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Regulation and Compliance > Federal Regulation

Why You Should Stay Vigilant About Regulations During the Pandemic

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It was just five months ago that the advisory industry appeared destined for crisis. Markets broadly retreated. With that, asset values declined materially and revenues followed. Fear set in. But five months later, markets are close to reaching pre-pandemic highs. What crisis? The markets tell us all is good!

Not so fast. This is different. This is not a financial crisis. It is a health crisis that has caused financial despair. Although such despair may have, thus far, been short-lived for the advisory industry, that doesn’t mean it’s gone, especially for those outside of our industry, many of who may be your clients.

Bankruptcy and business closures have become reality for many, and for others, such outcomes fearfully loom. So please, no complaints about less profits or smaller bonuses. Be thankful that we can work, pay our bills and keep our employees.

You were not concerned? Nonsense. How many of you called me about Paycheck Protection Program?

Those of us who scorned working from home have now come to accept it, including yours truly, a road warrior for the past 30 years. Moreover, many have found they don’t need the lavish offices, and the high costs that come with it. Maybe it’s time to reassess needs when the current lease matures — something I heard in 2000 and 2008-09.

Although I have not been on a plane since March, and may not be until next year, I remain fortunate. None of my family members have suffered. All staff remains employed (over 300), and although a few have contracted the virus, all have recovered. However, in my small town, several have died, which reminds me to remain vigilant.

And Regulators Haven’t Backed Off

And so must we all remain pandemic vigilant, and, yes, compliance vigilant. The Securities and Exchange Commission and states have not taken a break.

SEC examinations continue at a seemingly aggressive pace. No, not on-site, but rather correspondence exams. Exams that can be protracted and go on for six months or more.

And what is the SEC’s primary issue? How they can find a deficiency that will cause you to reimburse clients.

Have you misstated your fee schedule, failed to disclose conflicts, miscalculated fees, failed to reimburse terminating clients, billed on account inflows, while never correspondingly reducing fees for outflows, subjectively enforce a stated minimum fee, charge some clients for certain type assets/accounts, but not others.

The potential list goes on. In addition, do you have policies/procedures for elderly clients/financial exploitation (i.e., trusted contact, etc.)? The SEC is now including a series of elderly client questions on recent exams.

Of course, many RIAs think they need not be concerned about state regulators. Really? How many firms have investment professional employees who now are providing services remotely from a neighboring state, a state in which they are not individually registered as an investment advisor representative (IAR) of the firm?

Many IARs employed by or associated with both state-registered and SEC-registered investment advisors have been required to conduct business from their home or other temporary office location in the face of COVID-19.

If those displaced IARs are not currently licensed by the states where they are temporarily providing advisory services, firms should quickly analyze whether they must license these individuals under the respective and applicable state law.

One example: the Pennsylvania Department of Banking and Securities recently announced that as of Aug. 31, 2020, it would end its “grace period” for those IARs “who were displaced for teleworking to their PA home addresses during COVID-19” if they were previously unlicensed.

Other state regulatory bodies that have issued similar guidance and restrictions for IARs displaced from their principal office because of COVID-19.

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice Group of Stark & Stark, a law firm. He is a regular contributor and can be reached at [email protected].


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