Brokers get another month to comment on remote work pilot program

Brokers are getting at least another month to comment on a proposal that would let them conduct their internal inspections of home and branch offices remotely.

The Financial Industry Regulatory Authority, the broke-dealer industry's self-regulator, filed an amendment on Aug. 2 to a long-contemplated rule that would let firms sign up for a three-year pilot program to see if their required inspections of home and branch offices could be done just as well remotely as in person. The rule had been scheduled for approval by the Securities and Exchange Commission on Aug. 1. FINRA's new amendment will now give the public another 21 days to submit comments, after which there will be 14 days for rebuttals.

FINRA has struggled to find the right balance for its remote work proposals amid a steady barrage of criticism from the Public Investors Advocate Bar Association, a legal group for investor interests, and the North American Securities Administrators Association, which represents state financial regulators. These groups have repeatedly aired concerns that the technology meant to aid in the completion of remote inspections simply isn't up to the task.

"While it is understood that FINRA is attempting to leverage the increased use of virtual technology, the rule proposal leaves considerable opportunity for advisors to skirt the rules," Hugh Berkson, the president of PIABA, wrote in a letter to the SEC on May 24. "The amendments made to this rule proposal do not address the significant harm done to investors by rogue brokers working without someone adequately supervising them."

FINRA's new pilot-program proposal is its latest attempt to adopt rules meant to accommodate systems and technology that enabled remote inspections during the COVID-19 pandemic. Firms have already been allowed to do remote inspections of home and branch offices under an emergency rule adopted in 2020.

FINRA's pilot-program proposal is meant in part to give regulators additional time to learn if that policy is serving its intended purpose. Regulators are particularly eager to learn if they can achieve the twin goals of accommodating firm representatives who prefer to spend time working away from their firms' central offices while also protecting investors.

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To that end, the pilot-program proposal would require firms who sign up to participate to collect data on things like the number of remote inspections they conducted in a given year and the number of remedial actions they took as a result. That information would then be compiled with comparable data from 2019, when most inspections were being done in person. From all of that, regulators hope to gain an idea of whether their remote-work policies are in need of further tweaks.

This isn't the first time FINRA has made changes to its pilot-program idea, which was first introduced in 2022. The industry regulator pulled the proposal back for revisions in December and then a second time in April. 

The latest changes are fairly minor in scope. For instance, one provision of the amendment calls on firms to take into account any "red flags" when trying to decide if a given branch or home office site is a good candidate for remote inspections. FINRA defines red flags as disciplinary actions against individual firm representatives and other evidence of misconduct or irregularities.

FINRA has argued in previous versions of the rule that brokerages' past reliance on paper records had made in-person inspections necessary. Now, though, that most client data is held online in "the cloud," and most communications are done by email or messaging services, monitoring can be done mainly through electronic means.

"Rather than having a firm's compliance personnel walk around an office or location during an inspection to identify potential problems or to gather on-site intelligence—an approach that relies on chance encounters such as overhearing an associated person making a sales pitch to a customer for a product a firm is not approved to sell or observing an associated person cutting and pasting a customer signature onto a form—digitization now allows a firm to readily 'walk around the data,' reducing the member's dependence on on-site intelligence because most of activities occurring at an office or location are electronically captured," according to FINRA.

Brokerages and groups representing them continue to be largely supportive of the proposal. 

"The transition to remote environments during the pandemic has shown associates that they can perform their job functions from anywhere and they are now demanding continued flexibility in their workplaces," Dee O'Neill, a Raymond James senior vice president and head of branch examinations, wrote to the SEC on May 23. "The proposal recognizes these changes, both in technological advances as well as the shift in workplace dynamics and their impact on the industry's obligations with respect to office inspections."

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Meanwhile, FINRA is also seeking comments on recent revisions to a separate proposal that would allow the home offices of brokerage representatives who supervise other employees to be subject to inspection once every three years. The current standard calls for annual examinations of these "residential supervisory locations." Rebuttal comments on that proposal are due on Aug. 15.

In a letter to the SEC dated May 25, the brokerage services firm LPL Financial said the proposal on residential supervisory locations goes hand-in-hand with the pilot program meant to test out the efficacy of remote inspections.

"It is critical that the remote branch exam pilot program be approved in tandem because remote branch exams can be used to inspect residential supervisory locations of home office employees," wrote Mark Seffinger, LPL chief compliance officer. "This preserves the privacy of employee homes by limiting branch exam exposure to working areas inspected remotely."