FINRA amends proposal for extending remote inspections beyond 2023

On Behalf of | Jan 6, 2023 | Regulatory Investigations

The Financial Industry Regulatory Authority has made modifications to its plan for extending remote inspections of branch offices beyond the end of 2023, according to AdvisorHub.

Under FINRA Rule 3110, member firms are required to maintain a system of supervising the activities of their personnel to ensure compliance with securities laws and regulations. But beginning in November 2020 during the COVID-19 pandemic, a temporary rule was implemented to relieve firms of the obligation to perform on-site, in-person inspections amid the challenges of the health crisis.

The temporary rule was due to expire at the end of 2022. But FINRA filed proposals with the Securities and Exchange Commission for a one-year extension of the rule as well as a three-year pilot program that would move toward a more permanent system for remote inspections.

Last week, FINRA proposed amendments to the pilot program that would take into account additional risk factors in deciding whether remote inspections can be conducted at branch offices. According to the proposal, members conducting a risk assessment for each office or location would be required to consider, among other things, the volume and nature of customer complaints, the volume and nature of outside business activities, the volume and complexity of products offered, the nature of the customer base, including vulnerable adult investors, and failures to comply with the member’s written supervisory procedures.

Members would also be called upon to conduct on-site inspections or make more frequent use of unannounced, on-site inspections for high-risk locations or where there are “red flags”. Brokerages that have registered with FINRA in just the past year or those that have been suspended by the authority would be barred from remote-inspection eligibility.

The authority said it was proposing the changes based upon some of the comments received that opposed the initial proposal, including concerns related to the adequacy and scope of the program’s controls to address higher-risk conduct.

In addition, the Public Investors Advocate Bar Association had asserted that making remote inspections permanent would leave opportunities for “advisors working home from home to skirt the rules.”

The attorneys at Lewitas Hyman understand the complexities that come with being the subject of a regulatory inquiry by the SEC, FINRA and other self-regulatory organizations, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact us at (844) 651-2643 or through our online contact form for a free consultation.

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