Regulatory Notice 24-02 (“Notice”) was recently issued by the Financial Industry Regulatory Authority (“FINRA”), wherein it announced the adoption of FINRA Rules 3110.18 and 3110.19 (“Rules”), and the end of the regulatory relief for remote branch inspections granted in response to COVID-19 (Regulatory Notice 20-08 (“COVID-19 Relief Notice”). Based on that guidance, effective May 31, 2024, the temporary relief set forth in the COVID-19 Relief Notice will terminate, and effective June 1, 2024, the Rules will supersede that guidance, and Member Firms (“Firms”) will be subject to new guidelines with respect to remote inspections, including the Remote Inspection Pilot Program.
Opt-in Requirement for Remote Inspection Pilot Program
The Remote Inspection Pilot Program (“Program”) covers the inspection of certain OSJs, branch locations and non-branch locations of FINRA Member firms (“Firms“) for three years commencing July 1, 2024 (“Pilot Period”). In order to comply with FINRA Rule 3110, Firms wanting to continue to inspect branches remotely after June 30, 2024, will have to opt-in to the Remote Inspection Pilot Program (“Program”) by providing notice to FINRA that the Firm intends to participate in the Program, no later than 5-days prior to the start of the pilot program by June 25th, 2024.
Once the Firm files the opt-in notification the Firm agrees to participate in the Remote Inspections Pilot Program for subsequent Pilot Years until the Remote Inspections Pilot Program expires. Should a Firm decide to opt-out from the Pilot Program, Firms will provide opt-out notice at least 5-days prior to the end of the calendar year.
Risk Assessment
Firms who consider conducting branch inspections on a remote basis are required to conduct a risk assessment of each office location where they anticipate performing remote inspections. That risk assessment will include and analysis of:
- The volume and nature of customer complaints.
- The volume and nature of outside business activities, particularly investment-related activities.
- The volume and complexity of products offered.
- The nature of the customer base, including vulnerable adult investors.
- Whether associated persons are subject to heightened supervision.
- Any failures by respective associated persons to comply with the Firm’s written supervisory procedures; and
- Any recordkeeping violations.
Should the risk assessment identify any “red flags” to the Firm, the Firm will evaluate if a remote inspection is permissible, or if onsite inspections must be conducted. Based on the analysis, Firms may determine that more frequent onsite or unannounced branch inspections are required.
Prerequisite Conditions
In order to qualify for a remote inspection, the respective branch location must satisfy the following conditions: (i) electronic communications (e.g., e-mail) are made through the Firm’s electronic system; (ii) the associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with Rule 3110; and (iii) no books or records of the Firm required to be made and kept current are physically or electronically maintained and preserved at such office.
Filing Requirements
Initial Filing
All filings related to the Program will be made via the FINRA Gateway. For the initial filing with FINRA, Firms will need to file separately for each OSJ, Supervisory branch office, non-supervisory branch office and non-branch location. The filings will be required to include the following information by December 31, 2024:
- The number of offices and locations with an inspection completed between January 1st, 2024, and June 30, 2024.
- The number of offices and locations that were inspected remotely between January 1st, 2024, and June 30, 2024.
- The number of offices and locations that were inspected on-site between January 1st, 2024, and June 30, 2024.
- The number of offices and locations where findings were identified, the number of those findings and a list of the significant findings.
Quarterly Flings
After the initial filing, Firms choosing to continue to opt-in to the Program, will be required to make quarterly filings for each OSJ, Supervisory branch office, non-supervisory branch office and non-branch location: Firms will be required to provide the following information to FINRA in its quarterly filings:
- The number of offices and locations with an inspection completed during each calendar quarter, broker down by both remote and on-site inspections.
- The number of offices and locations that were inspected on-site because of a finding.
- The number of offices and locations where findings were identified, the number of those findings and a list of the significant findings.
Action Items
Firms participating in the Pilot Program will need to develop both written supervisory procedures for conducting remote branch inspections and a risk assessment program.
Risk Assessment
The risk assessment should be performed on all branches or locations where they are considering conducting remote branch inspections. Additionally, the Firm should prepare a listing of locations and branches where remote branch inspections will be conducted, in preparation for submission 5-days prior to July 1, 2024.
Written Supervisory Procedures
Additionally, it should be noted that the written supervisory procedures for remote inspections will need to address the following at a minimum:
- Procedures for escalating significant findings.
- Procedures for new hires.
- Procedures for supervising brokers with a significant history of misconduct; and
- Procedures related to outside business activities (“OBAs”) and doing business as (“DBA”) designations.
The information required to be addressed in the written supervisory procedures will need to be submitted with the initial filing made by the Firm to opt-in to the Program, and in the first quarterly report made after any amendments to the written supervisory procedures for remote inspections are made.