The COVID-19 pandemic has been a catalyst for dynamic change for advisor businesses in all but one area – the ongoing and inexorable march of regulation and compliance. Many regulatory deadlines and expectations have not been deflected by the real-world chaos that advisory firms are dealing with. A quick breather and a situational analysis on this front can be helpful.

To get a better sense of the regulatory environment amidst this pandemic, we decided to check in with Institute founding member Mac Bartine, CEO of SmartRIA – a software as a service (SAAS) compliance and business management platform for RIAs.  We asked him to share with us, from his unique regulatory and compliance perspective as an industry innovator, as to what financial services professionals should be most focused on during this time frame.


Hortz: What concerns you most about the legal/compliance environment for advisors right now?

Bartine: I have heard anecdotally that some lawsuits have been filed against advisors for various pandemic-related issues, but I am more concerned about the SEC and state regulators conducting audits down the road. They will be making sure fiduciary issues such as trading inactivity and high cash balances were tracked, documented, and remediated appropriately during the pandemic.

Another issue facing RIAs is working remotely without proper cybersecurity protections in place on their home networks, and from a compliance point of view, whether or not they have documented the steps they are taking to remain secure and protect their clients’ data.

I can sum up all the potential pandemic-related compliance problems with a phrase regulators use during exams: “If you didn’t document it, it never happened.” These are turbulent times, and without good tech and an active culture of compliance across your firm, details and documentation can easily slip through the cracks, which is very bad news at exam time. I’ve heard several stories about firms letting compliance slide because it’s difficult when everyone isn’t in the office and routines have been disrupted. Regulators have heard that too, and they will be looking for evidence of that in exams.

Hortz: What are the COVID-19 compliance issues around fiduciary responsibility?

Bartine: Let’s look at high cash balances as an example of something that could go wrong during the pandemic.

When markets fluctuate dramatically, some advisors and their clients decide to sell everything and sit the turbulence out. Investors went to 100% cash in the early days of the US pandemic, and many have opted to remain there.

My concern for advisory firms is if they do not note that the client’s account has been over 35% (or whatever an account’s acceptable threshold is) in cash for a given period of time, say 6 months, and if they do not remediate that with an explanation of why the cash balance is high, e.g. “Ms. Smith has elected to maintain this cash balance through 2020 while the pandemic plays out”, they will have an issue with regulators.

From the regulator’s point of view, advisors are charging a fee for clients’ investment accounts that have a large percentage of cash over an extended period of time. Regulators don’t care if the market went up or down. They care that the financial advisor is charging a fee and – because compliance documentation was missed in the pandemic scramble – they can’t prove they’re doing anything to earn it.

I know I already said this above, but it can’t be stressed strongly enough: document, document, document. Unfortunately, compliance has gotten complicated enough that if you don’t have solid RIA compliance software to help you spot, remediate and document issues like these, you should get some.

Hortz: What guidance and recommendations have the regulators been providing around conducting business during the coronavirus pandemic?

Bartine: Some regulators are making it easy on wealth management professionals to know what the regulators are thinking regarding the pandemic. I have found FINRA’s COVID-19 site to be the most comprehensive and up to date, but other useful information is available.

The SEC’s COVID-19 Response FAQ is a resource for SEC-registered RIAs and investment companies.

The NASAA COVID-19 Regulatory Response Overview provides links to each state regulator’s COVID 19 pandemic guidance for financial advisors, as well as other useful information for state regulated RIAs.

FINRA provides a rules and guidance page for the COVID-19 pandemic. It is a comprehensive resource that includes up to date news from FINRA regarding regulatory response to the pandemic.

Beyond the above resources, I recommend CCOs keep their ear to the ground for regulatory news about the pandemic, and work with a competent compliance consultant or attorney who is sending out regular updates. The latter part being a critical time saver, as these professionals are staying on top of pandemic-related regulatory issues so they can alert their clients as needed.

Hortz: What are your thoughts or concerns on applying some of these guidance recommendations?

Bartine: This is me being a broken record, but it really is key – you have to document your compliance-related activities. Getting compliance done right during the pandemic is going to be hardest for firms that did not already have a strong culture of compliance and good compliance software in use by everyone in their company. Dealing with a pandemic is a tough time to have to get your house in order, but if your house is not in order now, you definitely need to get help.

Hortz: What other compliance areas should advisors be proactively looking at and preparing for due to the current environment we are in?

Bartine: The SEC is concerned that business continuity plans are being maintained, tested, and updated during the pandemic, and that firms are documenting those efforts. There is nothing like a good crisis to remind regulators of the importance of business continuity, and they have been reminding advisors of that in turn.

Specifically, many advisors didn’t think to address a pandemic or civil unrest in their business continuity plan. Why would they? Well, now we have very good reasons to think about it. If compliance teams are not responding accordingly with updated plans, that is going to be called out in an exam.

Hortz: Any last words or advice you can offer advisors on how to meet some of these challenges brought on by COVID-19?  

Bartine: First piece of advice: Do not be in this alone. If you don’t have a good relationship with a compliance consultant or attorney, get one.

Second: Use technology to your advantage. Obviously, I believe SmartRIA’s compliance software is pretty fantastic, but you have several options and you should definitely be using one. Great tech speeds up compliance workflows, points out deficiencies for your compliance team to remediate, and can even be a strategic advantage for helping your firm grow.

Third and most important – I cannot say this enough – document everything.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. 

The institute was launched with the support and foresight of our founding sponsors – Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.

This article was originally posted by Bill Hortz on the Institute for Innovation Development Blog. Bill is the founder of the Institute for Innovation (IID). The  IID is an educational and business catalyst for members determined to grow their businesses in a world of constant change. 

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