Pandemic Raises Risk of Advisor Misconduct, SEC Warns

The alert “acknowledged some of the challenges that firms are facing in conducting diligence on new vendors; despite these challenges many investment managers are looking to deploy new surveillance tools to address blind spots created by a fully remote work environment,” he said.

Advisor Misconduct

For instance, COVID-19 may have increased the potential for misconduct regarding financial conflicts of interest, such as:

• recommending retirement plan rollovers to IRAs, workplace plan distributions, and retirement account transfers into advised accounts or investments in products that the firms or their personnel are soliciting;
• borrowing or taking loans from investors and clients; and
• making recommendations that result in higher costs to investors and that generate greater compensation for supervised persons, such as investments with termination fees that are switched for new investments with high up-front charges or mutual funds with higher cost share classes when lower cost share classes are available.

Remote Work Risks

Many firms require their personnel to use videoconferencing and other electronic means to communicate while working remotely, the alert notes.

While these communication methods have allowed firms to continue their operations, the agency states, these practices create vulnerabilities around the potential loss of sensitive information.

These risks are attributed to, among other things:

• remote access to networks and the use of web-based applications
• increased use of personally owned devices; and
• changes in controls over physical records, such as sensitive documents printed at remote locations and the absence of personnel at firms’ offices.

— Related on ThinkAdvisor:

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• SEC Clarifies Use of ‘Advisor,’ ‘Adviser’ by Dually Registered Firms
• DOL Sales Standard Proposal Could Backfire: ACLI