Financial and capital markets regulators respond to COVID-19
Last Updated March 22, 2020
Osler updates subsequent to this post:
- Securities Regulators:
- The Exchanges:
Capital markets and financial regulators have been actively taking steps to mitigate major market disruptions in the face of the novel coronavirus pandemic. They are introducing increased flexibility regarding regulatory requirements, and urging firms to keep investors appraised of risks.
Like the pandemic situation itself, regulatory expectations are continuously evolving. What follows are highlights of some regulatory initiatives relevant to businesses and investors.
Securities regulators: The OSC, IIROC, the CSA and the SEC
On March 10th, the Investment Industry Regulatory Organization of Canada (IIROC) informed member firms that while firms must continue to meet their regulatory obligations, it recognizes that a level of regulatory flexibility will be required to allow members to maintain market stability and best serve investors. IIROC stated that it has no objection to members meeting the requirements from backup sites or with staff working from home. The regulator has suggested that firms consider obtaining dedicated broadband service for the homes of critically important employees. IIROC’s examinations of members will be conducted remotely where possible, and certain committee meetings will be conducted by video or teleconference. In the event of a major disruption the regulator has Business Continuity Plans in place for each regulatory area of the organization, to preserve critical functions and activities.
The Canadian Securities Administrators (CSA) issued a statement on March 16, 2020, recommending that reporting issuers contact their principal regulator to discuss any potential effect on their ability to comply with their regulatory obligations. Issuers that foresee not being able to file annual or interim financial statements by their prescribed deadline because of the COVID-19 pandemic should consider applying for a Management Cease Trade Order (MCTO); if an MCTO is issued the issuer must comply with the alternative information guidelines as provided in NP 12-203: Management Cease Trade Orders until the required documents are filed. The CSA advised they will work to accommodate MCTOs filed less than the required two weeks before the required filing deadlines. Issuers should note that MCTOs issued in these circumstances will not be considered required disclosure in future documents.
The Ontario Securities Commission (OSC) issued its own guidance on March 16, 2020, recognizing a need for increased flexibility. On site compliance reviews and the planned Risk Assessment Questionnaire are being postponed until further notice. Normal-course registration and compliance activities will continue as planned, but the Commission will be “flexible on deadlines” for this information. All in-person outreach, including in-person consultation with advisory committees, market participants and investors, will be rescheduled as teleconference hearings. The OSC will not be holding any in-person hearings until at least April 30, 2020.
On March 18, the OSC announced it will provide temporary relief from some regulatory filings. The regulator is granting a blanket 45-day relief for periodic filings due to be made on or before June 1, 2020, including AIFs, financial statements, MD&A, management reports or fund performance, technical reports, and “certain other filings”. Additional details on the relief are said to be following “shortly”. This will bring relief to issuers who have not yet filed annual financials and/or MD&A and/or Q1 financials for those issuers with December 31 fiscal year ends.On March 20, 2020 the CSA announced that a reporting issuer that has already sent and filed its proxy materials can change the date, time or location of its in-person AGM (or decide to hold a virtual or hybrid AGM) without sending additional soliciting materials or updating proxy-related materials if it issues a news release, files the news release on SEDAR and takes all reasonably necessary steps to inform parties and proxies. Reporting issuers do not require exemptive relief under National Instrument 54-101: Communication with Beneficial Owners of Securities of a Reporting Issuer as long as registered holders and beneficial owners are treated equally.
The US Securities and Exchange Commission (SEC) has taken relatively more aggressive steps to ease virtually all filing deadlines and is also offering increased flexibility regarding the manner of satisfying certain requirements. According to an announcement made on March 13, 2020, publicly traded companies are free to switch their annual meeting to virtual or hybrid gatherings, so long as they provide adequate notice. Shareholders and their representatives cannot be penalized if they cannot present proxy proposals because of COVID-19. The regulator also issued orders providing relief from certain regulatory requirements for both investment firms and advisers . The orders permit virtual board meetings and ease certain document filing requirements. Most significantly, the SEC has also given registrants and other filers an extra 45 days to submit virtually all regulatory filings, including annual reports, quarterly reports, and current reports on Form 8-K as well as furnished Form 6-K reports required by foreign private issuers. To qualify for this relief, the filer must either file a Form 8-K report, or, for a foreign private issuer, furnish a report on Form 6-K explaining why additional time to comply with the filing obligation is needed by the later of March 16, 2020 and the original deadline. The report must include a statement regarding when the company expects to file and, if applicable to the filer, a risk factor explaining the impact of the virus on its business. Companies should be careful in formulating this disclosure and ensure that they qualify for the relief as improper reliance on relief may be the subject of an SEC enforcement.
On March 19, 2020 the SEC issued a no-action letter notifying self-regulatory organizations they have until at least May 20 before they are required to enforce new "consolidated audit trail" (CAT) compliance rules; the original deadline for some market participants was April 20.
TMX Group issued a statement on March 13, 2020, saying there are contingency plans in place should there be disruptions to trading operations, including the clearing and settlement of trades. The owner of the Toronto and Montréal Exchanges and the Canadian Derivatives Clearing Corporation said it is confident in its ability to operate and service the marketplace based on its contingency plans. These contingency plans contain various measures, including: splitting critical operations between offices, providing additional dedicated business continuity seats for each critical business area at their backup facilities and ensuring TMX hosted events are cancelled, prohibiting employees from attending or hosting external meetings or events and imposing a mandatory 14-day quarantine for any employee who has travelled outside of the country before returning to work.
The Canadian Depository for Securities (CDS) [PDF] has indicated on March 13, 2020 that it will accept PDF copies of global notes and debentures on settlement in lieu of an originally signed physical note. Email accounts have been set up to receive these documents.
The New York Stock Exchange LLC (NYSE) announced on March 18, 2020, that it will temporarily close its physical trading floor effective Monday, March 23, 2020, as a response to COVID-19. The NYSE has responded to a number of questions as a result of this decision here. On March 21, 2020, the SEC approved, for immediate effectiveness, a proposed rule filing submitted by NYSE to facilitate electronic auctions in light of this temporary closure.
On March 19, 2020, the NYSE filed a proposal with the SEC to suspend, until June 30, 2020, the application of its continued listing requirement that companies must maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million. On March 20, 2020 the SEC [PDF] designated this proposal effective upon filing.
While the NYSE is the only market thus far to temporarily close its trading floor, other exchanges have put in temporary restrictive measures. As of March 17, 2020 four European countries – France, Italy, Spain and Belgium – have applied temporary bans on short-selling of hundreds of listed stocks. The Spanish ban will extend to derivatives that involve creating a short position. The UK’s Financial Conduct Authority has also banned short selling of 140 Italian and Spanish stocks. Other European economies – specifically Switzerland and Germany – have reported that there are no plans to ban or limit short selling because “the market is functioning as it should”.
On March 13, the Office of the Superintendent of Financial Institutions (OSFI) announced measures to support the resilience of financial institutions, including:
- The Domestic Stability Buffer (DSB) requirement (“capital buffers”) for domestic systemically important banks (DSIBs): The DSB’s countercyclical design enables DSIBs to use the capital they have built up when needed. OSFI announced the DSB would be lowered by 1.25% of risk weighted assets; as such the requirement is now set at 1.00%. Allowing DSIBs to deploy their capital buffers is expected to free up more than $300B of additional lending capacity. The buffer will not be increased again for at least 18 months.
- Freezing dividends and share buybacks: OSFI set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted.
- Suspending plans to adjust the mortgage stress test: OSFI is suspending all consultations and policy development until conditions stabilize – this includes the proposed changes to the stress test for uninsured mortgages. Because of this, the Guideline B-20 benchmark rate used as the minimum qualifying rate for insured mortgages will not be replaced as previously announced and the current benchmark rate (five-year conventional mortgage rate) published weekly by the Bank of Canada will remain in force until further notice.
- Supervisory and regulatory priorities: OSFI will continue to monitor FRFI’s responses to ongoing regulatory shifts and will ensure supervisory work is reprioritized as needed.
The Financial Services Regulatory Authority of Ontario (FSRA) issued a statement on March 16, 2020 on its business continuity initiation. It has taken various steps to ensure it can respond to COVID-19, including: allowing employees to work remotely, operating the call centre, shifting all meetings to phone/video conference, postponing all on-site examinations not currently underway, and continuing to conduct public consultations online. The FSRA is also reviewing upcoming licensing, filing, and other similar requirements across the regulated sectors, and notified regulated entities that they should communicate concerns to the FSRA as soon as possible.
The Financial Consumer Agency of Canada (FCAC) stated on March 17, 2020 that it is reprioritizing its supervisory and regulatory work and will focus its resources on emerging risks and concerns. The FCAC recognizes that regulated entities will need to reassign and re-prioritize their own internal resources and the FCAC intends to work with entities to minimize the impact of regulatory requirements when delivering services.
While noting that reporting entities must still do everything possible to meet their obligations, including reporting obligations, Fintrac noted on March 13, 2020 that this may not be possible in all situations. In these cases, Fintrac is asking reporting entities to document and keep a record of the reasons why reporting is not possible. Entities should prioritize suspicious transaction reporting and alternative reporting arrangements are detailed for critical information relating to national security measures.
Global Central Banks, including the US Federal Reserve and the Bank of Canada have moved aggressively to stimulate economic activity. In coordinated statements announced on March 15, 2020, the Federal Reserve, the European Central Bank, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the Bank of England announced they will use swap lines to support the global supply of the US dollar and will add a weekly offering of dollars over a longer maturity and decrease the cost of the facility. The Reserve Banks of New Zealand and Australia also have eased monetary policy.
The Federal Reserve announced on March 16, 2020 that it had cut interest rates to near zero to prevent the credit crunch and financial market disruptions that during the 2008 market crash. Short term-rates have been cut to a target range of 0% to 0.25%, and Chair Jerome Powell announced at least $700 billion in Treasuries and mortgage-backed securities purchases in the next few weeks. The bank also lowered the primary credit rate by 150 basis points to 0.25% in order to encourage banks to taps its emergency lending window. Depository institutions may borrow from this so-called discount window for periods as long as 90 days, pre-payable and renewable by the borrower on a daily basis. Rates will stay where they are until Fed officials are “confident that the economy has weathered” events.
On March 15, 2020, Fed Chairman Powell announced that a broader set of the institution’s powers, including direct lending to financial firms, remains at the Fed’s disposal and that the central bank would not hesitate to use them. Measures already taking include: pledging to buy $500 billion in Treasury’s and $200 billion in mortgage-backed securities, and modifying banks' capital-buffer requirements built up ion the aftermath of the 2008 financial crisis. Reserve requirement ratios will be reduced to 0%. In a simultaneous move, eight of the biggest U.S. banks said they would stop stock buybacks through the second quarter in order to ensure the banks’ capital and liquidity is being used to support the broader economy. On March 20, 2020 the Fed announced that effective March 23, 2020, along with the Global Central Banks, they will increase the frequency of 7-day maturity operations from weekly to daily. This change will be effective through the end of April. Included in this announcement, the Central Banks will also continue to hold weekly 84-day maturity operations. The Fed also announced an expansion of its program to support the flow of credit to the economy. The Federal Reserve Bank of Boston, through Money Market Mutual Fund Liquidity Facility, will make loans available to eligible financial institutions secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds. Assets eligible under this program have been detailed in this term sheet.
On March 13, 2020 the Bank of Canada announced it had cut its trend-setting interest rate by half a percentage point to 0.75% from 1.25% in a surprise move late last week. In doing this the bank acted outside of its regular dates for rate announcements; it said it would provide a full update of its outlook for the Canadian and global economies as its scheduled meeting on April 15. On March 18, 2020 the Bank of Canada announced further steps; specifically it will allow Large Value Transfer System participants to temporarily assign 100 percent of their non-mortgage loan portfolio (NMLP) as pledged collateral for the SLF.
Businesses recognize that the pandemic is and will continue to impose significant burdens on their employees, clients and the economy as a whole. Calls for regulatory relief are growing louder from many quarters, including politicians. On March 17, for example, US Senate Banking Committee ranking member Sherrod Brown (D-Ohio) sent letters to major US financial and capital markets regulators urging regulators to “place an immediate moratorium on rule makings not related to the crisis at hand until the COVID-19 virus has been fully addressed”, and to, “instead focus and prioritize actions on activities related to the economic risks posed to markets”.
Regulators expect regulated entities (firms and individuals) to keep investors appraised of the firm’s position, and continue to follow all reporting obligations. Market participants similarly need regulators to communicate their expectations on a regular, perhaps constant, basis. While regulators’ willingness to provide relief and flexibility in these unusually challenging circumstances is encouraging, their respective approaches have varied.
The chart below (updated as of April 2, 2020) outlines various responses to date taken by financial and capital markets regulatory authorities in response to the COVID-19 pandemic. The announcements are identified by the date issued by the regulator. We will continue to monitor this matter and provide updates as appropriate.
For an updated chart outlining financial and capital markets regulatory updates, please see this resource page.
The authors appreciate the invaluable assistance of Chelsea Rubin on this article.
 One of the authors, Larry Ritchie, is on the FSRA Board; the content of this post reflects the views of the authors only and not any regulator.