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FINRA provides guidance for firms on new rule involving remote inspections

On Behalf of | May 13, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority is providing guidance to member firms on the new rules regarding its remote inspection program, according to ThinkAdvisor.

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 and adopted by FINRA in January.   According to Regulatory Notice 24-02, Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1; and Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1.

FINRA has now created a key topics page on its web site with resources pertaining to the rules, including relevant regulatory notices, key dates, and frequently asked questions.

The authority notes that a residential supervisory location (or RSL) is “generally defined as a private residence from which an associated person engages in supervisory functions, including those described in FINRA Rule 3110(f)(1)(D), (E), (F) and (G), and FINRA Rule 3110(f)(2)(B).  An RSL is non-branch location, which means that a firm does not need to register it as a branch office under Article IV, Section 8 of the FINRA By-Laws.  As a non-branch location, a firm is required to inspect an RSL on a regular periodic schedule in accordance with FINRA Rule 3110(c)(1)(C) and FINRA Rule 3110.13. ”

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 will 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.

In an email to ThinkAdvisor, ACA Group managing director Francois Cooke said advisors should check the FAQs under the Guidance section of the page to gain a greater understanding of the rules.

“The FINRA FAQs around RSLs provide clarity on some of the key questions that the industry has been asking about,” Cooke said. “The guidance also includes an RSL Eligibility Requirements and Conditions Checklist, which is a good resource for firms to use when determining eligibility of RSLs and should be used for each assigned RSL.”

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.

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