FINRA has proposed to extend temporary relief allowing firms to conduct their 2022 branch inspections remotely through year-end. If approved by the SEC, the extension of FINRA Rule 3110.17 would extend COVID-related branch office inspection relief that is now scheduled to end on June 30.
“The proposed additional six-month extension would provide further clarity to firms on regulatory requirements and account for the time needed for many firms to carefully assess when and how to have their employees safely return to their offices in light of vaccination coverage in the U.S. and transmission levels of the virus, including any emergent variants throughout the country,” FINRA wrote in its proposal to extend the effectiveness of temporary FINRA Rule 3110.17.
FINRA adopted Rule 3110.17 in November 2020 so that firms could complete their inspection obligations for calendar years 2020 and 2021 remotely. In September 2021, the regulator extended FINRA Rule 3110.17 to include calendar year 2022 inspection obligations through June 30.
“FINRA has followed the pandemic’s impact on member firms closely. It knows that COVID-19 continues to disrupt operations and that firms may need more time before returning to on-site branch inspections,” said Margie Webber, director of regulatory compliance for RegEd.
Many employers have delayed or modified their return-to-office plans due to the Omicron variant, for example, FINRA noted in its proposal to extend branch office inspection relief. With many employees still working from home, firms could struggle to establish inspection schedules for the second half of 2022 and ensure there is adequate, experienced staff available to travel and conduct on-site inspections, regulators explained.
Firms’ responsibilities under FINRA Rule 3110.17
FINRA Rule 3110.17 allows firms to do remote inspections for offices of supervisory jurisdiction, branch offices, or non-branch locations. If a firm chooses to inspect remotely, it must update its policies and procedures to account for remote branch inspection through Dec. 31, Webber said.
Per FINRA, “reasonably designed” written supervisory procedures for conducting remote inspections should include descriptions of the methodology and technologies that the firm may use. A firm should also use risk-based systems to identify and prioritize for review the areas with the great risk of violations.
Also, regarding an effective supervisory system, a firm doing a remote inspection will be held to the same standards for review as set forth under Rule 3110.12, FINRA noted. If a firm finds indicators of irregularities or misconduct, it may need to provide for more frequent monitoring of that office or location, including potentially a subsequent physical, on-site visit on an announced or unannounced basis when the member’s operational difficulties associated with COVID-19 abate, FINRA stated in its proposal to extend remote inspections.
In terms of documentation requirements, Webber noted that a firm must maintain and preserve a centralized record for each calendar year (2020, 2021 and 2022) that separately identifies:
- All offices or locations that had inspections that were conducted remotely; and
- Any offices or locations for which the member determined to impose additional supervisory procedures or more frequent monitoring, as provided in Rule 3110.17(c). (A firm must also identify any additional supervisory procedures or more frequent monitoring for that office or location that were imposed as a result of the remote inspection in its branch inspection documentation.)
“FINRA may be letting firms do examinations remotely but it expects them to be as vigorous in their inspections as usual. The pandemic does not excuse them from meeting their obligations,” Webber said.
Technology and best practices for remote branch inspections
RegEd’s Audit Management solution enables firms to implement an effective audit program and efficiently conduct remote inspections, per FINRA Rule 3110.17. 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 automate the process of pre-audit data collection.
View RegEd’s on-demand webinar on branch inspections to learn more about how branch oversight has changed during the COVID-19 pandemic. Experts discuss how regulators, including FINRA and the SEC, continue to expect firms to administer effective programs for overseeing branches and supervised individuals. They also review practical challenges and opportunities facing audit teams, as well as the latest best practices that have emerged as firms navigate the pandemic and remote work.
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