Remote FINRA Inspections Raise Misconduct Risk: PIABA

As PIABA laid out in a recent comment letter to FINRA, in 2024, the regulator launched a voluntary, three-year Remote Inspections Pilot Program, “allowing eligible member firms to meet their inspection obligations under FINRA Rule 3110 without conducting on-site visits.”

PIABA weighed in on Regulatory Notice 25-04, on FINRA launching a broad review of its rules.

The rules affecting residential supervisory locations, or RSLs, took effect June 1, 2024.

“The pilot will allow FINRA to collect evidence of the effectiveness of remote inspections,” Greg Ruppert, executive vice president and head of member supervision, and Jonathan Sokobin, executive vice president, chief economist and head of the Office of Regulatory Economics and Market Analysis, said in a blog post.

“As discussed in the rule proposal, FINRA will use the pilot data to assess whether remote inspections may be part of a modernized supervisory system that reflects the hybrid work environment and the availability of technologies that did not exist when the on-site inspection was conceived,” Ruppert and Sokobin said.

Strong Concerns

In its comment letter, PIABA states that “while we understand the intent to modernize regulatory oversight in a remote work environment, PIABA submits this comment to express strong concerns that movements towards entirely remote and disconnected supervision and inspections undermine FINRA’s foundational mission of investor protection.

“The flexibility granted by the Pilot Program creates a significant gap in supervision, particularly for representatives operating out of residential or remote offices,” PIABA said.

“This structure increases the risk of misconduct, including sales abuses and regulatory evasion, especially in cases where representatives work in isolation without direct, in-person oversight,” the group wrote.

“In prior comments, PIABA highlighted numerous regulatory actions involving brokers who engaged in misconduct — such as ‘selling away’ or orchestrating Ponzi schemes — from remote, often one-person offices.”

Given this reality, PIABA wrote, “reducing or eliminating on-site inspections for such locations amplifies fraud probabilities and weakens investor safeguards.”

FINRA’s position, “that firms can rely on remote surveillance and technological tools to supervise representatives, fails to fully address the limitations of such methods,” the group said. “As PIABA has previously noted, observing certain red flags requires physical presence.”

However, PIABA said, “they should not replace in-person inspections — particularly for residential supervisory locations.”

At a minimum, “these locations should be subject to annual, unannounced, in-person audits,” PIABA recommended.

“Even inspections every three years would be preferable to eliminating them entirely. To suggest otherwise is to accept a diminished standard of oversight and, by extension, diminished investor protection,” the group said.

The group urged FINRA “to reconsider the Pilot Program’s structure and adopt more robust safeguards to ensure that all investor-facing offices, regardless of location, remain subject to effective and meaningful supervision.”