The US’ Security and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) has published its latest Risk Alert, which highlights compliance risks and considerations for broker-dealers and investment advisers in the environment created by Covid-19.
OCIE notes that it has been pro-active in engaging in outreach efforts among SEC registrants to assess the impact of the pandemic and to discuss operational resiliency challenges, among other things. Through its work, the OCIE has identified a number of areas that have been subject to vulnerability and volatility as a result of Covid-19, exposing firms to potential misconduct. The areas listed below have been identified by the OCIE as in need of “additional attention”:
Protection of Investor Assets
Covid-19 has left many investors, especially those that are vulnerable, open to greater risk than before. The OCIE encourages firms not to lose sight of such weaknesses and to continuously review and alter their policies and procedures around disbursements to investors. In particular, firms should be looking for anomalies – such as where investors are taking unusual or unscheduled withdrawals from their accounts, particularly COVID-19 related distributions from their retirement accounts.
Supervision of Personnel
Regulated financial institutions have a regulatory obligation to supervise their personnel and to have sufficient oversight of person’s investment and trading activities. The circumstances presented by Covid-19 have meant that such monitoring obligations are not so easy to implement – away from the confines of the office, supervision is more difficult. The OCIE recognises that firms will need to make “significant changes” – such as moving to telework from “dispersed, remote locations” and dealing with myriad other operational and technological challenges.
Fees, Expenses, and Financial Transactions
The pandemic has caused widespread economic downturn, increasing market volatility and putting financial pressure on firms and their employees. In some instances, there will be pressure to compensate for revenue losses. These risks are not new but may be exacerbated by the pandemic. Firms should be alert to this heightened risk of misconduct – particularly that concerning conflicts of interest and investment fees and charges.
In line with increased market volatility, it is common that times of crisis or uncertainty create a heightened risk of investment fraud – especially that presented by fraudulent offerings. Over the past few months, market participants have noted increased fraudulent activities across the board as criminals move to take advantage of the new, uncertain situation. The OCIE asks firms to be cognizant of risks when conducting due diligence on investments and in determining that the investments are in the best interest of investors.
The OCIE’s Risk Alert notes that some firms should use the new landscape presented by Covid-19 to re-consider their ability to “operate critical business functions during emergency events”. Firms should take stock of their business continuity plans (BCP) and make changes to compliance policies and procedures where necessary.
Protection of Sensitive Information
Under Covid-19 firms now require employees to use electronic modes of communication to work effectively in a remote environment. These new technologies have allowed firms to continue operations – however, they also present new vulnerabilities, especially with regard to the loss of sensitive information. The OCIE asks that firms pay particular attention to the risks presented by the use of remote tools in working from home environments and review their policies and procedures accordingly.
The OCIE’s Risk Alert presents a handful of situations in which firms will benefit from automated regulatory intelligence. Monitoring and supervising personnel, managing regulatory and policy change and the protection of sensitive information are all tasks made more efficient with the use of regulatory technology.
The OCIE places significant focus on the review of policy and procedures. Undoubtedly, the new landscape presented by Covid-19 will foster constant change and a shifting tide of regulation and policy. Many financial institutions will need time and resources to recover from the turbulent economic activity presented by the pandemic – those that continue to employ manual compliance processes may find it difficult to keep their heads above water.
Financial institutions that implement automated regulatory compliance platforms, such as CUBE, to meet their financial regulatory obligations will be better equipped to manage resources and meet compliance goals in the ‘new normal’.