Securities Regulation Daily Advisory committee explores COVID-19 issues, including fraud and operational problems
Friday, April 3, 2020

Advisory committee explores COVID-19 issues, including fraud and operational problems

By Amanda Maine, J.D.

Staffs of the state regulatory agencies and FINRA are working remotely to make sure investors are protected.

The SEC’s Investor Advisory Committee (IAC), in a meeting held remotely by its members and witnesses, heard about the impact of the COVID-19 pandemic on investors. Testifying before the IAC included the president of NASAA and the senior vice president of FINRA on how regulators are approaching the crisis, as well as perspectives on how the broker-dealer industry is coping with its own challenges.

Clayton’s statement. Chairman Jay Clayton praised Commission staff and assured that the Commission is functioning well, although remotely. He stated that the SEC’s approach is premised on putting health and safety first, and it will continue to assist market participants in their efforts to continue business operations, including investor service operations, in the face of challenges caused by COVID-19.

Clayton also said that businesses face an unprecedented earnings period due to the economic shock and uncertainty caused by the coronavirus crisis. Some issuers will be able to file their quarterly reports on time, but that does not prevent issuers from putting out earnings releases and filing Forms 8-K, Clayton added. He also drew attention to guidance issued by the Division of Corporation Finance, which clarifies that issuers can provide prompt information addressing the effects of COVID-19 regardless of formal filing deadlines.

View from financial professionals. Penny Pennington, managing partner at financial services company Edward Jones, offered an industry view regarding the coronavirus pandemic. She noted that investment firms thrive on face-to-face relationships with clients, but in the wake of COVID-19, advisers have been working from home and serving clients through virtual relationships.

She added that in a "normal cycle of ebb and flow," there is an initiating event for a downturn, then buying, then investor fatigue, followed by investor confidence. The coronavirus effect on the market is different, though. As Pennington distinguished, the event did not start out as an economic crisis, but as a health crisis. The difficult part is trying to get people’s heads around the concept that the economy may come to a complete stop because it is a public health crisis, Pennington said.

NASAA view. Chris Gerold, chief of the New Jersey Bureau of Securities and the president of the North American Securities Administrators Association (NASAA), discussed how COVID-19 is impacting state securities regulators and enforcement actions. Like the SEC, staffs are working remotely, and NASAA and state administrators continue to share information with regulators and investors. State regulators are still available via regular and virtual communication channels, and enforcement proceedings are still going on, he assured.

Regarding examinations, Gerold said that they have shifted from on-site examinations to remote examinations and which may be delayed if necessary. He also noted that nearly all states are providing COVID-19-related relief. NASAA has developed a webpage regarding coronavirus that includes resources for industry professionals, as well as resources for states as the they contemplate types of relief provide by registrants.

Gerold also said that he anticipates concerns about market volatility in coming weeks, as well as an increase in complaints related to investor suitability. Another concern relates to broker-dealer operations and trading delays that might result in system crashes, he advised. Broker-dealer systems must be sufficiently robust to deal with a prolonged increase in engagement. Other related problems include call center volumes with frustrated or confused clients who cannot access their brokers, delays in trade executions, and delays in fund transfers, Gerold said.

FINRA. Gerri Walsh, senior vice president of Investor Education at FINRA, assured the committee that FINRA remains fully operational during the coronavirus crisis. FINRA maintains a website for coronavirus issues, including regulatory guidance and relief, FAQs, state stay-at-home orders, a compilation of SEC guidance, and other critical information that FINRA will post as it becomes available. She drew attention to FINRA’s cybersecurity guidance on strengthening cyber controls and guidance on business continuity plans. Walsh also said that FINRA has postponed all in-person arbitration proceedings up to May 31 but added that it can reschedule and is also open to remote options.

Walsh said FINRA has fielded many investor concerns, but despite the focus on coronavirus scams highlighted by many regulatory agencies, FINRA has mostly heard about issues related to market volatility and operational issues, such as difficulties in contacting one’s broker. She also noted that she has heard about best execution issues, including those relating to 401(k) accounts, but added that these issues may have resulted from restrictions on plans that had been imposed by the employer.

Committee member comments. Rick Fleming, the SEC’s Investor Advocate and a member of the IAC, said that his office has been hearing from retail investors, including some who want to ban short-selling or reinstate the uptick rule. Fleming stated that research shows that this would not be a be a good idea, but he wanted to note this concern from investors.

He also noted that one of the most common complaints from investors involves leveraged and inverse ETFs. According to Fleming, there is a widespread lack of understanding about how ETFs are supposed to operate, which is only compounded by the current market volatility.

Fleming, along with other committee members, addressed COVID-related scams that have become a concern. In particular, he cited the touting of small-cap companies that claim they have a cure for the coronavirus or some other product. Gerold also mentioned this in his comments to the IAC, noting that scammers will act to pump up the stock price of a company (usually a microcap company) supposedly manufacturing a COVID-19 vaccine or personal protective equipment (PPE).

Human impact. The impact of COVID-19 beyond just investing was also discussed by the witnesses and members of the IAC. Walsh advised that many who are victimized by coronavirus-related investment schemes are lonely and are more likely to be defrauded by fraudsters.

Committee member Nancy LeaMond of AARP was particularly forceful in her concern for vulnerable elderly persons, not just in relations to scams but to the pandemic itself. "People are scared to death," she said. They hear every night on the news that if they get the coronavirus, they will die. In addition to the health concerns, LeaMond said that people aged 50-64 years old are also anxious about the labor market and if they could get their job back.

LeaMond also said that studies have shown that older women are more anxious than men about the crisis. Women tend to have less income than men later in life, and they also tend to be caregivers, LeaMond said. She also drew attention to an AARP Fraud Watch Network which tracks coronavirus-related fraud.

MainStory: TopStory BrokerDealers Covid19 CyberPrivacyFeed DataBreach Enforcement FINRANews FraudManipulation GCNNews InvestmentAdvisers InvestorEducation NASAANews SECNewsSpeeches

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