FINRA Proposes Remote Inspection Pilot Program – Securities

FINRA recently proposed amendments to FINRA Rule
3110 (Supervision) to adopt a voluntary, three-year pilot
program (Pilot Program) to allow member firms to conduct remote
branch office inspections.  In a nod to where things have
headed since the onset of the Covid-19 pandemic (WFH and such),
providing firms with the option to forego on-site exams comes as no
surprise (although it is refreshing to see a regulator take
pragmatic steps like this). After all, FINRA itself has been in a
remote examination posture since the beginning of the pandemic, and
firms have been similarly conducting remote branch inspections via
temporary relief granted via FINRA Rule 3110.17.

Here are the key points we’ve extracted from the
proposal:

Risk Assessment

Before electing a remote inspection for an office or location, a
firm must develop a reasonable risk-based approach to using remote
inspections and conduct and document a risk assessment for that
location. The assessment must document the factors the firm
considered, including the standard for reasonable review set forth
in FINRA Rule 3110.12.  The assessment must also take into
account any higher risk associated persons or activities or that
take place at or are assigned to that location.

Supervision

Participating firms must adopt written supervisory procedures
reasonably designed to detect and prevent violations of, and
achieve compliance with, applicable securities laws and regulations
and applicable FINRA rules in relation to the Pilot Program,
including:

• 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 reasonably designed to comply with the
  firm’s recordkeeping and data collection and provision
  requirements.

Remote inspections will be subject to the same standards for
review as on-site inspections (set forth in FINRA Rule 3110.12).
 To effectively supervise a location pursuant to the Pilot
Program, if a identifies any red flags, the firm may need to (and
likely should) impose additional supervisory procedures or conduct
more frequent monitoring, including potentially a subsequent
on-site visit on an announced or unannounced basis.  If a firm
chooses not to impose these additional measures, it should document
the basis for not doing so.

Documentation

Participating firms must “maintain and preserve 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
firm determined to impose additional supervisory procedures or more
frequent monitoring. If a firm determines that additional
supervisory procedures or more frequent monitoring is necessary,
the firm’s documentation be 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, whether 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).

Opt-In (and 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.

Eligibility

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.

Next Steps

The proposal is pending for now and subject to review and public
comment (and ultimately approval or disapproval by the SEC). 
We’ll continue to monitor and provide related updates
(including any interesting feedback in the public comment
file).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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