This article, originally published in the Investment Advisers Association newsletter, analyzes the past to look ahead to a post-COVID world and SEC enforcement risk. Review from prior enforcement actions from the 2008 Crisis reveal the following themes:
- Failure to adequately disclose “bad news” in the face of red flags, including a variety of valuation and liquidity issues
- Crisis, as a form of real life stress test, with the result that certain products or investments are exposed as riskier than represented (either at sale or in subsequent reporting or disclosures) or certain financial operations or controls are proven to be deficient
- Actual “bad acts” taken in response to the crisis, such as insider trading, market abuse, risky trading strategies, and mismanagement of redemption requests
As asset managers move past the immediate stress of shifting to a pandemic posture, a key risk mitigation tool is to develop and maintain situational awareness around conduct and issues that could later be the subject of the SEC's hindsight scrutiny.
A key lesson from the 2008 Crisis is that public companies and asset managers, even in the midst of tackling the immediate problems of a crisis, should develop the situational awareness to identify conduct or deficiencies that may be subject to hindsight scrutiny by the SEC. And when issues are identified, firms should take reasonable steps to document their processes and analyses, augment or amend their policies and/or disclosures and make necessary adjustments to their business and plans to protect clients and/or investors, so when the SEC comes knocking after this crisis, they can demonstrate their good faith judgment and efforts.