Keeping it Virtual: Easing Barriers to Online Securities Law Compliance in the Wake of COVID-19

Bringing signatures into the modern age.

Bringing signatures into the modern age. Thanks to COVID-19, most of the financial business in the United States that was previously being done on-site is now being conducted virtually: financial markets are open, investment continues, and public companies continue to report.

Normally, virtual business and certain securities law requirements, such as manual signatures, hard-copy filings, and in-person meetings, simply are not compatible. Regulators have temporarily relaxed some of these requirements during the crisis. That helps. But it also raises an obvious question: why not make such relief both broader and permanent?

Virtual business was increasing before COVID-19, with 53 percent of American employees working remotely at least some of the time, and remote work options in the finance industry have been surging. That trend is likely to continue, and probably accelerate, after the crisis abates. Regulators need to keep pace with that change. More extensive reforms now will benefit financial market participants by offering a more modern and streamlined, and therefore less costly, way to meet regulatory obligations.

Consider something as basic as signature requirements. Federal, state, and self-regulatory organization rules all require a significant number of manual, or “wet,” signatures. These requirements persist even though many filings are made electronically. One example is the Form U4, which is required to register individuals with FINRA and states securities regulators. FINRA Rule 1010(c), like similar state rules, requires each electronic filing to be based on a Form U4 manually signed by the applicant and maintained in broker-dealers’ books and records. FINRA’s temporarily relaxed requirements permit applicants simply to acknowledge the document in writing prior to filing.

Many states have followed suit with similar regulatory relief, including California, Delaware, Maine, Massachusetts, Minnesota, and New Jersey. While it’s a start, this relief doesn’t go far enough, because filers still have to get a manual signature as soon as practicable. Requiring a signature, after the applicant has acknowledged the document, serves no discernable purpose. Indeed, Regulation S-T, the SEC’s electronic filing rule, permits filers to keep in their records either a manual signature or other document authenticating the filed document.

Regulation S-T, though, prohibits the use of electronic signatures and requires filers to keep paper records, hardly a model of modernity. These requirements were last revisited almost 20 years ago, when the SEC confirmed that its filings aren’t subject to the E-Sign Act, which recognizes electronic signatures and electronic records as having the same legal effect as paper.

In response to the current crisis, the SEC has provided insubstantial relief from Regulation S-T, only granting the signatory more time to forward the paper record to the filer. A group of law firms recently petitioned the SEC for more substantial relief, seeking a permanent rule change to permit electronic signatures and electronic recordkeeping. Given the ubiquity of electronic signatures in corporate business, improvements in electronic signature software, and widespread electronic recordkeeping capabilities, revising Regulation S-T to accommodate these developments is long overdue. Continuing to impose the outdated burdens of Regulation S-T inhibits the ability of companies to engage in virtual business.

Securities filings that cannot be made electronically also hinder virtual business. During the crisis, the SEC’s Division of Trading and Markets is permitting electronic submission of certain documents, including broker-dealer FOCUS reports and certain clearing agency submissions, and the SEC’s Division of Corporation Finance is accepting email filing for Forms 144 (notice of proposed sale of restricted securities by an affiliate). New York is temporarily permitting electronic filing of certain documents by broker-dealers and investment advisors, but still requiring hard copies to be filed. Yet this approach defeats the purpose of allowing electronic filings, particularly during an emergency.

New York is proposing, however, a permanent modernization of some rules: (1) requiring certain notice filings for securities to be made through the North American Association of Securities Administrators’ electronic filing depository (NAASA EFD) system, and bringing the filing deadlines in line with federal timetables; and (2) requiring registration of investment adviser representatives through the Central Registration Depository/Investment Adviser Registration Depository (CRD/IARD) system. Although the registration requirement is itself burdensome, the proposed changes should make filings easier while further harmonizing New York’s requirements with those of other regulators.

Finally, and most fundamentally, some securities laws insist on in-person interactions that rule out doing business virtually. Several states ordinarily require annual shareholder meetings to be held in person. Some of these states, including Connecticut, Georgia, and New York, have relaxed that requirement for the duration of the crisis, permitting shareholder meetings to be held virtually. The SEC has issued guidance to assist companies holding virtual meetings, including guidance on complying with proxy notice requirements. That’s a good step. But why not always let public companies and their shareholders have the option of holding virtual meetings?

Just as individuals will need to adjust to a “new normal” over the coming months, returning to the regulatory status quo after the public health crisis should not be a forgone conclusion. In addition to the comparatively modest steps described here, supporting virtual financial business will require more substantial strides to reduce regulatory burdens. The overlapping and duplicative regulatory regimes (federal, state, and self-regulatory) that apply to broker-dealers is one area ripe for reform: the redundancy, already a problem for the industry, specifically deters broker-dealers from having distributed and virtual workforces by imposing compliance costs for each state where employees are located. Regulatory flexibility, and the resulting lower compliance costs, will help financial business adapt to a changing, and increasingly virtual, world.