New FINRA Home Office Rules Take Effect in June
FINRA also set a launch date for a three-year pilot program for remote inspections.
The Financial Industry Regulatory Authority has adopted new rules for its remote inspections pilot program and to treat home offices as ”residential supervisory locations.”
The Securities and Exchange Commission approved the rules in November.
The new rules “reflect today’s hybrid work environment while still providing critical investor protections,” FINRA has said.
The rules around residential supervisory locations take effect June 1, while the Remote Inspections Pilot Program begins July 1.
FINRA also said that the regulatory relief described in Regulatory Notice 20-08, which addressed business continuity planning during the COVID-19 pandemic, will end on May 31.
Home Office Rule
The recently adopted home office rule will treat a private residence at which an associated person engages in specified supervisory activities, subject to certain safeguards and limitations, as a non-branch location, FINRA explains.
As a non-branch location, according to FINRA, “this newly defined residential supervisory location (or RSL) will be subject to inspections on a regular periodic schedule (presumed to be at least every three years) instead of the annual inspections currently required for an office of supervisory jurisdiction (OSJ) and ‘supervisory branch office.’”
Under the rule, a firm must conduct and document a risk assessment, and provide a list of RSLs to FINRA on a periodic basis.
On June 1, firms may start using the RSL designation, FINRA said. The first RSL list is due to FINRA on Oct. 15, 2024, covering all locations firms designate as RSLs during the period June 1, 2024, through Sept. 30, 2024.
FINRA states that it’s “currently developing a technological process in FINRA Gateway through which firms will be able to identify their RSLs and meet the obligation to provide their quarterly RSL lists to FINRA in an efficient manner.”
FINRA said it expects the tech process to be ready no later than May 31.
In July, FINRA filed to amend its residential supervisory location plan to include more stringent eligibility criteria.
Rule changes to amend Rule 3110 include:
- Adjusting the location ineligibility criteria pertaining to an associated person with less than one year of supervisory experience to also be satisfied by experience at a member firm’s affiliate or subsidiary that is registered as a broker-dealer or investment adviser;
- Clarifying the scope of the location ineligibility criteria pertaining to an associated person who is the subject of an investigation or proceeding by a regulator relating to an allegation of a failure to supervise by defining these terms as they are defined on Form U4 (Uniform Application for Securities Industry Registration or Transfer Registration) and address the applicability of the proposed exclusion when an investigation has remained pending for a period of time; and
- Requiring a firm to conduct and document a risk assessment for each office or location before designating such office or location as a residential supervisory location, including a non-exhaustive list of factors to consider as part of that risk assessment.
Remote Inspections
FINRA Rule 3110.18 sets up a voluntary, three-year remote inspections pilot program “to allow eligible member firms to fulfill their Rule 3110(c)(1) inspection obligation of qualified branch offices, including OSJs and non-branch locations remotely, without an on-site visit to such offices or locations, subject to specified terms,” FINRA explains.
A firm must affirmatively elect to participate in the Pilot Program by providing FINRA with an “opt-in notice” and once enrolled, must affirmatively elect to withdraw from the Pilot Program by providing FINRA with an “opt-out notice.”
FINRA states that it’s currently developing a technological process in FINRA Gateway through which firms will be able to provide FINRA the requisite notices electronically, and that further details about the manner and format of these notices will be released in subsequent guidance.
Under Rule 3110, FINRA requires its member firms to inspect:
- Offices of supervisory jurisdiction and non-OSJ branches that supervise non-branch locations at least annually;
- Non-supervising branch offices at least every three years; and
- Non-branch offices periodically.