The messages are clear. Sales practice concerns, fraud, and operational issues related to the COVID-19 pandemic have arrived. Compliance professionals who are responsible for the surveillance and review of targeted areas of the compliance program should understand what may be coming down the pipe and ensure that their programs are sufficiently flexible to identify potential red flags.
In response to recent concerns, the SEC recently published Investor Alert: Coronavirus Investor Scams that provides valuable information on expected trends. Likewise, FINRA published its Investor Insights on Fraud and the Coronavirus. Below are a few key highlights that compliance professionals should acknowledge.
All securities regulators have placed high importance on and suggested additional surveillance for protecting the senior and more vulnerable populations. As shelter-in-place orders continue across the nation, many seniors may feel the devastating effects of isolation. Compliance surveillance should include a review of senior and other specified individual accounts. Red flags could include potential misuse of low-priced securities, margin, money movements to unknown 3rd parties, and unsuitable trading practices.
Suitability: Use of Margin in Retail Accounts
During the April SEC Investor Advisory Committee, NASAA President Christopher Gerold noted: “In the coming weeks, I expect that we will see a significant increase in complaints related to suitability, specifically use of margin in retail accounts. While some will have been suitable, I expect many will have been unsuitable that will require investigation.” Compliance professionals should review accounts looking for unauthorized uses of margin. This could include using margin in a manner that exceeds the risk profile of the account and preys on the panic of the volatile markets or using margin in a manner that generates more revenue for the firm and is against the best interest of the client.
Regulators have published several cyber alerts over the past six months with an emphasis on educating financial firms on the prevalence of phishing scams in the industry. An email appears to be from a legitimate source attempting to notify the firm, or a specific department of the firm, about a request for funds or a potential money laundering involving a client of the firm. The email directs the recipient to open an attached document which contains a malicious virus or malware designed to obtain unauthorized access to the recipient’s computer network.
Additionally, compliance programs must ensure that telework training and notifications include best practices to avoid cyber-attacks while working from home. Cyber-attacks can range from false money movement requests to providing fraudsters with sensitive client information.
Suitability: Use of Private Placements as “Stable Securities”
For broker-dealers that focus on unregistered securities or private placement offerings, volatility in the market may drive certain investors’ interest in private placements. These products are assumed to be more stable and safer compared to other products on the secondary market that are repriced daily. Compliance departments in these firms should ensure that their onboarding process is strong to review for suitability including investor knowledge and experience to avoid investors purchasing unregistered offerings without a thorough understanding of the risks involved.
Check out our previous blog posts on COVID-19 pandemic-related compliance topics.
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