Brokerages push to extend delay of on-site inspections

It’s too early to tell whether remote supervision of financial advisers will be the primary mode of compliance following the coronavirus pandemic, but brokerage firms want it to continue beyond next March when it comes to inspecting branch offices.

The Financial Industry Regulatory Authority Inc. has proposed extending the deadline for 2020 onsite inspections to March 31, 2021. The broker-dealer self-regulator said the challenges posed by the COVID-19 outbreak make it “impracticable” for firms to inspect office locations in person.

“Finra emphasizes that this extension of time does not relieve firms from the on-site inspection requirement of branch offices and non-branch locations currently prescribed by the rule,” the proposal states.

Especially in COVID time, the end of March seems like a long way off. But the Securities Industry and Financial Markets Association, a major association representing many brokerages, is telling Finra that even by then, on-site inspections won’t be possible.

“SIFMA and its members firmly believe it will be virtually impossible to complete the 2020 on-site branch inspection cycle by the revised March 31, 2021, deadline due to the continuing and increasing operational challenges, travel restrictions, health and safety risks, and uncertainties presented by the COVID-19 pandemic,” Kevin Zambrowicz, SIFMA managing director and associate general counsel, wrote in a July 28 comment letter.

Since mid-March, many financial firm personnel have been working from home given health concerns surrounding the pandemic. Supervision of their activities has occurred remotely, too, a situation that SIFMA said is working.

“SIFMA believes that remote inspection programs offer a suitable alternative to on-site office inspections that would justify temporary relief from on-site office inspection requirements until such time normal operations can responsibly resume and firms can have adequate time to prepare for such inspections,” Zambrowicz wrote.

The disruptions caused by the pandemic could continue well into next year, said Marlon Paz, a partner at Mayer Brown. For instance, it could be difficult for a brokerage firm’s main office in New York City to conduct an on-site inspection of a branch even in a nearby state.

The end of March “is not a realistic deadline because it is not clear we would have resolved the issues that are preventing inspections of [branch] offices,” Paz said.

Jennifer DiValerio, managing director at Foreside, a compliance consulting firm, also says the end of March does not provide enough time to resume in-person inspections. Brokerages should document the supervision challenges they face in a remote work environment but not depend on that litany to get them off the compliance hook.

“Firms need to assess their risks and modify [their oversight procedures] as needed to bridge the gap until they can return to onsite supervision,” DiValerio said.

One best practice is for financial advisers to copy a chief compliance officer on invitations to clients for video meetings, said Chris DiTata, vice president and general counsel at RIA in a Box, a compliance consulting firm. That gives the oversight official a chance to sample such conversations.

“It’s not a perfect proxy for in-person remote office inspection, but it is a useful tool,” DiTata said.  

Paz said the pandemic is demonstrating the efficacy of remote supervision. For instance, a brokerage main office can review trading documents just as easily electronically as they can in person at a branch office.

“I don’t think that compliance oversight is dependent on someone being there in person,” said Paz, a former SEC senior special counsel. “I have sensed a willingness by regulators to have that conversation. I hope there is a silver lining amidst the difficulties we’ve been facing with the pandemic in the modernization and reinvigoration of supervisory rules.”