Financial Industry Regulatory Authority President and CEO Robert Cook said he wants examinations of firms’ branch offices to stay remote into next year, speaking at the Securities Industry and Financial Markets Association’s (SIFMA) virtual Compliance & Legal Forum this week. FINRA is currently in talks with the Securities and Exchange Commission about extending the remote exam option.
“What I’d like to see happen here, at least where my thinking currently is, is we would extend it into next year, and that we would also step back and look at that rule more holistically, and think about whether it could use some updating to accommodate a thoughtful, risk-based approach to when in-person exams would be necessary,” Cook said.
In the conversation with Ira Hammerman, an executive vice president and general counsel for SIFMA, Cook stressed that while this was what he currently thought, the agency still had significant work to do with other stakeholders, and it would need to be approved by the SEC. Cook did not give a timeline on when that decision would be finalized, though he said the agency was moving expeditiously and acknowledged that firms needed time for advanced planning to prepare for exams of their firms.
Originally, remote exams were allowed for 2020 and 2021, with guidance published in the Federal Register in November of last year stating that firms that had to conduct inspections of offices of supervisory jurisdiction, branch offices or non-branch locations could satisfy that mandate remotely (the rule cited the “compelling health and safety concerns and the operational challenges” firms faced by the pandemic and ensuing lockdowns). In May, FINRA Executive Vice President and Chief Legal Officer Bob Colby said that such an extension could “buy a little time” for firms and regulators to consider how inspections should be done in the future.
Cook noted that firms had learned a lot on how to conduct remote exams in the midst of the COVID-19 pandemic, and suggested a "risk-based approach" could allow firms to ensure their OSJs and branch offices maintained compliance standards while not necessarily going on-site in every instance.
Hammerman also asked whether the agency would reconsider the definitions for branch offices and OSJs, which some financial services firms have requested. Changing the definitions could impact when, how and even if those offices would be inspected. Cook said those questions were “one element of a broader exercise,” and that the agency was examining its rulebook to see if there were requirements that no longer made sense and whether there were areas where further guidance would help.
“We talked about this not very far into the pandemic. We knew this was going to be something the pandemic would bring to the forefront. It really accelerated some trends that have been in the making for some time,” he said. “And those trends really call into question the long-term efficacy of rules that have a basic brick-and-mortar underpinning to them.”
Like much of the industry, regulators like FINRA are navigating their return to the workplace. According to Cook, the agency had already opened some offices, and was expecting to be able to open up more offices in the coming weeks, while acknowledging that the agency would have “a lot of remote work” for some time going forward.
Lisa Hopkins, the president for the North American Securities Administrators Association (NASAA) and West Virginia’s Senior Deputy Securities Commissioner, said state securities regulators were responding in various ways. According to Hopkins, one state’s regulators had told her that they would be performing job duties exclusively remotely from now on, and would have to justify any reason for holding in-person meetings. Other states are trying hybrid solutions of two to three days in the office, while other state regulators are entirely back in the workplace.
“The states have not figured that out completely at this point,” she said, during a separate panel during the SIFMA forum.
Cook also touched on the agency’s response to the recent market structure developments raised by the GameStop saga from earlier this year. Cook noted that the SEC was the federal policymaker to respond to the issues, with FINRA creating rules aligning with the direction that the commission courses.
Cook noted the agency had undertaken a zero commission sweep that was still ongoing, focusing on whether the model affected firms’ ability to fulfill best execution obligations. He also said FINRA was considering sweeps around options account opening compliance, conflicts in the SPAC space, and “fin-fluencers,” looking into how firms supervise activities related to paid social media influencers.
“So, again, innovation is great, but compliance with the rules is not optional, and it can’t be sacrificed for the sake of innovation,” he said. “And I think that’s where you’ll continue to see us.”
