FINRA AND SEC GUIDANCE: EFFECTIVE RISK MANAGEMENT FOR BRANCH AUDITS

In its continual focus on the importance of effective risk management for broker-dealers (as well as investment advisers) the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations and FINRA have issued a National Exam Risk Alert aimed at providing broker-dealer firms with information on developing effective policies and procedures for branch office inspections.  In addition to reminding firms of their supervisory obligations under FINRA’s supervision rule, the alert notes some common deficiencies found during SEC and FINRA examination of branch office audit practices and emphasizes the need for firms to adopt a comprehensive risk approach to compliance practices. 

The Alert, including FINRA’s Regulator Notice 11-54 , contains a number of best practices that Chief Compliance Officers and other compliance professionals of broker-dealers should consider incorporating as part of their mandated supervisory oversight of branch offices.  The Alert warns that some practices FINRA and SEC examiners have observed, including

  • firms utilizing generic examination procedures for all branch offices, regardless of business mix
  •  leveraging  novice or unseasoned branch office examiners who lack the experience or understanding of the business to challenge assumptions, and
  •  devoting minimal time to each exam and little, if any, resources to reviewing the effectiveness of the branch office exam program

will not be tolerated.  In short, the alert is a reminder that the SEC and FINRA view branch office inspections as integral to determining whether a firm’s culture of compliance eliminates risks to the firm and its clients or contributes to violations of the securities laws.