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Risks For RIA Firms in a COVID World

October 20, 2020

In light of COVID-19, the U.S. Securities and Exchange Commission ("SEC"), recognizing that RIA Firms are facing operational, technological, commercial and other issues, has also outlined "regulatory and compliance questions and considerations" for SEC-registered Firms on these issues. The SEC's full alert on this subject is available here.

What does this mean for you? It means that the SEC will review, during an audit, whether a Firm has addressed these issues.

Overview

The SEC has recommended that RIA Firms should review the following broad categories:

  1. Protection of Client Information
  2. Protection of Client Assets
  3. Practices Involving Fees and Expenses
  4. Supervision of Personnel
  5. Business Continuity

Areas of Risk and Focus

1. Protection of Client Information

RIA Firms have an obligation to protect clients' personal information. In particular, Firms using videoconferencing and other electronic means to communicate while working remotely create the following issues:

2. Protection of Client Assets

Each Firm has a responsibility to ensure the safety of its investors' assets and to guard against theft, loss and misappropriation. Firms should update their supervisory and compliance policies and procedures to reflect any adjustments made. Firms should consider disclosing to investors that checks or assets mailed to the Firm's office location may experience delays in processing until personnel are able to access the mail or deliveries at that office.

Firms should review and make any necessary changes to their policies and procedures around disbursements to investors, including where investors are taking unusual or unscheduled withdrawals from their accounts, particularly COVID-19-related distributions from their retirement accounts. Thus, a Firm should consider implementing additional steps to validate the identity of the investor and the authenticity of disbursement instructions. And, a Firm may want to recommend that each client has a trusted contact person in place, particularly for seniors and other vulnerable investors.

3. Fees and Expenses

Firms have the obligation to inform clients about the cost of services and investment products, and the related compensation received by the Firms or their supervised persons. The current situation may have increased the potential for problems regarding:

4. Supervision of Personnel

Firms are obligated to supervise their personnel, including providing oversight of supervised persons' investment and trading activities, even though telework is conducted from dispersed remote locations, notwithstanding that the Firm is responding to operational, technological and other challenges. Firms may wish to modify their practices to address:

5. Business Continuity

Firms also should consider their ability to operate critical business functions during emergency events. Many Firms have shifted to predominantly operating from remote sites, and these transitions may raise compliance issues such as:

Firms should review their continuity plans to address these matters, make changes to compliance policies and procedures, and provide disclosures to clients if their operations are materially impacted.

Conclusion

Many complications and impediments to your business have arisen in today's environment. However, the SEC remains vigilant and is auditing RIA Firms. Thus, RIA Firms must be diligent in their legal and supervisory responsibilities. If you would like assistance in reviewing your responsibilities and whether you will comply with the SEC's mandates and guidelines, Miller Canfield can assist you. Please contact us.