FINRA is moving forward with a formal rule allowing firms to inspect their remote offices at a distance, rather than having to arrange in-person inspections.
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Since June 2024, the Financial Industry Regulatory Authority has allowed brokerage firms it oversees
FINRA’s remote-inspections policy grew out of emergency rules FINRA adopted during the COVID pandemic when most advisors were required to work from home to avoid spreading the illness. Many brokers and firms then found they were able to do their jobs away from central offices and pushed for permanent accommodations for remote work.
In-person inspections are more likely to turn up a ‘finding’
FINRA set up its pilot program largely as a data-gathering exercise to see if firms’ internal inspectors could perform their jobs looking for regulatory violations and other anomalies at a distance, rather than in person. Speaking at FINRA’s annual conference last month in Washington, D.C., FINRA Senior Economist Patricia Ledesma Liebana said 970 firms ultimately took part in the test, or just over 30% of the roughly 3,200 brokerages now in the industry.
Liebana said FINRA found that firms were most likely to conduct remote inspections of what it calls nonbranch offices, which are mostly residential locations. She said more than 20% of the remote examinations resulted in a “finding” — an issue possibly requiring further investigation.
For in-person inspections, the number was quite a bit higher. More than 40% resulted in a finding.
Even so, the type of inspection made little difference in the number of findings uncovered in a single examination.
“The rates are comparable — between two and three findings per inspection, when there was a finding, for both types of inspections,” Liebana said.
She said onsite and remote inspections proved equally capable of unearthing significant findings.
“So that gives us some comfort that remote inspections don’t have any blind spots, which was one of the possible outcomes when we went into the pilot,” Liebana said.
FINRA: Rule will prevent firms from ‘sending out an army’
Liebana said most of the participants — just over four-fifths — were large firms, which FINRA defines as those with 500 or more registered representatives. Because of that dominance by big brokerages, the pilot program took into account roughly 90% of firms’ branches and 86% of their more than 630,000 registered representatives, Liebana said.
Speaking at the same FINRA conference, Paxton Dunn —FINRA’s senior director operations, procedures and standards — said firms seem generally happy with the pilot program. Among other things, it means they don’t have “to send armies of people out to go do on-site inspections.”
He said there have been some awkward moments when remote inspectors have had to ask remote employees to move their cameras to provide a better view into their residence.
“But I think it’s probably a lot less awkward than somebody knocking on your door and saying, ‘Hey, can you show me your workspace and your bedroom?” he said.
Also on Thursday, FINRA’s Board of Governors proposed modifying a rule that allows firms to designate internal supervisors’
FINRA’s proposal, which is subject to approval by the SEC, would “extend the presumptive inspection cycle for nonbranch locations, simplify the approach for different types of residences and modify the supervisory ineligibility requirement for Residential Supervisory Locations,” according to FINRA.
The changes are being adopted as part of FINRA calls its FINRA Forward agenda, an attempt to bring its rules up to date after soliciting recommendations from firms and others in the brokerage industry.
