SEC Issues COVID-19 Compliance Observations and Recommendations for BDs and IAs

On August 12, 2020 the SEC Office of Compliance Inspections and Examinations (OCIE) staff alerted broker-dealers and investment advisers to additional COVID-19 compliance risks. The new considerations are based on the “operational, technological [and] commercial challenges” raised by the public and private sector response to the pandemic. 

OCIE staff grouped their observations and recommendations into several categories—here’s what you need to know:

Protection of investors’ assets

Based on its latest observations, OCIE recommended that firms review their practices on (i) collecting and processing investor checks and transfer requests, and (ii) around disbursements to investors, particularly concerning “unusual or unscheduled withdrawals” from retirement accounts. OCIE also recommended that firms update supervisory and compliance policies and procedures based on that review and consider additional disclosures to investors. Further, OCIE encouraged strengthening investor protections by enhancing the steps necessary to validate the identity of the investor and the authenticity of disbursement instructions. Finally, firms should ensure that seniors and other vulnerable investors have trusted contact persons in place.

Supervision of personnel

OCIE recommended that firms review and modify supervisory and compliance programs to reflect the changes made in response to COVID-19. Primarily, this refers to all operational aspects that might have changed due to the shift “to firm-wide telework conducted from dispersed remote locations.” Firms should consider (i) current levels of oversight, (ii) securities recommendations that may require additional review due to market volatility or the higher risk for fraud, (iii)  resource constraints affecting reviews of third-party managers, investments, and portfolio holding companies, and (iv) other communications or transactions occurring from remote locations or through the use of personal devices.

Practices on fees, expenses, and financial transactions

OCIE suggested firms consider whether the current pandemic and market volatility has heightened the potential for misconduct concerning financial conflicts of interest and the fees and expenses charged to investors. Among other recommendations, OCIE encouraged firms to enhance their compliance monitoring, validate the accuracy of their disclosures calculations and investment valuations, identify and review high fee transactions, evaluate risks associated with investor or client loans and update Form ADV filings (if the firm seeks financial assistance.)

Investment fraud

Firms should consider raising their awareness of the risk of investment fraud during the pandemic and enhance due diligence on investments, ensuring compliance with “best interest” standards and reporting to the SEC any suspicious activity or fraud.

Business continuity

Firms should also review their business continuity plans to address their “ability to operate critical business functions during emergency events.” Consistent with the above recommendations, OCIE suggested reviewing supervisory and compliance policies as well as security and resource support for protracted remote operations. 

Protection of investor and other sensitive information

Finally, firms should review vulnerabilities around the potential loss of sensitive information, given (i) the increased reliance on electronic communications from remote operations, and (ii) the heightened risk from fraudsters attempting to improperly access systems and accounts. OCIE recommended enhancing identity protection practices, increased trainings and strengthening system access security.

Bates Group will continue to keep you apprised.

Bates practice leaders, consultants and experts can help clients’ compliance, risk, supervision, audit and business teams. Contact Bates today:

Robert Lavigne, Managing Director, Bates Compliance – rlavigne@batesgroup.com

Rory O’Connor, Director, Bates Compliance (RIA compliance) – roconnor@batesgroup.com