Advisors Could ‘Skirt the Rules’ Under FINRA Home Office Plan: PIABA

 
 

The Public Investors Advocate Bar Association says the Financial Industry Regulatory Authority’s plan to allow a home office to be considered a non-branch “residential supervisory location” under certain conditions is “fundamentally flawed” and “leaves considerable opportunity for advisors working from home to skirt the rules.”

FINRA filed with the Securities and Exchange Commission in July its proposed changes to FINRA Rule 3110 to allow a home office to be considered a non-branch “residential supervisory location” under certain conditions.

The proposed amendment “would allow a home office to be considered residential supervisory location and then create rules and procedures for the supervision of same,” PIABA states.

The proposed rule was initially published for comment on Aug. 2.

PIABA submitted its comment on Aug. 23, urging the SEC to reject the rule proposal.

FINRA then consented to an extension of time through Oct. 31, “for the Commission to approve the rule, disapprove it, or institute proceedings to determine whether to approve or disapprove the proposal,” PIABA explained.

FINRA’s rule was published again on Nov. 4, and PIABA again submitted a comment on Nov. 22 asking the SEC to reject this proposal.

Hugh Berkson, PIABA president, stated in the letter that “the amendment is a fundamentally flawed idea and runs counter to FINRA’s stated objective of investor protection. While it is understood that FINRA is attempting to change with the increased use of virtual technology, it leaves considerable opportunity for advisors working from home to skirt the rules.”

Said Berkson: “There are some things that technology cannot detect, but would be found with little difficulty through an in-person audit.”

For example, Berkson continued, “when an auditor visits the advisor’s home office, the auditor can see their home, car, and other assets. Many firms’ compliance procedures ask supervisors to gauge whether the advisor is living within their means (or at least, their legitimate commissions or compensation), and this cannot be done effectively remotely or through in-person visits taking place every three years.”

Moreover, Berkson said, “a remote inspection will not find evidence of files or other documents related to unapproved investments being recommended to customers (i.e., ‘selling away’). Our members have had cases where brokers sold unapproved investments with brochures and other offering documents left in plain sight of their office. Obviously, a remote inspection would not uncover such problems.”