Brokerages want remote office inspections to be part of new normal

Brokerages want remote office inspections to be part of new normal
Firms say technological advances allow them to oversee reps no matter where they work. A compliance expert cautions that the best evidence of malfeasance is found on site.
MAR 11, 2022

It’s been two years since Covid-19 shut down the world economy and permanently changed the way all of us live and work. In a special section in the March 21 issue, the InvestmentNews team explores the new challenges, and benefits, that resulted from the pandemic and how the new normal has affected the financial services industry for the long term.

Probably the biggest change to U.S. business culture during the pandemic was that most Americans worked from home rather than going into the office. For brokerages, that shift ushered in remote office inspections by Finra, something the industry wants to see continue in the new normal.

The Financial Industry Regulatory Authority Inc. allowed remote supervision from the beginning of the coronavirus outbreak and continued to extend the temporary relief through the end of this year. Now the broker-dealer regulator is considering allowing remote inspections as part of risk-based examinations.

“Fidelity continues to find remote inspections to be as effective as inspections previously performed on-site,” three Fidelity Investments executives wrote in a Feb. 16 comment letter. “Looking forward to the post-pandemic environment, we believe there should be a path forward to preserve remote inspections as an option for broker-dealers to inspections.”

Advances in technology have given firms the ability to oversee their staff no matter where they work, according to the Fidelity officials. Remote inspections would allow them “to continue providing their employees with workplace flexibility,” they wrote.

Sander Ressler is skeptical about making remote inspections the new normal. Ressler, managing director of Essential Edge Compliance Outsourcing Services, said using the approach for low-risk firms periodically makes sense.

But he cautioned that remote supervision should not become widespread. If it does, regulators are likely to miss brokerage malfeasance because the best information they dig up on violations comes from what they find on their own while on site rather than what firms give them electronically.

He used the example of a firm that has 15,000 registered reps. If even a tiny fraction of them — 15 — are violating the rules, it could cause significant harm to investors.

“If you don’t ever go into those offices, you won’t know who the 15 are,” Ressler said. “Do you know how hard it is to play hide-and-seek when two people are in different houses? [Brokerages] are just advocating a cost management exercise, not an effective risk management program.”

Ken Bentsen Jr., chief executive of the Securities Industry and Financial Markets Association, said the organization has been talking to Finra, the Securities and Exchange Commission and state regulators to promote remote inspections.

“We need to update the rule book to what the workplace is going to look like in the post-pandemic world … it’s just a reality that you’re going to have hybrid working,” Bentsen said in an InvestmentNews 3 Questions interview. “So much inspection today is done electronically as it is.”

More articles from the special section:

Latest News

Maryland bars advisor over charging excessive fees to clients
Maryland bars advisor over charging excessive fees to clients

Blue Anchor Capital Management and Pickett also purchased “highly aggressive and volatile” securities, according to the order.

Wave of SEC appointments signals regulatory shift with implications for financial advisors
Wave of SEC appointments signals regulatory shift with implications for financial advisors

Reshuffle provides strong indication of where the regulator's priorities now lie.

US insurers want to take a larger slice of the retirement market through the RIA channel
US insurers want to take a larger slice of the retirement market through the RIA channel

Goldman Sachs Asset Management report reveals sharpened focus on annuities.

Why DA Davidson's wealth vice chairman still follows his dad's investment advice
Why DA Davidson's wealth vice chairman still follows his dad's investment advice

Ahead of Father's Day, InvestmentNews speaks with Andrew Crowell.

401(k) participants seek advice, but few turn to financial advisors
401(k) participants seek advice, but few turn to financial advisors

Cerulli research finds nearly two-thirds of active retirement plan participants are unadvised, opening a potential engagement opportunity.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today’s choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave