FINRA offers remote inspection pilot program – Securities


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FINRA recently proposed amendments to FINRA Rule 3110 (Supervision) to adopt a three-year voluntary pilot program (Pilot Program) to allow member firms to conduct branch inspections remotely. In a nod to where things are headed since the start of the Covid-19 pandemic (WFH and others), offering companies the option to waive on-site reviews comes as no surprise (although it’s refreshing to see a regulator take pragmatic steps like this). After all, FINRA itself has been in a remote review posture since the start of the pandemic, and companies have also been conducting remote branch inspections via a temporary waiver granted via FINRA Rule 3110.17.

Here are the key points we extracted from the proposal:

Risk assessment

Before opting for a remote inspection of an office or location, a business should develop a reasonable risk-based approach to using remote inspections and conduct and document a risk assessment for that location. The valuation should document factors considered by the business, including the standard of reasonable review set forth in FINRA Rule 3110.12. The assessment should also consider any people or activities associated with a higher risk or that take place or are affected at that location.

Surveillance

Participating firms must adopt written monitoring procedures reasonably designed to detect and prevent violations of applicable securities laws and regulations and applicable FINRA rules in connection with the pilot program, and ensure their compliance, including:

  • A description of the methodology, including technology, that the company can use to perform remote inspections;

  • The factors considered in the risk assessment performed for each applicable location;

  • Use of other risk-based systems generally employed by the firm to identify and prioritize areas that present the greatest risk of potential violations of applicable securities laws and regulations and FINRA rules; and

  • Policies and procedures reasonably designed to comply with firm requirements for record keeping and data collection and provision.

Remote inspections will be subject to the same standards of review as on-site inspections (set forth in FINRA Rule 3110.12). To effectively monitor a site in accordance with the pilot program, if a red flag is identified, the company may need (and probably should) impose additional monitoring procedures or conduct more frequent monitoring, possibly including a subsequent site visit. site during an announcement or unannounced basis. If a company chooses not to impose these additional measures, it must document the reason for not doing so.

Documentation

Participating companies must “maintain and maintain a centralized record for each of the “pilot years” that separately identifies: (1) all offices or locations that were inspected remotely; and (2) any offices or locations for which the Company has decided to impose additional monitoring procedures or more frequent monitoring. If a company determines that additional monitoring procedures or more frequent monitoring are required, the company’s documentation should be specific in this regard, including whether an on-site inspection was performed.

Collection and provision of data

At least quarterly, participating companies must collect and provide various data to FINRA regarding the number of locations examined remotely, on-site, or on-site due to a “discovery”, and information about those discoveries. . FINRA considers “findings” to be “items that have led to corrective action or have been listed in an inspection report by the member.” FINRA also wants to see what a company’s WSPs require in areas where companies have identified findings (presumably to see if they should have discovered or prevented any underlying issues identified in the findings).

Membership (and deactivation)

Any firm that elects to participate in the pilot program is required, at least five calendar days prior to the start of such “pilot year”, to provide FINRA with a “notice of membership” (in a manner and format FINRA will determine in the future). By registering, the company must agree to participate in the pilot program for the duration of this pilot year. A company will need to proactively opt out of the pilot program for subsequent years if it chooses.

Eligibility

Restricted businesses and recording businesses would not be eligible to participate in the pilot program. A specific office or location is also ineligible for remote inspection if a person associated with the office becomes (i) subject to increased surveillance; (ii) statutorily disqualified; (iii) subject to one or more definitive criminal cases or two or more Specified Risk Events; or (iv) responds affirmatively to certain disclosures in Questions 14A-14E of Form U4. Companies may also become ineligible to participate if they do not meet the pilot program requirements.

Next steps

The proposal is currently on hold and subject to public review and comment (and ultimately approval or disapproval by the SEC). We will continue to monitor and provide related updates (including any interesting comments in the public comment file).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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