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Dealing with Your Obligations to Clients During
the COVID-19 Pandemic
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Poles,
Andre G. Wyatt,
Bradley J. Borger
Gilligan, Frank Cipriano,
Chantal A. . Dorton, William
H.

April
2020

Industry Alerts

While
securities regulators on both sides of the border have provided some relief to
dealers and advisors, the Canadian Securities Administrators (“CSA”) and the
Securities and Exchange Commission (“SEC”) have not extended that relief to ease
the duties owed by registrants to retail clients. In particular, registrants
continue to be required to have sufficient current information about their
client’s situation and objectives when making recommendations to buy, sell, or
hold securities.  Dealers and advisors on both sides of the border should
be acting now to assess client information with an eye to ensuring that they
keep up with the altered and evolving market and economic conditions affecting
us globally.

Canada

When dealing with
clients during the COVID-19 pandemic, registrants must continue to focus on
their obligations to know their clients and to take reasonable steps to ensure
that any trading is suitable for the client.  Typically, registrants
collect “know-your-client” (“KYC”)
information at the start of the client relationship and periodically
thereafter.  In particular, registrants have an obligation to update KYC
when they become aware of a significant change to a client’s
circumstances.

In light
of the massive disruption to the economy, workplaces, and financial markets,
including the consequential impacts on investor incomes, portfolios, and wealth
brought on by the COVID-19 pandemic, it would be unusual for a registrant to
take the position that the requirement to update KYC has not been
triggered.

Registrants that operate with discretionary
authority over a client’s assets should be proactively reaching out to their
clients to understand if the client has experienced a change in financial status
in light of the pandemic.  In circumstances where there has been no
significant change to a client’s financial status, the current health crisis and
economic conditions may still have resulted in changes to the client’s
short-term and long-term investment goals and liquidity needs.  All of
these changes will need to be understood and considered by the registrant when
determining whether to continue to hold, sell, or acquire specific securities
for the client’s portfolio.

Similarly, registrants who deal with clients on
a transactional basis will need to be aware of changes to the client’s
circumstances when accepting trading instructions or making trading
recommendations.

In light
of the physical distancing requirements imposed across Canada, registrants will
need to develop and implement new and flexible measures related to their KYC
update process. Firms should update policies and procedures to reflect the “new
normal” when it comes to gathering information on a wide scale and communicating
with clients whose information may require updating.  Even while
implementing changes in response to the pandemic, registrants should remain
cognizant of the need for their compliance policies to both meet their
regulatory obligations and reflect how they are actually operating.  Once
implemented, the “new normal” should be reviewed and revised regularly as the
pandemic and its impacts evolve.

United
States

Similarly, in the United States, the SEC has not
eased any of the requirements regarding the duties that are owed to retail
investors by investment advisers or broker-dealers.  In an April 2, 2020
statement, Chairman Jay Clayton reiterated that investors remain the top focus
of the SEC and that the uncertainties caused by COVID-19 have not changed their
perspective and commitment to protecting investors.  Chairman Clayton also
stressed that the June 30, 2020 deadline for broker-dealer compliance with
Regulation Best Interest (“Reg BI”), Form CRS, and other
related requirements remains intact.[1]

Broker-dealers and investment advisers must
exercise reasonable diligence, care, and skill when making a recommendation to a
retail customer in light of that client’s investment profile and the potential
risks, rewards, and costs associated with the recommendation.  In light of
the current pandemic, U.S. broker-dealers and investment advisers need to
proactively assess their KYC information – and make appropriate updates as
necessary – in order to ensure continuing compliance.  In connection with
such an assessment, U.S. broker-dealers and investment advisers should consider
the following:

Reg BI was adopted on June 5, 2019 with a June
30, 2020 compliance deadline, and is a key component of the SEC’s broader
package of rules designed to raise the standard of care required of
broker-dealers and to enhance the quality and transparency of retail investors’
relationships with broker-dealers and investment advisers.

Broker-dealers and investment advisers must
exercise reasonable diligence, care, and skill when making a recommendation to a
retail customer in light of that client’s investment profile and the potential
risks, rewards, and costs associated with the recommendation.  Both before
and after the Reg BI compliance date, broker-dealers and investment advisers
need to have sufficient current KYC information to meet their obligations. In
light of these obligations and the current pandemic, broker-dealers and
investment advisers in the U.S. should consider updating KYC in light of the
following:

Changes in Current Financial
Status.  From the middle of March to the middle of April,
approximately 18 million people in the U.S. filed first-time unemployment
claims.  As it stands now, an estimated 13% of the labor force in the U.S.
is unemployed.  At the height of the Great Recession, that number was
9.9%.  More concerning is that these numbers are likely to continue to
rise.  Broker-dealers and investment advisers must assess the current
financial status of their clients and should adjust investment strategies and
recommendations accordingly.

Changes in Investment Goals.
Regardless of the employment and financial status of the client,
the current health crises and economic conditions may have changed the client’s
short-term and long-term investment goals.  Broker-dealers and investment
advisers should consider new policies and procedures for reviewing and
reassessing their clients’ risk tolerances and strategic goals in light of the
pandemic.

Need
for Liquidity.  Brokers and advisers should consider the client’s
need for liquidity before making recommendations or investment strategies.
The ability to easily liquidate assets may be much more important to investors
now that it was prior to the start of the pandemic.

Health
Care and Insurance.  Unfortunately, for most Americans, the loss of
employment also means the loss of health care benefits.  For those
fortunate enough to be able to maintain coverage through COBRA or the private
market, such coverage is expensive.  Additionally, firms should consider
the impact that COVID-19 might have on insurance carriers and stocks, as well as
whether certain types of insurance could be sound investments for certain
clients.

[1]
Reg BI was adopted on June 5, 2019 with a June 30, 2020 compliance deadline and
is a key component of the SEC’s broader package of rules designed to raise the
standard of care required of broker-dealers, and enhance the quality and
transparency of retail investors’ relationships with broker-dealers and
investment advisers.  The SEC’s Office of Compliance Inspections recently
issued two risk alerts providing guidance regarding the scope of forthcoming
examinations focusing on compliance with Reg BI and Form CRS.  The
examinations are scheduled to begin after the June 30 deadline.  Watch for
our upcoming release on this topic.

Related Services

COVID-19
Developments

Canada-U.S.
Platform

Contacts

Frank
Borger Gilligan

Of
Counsel Nashville

T:615-780-1106

E:[email-masked]

Chantal
Cipriano

Associate
Toronto

T:416-646-6864

E:[email-masked]

William
Dorton

Of
Counsel Lexington

T:859-899-8733

E:[email-masked]

Andre
Poles

Partner
Toronto

T:416-777-4037

E:[email-masked]

Bradley
Wyatt

Member and
Division Director, Transactions
Ann Arbor
Saginaw

T:734-623-1905

E:[email-masked]

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