Most regulators may be working remotely from home, but they’re watching you virtually and they’re bracing for all sorts of fallout from the COVID-19 crisis, including aggressive, abusive and fraudulent sales practices.

Officials from the Securities and Exchange Commission, Finra and the North American State Securities Regulators, who spoke at a specially convened SEC Investor Advisory Committee meeting last night, said they are monitoring for a wide spectrum of aggressive and unsuitable sales and outright fraud amidst the COVID-19 crisis. The meeting was webcast for regulators and compliance professionals nationwide.

“During this time Finra is focusing in particular on monitoring for fraud, illicit schemes and other manipulative activities seeking to take advantage of the tumultuous conditions that are created by COVID-19 and the ongoing market volatility that we’ve all been witnessing,” said Gerri Walsh, senior vice president of investor Education at Finra.

“In only a few instances to date have investors complained about recommendations that investment professionals made, for example, to hold a position even as its value declined or a failure to follow instructions, like moving a client to a more conservative portfolio,” Walsh said.

“But our call centers have told me it is still early days and complaints of this nature may well take time to surface,” she added.

“If history is any guide, the initiation of dispute resolution proceedings tends to follow periods of market volatility and market decline," Walsh said. "And we know as well that when markets fall, Ponzi-like schemes tend to unravel because their operators can no longer make their periodic payments that investors expect.”

State regulators are also continuing to track investor complaints and potential abuses closely and coordinating with both Finra and the SEC.

“We are monitoring risks, especially in the CARES Act for instance, which allows workers to withdraw up to $100,000 from their retirement accounts like their 401(k)s without a penalty. It’s fair to expect that some promoters may try to use this to get at investor money and put it into these schemes,” said NASAA President Christopher W. Gerold. 

Advisors and brokers who encourage investors to use margin accounts during these times to encourage investors to continue to invest may also find themselves in squarely in regulators’ crosshairs.

“We expect in the coming weeks to see a significant increase in the number of complaints related to suitability, specifically to the use of margins in retail accounts. While some of these uses of margin will be suitable, I suspect many will not be and will require investigations by regulators,” added Gerold, who is also chief of the New Jersey Bureau of Securities.

Private placement investments are on states’ radar screens, he warned. “We are particularly concerned that people will be pitched on private placements because they appear more stable. But there is no secondary market, they’re not being repriced on a daily basis,” Gerold said.

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