COVID-19: Compliance and Legal Considerations for Asset Managers
By Toppan_Merrill
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SEC Blog Covid4Original post March 18, 2020 by Stearling & Shearman LLP

As the world responds to COVID-19, we have identified a number of compliance and legal considerations for asset managers. We summarize a select list of these in our note below.

General Operations and Compliance Considerations

Like financial businesses more generally, many asset management firms have adopted far-reaching “work from home” policies. How these policies affect individual firms will vary, but firms with significant client or customer interaction or complicated operational processes (whether trading, operations or other functions) are more likely to be at risk of disruption.

In response to our informal survey, nearly all asset management firms in affected markets said that they have formally activated their business continuity policies. In due course, this action will require thoughtful consideration of how actual events tested preparedness.

Already there have been “lessons learned.” For example:

  • Compliance officers are realizing that a dramatic rise in remote operations also means evaluating whether the firm must adapt normal surveillance and supervision tools to the current environment.
  • Coordination with both senior executives and line managers is needed to ensure all personnel and business functions understand that daily compliance monitoring and supervision should be as strong as ever, notwithstanding dramatic change in the workplace.
  • Compliance officers are coordinating with information security teams to ensure that the much higher number of remote staff and increased demands on network functionality do not compromise cyber-preparedness. This follows a COVID-19 alert from the U.S. Department of Homeland Security addressing heightened cyber risk in remote work situations. Read the alert.
  • Asset management firms rely heavily on outside vendors from technology providers to valuation services to administrators and custodians, and it perhaps goes without saying that these vendors are likewise under operational and compliance stresses. Staying in close contact with vendors and continuously assessing their service capabilities is critical.

SEC Relief for Registered Investment Advisers, Registered Investment Companies and Business Development Companies

Over the past week, the U.S. Securities and Exchange Commission granted temporary relief from various filing requirements for SEC-registered investment advisers, exempt reporting advisers, investment companies and business development companies.

  • A general theme of the relief is that it is time-limited.
  • Another general theme is that it requires notifications and undertakings to the regulator and/or investors as to how a firm is affected by COVID-19 and why it is necessary or appropriate for the firm to claim reliance on the relief.

Read our alerts on the scope and timing of these temporary SEC regulations – one alert addresses relief specific to registered investment companies and BDCs; the other alert addresses relief specific to investment advisers. In some respects (e.g., accommodating a temporary inability to prepare and deliver financial reports or shifting required meetings from in-person to “virtual” formats), this relief largely tracks SEC relief and guidance for public reporting companies more generally. Read our alert on the temporary SEC regulations for public reporting companies.

Read the SEC’s press release on relief for certain companies affected by COVID-19. Read the SEC’s press release on guidance to promote continued shareholder engagement for companies and funds affected by COVID-19.

FINRA Guidance for Broker-Dealers

The U.S. Financial Institution Regulatory Authority (FINRA) temporarily suspended various requirements applicable to FINRA firms, including notifications to FINRA regarding remote offices. FINRA also published guidance specific to FINRA’s business continuity rule in light of current events. Read our alert on these FINRA regulations and guidance.

NFA Guidance for Commodity Pool Operators

Similar to FINRA’s guidance regarding remote offices, the U.S. National Futures Association stated that it “will not pursue a disciplinary action against” a Commodity Pool Operator or Commodity Trading Adviser that permits or requires its staff to temporarily work from locations not already listed as a branch office. The NFA guidance specifically requires firms to consider the need for “alternative supervisory methods” and appropriate recordkeeping.

Read the NFA’s guidance.

Client Communications

A Gallup survey notes that all manner of companies are communicating with the public regarding their COVID-19 responses.[1] According to the survey, these messages tend to be tailored to the recipients, whether employees or clients/customers, and often include a personal tone alongside expert advice.[2]

While such communications are important to the business, they also present a variety of risks:

  • Chief among these is that the communications must be accurate and complete (or “fair, clear and not misleading” in the words of European Union regulators). That is notwithstanding swiftly changing circumstances that put pressure on the ability of a firm to understand and synthesize information and leave little time for the normal institutional vetting process.
  • With so many staff working in different locations, there is the risk that communications may be disjointed.
  • There are related risks of selective disclosures that could inappropriately benefit the recipient relative to other similarly situated clients or investors.

In addition to general client and investor communications, we are aware of many funds, both SEC-registered investment companies and private funds, where there has been ongoing interaction these past weeks with the fund’s applicable governance body, whether that be a trustee, board of directors or investor body (such as a limited partner advisory committee). These types of board communications have covered:

  • Investment performance and attribution
  • Risk analytics
  • Valuation discussion
  • Shareholder or investor sentiment and flows (subscriptions / redemptions
  • Operational updates

Risk Disclosure

The SEC has advised any company aware of a risk related to COVID-19 that would be material to its investors to refrain from securities transactions with the public until investors have been appropriately informed about the risk.[3] The SEC added that companies disclosing such coronavirus-related risks should disseminate such information broadly.

  • Against that backdrop, we have seen at least some funds adding new risk disclosures. Others have determined their general market risk disclosures are satisfactory as-is and are not planning any near-term changes.
  • Most frequently, any new disclosures are high-level discussions of the market and economic risks associated either with COVID-19 or with pandemic health events generally.
  • More detailed and fund-specific disclosures are sometimes developed for more exposed investment programs, e.g., taking into account a particular geographic or sector focus.
  • While not fund industry-focused, the SEC has provided detailed guidance on consideration of COVID-19 risks in the context of an issuer of securities, which we summarize in an earlier alert.
  • Looking forward, some firms may need to analyze disclosure obligations—or consider “key person” undertakings to clients and investors—in light of the illness or incapacity of personnel. These will be highly fact specific judgments and will need to be informed both by traditional securities and commercial law considerations and by medical privacy rights and other factors not regularly addressed by commercial lawyers.

Maintenance and Access to Customer-Facing Functionality

When a firm maintains customer-facing functionality such as account or trading portals it is important consider how these functions can be maintained and kept fully available, notwithstanding operational stresses that can include surges in customer demand. At least one market participant has already faced well-publicized issues, including technical problems that allegedly prevented customers from trading during days in which there were significant up-and-down market movements.

Short-Selling Regulations

Regulators in a number of countries have introduced emergency regulations banning or limiting short selling. Compliance teams should coordinate with their traders to track these developing requirements.

Force Majeure and Material Adverse Effect Clauses

“Force majeure” (literally “greater force”) is a legal doctrine allowing for contract parties to assert that they are not required to meet their contract obligations because of significant external events outside the control of the parties that prevent fulfillment of the contract. To illustrate the potential scope of these kinds of provisions in a global crisis, the China Council for the Production of International Trade said that as of February 21, 2020 it had issued 3,325 “force majeure certificates” covering contracts worth more than $38 billion.[4] We have written in detail on COVID-19 related force majeure considerations in an earlier alert. Read our previous alert.

Material adverse effect (MAE) clauses similarly allow for parties to exit or modify contracts or particular terms of contracts based on significant events arising post-signing. These may be especially relevant for private equity or direct lending funds based on their underlying acquisition/disposition or lending activity in that contracts in those contexts can have well-developed MAE terms and related market customs.

Derivatives Considerations

COVID-19 and force majeure also have specific implications for derivatives contracts. Read our previous alert addressing whether certain aspects of the COVID-19 outbreak could constitute a force majeure or similar event of default or termination event under various derivatives contracts including International Swaps and Derivatives Association, Inc. or other market standard master agreements.

Valuation and Liquidity Challenges

Market volatility and trading dislocations can put pressure on any firm’s valuation and liquidity monitoring processes. This may become especially relevant in the event of market or exchange closures, as already evident in the unscheduled extensions of the Chinese Lunar New Year holidays.

  • In the event issues arise, an appropriate response should be organized, typically with input from a firm’s internal and external valuation specialists, auditors and legal and compliance.
  • For U.S. registered investment companies or other funds with a board of directors or trustees, the fund board or the board’s valuation or liquidity oversight committee might be consulted.
  • Valuation or liquidity matters can require consideration of client or regulator communications and assessment of options for “side pockets” or similar approaches that specially segregate or categorize illiquid or hard to value assets.
  • In some cases, these discussions extend to the prospect of imposing “gates” or suspensions on redemptions from the funds involved. Any such discussion is highly sensitive commercially and often will involve close consultation with a variety of parties including the fund’s directors or other governance body.

Loans and Leverage Challenges

Investment companies and private funds that utilize lines of credit or other financing arrangements should confirm that they continue to comply with covenants relating to asset coverage or other ratios that could result in an event of default. Read our previous alert discussing how the COVID-19 outbreak may affect both borrowers and lenders.

“Defensive” Investment Strategies

Firms must consider when it is appropriate to deviate from an account’s “normal” investment approach in favor of a “defensive” strategy.

  • In the case of U.S. registered investment companies, there is specific guidance on point under the so-called fund names rule. The rule requires that a registered investment company with a name that suggests that the company focuses on particular types of investments, industries, or countries or geographic regions is required to adopt a policy to invest, “under normal circumstances,” at least 80% of the value of its assets in the suggested type of investments.[5] The company may, however, depart from the 80% requirement to take a “temporary defensive position” to avoid losses in response to “adverse market, economic, political, or other conditions.”[6]
  • Of course, a firm should review the fund’s prospectus to confirm any defensive approach taken matches its disclosures. Although the SEC has yet to provide additional guidance on the nature or length of “adverse” conditions or related temporary defensive responses thereto, funds should consider recording the basis for invoking their defensive strategy and closely monitor the circumstances moving forward so that they are able to timely revert to their normal investment program once adverse conditions have been mitigated.
  • Absent this kind of specific guidance, it will be necessary to carefully analyze client or customer expectations and related disclosures and contract terms. It will not always be clear that a defensive approach is warranted and it may be reasonable (or even required) to stay fully invested in the relevant strategy.

Zero Interest Rate Issues

Central bank stimulus efforts have driven benchmark interest rates to near or below zero in many markets.

  • For asset managers that are sponsors or advisers to products that promise a minimum yield or fixed net asset values (such as some U.S. money market funds), very low interest rates can result in the need for various fund support efforts, notably including fee waivers or expense reimbursements.
  • Legal and compliance teams should confirm that any such arrangements have been approved by appropriate senior decision-makers, are properly documented and comply with law and relevant product contracts, and have been vetted by accounting and tax teams to ensure they work as intended.
  • Disclosure considerations should be reviewed as well.

Fund Launches

A fund sponsor commencing or soon commencing a fund launch—and particularly a closed-end fund launch—might consider building in deferral mechanisms to the fund documents in order to enable the sponsor to achieve an initial close, but not commence the accrual of management fees and the commencement of the investment program or investment period until a later date. This might enable sponsors to reach an initial closing while providing some flexibility to assess the impact of COVID-19 on investment opportunities and capital deployment schedules.


These volatile and unsettled times have presented, and will continue to present, novel legal and compliance considerations for asset managers. In some cases, there have been proactive governmental guidance and temporary regulations. In other cases, contracts and internal policies and procedures will control. Whatever the source of guidance, measured and thoughtful attention by legal and compliance personnel should be central to an asset management firm’s COVID-19 response. Visit our COVID-19 Resource Center regularly to stay informed on the issues.

To view all formatting for this article (eg, tables, footnotes), please access the original here

- Footnotes

[2]  Id.
[5]  17 C.F.R. § 270.35d-1(a)(2)-(3).
[6]  Investment Company Names, Investment Company Act Release No. 24,828 (Jan 17, 2001), 66 Fed. Reg. 8509, 8513 (Feb. 1, 2001)

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Note: This information is intended as a service to our clients and is not intended to provide legal guidance. You should check with your legal counsel to determine any information applicable to your particular situation. 

COVID-19 developments are fluid, so please refer to for real-time updates. Please review publish dates when referencing Toppan Merrill’s content.

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