A few weeks ago as this crisis began to take shape, we indicated it would be a good idea to dust off the old business interruption policies.  In response to some queries, we wanted to add to our discussion.

Regardless of anyone’s (including your insurance broker) belief, you should still make the claim on the policy.  There are a number of factors at play, including, but not definitively, some form of government intervention to cover these losses.  It would be critical to get those claims on file as soon as possible.

Of course, counsel is always a good place to start.  Please take care and stay safe and healthy.

With the chaos of the past week– and it is going to get worse before better– firms should check on their insurance coverage.

Most firms should check to see if there business interruption coverage is up to date.   This is a critical component of their business operations.  If things get worse and there are widespread shutdowns, most firms will need to look to these policies for coverage.   Keep in mind that it may apply if you cannot get into your offices or vendors or suppliers let you down.  You will need to make sure you keep detailed records of expenses and provide prompt notice to your insurance carrier if something happens.

Best way to make sure that you are on the right track is to call counsel and discuss.

Let’s be honest, the only people usually concerned about business continuity plans (“BCP”) are compliance folks and the lawyers.  In fact, many probably have not looked at their BCP since Hurricane Sandy.  Well, you better dust it off (or dry it off, more accurately).

FINRA has already provided notice regarding traders working at home.  https://www.bloomberg.com/news/articles/2020-03-09/finra-concedes-virus-may-impact-wall-street-oversight-of-traders.  Further, nearly everyone, who works at the SEC headquarters in Washington, D.C., has been sent home because a staff member tested positive for the coronavirus.   However, don’t get to happy about the SEC dispersion, staff members are still working around the country and from home.

In any event, firms need to start preparing and considering implementing their business continuity plans before it is too late.  Focus on the key functions: personnel, IT, and supervision.   Do your best, and remember legal counsel is there to assist.

Alas, the market crashes (nearly, 8% of its value today) and your 401k plan is devastated, but could it get worse?  Of course, it could.  Brokers and investment advisers as well as their employers should expect to see numerous arbitrations and lawsuits as a result of the market crash and volatility.

As a result, brokers and investment advisers should take precautions now.  Customer client files should be in order.  That means, you have to make sure the files have been properly reviewed and all the appropriate documentation is contained in the file.  Further, when there have been prior market crashes, it sometimes makes prior illegal activities, such as Ponzi schemes, come to light.  Compliance personnel must be vigilant to these matters.

With the market volatility, it is important to start the preparation for litigation now.  Consult with counsel and you will–hopefully- be able to weather the storm.

Recently, a REIT sought to avoid using a broker-dealer in a distribution.  Woe, onto those who seek to avoid the broker-dealer, especially when it leads to a SEC investigation and enforcement action. 

The REIT charged a 3% commission as part of its sales process, and used its website, social media, and radio ads.  These commissions and marketing tactics violated Exchange Act Rule 3a4-1, and, as a result, the REIT was operating as a broker-dealer in violation of Section 15(a) of the Securities Exchange Act of 1934.  The REIT was also charged with failing to comply with the Securities Act of 1933’s prospectus requirements. 

The REIT’s actions fly in the face of well-settled law.  It could have been easily remedied.  Essentially, the REIT could have avoided the enforcement action if it had used a broker-dealer or taken modest precautions by not charging a commission or engaging in these marketing scenarios.    See https://www.sec.gov/litigation/admin/2019/33-10702.pdf.  Remember always consult counsel before declining the use of a broker-dealer’s services.


Ernie Badway, the Chair of Fox Rothschild’s Securities Industry Group, will be speaking at the National Conference of the  National Society of Compliance Professionals.  Registration information may be found at: https://www.foxrothschild.com/ernest-e-badway/events/the-secs-challenging-new-guidance-on-the-solely-incidental-broker-exemption/

Recently, the SEC issued a concept release to obtain input on possible changes to the offering rules.  The SEC may change Regulation D private placements, Regulation Crowdfunding, secondary trading rules, the accredited investor definition and the use of private funds to raise capital, among other things.

The SEC may consider changes to the definition of accredited investor, by re-evaluating the financial qualifications’ thresholds; making separate categories of investors based upon experience, profession, or an exam; and/or measuring accreditation through investments.  Similarly, the SEC wants to make changes to private funds.  In particular, the SEC may include qualified purchaser funds in the accredited investor definition as well as changing the definition of a qualified client to make it easier to obtain performance fees.

In sum, those interested should comment to ensure their voices are heard as the SEC navigates these changes.

Fox Partner Kristen Howell was, recently, quoted in a Law360 article on security tokens following the ICO collapse.  https://www.law360.com/assetmanagement/articles/1162154/-security-tokens-slow-to-take-off-following-ico-collapse?nl_pk=5882ca7d-b76e-42a1-a1fe-eb96fcbcf60f&utm_source=newsletter&utm_medium=email&utm_campaign=assetmanagement.