Overview
The Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 24-02 (“Notice”) to announce the adoption of FINRA Rules 3110.18 and 3110.19 (“Rules”), which provides guidance on the supervision of residential locations (“RSL”), and reminded firms of their obligations once the rules become effective. Additionally, the Notice announced the end of the regulatory relief granted for certain regulatory obligations related to COVID-19, which was set out in Regulatory Notice 20-08 (“COVID-19 Relief Notice”). To that end, effective May 31, 2024, the temporary relief set forth in the COVID-19 Relief Notice will terminate effective June 1, 2024, and the Rules will supersede that guidance. At that time, FINRA Member Firms (“Firms”) will be able to designate an associated person’s private residence where supervisory activities are conducted as an RSL.
Definition of RSL
An RSL is defined as any location that is the associated person’s private residence where supervisory activities are conducted, and shall be considered a non-branch location provided that the following conditions are met:
- Only one associated person or multiple associated persons associated with the Firm conduct business at that location, and are members of the same immediate family.
- The RSL is not held out to the public as an office, and the associated person does not meet with customers at the location.
- Neither customer funds nor securities are handled at that location.
- The associated person is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, retail communications and other communications to the public by such associated person.
- The associated person’s correspondence and communications with the public are subject to the Firm’s supervision in accordance with the Rule.
- All electronic communications (e.g., e-mail) are made through the Firm’s electronic system.
- The Firm has a recordkeeping system to make and keep current, and preserve records required to be made and kept current, and preserved under applicable securities laws and regulations, FINRA rules, and the Firm’s own written supervisory procedures under Rule 3110; such records are not physically or electronically maintained and preserved at the office or location; and the Firm has prompt access to such records.
- The Firm must determine that its surveillance and technology tools are appropriate to supervise the types of risks presented by each RSL, and these tools may include but are not limited to: (a) firm-wide tools such as, electronic recordkeeping system; electronic surveillance of e-mail and correspondence; electronic trade blotters; regular activity-based sampling reviews; and tools for visual inspections; (b) tools specific to the RSL based on the activities of associated person assigned to the location, products offered, restrictions on the activity of the RSL; and (c) system tools such as secure network connections and effective cybersecurity protocols; and (d) any sales activity that takes place at the location complies with the conditions set forth under Rule 3110.
Action Items
Written Supervisory Procedures. Firms will need to update their Written Supervisory Procedures and conduct a written risk assessment of the associated person assigned to the location prior to designating the location an RSL.
Risk Assessment. The risk assessment will include ineligibility criterion in accordance with Rule 3110.19 for Member Firm Ineligibility Criteria and Location Ineligibility Criteria. Additionally, the risk assessment will need to address customer complaints; heightened supervision, if any; the history of a failure to comply with the Firm’s Written Supervisory Procedures; any regulatory communications related to the associated person’s supervision and business conduct; the complexity of products marketed by the associated person; the type of customers of the associated person (retail, institutional, legal entity); proprietary trading and away business, if appropriate; and an evaluation of their primary supervisor.
Quarterly Reporting. To further complicate the requirements, after the initial listing of RSLs due on October 15, 2024, Firms choosing to designate a location or branch as an RSL will be required to provide a listing of RSLs to FINRA via the CRD Gateway (method to be determined) by the 15th day of the month following each quarter.
Membership Agreement Review. Finally, Firms are reminded of the requirements of IM 1011-1 when considering the addition of RSLs, and should review their membership agreement before deciding to increase office locations. Depending on the outcome of that review, Firms may have to file a Continuing Membership Application or Materiality Consultation to add RSLs.