New York will provide loan and bond financing to U.S. companies with investment grade debt ratings. The term sheet is here.
- Secondary Market Corporate Credit Facility (SMCCF) – The Federal Reserve Bank of New York will purchase in the secondary market bonds issued by U.S. companies with investment-grade debt ratings. The term sheet is here. The PMCCF and the SMCCF are intended to support credit to large employers.
- Term Asset-Backed Securities Loan Facility (TALF) – The Federal Reserve Bank of New York will provide loans to U.S. companies that are secured by asset-backed securities with underlying credit exposure to consumer and small business loans, including student loans, auto and credit card loans, equipment loans, loans guaranteed by the Small Business Administration, and certain other assets. The term sheet is here.
- Money Market Mutual Fund Liquidity Facility (MMLF) – Established on March 18 (as covered in more detail below), the MMLF has been expanded to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit. Under the MMLF, the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. The MMLF is intended to assist money market funds in meeting demands for redemptions by households and other investors. The updated term sheet is here.
- Commercial Paper Funding Facility (CPFF) – Established on March 17 (see here for last week’s Roundup coverage), the CPFF is intended to 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. The CPFF has been expanded to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced. The updated term sheet is here.
The Federal Reserve also announced that it expects to establish a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses. We will include details of this new program when they become available.
Federal Reserve Establishes a Money Market Mutual Fund Liquidity Facility
On March 19, the Federal Reserve created the Money Market Mutual Fund Liquidity Facility (MMLF), similar to a facility created during the 2008 financial crisis, to make loans to financial institutions to purchase assets that money market funds (MMF) are selling to meet redemptions. Under the program, the Federal Reserve Bank of Boston (FRBB) will provide a non-recourse advance to an eligible borrower to purchase certain types of assets from an eligible MMF. The MMF must be a fund that identifies itself as a Prime, Single State or Other Tax Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. Eligible borrowers include all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks. The program opened on March 23, 2020, and will accept as collateral certain types of assets purchased by the borrower from MMFs (i) concurrently with the borrowing or (ii) on or after March 18, 2020, but before the opening of the MMLF. The Federal Reserve published frequently asked questions, the MMLF Request Form, agreements and other related documents, a term sheet and other information on its website. The program will continue through September 30, 2020.
On March 23, the SEC issued an order providing temporary exemptions from certain requirements of the Investment Company Act of 1940. The relief allows registered open-end management investment companies other than money market funds (open-end funds), insurance company separate accounts registered as unit investment trusts (separate accounts), and other registered investment companies to more easily obtain short-term funding via certain borrowing and lending arrangements. The order provides temporary exemptive relief that:
- Allows open-end funds and separate accounts to borrow and enter into certain other lending arrangements with affiliates;
- Provides additional flexibility for registered investment companies with or without existing interfund lending orders to employ interfund lending and borrowing facilities; and
- Allows an open-end fund, subject to prior board approval, to deviate from its fundamental policies with respect to lending arrangements or borrowings.
Each of the above exemptions is subject to various conditions as set forth in the order and is available until a date specified in a future public notice from the SEC staff. Such a date will be no earlier than June 30, 2020, and will be at least two weeks from the date of the future public notice, whenever that may come.
SEC Issues No-Action Letter Relief for Affiliated Purchases Under Rule 17a-9
On March 19, SEC staff (Staff) issued a no-action letter to the Investment Company Institute (the ICI Letter) that permits a bank affiliate of a registered investment company that is regulated as a money market fund under Rule 2a-7 (MMF) to purchase portfolio securities from the MMF under certain conditions in order to enhance the liquidity and stability of MMFs during the securities market disruptions related to the COVID-19 outbreak.
Rule 17a-9 under the Investment Company Act of 1940 provides an exemption from the prohibitions under Section 17(a) to permit affiliated persons of an MMF (or affiliated persons of such persons) to purchase distressed and non-distressed securities from the MMF. Among other conditions, Rule 17a-9 requires that any purchase be paid in cash and at a price that “is equal to the greater of the amortized cost of the security or its market price (in each case, excluding accrued interest).” In addition, Rule 17a-9 allows an MMF to “claw back” certain amounts from an affiliated purchaser in certain circumstances. According to the SEC, the rule is designed to enable investment advisers and their affiliates to address acute credit or liquidity problems in an MMF portfolio by purchasing securities from the MMF that would be difficult or impossible to sell on the open market at or near their amortized cost.
In light of the dislocation in the market for money market securities caused by the COVID-19 outbreak, bank affiliates of MMFs, which affiliates are subject to various banking regulations, may wish to purchase securities from the MMFs to enhance the MMFs’ liquidity or stability. However, such bank affiliates may be unable to do so in reliance on Rule 17a-9 because of conflicting banking regulations to which they are subject. The relief granted in the ICI Letter would permit such bank affiliates to purchase portfolio securities from the MMFs, subject to the following conditions:
- The purchase price of the purchased security would be its “fair market value as determined by a reliable third-party pricing service”;
- The bank affiliate satisfies the conditions of Rule 17a-9 except to the extent that the terms of such purchase would otherwise conflict with applicable banking regulations;
- The MMF timely files Form N-CR with the SEC to report such transaction, and reports in such Form that the purchase was conducted in reliance on the ICI Letter; and
- The relief set forth in the ICI Letter shall be in effect on a temporary basis in response to the national emergency concerning the COVID-19 outbreak, and will cease to be in effect upon notice from the Staff.
Purchases of MMF portfolio securities in reliance on the ICI Letter is just one method of supporting an MMF that has experienced increased redemption activities and/or a stressed net asset value. Advisers of MMFs facing these types of pressures may also wish to assess the potential use of other alternative methods of financial support.
On March 22, the Federal Reserve, FDIC, OCC, National Credit Union Administration, Consumer Financial Protection Bureau and Conference of State Bank Supervisors issued the Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus, encouraging financial institutions to work constructively with borrowers who are unable to meet their payment obligations due to the Coronavirus (COVID-19). The agencies will not direct supervised financial institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs), and the agencies have confirmed with the Financial Accounting Standards Board (FASB) that loans subject to good faith, short-term modifications made in response to COVID-19, that were current prior to such relief, are not TDRs. Loans secured by one-to-four family residential mortgages, which are prudently underwritten and not past due or carried in nonaccrual status will not be considered restructured or modified for the purpose of respective risk-based capital rules. If a loan is not otherwise past-due, financial institutions are not expected to report a deferred loan as past-due, if the financial institution agrees to a deferral and no payments are contractually past-due. Loans modified in accordance with this guidance will continue to be eligible as collateral at the Federal Reserve’s discount window based on the usual criteria.
Fed Temporarily Suspends Bank Examinations
On March 24, the Federal Reserve released a supervisory statement providing additional information to financial institutions on how its supervisory approach is adjusting in light of the coronavirus. In particular, the Federal Reserve stated that it will temporarily reduce its examination activities at least through the last week of April, with the greatest reduction in activities occurring at the smallest banks, and grant additional time for resolving non-critical existing supervisory findings. For supervised institutions with less than $100 billion in total consolidated assets, the Federal Reserve intends to cease all regular examination activity, except where the examination work is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need. For supervised institutions with assets greater than $100 billion, the Federal Reserve intends to defer a significant portion of planned examination activity based on its assessment of the burden on the institution and the importance of the exam activity to the supervisory understanding of the firm, consumer protection, or financial stability.
As part of the announcement, the Federal Reserve stated that large banks should still submit their capital plans that they have developed as part of the Comprehensive Capital Analysis and Review by the April 6 deadline. The plans will be used to monitor how financial firms are managing their capital in the current environment.
On March 19, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) released an interagency statement in which the agencies committed to providing favorable Community Reinvestment Act (CRA) consideration for the efforts of financial institutions to work with low- and moderate-income (LMI) customers and support LMI communities impacted by COVID-19, provided such activities are consistent with safe and sound banking practices. Examples of customer relief outlined in the statement include waiving certain fees; easing check-cashing restrictions; expanding the availability of short-term, unsecured credit products; increasing credit card limits; providing alternatives to branch-based service options; and payment accommodations. The statement also encourages financial institutions to modify or ease the terms of new or existing loans. Regarding community development activities, the agencies clarified that financial institutions would receive CRA consideration for activities that help to stabilize communities adversely affected by COVID-19 within the institution’s assessment areas, as well as within the broader geographic area that includes the assessment areas, “provided that such institutions are responsive to the community development needs and opportunities that exist in their own assessment area(s).”
Federal Reserve Bank of New York Issues FAQs on Primary Dealer Credit Facility
On March 19, the Federal Reserve Bank of New York issued a set of frequently asked questions (FAQs) regarding its previously announced new primary dealer credit facility (PDCF), which began on March 20, 2020. As covered in last week’s edition of the Roundup, the new PDCF will be available for at least six months, and will offer overnight and term funding with maturities up to ninety days. The PDCF is meant to support American households and businesses in their credit needs and to expand the ability of primary dealers to gain access to term funding. The FAQs address eligibility to participate, terms of PDCF loans, amounts that may be borrowed and eligible collateral.
Agencies Issue Q&As Regarding Use of Capital and Liquidity Buffers
The federal banking agencies have issued Q&As addressing questions they have fielded about their March 17, 2020 statement encouraging banks to use capital and liquidity buffers to “lend and undertake other supportive actions” and a related interim final rule to make automatic limitations on capital distributions more gradual. Both of these items were covered in last week’s edition of the Roundup. The Q&As:
- clarify the meaning of “liquidity buffer” and “capital buffer”;
- address how utilization of the 90-day draws available at the Federal Reserve’s discount window would impact the liquidity coverage ratio rule;
- address how the statement interacts with recovery and resolution plan triggers; and
- encourage banks to use their total loss-absorbing capacity buffers to lend to households and businesses.
OCC Revises Short-Term Investment Fund Rule
On March 22, in response to COVID-19’s negative impact on financial markets and on the ability of banks to operate in compliance with maturity limits identified in the short-term investment fund (STIF) rule for national banks acting in a fiduciary capacity, the Office of the Comptroller of the Currency (OCC) announced an interim final rule effective immediately, allowing the OCC to authorize banks to temporarily extend maturity limits of these funds. The OCC will accept comments for 45 days following publication in the Federal Register.
Simultaneously, the OCC announced an order extending the maturity limits for STIFs affected by the market effects of COVID-19, deeming a bank in compliance if (1) the STIF maintains a dollar-weighted average portfolio maturity of 120 days or less and portfolio life maturity of 180 days or less, both as determined by the SEC’s rule for money market mutual funds, (2) the bank acts in the best interests of the STIF under applicable law in connection in using the temporary limits, and (3) the bank makes any necessary amendments to the written plan for the STIF to reflect these temporary changes. The relief provided by the order will terminate on July 20, 2020, unless the OCC provides an extension.
On March 19, the New York State Department of Financial Services (DFS) issued guidance urging, but not requiring, all regulated and exempt mortgage servicers to support mortgage borrowers (mortgagors) who demonstrate they are not able to make timely payments due to the COVID-19 outbreak by:
- Forbearing mortgage payments for 90 days from their due dates;
- Refraining from reporting late payments to credit rating agencies for 90 days;
- Offering mortgagors an additional 90-day grace period to complete trial loan modifications, and ensuring that late payments during the COVID-19 pandemic do not affect their ability to obtain permanent loan modifications;
- Waiving late payment fees and any online payment fees for a period of 90 days;
- Postponing foreclosures and evictions for 90 days;
- Ensuring that mortgagors do not experience a disruption of service if the mortgage servicer closes its office, including making available other avenues for mortgagors to continue to manage their accounts and to make inquiries; and
- Proactively reaching out to mortgagors via app announcements, text, email or otherwise to explain the above listed assistance being offered to mortgagors.
In the guidance, the DFS stated that “reasonable and prudent efforts by [New York regulated and exempt mortgage servicers] during this outbreak to assist these mortgagors under these unusual and extreme circumstances are consistent with safe and sound banking practices as well as in the public interest and will not be subject to examiner criticism.”
Governor Cuomo followed up on the guidance by issuing an Executive Order directing the DFS to promulgate emergency regulations:
- Requiring that any person or entity facing a financial hardship due to the COVID-19 pandemic be provided with an opportunity for a forbearance of payments for a residential mortgage and that New York regulated institutions grant any application for such a forbearance in all reasonable and prudent circumstances during the period of the emergency; and
- Eliminating ATM, overdraft and late payment credit card fees during the period of the emergency, in each case subject to safety and soundness requirements.
On March 24, the DFS released the emergency regulation implementing the Executive Order. Importantly, the new Part 119 to 3 NYCRR (Emergency Regulation) exempts residential mortgage loans made, insured, or securitized by any U.S. agency, Government Sponsored Enterprise, or Federal Home Loan Bank, and the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for the Government National Mortgage Association, from the requirements of the Executive Order and Emergency Regulation. The Emergency Regulation also requires DFS-regulated institutions to email, publish on their website, mass mail, or otherwise similarly broadly communicate to customers how to apply for COVID-19 relief and provide their contact information no later than April 3, 2020. The Emergency Regulations also discuss the qualifications for receiving COVID-19 relief and the procedures for processing applications for such relief. Finally, the Emergency Regulation codifies the statement set forth in the guidance and the Executive Order that, during examinations, examiners will not criticize prudent and reasonable efforts by DFS-regulated institutions to grant forbearance of any payment due on a residential mortgage, consistent with safe and sound practices.
FHFA, HUD, and FHLBs Suspend Foreclosures and Evictions and Issue New Policies
On March 18, the Federal Housing Finance Agency (FHFA) announced that it had directed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and collectively with Fannie Mae, the Enterprises) to suspend foreclosures and evictions for at least 60 days due to the coronavirus national emergency. This foreclosure and eviction suspension applies to homeowners with an Enterprise-backed single-family mortgage. Previously, the FHFA announced that the Enterprises would provide payment forbearance to borrowers impacted by the coronavirus. Forbearance allows for a mortgage payment to be suspended for up to 12 months due to hardship caused by the coronavirus.
Also, on March 18, the Department of Housing and Urban Development announced an immediate foreclosure and eviction moratorium for single family homeowners with Federal Housing Administration-insured mortgages for the next 60 days.
On March 19, the Federal Home Loan Banks’ Mortgage Partnership Finance (MPF) program issued an MPF Announcement outlining temporary policies allowing participating financial institutions (PFIs) and mortgage servicers (Servicers) to assist borrowers impacted by COVID-19. All PFIs and Servicers are expected to abide by any/all federal or state laws or proclamations that may affect borrowers or loans affected by COVID-19. In addition, Servicers were instructed to suspend all foreclosure sales and evictions for the next 60 days, unless the property has been determined to be vacant or abandoned. The new policies included guidelines for PFIs and Servicers originating, delivering or servicing MPF Government loans, MPF Government MBS loans, MPF Xtra loans and MPF Direct loans.
On March 25, the SEC announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19. In addition, the SEC’s Division of Corporation Finance issued its current views regarding disclosure considerations and other securities law matters related to COVID-19.
The SEC issued an order that extends the filing periods covered by its earlier order providing conditional relief for certain filing obligations and obligations to furnish proxy and information statements for public companies and other persons. The March 25, 2020 order extends the period covered by the March 4, 2020 order to cover the period starting March 1, 2020 and ending July 1, 2020, extending the earlier April 30, 2020 termination date. The staff of the SEC Division of Corporation Finance also issued CF Disclosure Guidance Topic No. 9, “Coronavirus (COVID-19),” to provide important guidance on its views concerning disclosure considerations in light of the COVID-19 crisis.
The SEC also issued orders under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 that would provide certain investment funds and investment advisers with additional time with respect to holding in-person board meetings and fulfilling certain filing and delivery requirements, as applicable. These Orders supersede and extend the filing periods covered by the SEC’s original orders of March 13, 2020, previously covered by the Roundup. Among other conditions, entities must notify the Division of Investment Management staff and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur. The time periods for relief are described in the orders.
SEC Grants Signature/Retention Relief
On March 24, the SEC Divisions of Corporation Finance, Investment Management and Trading and Markets issued an announcement permitting temporary relief from the requirements of Rule 302(b) of Regulation S-T for those affected by COVID-19. Rule 302(b) requires every signatory to an electronic filing to manually sign the filing or an authenticating document, and requires the filer to retain it for five years and produce it upon request to the SEC. In light of the COVID-19 crisis, the staff announcement states that the staff of these division will not recommend enforcement action to enforce Rule 302(b) if:
- a signatory retains a manually signed signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
- such document indicates the date and time when the signature was executed; and
- the filer establishes and maintains policies and procedures governing this process.
Examples of compliance include having a signatory who is working remotely “execute a hard copy of the signature page remotely and hold that page for delivery to the filer upon his or her return to the place of work.” Another example says that the signatory could “provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed.”
SEC Issues Statement on Form ID and Related Notarization Issues
On March 23, the SEC issued a statement (1) recognizing that COVID-19 public health crisis is presenting challenges for some entities and individuals seeking initial access to file in EDGAR, particularly the notary requirement in the Form ID access application process and other EDGAR access processes that require notarization, and (2) directing filers having notarization or related access issues to contact filer support. The full text of the statement can be found here.
U.S. Senate Passes “Families First Coronavirus Act”
On March 18, the U.S. Senate passed the “Families First Coronavirus Response Act” (the Act), signed into law the same day by President Trump. The Act surpassed an earlier version passed by the U.S. House of Representatives (the Initial Bill), which placed more burden on employers, and includes employment provisions around emergency paid sick leave, emergency family and medical leave, and tax credits. Effective no later than April 2, 2020, the Act:
- Provides full-time employees with up to 10 days of paid sick leave, subject to payment level caps, for a variety of reasons relating to COVID-19;
- Provides employees with up to 12 weeks of paid leave, subject to a payment level cap, to care for a child under the age of 18 who is home due to school or day care closures or because their caregiver is unavailable as a result of COVID-19; and
- Mandates that the employers’ payments will be recoverable through tax credits.
To learn more about the “Families First Coronavirus Response Act,” read the client alert issued by Goodwin’s Employment practice.
COVID-19: Business Interruption and Insurance Amid A Pandemic
As the COVID-19 pandemic continues to spread at an exponential rate, businesses in the United States and around the world are trying to navigate the disruption partnered with “shelter-in-place” and “stay-at-home” orders and a shut-down of businesses that are not deemed as “essential” or “critical” to the general population. These actions have resulted in dramatic losses of income to business, which have led many of them to seek guidance on how to recoup some or all of these losses. To assist businesses with uncovering and interpreting potential coverage from their insurance policies, Goodwin released this Client Alert and the accompanying Business Interruption Toolkit (2020) to do the following:
- We identify core issues businesses should consider when evaluating whether they have business interruption coverage for their losses stemming from the coronavirus.
- If such coverage is available, we walk through the best practices for responding to a business interruption and submitting a claim with insurance carriers for such losses.
- For those businesses that lack insurance for lost business income, we identify the questions they should ask as they explore whether to supplement their insurance program to provide for such coverage in the future.
To determine whether your company has coverage for such claims, look at your policies and consult with your broker and legal counsel. In addition to this Client Alert and the Business Interruption Toolkit (2020), Goodwin’s risk management and litigation lawyers are available to assist with any questions you may have.
Enforcement & Litigation
DOJ Downplays Circuit Split on FCA Deference to Government Dismissals of Whistleblower Actions
On March 4, the United States Department of Justice (DOJ) filed a brief with the United States Supreme Court (the Court) asking the Court to decline review of U.S. ex rel. Schneider v. JPMorgan Chase Bank, N.A., No. 198-678 concerning the government’s power to dismiss qui tam – or “whistleblower” – actions under the False Claims Act. Read the LenderLaw Watch blog post.
Goodwin News
Nick Losurdo Rejoins Goodwin from SEC
Goodwin is pleased to announce that Nick Losurdo has a re-joined the firm as a partner in its financial industry group and as a member of its digital currency and blockchain technology practice. At the SEC, Nick served as counsel to SEC Commissioner Elad Roisman and advised him on an array of legal, policy and regulatory matters, including proposed and final rulemaking, interpretations and exemptive relief, and enforcement matters. Nick’s practice is focused on advising broker-dealers, alternative trading systems, equity and option exchanges, and investment advisors regarding SEC and FINRA rules and regulations. He also helps technology and other companies in the area of blockchain and digital currency, and assists private equity funds during strategic and financial acquisitions, dispositions, and restructurings involving financial institutions. Learn more about Nick here and visit his bio.
This week’s Roundup contributors: Josh Burlingham, Jessica Craig, William McCurdy and Andrew Zutz