Brokerages want speedy SEC review of Finra remote supervision proposals

Brokerage firms want the SEC to speed up its review of Finra proposals that would allow them to permanently conduct remote supervision of their registered representatives.

Earlier this week, the Securities and Exchange Commission published a request for comment in the Federal Register on the proposal by the Financial Industry Regulatory Authority Inc. to allow a broker working remotely to supervise other brokers without the broker’s home being designated as a branch office. The deadline for public input is Aug. 1, with a follow-up deadline of Aug. 15 for rebuttal comments.

Finra also has filed a proposal with the SEC that would establish a three-year pilot program for remote office inspections. The SEC must approve Finra proposals before they are finalized.

Following the advent of the coronavirus pandemic in early 2020, Finra approved a temporary rule that allowed remote inspections because the brokerage industry essentially moved to a work-from-home model during the outbreak. That relief from onsite office inspections runs out at the end of this year.

Under current rules, offices of supervisory jurisdiction and supervisory branch offices must be inspected in person at least annually, while nonsupervisory branches are inspected every three years.

Brokerage firms are hoping that the Finra proposals get an SEC imprimatur quickly so that they have some certainty about remote inspections.

"The SEC needs to act on these proposals sooner rather than later,” said Bernard Canepa, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “It will provide the industry regulatory certainty for their work arrangements and give firms enough time to operationalize before the current regulatory relief from conducting onsite inspections expires. Otherwise, Finra will be in the position of again requesting an extension of relief."

Much inspection work already was being done prior to an office visit, said Seth Miller, general counsel and president of advocacy and administration at Cambridge Investment Research Inc., an independent broker-dealer.

The firm’s employees all use the same technology platform for their work and that system also stores books and records information. That situation lends itself to remote inspections, Miller said.

“They’ve gone really well,” he said. “We’re all using the same electronic systems and networks, so how does it matter that I’m sitting at home or sitting in my office?”

Remote inspection allows supervisory personnel the same flexibility in conducting internal examinations from home that reps have in working from home, Miller added.

But the lack of an in-person probe of a branch office has raised concerns among state securities regulators and securities attorneys that potential malfeasance would go undetected and increase the chances of investor harm. The North American Securities Administrators Association, the umbrella organization for state regulators, has pushed back against various versions of the Finra proposals.

The latest iteration of the proposal for residential supervisory locations includes several revisions that appear to address NASAA reservations, including strengthening the criteria for doing risk assessments before locations are designated for remote supervision.

“We appreciate Finra being responsive to our concerns and observations,” NASAA spokesperson Fred Baldassaro wrote in an email statement. “There has been good dialogue on this proposal. We will review this new proposal and provide additional feedback to Finra.”

Finra CEO Robert W. Cook said at a conference earlier this year that talks about the remote supervision proposals are “going in a constructive direction."

As Finra and the SEC mull the proposals, they’ll continue to be pushed by the financial industry to put final rules in place.

“We continue to support this proposal as necessary to reflect a changed work environment and technological advancements made over the last decade and to help firms recruit and retain quality supervisors,” Canepa said.