Financial advisors and brokers are using just about every trick in the book to make up for revenues lost during the pandemic shutdown, including tactics that don't comply with the agency's rules, according to a risk alert the SEC published last week detailing its examiners’ findings that some

But if firms don’t want to feel the wrath of SEC, they would be well advised to look at the alert as a blueprint on how to follow to do the internal compliance work to avoid problems with the agency, Christine Lombardo, a partner in the law firm of Morgan Lewis, told Financial Advisor magazine.

SEC Office of Compliance, Inspections and Examinations (OCIE) examiners reported uncovering instances of advisors—many of them broker-dealer registered representatives—charging excessive fees, offering conflicted advice and even engaging in fraud during the Covid-19 shutdown, according to the alert. 

“I expect that OCIE will certainly be looking into the issues identified in its risk alert as part of its examination program throughout the pandemic and as we emerge from this crisis,” Lombard said. “In that regard, it will be critical that firms assess their own businesses, procedures and potential vulnerabilities in light of the points raised by OCIE, including documenting that review and determinations or enhancements made as a result."

The SEC said it has identified a number of alarming advisor practices and noted that “market volatility related to Covid-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention.” 

According to the SEC, these are some of the most egregious fee and expense violations examiners are seeing:

• Advisory fee calculation errors, including valuation issues that result in over-billing of advisory fees.
• Inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts.
• Failures to refund prepaid fees for terminated accounts.

“Firms may wish to review their fees and expenses policies and procedures and consider enhancing their compliance monitoring, particularly by validating the accuracy of their disclosures and 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,” the agency said.

How concerned are firms about the challenges of supervising advisors and reps remotely during the shutdown?

“We have worked with a number of firms on ways to enhance existing procedures to account for fully remote supervision. However, I will say that in my experience, the asset management industry was well-equipped to handle the sudden move to a remote working environment for a variety of reasons—most notably, that most firms already had the capability for employees to work remotely—both as standard practice, as well as through the firm’s business continuity procedures,” Lombardo said.

Firms that are willing to do internal compliance reviews and mitigate problems they uncover now will hopefully be better able to reduce their compliance exposure, post-Covid, she said.

“I would hope that the SEC will be reasonable with firms that make a good faith effort to adapt its procedures in light of some of the challenges presented by the pandemic. I do, however, expect that enforcement will focus on firms whose conduct or lack of adequate procedures resulted in investor or client harm."

The agency used the alert to make clear that the challenges of a pandemic-induced virtual workplace will not be a good defense against compliance failures. These are some of the problems the SEC said firms need to avoid:

• Supervisors not having the same level of oversight and interaction with supervised persons when they are working remotely.
• Supervised persons making securities recommendations in market sectors that have experienced greater volatility or may have heightened risks for fraud.
• Limited on-site due diligence reviews and other resource constraints associated with reviewing of third-party managers, investments and portfolio holding companies.
• Communications or transactions occurring outside of the firms’ systems due to personnel working from remote locations and using personal devices.

Many issues—such as firms’ not picking up client checks in the mail in a timely fashion—have been exacerbated by the new virtual, remote workplace, the SEC said.

What other compliance areas will be most troubling for firms, especially in the retail advice sector?

“While this is not specific to the retail sector, the protection of client and other sensitive information is an area where asset management firms ... have to constantly evolve to ensure that relevant procedures and systems are effective in light of the threat of cyber-attacks, hacking or other forms of identity theft,” Lombardo said.

Protecting clients’ financial information “is always a concern, but perhaps this concern is heightened in the current working environment where you have a disbursed workforce accessing a firm’s systems fully remotely,” she added.