The SEC published a risk alert providing guidance to broker/dealers and investment advisors regarding COVID-19-related issues, risks, and practices relevant that apply to their business. The SEC believes that due to the volatility in the market, that it may cause misconduct in various areas that the SEC believes should cause attention for broker/dealers and investment advisors.  In the Risk Alert, the SEC identified six categories that broker/dealers and investments advisors should review:

  1. Investor Assets: Firms should review and make any changes necessary around the disbursement of funds to investors where investors are taking unusual or unscheduled withdrawals from their account and take extra steps to validate the identity of the customer and authenticity of the disbursement.
  2. Supervision of Personnel: Due to Firm personnel working remotely during the pandemic, it can cause Supervisors to not have the same level of oversight and interaction with supervised persons. This can create more risk in the areas of transactions for customers, fraud, limited due diligence reviews, and communications/transactions happening outside of the Firm’s system due to working remote.
  3. Fees & Expenses: Due to persons working remote, it could lead to advisory fee calculation errors, overbilling in fees, failures to refund prepaid fees, etc. 
  4. Investment Fraud: During times of crisis, investment fraud is common through fraudulent offerings.  Firms should be sure they are reviewing investment opportunities to make sure they are the best for customers.
  5. Business Continuity: Firms should ensure their BCP includes the current operations of the business and branch offices which includes backup locations, data backup, etc.
  6. Protection of Customer Sensitive Information: Firms should pay particular attention to the risks regarding access to systems, investor data protection, and cybersecurity. Vulnerabilities around the potential loss of sensitive information, including PII. These risks are attributed to, among other things: (1) remote access to networks and the use of web-based applications; (2) increased use of personally-owned devices; and (3) changes in controls over physical records, such as sensitive documents printed at remote locations and the absence of personnel at Firms’ offices.

All Firms should consider reviewing their processes and procedures to ensure the Firm has the appropriate controls in place to monitor the business activities of its personnel, operations, and to ensure client information is confidential.  If you feel that your Firm may be lacking in any of the areas above, please reach out us as we can help test your processes and make recommendations to ensure you have a solid foundation in place during these turbulent times. You can access the full SEC Risk Alert here.