FINRA wins permanency for COVID-related work rules

FINRA has won approval for a pair of remote work policies meant to accommodate practices that became common in the industry during the COVID-19 pandemic.

In one proposal, firms will soon be able to sign up for a three-year pilot program meant to test remote inspections of their branch offices. Brokerages have been allowed to do these sorts of inspections at a distance under an emergency order adopted in response to the pandemic. But the Financial Industry Regulatory Authority, a self-regulatory organization for broker-dealers, wants to have a permanent policy in place and is hoping that data it gathers from its pilot program will help it devise one.

Separately on Friday, FINRA won approval from the Securities and Exchange Commission for a proposal allowing brokerage supervisors' homes to be designated as "non-branch offices" that will be subject to in-person inspections once every three years rather than the current requirement of once a year. This rule is scheduled to take effect 21 days after the publication in the Federal Register of a minor amendment meant to make its language more readable.

Together, the two policies should help ensure the continuation of work arrangements that became widely embraced during the pandemic. Although recent surveys have suggested fewer firm employees are now working entirely from home, many are still on hybrid schedules that have them coming into the office for only a few days a week.

For brokerage industry representatives like Jennifer Szaro, the approvals come as a long-awaited victory. Szaro, the chief compliance officer at brokerage firm XML Securities in Falls Church, Virginia, said the task now turns to making sure the new rules serve the needs of broker-dealers, regulators and investors alike.

"I think firms will learn best practices, and they're going to evolve," Szaro said. "As more firms conduct remote inspection, best practices will evolve and be shared, and everyone will learn from these."

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At least one group that had expressed opposition to the proposal in the past remained skeptical. Joe Peiffer, the new president of the Public Investors Advocate Bar Association, said he hasn't seen anything to change his opinion that granting brokers the ability to work at a distance from supervisors will only make fraud more easy to get away with.

"Zoom is good for many things, but inspections just aren't the same when you aren't doing them in person," Peiffer said. "You can't rummage through someone's desk, and that's how a lot of fraud is revealed."

The North American Securities Administrators Association, which represents state regulators, meanwhile said it was at least glad FINRA took its concerns into account in some of its revisions to the policies.

"While NASAA has expressed concerns about the way these programs were proposed, we appreciate the changes that were made in response to our comments," Claire McHenry, NASAA president and deputy director of the Nebraska Department of Banking and Finance Bureau of Securities, said in a statement. "We also look forward to seeing the requirements and safeguards underlying these programs executed diligently to best protect investors."

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. Firms that want to take part in the test of remote inspections and meet the qualifications will have to notify FINRA of their intention at least five days before the start of the pilot program, likely on July 1 next year.

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Participating brokerages would then have to provide regulators with quarterly reports detailing the number of inspections, both remote and in-person, it had conducted of its branch offices. They would also have to report any "findings" — such as regulatory breaches and remedial actions — that result from those reviews. 

FINRA and the SEC have allowed brokerages that meet certain criteria to conduct remote inspections of their branch offices since November 2020 as part of emergency rules adopted amid social-distancing policies used to curtail the spread of COVID-19. That temporary policy was originally scheduled to expire at the end of 2021 but has since been extended several times. FINRA in September submitted a request to push the sunset date out again, this time until June 30 next year.

Both FINRA's proposals on the pilot program and the less frequent inspections for supervisor's home offices have undergone frequent revision to get to where they are today. The pilot program rule, for instance, was introduced in 2022 and then pulled back first later that year and then second in April of this year for modifications. 

FINRA's proposal for residential supervisory locations was first submitted in July 2022. It was then replaced with a substantially similar rule in March 29 of this year and then subjected to even further revisions in July.