Regulatory Background
The world of branch office examinations has changed substantially since the onset of COVID-19 in 2020. Rules have been adopted to address remote reviews and new opt-in provisions offered by FINRA in 2024.
Under the current FINRA Rule 3110(c)(1), member firms are required to conduct on-site inspections of their branch and non-branch locations on a designated frequency. If applicable to the location, the written inspection report must include the testing and verification of the member’s policies and procedures, including supervisory policies and procedures for safeguarding of customer funds and securities; maintaining books and records; supervision of supervisory personnel; investment objectives changes and validation of such changes; and, transmittals of funds or securities from customers to third party accounts, to outside entities, to locations other than a customer’s primary residence, and between customers and registered representatives, and changes of customer account information, including address .
Whether branch office examinations are conducted by member firms on-site or remotely, the following FAQs highlight some of the issues governing these reviews:
- What are the current rules for firm remote vs. on-site branch office examinations?
FINRA Rule 3110.18 governs the terms of FINRA’s voluntary, three-year Remote Inspections Pilot Program, which started on July 1, 2024 and ends on June 30, 2027. Under the program, member firms will have the flexibility to satisfy their inspection obligation under Rule 3110(c)(1)(A), (B) and (C) without an on-site visit to the office or location, per terms that include conducting and documenting a risk assessment, producing written supervisory procedures (WSPs) for conducting remote inspections and providing inspection data to FINRA.
- When is the next opt-in timeframe for remote branch office examinations?
On or before December 27, 2024 for calendar year 2025.
- What are the current frequency requirements for branch office examinations?
Office of Supervisory jurisdiction (OSJ) annually, non-OSJ every three years.
- Are there exceptions to the one and three-year rule?
Yes. As part of a risk assessment, firms may elect to examine on a more frequent interval than the three-year requirement non-OSJ branch offices that have issues including, but not limited to, customer complaints, a high percentage of senior and vulnerable adult clients, and a high percentage of offering high-risk products.
- Should firms create an examination module for branch office examinations?
Although not required, it is recommended that firms create a module that is comprehensive and germane to the firm’s business for consistency and as a check for compliance with branch office records and supervision.
- Which regulatory agencies conduct branch office examinations?
The SEC, FINRA, and state securities regulators conduct branch examinations. The SEC and FINRA, generally, but not always, conduct branch examinations in conjunction with home office examinations. State regulators examine branch offices as a regular course of business.
- What types of books and records are generally reviewed during a branch examination?
Any records required by SEC Rules 17(a)-3 and 204-2 are based upon the types of products and services offered by the branch office. Most states adopt by reference the SEC’s books and records requirements for broker-dealers and investment advisors. However, firms should check with individual states for actual requirements.
- Do regulators request copies of any internal firm reviews of the branch office?
Some regulators may routinely ask for copies of internal reviews of branch offices. Firms should not allow the possibility of providing the review to a regulator, to influence the quality of documenting and remediating of examination issues. In addition to reviewing the findings of an internal branch office review, a regulator will review the quality of the module or examination procedures.
- Do regulators review for appropriate follow-up and remediation of branch office examination findings?
Regulators will review the firm’s records for prompt notice to the branch office of any issues detected during the review and documentation from the branch for any remediation required.
- During an examination will regulators review Business Continuity Plans for branch offices?
Yes. Regulators will review for the adequacy and testing of the BCP.
Additional Resources:
Branch exams: Equip Your Firm for Success
Your Remote Inspections May Be Ending Soon
Get Ready for the New FINRA Inspections Pilot Program
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About The Author
Bill Reilly
Bill Reilly is a respected financial services professional with over 35 years of consulting and regulatory experience. Bill leverages his industry expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers, investment advisers and law firms providing legal representation through both proactive and reactive regulatory processes and compliance issues.
