According to a filing last week, FINRA has submitted an amended proposal to the SEC to conduct a pilot program that would allow firms to perform virtual inspections. The re-filing included several revisions due in large part to widespread criticism from state securities regulators when the proposal was first submitted last summer.
The latest proposal is “largely similar” to what FINRA submitted last July and amended in December. The amendment covered six concerns, adding pertinent subparts to the proposed rule and a seventh amendment addressing other non-substantive or technical changes. According to FINRA, the current proposal reflects criticism that firms should be asked to explain why they opt for remote inspections, particularly for high-risk branches or those raising red flags.
So, What Exactly Changed?
The main source of criticism about the initial proposal came from a lack of requirement for firms to disclose personal information. The amended version bolsters the requirement; firms now need to provide more data including the number of branch locations. Firms that wish to participate will be assessed on three separate occasions to determine whether they are eligible for remote or on-site inspections. Quarterly data reports with specific information will be required from firms as well.
Additionally, FINRA narrowed the language used to disqualify firms from participating in the pilot program, another major criticism of the first proposal that was stated as being “overly broad”. FINRA altered the criteria to limit the number of eligible firms to participate in the three-year program. For example, certain locations will automatically disqualify firms from participating in remote inspections.
According to FINRA, they are expecting around 2,884 small firms, 183 mid-size firms, and 166 large firms would be eligible to participate in the pilot program, although large firms would likely have some branch offices excluded.
Other FINRA Rule 3110 Filings
The proposal is one of a two-part rulemaking package aimed at giving firms more flexibility to work-from-home conditions. Another rule, which would reduce the inspection requirement for home offices to once every three years from annually and would allow firms to treat private residences as non-branch offices instead of OSJs, was refiled last month.
To read the full pilot program proposal, click here.