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Compliance officers facing challenges for start of FINRA’s remote inspection program

On Behalf of | May 24, 2024 | FINRA Compliance

Compliance officials in the financial industry are preparing for the Financial Industry Regulatory Authority’s new rules regarding its remote inspection program, AdvisorHub reports.

The plan, allowing broker-dealers to inspect their branch offices remotely rather than in-person and treat home offices as residential supervisory locations,(RSLs)  was approved by the Securities and Exchange Commission in November.   According to Regulatory Notice 24-02, Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1; and Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1.

With the current regulations pertaining to in-person inspections due to expire May 31, supervisors in charge of compliance are dealing with the challenges involved in transitioning to the RSL plan, 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.

Compliance with the revised rule will involve a new set of requirements revolving around eligibility and recordkeeping, making it a challenging time.

“As we’re approaching implementation deadlines, the communal paranoia and anxiety is really ratcheting up with tons of interpretive questions,” Scott Kursman, chief compliance officer for Citigroup Global Markets, said during a panel at Finra’s annual conference in Washington, D.C.

Jennifer Grego, chief compliance officer and head of operational risk at Morgan Stanley Wealth Management, said the period of adjustment has “turned out to be far more complex than any of us probably would have imagined.”

Rule 3110.19(d) requires a member firm that elects to designate any of its offices or locations as RSLs to provide FINRA with a current list of them by the 15th day of the month following each calendar quarter in the manner and format as FINRA may prescribe. Firms can start using the RSL designation on June 1.

Peggy Ho, general counsel and chief risk officer for Commonwealth Financial Network, said the industry will have to get accustomed to home offices being classified as official supervisory locations. “We’re all trying to do the right thing and…just making sure that people are acting consistent with your culture when they’re not in the office,” Ho said. “And that concept isn’t anything new.”

She noted that FINRA has provided firms with much-needed guidance to help apprise them of the various issues associated with the transition.  The authority issued a regulatory notice on the new remote location inspection system as well as launching a web page detailing key topics pertaining to the pilot program.  The page explains that “eligible member firms will have the flexibility to be inspected “without an on-site visit to the office or location, subject to specified terms that include conducting and documenting a risk assessment, and producing written supervisory procedures for conducting remote inspections and inspection data to FINRA.”

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