Advisers working from home increases compliance risks

In response to the rapidly spreading coronavirus, some financial advisory firms are telling their staffs to work from home, a move that adds compliance challenges to the other problems caused by the pandemic.

Market volatility, working remotely and the enhanced cybersecurity vulnerability introduced by doing so, take firms into a danger zone, said G.J. King, president of RIA in a Box, a compliance consulting and software firm.

“Everyone is scattered while you’re busier than ever,” Mr. King said. “It’s a perfect storm, unfortunately, for bad things to happen to your business. The risk of compliance issues and violations increases dramatically.”

The chief compliance officer is the key person to help a firm avoid missteps. But the logistics of that role change when advisers are working from far-flung locations instead of under one roof, and the CCO can’t roam the halls to check on colleagues.

“If people are not in the office, you can’t tell if they’re working or not working and what exactly they are saying to customers,” said Amy Lynch, president of FrontLine Compliance. “You’re counting on staff coming to you rather than you being able to discover [problems] yourself because you’re not physically present.”

Advisory firms must ensure they’re able to supervise staff members who are working outside the office and must be able to archive communications between staff and clients, Mr. King said.

The problem is that many firms are still using a paper-based compliance system.

“Compliance software is one of the least used types of software within the broader RIA industry,” Mr. King said.

Firms must have the means to track email and social media interactions between advisers and clients. They should also have audio and video-conferencing capabilities, said Marianna Shafir, regulatory adviser at Smarsh, a provider of cloud-based information archiving.

“Technology is really key right now,” Ms. Shafir said. “You want to make sure you have technology solutions in place to capture those conversations. If you don’t have it at this point, you should be getting it on board.”

On Monday, the Financial Industry Regulatory Authority Inc. released a regulatory notice telling its broker-dealer members to review their business continuity plans to ensure they’re responsive to a pandemic situation. The notice also outlined Finra’s expectations about the supervision of employees working from home.

“FINRA understands that the use of remote offices or telework arrangements during a pandemic may necessitate a member firm to implement other ways to supervise its associated persons who change their work locations or arrangements for the duration of the pandemic,” the notice stated. “In such cases, FINRA would expect a member firm to establish and maintain a supervisory system that is reasonably designed to supervise the activities of each associated person while working from an alternative or remote location during the pandemic.”

Testing remote working capabilities and doing related training are also important.

“Firms must provide adequate training to their employees regarding the use of remote work, including technology making sure customer records and information are kept confidential,” Ms. Shafir said.

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