Broker-dealers were able to effectively manage their branch inspections remotely, despite the challenges of the pandemic, says industry regulatory panel.
Remote branch inspections by U.S. broker-dealers have yielded much the same results as the on-site exams normally required by regulators, but there are several risks from pandemic-related disruptions, said both firms and examiners on a panel hosted by the Financial Industry Regulatory Authority (FINRA), the securities industry self-regulator, earlier this week.
The online panel occurred with just weeks before a March 31 deadline for broker-dealer firms to complete their own remote self-inspections of firm branch locations under a COVID-19 rule exemption that has allowed firms to avoid on-site reviews. “The window is closing for 2020 exams to comply with this relief,” said John Edmonds, senior director of examinations for FINRA.
Brokerage compliance officers and Edmonds both said they found the remote examinations effective but challenging. “We have not necessarily noticed a difference in the type of findings,” Edmonds said, adding that regulators have been able to conduct “robust examinations — but it certainly has been a challenge.”
Compliance officers and FINRA’s examiner cited several sources of potential risks for rule violations or deficiencies due to remote operations. Firms were given the exemption to dispense with required on-site inspections during the pandemic, but also had to adjust to the changes required by FINRA examiners working from remote locations.
Here are 10 key challenges and process changes cited by participants during the FINRA panel:
- Delays in handling client checks that were sent to brokers while branch offices were closed — Firms were allowed to change practices to account for COVID-19 disruptions but were required to have processes in place for any new arrangements. “The check forwarding has not been done on a timely basis, and there are uses of technology that could avoid that,” Edmonds said. “And moving forward those are things that should be considered.”
- Outside business activities — Panelist Jennifer Szaro, chief compliance officer of XML Securities, said that outside sources such as state incorporation registries and property tax records have been useful tools in detecting banned outside business activities. “What you can get now publicly is astonishing,” she said, noting that outside sourcing also adds credibility since “reps can’t alter or control these public records.”
- Failure to capture material information due to use of inadequate new tools — The omissions fall outside pandemic exemptions and lead to enforcement actions if they are not documented.
- Gaps in oversight related to use of non-compliant communications applications — “If I were a firm, I would be watching for findings similar to those,” Edmonds said.
- Commercial bank offices typically prohibit photos and videos due to security and privacy concerns — An office inspector may need to consult with a branch manager to gain input, Szaro said. “Sometimes it means getting a person’s third-party impression from someone like a branch manager.”
- Inspectors have gained new visibility into rule infractions through remote computer-access tools — “There’s functionality within Webex that allows you to share the computer, and then we can do a lot of our testing through Webex,” said Charis Jones, senior vice president and head of home office supervision in business risk management for LPL Financial.
- Email reviews have shown violations in off-network, un-monitored contacts with clients — The increased reliance on email — always a regulatory risk — has become more complicated in home offices with access to more email options. Message content has pointed to additional violations.
- Increased use of WhatsApp and other communications applications that violate firms’ policies — “It’s not necessarily intentional, and the rep is often really just looking to do right by their customer,” Edmonds said. “But these actions can create significant risks for the firm.”
- Delays and potential violations linked to increased use of e-signing — Firms need to take steps to offer and train employees in tools to create electronic signatures.
- Private securities transactions have led to violations over inadequate documentation of approval — The compliance specialists agreed that remote inspections have worked effectively and expanded the range of tools for inspecting sites, but said remote inspections also involve tradeoffs. “Some things we can find a bit better and more efficiently in remote inspections and by using remote operations and electronic messaging,” said Szaro. For those covered employees less keen and adept with technology, however, the process can be difficult. The use of unauthorized digital applications is often “not nefarious,” but can complicate examinations and lead to potential deficiencies, Edmonds added.
LPL Financial’s Jones agrees. “As good as technology is, and no matter how we leverage it and take advantage, it’s still not the same thing as being in-person with people and establishing relationships,” she said. “So, I would say that’s one of our challenges, that lack of real in-person meetings.”
The examination and audit process, already fraught, becomes even more tense in remote meetings, and often more can be difficult to schedule and complete. The time saved in travel and cost in on-site visits may be reduced, but remote inspections still require advance planning to make certain tech tools are in synch and tailored to office type, risk factoring, and business model.
“Technology can be a wonderful thing,” said Edmonds. “But it can be a horrible thing when it goes wrong.”