Continued Compliance and Supervision in Light of COVID-19

I have been receiving an uptick in questions from clients regarding the transition to remote operations and best practices in light of the current pandemic. This is a great question and one that my clients have been really preparing for since Hurricane Sandy. This post is intended to provide an investment adviser’s Chief Compliance Officer and management with a high level list of items to consider because of COVID-19. In no way should this be considered an exhaustive list, and depending on the type of business your firm operates, it may not be entirely applicable.

  1. Client Communication. The pandemic has caused great uncertainty in the U.S. and world economy and client’s portfolios are losing value at rates that haven’t been witnessed since at least 2008. Some firms are taking or have already taken proactive measures to reduce their clients’ market exposure by increasing their cash allocations. Others have determined to ride out the storm. Regardless of the investment strategy being taken, it is crucial to communicate that strategy to clients. Based on personal experience, the best litigation risk reduction strategy is regular and honest communication with clients. This is especially true with respect to those clients who have expressed concerns about their financial plan, investment objectives, or ability to withstand their current losses. It is important to listen during these times and try to best accommodate a client’s wishes. If the client’s wishes are against their interests, advisers should try and explain to the client why their desires are not prudent.
  2. Adviser Communication. As most firms have implemented business continuity plans that involve staff working entirely remote or partially remote, Chief Compliance Officers and management should maintain regular lines of communication with all staff, but especially client service, investment and operational staff responsible for trading, billing, and money movement.  
    • Client Service Staff Communication. Communication from management to client service teams must provide clear directives on the firm’s philosophy during this crisis. In addition, client service personnel should be reminded the importance of listening and empathy during this difficult time. While it is a difficult balancing act, advisers must be able to instill confidence in clients and explain the unknown direction of the market on any given day.
    • Trading Staff Communication. Given the potential for increases in the volume of trading, it is important that traders be extra careful at this time. In addition, with many traders continuing their craft remotely from their home workstations, there are many added distractions that traders have not previously had to confront. For example, children or pets, while adorable, may distract traders who are placing very important and potentially large orders. Management should remind traders of the importance of these functions and ensure that their traders are able to perform their functions remotely with absolute focus. If a trader feels like they have too many distractions at home, management and the trader may want to mutually evaluate options to optimize the situation.
    • Money Movement and Billing Staff Communication. I am seeing a number of frauds being perpetrated on investment advisers and their clients surrounding COVID-19. This is a time where money movement staff should be extra vigilant. It is necessary to follow all red flag policies currently in place and any verbal or mutli-factor authentication procedures that a firm maintains prior to disbursing client funds. If your firm’s money movement staff is working remotely, it may even make sense requiring a second verbal confirmation prior to disbursing money. If firms do not have these types of measures in place already, they will want to consider implementing them now. With monthly and quarterly billing cycles likely to take place while staff are working remotely, those responsible for billing must be kept in the loop regarding credits or waivers provided to clients during these trying times. They must also be sure the credits and waivers are being applied correctly.
  3. Cash Monitoring. In any event, if the firm’s strategy or a client’s wishes involve going to cash, the firm should have a policy or procedure to monitor cash balances and for reviewing and making decisions on when to get back in the market. If the firm is not going to take on the obligation of monitoring cash balances and determining when to get back in the market, it must communicate that to the client. Regardless, from a business perspective, a firm probably does not want any of its clients to miss out on any rebound, so a constant reminder to clients with cash balances may be a prudent practice.
  4. Fair Treatment of Clients. For firms that manage proprietary funds or that trade in less liquid or low-volume securities, or that manage accounts across various custodians, they should be extra sensitive with respect to these issues. They will want to ensure that allocations are made consistent with the firm’s policies and procedures and that clients are treated fairly. To the extent that cross transactions are being executed, both clients must be treated fairly.
  5. Investment Policy or Guideline Monitoring. Firms should be monitoring investment policies and guidelines to ensure that recent market events have not caused them to be breached. If actions can be taken to avoid breaches, they should be taken. If a breach has occurred, firms should remediate those breaches.
  6. Cybersecurity, Information Security, and the Continued Operation of Remote Working Capabilities. The importance of these items are self-evident. Firms should be reviewing their policies and procedures regarding cybersecurity and information security, and make sure their employees and staff understand their most important roles and responsibilities.
  7. Continued (and Heightened) Supervision. Given that there is no sense of direct supervision for employees (and not solely advisers who interface with clients), it is important to continue to supervise employees in whatever ways that can be done. For example, firms may want to consider:
    • performing additional or more focused email reviews with a view towards client complaints or potential complaints;
    • implementing additional safeguards for approving and reviewing money movement (especially larger transfers);
    • having teams assigned for trading or large trades that operate as a “buddy system”; and
    • randomly or scheduling calls or video conferences with employees during the work day to ensure they are performing their essential functions. In addition, the longer that offices are closed, these visits may be determined necessary as part of a firm’s branch office review policy.
  8. Plan for Mail Delivery. To the extent that main and branch offices are able, they will want to have a process for reviewing hard copy mail. The SEC Staff has provided temporary relief from the custody rule if it receives checks or securities during this period and is unable to access its mail or deliveries, but it would be best if the mail was still being processed. That guidance is available here (see Question II.1). This process must be done in a manner that is consistent with any executive orders issues by state or local government regarding continued business operations.
  9. Business Continuity Plan Review. While most business continuity plans have already been implemented, now is a good time to review and update the firm’s business continuity plan. I have personally witnessed OCIE Staff requesting information about these policies and their implementation during examinations conducted in March 2020. If you have too many things going on currently, this should absolutely be a focus of the firm’s annual review of its policies and procedures pursuant to Rule 206(4)-7.
  10. Review of Form ADV Part 2. Firms should review their Form ADV Part 2 brochures to ensure that they remain accurate in light of changes in their practices. In addition, advisers should review the offering documents for any investment vehicle sponsored by the adviser to ensure disclosures remain accurate.
  11. Due Diligence of Vendors and Service Providers. Firms should continue and perhaps increase their review of vendors and key service providers to ensure that they can continue to perform as needed.

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