As the pandemic continues, firms have begun to consider whether certain
practice and cultural changes spurred by COVID-19 should become more
permanent. To date, the U.S. Securities and Exchange Commission (SEC) and
Financial Industry Regulatory Authority (FINRA) have worked with securities
industry registrants with respect to the many operational, technical,
commercial and other challenges they face as a result of the pandemic. The
SEC recently offered observations and recommendations on a number of
COVID-19-related risks and practices relevant to registrants. Importantly,
the SEC’s recommendations are valuable practices to follow post-pandemic.
Further, FINRA’s recent updated gifts and entertainment guidance is as
relevant now, during the pandemic, as it will be after the pandemic has subsided.
SEC Office of Compliance Inspections and Examinations Risk Alert
On Aug. 12, 2020, SEC’s Office of Compliance Inspections and Examinations
(OCIE) issued a
directed at SEC-registered investment advisers and broker-dealers that
identifies a number of COVID-19-related issues, risks and practices. OCIE
addressed six topics:
Protection of Investor Assets
- OCIE noted that, as a result of COVID-19, some firms have modified their
normal operating practice regarding collecting and processing investor
checks, as well as transfer requests. OCIE encouraged firms to review their
practices and make adjustments for situations where investors continue to
mail checks since firms may not be collecting mail daily.
- Where investors are taking unusual or unscheduled withdrawals from their
accounts — particularly COVID-19-related tax-advantaged early distributions
from retirement accounts as authorized by the Coronavirus Aid, Relief, and
Economic Security Act — firms are encouraged to validate the identity of
the investor and authenticity of disbursement instructions.
- Supervision of Personnel
- OCIE encouraged firms to closely review and modify their supervisory and
compliance policies and procedures to, among other things, address
oversight of remote personnel and the impact of limited on-site due
diligence reviews, as well as other resource constraints associated with
reviewing of third-party managers, investments and portfolio holding
- Practices Relating to Fees, Expenses and Financial Transitions
- OCIE observed that recent market volatility and the resulting impact on
investor assets and the related fees collected by firms may increase
financial pressures on firms and their personnel to compensate for lost
revenue and create an environment for misconduct.
- OCIE suggested that firms may enhance their compliance monitoring in
these areas by:
- validating the accuracy of disclosures, fee and expense calculations, and
the investment valuations used;
- identifying transactions that resulted in high fees and expenses to
investors, monitoring for such trends, and evaluating whether these
transactions were in the best interest of investors; and
- evaluating the risks associated with borrowing or taking loans from
investors, clients and other parties that create conflicts of interest, as
this may impair the impartiality of firms’ recommendations.
- Investment Fraud
- Consistent with prior SEC guidance, OCIE has observed that times of
crisis or uncertainty can create a heightened risk of investment fraud
through fraudulent offerings.
- OCIE advised firms to be cognizant of these risks when conducting due
diligence on investments and in determining that the investments are in the
best interest of investors.
- Firms and investors who suspect fraud should contact the SEC and report
the potential fraud.
- Business Continuity
- OCIE encouraged firms to consider their ability to operate critical
business functions during emergency events and to review their continuity
plans to address these matters, make changes to compliance policies and
procedures, and provide disclosures to investors if their operations are
materially impacted, as appropriate.
- Protection of Investor and Other Sensitive Information
- OCIE observed that increased reliance on technology and the use of video
conferencing can create vulnerabilities around the potential loss of
sensitive and personal information.
- OCIE advised firms to consider enhancements to their cybersecurity
systems, identity protection practices, personnel training, access security
and cybersecurity reviews.
FINRA Gifts and Entertainment FAQs
FINRA recently posted an update to its frequently asked questions page
Gifts/Business Entertainment/Non-Cash Compensation
addressing the application of FINRA Rule 3220 (Influencing or Rewarding
Employees of Others) and related FINRA rules to virtual events hosted by an
associated person of a broker-dealer.
Notably, this new guidance is beneficial for events that now must be hosted
virtually due to COVID-19 because of government restrictions on travel or
size of gatherings and concerns about health and safety. While this new
guidance was issued during the pandemic, it is intended to be applicable in
the post-COVID-19 world as well. This is a long-overdue change and
recognizes that many in the industry work and do business with others in
locations throughout the country.
$100 Gift Limit
- FINRA advised that it will view the associated persons’ provision of
reasonable amounts of food and beverage to be consumed during that
event as not subject to the $100 gift limit imposed by Rule 3220,
provided that the cost of the food and beverage and the frequency with
which it is provided do not raise questions of propriety and are not
conditioned on a sales target.
- FINRA suggested that, as hosts, the associated persons who send the
food and beverage should control who can participate in the meeting,
interact with each participant, and remain present and visible
throughout the meeting.
- FINRA advised that members should maintain records of virtual
meetings and events, including information about the food and beverage
provided, in a manner similar to record-keeping for in-person meetings
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.