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Brokerage industry applauds, PIABA criticizes approval of remote inspection proposals

Business

A lawyer who represents investors in disputes with brokerages says online inspections of branch offices will increase his business in a bad way. Trade groups representing brokers say easing the requirement for onsite reviews better aligns supervision rules with the hybrid work environment.

Those divergent opinions arise in the wake of the Securities and Exchange Commission’s approval last week of Finra rule proposals that would establish a three-year pilot program for remote inspections and allow a broker’s home to be designated as a nonbranch office, or residential supervisory location.

The Financial Industry Regulatory Authority Inc. has pursued the rule changes in response to a work-from-home trend in the brokerage industry that started during the coronavirus pandemic and that the regulator says likely will continue.

The pilot program proposal, introduced in 2022, builds on a temporary rule for remote inspection that has been in place since November 2020 and has been extended a couple of times while Finra worked on the proposal.

Some firms and locations will not be able to conduct online reviews based on past disciplinary problems and other factors to minimize risk. Finra amended the proposal on residential supervisory locations to strengthen eligibility criteria.  

But throughout the rulemaking process, Finra has said that technological advances have enabled brokerages to supervise employees effectively through electronic means.

“The new rules reflect today’s hybrid work environment while still providing critical investor protections,” Finra said in a statement.

One reason it took the regulator a while to get the proposals over the finish line is because of resistance from securities lawyers who represent investors and state securities regulators. The groups warned regulatory gaps might be created as inspections go online.

The Public Investors Advocate Bar Association criticized the SEC’s approval of the remote inspection proposals.

“It’s supervision by Zoom,” said PIABA president Joe Peiffer. “You don’t know if people are wearing their pants on Zoom, so you don’t have any idea what they’re really doing with investors.”

He foresees an increase in investor harm thanks to the inspection reform.

“We’ll have more cases,” said Peiffer, a partner at Peiffer Wolfe Carr Kane Conway & Wise. The rules are “a good thing for fraud but a bad thing for [investors] keeping their money.”

The organization for state securities regulators, the North American Securities Administrators Association Inc., took a more hopeful view.

“While NASAA has expressed concerns about the way these programs were proposed, we appreciate the changes that were made in response to our comments,” NASAA President Claire McHenry said in a statement. “We also look forward to seeing the requirements and safeguards underlying these programs executed diligently to best protect investors.”

Financial industry trade associations welcomed the codification of remote inspections.

“We are pleased the SEC approved Finra’s remote work proposals, which are a step in the right direction towards modernizing the supervisory regime,” Bernard Canepa, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said in a statement. “They are a positive benefit to the industry, allowing firms to more efficiently supervise, and providing individuals with greater workplace flexibility. This will allow the industry to become more diverse, which in turn will benefit investors. “

The American Securities Association, which represents regional financial firms, said it tried to help regulators understand how brokerages are adapting to home offices becoming a permanent part of the business landscape.

“We’re pleased regulators recognized that industry has been able to work flawlessly in this new work environment, and we look forward to continuing to educate Finra and the SEC as to the efficiencies that hybrid-work environment allows,” ASA CEO Chris Iacovella said in a statement.

A Finra spokesperson said the regulator would announce later when the remote inspections rules will become effective.

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