Remote Inspections and the Changing Landscape of Work

The Securities and Exchange Commission has recently given its approval to two rule proposals put forward by the self-regulatory organization Finra. These proposals are centered around the virtual inspection of branch offices and the growing trend of remote work.

Finra’s spokesperson stated that these new rules have been designed to adapt to the current hybrid work environment, while still maintaining crucial investor protections. The first proposal introduces a voluntary pilot program that spans three years, allowing eligible brokerage firms to conduct required inspections of their own branches remotely, without the need for physical visits.

The inception of this proposal can be traced back to Finra’s experiences during the pandemic when virtual inspections were permitted instead of in-person ones. In normal circumstances, Finra’s regulations oblige brokerage firms to supervise their registered representatives and ensure compliance with securities laws and regulations. This entails reviewing each branch office’s activities and conducting periodic onsite inspections.

However, as technology continues to evolve, prompting significant changes in the industry, Finra has realized the need to reassess the necessity of in-person inspections. In addition to the lessons learned during the pandemic, the digitization of the brokerage business plays a significant role. Finra’s proposal highlights that tasks such as recordkeeping, correspondence, opening customer accounts, placing trades, and transmitting customer funds and securities are increasingly being done electronically.

Furthermore, the rise of hybrid work has become increasingly common among white-collar professionals in the United States. This trend further supports Finra’s proposal for remote inspections.

Overall, these new rules presented by Finra not only cater to the changing landscape of work but also prioritize investor protection. By embracing technology and adapting to the hybrid work environment, Finra aims to ensure the continued compliance of brokerage firms with securities laws and regulations.

Proposal Faces Criticism for Lack of Investor Protection

The recent proposal by Finra has come under fire from state securities regulators and Piaba, an association of investors’ lawyers. Critics argue that the proposal does not do enough to protect investors and ensure proper supervision of brokers.

According to Piaba President Hugh D. Berkson, while it is understood that Finra is adapting to the increased use of virtual technology, there are concerns that this leaves room for advisors to bend the rules and potentially harm unsuspecting clients. Berkson further highlights that brokerage firms’ electronic surveillance has been insufficient, with only a sampling of emails and other electronic communications being reviewed, causing potential red flags to be missed.

Finra Responds to the Rise of Remote Work

In response to the growing number of advisors and wealth management professionals working remotely, Finra has put forth another proposal regarding remote work. This proposal would allow a private residence, where a registered representative engages in specified supervisory activities, to be treated as a non-branch location.

Typically, registering a private residence as a branch office would require annual inspections. However, Finra’s proposal aims to ease the burden on brokerage firms by exempting them from these inspections for private residences. This is in line with the rise of hybrid workforce models and aims to mitigate associated costs.