FINRA recently held its South Region Compliance Seminar in Fort Lauderdale, Florida. One of the panels at the conference was titled, Branch Office Supervision. There were no surprises from this panel – branch supervision is a critical aspect of any supervisory system. And with the updates to FINRA’s Supervision Rule taking effect December 1, 2014, now is a good time to be discussing branch office supervision. What was clear from this discussion is that FINRA is moving more and more to a risk-based approach to supervising branch offices.
FINRA staff during the panel suggested that broker-dealers conduct a percentage of their branch office examinations on an unannounced basis. This is long supported by case law. FINRA staff also pointed out several characteristics of broker-dealers with effective branch office supervision programs, specifically:
1) inspections are tailored to the business conducted in that branch
2) these firms conduct a significant number of their branch office inspections on an unannounced basis
3) that branches are selected through a combination of random selection and risk-based analysis
4) that the frequency and intensity of the branch inspections is based on the risk posed by that branch
5) use senior branch examiners who understand the business and will challenge assumptions.
Clearly, the move in branch office examinations to a risk-ranking approach is what FINRA is expecting. So to the extent your branch inspection program uses solely a calendar-based approach to determining when inspections are conducted, it may be time to consider implementing a risk-raking approach to your branch offices. Mitch Atkins, Principal of FirstMark Regulatory Solutions, has worked with clients to re-design their branch office inspection programs in the past. Using internal data, firms can consider which data points indicate the greatest risk, and thus develop a ranking process for each branch office. This ranking process can drive the frequency and intensity of the branch office inspection program for the firm, resulting in more effective deployment of branch examination resources. FINRA and the SEC have stated that firms should also avoid using generic exam procedures for the branch office inspection and instead should develop procedures that are specific to risks noted in the particular office.
FINRA also discussed branch examination preparatory techniques. These included some enhanced diligence approaches such as searches for outside business activities through the appropriate state’s division of corporations website, Google searches and social media searches. FINRA reminded attendees that they should not simple rely on information that has been disclosed by associated persons in the branch office, but should instead seek independent verification through available public records searches, economic reality testing and other reliable methods.
Mitch Atkins, FINRA’s former Senior Vice President and Regional Director, has extensive experience with branch office inspection programs. As Principal of FirstMark Regulatory Solutions he can provide assistance in developing compliant branch office inspection programs. Contact Mitch Atkins at 561-948-6511.