FINRA and the SEC issued a joint risk alert and regulatory notice Wednesday, advising broker-dealers to make sure they’re mindful of what’s going on within their branch offices and even offering some tips to ensure they remain in compliance.

“A robust process for self-inspection of branch offices is a critical element of a firm’s compliance and supervision process, and a vital part of a comprehensive risk management program,” said Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations department, said in the alert, adding that the regulatory agencies have unearthed “major deficiencies” during recent broker-dealer branch inspections.

“An effective risk-based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interests,” Stephen Luparello, FINRA’s vice chairman, said in the alert. “FINRA encourages broker-dealers to review this guidance and consider enhancements to their own branch office inspection programs.”

Some of the recommended and effective practices observed by SEC and FINRA examiners include:

-- Using risk analysis to identify whether individual non-supervising branches should be inspected more frequently than the FINRA-required minimum three-year cycle, with more frequent inspections of branches meeting certain risk criteria. In addition, some firms conduct “re-audits” when routine inspections reveal a high number of deficiencies, repeat deficiencies, or serious deficiencies. Typically, these re-audits and audits for cause are conducted as unannounced inspections.

-- Using surveillance reports and employing current technology and techniques to help identify risks and develop a customized approach for branch office inspections based on the type of business conducted at each branch.

-- Employing comprehensive checklists that incorporate previous inspection findings and trends noted in internal reports such as audit reports.

-- Conducting unannounced branch inspections either randomly or based on certain risk factors. “Surprise” exams may yield a more realistic picture of a broker-dealer’s supervisory system as they reduce the risk that individual RRs and principals might attempt to falsify, conceal, or destroy records in anticipation for an internal inspection.

-- Involving qualified senior personnel in several branch office examinations each year.

-- Incorporating findings of branch office inspections into management information or risk management systems and using a centralized, comprehensive compliance database that enables compliance personnel in various offices to access to information about all of the firm’s RRs and their business activities. Such a system appears to be very useful when supervising independent contractor RRs dispersed across a broad geographic area.

-- Providing branch office managers with the firm’s internal inspection findings and requiring them to take and document corrective action.

-- Tracking corrective action taken by each branch office manager in response to branch audit findings.

-- Elevating the frequency of branch inspections, or their scope, or both, in cases where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer, for example away from the firm.

The “risk alert” is the second in a continuing serious that the SEC’s national examination staff expects to issue and is intended to alert senior management, risk management, and compliance managers in the securities industry to significant risks identified by the SEC’s national examination staff so that industry members can more effectively address those risks.



Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access