AdvisorHub (November 20, 2023) - By Miriam Rozen
Brokers who prefer to stay in their pajamas while selling stocks have caught a break from the Securities and Exchange Commission.
The federal agency approved on Friday rules allowing firms to remotely inspect brokers’ offices and reduce the required examination frequency for brokers’ home offices from annual to once every three years.
The approval of the rules, which were proposed in summer 2022 by the Financial Industry Regulatory Authority after pandemic-triggered shutdowns, follows more than a year of debates and objections by investor advocates to the increased flexibility for brokers and their employers. The SEC said that the rules were ultimately “consistent” with its broader obligations to supervise for fraud and investor harm.
Finra, the brokerage industry’s self-regulatory organization, welcomed the approvals, which a spokesperson said “reflect today’s hybrid work environment while still providing critical investor protections.”
Finra initially suspended its requirement for in-person inspections in 2020 amid Covid-triggered shutdowns and had previously extended the relief measure through the end of this year amid discontent, particularly from state regulators and plaintiff lawyers.
In August, the SEC sought additional comments on the remote inspection plan, which establishes what Finra described as a three-year pilot. State securities regulators and plaintiffs’ lawyers had continued to push back saying it would loosen oversight of brokers and increase risk for investor harm.
In response, Finra argued that advances in surveillance technology allow for more effective remote monitoring and that it has restrictions in place to keep high-risk firms and brokers from participating in the pilot.
The SEC said in its approval that the pilot gave firms “flexibility” while mitigating risks because it would “establish safeguards” to limit eligibility to only certain member firms and locations.
“Bad news for American investors,” said Joe Peiffer, who is president of the Public Investors Advocate Bar Association, about SEC’s approval of the rule changes.
“Brokers can now be supervised by zoom,” Peiffer added. “The one thing we’ve learned over the pandemic is that Zoom is good for some things, but you can’t even tell if the guy is wearing pants. You’ll never know what they’re telling people. This is going to increase fraud.”
But Claire McHenry, president of the North American Securities Administrators Association, expressed optimism about the new rules, based on the amendments Finra agreed to make to its original proposal in response to hers and other state regulators’ concerns.
“While NASAA has expressed concerns about the way these programs were proposed, we appreciate the changes that were made in response to our comments,” McHenry, who also serves as deputy director of the Nebraska Department of Banking and Finance Bureau of Securities, said in a written statement. “We also look forward to seeing the requirements and safeguards underlying these programs executed diligently to best protect investors.”
Finra officials previously told the SEC that its rule change allowing for less frequent examination of home-offices merely aligns those residential settings with its definition of a “non-branch” location.
The industry had broadly supported the rules as officials at firms said they hired remote examiners during the pandemic but would likely have to terminate them if they were required to come into an office.
Its spokesperson said Finra would announce “shortly” when the changes will become effective.