10-13-20

Important Takeaways from SIFMA-Bates Virtual Branch Office Compliance Visits Webinar

Important Takeaways from SIFMA-Bates Virtual Branch Office Compliance Visits Webinar

On Monday, October 5, 2020, nearly 700 Compliance, Supervision, Risk, Legal and Regulatory experts and professionals tuned in to a panel discussion covering virtual branch office inspections and the challenges facing regulators and industry supervision and compliance teams. The webinar, jointly organized by Bates Compliance and SIFMA, reviewed the current requirements and status of branch office inspections, recent regulatory relief, and compliance expectations for on-site inspection requirements going forward. The featured speakers included:

  • Jennifer Stout – CEO, Bates Group (opening remarks)
  • Jill Ehret - Director, Bates Compliance - Bates Group
  • Lou Moschetta - Senior Vice President and Deputy Director of Compliance, Wells Fargo Advisors
  • Joseph Neary - Chief Risk Officer, Cetera Financial Group
  • John O’Neill - Executive Vice President and Chief Compliance Officer, LPL Financial
  • Joseph J. Sheirer - Vice President, Member Supervision Examination Program, FINRA
  • Paul M. Tyrrell - Partner, Sidley Austin (moderator)
  • Kevin Zambrowicz - Managing Director and Associate General Counsel, SIFMA

Here are some of the highlights.

Branch Office Inspections

Led by Sidley Austin partner Paul Tyrrell, the panelists discussed the dramatically altered environment since on-site compliance and regulatory inspections ceased in March 2020 due to the pandemic. Bates Compliance’s Jill Ehret described the significant impact on firm compliance based on differences in firm size, the number of home offices, the sufficiency of technology, and the necessity of new practices and protocols to mitigate risk. SIFMA’s Kevin Zambrowicz mentioned that most branch offices are closed or are providing very limited or no onsite client services, and that so far firms are taking a conservative approach to reopening. He said that many firms are doing what they can to do inspections remotely—for most firms, “the policy…is that corporate travel is restricted,”—and are relying on technology instead of an  on-site examination component. Wells Fargo’s Lou Moschetta expects no on-site inspections for an extended period—“possibly 2nd quarter next year.”

The panelists generally agreed that the FINRA relief that extended the 2020 exam cycle through Q1 2021 was necessary, but that the extension is not long enough to complete the 2020 cycle. Zambrowicz expressed concern about the ripple effects of such a time frame for the 2021 inspection cycle, anticipating going in the direction of extended relief and remote inspections for both 2020 and 2021. Cetera Financial Group’s Joseph Neary stated that the current 2020 and 2021 deadlines are “unrealistic.” LPL Financial’s John O’Neill said that his firm has thousands of locations; as a result, they are “focusing on how to triage which branches we can get to by March 2021,” and are employing risk-based approaches to prioritize offices within a three-year cycle.

Reopening (Hypothetically Speaking)

Zambrowicz discussed efforts to address the “practicalities” of a return to onsite inspections amid re-openings, describing such a process as “exceedingly complicated.” He explained a firm’s duty to have a supervisory system in place, but noted the logistics involved for a firm staffer to visit a location in this environment, including state- and even county-level travel restrictions and the testing and quarantining around even a single visit. He stated that, without even “considering the health concerns of the examiner,” the logistics of the process were “not feasible.” He advocated for the use of remote supervision using existing technology, an approach which has already been embraced by certain regulators who have recognized the need and capability to go remote.

Moschetta furthered the point, saying that a big management concern is the volume of advisers operating from remote locations. “How many will continue to work from home? Could be thousands… No answer to that yet.”

FINRA’s Joseph Sheirer highlighted the temporary relief provided to firms from having to register locations as non-branch offices, saying, “we’ve given a pass on registering these locations, recognizing the challenges of on-site inspections.” He stated that FINRA is facing the same challenges as the industry and that unless there was a customer harm, or a threat to market integrity, the inspections that have been conducted have been all remote: “We are as virtual as you can get.” He noted that  includes remote examinations, branch office visits and enforcement programs, and said that, to date, even “on-the-record” testimony has been handled remotely.

Learning How to Adapt

Bates Compliance’s Ehret described how firms are adapting to current conditions. She said that although the focus has been on the rules and the inspections, “we should be thinking more about the review element,” which does not need to be on site. The more off-site preparation completed during the review phase, the less burden there is on the on-site element. Ehret said that firms are also thinking about other practical changes to (i) address travel limitations, including, for example, using supervisors who are closest in proximity to do onsite reviews, (ii) strengthen pre-visit questionnaires, and (iii) conduct virtual interviews.

FINRA’s Sheirer highlighted the value of recent regulatory notices on remote supervision. The guidance emphasized using a risk-based approach and sharing industry best practices. He agreed that firms should consider and document changes to protocols and practices, including using new communications platforms and enhancements to virtual monitoring and supervision.

Zambrowicz said there were numerous examples of different regulators (e.g., CFTC, NFA) allowing virtual solutions to satisfy on-site requirements. Moderator Tyrrell added that recent interpretive guidance from the NFA represents an “important marker” to that end. Sheirer cautioned that while FINRA is considering making certain relief permanent, “there are still things that benefit from an on-site,” such as the ability to see space sharing that may present conflicts of interest, outside business activities, body language, and the like. Like Ehret, he focused on solutions that could enable off-site inspections, such as enhanced email review and monitoring.

Issues Pre-COVID (and Beyond)

Cetera’s Neary also emphasized pre-exam work, noting how his firm upped its requirements on electronic record keeping, email review, and centralized trading. LPL Financial’s O’Neill pointed out that the results of virtual reviews have been relatively “consistent” with pre-COVID reviews. O’Neill noted “an uptick of email use, which is good for our email review system,” .. O’Neill reiterated that “we’re not necessarily seeing a drop-off in quality or anything… So, we’re trying to look at our program and say, ‘how we can make some of this permanent?’”

Similarly, Moschetta said his firm was seeing the same sort of findings in substance and volume as those found in pre-pandemic on-site review. He said that existing and new technology processes and enhancements generally discover items such as outside business activities, private securities transactions and unreported complaints. Further, he said, the new efforts are helping their partners cope in the field know what to expect and to deliver.

Ehret noted some additional benefits. She said new technology is enabling “look backs, specialized reviews for outside business activities, identification of red flags on social media, and more documentation on office activities that are now subject to additional firm reporting.”

All Roads Lead to Virtual Supervision and Inspections

SIFMA’s Zambrowicz stated the consensus position that the evolution of technology is mitigating the need “to actually be there” and that firms should use the lessons from the current environment to recognize “the opportunities.” He said that “it is a logical next step to go virtual and that the pandemic brought to a head the natural and technological evolution of virtual supervision and inspections.”

Bates Compliance’s Ehret reiterated that most of the work required for an inspection is done prior to an on-site inspection: “The heavy lifting has already been done in review.” The way clients are currently working with their advisers is the way of the future.

SIFMA has made this program available on demand.

For more information or further questions about this program or Bates Compliance's services, please contact David Birnbaum, Managing Director, at dbirnbaum@batesgroup.com or call 917-273-2682.


About Bates Compliance:

Jill Ehret is a Bates Compliance Director based in St. Louis, MO. Ms. Ehret is a seasoned securities industry professional with over 19 years of experience bringing practical, application-based insight and approaches to broker-dealer and registered investment advisor compliance departments and issues.

Bates Compliance’s consulting practice delivers guidance and tailored compliance solutions to our broker-dealer, investment adviser and hybrid firm clients on an as-needed or ongoing basis. Our team—made up of experienced senior compliance, legal and former regulatory professionals—drafts and tests policies, procedures, and supervisory and compliance processes, recommending and implementing changes based on leading practices to enhance compliance and supervisory systems and to remediate regulatory, litigation and internal audit findings. With nearly four decades of working with leading law firms, financial services companies and regulatory bodies, Bates provides support every step of the way.

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