Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 30, 2011

SEC & FINRA Issue Risk Alert on Broker-Dealer Branch Inspections

The SEC’s Office of Compliance Inspections and Examinations (OCIE) and FINRA today issued a Risk Alert and a Regulatory Notice on broker-dealer branch inspections, and offered suggestions to help securities industry firms better perform this key supervisory function.

Along with specific requirements outlined in the report, effective practices observed by examiners include:

Using risk analysis to identify whether individual non-supervising branches should be inspected more frequently than the FINRA-required minimum three-year cycle, with more frequent inspections of branches meeting certain risk criteria. In addition, some firms conduct “re-audits” when routine inspections reveal a high number of deficiencies, repeat deficiencies, or serious deficiencies. Typically, these re-audits and audits for cause are conducted as unannounced inspections.

Using surveillance reports and employing current technology and techniques to help identify risks and develop a customized approach for branch office inspections based on the type of business conducted at each branch.

Employing comprehensive checklists that incorporate previous inspection findings and trends noted in internal reports such as audit reports.

Conducting unannounced branch inspections either randomly or based on certain risk factors. “Surprise” exams may yield a more realistic picture of a broker-dealer’s supervisory system as they reduce the risk that individual RRs and principals might attempt to falsify, conceal, or destroy records in anticipation for an internal inspection.

Involving qualified senior personnel in several branch office examinations each year.

Incorporating findings of branch office inspections into management information or risk management systems and using a centralized, comprehensive compliance database that enables compliance personnel in various offices to access to information about all of the firm’s RRs and their business activities. Such a system appears to be very useful when supervising independent contractor RRs dispersed across a broad geographic area.

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.

Elevating the frequency of branch inspections, or their scope, or both, in cases where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer, for example away from the firm.

This is the second in a continuing series of Risk Alerts that the SEC’s national examination staff expects to issue. These documents 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.

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