The Financial Industry Regulatory Authority provided an update on its three-year Remote Inspections Pilot Program, which allows for remote inspection of branches and offices by member firms.
According to a FINRA news release, a total of 741 member firms, 22%, have volunteered to participate in the program so far. The authority called it a “strong response.”
The plan, allowing broker-dealers to inspect their branch offices remotely rather than in-person and treat home offices as residential supervisory locations, was approved by the SEC in November and adopted by FINRA in January. Rule 3110.19 (Residential Supervisory Location) took effect on June 1; and Rule 3110.18 (Remote Inspections Pilot Program) became effective on July 1.
The opt-in period for firms to participate in the initial phase of the pilot program ended on June 26.
“FINRA proposed in 2023 to create a voluntary, three-year Remote Inspections Pilot Program to evaluate the impact and efficacy of remote inspection of branches and offices by member firms. The idea for the pilot arose from trends FINRA saw in the use of technology and evolving business practices in compliance,” Greg Ruppert, Executive Vice President and Head of Member Supervision at FINRA and Jonathan Sokobin, Executive Vice President, Chief Economist and Head of the Office of Regulatory Economics and Market Analysis at FINRA, wrote in a blog post.
“The pilot will allow FINRA to collect evidence of the effectiveness of remote inspections. As discussed in the rule proposal, FINRA will use the pilot data to assess whether remote inspections may be part of a modernized supervisory system that reflects the hybrid work environment and the availability of technologies that did not exist when the on-site inspection was conceived. The first submission of data from the participants is due in mid-October,” Ruppert and Sokobin added.
FINRA said the highest rate of opt-ins into the pilot program were among large firms (500 registered representatives or more), with 60% participating. 47% of mid-size firms are taking part, and 18% of small firms.
The deadline to opt-in to participate for Year 2 of the pilot program is Dec. 27, 2024. Year 2 of the pilot program will start on Jan. 1, 2025, and end on Dec. 31, 2025.
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 COVID-19 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.
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