On June 25, 2020, SEC Chair Jay Clayton gave testimony before the Investor Protection, Entrepreneurship and Capital Markets Subcommittee of the U.S. House Committee on Financial Services on the topic of capital markets and emergency lending in the Covid-19 era. The next day, on June 26, Chair Clayton, William Hinman, Director of the Division of Corporation Finance, Dalia Blass, Director of the Division of Investment Management and Brett Redfearn, Director of the Division of Trading and Markets issued a public statement on the same topic but expanded to include efforts to ensure the orderly function of U.S. capital markets.
Chair Clayton Testimony
Chair Clayton breaks down his testimony over five topics including: (i) market monitoring and regulatory coordination; (ii) guidance and targeted assistance and relief; (iii) investor protection, education and outreach efforts; (iv) ongoing mission-oriented work; and (v) the SEC’s fiscal-year 2021 budget request.
Market Monitoring and Regulatory Coordination
Despite the extraordinary volumes and volatility we have seen in the securities markets over the few months, at a high level, the “pipes and plumbing” of the securities markets have functioned largely as designed and as market participants would expect. The SEC has observed no systemically adverse operational issues with respect to key market infrastructure.
The SEC has also stepped up its market monitoring efforts establishing a cross-divisional Covid-19 Market Monitoring Group to manage and coordinate efforts to monitor markets and respond to issues. The Group has been continuously monitoring the market with respect to prices and price movements, capital flows and credit availability. The Group has also initiated work to: (i) identify, analyze and clarify interconnections across key segments of financial markets with increased specificity; and (ii) analyze the risks and potential pro-cyclical effects of investment strategies and mandates that include or are subject to mechanistic rules, guidelines or restrictions on holdings of assets—for instance, by reference to ratings and downgrades.
The SEC has also been in close contact with other domestic and international financial regulators regarding risks and impacts resulting from Covid-19 on investors, companies, state and local governments, issues and the financial system as a whole. Cybersecurity risks remain a top concern and priority. On the international level, attention is being paid to market impacts and increased risks with a focus on preserving orderly market functions.
Covid-19 Related Guidance and Targeted Regulatory Assistance and Relief
Chair Clayton highlights the various regulatory relief efforts of the SEC in response to Covid, for example temporary relief from filing deadlines, allowing virtual shareholder meetings, transfer agent relief (see HERE), and temporary expedited crowdfunding rules (see HERE). Chair Clayton testified about the SEC’s guidance on disclosures by public companies related to the impact of Covid on their businesses (see HERE) and the importance of those disclosures to the markets.
The SEC has also pursued many actions focused on operational issues, including facilitating the shift to business continuity plans that are consistent with health and safety directives and guidance and implementing a work-from-home system.
Investor Protection, Education and Outreach
Chair Clayton confirms that investor protection is as important as ever and that the SEC’s Office of Compliance Inspections and Examinations (OCIE) and Division of Enforcement remain fully operational and continue their robust efforts to protect investors. As all practitioners have noticed, Enforcement has been actively monitoring the markets for frauds, illicit schemes and other misconduct affecting U.S. investors relating to Covid and has dedicated significant resources to responding quickly to Covid-related misconduct. The SEC has issued over 30 trading suspensions on companies that have made claims related to access to testing materials, development of treatments or vaccines or access to personal protective equipment, and many of these have followed with enforcement actions.
The Office of Investor Education and Advocacy, along with Enforcement’s Retail Strategy Task Force, has issued investor alerts to inform and educate investors about concerns related to recent market volatility and Covid-related schemes. A separate alert warned investors of bad actors using CARES Act benefits to promote high-risk, high-fee investments and other inappropriate products and strategies.
Furthermore, Regulation Best Interest, establishing a new standard of conduct for broker-dealers when making a recommendation of any securities transaction or investment strategy to a retail customer, became effective on June 30, 2020. The SEC set up an investor-facing website explaining Regulation Best Interest and the Form CRS that broker-dealers are required to file.
Ongoing Mission-oriented Work
Despite the work-from-home status of the SEC, planned rulemaking and scheduling has continued unabated. Other initiatives, such as concerns with the risks associated with companies operating in emerging markets, have likewise continued. For more on that topic, see HERE.
Keeping with the national topic of the moment, Chair Clayton testified that the SEC is committed to diversity and inclusion. Over the last weeks, the topic has been brought to the forefront and the SEC recognizes it needs to make improvements and is working diligently with its Office of Minority and Women Inclusion on further initiatives. Chair Clayton also pointed out that in March 2020, the SEC released its first Diversity and Inclusion Strategic Plan to promote diversity and inclusion within the SEC and the entities the SEC regulates, the Office of the Advocate for Small Business Capital Formation recently held its Government-Business Forum on Small Business Capital Formation including a panel on minority- and woman-owned businesses, and the Asset Management Advisory Committee held a public meeting on diversity and inclusion in the asset management industry.
FY 2021 Budget Request
The SEC FY 2021 budget request of $1.895 billion, an increase of 4.4% over FY 2020, is hoped to provide the agency with resources to better execute its responsibilities. Key priorities include: (i) facilitating main street investor access to long-term, cost-effective investment opportunities and expanding outreach to small businesses; (ii) responding to continued evolution and innovation in the securities markets and meeting long-standing and emerging investor protection and oversight needs; and (iii) assessing and securing our data footprint with a focus on cybersecurity.
Public Statement on SEC’s Targeted Regulatory Relief Related to Covid-19
On June 26, Chair Clayton, William Hinman, Director of the Division of Corporation Finance, Dalia Blass, Director of the Division of Investment Management and Brett Redfearn, Director of the Division of Trading and Markets, issued a public statement on targeted regulatory relief and orderly markets amid the Covid-19 crisis. The statement reiterated much of Chair Jay Clayton’s testimony the day prior as summarized above. However, it also expanded to discuss continued changes and expansion to the relief as the virus crisis continues and is expected to continue to impact businesses and the public markets.
The SEC has reiterated many times that they are taking a health-first approach, prioritizing the health and safety of not only its employees and staff, but also making concessions for businesses to do so as well. All SEC staff is and will continue to work remotely and the SEC intends to extend relief it has provided to market participants to support a remote-work environment, such as virtual annual meetings. The SEC will also continue to provide relief related to the delivery of proxy materials in areas where mail cannot be delivered. Furthermore, the SEC will continue to allow the electronic submission of Form 144s and other documents that are still required to be delivered in paper form.
On the other hand, the SEC has no intention of offering further relief from filing deadlines for periodic reports such as 10-Qs and 10-Ks.
In May 2020 the SEC adopted temporary, conditional expedited crowdfunding access to small businesses using Regulation Crowdfunding (see HERE). The temporary rules provide eligible companies with relief from certain rules with respect to the timing of a company’s offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief is scheduled to end on August 31, 2020. The SEC has not yet decided if it will extend this temporary rule.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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