Finra Extends Work on Remote Supervision Proposals Due to Investor Protection Issues

Finra’s two proposals, which would allow brokerages to monitor affiliates remotely, will fall short of becoming final rules next month as the organization continues to address investor protection concerns.

Last year, the Financial Industry Regulatory Authority filed proposals with the Securities and Exchange Commission. A three-year remote inspection pilot program could be established. The other will determine the place of residence of the broker as the place of supervision. The SEC was due to take action on the pilot program by April 12, and on the home office proposal by March 30.

Finra CEO Robert W. Cook said Wednesday that more work needs to be done on each of the proposals. The broker-dealer self-regulator is negotiating with the SEC, fellow regulators and others who have contributed to the measures.

“If you look at your watch and say, ‘I’m looking forward to having these rules in place by the end of the month,’ I wouldn’t hold my breath,” Cook said at a conference on securities and financial markets. Association conference in San Diego. “I think the healthy conversation is going on and I think it’s going in a constructive direction.”

State regulators have criticized the proposals, saying remote checks could leave a regulatory gap in oversight of branch operations. The North American Securities Managers Association submitted several letters of comment during the rulemaking process.

“From the outset, NASAA had concerns about the proposed remote branch inspection pilot program,” NASAA President Andrew Hartnett said in a statement. “Two examples underlying these concerns are the numerous instances in which government regulators have discovered undisclosed outside activity as a result of on-site inspections, and the apparent shortcomings of remote inspections, as evidenced by out-of-channel SEC cases.”

He was referring to recent SEC enforcement action related to the use of messaging apps by employees of brokerage firms to conduct business. Hartnett appeared at the SIFMA conference separately from Cook.

“We are pleased to see the pilot program being improved to add additional guards, and we are grateful to Finra and the SEC in addressing our concerns,” said Hartnett, Iowa Deputy Insurance Commissioner.

Under current regulations, supervisory jurisdiction offices and supervisory branches must undergo personal inspections at least once a year, while non-supervisory branches and other locations are inspected every three years.

But Finra argues in rule proposals that technological advances have improved the oversight and monitoring of affiliates and non-affiliates by firms.

During the pandemic, most financial companies have adopted work-from-home approaches to doing business. Many still operate in hybrid mode. Cook said that maintaining the existing oversight rule could force brokerages to stop working from home.

“The consequence of not having any structure is that we are effectively saying that all work should be done in the office,” he said. “I don’t think this is where most of the regulators are. I’m not saying that there are not very important, justified concerns. I think this is where the dialogue with the SEC and other regulators has been very helpful to think about how we can make sure this program is well designed to keep investors protected while providing an appropriate degree of flexibility.”

For now, a temporary rule is in place allowing brokerage firms to conduct remote branch checks. It was installed at the beginning of the coronavirus pandemic and extended until the end of this year.

Whether the interim rule is extended again to 2024 depends on the fate of rule proposals before the SEC, Cook said. The SEC must approve all Finra rules.

SIFMA, one of the largest financial services trade associations, has been at the forefront of promoting remote verification. He still has work to do to turn the policy into final rules.

“We continue to face regulatory hurdles on these proposals,” said Saima Ahmed, Executive Vice President and General Counsel of SIFMA, while moderating Cook’s session at the conference.

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