Remote regulation to add new hurdles


This article is part of a series of special reports entitled “The New Normal” appearing in the March 30, 2020, edition of InvestmentNews.

If securities regulators and advisers work from home for an extended period, it will change the look and feel of oversight and create drawbacks for both groups.

Over the last couple of weeks, headquarters staff at the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. have been performing their duties remotely as a result of the COVID-19 pandemic. Both regulators have posted statements on their websites saying they are fully operational.

With many financial advisers and most regulators working from home, there is little chance of a regulator darkening the door of a financial firm. The SEC Office of Compliance Inspections and Examinations said in a statement Monday that it “has moved to conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site.”

As they move toward remote operations, regulators are likely to rely more on email, telephonic, video and online communications rather than face-to-face interactions with advisers. Although they have been working for years to be more streamlined and targeted in examinations and enforcement activities, doing everything remotely creates logistical complications.

For instance, if a document needed in an examination is missing, an SEC staffer can’t just ask an adviser to retrieve it from her office down the hall. In an enforcement investigation, it could become much more difficult to arrange for an adviser and his attorney to be in the same room for an interview.

“There are inherent inefficiencies in working remotely,” said Julie Riewe, a partner at Debevoise & Plimpton and former co-chief of SEC Enforcement’s asset management unit. “It’s not the same as being there in person. Those inefficiencies all add up over time.”

If they’re not in the same room as leaders of financial firms, it could diminish regulators’ ability to gauge how serious the firm is about compliance.

“The intangible of getting the sense of the culture is difficult, if not impossible, to replicate over the phone,” said Junaid Zubairi, a partner at Vedder Price and a former senior attorney in the SEC’s Chicago office.

Mounting a defense during a remote enforcement case also could become tougher for advisers because they potentially lose some atmospherics that come from sitting across the table from SEC investigators.

“You won’t be able to have the in-person human touch to it,” Zubairi said. “Not having that contact can be a disadvantage to the registrant.”

Despite the challenges of remote regulation, it’s clear that regulators are trying to move away from oversight being a binary choice — in-person or offsite — and shift to a combination of the two, said Valerie Mirko, a partner at Baker & McKenzie.

“Federal regulators are really looking at the offsite exam experience and workstreams and considering how those can be augmented,” Mirko said.

So far, the SEC is doing “an incredible job” of adjusting to remote regulation while ensuring markets operate smoothly and investors are protected, said Daniel Gallagher Jr., a former SEC commissioner.

Prior to becoming an SEC member, he served on the SEC staff and observed firsthand the problems the agency experienced during another turbulent time.

“As someone who lived through the financial crisis in ’08, on the ground floor as an SEC staffer, I wish we had been so deft back then in our handling of things,” said Gallagher, a partner at Wilmer Hale.

Perhaps the most important question facing the SEC is whether it can catch the next Bernie Madoff if its staff and the employees of financial firms are conducting business from far-flung private residences.

“Today, with the custody rule and other post-Madoff reforms in place, the Madoff fraud could be caught in a remote exam atmosphere,” Gallagher said. “It’s not ideal but the SEC staff is resourceful and determined.”

If it’s difficult for SEC enforcement to show up at a place where a rip-off is occurring, they’ll reach out to local authorities.

“If the SEC staff senses any serious fraudulent activity, they will be in close contact with criminal law enforcement,” Riewe said.

More articles from The New Normal:

Advice firms will move more workers home — by Jeff Benjamin

Communicate or get kicked to the curb — by Bruce Kelly

Investment styles will take on an active approach — by Sean Allocca

Expect an influx of new clients — by Emile Hallez

Lower valuations a reality for firms — Ryan W. Neal

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