It is not yet clear when the SEC will rule on the pilot programme and what its potential long-term impact on brokerage supervision would be. However, it is undeniable that throughout the pandemic, broker-dealers demonstrated their ability to maintain regulatory compliance in a remote environment. This survey, conducted by SIFMA and Protiviti on behalf of the securities industry, aims to resolve concerns about remote inspections during the pandemic.
The qualitative and quantitative data that we collected supports modernising Rule 3110 to permit remote branch inspections on a risk basis. As demonstrated below, the 28 firms that participated in the survey:
- Represented a significant swath of the industry by registered representatives
- Met their inspection obligations seamlessly, conducting thousands of inspections remotely throughout the pandemic with technologies easily and affordably available
- Identified and rectified inspection findings as appropriate, with no increase in significant findings from branch inspections during the pandemic
- Focused in-person inspections on higher-risk locations as pandemic restrictions eased and conditions allowed
- Benefited from the ability to recruit and retain diverse, qualified staff essential to their supervisory programmes
The advancement of our governing rule to address industry practice and investor expectations is essential to our capital markets and investor protection. However, Rule 3110, which predates the transition of the
National Association of Securities Dealers (NASD) into FINRA, has not evolved effectively to address decades of changes in technology and those regulated by it.
On-site inspections are far less relevant in the current work environment, which is largely a distributed model in which physical branches maintain much less significance than they have in the past because of the widespread use of electronic books and records and central supervisory programmes. Client behavior also changed. On-site client traffic, as well as employee count at the branch level, remain well below pre-COVID levels — the new normal, the industry believes.
In the industry’s view, the blanket expectation for on-site branch inspections prior to the pandemic was often a mismatch for the respective location and rarely an effective use of supervisory capabilities, contrary to what some regulators assert, unless the circumstances warranted or there was a business need. The pandemic demonstrated the industry’s resiliency to operate in a remote environment and surveil and supervise remotely. To date, there has not been any material change in examination findings or enforcement actions that can be attributed to a lack of on-site branch inspections, as FINRA recognised in a preliminary review, and based on available data and publications by securities regulators.