Financial Advisor IQ (November 30, 2022) - The Public Investors Advocate Bar Association contends that a proposal to classify home offices as non-branch locations “leaves considerable opportunity for advisors working from home to skirt the rules.”
The Public Investors Advocate Bar Association is asking the Securities and Exchange Commission to reject a proposal to classify home offices as non-branch locations, contending that they allow advisors to evade compliance.
The association believes that the proposal, presented by the Financial Industry Regulatory Authority, “is a fundamentally flawed idea” because “it leaves considerable opportunity for advisors working from home to skirt the rules.”
This summer, Finra proposed regulating the use of home offices as non-branch locations by classifying an eligible home office as a "residential supervisory location." The industry’s self-regulator said at the time that homes serving as non-branch locations had soared by 53%, to 37,290 at the end of April this year, from 24,369 on December 31, 2019.
The proposal specifies that residential supervisory locations may have only one associated person conducting business at the location; that the person must be assigned to a specific branch office; and that the non-branch location must not be used to meet with clients or prospects, may not handle customer funds or securities, may use only electronic communications within the broker-dealer's electronic system, and must maintain books and records.
The non-branch locations would be subject to inspections at least every three years, per the proposal. OSJs and other supervisory branch locations are subject to annual inspections.
Piaba took issue primarily with the inspection element, arguing that the three-year inspection interval would not allow supervisors to effectively monitor an advisor's standard of living to assess whether the advisor was living within the means of his or her compensation, and the association also contends that “a remote inspection will not find evidence of files or other documents related to unapproved investments being recommended to customers.”
“These proposed rules … would provide even more ample opportunity for a broker to engage in fraudulent conduct without a supervisor or auditor adequately supervising the broker’s conduct,” Piaba president Hugh Berkson wrote in a letter to Vanessa Countryman, secretary of the SEC.
“If anything, FINRA should require firms to develop and implement more unannounced inspections as residential and remote offices and virtual technology becomes more prevalent,” Berkson added (emphasis his).