The Securities and Exchange Commission and the Financial Industry Regulatory Authority (Finra) have issued a new broker-dealer branch inspection program that includes guidelines on how securities firms can better supervise themselves.
Along with specific requirements outlined in the report, the program includes effective practices to be observed by broker-dealer branch office examiners:
Use risk analysis to identify whether individual non-supervising branches should be inspected more frequently than the FINRA-required minimum three-year cycle, and conduct more frequent branch inspections. Some firms are to conduct "re-audits" when routine inspections reveal a high number of deficiencies, repeat deficiencies or serious deficiencies. These re-audits and audits for cause are conducted as unannounced inspections.
Use surveillance reports and employ current technology and techniques to identify risks and develop a customized approach for branch office inspections.
Use comprehensive checklists that use previous inspection findings and trends noted in internal reports.
Conduct unannounced branch inspections either randomly or based on certain risk factors. "Surprise" exams may yield a more realistic picture of a broker-dealer's supervisory system as they reduce the risk that individual registered reps and principals might attempt to falsify, conceal or destroy records in anticipation of an internal inspection.
Use qualified senior personnel in several branch office examinations each year.
Insert branch office inspections findings into management information or risk management systems and use a centralized, comprehensive compliance database that allows compliance personnel to access to information about all firm's registered reps and their business activities. The system is useful in supervising independent contractor registered reps dispersed across a broad geographic area.
Provide branch office managers with the firm's internal inspection findings and require them to take and document corrective action.
Track corrective action taken by each branch office manager in response to branch audit findings.
Elevate the frequency of branch inspections, or their scope, or both, in cases where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer-for example, away from the firm.