Pandemic prompts brokerages to seek relaxed in-person inspection requirements

Member firms and trade associations representing them told Finra their pandemic experience has shown that supervisors don’t need to look over the shoulders of registered reps physically to ensure they’re following the rules.

After working remotely for nearly a year due to the coronavirus pandemic, brokerages are asking Finra to ease requirements for in-person personnel supervision and revise other rules to reflect that business is increasingly being conducted digitally.

Member firms and trade associations representing them told the Financial Industry Regulatory Authority Inc. their pandemic experience has shown that supervisors don’t need to look over the shoulders of registered representatives physically to ensure they’re following securities laws and rules.

In December, the broker-dealer self-regulator issued a regulatory notice seeking public comment on whether it should change to its rules, operations or administrative processes to reflect lessons learned during the pandemic. The comment letters were due Tuesday.

“The pandemic made our industry acutely aware that the physical location of, or supervisor’s physical proximity to, the associated person is less relevant to today’s supervisory program than it once was,” Barbara Armeli, senior vice president and chief compliance officer at Charles Schwab & Co. Inc., wrote in a Feb. 12 comment letter. “Firms proved able to properly supervise representatives in remote locations, performing a wide range of functions, without compromising our commitment to investor protection.”

Other recommendations in comment letters included redefining what is meant by a branch office and office of supervisory jurisdiction, allowing greater use of electronic signatures and expanding the number of licensing exams that can be taken online.

Finra adopted a temporary rule change to allow remote office inspection for last year and this year through the end of this year. Previously, Finra had moved the deadline for in-person 2020 inspections to the end of March.

“Finra should consider fashioning permanent relief that allows remote inspections as the primary directive, with a reasonable risk-based approach to the determination of how and when to conduct a physical onsite inspection,” Armeli wrote.

The Financial Services Institute, which represents independent broker-dealers and financial advisers, said its members have found remote inspections to be efficient.

“Overall, FSI members have found that remote inspections still promote Finra’s goal of investor protection,” Robin Traxler, FSI vice president of regulatory affairs and associate general counsel, wrote in a Feb. 11 comment letter. “This is especially true given advancements and the widespread use of technology, which allows FSI members to easily conduct inspections using video conferencing, electronic document review and other available tools.”

Foreside Financial Group, a group of 17 affiliated broker-dealers and compliance consultant, said firms should decide for themselves whether to conduct remote or in-person inspections.

“A firm should be able to determine the appropriate office visit schedule and the manner of visitation (in-person, virtual or telephonic) based on an internal risk assessment, which would include, among other factors, the number of people located in an office location, the type of activity conducted from an office location and the disciplinary history of the representatives,” four chief compliance officers from Foreside firms wrote in a Jan. 26 comment letter.

One of Finra’s risk priorities – the monitoring of outside business activities – can be done well remotely, Traxler said.

“In fact, OBAs are often discovered and monitored through automated processes, such as reviewing an associated person’s bank records, emails, and through targeted Internet searches,” Traxler wrote.

FSI also cautioned Finra not to designate reps working from home as operating in a branch office, which it said would place an undue burden on its members.

“FSI recommends providing flexibility with respect to the number of transactions that may be facilitated through a ‘non-branch office,’ given the current state of remote work and the likelihood that such alternative work arrangements will become commonplace,” Traxler wrote.

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