FINRA is filing a proposed rule to extend firms’ ability to conduct remote branch office inspections through December 31, 2022. FINRA Rule 3110.17 currently provides firms with the option of satisfying their inspection obligations under Rule 3110(c) remotely for calendar years 2020, 2021 and June 30 of 2022, subject to specified conditions. Factoring into this decision are the operational challenges posed by the COVID-19 pandemic.
Although the extension is a welcome relief for CCOs, it is important to note that FINRA is not changing its requirements.
- Updating Procedures. Firms should have completed their 2021 inspections no later than December 31st. FINRA expects that firms will have amended or supplemented their procedures to provide for remote inspections, and that those procedures ensure remote inspections are as effective as onsite inspections. FINRA also expects these procedures to include a description of the methodology used to conduct remote inspections, including the tools and technologies used. The procedures should outline the use of any other risk-based systems used to identify and prioritize the areas for review based on areas of greatest risk. Most firms have used such risk-based systems and surveillance for assessing branch locations for a long-time. It is important, however, to ensure that the firm’s procedures for remote inspections capture how these systems are used.
- Standards. As always, FINRA expects that firms continue the practice of ongoing reviews of the activities at all locations. You can anticipate that FINRA examiners will be assessing firm’s remote inspections to ensure that they meet the same standards for review required prior to the temporary relief. Examiners will be assessing how firms reviewed for and identified any red flags and the steps taken to address those red flags. The regulator will expect to see that firms took additional steps and supervisory reviews where necessary, and that on-site inspections, on an announced or unannounced basis, are performed when the circumstances are appropriate.
- Documentation. According to the temporary relief, firms must maintain separate records evidencing all locations where inspections were conducted remotely and any locations where additional supervisory procedures or more frequent monitoring were imposed. Additionally, FINRA expects that firms document in the results of remote inspections any additional supervisory procedures or more frequent monitoring imposed as a result of the remote inspection.
Oyster Consulting has been conducting remote testing for a long time. We have effectively utilized methods and tools to allow us to be able to share and review records, interview key personnel and stakeholders, observe locations and operations, and test supervisory systems. Our experts can help you develop your remote inspection plans, draft the necessary procedures and, where needed, conduct remote inspections of your branch locations.
About The Author
Ed Wegener
Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as Senior VP and Midwest Regional Director.
