Get Ready! FINRA's New Home Office Rules Are Nearly Here

The Financial Industry Regulatory Authority’s new rules to treat home offices as ”residential supervisory locations” and for its remote inspections pilot program “will be key in defining the future state of how firms conduct branch office inspections,” according to Patrycja Savignano, director at ACA Group. And the effective dates of these rules are just around the corner.

The Securities and Exchange Commission approved the rules in November, and FINRA adopted the new rules on Jan. 24.  The rules affecting residential supervisory locations, or RSLs, take effect June 1, while the Remote Inspections Pilot Program begins July 1.

ThinkAdvisor caught up with Savignano — whose firm focuses on governance, risk and compliance in financial services — to gauge where advisory firms need to be when it comes to compliance and trouble spots they’re running into.

THINKADVISOR: Where should firms be in their compliance with FINRA’s ”residential supervisory locations” and its remote inspections pilot program?

SAVIGNANO: Regarding the branch office remote pilot program: At this point, firms should be completing their analysis of Rule 3110.18 to see if the pilot program will be beneficial for the firms. This should include a review of the exclusions, conditions, and risk assessment requirements to determine if the firm and its offices are eligible.

If a firm decides to opt in after the analysis, it should:

• Update procedures to address the specific requirements as outlined by the program
• Conduct and document a risk assessment of its offices
• Review the firm’s surveillance systems and recordkeeping systems to ensure they meet the technological requirements of the pilot

If a firm is not opting in, the firm should review its list of branch offices and upcoming inspection cycles.

ACA recommends that the firm conduct remote inspections of offices by June 30, 2024 to reset inspection cycle for upcoming offices. After June 30, remote inspections will not be available unless participating in the pilot program.

With respect to the Residential Supervisory Location (RSL) Rule 3110.19, firms should be completing their reviews of all branch office locations and currently assigned office categories.

Once review is complete, firms should:

• Designate any residential office locations with a supervisory presence as an RSL (as long as all conditions of the rule are met)
• Confirm that any previously designated non-branch locations do not require registration via a Form BR or disclosure on a U4
• Review the firm’s FINRA membership agreement to confirm if any changes are needed to the permitted number of offices specified in their agreement

We have completed a poll of more than 30 firms with respect to the anticipated participation in the inspections pilot program. More than half of the participants were undecided, and approximately one-third stated that they planned to participate.

After the three year branch office inspections pilot program is complete, FINRA will provide its analysis and determine the state of inspections going forward. Many firms hope that remote inspections are something that will be the new normal, since the hybrid branch office model appears to be something that will stay with us for the foreseeable future.

Do unanswered questions remain regarding compliance?

Firms are still awaiting guidance with respect to the specifics for opting into the branch office inspections pilot program and reporting the required data.

Firms are also waiting to hear from FINRA about the method of reporting of the RSL locations.

How about trouble spots regarding compliance that BDs are experiencing? 

Some firms have expressed that the tracking and reporting requirements of the pilot program may prove to be burdensome, especially for smaller firms with limited resources. Some firms are also reviewing unique situations with respect to the RSL definition, and determining which offices will require the designation and which will not.

In particular, firms are finding it challenging in how to handle associated persons that are in a “hybrid” situation. This is when a person goes into the office some days during the week, and otherwise works from their residence.

Are you expecting anymore guidance from FINRA before the compliance dates? 

Yes. FINRA noted in [Regulatory Notice] RN 24-02 that additional guidance will be provided with respect to both the inspections pilot program and the RSL designations, specifically around the opt-in and reporting processes.

Is there anything else you’d like to point out about the rules? 

One important thing to note is that there is an additional reporting requirement for firms that want to opt into the inspections pilot program which was embedded in Rule 3110.18.

The reporting is specific to the firms’ 2019 inspections data. Firms that elect to participate in the inspections pilot program must, using best efforts, collect 2019 data and information and provide the data to FINRA no later than Dec. 31, 2024.