Broker Dealer Branch Office Audit Checklist

Broker dealer branch offices must be subjected to regular inspection by both FINRA and the SEC, often known as audits.

FINRA’s longstanding rule regarding branch office examinations suggests that firms conduct risk-based analyses on each location, leading to more frequent unannounced examinations in those that pose greater risks.

1. Review of the business plan
Reviewing your business plan periodically is an integral component of keeping a firm focused on its future goals and can also identify any areas which require modification or correction.

Broker Dealer Branch Audit Systems provide firms with visibility over ever-evolving rules and regulations. Regulatory Intelligence’s actionable workflow and content empower compliance teams to spend less time documenting, reporting, and more time providing value added services to clients.

Exams may take place unannounced or scheduled; usually staff will notify a broker-dealer in advance to ensure someone familiar with its procedures and records will be available during the examination. Once complete, an examiner will send back a written examination report outlining any deficiencies and concerns identified during inspection.

2. Review of the supervisory system
Each broker-dealer must establish, implement and implement written supervisory procedures designed to comply with securities laws. Each firm should designate registered principals to carry out supervisory responsibilities as well as adequate controls that detect potential issues or sales practice abuses.

FINRA regulations mandate that brokers and dealers regularly review their written supervisory procedures to ensure their effectiveness. Appropriate inspections help detect early signs of misconduct, deter future wrongdoing, and safeguard market integrity.

Branch offices and offices under supervisory jurisdiction should be regularly inspected, with inspection frequency determined by risk-based factors, such as business volume and complexity conducted at the office. It is crucial that an unbiased inspector conduct the inspection, rather than being part of the supervisory structure at the location.

3. Review of the compliance program
Broker dealers must implement effective monitoring procedures to oversee the activities of its salespeople, such as an effective system to capture and store electronic business-related correspondence sent by salespersons as well as an expeditious response mechanism for responding to “red flag” exception reports in a timely fashion. Furthermore, if salespersons engage in private securities transactions (selling away), there must be adequate supervisory procedures put into place so this activity can be effectively tracked.

The new Risk Alert suggests that BD should conduct unannounced examinations of its branch offices using risk analysis; however, such an effort would likely create practical difficulties for many firms and could violate regulators’ expectations regarding conflicts of interest among examiners.

4. Review of the internal control system
Branch offices play an essential role in broker dealers’ daily business activities such as purchasing and selling securities and providing financial advice to customers. Accordingly, they must abide by all regulatory requirements associated with main offices including record keeping procedures, net capital requirements and supervision of branch offices – something FINRA requires all broker dealers to do through written supervisory procedure reviews (WSPs).

Internal Control Systems are implemented by management to help ensure compliance with management policy, the protection of assets, the prevention and detection of fraud or errors and reliable financial statements and reports are achieved.

An internal control review helps ensure that effective procedures remain in place or that enhanced controls can meet changing risks and circumstances.

5. Review of the risk assessment
Risk evaluation is a methodology designed to represent and communicate knowledge and risks in an understandable manner, taking both factual and value-based considerations into account. A meaningful risk analysis requires expert review and judgement for meaningful results.

Broker dealers must conduct Branch Inspections in accordance with FINRA and SEC rules, in order to detect practices which threaten customer funds/investments, uncover violations of recordkeeping requirements or reveal other areas of concern. These inspections could uncover practices which threaten to compromise safeguarding efforts or uncover violations in recordkeeping requirements – as well as potentially uncover other areas for concern.

Firms determine when it is appropriate for them to conduct branch office inspections based on factors like nature and complexity of each office, salesperson outside business activity, complaints and disclosures. Firms can satisfy FINRA’s branch inspection requirement remotely with remote audits using the Regulatory Intelligence Branch Audit solution which emulates examination processes to enable more efficient workflow processes while meeting FINRA Rule 3310(c).