COVID-19 cases are on the rise again nationally, and it’s incumbent on professionals in the wealth management industry to try to limit the spread of the disease, both to protect ourselves and the people with whom we work.
That includes eliminating unnecessary in-person interactions to the greatest extent possible, while managing, as best we can, to carry on and do our work through virtual channels. For some functions, this presents minimal friction in the ordinary course of a business day, while for others, it is a formidable challenge.
The latter is the case with broker/dealer branch-office examinations, the FINRA-mandated in-person review of records, policies and procedures that has been a rule for decades. With the onset of the pandemic, broker/dealers, rightfully, halted in-person exams. Meanwhile, COVID-19 shows few signs of relenting, and FINRA rules still require examinations at least once per year for offices of supervisory jurisdiction (OSJs) and once every three years for non-OSJ branches. Since the pandemic began, FINRA has been virtually silent on its expectations for compliance with these requirements. Firms remain in the dark as to whether they will be fined or disciplined for not conducting in-person reviews amid the uncertainties of the pandemic.
Doing nothing is not an option. To comply with the spirit of the requirements and protect the health of the exam participants, firms may choose to thread the needle by using a hybrid branch examination model that does much of the upfront work of document collection and inspection remotely, with an option for an in-person visit, if one is deemed necessary. If an on-site visit is not possible due to the health risks it might raise, a follow-up phone conversation is a simple alternative.
A Balance of Priorities
Prior to the pandemic, branch examinations involved the examiner traveling to the branch office; collecting and scanning documents; examining advisors’ computers and the applications they are using; and asking a series of questions about vendors, policies and procedures. The on-site portion of the process wrapped up in a few hours. No matter how far-flung the office, examiners would make the trek, because FINRA requires it.
With a hybrid model, firms can set up regulation-compliant, secure websites for uploading documents. Based on their inspection of those documents and a follow-up phone conversation, firms can determine if an abbreviated in-person visit could yield additional information necessary to completing the examination.
If a visit is needed, examiners and firms should do a risk-benefit analysis along two dimensions, weighing both the financial costs and the health risks for the examiner and branch office employees against what could be gained.
For example, if an examiner is based in South Florida, as I am, would the cost in time and resources to travel to a branch office in Montana for a single in-person examination justify whatever additional information could be gleaned over a virtual examination?
Meanwhile, if the branch office were in Orlando, but the advisor there was 75 years old with diabetes or another underlying medical condition, is the additional information and color I would garner by seeing their office in person worth risking their health?
If an in-person visit is deemed too costly or risky, the examiner would document the rationale for not doing the visit and prioritize the branch office in question for an in-person examination when one is possible.
Unprecedented Times
Those are extreme scenarios, which makes them easy calls. But in the real world, of the hundreds or thousands of examinations that must be completed for any given broker/dealer’s branches, there are bound to be specific cases that require closer consideration.
The hybrid model is not the ideal solution. Will red flags be missed in a remote exam that might have been caught with an on-site visit? Possibly. For example, in “normal” circumstances, an examiner can inspect an advisor’s computer to determine if they are using any applications that would create cybersecurity vulnerabilities or using separate email accounts that might suggest they’re engaged in nefarious activities.
However, in these unprecedented times, all of us are simply trying to manage as best we can. There are rules set forth by regulators on branch examinations, and firms must comply. In short, doing nothing is not an option.
Considering the circumstances, the hybrid examination would offer a viable, if temporary, approach to comply with regulations while protecting the health and safety of examiners, branch employees and advisors.
Sander J. Ressler is founder and managing director of Essential Edge Compliance Outsourcing Services LLC, a Delray Beach, Fla.-based regulatory and compliance supervision consultancy.
