Now You See Us, Now You Don’t

By Peggy E. Chait

Piaget’s theory of “object permanence” recognized that a developmental milestone in an infant’s life is when they cognitively understand that an object still exists, even if the infant cannot see or perceive it. So too, exists the ability of a Broker/Dealer to function efficiently and effectively without anyone conducting an onsite Branch Office Inspection. It has never before been so well evidenced that the need for an onsite examination is a fossil of previous generations, and that the Covid-19 pandemic worked like a team of well-trained archeologists to uncover this. For FINRA requested information and documentation from remote locations, including those of its own personnel, the examination process proceeded as required, and exams were conducted and concluded efficiently. FINRA should begin immediately to revise its terminology as to what defines an “office” “branch office” and “non-branch office” (as does it really matter in terms of supervision?) and then eradicate antiquated rules regarding any inspections, which are no longer applicable to the manner in which we conduct business in the modern age. Much of securities activity is conducted equally effectively from a bricks and mortar office or from a far-off resort or one’s bedroom and it doesn’t matter what the workplace venue is called. For many firms, much of their transactional volume is conducted currently in the bowels of a computer located somewhere in cyberspace. A rose by another other name would smell as sweet!

In this day and age, what really can be gained from an onsite inspection? Even in firms that produce research, a physical inspection could confirm the existence of a physical “Information Barrier”, but the same information may be gleaned from a review of trade tickets, trade blotters, brokerage statements of associated persons, their spouses and minor children, and the timing of research produced. For many firms, especially boutique ones that specialize in Investment Banking activities, onsite inspections of branch offices are of dubious utility and perhaps are only productive for the inspector so that he or she gets a well-deserved change of venue. Little insight can really be offered by a physical presence since most records are captured electronically for review than by any other means. “Being there” does not always mean “being aware.” A robust inspection can be accomplished remotely, and more likely, an increase in virtual meetings and the ease in which they are accomplished, is a more effective method of establishing supervision and reinforcing applicable rules.

Equally misguided is FINRA’s reverence for Written Supervisory Procedures. Having been in the business for over 40 years, I can tell you wholeheartedly that nobody, except examiners and masochists, really reads them. I suggest to most industry professionals that they read them at bedtime, and when doing so, are therefore, guaranteed to fall asleep within minutes. What is the point of having rule after rule after rule droningly enumerated in a manner, which cannot be absorbed effectively? Let me ask how many of us were able to pass qualifying examinations, only to forget the bulk of what we’ve studied the moment we left the examination site? Instead, why don’t we strengthen the use of Continued Education as a tool to reiterate the responsibilities of each Associated Person/Registered Person, and their duties in an applicable, memorable, and efficient manner?

We don’t need to be seen to exist, to be labeled to know what our responsibilities are, or require a set of WSPs located on a bookshelf in order to follow the rules. Industry professionals understand that we are bound by regulation and supervision and FINRA should allow us the space to prove it without the current confines.

We at Integrated Solutions can help firms comply with regulatory rules and analyze their relevance to their particular business scenario. With the expertise of our staff and the commitment that we make to our clients, we can make compliance a less onerous task, allowing people to focus on their business. Please contact us if we can help you navigate the world of compliance.