FINRA’s New Remote Branch Office Inspection Pilot Program and Residential Supervisory Location Designation

On January 23, 2024, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 24-02 (Reg Notice 24-02), which adopts FINRA Rule 3110.19 (Residential Supervisory Location) and FINRA Rule 3110.18 (Remote Inspections Pilot Program).

Residential Supervisory Location Designation

Currently, FINRA Rule 3110(c) requires that home offices or non-branch offices where an associated person engages in specified supervisory activities are treated as offices of supervisory jurisdiction (OSJs), and therefore required to be inspected annually.

Effective June 1, 2024, firms that have a supervisory function or a principal at a home office OSJ will no longer have to name the location as an OSJ or conduct annual inspections. Such locations will now be categorized as Residential Supervisory Locations (RSLs) and can be inspected once every three years like non-branch and regular branch offices.

For an office to be designated an RSL under the new rule, the firm and the associated person located at each RSL must meet specified conditions and eligibility requirements. Such requirements will include (please refer to the final rule for a full list):

• Conduct and document risk assessments
• Provide FINRA with a list of RSLs on a regular basis

Firms may use the RSL designation as of June 1, 2024. However, beginning October 15, 2024, firms that designate offices or locations as RSLs must provide FINRA with a list of such locations no later than 15 days after the end of each calendar quarter.

FINRA is developing a technological process in FINRA Gateway where firms can efficiently identify their RSLs and meet their quarterly RSL reporting obligation. FINRA expects the process to be ready by May 31, 2024.

Remote Branch Office Inspection Pilot Program

On-site branch office inspections are required under FINRA Rule 3110(c)(1) either annually or every three years, depending upon the office type. However, in response to the COVID pandemic, FINRA adopted temporary amendments that allowed broker-dealers to fulfill inspection requirements remotely if offices met certain conditions. Many firms have been operating under this relief since 2020.

The newly approved Remote Branch Office Inspection Pilot Program allows eligible broker-dealers to fulfill their branch office, non-branch locations, and OSJ inspection obligations remotely - without an on-site visit. The program will begin on July 1, 2024, and automatically sunset after three years.

Pilot Program eligibility is limited to certain firms and locations based on risk-based criteria. These safeguards will

• Exclude certain firms from participating
• Exclude certain locations of participating firms from the program
• Enforce certain conditions that a participating firm and its eligible locations must meet prior to participating
• Require any participating firm to provide specified data to FINRA regularly

For a list of specific conditions and eligibility criteria, please refer to the final rule.

Pilot Program opt-in and reporting to FINRA

Firms that would like to participate in the Pilot Program must opt-in at least five calendar days before the program begins for the relevant year. A firm providing an opt-in notice will be automatically deemed to have agreed to participate in the program until it expires.

Pilot Year 1 starts on July 1, 2024, and ends on December 31, 2024. Eligible firms may opt in from June 1 through June 26, 2024.¹

Eligible firms that do not join in Pilot Year 1 may join in subsequent years on or before these dates:

• December 27, 2024, to join Pilot Year 2 (January 1 to December 31, 2025)
• December 27, 2025, to join Pilot Year 3 (January 1 to December 31, 2026)
• December 27, 2026, to join Pilot Year 4 (January 1 to June 30, 2027)²

Participating broker-dealers must provide the following information quarterly to FINRA:

• The total number of locations with completed inspections during each calendar quarter
• The number of locations inspected remotely during the quarter
• The number of locations inspected on-site during the quarter
• The number of locations subjected to on-site inspections during the quarter due to a finding
• The number of locations during the quarter in which an on-site or remote inspection identified a finding, the number of those findings, and a list of the most significant findings

Firms that fail to satisfy any of the requirements or conditions outlined in the rule, including collecting and submitting the requested information, will be deemed ineligible for participation and required to conduct on-site inspections of all locations during such Pilot Year.

FINRA noted that it is developing a process within the FINRA Gateway for firm participants to efficiently provide the required aggregated Pilot Program data and information.

Further details on this the process will appear in subsequent guidance.

Our guidance

The two new rules are welcome improvements which will provide FINRA with “the opportunity to gauge the effectiveness of remote inspections as part of a modernized, reasonably designed supervisory system that reflects the current work environment and availability of technologies that did not exist when the on-site inspection originally was conceived.”

With the new RSL designation, firms will need to assess their supervisory systems and controls, as well as their written supervisory procedures, and make enhancements as necessary to supervise activities conducted from these locations and to comply with other applicable regulatory requirements. Notably, Reg Notice 24-02 emphasizes potential changes to firms’ membership agreements as a result from an increase in remote office locations.

How we help

Broker-dealers have a number of obligations for FINRA, the SEC, and other regulators. ACA Signature can help.

ACA Signature is a scalable solution curated to suit your firm’s unique compliance needs. We combine compliance advisory, innovative technology, managed services, and cybersecurity to effectively address regulatory commitments and day-to-day responsibilities.

Reach out to your ACA consultant, or contact us to find out how we can help transform your firm’s compliance program.

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<sup>1. Please reference Regulatory Notice 24-02 for a matrix of Key Dates.
2. Pilot Years 1 and 4 are six months in duration.</sup>