COVID-19 has ushered in a new way of doing business, and the SEC has developed guidelines to address key risk issues. The pandemic has changed the financial advisory landscape, but it does not alleviate our responsibilities to our clients. The SEC has made it clear that the coronavirus will not be a cover for misconduct. The latest risk alert from the agency on August 12 speaks to 6 important issues that have emerged in these unprecedented times.
Protection of investors’ assets
Updating supervisory and compliance policies are important in protecting investors’ assets from theft, loss, and misappropriation. Unusual withdrawals from accounts should undergo extra scrutinized, especially COVID-19-related distributions from a retirement account. Clients should also be made aware of changes when making deposits to their accounts. Ideally, checks should be sent directly to the custodian, but make sure to inform clients that their checks may take longer to process.
Supervision of personnel
Firms are obligated to supervise personnel activities, including personal trading. While supervising employees from a distance is difficult, it is important to implement safeguards such as only using firm-approved and secure communications channels and devices.
Practices relating to fees, expenses, and financial transactions
Transparency in fees and expenses has always been a focus for examiners, but even more so because of increased financial pressures firms are facing in volatile markets. Violators will be penalized for egregious errors in billing, borrowing money from a client, and making recommendations that will generate higher fees but are not in the best interest of the client.
The OCIE examiners have observed that uncertain times can create a heightened risk for investment fraud. Be mindful of these risks as you perform your due diligence in making recommendations in the best interest of your clients. Remember, if you suspect fraud, contact the SEC to report it.
Because many firms are working from home, business continuity plans are no longer hypothetical and have been put into practice. Succession plans for key personnel need to be in place to ensure business disruptions are kept to a minimum. Protracted remote operations will require evolving policies and procedures.
Protection of investor and other sensitive information
Protecting a client’s personally identifiable information (PII) is a top priority. With the increased use of videoconferencing and web-based applications and increased use of personal devices, there has been an uptick in phishing and other forms of fraud. Cybersecurity vulnerabilities need to be addressed, and policies amended in this fast-changing environment.
Pandemic workplace conditions will not be a defense for compliance failures. The SEC has recently created the Event and Emerging Risks Examination Team (EERT) designed to act quickly to help firms better prepare for emerging threats and market events that warrant quick expertise and resources.
As your team learns to adapt and navigate this new virtual reality, take action, and document any updates to your policies and procedures necessary to fulfill these demands. For additional ideas or recommendations in any of these areas, feel free to reach out to us at Beacon HQ to let us know how we can be of help.
Sources: SEC.gov, RIAinaBox.com, Financial Advisor, ThinkAdvisor