Investment News (September 14, 2023) - Over nearly three years 'our branch examiners have refined their skills and become very adept at identifying risk remotely,' insists LPL Financial.
State securities regulators continue to resist Finra’s efforts to allow brokerages to conduct online supervision of branch offices.
The state regulators’ organization, the North American Securities Administrators Association, has been a consistent opponent of the Financial Industry Regulatory Authority’s proposal to establish a voluntary three-year pilot program for remote inspections.
The proposal, introduced last year, builds on a temporary remote-inspection rule that has been in place since November 2020, when most brokerages personnel were working from home due to the coronavirus pandemic. The temporary rule expires at the end of the year.
Finra modified the pilot program proposal over the course of several versions to strengthen risk assessment for participating firms in response to criticism from NASAA, the Public Investor Advocate Bar Association and others.
The changes haven’t assuaged state regulators.
“We have previously noted in comment letters that we appreciate Finra incorporating some of our suggestions, even as we have encouraged Finra to incorporate still more and the SEC to require them to do still more,” NASAA spokesperson Fred Baldassaro said in a statement Thursday. “We will continue to work with Finra.”
Earlier this week in her inaugural speech, new NASAA President Claire McHenry said it is state regulators’ “understanding of the importance of the role of supervision and compliance that has informed our comments to the SEC on Finra’s pilot on remote supervision.”
Finra filed the latest iteration of the proposal with the Securities and Exchange Commission earlier this year. The SEC, which must approve Finra rules, took public comments on the proposal in August.
In an Aug. 29 comment letter, former NASAA President Andrew Hartnett said NASAA requested that Finra “be more prescriptive” regarding risk assessment, supervisory procedures and regulatory disclosures for the pilot program.
“We appreciate that Finra incorporated some of these recommendations into the revised proposal,” wrote Hartnett, who is deputy Iowa insurance commissioner. “However, we believe the revised proposal still does not go far enough to protect investors.”
Hartnett outlined further changes NASAA is seeking, including a tougher standard for regulatory disclosures.
State regulators will keep pushing Finra on the issue, even if the SEC signs off on the pilot program.
“Should the SEC decide to approve the proposals, we look forward to engaging with our friends at Finra as the pilot progresses,” said McHenry, deputy director of the Nebraska Bureau of Securities.
Finra’s modifications didn’t win over PIABA, either.
“The amendments made to this rule proposal do not address the significant harm done to investors by rogue brokers working in the absence of adequate supervision,” PIABA president Hugh Berkson wrote in an Aug. 29 comment letter.
Brokerages have been deploying technology to improve their supervision of branch offices and other locations, a trend that accelerated during the pandemic, Finra has said during the rulemaking process.
LPL Financial, the country’s largest independent broker-dealer, has performed more than 27,300 remote branch inspections since March 2020, said Tara Gilchrist, LPL senior vice president and head of branch examinations.
“Our team has reimagined the branch exam process to leverage publicly available online tools and resources, including secretary of state databases, google searches and google street view, in order to efficiently and effectively examine branches using video calls,’ Gilchrist wrote in an Aug. 29 comment letter. “Although the program was built out quickly, over the course of nearly three years our branch examiners have refined their skills and become very adept at identifying risk remotely.”
The pilot program is one of two Finra remote-inspection proposals sitting at the SEC. The other would allow supervisors to conduct inspections from their home offices, or remote supervisory locations. It’s unclear when the SEC will make a decision on the proposals.