In the past few months, the Securities Lawyer Blog has posted on several alleged supervisory problems that firms have settled with FINRA or the SEC. As a key component of compliance and supervision, FINRA and SEC staff have now issued a joint Regulatory Notice 11-54 for guidance on branch office inspections, as well as a Risk Alert related to this issue. These are intended to guide the securities industry to "better perform this key supervisory function" as well as to protect investors and firms.
The SEC Office of Compliance Inspections and Examinations and FINRA examination staff have put together a list of the elements that comprise firm best practices with regard to the process of branch examinations. These include such specifics as: focusing the exams on the business within the specific branch; scheduling the exams in terms of underlying risk, as opposed to an arbitrary cycle; conducting an exam at least on an annual basis; performing unannounced exams that are based on the risk and also selecting branches randomly; using senior level examiners who are in a better position to challenge assumptions; and, ensuring that procedures are in place to avoid the types of conflicts of interest that would make it difficult for the examination to be effective.
On the other hand, staff has identified various common deficiencies in branch inspections, which include: failing to tailor the examination procedures based on the business itself or the underlying risk assessment; using examiners who are not sufficiently experienced to fully understand the business or to effectively challenge assumptions; performing cursory exams that are generic; failing to adequately review the exam program itself for effectiveness and following existing policies and procedures; announcing exams when they should have been unannounced; failing to focus on individuals with a history of disciplinary issues and applying more supervision with those individuals.
Other suggested approaches to ensure compliance and effectiveness are also identified in the guidance issued jointly by the agencies. One important area is analyzing the risk to support the evaluation as to whether certain branches should be inspected more often than required within the FINRA three year cycle. Additionally, engaging in unannounced re-audits is a suggested practice when varying degrees of deficiencies are found. Circling back to branch office managers with the firm's internal inspection findings with monitoring of corrective measures within the branch is also suggested.
The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to firms and broker-dealers in establishing and maintaining proper supervisory systems and all related compliance with FINRA and SEC rules and regulations. Please contact our law firm to discuss our advisory services and representation by lawyers with expertise and experience before all regulatory agencies and courts in the field of securities law.
