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.