Legal Law

The Pandemic And The ‘New Regular’ In Securities Legislation

The pandemic era has been marked by disruption, from family holiday plans to supply chains. The workings of capital markets are no different.

In the beginning, the Securities and Exchange Commission had to adapt quickly and issue guidance and rule changes to help companies cope. Stock trading by individuals surged, perhaps due to remote work and lockdowns. Technology became more vital than ever. 

Now, as the pandemic workplace feels more like a fact of life than a crisis, most market players seem to be handling it well.

“Frankly, this feels like the new normal,” said Keir D. Gumbs, the chief legal officer of financial technology firm Broadridge Financial Solutions, Inc., which develops technology-driven solutions for banks, broker-dealers, asset and wealth managers, and public companies. Gumbs is a co-chair of PLI’s 53rd Annual Institute on Securities Regulation as well as the upcoming Directors’ Institute on Corporate Governance.

The situation “doesn’t feel new anymore,” Gumbs continued. “It feels like the status quo.” While Gumbs noted there may be some benefits from in-office work and in-person meetings, communication hasn’t suffered all that much. The SEC, for instance, didn’t miss a beat.

“I think the staff has really transitioned. And the thing I’m most curious about is when the staff goes back to the office — I assume they will, at some point — what that’s going to be like. I’m not sure that it’s necessarily going to be better.”

New Rules and Guidance

In the months following the official declaration of the Covid-19 pandemic in the spring of 2020, the SEC issued guidance and relaxed rules to make it easier for entities to meet corporate governance requirements as they faced a difficult situation.

If a company had to change the date, time, or location of a shareholder meeting after its proxy materials had already been sent out, for example, it did not have to begin the whole expensive process over again.

On its website, the SEC stated a company needing to reschedule would be in compliance if it “issues a press release announcing such change; files the announcement as definitive additional soliciting material on EDGAR [a publicly accessible database of SEC filings]; and takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.”

In addition, notice rules regarding virtual shareholder meetings and the presentation of shareholder proposals were relaxed. The SEC assured companies it recognized that many pandemic-related disruptions were beyond their control.

The changes were meant to “basically to give a company a little bit more flexibility,” Gumbs said. “If a company couldn’t make the distribution of a proxy or other materials on time because of Covid and staffing-related issues, that wouldn’t necessarily be held against them so long as the company was making reasonable efforts to get that information out.”

Like all companies last year, Gumbs added, Broadridge balanced the need to protect the health of its workers with the need to process documents. He said the SEC guidance was helpful.

“Generally speaking, we have processed upwards of 80 to 90 percent of the votes in any given proxy season. We are in some ways a hub for corporate governance, because so much of the voting takes place using our technology,” Gumbs said. 

And the SEC regularly updated its information as the pandemic wore on. For example, the latest guidance on shareholder proposals — allowing them to be made virtually or telephonically as opposed to in-person as the rule once called for — was posted in April of this year. Also in April, an order providing flexibility in short-term funding was withdrawn.

Keeping the issuers of securities well informed during all these changes was no easy task. Gumbs gives the SEC high marks considering the agency itself was affected by the pandemic.

The staff didn’t allow service gaps despite the need to transition to remote work, Gumbs noted. 

“And I felt like that was seamless, from an SEC review perspective. The things we submitted got reviewed on time and there was almost no real meaningful break in the way that the SEC fulfilled its obligations in providing advice, answering questions, reviewing documents, and that sort of thing.”

Disclosures

As the economy reeled in the early days of the pandemic, “a lot of guidance came from the SEC for companies like us who are assisting others in making their disclosures,” Gumbs said.

The issuers of securities had to be extremely careful lest they be confronted with lawsuits brought by disgruntled investors claiming the issuers failed to disclose material facts. To assist, the SEC issued guidance in June 2020 regarding the “diverse range of operational adjustments in response to the effects of Covid-19.”

Adjustments noted by the SEC included the transition to telework, changes to the supply chain, health and safety guidelines, and a “complex range” of financing activities.

The guidance mentioned the use of “credit facilities, accessing public and private markets, implementing supplier finance programs, and negotiating new or modified customer payment terms.” Given that these funding arrangements were likely to include “novel terms and structures” because of the unprecedented nature of the crisis, the SEC advised companies to “provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment.”

Absent this assistance from the SEC — which included copious suggestions about the kind of details which might be considered “material” — Gumbs said a lot of companies in different parts of the financial ecosystem “would have been adversely impacted as they complied with their disclosure obligations. I do think the guidance was incredibly helpful.”

Digitization

Of course, the pandemic is not over. “The new normal” goes on, including the transition from paper to electronic filing. 

For example, on November 4, the SEC published proposed amendments to the rules on electronic filing, doing away with the requirement that certain forms be submitted in paper format.

“The electronic filing capabilities have been an effective measure in addressing logistical and operational issues raised by the spread of coronavirus disease (COVID-19). Electronic submissions would allow the Commission, and those filing submissions, to effectively navigate any future disruptive events that make the paper submission process unnecessarily burdensome, impractical, or unavailable,” the SEC’s announcement said. As of this article’s date of publication, the 30-day public comment period for these amendments was still open.

Three Trends

This movement toward electronic filing is part of three big trends Gumbs sees in the operations of capital markets: digitization, democratization, and mutualization.

Although he can’t be sure if these trends were caused or accelerated by the pandemic, “they were at least coincident with the pandemic,” he said.

Digitization has perhaps the clearest causal relationship with Covid, given that offices shut down and people sought to avoid delivering documents in person. Gumbs said he’s observed an increase in the use of scanned documents and the conversion from paper to electronic.

“The pandemic did accelerate this digitization trend and businesses like ours really focused on it,” he said.

By democratization, Gumbs means increased participation in the markets.

“Look at platforms like Robin Hood and similar ones where the number of retail investors grew dramatically over the last two years. Whether that was caused by the pandemic, it’s very hard to say . . . but it is a fact that in 2020 and 2021 we saw record stock growth.”

Finally, Gumbs mentioned mutualization, a move toward efficiency as enabled by technology. This is the kind of service his company provides.

To illustrate, he offered a simplified example in electronic delivery. Say an investor uses four different platforms — Morgan Stanley, Schwab, E-Trade, and Merrill Lynch — with one share of Microsoft on each.

“Each platform has an obligation to deliver a proxy statement for Microsoft,” Gumbs explained. Companies like Broadridge can streamline this process.

“Instead of sending four packages, we consolidate that to one, and we’ll say, we’re going to send you one package, but you get four votes. That’s mutualization and it’s a key aspect of how our business operates.”

Gumbs touted the environmental benefit of transforming four physical packages into one email, a boon of digitization in addition to the reduction of person-to-person contact during the pandemic. The “new normal” in the workplace is not without its positive aspects. 


Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.

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