End of COVID Relief, Newly Designated Residential Supervisory Locations, and Implementation of Pilot Remote Inspection Program
On January 23, 2024, the Financial Industry Regulatory Authority (“FINRA”) announced the adoption of FINRA Rules 3110.18 and 3110.19, providing FINRA member firms with flexibility in structuring and managing their supervisory systems for remote offices when associated and supervisory persons work from their residences following the expiration of temporary COVID-19 relief measures on May 31, 2024.
Firms interested in relying on these new rules should initiate preparations promptly to establish a compliance framework for both initial implementation and ongoing reporting obligations. Conversely, firms less inclined to leverage these rule changes may need to instead register numerous new locations as branches and conduct in-person inspections at all sites.
FINRA Rule 3110.18 introduces a voluntary three-year pilot program for remote inspections. This program enables eligible firms to fulfill their Rule 3110(c)(1) inspection obligation for qualified branch offices, including offices of supervisory jurisdiction and non-branch locations, remotely without an on-site visit. A firm opting to participate in this pilot program during the period from July 1, 2024, through December 31, 2024, must submit its opt-in notice by June 26, 2024.
FINRA Rule 3110.19 permits an associated person’s private residence, where supervisory activities take place, to be designated as a non-branch location of the associated person’s firm, subject to certain conditions and controls. Both the firm and the relevant associated person at each potential Remote Supervisory Location (“RSL”) must meet eligibility criteria to establish the RSL designation. Additionally, firms opting to designate locations as RSLs must periodically furnish FINRA with an up-to-date list of their RSLs every quarter, starting on October 15, 2024.
If firms are not already doing so, firms should be analyzing the work locations of all associated and supervisory staff and assess whether these arrangements will need to be accounted for in the branch examinations program of the firm, or decisions about returning workers to the firm’s established branch office locations will need to be made. If firms choose to designate RSLs, it could likely result in an increase in the number of firm office locations. Consequently, firms seeking to take advantage of Rule 3110.19 must evaluate whether this increase will constitute a “material change in business operations” necessitating the submission of an Application for Approval of Change in Ownership, Control, or Business Operations under FINRA Rule 1017.
Many of our clients are not only broker dealers, but either are, or operate affiliated investment advisers, commodity pool operators, and commodity pool advisers. While considering your broker dealer residential office supervision procedures, it may be prudent to also consider relevant SEC and NFA requirements and guidance on supervision of offices. See, e.g., OCIE’s Risk Alert, Observations from OCIE’s Examinations of Investment Advisers: Supervision, Compliance and Multiple Branch Offices, November 9, 2020; NFA Interpretive Notice 9019 – Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBS. Building programs that seek to maximize efficiency and costs and eliminate duplicative policies procedures and workstreams in a firm with multiple regulatory requirements, can benefit such firms regardless of their size.
If you have any questions about this alert, or would like assistance thinking through, documenting and implementing your firm’s supervisory arrangements in this regard, please contact Tom Kennedy – Partner, Regulatory Compliance Practice, at (212) 573-8038 or tkennedy@sadis.com, or Jaywon Choi, Associate in Financial Services Practice, at (212) 573-8424 at jchoi@sadis.com.
