Dealing with Your Obligations to Clients = During=20 the COVID-19 Pandemic
DOWNLOAD PDF =- Poles,= =20 Andre G. Wyatt= ,=20 Bradley J. Borger=20 Gilligan, Frank C= ipriano,=20 Chantal A. . Dorton, = William=20 H. =20 =20
-
Industry Alerts =
=20
While=20 securities regulators on both sides of the border have provided some = relief to=20 dealers and advisors, the Canadian Securities Administrators = (=E2=80=9CCSA=E2=80=9D) and the=20 Securities and Exchange Commission (=E2=80=9CSEC=E2=80=9D) have not = extended that relief to ease=20 the duties owed by registrants to retail clients. In particular, = registrants=20 continue to be required to have sufficient current information about = their=20 client=E2=80=99s situation and objectives when making recommendations to = buy, sell, or=20 hold securities. Dealers and advisors on both sides of the border = should=20 be acting now to assess client information with an eye to ensuring that = they=20 keep up with the altered and evolving market and economic conditions = affecting=20 us globally.
Canada
When = dealing with=20 clients during the COVID-19 pandemic, registrants must continue to focus = on=20 their obligations to know their clients and to take reasonable steps to = ensure=20 that any trading is suitable for the client. Typically, = registrants=20 collect =E2=80=9Cknow-your-client=E2=80=9D (=E2=80=9CKYC=E2=80=9D)=20 information at the start of the client relationship and periodically=20 thereafter. In particular, registrants have an obligation to = update KYC=20 when they become aware of a significant change to a client=E2=80=99s=20 circumstances.
In light=20 of the massive disruption to the economy, workplaces, and financial = markets,=20 including the consequential impacts on investor incomes, portfolios, and = wealth=20 brought on by the COVID-19 pandemic, it would be unusual for a = registrant to=20 take the position that the requirement to update KYC has not been=20 triggered.
Registrants that operate with = discretionary=20 authority over a client=E2=80=99s assets should be proactively reaching = out to their=20 clients to understand if the client has experienced a change in = financial status=20 in light of the pandemic. In circumstances where there has been no = significant change to a client=E2=80=99s financial status, the current = health crisis and=20 economic conditions may still have resulted in changes to the = client=E2=80=99s=20 short-term and long-term investment goals and liquidity needs. All = of=20 these changes will need to be understood and considered by the = registrant when=20 determining whether to continue to hold, sell, or acquire specific = securities=20 for the client=E2=80=99s portfolio.
Similarly, registrants who deal with = clients on=20 a transactional basis will need to be aware of changes to the = client=E2=80=99s=20 circumstances when accepting trading instructions or making trading=20 recommendations.
In light=20 of the physical distancing requirements imposed across Canada, = registrants will=20 need to develop and implement new and flexible measures related to their = KYC=20 update process. Firms should update policies and procedures to reflect = the =E2=80=9Cnew=20 normal=E2=80=9D when it comes to gathering information on a wide scale = and communicating=20 with clients whose information may require updating. Even while=20 implementing changes in response to the pandemic, registrants should = remain=20 cognizant of the need for their compliance policies to both meet their=20 regulatory obligations and reflect how they are actually = operating. Once=20 implemented, the =E2=80=9Cnew normal=E2=80=9D should be reviewed and = revised regularly as the=20 pandemic and its impacts evolve.
United=20 States
Similarly, in the United States, the = SEC has not=20 eased any of the requirements regarding the duties that are owed to = retail=20 investors by investment advisers or broker-dealers. In an April 2, = 2020=20 statement, Chairman Jay Clayton reiterated that investors remain the top = focus=20 of the SEC and that the uncertainties caused by COVID-19 have not = changed their=20 perspective and commitment to protecting investors. Chairman = Clayton also=20 stressed that the June 30, 2020 deadline for broker-dealer compliance = with=20 Regulation Best Interest (=E2=80=9CReg BI=E2=80=9D), = Form CRS, and other=20 related requirements remains intact.[1]
Broker-dealers and investment advisers = must=20 exercise reasonable diligence, care, and skill when making a = recommendation to a=20 retail customer in light of that client=E2=80=99s investment profile and = the potential=20 risks, rewards, and costs associated with the recommendation. In = light of=20 the current pandemic, U.S. broker-dealers and investment advisers need = to=20 proactively assess their KYC information =E2=80=93 and make appropriate = updates as=20 necessary =E2=80=93 in order to ensure continuing compliance. In = connection with=20 such an assessment, U.S. broker-dealers and investment advisers should = consider=20 the following:
Reg BI was adopted on June 5, 2019 = with a June=20 30, 2020 compliance deadline, and is a key component of the = SEC=E2=80=99s broader=20 package of rules designed to raise the standard of care required of=20 broker-dealers and to enhance the quality and transparency of retail = investors=E2=80=99=20 relationships with broker-dealers and investment advisers.
Broker-dealers and investment advisers = must=20 exercise reasonable diligence, care, and skill when making a = recommendation to a=20 retail customer in light of that client=E2=80=99s investment profile and = the potential=20 risks, rewards, and costs associated with the recommendation. Both = before=20 and after the Reg BI compliance date, broker-dealers and investment = advisers=20 need to have sufficient current KYC information to meet their = obligations. In=20 light of these obligations and the current pandemic, broker-dealers and=20 investment advisers in the U.S. should consider updating KYC in light of = the=20 following:
Changes in Current Financial=20 Status. From the middle of March to the middle of April,=20 approximately 18 million people in the U.S. filed first-time = unemployment=20 claims. As it stands now, an estimated 13% of the labor force in = the U.S.=20 is unemployed. At the height of the Great Recession, that number = was=20 9.9%. More concerning is that these numbers are likely to continue = to=20 rise. Broker-dealers and investment advisers must assess the = current=20 financial status of their clients and should adjust investment = strategies and=20 recommendations accordingly.
Changes in Investment Goals.=20 Regardless of the employment and financial status of the = client,=20 the current health crises and economic conditions may have changed the = client=E2=80=99s=20 short-term and long-term investment goals. Broker-dealers and = investment=20 advisers should consider new policies and procedures for reviewing and=20 reassessing their clients=E2=80=99 risk tolerances and strategic goals = in light of the=20 pandemic.
Need=20 for Liquidity. Brokers and advisers should consider the = client=E2=80=99s=20 need for liquidity before making recommendations or investment = strategies. =20 The ability to easily liquidate assets may be much more important to = investors=20 now that it was prior to the start of the pandemic.
Health=20 Care and Insurance. Unfortunately, for most Americans, the = loss of=20 employment also means the loss of health care benefits. For those=20 fortunate enough to be able to maintain coverage through COBRA or the = private=20 market, such coverage is expensive. Additionally, firms should = consider=20 the impact that COVID-19 might have on insurance carriers and stocks, as = well as=20 whether certain types of insurance could be sound investments for = certain=20 clients.
[1]=20 Reg BI was adopted on June 5, 2019 with a June 30, 2020 compliance = deadline and=20 is a key component of the SEC=E2=80=99s broader package of rules = designed to raise the=20 standard of care required of broker-dealers, and enhance the quality and = transparency of retail investors=E2=80=99 relationships with = broker-dealers and=20 investment advisers. The SEC=E2=80=99s Office of Compliance = Inspections recently=20 issued two risk alerts providing guidance regarding the scope of = forthcoming=20 examinations focusing on compliance with Reg BI and Form CRS. The=20 examinations are scheduled to begin after the June 30 deadline. = Watch for=20 our upcoming release on this = topic.
Related Services
Contacts
Recent Insights
- April 27, 2020Industry=20 Alerts = =20 Copyright Office Response to COVID-19 Pandemic = =20
- April 27, 2020Industry=20 Alerts = =20 Nevada State and Local Governments Make Licensing and Permit = Accommodations to=20 Help Businesses Amid the COVID-19 Crisis = =20
- April 27, 2020Industry=20 Alerts = =20 New Details about the Canada Emergency Commercial Rent Assistance = Program and=20 the Ontario-Canada Emergency Commercial Rent Assistance Program = =20
- April 27, 2020Industry=20 Alerts = =20 UPDATE -- SBA Adds Guidance Regarding Necessity Certification Under = the=20 Paycheck Protection Program =
- April 24, 2020Industry=20 Alerts = =20 Maintaining Trade Secrets Amid the COVID-19 Pandemic = =20
- April 23, 2020Industry=20 Alerts = =20 Business Interruption Insurance and COVID-19 in Ontario = =20
- April 23, 2020Industry=20 Alerts = =20 Pause in Immigrant Visa Processing Imposed by Presidential = Proclamation -=20 Effective April 23 for Sixty Days at Consular Posts = =20
- April 23, 2020Industry=20 Alerts = =20 Virtual Witnessing of Wills and POAs During COVID-19 = =20
- April 22, 2020Industry=20 Alerts = Is=20 Now the Right Time for an Estate Freeze? = =20