Regulatory compliance does not stop in a crisis

In times like these, the last thing you want is to learn that your compliance systems are not regulator-standard compliant.

We recently sent out an email alerting clients that the inexpensive cloud backups many advisors/broker-dealers use like Dropbox, Google Drive, SharePoint or AWS are not 17a-4 compliant. Nor is the local backup so many rely on. Cloud-based backups are just that – backups that play an important role in any Business Interruption Recovery Plan. Like a hurricane or earthquake. But when they come to meeting compliance standards set out for the Exchanges, Financial Services or Insurance sectors, they do not make the grade. None of these cloud/local backup tools are 17a-4 compliant. Nor is your regular local backup. We have a solution, of course. But more on that in a minute. First, heed the warning of Wealth Management Reporter Patrick Donachie discussing the new compliance environment in the face of COVID-19.

WAH for you and the regulators

Donachie posts that the new way of working (remote, or work-at-home (WAH)) could expose advisory firms to regulatory infractions they have not even considered. He reports that like the rest of the world, financial advisors and firms are working entirely with clients and colleagues remotely (Zoom.us stock anyone?)

So are the regulators. Agencies like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), also are adjusting to this new out of the office work environment. Nonetheless, compliance mandates remain in force. This means exchanges, broker-dealers, registered investment advisors and compliance offers still must conduct their business within regulatory lines.

According to Karen Barr, president of the Investment Adviser Association (IAA), this means carefully identifying potential and previously unforeseen compliance vulnerabilities like unsecure wi-fi networks.

She told Donachie that while many may not have contemplated a full-on remote environment, ” I don’t know if everyone contemplated a full-on remote environment; are people’s laptops all secure? Are there cybersecurity concerns?” she said. “They still need to be reminded in the midst of all that’s going on, they need to follow their procedures.”

The crux of many concerns centers around how client communications are archived.

Brian Hamburger, MarketCounsel CEO and co-founder of MarketCounsel, cautioned that any email sent to more than one client could be considered advertising and should be reviewed as such.

More advisors and staff are communicating with each other digitally, using text and email or video chats in place of face-to-face interactions.

What records are discoverable?

In his interview with Donachie, Hamburger said, “Everything that’s captured electronically is therefore discoverable. Whether on a conference call or videoconference, these interactions between colleagues may be looked at with 20/20 hindsight at some point, and those words may be used against them in a context they never would have imagined.”

Advisors are urged to continue to document all interactions with clients and team members, regardless of the channel or platform, in case regulators look for discrepancies between messaging and client activity. 

According to Donachie, this may be easier said than done for some firms, as clients and advisors explore ad hoc ways of communicating in lieu of personal meetings. For example, clients may want to communicate with advisors via text, and if firms are not set up to document those messages, they may have to resort to screenshots of conversations. Twitter direct-messaging or LinkedIn messages with clients are other potential pitfalls to avoid.

Compliant mail archiving is vital

Getting employees onboard with an existing or new email archiving system can be challenging. Donachie added that Max Schatzow, founder of AdviserCounsel, expects the industry will see an uptick in fraudulent or unethical behavior in the coming months.

Even as the tools are available, Donachie writes, it’s the uncharted nature of the new business environment that is a challenge. The sudden combination of a market rout, largely untested work environments and processes, as well as the compliance pitfalls, will have a winnowing effect on advisory firms.

What can Patrina offer the WAH exchange, adviser, broker-dealer community?

Fast, easy-to-use, affordable compliance archiving. Patrina is the leading innovator in regulatory compliance, with a real track record for delivering the right intuitive, affordable compliance solutions to Exchanges and the Finance and Insurance sectors. So, let’s talk. Call 212-233-1155 and ask for me, Mark Opila. I’m the CEO of Patrina Corporation. Be smart. Be covered.Let’s talk.