InvestmentNews (August 3, 2023) - But LPL Financial, Fidelity back the idea of allowing supervisors to work from home, using technology to oversee reps, as they did during the pandemic.
State regulators and securities plaintiffs’ attorneys continue to resist a Finra plan that would allow brokerages to conduct remote supervision of their registered representatives.
In March, the Financial Industry Regulatory Authority Inc. released a proposal that would treat a home office from which a broker is supervising other reps as a non-branch location — or a residential supervisory location.
The measure, along with one that would establish a pilot program for remote branch office inspections, seeks to make permanent the online oversight of reps that became routine during the coronavirus pandemic, as firms use technology in lieu of in-person reviews.
After it received criticism during a public comment period last spring, Finra amended the proposal. The revised version modified the amount of experience a broker must have to supervise remotely; clarified that a location is ineligible for RSL status if a broker at the location is the subject of an investigation alleging supervisory failures; and required a firm to conduct a risk assessment of a location before designating it an RSL.
Last month, the Securities and Exchange Commission opened a comment period on the revised RSL proposal. The SEC must approve Finra rule changes. The comment period ended Tuesday. Rebuttal comments are due Aug. 15.
The feedback the agency received indicates the changes Finra made to the RSL proposal haven’t quieted the opposition.
The North American Securities Administrators Association, a group made up of state regulators, said Finra’s revisions “strike a more appropriate regulatory balance” but that the latest iteration still falls short.
The state regulators said Finra should require firms to review the RSLs frequently themselves.
“The RSL proposal should be revised to establish an annual inspection schedule for RSLs,” NASAA President Andrew Hartnett wrote in a July 26 comment letter. “Finra’s continued reluctance to make this sensible revision is concerning, given the important role of inspections in the supervisory structure. If Finra is confident that reducing the frequency of inspections is acceptable, it should include its reasoning for reaching that conclusion in its filing with the Commission.”
Under current rules, offices of supervisory jurisdiction and supervisory branch offices must be inspected in person at least annually, while nonsupervisory branches are inspected every three years.
The Public Investors Advocate Bar Association remains opposed to the RSL rule.
“While it is understood Finra is attempting to change with the increased use of virtual technology, it leaves considerable opportunity for advisors working from home to skirt the rules,” PIABA President Hugh Berkson wrote in a July 31 comment letter. “Moreover, multiple aspects of [the revised proposal] weaken rather than strengthen investor protection.”
The group said that brokers who have many customer complaints shouldn’t be eligible to operate an RSL.
“Rather than trusting member firms to conduct and document a risk assessment that includes ‘volume and nature of customer complaints,’ multiple customer complaints should be a specific ineligibility criterion as PIABA proposed,” Berkson wrote.
The broker-dealer self-regulator explained in its own July 25 comment letter the changes it made to the proposal to address concerns raised by NASAA, PIABA and others. A Finra spokesperson said the organization is reviewing the comments the SEC has received.
Brokerages support the RSL proposal.
“Adoption of a new definition for residential supervisory locations will allow supervisors to continue to work from home, something that they have been doing since the onset of the coronavirus pandemic in March 2020,” Mark Seffinger, chief compliance office at LPL Financial, wrote in an Aug. 1 comment letter. “This flexibility will increase the ability for firms like LPL to attract and retain talent from across the country by allowing them the option to work from a location of their choosing.”
The financial industry wants the SEC to approve Finra’s remote inspection proposals before a temporary rule allowing them expires at the end of the year.
“We greatly appreciate Finra’s continued willingness to modernize its longstanding branch office definition,” Gail Merken, chief compliance officer at Fidelity Brokerage Services, and two of her colleagues wrote in an Aug. 1 comment letter. “We urge the SEC to consider [the RSL] proposal with an effective date prior to the expiration of the relief provided under” the temporary remote-inspection rule.