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SEC approves FINRA’s proposed rules for remote inspection program

On Behalf of | Nov 28, 2023 | Securities and Compliance

The Securities and Exchange Commission has approved a plan allowing broker-dealers to inspect their branch offices remotely rather than in-person, according to AdvisorHub.

The plan was initially developed by the Financial Industry Regulatory Authority in response to the COVID-19 pandemic.  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 when the pandemic began, 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.  Firms were thus permitted to remotely inspect their brokers’ offices.

The SEC has now approved FINRA’s ‘Residential Supervisory Locations’ (RSL) proposal, which 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.

“To help mitigate the potential risks associated with a less frequent inspection cycle, the proposed rule change also would establish safeguards that limit [residential supervisory location] designation to certain firms and locations based on criteria designed to minimize risk,” FINRA said in its proposal.

At the same time, the SEC approved FINRA’s request to extend its temporary program for remote inspections to June 30, 2024. It had been scheduled to expire at the end of 2023.

The SEC said that the new rules were “consistent” with its responsibility to supervise broker-dealers in order to prevent fraud and harm to investors.  The commission said the rules would allow firms to “effectively and more efficiently carry out their supervisory responsibilities to review the activities of each office or location while preserving investor protections.”

The rules “reflect today’s hybrid work environment while still providing critical investor protections,” FINRA said in a statement.

FINRA’s proposal had drawn opposition from state regulators and some industry groups, including the Public Investors Advocate Bar Association.  The PIABA said in its comment letter, “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.”

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