Regulators remain open to extending remote examinations for broker-dealers into 2022 and firms hope the relief will last even longer.
FINRA President Robert Cook recently reiterated the need for exams to remain remote into 2022 during a conference held by the Securities Industry and Financial Markets Association’s (SIFMA), WealthManagement reported. “What I’d like to see happen here, at least where my thinking currently is, is we would extend it into next year, and that we would also step back and look at that rule more holistically, and think about whether it could use some updating to accommodate a thoughtful, risk-based approach to when in-person exams would be necessary,” Cook said, according to WealthManagement.
FINRA Chief Legal officer Bob Colby expressed a similar desire to extend remote exams into 2022 during the regulator’s annual conference in May, noting that FINRA had been discussing a possible extension with the SEC. “That is intended to buy a little time in order to figure out how to do this in the longer term,” he said.
FINRA granted firms temporary relief to allow remote inspections for calendar years 2020 and 2021 last November. “The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic,” FINRA noted in explaining why firms could complete remotely their inspection obligations under FINRA Rule 3110(c) (Internal Inspections) without an on-site visit to the office or location.
Firms have pushed for lasting changes to FINRA’s onsite branch inspection component. “Many broker-dealers believe they can maintain compliance remotely with the right technology and processes through a risk-based approach to branch supervision,” said Margie Webber director of regulatory compliance for RegEd. “They’ve been able to achieve branch supervision efficiencies through the use of technology during the pandemic by streamlining audit management, with the added bonus of eliminating travel risks and costs.”
Pandemic shows that remote branch inspections can work.
SIFMA has urged FINRA to make permanent changes to branch inspections for broker-dealers. “A remote inspection should be the default, and if firms determine that there are additional risks, only then should an on-site inspection be warranted. If significant concerns are discovered within a location that cannot be addressed in a virtual environment, an on-site inspection could be conducted,” SIFMA wrote in a February letter in response to a request for comment on lessons from the COVID-19 pandemic that FINRA issued in December. In its request, FINRA asked the industry for comment on the utility of current office definitions as well as the use and effectiveness of remote inspections.
“In order to implement risk-based inspection scheduling, we recommend that FINRA remove the annual requirement of FINRA Rule 3110.12 and the FINRA Rule 3110.13 presumption that such locations require inspection at least every three years in favor of a risk-based schedule,” SIFMA continued in its response.
“Risk factors weighed by firms, such as business conducted, access to firm books and records, heightened supervision of certain persons, and access to firm capital, could be documented. This process would allow for greater flexibility in handling supervision of lower risk areas of firm business without increasing risk of customer harm and would significantly lower costs on firms as more employees work more frequently from remote locations.”
Firms say the industry is prepared to conduct proper supervision virtually, noting as well that most broker/dealer functions can be performed remotely without on-site supervision and that many employees will not return full-time to a physical office, WealthManagement wrote in reporting that FINRA firms want inspectors to work remotely, permanently.
At FINRA’s annual conference in May, the regulator’s senior director of examinations, John Edmonds, and brokerage compliance officers agreed that remote examinations have been effective but challenging. As participants in a panel discussion, they noted challenges like tracking outside business activities and private securities transactions.
Technology improves remote supervision for broker-dealers.
“Firms need the proper technology to reduce risks associated with remote supervision,” said Webber from RegEd, whose conflict of interest suite includes solutions for tracking outside business activities, personal securities account management, and gifts, gratuities and political contributions.
RegEd assists broker-dealers in overcoming challenges associated with remote supervision through its Audit Management solution as well, which enables firms to implement an effective audit program per FINRA Rule 3110. Also, RegEd’s compliance questionnaires streamline the annual certification of the registered representative population in accordance with FINRA’s Supervision Rule.
During the COVID-19 pandemic, RegEd has helped firms review their branch exams with remote work and remote exams in mind, like with pre-audit questionnaires (PAQs) that streamline audit coordination and data input. “The PAQ is a perfect tool for compliance teams that want to cover the basics for a large volume of branch exams,” said Lindsay Restrepo, product manager for RegEd. “With auditors free to focus their on-site visits on higher-risk individuals and branches, the firm can prioritize travel based on federal and local health and safety guidelines. “
As built-for-purpose enterprise compliance solutions tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are highly effective as well as cost-efficient. Firms can seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.
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