Remote work is a post-Covid fact of life. So it’s not surprising that the brokerage industry wants the Securities and Exchange Commission to speed up its review of proposals presented by the Financial Industry Regulatory Authority Inc. that would allow firms to permanently conduct remote supervision of their registered representatives. There are good reasons, however, for the SEC not to rush.
Proposals Finra put out for comment in July 2022 would establish a three-year pilot program for remote office inspections and allow a broker working remotely to supervise other brokers without the broker’s home being designated a branch office. Current rules require offices of supervisory jurisdiction and supervisory branch offices to be inspected in person at least annually, and nonsupervisory branches to be inspected every three years.
The Finra proposals on which the SEC is now seeking comments update the original proposal in several ways, including strengthening the criteria for doing risk assessments before locations are designated for remote supervision.
As Mark Schoeff, Jr. reported, the industry wants some certainty around remote supervision because the temporary rule allowing it, which was instituted during the Covid pandemic, expires at the end of this year. Wanting certainty is reasonable, as are the concerns voiced by state regulators and the plaintiff’s bar, whose criticisms and suggestions appear to have influenced the revised Finra proposal.
During the initial comment period last summer, the North American Securities Administrators Association and the Public Investors Advocate Bar Association filed comments asking the SEC to hold off on its approval, maintaining that Finra had not provided sufficient justifications for either proposal. NASAA charged that “contrary to Finra’s confidence in technology, recent investigations and enforcement actions show that inadequately controlled firm personnel, including supervisors, have used new technologies to evade regulatory responsibilities and potentially engage in misconduct.”
Pointing to technology, PIABA noted that since firms review only a small sampling of electronic correspondence, the group’s members had seen many cases where brokers discussed selling unauthorized securities via firm email. These discussions were never detected, PIABA charged, because adequate systems weren’t in place to monitor and flag the emails.
Since this is the third time the SEC has requested comments on remote supervision — the second came late last October — and considering the looming expiration of the temporary rule, the industry’s frustration is understandable. But state regulators and the plaintiff’s bar have a point, too: There are already too many cases of investors being sold unsuitable investments or being otherwise harmed by unethical brokers whose firms were woefully unaware of what was going on despite technology intended to flag suspicious behavior. Remote supervision that results in more such breaches — and costly investor lawsuits — surely won’t be the result the industry wants.
NASAA said that it’s been speaking with Finra about the proposals and that the self-regulator has been responsive to its concerns and observations. For the sake of investor protection as well as the need to adjust to modern working conditions, let’s hope the new proposals satisfy the need for protection as well as efficiency.
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