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Compliance & Risk

U.S. financial firms seen as out in front of coronavirus risks

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

Heavily-regulated U.S. financial services companies may be ahead of the game in tackling the health and legal risks associated with the coronavirus when compared with other non-financial firms, say legal experts.

With  the virus spreading in the United States over recent weeks, how companies are managing the risks to their employees and supplier relationships has come into sharper focus. Legal experts have warned U.S. companies to ensure that their boards and management teams are taking the necessary steps to safeguard employees and limit their exposure to foreign countries with which they may have close relationships.

Many have started to close offices, cancel events, or encourage employees to work from home.

However, not all firms are alike in terms of the risks they face. Unlike U.S. manufacturing companies that have plants located in China or are dependent on suppliers in Asia, financial firms are perhaps better positioned to avoid some of these risks. Moreover, given that financial firms are heavily regulated adds an additional layer to tackling risks related to the virus.

“I have to think that for financial services companies, especially the banks, since they are properly regulated, from a risk management and governance point of view, the regulatory overlay operates in its current form to ensure that they are all over the risks presented by the coronavirus situation,” says Louis Goldberg, a partner at Davis Polk.

U.S.-based banks and brokers are reported to be in discussions with federal regulators about allowing staff to work from home and other business continuity arrangements amid the spread of the CORVID-19 coronavirus. The industry is reviewing and updating contingency plans in order to minimize any potential disruption to the financial markets that could be caused by personnel being unable to work onsite, explains Kenneth Bentsen Jr., CEO of the Securities Industry & Financial Markets Association.

Like financial firms in other global centers, several Wall Street firms have also taken steps to limit  employee exposure. For example, Goldman Sachs has told its staff that all non-essential business travel should be postponed, and sent some traders to offices outside New York City Citigroup and Wells Fargo have also restricted all cross-border travel by employees in response to the rapidly spreading coronavirus outbreak.

Meanwhile, JPMorgan is asking thousands of U.S. employees to spend a day working from home in the coming weeks to test its contingency plans, and it too sent some New York employees to a secondary site.

Financial regulators have also begun responding. The Securities and Exchange Commission, for example, granted companies affected by the coronavirus delays in filing required reports.

Limited board risk compared with non-financial companies

Davis Polk last week published a note to clients that highlighted some of the risks and responsibilities for company boards and their management. The law firm wrote that boards “understand that, as part of their fiduciary duties embodied in the so-called Caremark doctrine, they are charged with understanding and overseeing the company’s approach to managing its key risks. It is obvious that the risks presented by the novel coronavirus transcend ‘business as usual.’”

The Caremark doctrine emerged from a 1996 landmark case that forces directors to maintain certain fiduciary duties in the oversight of their companies. However, for financial firms, director liabilities were likely to be less consequential than for those at non-financial firms, says Davis Polk’s Goldberg.

Given that financial company directors were not found liable for governance failures during the 2009 financial crisis, the risk of such liabilities arising due to the coronavirus crisis are remote, notes Goldberg. “For a board going through a proper process of overseeing the risks, there isn’t really board risk from a Caremark duty perspective,” he says. “I don’t think you will see actual director liability exposure.”

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