It is said that those who forget the past are condemned to repeat it. Perhaps “condemned” is not the best word choice, given the current circumstances, but past events can and should inform the present. Case in point: the role of compliance during turbulent times. In October 2008, as the financial crisis raged and the Great Recession loomed large, Lori Richards, then-OCIE Director, made a speech that proved prophetic then and is perhaps a harbinger of things to come now. In her speech before the NSCP (Compliance Through Crisis: Focus Areas for SEC Examiners and Compliance Professionals1), Ms. Richards said,
“…in times of financial strain, people may act in uncharacteristic ways – in order to conceal losses, inflate revenues or profits, to stay in business or just avoid delivering bad news. Examiners will be alert for indications of fraud and “acts of desperation” by individuals and firms that are under financial duress.”
The speech continued by reminding compliance professionals that they are best positioned to identify any fraudulent or deceptive actions, and warned that, “You should insist on absolute compliance with policies and procedures, there should be no possibility of “suspending” compliance.”
Given today’s similarly turbulent times, it would be unwise to disregard what is, quite possibly, a glimpse into the current focus of SEC examiners. In addition to the timely completion of recurring compliance obligations, prior crises have demonstrated that the following areas warrant special attention in this environment:
- Portfolio Management: Have investing patterns changed as financial market volatility has increased? Be alert for signs of aggressive trading in an attempt to recover recent losses or increase performance-based fees. Ensure that any such changes conform to client investing and risk guidelines (e.g. IPSs, fund governing documents) as well as representations made in disclosures and advertising.
- Suitability of investments: Ensure that investments are consistent with clients’ investment objectives and time horizons. Pay special attention to senior investors and the use of alternative and complex investments. Clients may be more susceptible to pitches of investments touted as safe or those that claim potential for outsized gains.
- Valuation: Securities that are illiquid or hard to value must be scrutinized to prevent clients from receiving incorrect information. Don’t blindly rely on valuations obtained from third parties; compare valuations and sale prices with those from another third party.
- Mergers and Acquisitions: Examiners will be looking for strong controls and supervision, adherence to policies and procedures, cybersecurity and business continuity plans.
- Regulation SP: Review procedures for protecting client assets from misappropriation or unauthorized use. Particularly now, during the current crisis, with so many advisers’ staff working from home, data protection and adherence to cybersecurity protocols have never been more paramount.
- Rumor mongering, manipulative trading, insider trading and personal securities transactions: Conduct appropriate surveillance to prevent and detect wrongdoing.
- Disclosure: Are the steps taken by the firm to adapt to the current crisis or to address the resulting market volatility consistent with the firm’s disclosures? In other words, does the firm have the “informed consent” of its clients to take the unprecedented steps it may be taking?
- Supervision and Compliance: Again, with an unprecedented number of adviser staff working from home, how has the firm’s supervisory approach adapted? How does the firm monitor activities for compliance with written policies and procedures?
In chaotic times it can be easy to lose focus; don’t allow coronavirus uncertainty and related chaos to compromise your fiduciary obligations, the security of your clients or the long-term health of your compliance program.
How NRS can help
From virtual webinar sessions and on-demand learning through BlazeXpress self-service education, to our industry leading technology platforms such as ComplianceGuardian and ComplianceMAX, and our consulting solutions designed to help you address your critical compliance needs, NRS can help you maintain your compliance responsibilities during these challenging times. Find out how we can help you by contacting us here.