[The COVID-19 pandemic has been a catalyst for dynamic change for advisor businesses in all but one area — the ongoing and inexorable march of regulation and compliance. Many regulatory deadlines and expectations have not been deflected by the real-world chaos that advisory firms are dealing with. A quick breather and a situational analysis on this front can be helpful.
To get a better sense of the regulatory environment amidst this pandemic, we decided to check in with Institute founding member Mac Bartine, CEO of SmartRIA — a software as a service (SAAS) compliance and business management platform for RIAs. We asked him to share with us, from his unique regulatory and compliance perspective as an industry innovator, as to what financial services professionals should be most focused on during this time frame.]
Bill Hortz: What concerns you most about the legal/compliance environment for advisors right now?
Mac Bartine: I have heard anecdotally that some lawsuits have been filed against advisors for various pandemic-related issues, but I am more concerned about the SEC and state regulators conducting audits down the road. They will be making sure fiduciary issues such as trading inactivity and high cash balances were tracked, documented, and remediated appropriately during the pandemic.
Another issue facing RIAs is working remotely without proper cybersecurity protections in place on their home networks, and from a compliance point of view, whether or not they have documented the steps they are taking to remain secure and protect their clients’ data.
I can sum up all the potential pandemic-related compliance problems with a phrase regulators use during exams: “If you didn’t document it, it never happened.” These are turbulent times, and without good tech and an active culture of compliance across your firm, details and documentation can easily slip through the cracks, which is very bad news at exam time. I’ve heard several stories about firms letting compliance slide because it’s difficult when everyone isn’t in the office and routines have been disrupted. Regulators have heard that too, and they will be looking for evidence of that in exams.
Hortz: What are the COVID-19 compliance issues around fiduciary responsibility?
Bartine: Let’s look at high cash balances as an example of something that could go wrong during the pandemic.
When markets fluctuate dramatically, some advisors and their clients decide to sell everything and sit the turbulence out. Investors went to 100% cash in the early days of the US pandemic, and many have opted to remain there.
My concern for advisory firms is if they do not note that the client’s account has been over 35% (or whatever an account’s acceptable threshold is) in cash for a given period of time, say 6 months, and if they do not remediate that with an explanation of why the cash balance is high, e.g., “Ms. Smith has elected to maintain this cash balance through 2020 while the pandemic plays out”, they will have an issue with regulators.