In recent months, as the coronavirus pandemic has made remote work a new norm, broker-dealers, branch offices and financial advisors have found technological workarounds to the in-person interaction that has traditionally characterized how we work together in the wealth management space.

Yet one area in which substitutes for face-to-face interactions will not be sufficient is branch-office examinations. These exams fulfill a requirement from Finra to verify that branch offices are complying with basic requirements on maintaining documentation and disclosures. In rarer cases, they root out bad actors whose wrongdoing may be putting themselves and the firms with which they affiliate at risk, either from regulatory action or client arbitration.

Until coronavirus arrived, these branch-office inspections were done in person by an examiner from the home office, a designated branch manager or a third-party examiner. But the stay-at-home orders in effect in most parts of the country have made it impossible to conduct in-person exams.

The unexpected hiatus puts broker-dealers in a bind. Finra requires branch examinations at least once per year for Offices of Supervisory Jurisdiction (OSJs) and once every three years for non-OSJ branches. With a few months already lost and little clarity on when social distancing will ease in many parts of the country, firms face the prospect of having to complete nearly a full year’s worth of inspections in a severely compressed timeframe.

Finra has not provided specific guidance on how firms are to navigate this, but it should. If we get much farther into the second quarter, Finra should let firms roll their required 2020 OSJ exams into next year and allow them to use that exam to count for both 2020 and 2021. Similarly, it could allow non-OSJ branches with required exams due by the end of 2020 to conduct them in 2021. Examination deadlines for both types of branches would be Dec. 31, 2021.

Why Branch Exams Should Be Done In-Person
In 2017, Finra issued Regulatory Notice 17-38, requesting industry comment on amending Rule 3110 (Supervision) to provide firms the option to conduct remote inspections of branch offices that meet specified criteria. The rationale, it said at the time, was that communications technology was so accepted and remote work so commonplace that firms “questioned the practicality and efficiency of conducting on-site inspections of such locations in fulfilling their obligations…”

Remote examinations would do an adequate job of verifying ordinary course-of-work compliance activities, for which the examiner must simply verify the presence of an electronic paper trail. Much of the work of in-person examinations involves this kind of inspection.

The reason the proposal didn’t progress much farther than the comment phase is simple. Remote examinations probably won’t detect is evidence of more insidious activities, such as selling away or fraud, for which the perpetrator is taking active measures to hide or eliminate documentation to avoid being discovered. Those types of activities are much more likely to be uncovered in an in-person examination.

In-person examinations are much more likely, in other words, to protect the investing public by yielding a more thorough, more complete picture of the activities of a branch office and its associated representatives. Relatedly, even the possibility that someone will look under the hood during an annual in-person examination can keep offices and representatives on their toes and serve as a deterrent to potential bad behavior.

Giving Firms More Certainty And Flexibility
Virtually all firms have stopped conducting exams as they wait out social-distancing orders across the country. And rightfully so: Public health should trump regulatory compliance every day of the week and twice on Sunday, and as long as there is a window to get the 2020 exams done before the end of this year, firms still have time to comply.

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