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 risk alert 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 companies.
• 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 regarding 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.
• Controls - 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.
• Records - 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 and events.