(Goodwin) - Firms would be able to treat private residences as non-branch offices instead of OSJs under certain circumstances. FINRA hopes to align its supervisory rules with current work-from-home practices.
FINRA recently re-proposed amendments to its supervision rule that would enable firms to treat a private residence as a non-branch location even if specified supervisory activities are conducted there. Dubbed by FINRA as a Residential Supervisory Location or RSL, the permissible supervisory activity largely tracks that which is specified in the OSJ definition in FINRA Rule 3110(f) (including related to order execution and approval of retail communications). Today, this location would be an OSJ.
As proposed, RSL activity must, for the most part, fit within the existing Rule 3110 guardrails for private residence non-branch office locations. For example, no customer funds or securities could be handled at the location and no customer meetings or sales activity could take place at the location. RSJs would also be subject to periodic inspections, which would be presumed to be at least every three years, rather than an annual inspection requirement for OSJs and other supervisory branch offices.
The re-proposal makes several adjustments in response to prior industry concerns, including:
- Prohibiting records from being physically or electronically maintained and preserved at the RSL
- Expanding the ineligibility criteria to include suspended firms, firms that have been a FINRA member for less than 12 months, and residences of associated persons subject to an investigation or other action relating to a failure to supervise
- Requiring firms to provide FINRA with quarterly lists of designated RSLs
The proposal follows an initial attempt FINRA withdrew in 2022 after opposition from NASAA, PIABA, and other key industry groups. Those groups argued that permitting remote supervision would undermine investor protection. They will likely provide additional comments. NASAA, for example, previously urged the SEC to require that FINRA embark on a lengthy and complicated process before re-proposing its RSL rules, including conducting a wide-ranging examination sweep supervised by the SEC, issuing a public report on the results of that sweep, and conducting a multi-step notice and comment process. FINRA did not engage in this process, although it did respond with adjustments intended to address other concerns expressed by NASAA and other commenters.
On the other hand, many broker-dealers will likely support the proposal (even if in their silence), given the challenges they are experiencing getting their personnel to return to the office.
By Nicholas J. Losurdo and David G. Adams
April 10, 2023
