By Anne Sherry, J.D.
SIFMA urged the SEC to allow brokerage firms to conduct branch inspections remotely in consideration of the COVID-19 pandemic. The industry group commented on a proposed rule change by FINRA to allow member firms until March 31, 2021, to complete their calendar year 2020 inspections. According to SIFMA, this deadline is "virtually impossible" with the pandemic itself likely to extend into next year, and members should instead be permitted to rely on remote branch inspections for the duration of the pandemic.
FINRA’s proposal would adopt a new rule extending the deadline for calendar 2020 inspections to March 31, 2021. The proposal specifically "emphasizes that this extension of time does not relieve firms from the onsite inspection requirement currently prescribed by the rule." The self-regulatory organization stated its intent to balance firms’ operational needs with investor protection. It also said it believes that the risks of the extension are mitigated by its temporary nature and by firms’ ongoing supervisory obligations and offsite monitoring.
However, SIFMA urges the SEC and FINRA to allow members to rely on remote branch inspection programs in lieu of onsite inspections for 2020 and 2021. The comment letter says that remote inspection programs "leverage existing, proven processes and technology to ensure that sales practice risks, suitability risks, and investor protection concerns are properly addressed." Already, SIFMA says, most tasks associated with a branch inspection are conducted prior to the onsite visit. A remote inspection program could incorporate pre-visit questionnaires; reviews of COVID policies and procedures; interviews; testing and supervision; and targeted reviews and searches.
The comment letter observes that most firms have enabled remote work, with little to no account processing, no client contact, and limited onsite staff. Firms have also restricted travel, and governments themselves have instituted travel restrictions or advisories. As a result, onsite inspections ended in February or March 2020. Inspectors have shifted to remote work, and firms have been using technology to supervise remotely as well as exploring how technology could be used to conduct inspections. SIFMA points out that the SEC has transitioned to remote work for its staff to further its prioritization of health and safety.
SIFMA also notes that the regulators have issued similar relief in other areas. The SEC issued relief facilitating remote board meetings and remote contracts; FINRA and NASAA implemented remote testing; and the SEC approved a temporary FINRA rule change allowing oral arguments before the National Adjudicatory Council to be held remotely. State securities regulators and non-financial federal regulators have issued guidance and relief in recognition of the safety and operational issues presented by the pandemic.
Furthermore, the rule proposed to be changed, FINRA Rule 3110(c), does not state expressly that a firm must perform onsite branch inspections, SIFMA writes. Rather, the requirement that inspections take place onsite is a FINRA interpretation. The group cites the 2019 presidential executive order stating that agencies should "treat guidance documents as non-binding" and Chairman Clayton’s 2018 statement that "all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties." While the FINRA rule is not an SEC rule, it is subject to SEC review and approval and thus should fall within the purview of the executive order and chairman’s statement. SIFMA believes its approach complies with the text of Rule 3110, requiring that firms establish and maintain systems of supervision to ensure compliance with the securities laws and rules.