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Broker-Dealer Branch Office Inspection Guidance Issued by SEC and FINRA




by:
Hugh C. Nickson
Jones, Walker, Waechter, Poitevent, Carrère & Denègre L.L.P. - Birmingham Office

 
December 13, 2011

Previously published on December 8, 2011

On November 30, 2011, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) issued joint guidance regarding broker-dealer branch inspections in the form of a National Examination Rick Alert (the “Alert”). The Alert noted that an effective branch inspection program is an important part of managing the firm’s total risk resulting in the protection of the firm’s investors and interests.

The Alert observed that firms that employ an effective branch inspection program typically include the following elements:

  • The use of suitably senior branch office examiners who both understand the business and have the institutional authority to challenge assumptions and business models.
  • Design procedures that avoid or eliminate any potential conflicts of interest that could undermine an effective examination.
  • Focus the examination on the actual business conducted in a particular branch and investigate the risks specific to the business conducted.
  • Allow the underlying risks inherent in the business of a branch to determine how often to perform an inspection, how intense the inspection should be, and how many inspections should be unannounced.
  • Even relatively low risk businesses should be subject to at least an annual inspection and at least the possibility of an unannounced inspection.

The Alert noted that unannounced inspections often allow the examiner to obtain more unvarnished information than an announced inspection and thus should constitute a significant percentage of all inspections.

The Alert listed the following policies and procedures (“P&P”) that should be included in many inspections:

  • P&P pertaining to supervision of customer accounts;
  • P&P regarding the branch’s taking in money and securities;
  • Validation of changes to customer account information and retail sales practices;
  • P&P regarding funds transmissions between customers and third parties and customers and registered representatives;
  • Firm testing of P&P related to specific retail products;
  • P&P regarding advertising and other communications with customers or the public; and
  • P&P regarding the handling of customer complaints.

The Alert also noted that an effective examination could uncover evidence of unreported outside or other unauthorized business activities and the possible use of unauthorized computers, other electronic devices, or social media.

The Alert concluded that branch office inspections must be conducted with vigilance while also recognizing that each firm was different and that each inspection process should be tailored to fit that firm.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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