COVID-19 has bought a “new normal”. From stay-at-home orders and teleworking requirements to market volatility, consumer worry, and delayed public disclosure, the face of the industry will be forever changed. In light of this, Registered Investment Advisor compliance departments should consider reviewing the landscape of the Code of Ethics requirements.
The SEC’s Public Statement Regarding Market Integrity highlighted that regulators will continue “to emphasize the importance of maintaining market integrity and following corporate controls and procedures.” Below are a list of considerations and best practices for your Code of Ethics program based on the ever-evolving climate of COVID-19 and market volatility.
Increase Supervisory Electronic Oversight
Due to market volatility, employee trading may have increased, and client trading may become slightly more erratic. Firms must re-evaluate their current trading review process in light of these changes. Firms may consider reviewing real-time trading through custom alerts against the firm watch or restricted list. The firm may also review employee trading more frequently to ensure compliance with the Code of Ethics. Firms may also consider adding additional personal trading rules in your Code of Ethics, such as Short-Swing Profit Rules (30-Day, 60-Day, 90-Day).
Re-Evaluate Communication and Escalation Channels
As more employees are working from home, long gone are the days of popping into the compliance officer’s office to get approval or immediate feedback on a compliance matter. Firms should evaluate and update their communication channels, as well as establish the proper approval and escalation process within the channels of communication. Doing so will reinforce the transparency of the firm’s Code of Ethics and Privacy Policy to prevent insider trading within the Code. Recently, firms may have begun to employ new tools of communication, such as IM, Slack, etc. They must ensure that all innovative technology tools are approved, archived (SEA 17a-3 and SEA 17a-4), and tested. Additionally, all employees should receive proper training on the approved use of new technology.
Re-Evaluate Conflicts of Interest
Firms should review and, if possible, mitigate any potential conflicts of interest. Certain conflicts may not have existed pre-COVID-19. These can include employees with spouses or roommates who work for other RIAs or Financial Institutions, privacy concerns related to teleworking, increased trading risk with certain employees due to their client base. Take a fresh look at potential breaches and conflicts that could occur now or could occur in the future as this situation evolves the landscape of the trading world.
Do Not Overlook Training
Training your staff is now more important than ever. As the structure and operations of the firm evolve, oftentimes, employees are trying to figure out how to adjust. This can become a regulatory risk if the firm does not provide proper guidance. Review your firm’s current process related to your employee’s compliance with the Code of Ethics. These could include cybersecurity risk, conflicts, privacy of information, work from home conduct, and more. If changes are necessary, providing that guidance to your employees is a proactive measure to help protect your firm. This can also provide consistency in both supervision and implementation.
Our expert team can supply valuable guidance on building an effective Code of Ethics program during these stressful times. Please contact our office for more information.
