Devil is in the detail of Finra's new remote inspections pilot

When FSI engages in advocacy, we always try to be constructive, whether dealing with regulators, lawmakers or other groups that can shape the independent financial services landscape. 

While this approach doesn’t always garner shocking headlines, it is time-tested and allows us to establish goodwill with partners, build respectful working relationships and, importantly, generate results for our members. 

The effectiveness of constructive engagement was evident yet again earlier this year. In January, Finra modified its rules around what constitutes a branch office. Previously, professionals with remote supervisory responsibilities were treated like an OSJ or branch office. 

During the pandemic, Finra provided temporary relief to such workers. But if the regulator had not permanently adjusted its rules, they would have been subject to annual inspections and caused duplicative and unnecessary administrative burdens for firms. 

Shaping common-sense rules for the industry

Now, supervisory professionals working from home can be designated as a residential supervisory location (RSL). To obtain that designation, they have to meet various conditions. For instance, they can’t meet with the public and no one else can work at that location. 

But the upshot is that RSLs do not count as broker-dealer branch offices. That means they can be inspected less frequently, and firms don’t have to overhaul their Finra registrations to account for them.

Before the rules were unveiled, we played an important role in helping shape them, sharing comments about this issue on three occasions. And, again, while the final rule didn’t reflect all of our feedback, Finra embraced many of our suggestions. 

In our comment letters, we stressed that regulators needed to acknowledge the realities of the American workplace, pointing out that the shifts weren’t entirely due to COVID-19. Indeed, many industries, including ours, had already embraced a range of flexible work models long before the pandemic took hold. 

We also mentioned that supervisory professionals increasingly rely on technology and centralized, cloud-based systems to do their jobs. Few, if any, of them maintain physical books and records in their homes, and they don’t participate in sales activity, all of which makes yearly inspections disproportionate.  

Therefore, in this case, Finra should be applauded. It listened to the public, the industry, and other stakeholders and then came up with rules that not only were more in line with the way Americans work and live but also provided investors with the protections they deserve.  

Still work to do

That said, another set of rules surrounding remote inspections are less promising. On July 1, Finra’s Remote Inspections Pilot Program begins. On the surface, it also seems consistent with the regulator’s attempt to modernize its rules to account for the fact that more industry professionals are taking advantage of flexible work arrangements. 

The devil, however, is in the details. And that’s where things get interesting. Without delving into the minutia of the rule, the issue is the number of conditions firms need to meet to be eligible for the pilot program. 

In speaking with our members, it’s become clear that meeting all of them will be a high bar that could discourage many firms from participating, even as much of the industry finds the program useful in theory and wants to leverage technology to do inspections. Also, after the pandemic restricted business travel, many advisors actually want to visit with the home office in person and vice versa. 

As a result, when Finra in three years evaluates whether the program is working, low levels of participation may yield an incomplete data set, making it difficult to decide what modifications to implement – or whether to continue it at all. Either way, we look forward to staying in contact with Finra about the program.

Constructive Engagement

Advocacy can be a contact sport. But it doesn’t have to be. No matter the issue, it’s always very productive to find common ground, leverage the insights of experts and other industry participants, and then find the best way forward.

Most of the time, that tends to generate positive outcomes that make the industry work better for firms, advisors and clients. And when it doesn’t, the key is to continue to work.