SR-FINRA-2023-006

The Financial Industry Regulatory Authority, FINRA, has published on its website and meanwhile also in the Federal Register proposed amendments to FINRA Rule 3110 as regards supervisory practices with respect to home office „arrangements“. In view of new work models following the COVID-19 pandemic, FINRA finds a revision of its rules pertaining to office locations and inspections to be necessary to further accommodate and promote (to a certain extent) these new models. A corresponding draft for the revision of Rule 3110 was already published in 2022, but was subsequently withdrawn by FINRA.
Specifically, FINRA seeks to „adopt Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision)“ to add a new category entitled „Residential Supervisory Location“ for purposes of the rule. Thereafter, the private residence of associated persons engaged in specified supervisory activities would be treated as a non-branch location provided that certain conditions are met. The conditions include, but are not limited to
– customer funds and assets are not handled at such location;
– the associated person refrains from meeting with customers at the location;
– all firm-related communication must be made via the firm’s own communication system; or
– books and other documents of the firm are not kept at this location.
Additionally, to mitigate the risks addressed in the comments of last year’s proposal, FINRA would exclude certain locations to qualify as „Residential Supervisory Locations“, for example, if
– the associated person is inexperienced (less than one year of work experience in supervisory functions);
– an investigation is underway towards the person; and / or
– if the person is subject to a „mandatory heightened supervisory plan“.
As a consequence, the residential location would be exempt from the yearly inspection requirements as mandated by the rule. Nonetheless, such locations would still be subject to periodic inspections of at least every three years.