Large firms seek to show FINRA remote work can work

Only about a fifth of all FINRA member firms are taking part in a study of firms' ability to inspect their branch offices at a distance.

Still, industry representatives are optimistic that the Financial Industry Regulatory Authority's recently begun remote inspections pilot program will result in permanent remote work policies for the industry. That's in part because large firms are among the biggest participants in the study.

FINRA published a blog post last week laying out key figures for its pilot program, which allows brokerages to continue remote inspection policies that many adopted during the COVID-19 pandemic. The industry self-regulator reported that 741 firms in total signed up by the June 26 deadline set for taking part in the first phase of the study.

That came to only 22% of the 3,298 member firms FINRA listed in its recently released 2024 industry snapshot. But among large outfits with 500 or more representatives, the participation rate was much higher. A full 60% of the 155 firms falling into that category elected to take part in the pilot program.

"They can definitely declare mission accomplished," said Jennifer Szaro, the chief compliance officer at XML Securities, which is taking part in the pilot. "This is indicative of how much need there is for this now. I think this is a good mix to get some useful data."

READ MORE:
FINRA tells firms there's no mandatory RTO — but it's time to register your remote locations
Wells Fargo fires remote wealth employees over 'simulation of keyboard activity'
FINRA sets sign-up deadline for firms that want to continue remote inspections
Remote work? Not for the vast majority of firms these days, survey says

Russell Sacks, a financial services lawyer at King & Spalding, said some smaller firms are taking a "wait and see" approach to the pilot program. Many no doubt want to learn how large industry players deal with the program's more onerous documentation and reporting requirements before signing up themselves.

The pilot program, approved by the Securities and Exchange Commission in November, is intended in part as a data-gathering exercise. Participating firms will have to provide regulators with quarterly reports detailing the number of inspections, both remote and in-person, they conduct of their branch offices. 

Any findings — such as regulatory breaches and remedial actions — will then have to be reported to FINRA. The first submissions are due in October.

FINRA is asking firms to also gather and report similar data from 2019. That will give it a baseline for making comparisons with in-person inspections conducted before the outbreak of COVID, Sacks noted.

"Some firms may not have great records for that year, or the records may not have been made with these issues in mind," Sacks said. "It's a significant compliance burden that firms are working with, and the specific requirements were not something that people had to do during COVID, when remote work and remote inspections were ubiquitous."

For Szaro, large brokerages' interest greatly increases the chances that the study will yield results leading to permanent remote work policies. The workload for participating firms is heavy, she said.

Her employer's decision to take part has meant that Szaro and her colleagues have had to review each of the firm's roughly 45 branch offices to decide which are good candidates for remote inspections and which may still require periodic in-person visits. Szaro said that compliance burden is likely what kept many small firms from signing up.

"Having to go through all of the criteria to comply with the rules has been a massive undertaking," she said.

Smaller firms make up the majority of the industry but tend to have fewer branch offices that could benefit from remote inspections. FINRA's industry snapshot notes that the 2,945 firms with 150 or fewer employees last year were operating just over 9,000 branches. Large brokerages, by contrast, had more than 129,000 branch offices.

Those sprawling networks make remote inspections almost a practical necessity at some of the biggest organizations.

"I do think some more firms will sign up for next year, after they've done the in-person inspections and thought about it more and got their head around it," Szaro said. "But some of the firms just don't necessarily have the number of offices that would warrant that."

Szaro credited FINRA for allowing firms to use its online Active Individual Roster reporting template to easily upload required information about branch offices. The industry regulator has also said it plans to allow the data required by the pilot program to be submitted digitally.

Most firms have been conducting required internal inspections of their branch offices remotely under emergency rules adopted several months after the outbreak of COVID-19 in March 2020. Many broker-dealers have since argued these practices have become essential to their way of doing business, even as regulators have struggled to devise permanent remote work rules.

The pilot program's first phase runs from July 1 to Dec. 31. Firms that want to take part in its second phase, running for all of 2025, have until Dec. 27 to sign up.

FINRA's blog post noted other ways in which the industry is already largely represented in the study. The participating firms employ 67% of the 628,392 registered representatives who were in the industry last year, according to FINRA's snapshot. They also had 53% of the registered branch offices. 

Firms that don't elect to take part won't be totally escaping regulatory burdens. For one, they also have to resume sending out supervisors at least once a year to inspect their branch offices in person. Moving forward, they'll have to make sure their documents used for registering individual employees (Form U4) and branch offices (Form BR) contain up-to-date information.