The SEC and FINRA issued new broker-dealer branch inspection guidelines to securities firms so as to improve their supervision systems.

In particular, the SEC and FINRA have advised broker-dealers to use risk analysis to identify if individual, non-supervising branches should be inspected more frequently.  The SEC and FINRA will be using risk analysis to identify such requirements for future inspections.  Currently, FINRA requires a minimum three year cycle, but may conduct more frequent branch inspections. 

Firms are required to conduct re-audits when routine inspections reveal a high level of repeat deficiencies or serious deficiencies.  In many cases, these inspections will then allow for audits or cause examinations. 

Securities firms should use surveillance reports, as well as technology and investigative techniques to identify the risks.  Both the SEC and FINRA recommend custom approaches for these inspections, and comprehensive check lists developed from previous findings, trends and internal reports.  Further, the SEC and FINRA advised that firms should conduct unannounced branch inspections either randomly or based on risk factors.  These surprise exams may result in a more realistic picture of the firm’s systems and reduce the risk of certain individuals, who may try to falsify, conceal or destroy records. 

The firm should also use qualified senior personnel for these examinations, and make branch office inspection findings part of management information or risk management systems.  Additionally, the results should be placed in a comprehensive compliance database so as to be helpful in supervision, especially as it relates to independent contractor registered representatives in national firms.  Branch and compliance managers should also be provided with these findings, and they should be required to take and document any corrective action.  The firm should also track all corrective action in response to these findings. 

Finally, the SEC and FINRA are recommending that firms elevate the frequency of branch inspections, and their scope, particularly, where registered personnel conduct business activities other than broker-dealer associated person activities.  Essentially, if the firm permits activity, or business  away from the firm, its supervisory systems should be more vigilant.

These new guidelines demonstrate the focus for SEC and FINRA investigations in the upcoming year.  As such, firms should prepare and consider their response now before it is too late.