Three-Year Pilot Program Seeks to Modernize Inspection Process for OSJs, Branch Offices, and Non-Branch Locations
The Financial Industry Regulatory Authority (FINRA) has withdrawn its original remote inspection pilot program from 2022 and proposed a new pilot initiative. This revised program aims to bring the inspection process for Office of Supervisory Jurisdiction (OSJ), branch offices, and non-branch locations into the modern era. The proposed pilot program is currently open for public comment.
Risk Assessments and Preaudit Questionnaires
The pilot program, which is set to last for three years if approved by the Securities and Exchange Commission (SEC), would require participating firms to conduct and document location-specific risk assessments. These assessments will help determine if a location is eligible for remote or on-site inspections. FINRA’s proposal suggests that preaudit questionnaires could be utilized to assess the risk level of a branch office and determine the frequency of inspections (remote or on-site) on either an announced or unannounced basis.
Written Supervisory Procedures for Remote Inspections
Firms participating in the pilot program must adopt WSPs specifically addressing remote inspections. These procedures should cover aspects such as the methodology (including technology used), factors considered in risk assessment, quarterly reporting to FINRA, use of other risk-based systems, escalating significant findings, new hires, supervision of those with a history of misconduct, OBAs and DBA designations, and prioritizing high-risk locations.
Ongoing Reviews and Red Flags
Participating firms will also be required to maintain ongoing reviews of activities and functions at all locations, whether inspected remotely or on-site, and adhere to the same supervisory standards. If a remote inspection reveals red flags, the firm may need to impose additional supervisory procedures, more frequent monitoring, or on-site follow-up inspections.
Documentation and Ineligibility Criteria
Documentation for each pilot year must separately identify all locations inspected remotely, the results of these inspections, and any additional supervisory procedures, more frequent monitoring, or on-site follow-up inspections that were imposed. Certain firms will be ineligible to conduct remote inspections if, at any time during the pilot, they meet specific criteria.
Recordkeeping and Surveillance Technology
Pilot participating firms must have a recordkeeping system in place that preserves the records required by securities laws, regulations, rules, and the firm’s WSPs. Appropriate surveillance and technology tools must be used to supervise the risks presented by remotely supervised locations.
Restrictions for Certain Locations
Certain locations will be ineligible for remote inspections during the pilot period if they meet specific criteria, such as having associated persons subject to mandatory heightened supervision or being statutorily disqualified, handling customer funds or securities, or having associated persons engaged in proprietary trading or the direct supervision of such activities.
Risk-Based Approach and Reporting Requirements
As part of the requirement to develop a reasonably designed risk-based approach to using remote inspections and the requirement to conduct and document a risk assessment for each location, participating locations must satisfy specific conditions. Pilot participating firms will be required to collect specific data and information and provide it to FINRA on a quarterly basis.
In summary, FINRA’s new remote inspections pilot program seeks to modernize the inspection process for OSJs, branch offices, and non-branch locations through a three-year pilot period, pending SEC approval. The proposal outlines the requirements for participating firms, including the adoption of WSPs addressing remote inspections, the use of appropriate surveillance and technology tools, and the collection and reporting of data to FINRA on a quarterly basis. The program aims to strike a balance between improving efficiency and maintaining high supervisory standards across all locations, ensuring that the financial industry remains compliant.
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