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Pandemic Raises Risk of Advisor Misconduct, SEC Warns

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The Securities and Exchange Commission’s exam division released Wednesday a risk alert identifying COVID-19-related issues, risks and practices that registered investment advisors and broker-dealers should be focused on.

The alert, issued by the agency’s Office of Compliance Inspections and Examinations, notes that market volatility related to COVID-19 “may have heightened the risks of misconduct in various areas that the staff believe merit additional attention.”

Observations and recommendations from SEC examiners cover six categories: protection of investors’ assets; supervision of personnel; practices relating to fees, expenses, and financial transactions; investment fraud; business continuity; and the protection of investor and other sensitive information.

Joshua Broaded, partner and co-head of US Regulatory Compliance at ACA Compliance Group, noted in a Wednesday email to ThinkAdvisor that the alert highlights risks “from both the direct implications of COVID-19, such as employees working in a fully remote environment, as well as emergent risks posed by an increase in market volatility and some firms pushing into new strategies and asset classes.”

At ACA, Broaded continued, “we are seeing additional client interest in data-driven surveillance, both related to market abuse and client trading, and related to employees’ personal trading.”

The alert “acknowledged some of the challenges that firms are facing in conducting diligence on new vendors; despite these challenges many investment managers are looking to deploy new surveillance tools to address blind spots created by a fully remote work environment,” he said.

Advisor Misconduct

For instance, COVID-19 may have increased the potential for misconduct regarding financial conflicts of interest, such as:

  • recommending retirement plan rollovers to IRAs, workplace plan distributions, and retirement account transfers into advised accounts or investments in products that the firms or their personnel are soliciting;
  • borrowing or taking loans from investors and clients; and
  • making recommendations that result in higher costs to investors and that generate greater compensation for supervised persons, such as investments with termination fees that are switched for new investments with high up-front charges or mutual funds with higher cost share classes when lower cost share classes are available.

Remote Work Risks

Many firms require their personnel to use videoconferencing and other electronic means to communicate while working remotely, the alert notes.

While these communication methods have allowed firms to continue their operations, the agency states, these practices create vulnerabilities around the potential loss of sensitive information.

These risks are attributed to, among other things:

  • remote access to networks and the use of web-based applications
  • increased use of personally owned devices; and
  • changes in controls over physical records, such as sensitive documents printed at remote locations and the absence of personnel at firms’ offices.

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