Last week, the SEC and FINRA issued a joint Risk Alert/Regulatory Notice on broker-dealer branch office inspections. The notice/alert is aimed at providing broker-dealers with guidance to consider with respect to the firm's branch office (and other office locations) inspection program. The alert/notice highlights best practices observed by the regulators, as well as highlighting deficient practices that may lead to issues with the integrity of a firm's inspection program.
Among other things, the regulators encourage firms to utilize a risk-based approach to "help drive the frequency, intensity and focus of branch office inspections," further encouraging that such risk analysis be made on an ongoing basis, and to move away from a model that simply relies on examiners checking a box, where that box and the inspection program has not been somewhat tailored for the firm, and for that office. The notice/alert also provides further guidance in the way of previously issued notices and interpretations relating to the applicable supervision rules.
Firms should understand that this notice/alert does not propose or institute a new rule or requirement. Historically, firms have been required to inspect their offices, and they still are. Firms should, however, understand that this issue is on the radar of the regulators, and that when a firm faces an examination by FINRA or the SEC, the adequacy of their office inspection program will likely be reviewed. According to the SEC's release, the Risk Alerts are "intended to alert senior management, risk management and compliance managers in the securities industry to significant risks identified by the SEC's national examination staff so that industry members can more effectively address those risks." The regulators appear to consider this a significant area; forewarned is forearmed.