Financial Institutions

On July 15, 2022, FINRA filed with the Securities and Exchange Commission a proposed addition to Rule 3110 (Supervision) to include new Supplementary Material 3110.19 (Residential Supervisory Location). The SEC’s notice states that the addition “would align FINRA’s definition of an office of supervisory jurisdiction (“OSJ”) and the classification of a location that supervises activities at non-branch locations with the existing residential exclusions set forth in the branch office definition to treat a private residence at which an associated person engages in specified supervisory activities as a non-branch location, subject to safeguards and limitations.” As a non-branch location, a Residential Supervisory Location would be subject to inspections on a “regular periodic schedule, which is presumed to be at least every three years, rather than an annual inspection requirement required of OSJs and other supervisory branch offices.”

FINRA believes that a “blended workforce” will outlive the COVID-19 pandemic, where member firms have a mix of employees working remotely and on-site in traditional offices. The pandemic led to FINRA reevaluating “the regulatory benefit of requiring firms to designate a private residence where lower risk activities are conducted as an OSJ or branch office.” FINRA’s proposal acknowledges that the pandemic increased reliance on technology for supervision that now makes treating a Residential Supervisory Location as a non-branch location or unregistered office feasible. Of course, the Residential Supervisory Location would still have to comply with investor protection safeguards and limitations.  

Under proposed Rule 3110.19(a), Residential Supervisory Locations would be subject to several limitations, such as:

  1. only one associated person, or multiple associated persons who reside at that location and are members of the same immediate family, conduct business at the location;
  2. the location is not held out to the public as an office;
  3. the associated person does not meet with customers or prospective customers at the location;
  4. no sales activity takes place at the location other than as permitted and subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or (iii);
  5. neither customer funds nor securities are handled at that location;
  6. the associated person is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, retail communications and other communications to the public by such associated person;
  7. the associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with Rule 3110;
  8.  all electronic communications by the associated person at that location are made through the member’s electronic system;
  9. a list of the residence locations is maintained by the member; and
  10. all books or records required to be made and preserved by the member under the federal securities laws or FINRA rules are maintained by the member other than at the location.

The proposed limitations are “substantially similar to those applied to the current primary and non-primary residence exclusions.” However, there is a new condition that prevents any books and records a member firm is required to maintain from being stored at the Residential Supervisory Location.

In addition to limitations, certain non-branch offices are ineligible to qualify as Residential Supervisory Locations. Generally, ineligible firms are “restricted firms” or “taping firms.” Associated persons are ineligible if one or more persons at that location are subject to mandatory heightened supervision, statutorily disqualified, answered “yes” to certain Form U4 disclosures within the past three years, or if the person has been notified that they are subject to an investigation, proceeding, complaint, or other action alleging they failed to supervise another person under their supervision.

FINRA believes the limitations and eligibility requirements will allow for the modernization of Rule 3110 to be consistent with technology advancements and hybrid work environments, while still protecting investors.

Read the SEC’s full notice of proposed Rule 3110.19 here.

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