If your firm is anything like us, you understand how virtual work has become an almost universal experience. When the world shut down, it was a necessity that unintentionally proved productivity levels don’t fall when working from the comfort of your home. Now that things are opening once again, firms are reluctant to go back to the office; and after a recent announcement from FINRA, it seems they have noticed.
The latest proposals to amend FINRA’s Rule 3110 (Supervision) announced a pilot program that would allow firms to opt-in and conduct remote branch office inspections. This proposal is a nod to the remote inspections that have been ongoing since the start of the Covid-19 pandemic and signify that FINRA recognizes that this shift to working from home is likely to stay.
If this proposed amendment has piqued your interest, here are a few key items to be aware of.
Firms must first develop a reasonable risk-based approach to using remote inspections before electing to utilize the pilot program. The approach must include a way to conduct and document a risk assessment for that location, including the standard for reasonable review set forth in FINRA rule 3110.12. It must also take into account any higher risk associated with persons or activities that take place at or are assigned to that location.
Written supervisory procedures designed to detect and prevent violations of, and achieve compliance with, applicable securities laws and regulations must also be adopted. These procedures include:
- A description of the methodology, including technology, the firm may use to conduct remote inspections;
- The factors considered in the risk assessment made for each applicable location;
- The use of other risk-based systems employed generally by the firm to identify and prioritize for review those areas that pose the greatest risk of potential violations of applicable securities laws and regulations and FINRA rules; and
- Policies and procedures are reasonably designed to comply with the firm’s recordkeeping and data collection and provision requirements.
A centralized record for each of the ‘Pilot Years must be maintained and separately identify: (1) all offices or locations that were inspected remotely; and (2) any offices or locations for which the firm determined to impose additional supervisory procedures or more frequent monitoring. If a firm determines that additional supervisory procedures or more frequent monitoring are necessary, the firm’s documentation is specific in this regard, including whether an on-site inspection was conducted.
Data Collection and Provision
At least quarterly, participating firms must collect and provide various data to FINRA related to the number of locations examined remotely, on-site, or on-site because of a “finding,” and information about those findings. FINRA considers “findings” to be “items that led to any remedial action or were listed on an inspection report by the member.” FINRA also wants to see what a firm’s WSPs require in areas where firms identified findings (presumably to see if they should have uncovered or prevented any underlying matters identified in the findings).
Restricted firms and taping firms would not be eligible to participate in the Pilot Program. A specific office or location is similarly ineligible for remote inspection if an associated person of the office becomes (i) subject to heightened supervision; (ii) statutorily disqualified; (iii) subject to one or more final criminal matters or two or more specified risk events; or (iv) answers in the affirmative to certain disclosures in question 14A-14E on Form U4. Firms can also become ineligible to participate if they fail to meet the requirements of the Pilot Program.
Opt-In (Or Out)
Any firm that elects to participate in the Pilot Program is required to, at least five calendar days before the beginning of such “Pilot Year,” provide FINRA an “opt-in notice” (in a manner and format FINRA will determine in the future). By opting in, the firm must agree to participate in the Pilot Program for the duration of that Pilot Year. A firm would need to proactively opt out of the Pilot Program for subsequent years if it so chooses.
Read more details about the program proposal on FINRA’s website here.