FINRA requested comments on a proposal to amend rules on supervision to allow for firms to conduct remote inspections of certain "qualifying offices."

Currently under FINRA Rule 3110, a firm must conduct on-site inspections of its office locations (see FINRA Regulatory Notice 11-54). According to FINRA, firms have raised questions regarding the efficiency and practicality of conducting on-site inspections of remote locations at which limited firm activity takes place.

In response to these concerns, FINRA is proposing to add Supplementary Material .15 to FINRA Rule 3110, which would permit firms to conduct remote inspections in lieu of physical, onsite inspections. To be eligible for a remote inspection, a "qualifying office" would be required to satisfy criteria, including:

  • not more than three associated persons are designated to the location;
  • the location is not represented to the public as an office of the firm;
  • firm business at the location is only conducted through the firm's authorized electronic systems and platforms;
  • books and records are not maintained at the office;
  • no customer funds or securities are handled at the location; and
  • no registered person at the location has a disciplinary history and no associated person is subject to a statutory disqualification.

Comments on the proposal must be received by January 12, 2018.

Commentary / Patrick A. Calves

Industry members should consider commenting on the criteria that FINRA has proposed for an office to qualify for remote inspections, particularly with respect to the requirement that a "qualifying office" cannot have more than three associated persons designated to the office. For example, the focus of such a designation might better be applied to the types and volume of activities conducted through an office (i.e., whether such activities are sufficiently low-risk), as opposed to an arbitrary number of representatives. Firms should also consider providing FINRA with information regarding the availability of information systems to conduct remote inspections and practically how such tools could be implemented.

It is notable that FINRA is considering (i) the ways in which technology continues to affect how firms conduct business, including through the increasing use of temporary and shared office spaces and flexible work arrangements for employees, and (ii) ways to provide firms with optionality in order to take advantage of such advancements.

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