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FINRA remote inspections program set to take effect under new rules

On Behalf of | Feb 2, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority has issued a notice to member firms to update them on the new rules for its remote inspection program, ThinkAdvisor reports.

The plan, allowing broker-dealers to inspect their branch offices remotely rather than in-person and treat home offices as residential supervisory locations, was approved by the Securities and Exchange Commission in November.   According to Regulatory Notice 24-02, Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1, 2024; and Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1, 2024.

Under FINRA 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 when the COVID-19 pandemic began, 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.  Firms were thus permitted to remotely inspect their brokers’ offices.

FINRA subsequently developed its ‘Residential Supervisory Locations’ (RSL) proposal, which 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.

“To help mitigate the potential risks associated with a less frequent inspection cycle, the proposed rule change also would establish safeguards that limit [residential supervisory location] designation to certain firms and locations based on criteria designed to minimize risk,” FINRA said in its proposal.

FINRA has stated that the new rules “reflect today’s hybrid work environment while still providing critical investor protections.”

Rule 3110.19(d) requires a member firm that elects to designate any of its offices or locations as RSLs to provide FINRA with a current list of them by the 15th day of the month following each calendar quarter in the manner and format as FINRA may prescribe. Firms can start using the RSL designation on June 1.

Under FINRA Rule 3110.18, the authority is establishing 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.”.

Firms must affirmatively elect to participate in the program by providing FINRA with an “opt-in notice” and once enrolled, must affirmatively elect to withdraw by providing FINRA with an “opt-out notice,” in the form and manner prescribed by FINRA.

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