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FINRA files new amendment with SEC on remote inspection proposal

On Behalf of | Aug 17, 2023 | FINRA Compliance

The Financial Industry Regulatory Authority has proposed a new amendment to its plan regarding remote work locations, Financial Planning reports.

FINRA has proposed changes to Rule 3110 to allow member firms to conduct remote inspections of branch offices and locations.  The SEC had published a request for comment on FINRA’s proposal, originally setting Aug. 1 as the deadline for comments.

But the filing of the new amendment recently means there will be an additional 21 days set aside for the public comment period, followed by 14 days for rebuttals.

Under Rule 3110, member firms are required to maintain a system of supervising the activities of their personnel to ensure compliance with securities laws and regulations. But during the COVID-19 pandemic, a temporary rule was implemented to relieve firms of the obligation to perform on-site, in-person inspections amid the challenges of the health crisis.

The temporary rule was due to expire at the end of 2022. But FINRA filed proposals with the SEC for a one-year extension of the rule as well as a three-year pilot program that would move toward a more permanent system for remote inspections.

FINRA’s Residential Supervisory Locations (RSL) proposal would allow a broker working remotely to supervise other brokers without the broker’s home being designated as a branch office. The RSL would be subject to examination by the parent brokerage once every three years instead of the annual inspection that must be performed at an office of supervisory jurisdiction.

The plan was amended in April to set forth certain conditions for a home office to be considered a non-branch residential supervisory location.

Following a period of public comment, FINRA amended the RSL proposal further to tighten the criteria for eligibility.  The authority set forth the following proposed changes:

— Adjust 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.

— Clarify 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 in 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.

— Require 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.

After additional public comments, FINRA is now proposing additional changes including highlighting that as part of the risk assessment and consistent with Rule 3110(a), firms must take into consideration any red flags when determining whether to conduct a remote inspection of an office or location.

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