SEC Releases COVID-19 Risk Alert for Brokers and Advisors


Author: Brian DeChow

On August 12th, the Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alert highlighting a variety of compliance issues that the COVID-19 pandemic may have impacted. The observations and recommendations fall broadly into six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information.

1. Protection of Investors’ Assets

Due to current circumstances, many firms have modified practices regarding collecting and processing investor checks and transfer requests. If checks are being sent to an office where all personnel are working remotely, investors should be informed of possible delays. A plan for collecting checks sent to the office and preventing the loss of investor assets should be included in a firm’s business continuity/disaster recovery plan. The OCIE has encouraged firms to review their practices to prevent the loss, theft, and misappropriation of investor assets. Firms may want to implement additional steps to validate the identity of investors who are requesting disbursements, particularly those related to COVID-19 and recommend that each investor, especially senior and other vulnerable investors, have a trusted contact person in place.

2. Supervision of Personnel

Firms have had to make significant changes during the COVID-19 pandemic. One such change may be shifting entirely to telework. When all or a significant number of personnel are working remotely supervisors don’t have the same level of oversight or interaction with personnel. The OCIE also has concerns about the heightened risk for fraud and limits on oversight when trading is done remotely. Additionally, there are concerns about due diligence in regard to third party managers and investments, as well as new hires. All firms should review their policies and procedures to make sure that these concerns are addressed.

3. Practices Relating to Fees, Expenses, and Financial Transactions

The OCIE is concerned that market volatility may have had an adverse impact on investor assets and the related fees collected by firms. The current situation may have increased the potential for misconduct regarding conflicts of interest as well as fees and expenses charged to investors. Firms should increase compliance monitoring with particular attention paid to fee and expense calculations, especially those transactions that result in higher fees and expenses to investors.

4. Investment Fraud

As discussed above, there is a heightened risk of fraud in the current environment, since supervision is more difficult, and volatility is high. Firms should have increased awareness when conducting due diligence and when ensuring that trades are made in the best interest of investors. Firms and investors should report all suspected fraud to the SEC.

5. Business Continuity

With many firms unable to utilize their regular office space and work under “normal operating conditions” some compliance risks have been raised. Firms should be following their business continuity plans, which should be modified or enhanced to address the unique risks of the current situation. Additionally, firms should consider reviewing the security of vacated offices and securing servers and systems.

6. Protection of Investor and Other Sensitive Information

Firms should take steps to ensure that investors’ personally identifiable information (“PII”) is secure, since remote access and the increased use of personally owned devices poses additional risks to cybersecurity. The OCIE recommends that firms review their cybersecurity policies with personnel and potentially add additional training. Firms should also consider enhancing identity protection practices and ensure that remote access is fully secured.

The recent risk alert published by the SEC is a reminder that even in turbulent times, investment advisers are fiduciaries in a heavily regulated industry. Despite this, we are impressed by the resiliency that investment advisers have shown. If you need a partner to assist you in meeting your regulatory requirements, Key Bridge Compliance would be proud to work with you.

You May Also Like:

The SEC's 2022 Examination Priorities

May 10, 2022

The SEC's 2022 Examination Priorities

By Kevin Kirk On March 30, 2022, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (“Division”) released its 2022 Exam Priorities. The stated purpose for the Division in releasing these priorities is to promote compliance, prevent fraud, identify and monitor risk,...

Read More
The SEC Updates Form CRS FAQs

Oct 19, 2020

The SEC Updates Form CRS FAQs

In the wake of an investigation by the Wall Street Journal showing that 20% of firms incorrectly stated having no disciplinary history in their Form CRS, the SEC updated its Form CRS FAQ on October 8 to clarify this particular reporting requirement. The FAQs illuminate questions 11 and 4 with the...

Read More
SEC Expands Definition of Accredited Investor

Sep 21, 2020

SEC Expands Definition of Accredited Investor

Author: Amy D’Avella Accredited investors are those the SEC deems sufficiently sophisticated to operate in riskier investment environments, such as private markets. This definition has long been limited to select entities and individuals who meet certain net worth requirements. On August 26,...

Read More