Remote Branch Exams: Expert Tips for Rule 3110 Compliance
Temporary relief for remote inspections is set to expire on December 31, 2023. At FINRA’s 2023 Annual Conference, panelists discussed the future of remote inspections and the status of FINRA’s proposals in this area.
In response to the current hybrid style of work that many member firms have employed, FINRA has re-filed with the SEC the three-year Remote Inspection Pilot Program Proposal and the Residential Supervisory Location Proposal. Additional controls around record keeping were added to the proposals based on comment letters and concerns from state regulators. Comment periods for both proposals are now closed. FINRA is aware that the relief period for remote inspections could arrive before the proposals are approved and will issue more guidance as necessary.
Branch Office Considerations for Member Firms
- How to know when to designate a location as a branch office. There is no clear definition of how much working at a location leads to it being a branch location. FINRA guidance of “regularly engaged” in business at the location is meant to provide flexibility for firms to make that determination. FINRA expects firms to use common sense and reasonableness in this determination.
- Continuing Membership Application considerations. These may occur because office locations might increase if proposals are approved. For example, some firms may choose to designate an employee’s home as their office as well as the firm’s traditional office location. FINRA currently has a safe harbor number of offices that a member firm can add without filing a CMA. If a firm exceeds this number, it must go through a review to determine if the increase is material to its business. Materiality may be based on the ability to supervise the new locations, technology tools utilized, and the policies and procedures in place. FINRA has an informal process called a Materiality Consultation Process firms can utilize if they are unclear whether they need to file a CMA.
- Firms should also review state regulations when determining whether to register location as a branch. Some state regulations are stricter than others. State requirements for branch inspections also differ, and those should be reviewed as well.
Tools and Best Practices for Remote Inspections
- Have written procedures for remote inspections that include a description of the methodology used to conduct the branch inspection, the tools and the technologies used, and the risk-based system used to identify and prioritize the areas of review
- For efficiency, utilize Pre-Inspection Questionnaires and perform internet and social media searches for branch personnel prior to the inspection.
- Facetime calls and video calls continue to be a good way to visually inspect branch offices. Look for items with client information in plain view, listen for background conversations and take screen shots during the call to review more closely later.
- Red flags observed during the remote inspection may require an on-site visit, conducted by senior branch office examiners, as well as additional training for the branch.
- Utilize FINRA’s Branch Inspections Templates, available in the Peer-to-Peer Library located in Gateway and accessible by member firms.
- Prepare written reports for each inspection and require written responses from branches to document corrective action.
Oyster Consulting believes that every compliance program should be designed to monitor the activities of the firm’s associates and tailored to assess the risks specific to the firm’s business. Our experts are former industry practitioners with the experience to assist with branch office examinations, the development of branch examination procedures and a review of your firm’s existing compliance program.
