Robert L. Hickok, Jay Dubow and Whitney Redding of Pepper Hamilton

Many Americans have transitioned to working from home. The SEC is no exception. Since the week of March 9, SEC staff have been teleworking and keeping the agency fully operational. The SEC has been operating on multiple fronts to address the challenges raised by the COVID-19 pandemic. Relief has come in the form of guidance, orders, statements, rules and trading suspensions that have been issued by the SEC and its divisions on an almost daily basis.

A consistent theme has emerged in the SEC's COVID-19 response: the commission wants to offer flexibility to account for unavoidable difficulties that have arisen due to the pandemic, but the law still applies. Now more than ever, investors need high-quality information to assess the impacts of COVID-19. Many of the actions taken by the SEC are aimed at providing relief to address operational and logistical challenges, but guidance and enforcement actions to date suggest that the commission will continue vigorously protecting investors and the integrity of the markets.

This article contains a roundup of actions taken by the SEC and its divisions, offices and committees in response to the effects of COVID-19 to date.

Division of Corporation Finance

The Division of Corporation Finance has offered detailed guidance and statements addressing the issues many companies face in these unprecedented times.

On March 25, the Division of Corporation Finance provided extensive guidance on the division's views regarding disclosure obligations. While acknowledging that the actual impact of COVID-19 may depend on factors outside a company's control, the guidance nevertheless makes clear that information relating to management's views on the expected impacts of COVID-19, how management is currently responding, and how management is planning for future COVID-19 related uncertainties may be material information to investors. The guidance includes a nonexhaustive list of questions for companies to consider relating to their present and future operations and encourages companies to proactively revise disclosures as circumstances change. To the extent these types of disclosures involve forward-looking information, the guidance reminds companies to take advantage of the safe harbors available.

On April 8, Chairman Jay Clayton and William Hinman, the director of the Division of Corporation Finance, issued a corporate issuer statement again stressing the need for high quality disclosures reflecting a company's current state of affairs and future outlook and encouraging companies to avail themselves of the safe harbors for forward-looking statements. Going a step further than the March 25 guidance, the chairman and director indicated that good faith attempts to provide appropriately framed forward-looking information would not be second guessed by the SEC.

In addition to disclosure-related guidance, the staff of the Division of Corporation Finance and the Division of Investment Management have also released guidance on how to hold virtual shareholder meetings. The guidance describes the permitted ways to send or change the notices setting the date, time or location of shareholder meetings and how to use the "notice-only" delivery option to furnish proxy materials.

Orders issued by the SEC have provided companies with targeted regulatory assistance and relief. Most notably, in recognition of the need for companies to consider the impact of COVID-19 and make the necessary disclosures required under the federal securities laws, the SEC has issued orders granting, subject to certain conditions, a 45-day extension for certain disclosure reports (e.g., Forms 10-K and 10-Q) that would otherwise have been due between March 1 and July 1. The SEC also has provided conditional relief relating to the furnishing of proxy and information statements for public companies and other persons.

Division of Investment Management

On April 14, the Division of Investment Management issued a staff statement emphasizing the importance of delivering timely and material information to investment company investors.

Several orders have been passed under the Investment Company Act providing temporary exemptions to registered management investment companies, business development companies, and registered funds from requirements that may pose logistical difficulties, such as holding in-person board meetings.

Orders have also provided insights on the commission's positions on certain enforcement actions.  For example, the commission has indicated that the failure of a registered fund to timely deliver to investors the current prospectus of the registered fund would not be a basis for a commission enforcement action due to circumstances relating to COVID-19 provided delivery of the prospectus was originally required on or before June 30, the prospectus is delivered to investors no later than 45 days after the original deadline, and the registered fund provides notice to commission staff that it is relying on the commission position, publishes on its website that it intends to rely on the commission position and publishes its current prospectus on its website.

Beyond official orders, the staff of the Division of Investment Management has issued several new and updated frequently asked questions for investment advisers impacted by COVID-19 relating to Form ADV requirements and custody rule requirements.

Division of Trading and Markets

The Division of Trading and Markets has similarly acknowledged the challenges presented by COVID-19 and offered relief and guidance on various topics.

For example, on March 16, the division issued a temporary no action letter stating that it would not recommend enforcement action against industry members for failure to enforce the consolidated audit trail implementation deadlines to allow firms to maintain focus on operational readiness and business continuity plans.

On April 22, the division issued answers to frequently asked questions relating to certain provisions of the broker-dealer financial responsibility rules, which included temporary relief from certain obligations, such as the duty to promptly transmit customer checks when broker-dealers may not have access to their offices.

On the other side of the coin, Clayton issued a statement declining to extend the deadline for broker-dealers to comply with regulation best interest (Reg BI) and Form CRS despite the challenges posed by COVID-19. The commission adopted Reg BI on June 5, 2019. Reg BI establishes a new standard of conduct for broker-dealers that applies when broker-dealers make recommendations to retail customers. In light of the chairman's statement, this regulation will go into effect on June 30 as scheduled. The SEC stressed that this decision was made because Reg BI will significantly benefit Main Street investors.

Division of Enforcement

The SEC has been actively monitoring the markets for frauds, scams and other misconduct affecting investors relating to COVID-19. In late March, the division formed a coronavirus steering committee to coordinate the division's response to COVID-19-related enforcement matters, ensure appropriate allocation of resources and avoid duplication of efforts.

Between February and May, the SEC has used its authority to suspend trading in over two dozen publicly traded stocks for up to 10 days. Most of the suspensions have related to concerns regarding the accuracy and adequacy of public statements made about COVID-19 testing, treatments, vaccines and personal protective equipment. For example, the commission temporarily suspended trading of Key Capital Corp. stock after questions were raised about the veracity of information in the market indicating that the company had the ability to develop and make a COVID-19 vaccine available to the mass market in three to six months.

Three suspensions have related to concerns that investors will confuse the issuer with similarly named companies which have had increased media attention during the COVID-19 pandemic. Specifically, the SEC stopped trading of: SpectrumDNA, Inc. (SPXA), a company that has not had any public disclosures since 2015, over concerns that it was possibly being confused for Spectrum Solutions, a saliva collection device manufacturer; Prestige Capital Corp. (PGEC), an emerging growth company, over concerns that it was possibly being confused for Prestige Ameritech, a private manufacturer of N95 masks; and Zoom Technologies, Inc. (ZOOM), a penny stock, over concerns that it was possibly being confused for the videoconferencing provider, Zoom Video Communications (ZM).

Although a trading suspension is not an enforcement action or finding of wrongdoing, some have led to enforcement actions. In the case of Praxsyn Corp., the SEC halted trading of the company's stock on March 25. A month later, on April 28, the SEC announced charges against Praxsyn and its CEO under the antifraud provisions of the federal securities laws for allegedly false statements made by the company in press releases issued on Feb. 27 and March 4. The press releases touted the company's ability to supply large quantities of N95 masks, claiming that it had N95 masks on hand, a direct supply chain from manufacturers and suppliers, and that it was taking orders of a minimum of 100,000 masks. The SEC's complaint alleges that these statements were false. Indeed, on March 31, Praxsyn issued a third press release stating that it never had any masks available to sell.

In the case of Turbo Global Partners, Inc., the SEC suspended trading of the company's stock on April 9. On May 14, the SEC announced charges against the company and its CEO relating to allegedly false and misleading press releases issued on March 30 and April 3 regarding a "multi-national public-private partnership" to sell human temperature screening equipment to help combat COVID-19. The SEC's complaint alleges that no such partnership or agreement exists.

In the case of Applied BioSciences Corp., the SEC stopped trading on April 13, and later announced charges against the company on May 14 relating to allegedly fraudulent statements made by the company in a March 31 press release. That press release stated that the company had finger-prick COVID-19 tests available to the general public for use in "homes" or by "anyone wanting immediate and private results." The SEC's complaint alleges that contrary to these representations, the tests were not intended for home use and required a medical professional to administer. Further, the press release failed to disclose that the tests were not authorized by the U.S. Food and Drug Administration.

Office of Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations has remained fully operational during the pandemic but has moved to conducting examinations off-site through correspondence. The office has stressed that reliance on regulatory relief issued in response to COVID-19 will not be a risk factor utilized by the office to determine whether to commence an examination.

Office of Chief Accountant

The Ooffice of Chief Accountant has been engaging with a number of stakeholders to understand and respond to emerging issues presented by COVID-19.

For example, the office has been working with Financial Accounting Standards Board (FASB) to identify accounting areas that may involve significant judgments and estimates due to the uncertain environment created by the pandemic. The office has reiterated its position that it will not object to well-reasoned judgments.

The office is also working collaboratively with the Public Company Accounting Oversight Board (PCAOB) as well as engaging with the international audit community on issues relating to the impact of COVID-19.

Office of Municipal Securities

On May 4, Clayton and Rebecca Olsen, the director of the Office of Municipal Securities, issued a statement to issuers of municipal securities. Like the April 8, corporate issuer statement released by the chairman and the director of the Division of Corporation Finance, the statement encourages issuers of municipal securities to provide current and forward-looking disclosures relating to the impact of COVID-19 and includes a list of factors that could weigh in favor of disclosure, as well as a list of examples of information that issuers could provide.

Investor Advisory Committee

The Dodd Frank Act established the Investor Advisory Committee to advise the commission on regulatory priorities, the regulation of securities products, and initiatives to protect investor interest and the integrity of the markets. The Investor Advisory Committee has met on three occasions during the past two months. On April 2, the committee met to discuss the impact of COVID-19 on Main Street investors and how the SEC could help address challenges impacting Main Street investors. On May 4, the committee met to discuss "issuer-investor engagement in the context of the challenges posed by COVID-19, including, in particular, disclosure considerations." At this meeting, the committee also discussed virtual shareholder meetings. On May 21, the committee held panel discussions on index funds and credit rating agencies.

Office of the Advocate for Small Business Capital

On April 2, the Small Business Capital Formation Advisory Committee held a special meeting to discuss ways to help small business address their short-term capital needs in response to challenges presented by COVID-19.

The Office of the Advocate for Small Business Capital has also hosted a series of virtual coffee breaks to discuss updates, trends and perspectives relevant to small business capital raising.

Office of Investor Education and Advocacy

In light of the emergence of scams relating to the COVID-19 pandemic, on April 10, the Office of Investor Education and Advocacy issued an investor alert providing examples of frauds being perpetrated on Main Street investors relating to COVID-19, including: fraudulent stock promotions, fraudulent unregistered offerings, charitable investment scams, community-based financial frauds, and phony CDs offering high returns.

COVID-19 Market Monitoring Group

On April 24, the SEC announced the creation of a cross-divisional group consisting of senior level SEC officials whose purpose will be to provide advice and analysis related to the effect of COVID-19 on markets, issuers, and investors, and to coordinate with other regulators and public sector partners. The group is chaired by S.P. Kothari, the SEC's chief economist and director of the Division of Economic and Risk Analysis.

Conclusion

The above roundup of activities illustrates that the immediate goal of the SEC during this pandemic is to keep the markets functioning and to keep investors informed of the evolving impact of COVID-19. The SEC should be recognized for the proactive steps that it has taken to allow companies to comply with their obligations under the federal securities laws, but with appropriate adjustments. At the same time, the SEC recognizes that certain people will try to take advantage of the current situation to defraud investors. As such, Division of Enforcement activity to date has focused on monitoring companies' press releases, websites and public statements to ensure Main Street investors are not defrauded by dubious claims relating to COVID-19. Yet, the commission has repeatedly emphasized the importance of robust and timely disclosures, which suggests that a wave of enforcement actions may follow the pandemic relating to the adequacy and accuracy of disclosures, insider trading and market manipulation schemes.

Robert L. Hickok is a partner and former co-chair of the litigation and dispute resolution department of Pepper Hamilton, resident in the Philadelphia office. He is a past member of the firm's executive committee. He can be reached at 215-981-4583 or [email protected].

Jay A. Dubow is a partner with the firm, resident in the Philadelphia office. He is a member of the firm's white-collar litigation and investigations practice group and is co-chair of the securities and financial services enforcement group. He can be reached at 215-981-4713 or [email protected].

Whitney R. Redding is an associate with the firm, resident in the Pittsburgh office. She concentrates her practice in commercial litigation, with a particular emphasis on domestic and international arbitration, appellate work, and complex breach of contract litigation. She has provided successful representation to Fortune 500 companies, midsize companies and national and international clients.