Finra proposes 3-year pilot program for remote office inspections

Working from home has lingered beyond the height of the coronavirus pandemic, and it’s likely to change how brokerages supervise their employees.

The Financial Industry Regulatory Authority Inc. filed a proposal last Friday with the Securities and Exchange Commission that would establish a three-year voluntary pilot program for financial firms that want to continue remote inspections of branch offices and other locations.

The pilot program effectively would extend the online supervision that Finra has allowed since November 2020 in response to the pandemic. Finra eased in-person office inspection requirements in light of social distancing during the pandemic that caused most brokerages to switch to remote operations.

Firms have been deploying technology that has enabled them to improve their supervision of branch offices and other locations, Finra said. That trend accelerated during the pandemic when many registered representatives and other employees worked from home.

“Insights obtained from member firms and other industry representatives through various pandemic-related initiatives and other industry outreach have led Finra to carefully consider whether some processes and rules, including the manner in which a firm may satisfy its [supervision] obligations, should be modernized,” the rule proposal states. “With the confluence of advances in compliance technology and the permanent shift to a remote or hybrid work environment, made more pronounced by the pandemic, Finra believes that the optimal use of on-site inspections deserves further consideration.”

Finra said it’s now assessing long-term rule changes regarding remote inspections. The pilot program will help the broker-dealer self-regulator collect data on how effective they are.

The SEC must approve the proposal. The agency could seek public comment or send it back to Finra for modifications. If the SEC approves the pilot program, Finra will announce an effective date.   

Sander Ressler, co-owner and managing director of Essential Edge Compliance Outsourcing Services, has been a skeptic of remote inspections. But he called the Finra proposal “pretty solid.”

“I hope they’ll take [the pilot program results] over the next three years to build a better permanent rule after 2025,” Ressler said.

Under the proposal, brokerages could join the pilot program after conducting a risk assessment for each office or location it wants to examine remotely. They also must report to Finra data such as the total number of inspections — remote and in-person — conducted each quarter.

Finra said it will exclude from the program higher-risk firms, offices and locations, such as those that have been designated as restricted or taping firms.   

In a hybrid work environment, firms should use remote inspections for some offices and in-person exams for other locations, Ressler said.

The proposal “is a good middle ground,” he said. “If firms were smart, they would continue to do on-site exams.”

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 technological advances have enhanced firms’ supervision and monitoring of branch and non-branch locations, Finra said. “In response to these developments, member firms have questioned the historical expectation that firms satisfy the inspection component … solely in a physical, on-site manner,” the rule proposal states.

Ressler cautioned that smaller brokerages may still need in-person inspections because they don’t utilize artificial intelligence, robotics and other advances that Finra cites in the proposal.

“That technology isn’t available across the board,” Ressler said.

Brokerage supervision is likely to continue to evolve along with the location of brokerage operations.

“Finra recognizes that the pandemic has changed the conventional thinking on where work is conducted and this shift in the workforce landscape will unlikely revert to the model that existed pre-pandemic,” the rule proposal states.