Q: I work in a branch office. How often should we expect on-site visits from our chief compliance officer? I know some of our branches are visited every year while others haven’t been visited in three or four years.
A: Although it may seem longer, I would assume that the longest time between exams at some of your branches is actually about three years. FINRA rules require member firms to inspect every OSJ and any branch office that supervises one or more non-branch locations at least once per calendar year.
However, member firms need only inspect a branch office that does not supervise other locations at least once every three years.
The regulator plans to ramp up scrutiny of bad brokers and electronic communications, among other new measures.
Notwithstanding this rule, keep in mind that when deciding how often to inspect a non-supervisory branch office, the firm is required to consider the nature and complexity of the activity that occurs in the branch, including the volume of business and the number of associated persons assigned to the location.
Other factors that should determine the frequency of inspections include: sales of structured or other complex products, including variable annuities; sales of private or otherwise unregistered offerings of any type; or offices that hire reps with a disciplinary history or who previously worked at firms with disciplinary histories. (Yes, guilt by association is alive and well in the brokerage industry).
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Regardless of the type of branch office, compliance officers should not inspect branches using simple check-the-box questionnaires. FINRA expects CCOs to critically question the underlying controls and their effect on risk exposure. As FINRA has said:
“An effective risk assessment process will help drive the frequency, intensity and focus of branch office inspections; it should also serve as an important consideration in the decision to conduct the exam on an announced or unannounced basis. Therefore, branch offices should be continuously monitored with respect to changes in the overall business, products, people and practices. Branch inspections should be conducted by persons that have sufficient knowledge and experience to evaluate the activities of the branch, and should be overseen by senior personnel such as the CCO or other knowledgeable principal.
Further, procedures should be designed to avoid conflicts of interest that may serve to undermine complete and effective inspections because of the economic, commercial or financial interests that an examiner holds in the associated person or branch being inspected.”
It is critical, therefore, that the policies and procedures specify a branch office examination cycle, including an explanation of the factors used in determining the frequency of the inspections.
