A month ago, it was unclear of how much COVID-19 (the “coronavirus”) would impact all of us in every facet of our lives. For some, we are indefinitely “sheltered in” and are working remotely where possible. Others must take care of loved ones and those who have special needs (due to illness, school-age children and the elderly). For those in the financial industry, we are experiencing a roller-coaster of dynamic markets caused by uncertainty and investor fears of the financial impact of COVID-19. But through all of this, regulatory compliance requirements and considerations remain.
The safety and health of everyone’s family comes first. Core Compliance & Legal Services, Inc. SM (“Core Compliance”) recognizes that most financial firms are working long hours to communicate with clients, to rebalance portfolios where needed and implement business continuity plans, all within a span of just a few short weeks.
For investment advisers, this is where the strength of your compliance program will be tested.
In this month’s Legal Risk Management Update, we will summarize the impact of COVID-19 in three areas: business continuity planning, remote supervision considerations and exemptive relief for regulatory filings, summarizing areas of particular interest to regulators and provide risk management tips moving forward.
Compliance Program Considerations
- Business Continuity Plans
In accordance with Rule 206(4)-7 of the Investment Advisers Act of 1940 (the “Compliance Rule”), investment advisers are required to adopt business continuity plans. Specifically, footnote 22 of the Compliance Rule provides, “[the staff] believe[s] that an adviser’s fiduciary obligation to its clients includes the obligation to take steps to protect the clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services after, for example, a natural disaster or, in the case of some smaller firms, the death of the owner or key personnel. The clients of an adviser that is engaged in the active management of their assets would ordinarily be placed at risk if the adviser ceased operations.” At this most critical of times when investors have needs for asset protection and raising cash to care for their families, having a robust business continuity plan is essential.
While many business continuity plans address natural disasters, not all have considered a pandemic, such as COVID-19. Consequently, as with all policies and procedures, your business continuity plan should be a dynamic process and enhanced if and when gaps are detected.
As more and more businesses are required to work remotely it is essential to evaluate the strength of your business continuity plan, particularly as employees begin to telecommute.
Consider the following:
- Have you established protocols for telecommuting?
- Does your firm have a policy on the use of personal devices?
- Does your firm have the capabilities for all essential employees to use remote desktop support (“RDS”) or virtual private network (“VPN”) to securely connect to your IT infrastructure?
- Have you addressed potential connectivity challenges such as bandwidth needed to support employee access to RDS and VPN?
- Have you tested whether employees are able to access essential software (such as Quickbooks) to perform essential functions?
- Have you had employees sign attestations related to:
- Only performing work on the firm’s secured network;
- Only saving work product and sending business communications through the firm’s secured network;
- Safeguarding protocols to protect client and proprietary firm information;
- Protocols for cybersecurity, such as the use of strong passwords, multi-factor authentication, secure wi-fi networks and heightened awareness of phishing attempts
- Have implemented enhanced communication methodologies such as use of Zoom and Go-to-Meeting, MS teams and automated phone systems that forward to cell phones?
Whatever measures you take, make sure that you document all steps being taken, and when, so that you can easily evidence to the SEC the protocols taken in response to the pandemic.
- Remote Supervision Considerations
While many firms have “branch office” locations, most organizations are not used to having essential home office employees work remotely. For investment advisers, this can be challenging, particularly for portfolio managers, traders, operations and compliance personnel who often work in teams and provide services to both client servicing professionals and advisory clients.
As mentioned above, telecommuting has many challenges, particularly as it relates to safeguarding of confidential client and firm information. Communications, particularly among the team are challenging. No longer can you simply walk down the hall to converse; now, you must rely on responses to voice and emails which can be delayed as employees are focused on tasks at hand.
It is important to have a defined structure in place, with regular touch-points to establish who are deemed “essential employees;” how have roles and responsibilities changed as a result of all employees telecommuting (e.g., who will process checks and where mail will be forwarded to, as applicable, for “shelter in” locations); what are expectations of supervisors to oversee work and projects prior to delivery; what procedures need to be revised due to limitations of telecommuting; are committee meetings going to regularly occur, occur with more frequency or change in participant composition; how will compliance oversee that cybersecurity and Regulation S-P are complied with by remote employees; and how does the firm “trust but verify” that essential employees are completing necessary work for the business.
Each firm should consider responses to each of these. Additional training may be required, with over communication to employees. Once key decisions are made, consider doing the following:
- Reach out to all customers and maintain open lines of communication on how to contact you and one another; consider posting additional information on the home page of your website
- Provide daily video teleconference options to clients and with employees whenever possible
- Identify primary risks and challenges from telecommuting and address with senior management
- Consider the impact to the firm of remote working for several months, potential areas of exposure and action steps to address each; pivot resources accordingly
- Implement collaborative project management tools like Teamwork or Asana to enhance communications and workflow
- Update and continuously update telecommuting policies and procedures frequently; provide training and obtain employee attestations accordingly
- Regulatory Filings
Many investment advisers have a fiscal-year end of 12/31 and therefore have an obligation to file an annual amendment to Form ADV by or before March 30, 2020. However, on Friday, March 13, 2020, the U.S. Securities and Exchange Commission (“SEC”) issued an order providing temporary exemptive relief related to COVID-19 (the “Order.”) Specifically, temporary exemptive relief is available to registered investment advisers and exempt reporting advisers (“ERAs”) for filing and delivering Form ADV amendments (and if applicable, Form PF) if certain conditions are satisfied. This Order relief extends to April 30, 2020.
To satisfy the exemption, several conditions must be satisfied:
- The investment adviser or ERA must be unable to meet a filing deadline or delivery requirement due to circumstances related to current or potential effects of COVID-19;
- The investment adviser relying on the Order with respect to filing of Form ADV or delivery of its brochure, summary of material changes, or brochure supplement required by Rule 204-3(b)(2) or (b)(4) must promptly provide the SEC with notification (by emailing the SEC at IARDLive@sec.gov) and disclose on its public website (or alternatively, if the adviser does not a public website, through prompt notification to clients and/or private fund investors) the following information:
- that the adviser is relying upon the Order;
- a brief description of the reasons why it could not file or deliver its Form on a timely basis; and
- the estimated date by which it expects to file or deliver the Form.
- The investment adviser relying on the Order with respect to filing Form PF as required by Rule 204(b)-1 must promptly provide the SEC with notification (by emailing the SEC at FormPF@sec.gov) and state:
- That it is relying upon the Order;
- a brief description of the reasons why it could not file its Form on a timely basis; and
- the estimated date by which it expects to file the Form.
- The investment adviser or ERA must file the Form ADV (and if applicable, Form PF) and deliver its brochure (or summary of material changes) and brochure supplement as required as soon as practicable (but no later than 45-days after the original due date for filing or delivery).
Importantly, the Order emphasizes that investment advisers should consider their fiduciary obligations when deciding whether to rely on the temporary exemptive relief. Firms also should consider when making its ADV updates whether explicit COVID-19 disclosures should be included within the brochure, particularly as it relates to the impact on the adviser’s business. For example, if research efforts are curtailed due to travel bans, that could impact the adviser’s efforts and should be disclosed.
Final Risk Management Tips
The effects of COVID-19 will have a lasting impact to the financial industry, and potentially, to the way we conduct business in the future. As we continue to navigate these unchartered waters, consider these additional risk management tips:
- Expect that the SEC will continue conducting examinations (remotely where possible) and will inquire as to the steps the firm has taken to fulfill fiduciary obligations (through the implementation of heightened cybersecurity controls and business continuity plans, new communication procedures, supervisory controls and disclosures to clients).
- Continue to conduct due diligence on critical vendors and ensure that their ability to provide essential services to the adviser and its customers is not disrupted.
- As a result of market volatility, consider if the adviser’s style of management has changed, and if so, how that was communicated to clients.
- Assess the entire compliance program, identifying the biggest risks, and take steps to mitigate, and wherever possible, eliminate each.
For more information on these and other considerations relating to the compliance program considerations related to COVID-19, please contact us at (619) 278-0020. We are here to support you.
Author: Michelle L. Jacko, CEO; Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, hedge funds, private equity firms and banks on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
 See https://www.sec.gov/rules/final/ia-2204.htm#P102_22999.
 See https://www.sec.gov/rules/other/2020/ia-5463.pdf.