Co-authored by Avi Badash.
The Financial Industry Regulatory Authority and the Securities and Exchange Commission have issued a National Exam Risk Alert (the Risk Alert) that provides broker-dealers with guidance on adopting effective policies and procedures for branch office inspections.
The Risk Alert highlights some practices that examiners have identified as effective in branch office supervisory systems. Such recommended practices may include the following:
- Using risk analysis to identify whether individual non-supervising branches should be inspected more frequently than the FINRA-required minimum three-year cycle;
- Using surveillance reports to help identify risk and that considers the type of business conducted at each branch;
- Employing comprehensive checklists that incorporate previous inspection findings and trends from internal reports such as audit reports;
- Conducting unannounced branch inspections either randomly or based on certain risk factors;
- Including in a branch office inspection report any noted deficiencies and areas of improvement, as well as including an outline of agreed upon actions and timelines to correct the identified deficiencies;
- Using examiners with sufficient experience to understand the business being conducted at the particular branch being examined and the gravitas to challenge assumptions;
- Designing procedures to avoid conflicts of interest by examiners;
- Involving qualified senior personnel in several branch office examinations per year;
- Incorporating findings on results of branch office inspections into appropriate management information or risk management systems;
- Using a compliance database that enables compliance personnel in various offices to have centralized access to comprehensive information about all of the firm’s registered representatives and their business activities;
- Providing branch office managers with the firm’s internal inspection findings and requiring them to take and document corrective action;
- Tracking corrective action taken by each branch office manager in response to branch audit findings; and
- Elevating the frequency and/or scope of branch inspections where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer, for example away from the firm.
Click here to read the National Exam Risk Alert.