Broker-dealers who don’t sign up for a pilot program allowing them to maintain their remote-working arrangements may find themselves feeling they’ve stepped into a time warp back into pre-COVID days.
May 31 is the last date for emergency rules adopted during the pandemic to allow brokerages to conduct remote inspections of residential and other “non-branch” offices. Firms that want to continue operating at a distance without sending out inspectors as often as once a year will have to sign up for a three-year pilot program being run by the Financial Industry Regulatory Authority.
FINRA, the brokerage industry’s self-regulator, is planning to use data gathered from the program to adopt permanent rules for remote inspections. Firms that want to take part will have from June 1 to June 26 to sign up, according to a regulatory notice FINRA released on Jan. 23.
Kyle Whitehead, a partner at Morgan Lewis in Washington, D.C., said firms that choose not to take part in the pilot will have to go through a “turn back the clock exercise.”
“It’s going to require sort of dusting off old policies and procedures — pre-COVID policies and procedures,” he said. “And so by virtue of that … there’s sort of a waterfall of consequences.”
Many brokerage representatives have said that in-person inspections are unnecessary in an age when technology has enabled rapid transmissions of visual and other sorts of data. Advocates for reforming remote-work policies have argued that remote reviews conducted under the pandemic-related emergency rules showed the industry could police itself at a distance.
Jennifer Szaro, the chief compliance officer at brokerage firm XML Securities in Falls Church, Virginia, said she thinks many firms are weighing the likely costs and benefits of taking part in FINRA’s pilot program before making a commitment either way. She noted that participation will require brokerages to collect an extensive array of data and submit it to FINRA every quarter.
“Many firms have expressed that they are undecided on whether they will opt in to the Remote Inspection Pilot Program until they have a clear understanding of what data is collected and how,” Szaro said in an email.
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Firms that take part in the tests will have to provide regulators with quarterly reports detailing the number of inspections, both remote and in-person, they have conducted of their branch offices. Any findings — such as regulatory breaches and remedial actions — will then have to be reported to FINRA.
Firms also have to submit any written procedures governing remote inspections. Those that plan to enroll for the first year of the pilot program need to collect the same data for the first half of 2024.
Regulators are hoping to use such data to develop permanent remote-work rules for the industry. Participating firms will also be asked to provide inspection data from 2019 for use as a basis for comparisons. FINRA said in its regulatory notice that it’s developing a system that will allow brokers to submit the required data electronically.
Whitehead said participating in the pilot program will require a lot of work from firms, but so could choosing to sit it out. Brokerages that work primarily with large institutions or investors may have already called most of their employees back to the office, making questions about remote work moot.
But many firms that have more of a retail relationship with clients most likely still have large percentages of their employees working remotely. For them, it will be a question of whether scheduling in-person inspections is more or less of a hassle than collecting the data required by the pilot program.
“I think it’ll really depend on each particular firm,” Whitehead said.
Regardless of whether firms decide to take part in the pilot program, the coming suspension of FINRA’s pandemic-related remote-work rules also means firms will need to make sure their registration information is up to date. The regulator’s Jan. 23 notice calls on brokers to submit “U4” forms listing the current employment addresses of all employees, including those working remotely. They also have to report any new branch offices that were opened as a result of the pandemic.
“Maybe somebody’s moved to their primary residence during COVID, and, if they’re not intending on coming back to the office, that location might need to be registered,” Whitehead said. “And with that comes other consequences as well, such as inspections. And the next step of that is in-person inspections, to the extent the firm has not taken advantage of the remote inspection program.”
FINRA’s notice also announced that June 1 is the start date for a separate rule allowing brokers to designate firm supervisors’ home offices as “non-branch locations” that will be subject to in-house inspections only once every three years. The current standard calls for annual inspections.
FINRA’s remote-work proposals contain a number of restrictions meant to make fraudulent activity hard to engage in. The rule for supervisors’ home offices, for instance, prohibits residences from being used to store records or documents required by FINRA or federal rules. Brokerage representatives also can’t use residential offices to meet with customers or conduct various types of transactions and must use their firm’s IT systems for electronic communications.
Firms will be barred from having residential offices if either they or regulators have decided their employees deserve heightened supervision. And before designating a home office a “residential supervisory location,” they will have to conduct a risk assessment looking at how many customer complaints the firm has received, record-keeping violations or other regulatory red flags.
