FINRA Proposes Updates to Supervisory Rule on Home Offices

FINRA has filed with the SEC proposed changes to FINRA Rule 3110 to add new Supplementary Material 3110.19 (Residential Supervisory Location). The changes allow a home office to be considered a non-branch “residential supervisory location” under certain conditions. As detailed in numerous Bates’ posts (see, e.g., here and here), the pandemic moved regulators to issue relief from strict regulatory requirements to firms in order to allow employees to work from home, including the use of new technology and communications to permit remote supervision. By this proposal, FINRA is adapting to a new, post-pandemic “blended workforce” model, one in which employees work at both conventional offices and in their private residences—and which FINRA acknowledges is likely to “endure.” Further, FINRA noted that “technological advances in surveillance and monitoring capabilities” have enabled such greater “workplace flexibility.” The proposal, therefore, is considered a reassessment of “the manner in which firms may effectively and efficiently carry out their supervisory responsibilities considering evolving business models and practices, advances in technology, and regulatory benefits.”

The proposed amendment—to classify some private residences as non-branch locations, subject to specific limitations—“aligns” the classification of non-branch locations with certain exclusions, which, according to FINRA “will not result in a loss of the important regulatory information that the rules were designed, in part, to provide regarding the locations or associated persons.”

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Under the proposal, “residential supervisory locations” would be subject to several limitations. Among them are: (i) that only one associated person can conduct business at the location; (ii) that the location is not held out to the public as an office (and that the associated person cannot meet with clients or prospects there); (iii) that no customer funds or securities are handled there; (iv) that the associated person is assigned to a specific branch office; (v) that all electronic communications are made through the member’s electronic system; and (vii) that books and records must be maintained.  

The proposed rule also elaborates on what makes a non-branch office ineligible to be designated a “residential supervisory location.” These factors generally concern member firms that are considered “restricted firms” or “taping firms,” or associated persons who are subject to mandatory heightened supervision, statutory disqualification, or otherwise subject to an investigation, proceeding, complaint or other action for failure to supervise another person that is subject to their supervision.

FINRA pointed out that once a home office has been designated a “residential supervisory location,” inspections would be required on a regular periodic schedule (likely once every three years, as opposed to annually), as is required of other supervisory branch offices.

Bates will keep you apprised as the proposal goes through rulemaking.

Bates Compliance delivers guidance and tailored compliance consulting solutions to our broker-dealer, investment adviser and hybrid firm clients on an as-needed or ongoing basis. We also offer remote branch office inspections - Learn More.

Hank Sanchez, Managing Director

hsanchez@batesgroup.com or  504-450-9632

David Birnbaum, Managing Director

dbirnbaum@batesgroup.com or  917-273-2682