RIA Compliance Blog
The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently jointly issued a Risk Alert and a Regulatory Notice on broker-dealer branch office inspections designed to help securities industry firms better supervise their branch offices, as well as to underscore the importance of that supervision.
“An effective risk based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interest,” stated Stephen Luparello, Vice Chairman of FINRA.
The risk alert specifically makes the following recommendations to firms, including:
- Increasing the frequency of branch inspections, especially unannounced visits;
- Customizing examinations to branch activity based on risk assessments;
- Involving more senior personnel in exams;
- Insuring that examiners have no conflicts of interest; and
- Increasing supervision of certain offices based upon surveillance data and requiring corrective actions to address deficiencies noted.
FINRA has recently indicated it is increasingly emphasizing the review of branch office practices in its own exams, using more risk-based criteria to guide its exams and refocusing examinations on point of sale activity. According to FINRA, it has almost doubled its number of branch office exams – from about 450 in 2010 to almost 800 in 2011. Overall, in 2011 FINRA brought 1,411 disciplinary actions totaling more than $63 million in fines, and barring 317 individuals, suspending 432 brokers and expelling 17 firms from the securities industry.
FINRA’s Chairman, Richard Ketchum, said, “Our top priority is to protect investors. We are continually incorporating measures designed to root out products and practices that harm investors, as well as providing information and tools that help investors save and invest for their future and avoid costly mistakes. We remain committed to ensuring that those who engage in fraudulent or other activities posing a threat to investors are held accountable.”
In order to accommodate its heightened focus on branches, FINRA has increased the number of staff in the district offices. According to FINRA, this extra staff has more expertise in issues relating to specific firms and the ability to perform real-time monitoring of business and financial changes. With an increased ability to evaluate regulatory information, FINRA believes that it can now more easily target areas believed to be a greater risk to investors and deal with them accordingly.
It is apparent that firms can expect FINRA to continue to look closely at branch office activity in 2012, as well as at the firms’ commitment to effectively examine their branches. It is important that senior management, risk management and compliance managers review and act in accordance with the steps outlined in the alert to effectively address branch office risks and reduce the chance of future misconduct.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.