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FINRA remote supervision plan draws concerns of attorneys, state regulators

On Behalf of | Aug 14, 2023 | FINRA Compliance

The Financial Industry Regulatory Authority’s plan to allow remote supervision of registered representatives is continuing to draw some opposition, reports InvestmentNews.

A public comment period has been underway on FINRA’s proposal that has been sent to the Securities and Exchange Commission.

FINRA has proposed a three-year pilot program that would allow most firms to conduct inspections of branch offices remotely without visiting them onsite. In April, FINRA filed the latest revision to its plan with the SEC.

The proposal would amend FINRA Rule 3110, which requires member firms to maintain a system of supervising the activities of their personnel to ensure compliance with securities laws and regulations. The authority’s ‘Residential Supervisory Locations’ (RSL) proposal would allow a broker working remotely to supervise other brokers without the broker’s home being designated as a branch office. The RSL would be subject to examination by the parent brokerage once every three years instead of the annual inspection that must be performed at an office of supervisory jurisdiction.

Among those weighing in during the public comment period was the North American Securities Administrators Association, a group of state regulators. In its comment letter, NASAA said “the proposed amendments to the RSL Proposal strike a more appropriate regulatory balance on the specific issues addressed. The RSL Proposal could be improved, however.”

Specifically, the organization said “The RSL proposal should be revised to establish an annual inspection schedule for RSLs. FINRA’s continued reluctance to make this sensible revision is concerning, given the important role of inspections in the supervisory structure. If FINRA is confident that reducing the frequency of inspections is acceptable, it should include its reasoning for reaching that conclusion in its filing with the Commission.”

Also opposing the FINRA plan is the Public Investors Advocate Bar Association, an international bar association whose members represent investors in disputes with the securities industry.

The PIABA said it is asking the SEC to reject the latest iteration of the proposal. “PIABA submits this comment because the bar association believes the rule proposal runs counter to FINRA’s stated objective of investor protection,” the comment letter said. “While it is understood that FINRA is attempting to change with the increased use of virtual technology, it leaves considerable opportunity for advisors working from home to skirt the rules.”

But brokerages, including Fidelity, submitted letters calling on the SEC to approve FINRA’s proposals before the end of the year, when a temporary rule permitting remote inspections is due to expire. The rule was implemented in November 2020 during the COVID-19 pandemic to relieve firms of the obligation to perform on-site, in-person inspections amid the challenges of the health crisis.

“We greatly appreciate Finra’s continued willingness to modernize its longstanding branch office definition,” Gail Merken, chief compliance officer at Fidelity Brokerage Services, and two of her colleagues wrote in their letter.

Following the expiration of the public comment period, rebuttal comments are due August 15. The SEC must approve FINRA’s proposal before the rule becomes final.

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