Last week, financial services firms and regulators worldwide continued to anticipate and try to mitigate potential issues related to the expected increase in remote working in light of the COVID-19 pandemic. Unrelatedly, the Bank of England began considering the rollout of a central bank digital currency and issued a discussion paper itemizing issues it's evaluating in connection with such a potential project. As a result, the following matters are covered in this week’s edition of Bridging the Week:
Next week, more home working is anticipated as governments worldwide seek to slow the spread of COVID-19 by minimizing situations where persons might congregate in groups, such as in formal workplaces.
Early last week, in response to current developments, the Financial Industry Regulatory Authority issued a comprehensive pandemic-related regulatory notice reminding members of their requirement to have and review at least annually a business continuity plan. These plans should be designed to enable firms to meet their regulatory obligations to customers and address firms’ relationships to other broker-dealers and counterparties. Although each firm should develop a BCP tailored to its unique business, each BCP must address 10 enumerated elements as provided by a FINRA rule. (Click here to access FINRA Rule 4370.) Among these elements are
In its notice, FINRA encouraged firms to consider pandemic preparation specifically, including:
FINRA referred members to a regulatory notice it issued in 2009 expressly related to pandemic preparedness for specific guidance (click here to access).
Acknowledging the likelihood of increased use of remote offices and teleworking "to mitigate the impacts of a pandemic," FINRA said that where there was widespread remote working by employees, firms might have to institute non-traditional methods of supervision. However, members would still be expected to implement an oversight system “reasonably designed” to supervise the activities of employees “while working from an alternative or remote location during the pandemic.” FINRA encouraged members to test the use of remote offices and teleworking capabilities prior to implementing their BCPs.
FINRA also observed that risk of cyber-breaches might be elevated because of the use of remote offices and tele-working. Accordingly, FINRA recommended that firms ensure that:
To accommodate the use of remote locations, FINRA indicated that, during the course of the COVID-19 pandemic, it would suspend the requirement that that registration filings for registered persons (Form u4) be updated to reflect temporary employment addresses, as well as firm requirements to update their registration information to reflect new temporary offices (Form BR). FINRA did request, however, that members use their “best efforts” to notify their FINRA Risk Manager in writing of any new temporary office space or space-sharing arrangements as soon as possible. FINRA also cautioned member firms to be careful to validate the identity of customers from remote locations.
The National Futures Association offered similar guidance to its members two weeks ago. (Click here for details in the article “Business Not as Usual – Regulators Issue Guidance on Responding to COVID-19 and Firms Take Precautions to Adapt” in the March 9, 2019 edition of Bridging the Week.)
Last week, in anticipation of relief being granted by staff of the Commodity Futures Trading Commission later this week, CME Group and ICE Futures U.S. granted relief from certain of their rules to members. Among other things, both organizations said that, during the duration of the COVID-19 pandemic, persons authorized to handle customer orders could do so from locations other than the premises of registered entities provided such locations were approved by their employers; special rules applied to floor brokers on CME Group. Generally all persons accepting orders that could not be entered immediately into the organization’s order matching system must:
The organizations will not require compliance with oral recording requirements with orders handled from temporary remote locations. CME Group also adopted express, similar exemptions from preparing order records with electronic timestamps for block trade and exchange for related product (EFRP) transactions arranged from remote locations during the COVID-19 pandemic. Ordinary CME Group and IFUS trade practice and other rules would apply during the COVID-19 pandemic period.
Actions taken by other regulators included:
Getting the Business Done: There will be many challenges to remotely supervising employees working from home, particularly where telephone lines may not be recorded and timestamps may not be electronic. Moreover, where required records will be very dispersed, collection, review, organization and retention of manually generated order records could be challenging.
Firms permitting or requiring remote working should document in writing all procedures that should be followed by registrants working remotely, including dealing with customers and counterparties, as well as memorializing orders, and should implement means to test employees’ compliance with such procedures in a manner practical under the circumstances. Firms should also implement procedures that are reasonably designed to enable them to assess remote employees’ compliance with remote working procedures. All procedures must be practical under the circumstances and address particular business activities and remote working situations. Customers and counterparties must be advised how to contact their remote-working contacts at firms, and what backup exists should they be unable to contact their ordinary firm contact. Temporary procedures that are not fully compliant with applicable law should be noted and ordinary regulatory contacts should be advised of these as soon as practical. Employees should be formally trained regarding any new procedures.
Firms must be mindful of cybersecurity and other issues that might arise if employees use their own computers to connect to firm networks. Employees must be careful not to fall for phishing attacks or requests for transactions by unauthorized persons masquerading as legitimate clients. Use of private means of communication for regulated business may be expressly prohibited by ordinary firm policy; however, it may occur notwithstanding by employees working remotely.
Moreover, to the extent possible, supervisors should regularly stay in contact with subordinates – preferably by a video-facing service, but at least by telephone. Virtual group meetings should also be encouraged as they may not only help to maintain dispersed employees' morale, but could also identify common issues arising through experience that should be promptly mitigated. Records of such conversations should be retained.
It will be a challenging period. However, by drafting and updating procedures based on evolving experiences, reasonably effective if not optimal supervision can occur.
The Bank said the public currently can hold money issued by it in the form of banknotes while commercial banks and certain financial institutions can hold electronic central bank credit in the form of reserves as part of the Bank’s Real-Time Gross Settlement Service. Contrariwise, CBDC could be used by households and businesses to directly make payments and store value. The Bank does not anticipate replacing cash or commercial bank deposits; CBDC would exist parallel to such products. All CBDC, said the Bank, would have to be directly convertible into cash and deposits and be a form of central bank money. The Bank also noted that CBDC’s infrastructure would have to enable the money to be transferred and used for payments.
The Bank sees CBDC as being safer than other new forms of privately issued money such as stablecoins, and might facilitate more efficient cross-border payments.
The Bank anticipates enabling private sector companies – Payment Interface Providers – to leverage CBDC to create greater choices for consumers. For example, overlay services could be provided that enable programmable money and smart contracts. CBDC would rely on a core data ledger that the Bank might operate itself or could utilize distributed or decentralized ledger technology. Critical, however, is that any platform satisfies core design principles “of being reliable and resilient, fast and efficient, and open to innovation and competition.” CBDC should be designed so that payments are interoperable – permitting payments between users of different providers and to work with other countries’ CBDC payment systems, said the Bank.
As part of its analysis, the Bank will consider the impact of CBDC on its ability to promote monetary and financial stability.
In response to its discussion paper, the Bank is seeking comments on 35 specific questions. Comments will be accepted through June 12.
In other regulatory and legal developments related to cryptoassets:
In its Proposed Guidance issued in December 2017, the CFTC said that, consistent with prior guidance involving retail transactions of tangible commodities (click here to access), it will consider “actual delivery” of a virtual currency to have occurred when a customer can take “possession and control” of all of the cryptocurrency and use it freely no later than 28 days from the date of the initial transaction and can do so unencumbered. This would require neither the offeror nor seller, or any person acting in concert with such persons, retaining any interest or control in the virtual currency after 28 days from the date of the initial transaction.
My View: Last year, partly in response to the publicity around Facebook’s proposed Libra initiative, international government-related organizations issued statements acknowledging the potential benefits of privately issued stablecoins including private banking services to the unbanked and expediting cross-border financial transactions while articulating regulatory concerns particularly related to money laundering and investor and consumer protection. The International Organization of Securities Commissions issued a statement in November 2019, for example, noting “that stablecoins are “rightly subject to significant international and public scrutiny” and urged all persons seeking to launch stablecoins – particularly those with potential global reach – to engage with all regulatory bodies in jurisdictions where they seek to operate.” (Click here for background in the article “IOSCO Encourages Stablecoin Issuers to Engage With Relevant Regulatory Bodies Prior to Issuance” in the November 17, 2019 edition of Bridging the Week.)
Libra was formally proposed by Facebook in June 2019 with the goal of creating a secure, scalable blockchain and global virtual currency to help individuals currently outside the financial system benefit from an efficient payment system and to help reduce payment transaction costs for others.
As contemplated, Libra was intended to function as global money in the form of a non-government-issued stablecoin backed by a reserve basket of “low volatility assets” including bank deposits and short-term government securities representing multiple international currencies “from stable and reputable central banks.” No Libra could be issued without a purchase of Libra for fiat currency and a transfer of the fiat currency to the reserve. Initially, all aspects of the reserve, as well as Libra generally, would be controlled by a not-for-profit membership association based in Switzerland – the Libra Association. However, the reserve was not intended to be “actively managed” and the reserve will be “structured with capital preservation and liquidity in mind.” Users of Libra would not be entitled to any return from the reserve; interest earned from the reserve will be used to support operations of the Association. (Click here for further background regarding Libra in the My View section of the article “Global AML Standards Setter Says Countries Should Require Virtual Asset Service Providers to Obtain and Transmit Certain Information Regarding Senders and Recipients for All Virtual Asset Transfers” in the June 23, 2019 edition of Bridging the Week.)
Earlier this year, J. Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission, and Daniel Gorfine, former head of LabCFTC, partnered with Accenture to promote consideration of a potential US CBDC. (Click here for background.) China is likely to be the first major country to issue a CBDC – a stablecoin backed by Chinese Yuan issued by the People’s Bank of China. (Click here to access an August 2019 research report by Binance.)
The Bank of England’s initiative to formally study its own potential CBDC is highly merit worthy. However, in order for any government-issued stablecoin to truly have value, it must – as the Bank recognizes – be interoperable with other governments’ CBDC systems. This will be a great challenge.
(Click here for general background regarding stablecoins in a presentation entitled "Summary Review of Stablecoins and the Law Regarding Stablecoins" by Gary DeWaal and Lee A. Schneider, made before the CFTC's Technology Advisory Committee on October 3, 2019.)
Disclosures would be required by such companies in their capacity as issuers and not as regulated firms. Firms whose equities are subject to a premium listing categorization are subject to higher standards of regulation and corporate governance than other listed companies. (Click here to access the Listing Regime of the London Stock Exchange.)
The TCFD is a global organization established in January 2016 consisting of representatives from worldwide banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms and credit rating agencies. (Click here to access TCFD’s June 2017 recommendations.)
FCA seeks comments to its proposals by June 5, 2020.
Generally, persons conducting a financial services business in Australia must hold an AFS license absent relief granted by the Australian Securities and Investment Commission or an exemption under law. Under Australia’s new Foreign Financial Services Providers regime, a qualified entity authorized by a “sufficiently equivalent overseas” regulator – currently including the UK Financial Conduct Authority, the US Commodity Futures Trading Commission and the US Securities and Exchange Commission, among other international regulators – may apply for a foreign AFS license in order to engage in specified enumerated activities, typically involving providing advice and brokerage services related to derivatives and securities, and offering managed investment products. Express conditions apply, and holders of foreign AFS licenses will be subject to certain requirements under local law and subject to supervisory and enforcement provisions as are ordinary for AFS license holders.
ASIC has instituted a streamlined registration process for a foreign AFS license which must be obtained by relevant overseas firms by March 31, 2022. Until then, transitional relief for eligible firms may apply.
The CFTC requested relief because “the public interest and judicial economy strongly favor vacating the February 14, 2020 Order.” The CFTC noted that, if the court desires, it could still publish an opinion with respect to the contempt motion should it agree to vacate the partial contempt order. In any case, the CFTC requested that the court not name individuals when it issues any opinion.
For further information:
Bank of England Evaluates Central Bank-Issued Digital Currency:
Business Not as Usual: Coronavirus Pandemic Continues to Disrupt Businesses and Prompt Regulatory Actions:
CFTC Asks Court Hearing Long-Standing Purported Wheat Manipulation Enforcement Action Not to Hold It in Contempt in Light of Pending Settlement:
CFTC Scheduled to Actually Deliver Final Guidance on Actual Delivery for Virtual Currencies:
Foreign Financial Service Providers Authorized to Engage in Business with Wholesale Australian Clients Relying on Lite Registration Scheme:
UK Conduct Regulator Proposes Enhanced Climate-Related Disclosures by Certain Listed Companies:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 14, 2020. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made. Views of the author may not necessarily reflect views of Katten Muchin or any of its partners or employees.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.
May 03, 2020
April 12, 2020
March 29, 2020
Katten is a firm of first choice for clients seeking sophisticated, high-value legal services in the United States and abroad.
Our nationally recognized practices include corporate, financial services, litigation, real estate, environmental, commercial finance, insolvency and restructuring, intellectual property, and trusts and estates.
Our approximately 650 attorneys serve public and private companies, including nearly half of the Fortune 100, as well as a number of government and nonprofit organizations and individuals.
We provide full-service legal advice from locations across the United States and in London and Shanghai.
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585
Bridging the Week by Gary DeWaal: March 9 - 13, and March 16, 2020 (COVID-19; Remote Offices; Bank of England Digital Currency; Climate-Related Disclosures)Jump to: APAC Regulation (sans Capital and Liquidity) Bitcoin Ecosystem Bridging the Week Business Continuity Disaster Recovery Planning Central Bank Digital Currency COVID-19 Environmental, Social and Governance Getting the Business Done Manipulation My View Policy and Politics Registration Supervision UK Regulation (sans Liquidity and Capital)