SEC Issues Covid-19 Risk Alert

On August 12, 2020, the Securities and Exchange Commission’s (the “SEC”) Office of Compliance and Examinations (“OCIE”) issued a Risk Alert for broker-dealers and investment advisers.  The OCIE explained that it issued this alert because registrants were facing new operational, technological, and commercial challenges stemming from the Covid-19 pandemic.  This alert included six broad categories of advice for broker-dealers and investment advisers to consider:

(1) Protection of investors’ assets – OCIE encouraged registrants to review and make necessary changes to their policies and procedures around disbursements to investors, especially considering that many investors are making unusual or unscheduled withdrawals from their accounts as a result of Covid-19 uncertainty;

(2) Supervision of personnel – OCIE encouraged registrants to closely review and modify their supervisory and compliance policies and procedures, especially considering that many of their employees are now teleworking;

(3) Practices relating to fees, expenses, and financial transactions – OCIE encouraged registrants to review their fees and expenses policies and procedures and consider enhancing their compliance monitoring, especially considering the increased financial pressures on registrants and their employees to compensate for lost revenue during the pandemic;

(4) Investment fraud – OCIE encouraged registrants to be cognizant of increased fraud during the pandemic when conducting due diligence on investments;

(5) Business continuity – OCIE encouraged registrants to review their continuity plans and to provide disclosures to investors if their operations are materially impacted by the pandemic;  

(6) The protection of investor and other sensitive information – OCIE encouraged registrants to pay particular attention to the risks regarding access to systems, investor data protection, and cybersecurity, especially with the rise of teleconferencing and remote work during the pandemic. 

SEC Charges Former Hertz CEO

On August 13, 2020, the Securities and Exchange Commission (“SEC”) charged former Hertz Rental Car CEO and Chairman Mark Frissora with aiding and abetting Hertz in its filing of inaccurate financial statements and disclosures.  While Hertz previously paid $16 million in fines in 2018 to settle SEC charges stemming from this same conduct, the SEC’s complaint against Frissora specifically alleged that “as Hertz’s financial results fell short of its forecasts throughout 2013, Frissora pressured subordinates to ‘find money,’ principally by re-analyzing reserve accounts, causing Hertz’s staff to make accounting changes that rendered the company’s financial reports materially inaccurate.”  The SEC also alleged that Frissora’s conduct caused Hertz to “hold rental cars in its fleet for longer periods and thus lower its depreciation expenses, without properly disclosing the change,” which ultimately forced Hertz to revise and restate its financial statements in 2014 and 2015.  The SEC additionally noted that Frissora has agreed to settle these charges by repaying Hertz nearly $2 million in incentive-based compensation.