The SEC and FINRA have 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. The Risk Alert noted that the branch inspection process is a critical component of a comprehensive risk management program and can help protect investors and the interests of a firm. The SEC and FINRA offered the following tips to help perform robust branch inspections:
- Tailor the focus of branch exams to the business conducted in that branch and assess the risks specific to that business;
- Schedule the frequency and intensity of exams based on underlying risk (rather than on an arbitrary cycle) and examine branch offices at least annually;
- Engage in a significant percentage of unannounced exams, selected through a combination of risk based analysis and random selection;
- Deploy sufficiently senior branch office examiners who understand the business and have the gravitas to challenge assumptions; and
- Design procedures to avoid conflicts of interest by examiners that may serve to undermine complete and effective inspections.
- Utilized generic examination procedures for all branch offices, regardless of business mix and underlying risk;
- Attempted to leverage novice or unseasoned branch office examiners who do not have significant depth of experience or understanding of the business to challenge assumptions;
- Performed the inspection in a “check the box” fashion without questioning critically the integrity of underlying control environments and their effect on risk exposure;
- Devoted minimal time to each exam and little, if any, resources to reviewing the effectiveness of the branch office exam program;
- Failed to follow the broker-dealer’s own policies and procedures by not inspecting branch offices as required, announcing exams that were supposed to be unannounced, or failing to generate a written inspection report that included the testing and verification of the firm’s policies and procedures, including supervisory policies and procedures;
- Failed to have adequate written supervisory procedures, particularly in firms that used an independent contractor model and allowed registered personnel to conduct business away from the firm; and
- Lacked heightened supervision for individuals with disciplinary histories (both past and present).