Compliance officers at several large brokerage and advisory firms say they need additional time from FINRA to complete their 2020 branch office inspections, even beyond the already extended deadline of March 31 next year.
The comments were made during a webinar co-hosted by the Securities Industry and Financial Markets Association (SIFMA) and Bates Compliance, which counsels broker/dealers and investment advisory firms on regulatory compliance. Kevin Zambrowicz, the managing director and associate general counsel at SIFMA’s Office of General Counsel, noted that while FINRA had already pushed the end of the 2020 inspection cycle from the end of the year to the end of 2021’s first quarter, additional relief seemed necessary.
“What I’m hearing across the board from firms is while that relief is appreciated, and it’s always nice to have additional time, from a practical standpoint, it’s still not possible to be able to complete these 2020 exam cycles with that additional time,” he said.
The webinar focused on how firms conducted “virtual” branch office visits while striving to comply with FINRA rule 3110, which mandates that firms “inspect” their offices of supervisory jurisdiction and supervisory branch offices annually, nonsupervisory branch offices every three years, and nonbranch offices on a periodic basis.
The impact of the COVID-19 pandemic was swift and pronounced for on-site visits; Lou Moschetta, a senior vice president and deputy director of compliance with Wells Fargo Advisors, said he was not aware of any on-site inspections since March, and that was not expected to change. Meanwhile, Joe Neary, a chief risk officer with Cetera Financial Group, said the firm was not looking to have anyone on the road at least until after 2021’s first quarter.
John O’Neill, an executive vice president and chief compliance officer with LPL Financial, said his firm had “thousands” of locations to consider, including about 1,500 offices of supervisory jurisdiction, and the challenge is to determine which firms they can properly inspect by FINRA’s new March 31 deadline. O’Neill also hoped that the relief would be extended, and said LPL was learning a great deal about conducting inspections remotely.
“We’re not necessarily seeing different results by doing virtual visits, and not necessarily seeing a dropoff in quality or anything,” he said. “So we’re trying to look at our program and say, ‘How can we make some of this permanent?’”
One of the chief challenges in restarting on-site visits to branch offices is travel, particularly in following COVID-19-related travel restrictions, which could differ from state to state.
To illustrate, Zambrowicz said SIFMA hypothesized and calculated the costs and challenges of a Maryland-based firm staffer tasked with on-site visits to offices in Connecticut, Rhode Island and Massachusetts. With travel restriction in those states, SIFMA found that such a circuit could take the staffer over two months to complete, subject them to five separate COVID-19 tests and potentially involve four separate quarantine periods. And this analysis was only on a state level, not counting restrictions and closures on county or city levels.
“While the person’s on the road, the pandemic could change in the jurisdiction they’re in and trigger additional restrictions on the state they’re going to,” he said. “Imagine ... when you multiply that by the hundreds or thousands of branches you have to visit. It’s not feasible, and that’s not even considering the health concerns of people who are visiting.”
Bates Compliance Director Jill Ehret
But with so much focus on inspections, firms should also remember that reviews can be done prior to inspections, according to Jill Ehret, director of Bates Compliance. Prior to the COVID-19 pandemic, such “prep work” was already done off-site before ever traveling for a physical inspection. She suggested firms could do as much prep work as possible now, and if and when restrictions end those firms could run a limited on-site inspection process of offices to save time. She also suggested a number of best practices firms conducting virtual inspections could follow, including strengthening pre-visit questionnaires, interviewing personnel and advisors using virtual tools, and reviewing policies and procedures specifically implemented because of COVID-19.
Though current conditions mandate virtual visits, Joe Sheirer, a vice president of FINRA’s Member Supervision Examination Program, said that there were several things that are easier to spot on-site, including space-sharing issues with employees that could raise compliance concerns, outside business activities and even reading body language during an interview.
Sheirer didn’t comment on the possibility of further relief from FINRA, though he said that like most firms, the agency’s inspections were now almost entirely remote. Any exceptions would involve cases where there were consumer harm or market integrity issues that would demand a physical visit, though those are few and far between.
“Back in March we were trying to figure this out,” he said. “And now we’re in this state of a new, or at least temporary, normal.”
