Proposal to Amend FINRA Rule 3110
Summary
SIFMA provided comments to the Financial Industry Regulatory Authority (FINRA) in Regulatory Notice 17-38, regarding a proposal to amend Rule 3110 to provide firms the option to conduct remote inspections of offices and locations meeting specified criteria.
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Excerpt
January 12, 2018
By Electronic Mail to [email protected].
Jennifer Piorko Mitchell
Office of the Corporate Secretary
Financial Industry Regulatory Authority
1735 K Street, NW
Washington, DC 20006-1506
Re: FINRA Regulatory Notice 17-38:
SIFMA Comment on Proposal to Amend FINRA Rule 3110 (Supervision) to Provide Firms the Option to Conduct Remote Inspections of Offices
Dear Ms. Mitchell:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to respond to the request for comment issued by the Financial Industry Regulatory
Authority (“FINRA”) in Regulatory Notice 17-38 (“RN 17-38”)2 regarding a proposal to amend Rule 3110 (Supervision) to provide firms the option to conduct remote inspections of offices and locations meeting specified criteria.
I. EXECUTIVE SUMMARY
SIFMA strongly supports FINRA’s efforts to amend Rule 3110 to provide firms with the option to conduct remote inspections of offices that meet specified criteria. Without detracting
from that support, our comments on RN 17-38 highlight various improvements that we respectfully submit for FINRA’s consideration during the amendment process for Rule 3110.
SIFMA members’ comments primarily respond to FINRA’s first, third, fourth, and fifth requests for comment in RN 17-38, as explained in Sections II.B.1, II.B.2, II.B.3, and II.B.4 below.
II. COMMENTS
A. General Comments
SIFMA members recognize the centrality of a firm’s responsibility to supervise its associated persons and the activity conducted at all of its office locations. Effective monitoring prevents and detects compliance challenges and deficiencies, which can be harmful to investors and costly to a firm. Appropriately tailored supervision requirements can improve firm efficiency and protect investors. Accordingly, SIFMA supports FINRA’s efforts to adopt and enforce supervision rules that promote diligent and thorough inspections of office locations. Our comments reflect our member firms’ commitment to transparency, compliance, and investor protection and are intended to give FINRA the information it needs to finely hew its proposed revisions to Rule 3110 to achieve FINRA’s stated goal of “reducing the burden of on-site inspections in limited circumstances that would not result in a diminution in investor protection.”
As noted in RN 17-38, we are concerned that as currently written Rule 3110’s requirement of on-site inspections for all offices, irrespective of office type, imposes costs and burdens on firms that cause inefficiencies and do not improve the efficacy of firms’ monitoring efforts. The on-site inspection requirements are particularly burdensome relative to their benefit for offices with fewer personnel or operations posing a lower risk of investor harm. By utilizing ever-advancing technology, associated persons perform activities in geographically disperse locations to a far greater extent than in the past. Decentralized, alternative, and mobile work arrangements can improve investor services, firm efficiency, and quality of life for associated persons. Many of these locations engage in low-risk activity. While we agree that firms must appropriately supervise all locations, regardless of size, operations, or geographic location, onsite inspections for these locations is increasingly costly and time-inefficient. These burdens not only impact firms’ revenue, but they impose regulatory and compliance opportunity costs, detouring valuable resources that could be better deployed supervising higher-risk locations and activities.
Fortunately, modern technology has made it feasible to conduct remote virtual inspections that meet the same qualitative standard as on-site inspections. To a similar degree as on-site inspections, remote inspections can “assist firms in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations, and with FINRA rules.”3 While SIFMA recognizes that periodic on-site inspections are important to the effectiveness of any supervision program, remote inspections are also appropriate in certain circumstances and can help firms allocate resources to closer monitoring of relatively higher-risk activities. Many offices simply do not conduct activities that warrant devoting significant firm resources toward conducting on-site inspections.
1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
2 http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-38.pdf.
3 FINRA Rule 3110(c)(1).