Finra extends work on remote supervision proposals amid investor protection concerns

State regulators cite brokers' outside business activities and 'off-channel communications' as two areas that can't be overseen from afar.

Two Finra proposals that would allow brokerages to conduct remote supervision of branch offices won’t meet their deadlines to become final rules over the next month as the organization continues to address investor protection concerns.

The Financial Industry Regulatory Authority Inc. filed the proposals with the Securities and Exchange Commission last year. One would establish a three-year remote-inspection pilot program. The other would allow a broker’s residence to be designated as a supervisory location. The SEC was to have acted on the pilot program measure by April 12 and the home-office proposal by March 30.

Finra CEO Robert W. Cook said Wednesday that more work needs to be done on each of the proposals. The broker-dealer self-regulator is talking to the SEC, fellow regulators and others who have given input on the measures.

“If you’re looking at the clock saying, ‘I’m looking forward to seeing those rules approved by the end of the month,’ I wouldn’t hold your breath for that,” Cook said at a Securities Industry and Financial Markets Association conference in San Diego. “I think there’s a healthy conversation that’s continuing and I think it’s going in a constructive direction.”

State regulators have criticized the proposals, saying that remote inspections can leave a regulatory gap in overseeing a branch office’s operations. The North American Securities Administrators Association has submitted a couple of comment letters during the rulemaking process.

“From the outset, NASAA has had concerns with the proposed pilot program for remote branch office inspections,” NASAA President Andrew Hartnett said in a statement. “A couple of examples underlying those concerns are the numerous cases where state regulators have uncovered undisclosed outside business activities as the result of an onsite inspection and the apparent shortcomings in remote inspections as evidenced by the SEC’s off-channel communication cases.”

He was referring to recent SEC enforcement actions centering on the use of messaging apps by brokerage staffs to conduct business. Hartnett appeared at the SIFMA conference on a separate panel from Cook.

“We’re glad to see that the pilot program is being refined to add additional guardrails and we appreciate Finra and the SEC considering our concerns,” said Hartnett, who is Iowa’s deputy insurance commissioner.

Under current rules, offices of supervisory jurisdiction and supervisory branch offices must be inspected in person at least annually, while nonsupervisory branches and other locations are inspected every three years.

But Finra argues in the rule proposals that technological advances have enhanced firms’ supervision and monitoring of branch and non-branch locations.

During the pandemic, most financial firms adopted work-from-home approaches to conducting business. Many are still operating in a hybrid mode. Cook said that keeping the existing supervision rule in place might force brokerages to end work from home.

“The consequence of not providing some kind of framework is that we’re effectively saying all work has to be done in the office,” he said. “I don’t think that’s where most regulators are. I’m not saying there aren’t really important, valid concerns. I think that’s where the dialogue has been very helpful with the SEC, with other regulators, to think about how do we make sure this program is well designed to preserve investor protection while allowing an appropriate degree of flexibility.”

For now, a temporary rule is in place that allows brokerages to conduct remote branch office inspections. It was established at the outset of the coronavirus pandemic and has been extended through the end of this year.

Whether the temporary rule is renewed again for 2024 depends on the fate of the rule proposals in front of the SEC, Cook said. The SEC must approval all Finra rules.

SIFMA, one of the largest financial services trade associations, has been at the forefront of pushing for remote inspections. It still has work to do to get the policy into final rules.

“We continue to see obstacles from regulators on those proposals,” Saima Ahmed, SIFMA executive vice president and general counsel, said while moderating Cook’s session at the conference.