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.
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:
Messaging apps take on Wall Street
Learn more about reprints and licensing for this article.
