• Covid-related investments. The SEC has already charged some companies with “pump-and-dump” schemes tied to Covid-related investment and penny stock saales. As a growing number of companies promote stocks based on new products or services to prevent, treat or even cure Covid, Clayton warned that broker-dealers and their reps must have “an understanding of the potential risks, rewards and costs associated with such investments. Similarly, an investment advisor must have a reasonable belief that its advice, including its advice with respect to Covid-related investments, is in the best interest of the client, including a consideration of whether investments are recommended only to those clients who can and are willing to tolerate the risks of those investments and for whom the potential benefits may justify the risks,” Clayton said.
• SPACs and other structured investment vehicles. Clayton also warned firms about using SPACs, or special purpose acquisition corporations, which are created to raise money from investors on the premise that the sponsor will, in the future, identify and acquire another, usually privately held, company. Before the target company is acquired, the SPAC acts as a pool of capital, and if a target company is not identified during a specific period of time, investors typically receive their money back.
“These investments may be appropriate for various types of retail investors, including as a component of a diversified portfolio. However, because of this 'money back' feature, during times of heightened market volatility, retail investors may view SPACs as a relatively safe investment option, even though the structure and strategy of a SPAC may present complex risks. Those risks may include potential conflicts of interest caused by the compensation structure in itself and in combination with the 'money back' feature,” Clayton warned.
As part of Reg BI compliance push, the SEC also unveiled a new website to help investors understand the new customer relationship summary that all retail securities professionals must deliver to clients to explain their services, conflicts and compensation beginning June 30. The website is available here.