The die is cast: FINRA has published Regulatory Notice 24-02 (RN 24-02) announcing the effective dates and other key dates and considerations for its recently adopted Residential Supervisory Location (RSL) and Remote Inspection Pilot Program (Pilot Program) rulemakings, to be codified as FINRA Rules 3110.19 and 3110.18, respectively. Together, these rules will offer FINRA member firms additional flexibility in how they structure certain aspects of their supervisory system following the sunsetting of related COVID-19 relief.
Under new Rule 3110.19 (RSL), member firms will be permitted to treat a private residence at which an associated person engages in specified supervisory activities, subject to certain safeguards and limitations, as a non-branch location for which inspections must be conducted on a regular periodic schedule (presumed to be at least every three years) instead of the annual inspections currently required for an office of supervisory jurisdiction (OSJ) and “supervisory branch office.”
New Rule 3110.18 (Pilot Program) establishes a voluntary three-year remote inspections pilot program to allow eligible member firms to fulfill their Rule 3110(c)(1) inspection obligations remotely, without an on-site visit, subject to specified terms, including risk assessments for each location under consideration for remote inspection, disqualification of certain locations, and quarterly reporting obligations.
Importantly, RN 24-02 also announces the end date of the COVID-related temporary relief set forth in Regulatory Notice 20-08 (RN 20-08) with respect to the obligation of member firms to maintain current information for employment addresses and branch offices on Forms U4 and BR. In addition, on the effective date of new Rule 3110.18 (Pilot Program), firms will no longer be able to rely on Rule 3110.17, the temporary relief from in-person inspections.
Key Dates
- Sunset of Form U4 and Form BR Relief in RN 20-08: May 31, 2024
- Effective Date of Rule 3110.19 (RSL): June 1, 2024
- Sunset of In-Person Inspection Relief in Rule 3110.17: June 30, 2024
- Effective Date of Rule 3110.18 (Pilot Program): July 1, 2024
Additional key dates are set forth in RN 24-02.
Observations and Takeaways
The potential impact of the RSL and Pilot Program rulemakings (and cessation of the RN 20-08 relief) cannot be overstated. They reflect FINRA’s years-long effort to adapt its supervisory and inspection frameworks, which are also tethered to certain state regulatory interests, to the realities of a post-COVID world and member firms’ heavy shift to remote and hybrid work arrangements.
Firms seeking to take advantage of the RSL and Pilot Program rulemakings should begin preparing as soon as possible. Each new rule will require substantial preliminary work to establish a compliant framework for initial and ongoing implementation and reporting requirements.
For those firms less inclined to take advantage of the rulemakings, there remains significant work and planning to be done. For instance, the termination of the RN 20-08 relief means that many firms may be required to newly register as branches a multitude of new locations (if the locations cannot fit within an existing exclusion from the “branch office” definition) and firms will have to prepare to resume in-person inspections of all locations (whether designated an OSJ, branch office, or non-branch location).
In addition, FINRA emphasizes in RN 24-02 that, as firms prepare for the end of the temporary relief RN 20-08 and the effective date of Rule 3110.19 (RSL), they should consider whether any potential increase in the number of offices or locations may fit within IM-1011-1 (Safe Harbor for Business Expansions), which specifies the thresholds and conditions for increases in the number of offices (registered or unregistered) that, if met, are presumed not to be material for purposes of Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations), or may implicate Rule 1017, which requires a firm to seek FINRA approval for a “material change in business operations.”
Additional details regarding reporting obligations and timelines under Rules 3110.19 (RSL) and 3110.18 (Pilot Program) are provided in RN 24-02.
While the RSL and Pilot Program rulemakings are welcome developments as FINRA member firms seek to determine how exactly their post-COVID businesses and supervisory systems will operate on a more permanent basis, there remain a variety of interpretive questions that firms will need to consider.