Remote Inspections Pilot Program

Rule 3110.18 governs the terms of FINRA’s voluntary, three-year Remote Inspections Pilot Program (Pilot Program), which starts on July 1, 2024 and ends on June 30, 2027.  Under the Pilot Program, eligible member firms will have the flexibility to satisfy their inspection obligation under Rule 3110(c)(1)(A), (B) and (C) without an on-site visit to the office or location, subject to specified terms that include conducting and documenting a risk assessment, and producing written supervisory procedures for conducting remote inspections and inspection data to FINRA.

FINRA reminds firms that Rule 3110.17, the temporary remote inspections rule, will end on June 30, 2024.  Thus, a firm that does not participate in the Pilot Program cannot satisfy its obligations under Rule 3110(c)(1)(A), (B) and (C) remotely.  As articulated in Regulatory Notice 11-54, such member firm must conduct on-site inspections of each of its offices of supervisory jurisdiction (OSJs), supervisory branch offices, non-supervisory branch offices and non-branch locations (i.e., unregistered offices).

Risk Assessment

A firm that participates in the Pilot Program (Pilot Program participant) must conduct and document a risk assessment for that office or location.

The assessment must document the factors considered, including the factors set forth in Rule 3110.12 (e.g., firm’s size, number and location of offices, the nature and complexity of the products and services the firm offers, the volume of business) and must take into account any higher risk activities that take place at, or higher risk associated persons that are assigned to, that office or location.

Rule 3110.18(b)(2) enumerates a non-exhaustive list of factors a Pilot Program participant must consider as part of the risk assessment.  These factors include:

• The volume and nature of customer complaints;
• The volume and nature of outside business activities, particularly investment-related;
• The volume and complexity of products offered;
• The nature of the customer base, including vulnerable adult investors;
• Whether associated persons are subject to heightened supervision;
• Failures by associated persons to comply with the member's written supervisory procedures; and
• Any recordkeeping violations.

In addition, consistent with Rule 3110.12, a Pilot Program participant should conduct on-site inspections or make more frequent use of unannounced, on-site inspections for high-risk offices or locations or where there are indicators of irregularities or misconduct (i.e., “red flags”).  Moreover, a Pilot Program participant must develop a reasonable risk-based approach to using remote inspections, and consistent with Rule 3110(a), the supervisory system must take into consideration any red flags when determining whether to conduct a remote inspection of an office or location.

Written Supervisory Procedures

Rule 3110.18 sets forth several areas that a Pilot Program participant’s written supervisory procedures must cover and they include:

• the methodology, including technology, that may be used to conduct remote inspections;
• the factors considered in the risk assessment;
• the use of other risk-based systems employed generally by the member to identify and prioritize for review those areas that pose the greatest risk of potential violations of applicable securities laws and regulations and of applicable FINRA rules;
• procedures for escalating significant findings;
• procedures for new hires;
• procedures for supervising brokers with a significant history of misconduct;
• procedures related to outside business activities (OBAs) and doing business as (DBA) designations; and
• compliance with data and information collection, and transmission under Rule 3110.18(h).