On January 23, 2024, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 24-02 (Notice) to announce the adoption of FINRA Rules 3110.18 and 3110.19 and remind firms of their obligations once the rules become effective. In addition, the Notice announces the end of the Covid-19 temporary relief from certain regulatory obligations described in Regulatory Notice 20-08 (the Notice 20-08 Relief).
As a reminder, FINRA Rule 3110.18 will establish the Remote Inspections Pilot Program, and FINRA Rule 3110.19 will establish the criteria for designating an associated person’s private residence as a Residential Supervisory Location (RSL). In addition to announcing the applicable deadlines associated with FINRA Rules 3110.18 and 3110.19, the Notice provides that an increase in the number of offices or locations could constitute a material change in a firm’s business operations requiring approval under FINRA’s Membership Application Program (MAP) rules. FINRA urges firms to consider any potential MAP implications when contemplating an increase in offices resulting from RSLs designations and the end of the Notice 20-08 Relief.
Firms should immediately assess the new rules to determine whether they intend to rely on them and for whom RSLs will need to be established, draft and adopt appropriate policies and procedures related to the implementation of the rules, and assess whether they need to do a materiality consultation with FINRA related to the sunset of the Notice 20-08 Relief and establishment of RSLs. Likewise, to the extent possible, firms should commence the process of updating Forms U4 and BR to reflect offices of employment address and new branch offices.
Effective Dates
In this Notice, FINRA announced the following effective dates:
- end of the regulatory relief described in Notice 20-08: May 31, 2024
- effective date of FINRA Rule 3110.19: June 1, 2024
- effective date of FINRA Rule 3110.18: July 1, 20241
End of Notice 20-08 Relief
Citing the end of the public health emergency due to Covid-19, firms will no longer be able to rely on the Notice 20-08 Relief. Specifically, beginning June 1, 2024, firms that have been relying on the Notice 20-08 Relief must comply with the following obligations:
- maintain updated Form U4 information regarding the office of employment address for registered persons who relocated due to Covid-19 within the specified timeframe by filing an appropriate amendment as prescribed in Article V, Section 2 of the FINRA By-Laws
- submit or update branch office applications on Form BR for any office locations or space-sharing arrangements established because of Covid-19 that have not otherwise been registered or updated with FINRA through Form BR as prescribed in Article IV, Section 8 of the FINRA By-Laws
Accordingly, firms that relied on the Notice 20-08 Relief from the above-listed obligations must ensure that Forms U4 and BR reflect current registration and address information for each of their offices and locations by July 1, 2024.
Implementation of FINRA Rule 3110.19
Key Events Associated With the Implementation of FINRA Rule 3110.19 — Private Residence/Supervisory Activities
FINRA Rule 3110.19 will allow an associated person’s private residence where supervisory activities are conducted to be considered a nonbranch location of the associated person’s firm, subject to certain conditions and controls. Specifically, the firm and the relevant associated person at each prospective RSL must meet specified conditions and eligibility requirements to be able to avail themselves of the RSL designation. Firms should familiarize themselves with the list of events that can render ineligibility for designation as an RSL under FINRA Rule 3110.19(c) to ensure compliance.
Firms that choose to designate locations as RSLs will also be required to provide FINRA with a current list of their RSLs by the 15th day of the first month of each quarter, starting on October 15, 2024. The lists submitted to FINRA on October 15, 2024, will reflect the locations firms have designated as RSLs during the period June 1, 2024, through September 30, 2024. FINRA is developing a process in the FINRA Gateway through which firms will be able to submit their lists to FINRA. FINRA anticipates that this process will be available to firms no later than May 31, 2024. Firms can then begin designating RSLs on June 1, 2024.
MAP Considerations Associated With the Designation of RSLs Under FINRA Rule 3110.19
The designation of RSLs is likely to cause an increase in the number of firm office locations. The Notice draws attention to the importance of firms’ considering whether an increase in the number of firm offices due to the designation of RSLs will result in a “material change in business operations” that would require the firm to file an Application for Approval of Change in Ownership, Control, or Business Operations under FINRA Rule 1017. Firms should consult FINRA Rule 1017, IM-1011-1 and Notice to Members 00-73 to assess whether a change in the number of firm offices would constitute a “material change in business operations” for the purposes of FINRA Rule 1017.
FINRA encourages firms that are uncertain whether an increase in several firm offices or locations would constitute a “material change in business operations” for the purposes of FINRA Rule 1017 to seek guidance from its MAP Group through the materiality consultation process.
Implementation of FINRA Rule 3110.18
Key Events Associated With the Implementation of FINRA Rule 3110.18 — Remote Office Inspections
As a reminder, FINRA Rule 3110.18 establishes a voluntary, three-year remote inspections pilot program (Pilot Program) to allow eligible member firms to fulfill their Rule 3110(c)(1) inspection obligation of qualified branch offices, including offices of supervisory jurisdiction and nonbranch locations remotely, without an on-site visit to such offices or locations, subject to specified terms. A firm must affirmatively opt in to participate in the Pilot Program and, once enrolled, must affirmatively opt out of the program if it chooses to no longer participate. Similar to the process for FINRA to be able to collect required lists of RSLs under FINRA Rule 3110.19, FINRA is developing a process in the FINRA Gateway by which firms will be able to submit opt-in and opt-out notices to FINRA.
A firm that elects to participate in the Pilot Program for the period of July 1, 2024, through December 31, 2024, must submit its opt-in notice no later than June 26, 2024. The Notice explains that June 1, 2024, is currently the first date on which a firm may submit an opt-in notice, but this may change if the FINRA Gateway process for submitting opt-in notices is ready earlier than expected. A firm that chooses to opt out of the second year of the Pilot Program (which will cover the period from January 1, 2025, through December 21, 2025) must submit its opt-out notice by December 27, 2024. December 27, 2024, is also the date by which a firm that did not participate in the first year of the Pilot Program may opt in for the second year.
Data Required to Be Submitted Under FINRA Rule 3110.18
A firm that elects to participate in the Pilot Program must submit the following data to FINRA through a new process that will become available in the FINRA Gateway:2
- quarterly data for each pilot year as specified in Rule 3110.18(h)(1)(A) — (F) (due by October 15, 2024, for the first year of the Pilot Program)
- supplemental written supervisory procedures for conducting remote inspections in compliance with Rule 3110.18(h)(1)(G), and if applicable, any subsequently amended procedures (due by October 15, 2024 for the first year of the Pilot Program)
- for a firm participating in the first year of the Pilot Program (from July 1, 2024, through December 31, 2024), additional data and information covering January 1, 2024, through June 30, 2024 (due by December 31, 2024, for the first year of the Pilot Program)
- acting in good faith using best efforts, calendar year 2019 inspection data and information as specified under Rule 3110.18(h)(3) (due by December 31, 2024, for the first year of the Pilot Program)
Additional Guidance
Firms will await the additional guidance FINRA indicated is forthcoming related to the operational processes for RSL designations and remote inspection pilot notices.
Going Forward
The above new rules are welcome changes made by FINRA to modernize its regulatory framework related to remote workplace locations, but as FINRA noted in its rulemaking process, firms will need to assess their supervisory systems and controls and make enhancements as necessary to supervise activities conducted from these locations and to comply with other applicable regulatory requirements. Notably, the Notice highlights potential MAP implications resulting from an increase in remote office locations. Accordingly, firms contemplating an increase in remote work locations due to the sunsetting of the Notice 20-08 Relief or the designation of RSLs should assess their supervisory processes and controls, including written supervisory policies and procedures, and make any necessary enhancements.
In addition, considerations should be given to whether an increase in remote office locations constitutes a material change of business operations requiring FINRA approval under MAP rules or to seek guidance through FINRA’s materiality consultation process. Also, firms should start identifying their representatives who will need Form U4s updated to reflect addresses for their remote work locations and, if possible, consider updating Form U4 information in advance of the July 1, 2024, due date.
1 FINRA Rule 3110.17, which is the current, temporary FINRA rule regarding remote inspections, will sunset on June 30, 2024.
2 Due dates associated with each type of data is indicated in parentheses.
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