Compliance Considerations for COVID-19

SEC Issues Risk Alert for COVID-19 Compliance Risks

Investment advisers and broker-dealers have been faced with new challenges and risks as a result of COVID-19, many of which have created regulator and compliance questions for registrants.

The Office of Compliance and Inspections (OCIE) has remained in operation during the pandemic and has guided investment advisers and broker-dealers, noting their observations and recommendations in several key areas.

Protection of Investor Assets:  Firms should review and adjust their practices, where appropriate, such as in situations where mail is not being picked up daily by the firm, and consider disclosing to investors that checks or assets mailed to the firm’s office may experience delays in processing until personnel can access the mail at the office. Now more than ever, it is important to implement additional steps to validate the identity of an investor and the authenticity of disbursement instructions.

Supervision of Personnel:  Firms have an obligation to supervise their personnel, including providing oversight of supervised persons’ investment and trading activities, as well as communications. The OCIE encourages firms to consider discrepancies between on-site and remote oversight, as well as the limitations and constraints related to diligence regarding supervised persons, investments, service providers, and the onboarding of new personnel.

Practices Relating to Fees, Expenses, and Financial Transactions:  Firms have obligations to inform investors about the costs of services and investment products, and the compensation received. The OCIE encourages firms to review their policies and procedures related to fees, and expenses, and consider enhancing their compliance monitoring, particularly by validating the accuracy of disclosures for investment valuation, fee and expense calculations.   Also, the OCIE notes that if a firm seeks financial assistance, this may lead to an obligation to update disclosures on its Form ADV Part 2.  

Investment Fraud:  During times of crisis or uncertainty, there is a heightened risk of investment fraud through fraudulent offerings.  Firms should be cognizant of these risks when conducting due diligence on investments, as well as in determining that such investments are in the best interest of investors.

Business Continuity:  As a result of the pandemic, many firms have shifted to operating predominantly from remote sites and such transitions raise compliance issues and other risks to consider.  The OCIE encourages firms to review their business continuity plans to address these matters, make any necessary changes, and provide disclosures to investors if their operations are materially impacted.

Protection of Investor and Other Sensitive Information:  Firms are obligated to protect investors’ personally identifiable information.  Increased remote and electronic communications create a number of vulnerabilities for firms and additional opportunities for fraudsters to use phishing and other means to improperly access systems and accounts of a firm by impersonating its personnel, valid websites, or clients/investors.  The OCIE encourages firms to prioritize reviewing policies and procedures regarding cybersecurity, data protection, and access to firm systems.

For more information: For COVID-19 related issues, risks, and practices relevant to investment advisers and broker-dealers, please refer to the full SEC Risk Alert.

How Coast to Coast Compliance Can Help

Coast to Coast Compliance can help design and implement compliance policies and procedures, or otherwise review and update your existing policies and procedures to ensure they reflect the additional risks and considerations highlighted by the OCIE.