SEC Releases COVID-19 Compliance Risks and Considerations for IAs and BDs

In a release on August 12, 2020, the SEC’s Office of Compliance Inspections and Examinations identified specific COVID-19-related issues, risks, and practices relevant to investment advisers and broker-dealers across six categories:

  1. Protection of client assets, particularly with regard to receipt and disbursement of client funds.
  2. Supervision of personnel in a remote work environment.
  3. Practices relating to fees, expenses, and financial transactions.
  4. Investment fraud.
  5. Business continuity.
  6. Protection of investor and other sensitive information.

Firms should ensure that they document policies and procedures that reflect current practices in the pandemic-response world, including work-from-home oversight, lower or less frequent in-office presence, additional measures to verify client instructions, and remote oversight of third-parties. Consideration should be given as to whether the measures currently in place reflect an element of the business continuity plan or a “new normal” for their firm.

Firms should review their conflicts of interest in light of both market and marketplace volatility. Financial conflicts of interest, while always present, may be under additional pressure. Firms should document an assessment of how the current environment has affected the firm overall, the implications for the firm’s personnel, and how the firm is responding. Firms should also monitor for any changes to client recommendations, trading patterns, and fees. The SEC reminds firms of their obligation to protect investors’ personal information, noting particularly the increased reliance on videoconferencing and other electronic communications.

Material changes to business practices should also prompt a review of client disclosures. Firms should consider the need to disclose any financial assistance sought. In addition, firms should not presume that the disclosures that were adequate to describe business practices in the office will suffice to capture the remote office world. If applicable, disclosures should be promptly updated.

We recommend a complete assessment of the firm in light of the current working environment. CCOs should have an increasing understanding of the types of vulnerabilities introduced during these uncertain times and they should be able to speak fluently regarding the measures taken in the policies and procedures, testing, and disclosures to address those specific risks. For questions or a consultation, please contact us at info@seccc.com.

Janaya P. Moscony, CFA
President