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SEC Urges Firms to Take Precautions on COVID-19 Retirement Account Distributions

Regulatory Compliance

Considering that many firms have modified their normal operating procedures and moved to a company-wide telework environment, the Securities and Exchange Commission is urging firms to take extra steps to ensure the safety of its investors’ assets. 

Among other things, the eight-page Risk Alert from the SEC’s Office of Compliance Inspections and Examinations (OCIE) encourages firms to “review and make any necessary changes to their policies and procedures around disbursements to investors, including where investors are taking unusual or unscheduled withdrawals from their accounts, particularly COVID-19 related distributions from their retirement accounts.” 

To that end, the OCIE suggests that firms consider implementing additional steps to validate the identity of the investor and the authenticity of disbursement instructions, including whether the person is authorized to make the request, and whether bank account names and numbers are accurate. The Alert also recommends that each investor has a trusted contact person in place, particularly for seniors and other vulnerable investors.

Background

Following various outreach efforts and consultation with other regulators, the OCIE notes that it has identified a number of COVID-19-related issues relevant to SEC-registered investment advisers and broker-dealers. In addition, the Alert notes that market volatility related to COVID-19 may have heightened the risks of misconduct in various areas that the staff believes merit additional attention. 

The observations and recommendations in the Alert are broken down into six categories: 

  • protection of investors’ assets; 
  • supervision of personnel; 
  • practices relating to fees, expenses, and financial transactions; 
  • investment fraud; 
  • business continuity; and 
  • protection of investor and other sensitive information.  

Fees, Expenses and Financial Transactions 

The Alert observes that the recent market volatility and the resulting impact on investor assets and the related fees collected by firms may have increased financial pressures on firms and their personnel to compensate for lost revenue.  

While these incentives and related risks always exist, the current situation 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. 

Consequently, the OCIE recommends that firms review their fee and expense policies and procedures, and consider enhancing their compliance monitoring by:  

  • validating the accuracy of their disclosures, fee and expense calculations, and the investment valuations used; 
  • identifying transactions that resulted in high fees and expenses to investors, monitoring for such trends and evaluating whether these transactions were in the best interest of investors; and  
  • evaluating the risks associated with borrowing or taking loans from investors, clients and other parties that create conflicts of interest, as this may impair the impartiality of firms’ recommendations.

Sensitive Information  

In considering that firms have an obligation to protect investors’ personally identifiable information, the SEC staff has observed that many firms require their personnel to use videoconferencing and other electronic communications while working remotely. “While these communication methods have allowed firms to continue their operations, these practices create vulnerabilities around the potential loss of sensitive information,” the Alert explains. 

As such, the OCIE recommends that firms pay particular attention to the risks regarding access to systems, investor data protection and cybersecurity. Among the changes that firm should consider include:   

  • Enhancements to their identity protection practices, such as by reminding investors to contact the firms directly by telephone for any concerns about suspicious communications and for firms to have personnel available to answer these investor inquiries.  
  • Providing personnel with additional trainings and reminders, and otherwise spotlighting issues, related to phishing and other targeted cyberattacks; sharing information while using certain remote systems; encrypting documents and using password-protected systems.  
  • Using validated encryption technologies to protect communications and data stored on all devices, including personally owned devices. 

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