Investor Advocacy Group Criticizes FINRA’s Remote Inspections

Here’s one more name to add to the list of remote work naysayers.

Whenever regulators show up to flip through files and ask tough questions, everybody has to be on their best behavior. But what if the pressures of on-site visits from the Financial Industry Regulatory Authority were no more? Well, that creates a whole host of new problems, according to the Public Investors Advocate Bar Association. FINRA’s remote inspection pilot program, rolled out last July, undermines its “foundational mission of investor protection” and increases the risk of misconduct, including sales abuses and regulatory evasion, PIABA wrote in a public letter to the self-regulator last month.

While a mix of in-person and remote inspections could be the norm for advisors in the future, PIABA President Adam Gana argues on-site visits in their current state are already lackluster and says introducing regular off-site options would be a step backward for client protection. “What FINRA should be doing is adding more robust inspection requirements instead of limiting them,” he told Advisor Upside. “We’ve seen regularly over the last 10 years a lack of sufficient supervision necessary to protect investors.”

The Honor System

FINRA’s voluntary, three-year Remote Inspections Pilot Program allows for eligible member firms to meet their inspection obligations without on-site visits. Firms just need to submit data including firm size, the volume and nature of customer complaints, the complexity of products offered and the nature of the client base. It’s similar to how FINRA allowed broker-dealers to fulfill inspection requirements remotely if offices met certain conditions during the pandemic. 

“Instead of going onsite to an advisor’s office, opening up cabinets and saying ‘What’s in there? Tell me about this document? What is this check on your desk?’ [FINRA] just talks to an advisor remotely,” Gana said.

In its letter to FINRA, PIABA said:

• Remote inspections should not replace in-person visits, especially when it comes to home offices. Those locations should be subject to annual, unannounced, in-person audits. 
• Even inspections every three years would be preferable to eliminating them entirely.
• In-person audits allow compliance personnel to spot red flags like financial excess, physical marketing materials for unauthorized investments and other evidence of off-the-books activity.

“There are simply elements of supervision, culture, and compliance that cannot be adequately assessed through a screen,” Gana said. “PIABA does not support remote inspections — period.”