Residential supervisory locations: Key compliance considerations for broker-dealers

Understanding FINRA’s new rules and their impact on supervisory practices

As remote and hybrid work has become more common, broker-dealers should revisit their supervisory frameworks to confirm alignment with Financial Industry Regulatory Authority (FINRA) requirements. Understanding evolving regulations can help firms stay in compliance while maintaining operational efficiency and flexibility for employees.

Broker-dealers who are members of FINRA should look at recent regulations before approving residential supervisory location (RSL) arrangements. In particular, on January 23, 2024, FINRA issued Regulatory Notice 24-02, announcing the adoption of FINRA Rule 3110.19. This rule permits firms to designate a private residence from which an associated person engages in specified supervisory activities, as a non-branch location, subject to certain safeguards and limitations.

The notice further detailed that such location will be designated as an RSL and would be subject to inspections on a regular periodic basis instead of the annual inspections currently required for an office of supervisory jurisdiction (OSJ).

The RSL rule became effective on June 1, 2024, when firms could start using the RSL designation. As required by the rule, firms must respond to the RSL Question on the Form U4 no later than December 26, 2024, for any location that is marked as a private residence on the Form U4. FINRA has amended the Form U4 with an RSL question where firms can answer “Yes” or “No”. The question became available on September 14, 2024, and will be implemented on November 26, 2024.

Action items for firms to consider

To navigate the new RSL regulations effectively, broker-dealers should take proactive steps for compliance. Consider these key action items to help your firm align with FINRA requirements and maintain oversight:

1. Review firm gateway reports to assess your current list of associated persons & their disclosed locations
2. Review Uniform Branch Office Registration Forms (Form BRs)
3. Amend Written Supervisory Procedures (WSPs)
4. Complete RSL Eligibility Requirements & Conditions Checklist
5. Conduct risk assessment of each AP for RSL designation
6. Update Form U4s to include appropriate addresses
7. File/Amend Form BRs as applicable
8. Update Branch Inspection Schedule

The notice highlighted important requirements for eligibility to designate a location as an RSL. Specifically, member firms must conduct a risk assessment and provide FINRA with a list of RSLs on a periodic basis.

Clarifying the scope of the new rule

Some FINRA members were slightly confused by this new rule, as they believed that it would provide flexibility for all who wished to work remotely. Rather, the flexibility of this rule is specific to designated supervisory persons working from private residential locations that would previously have been required to register as an OSJ or as a supervisory branch office.

FINRA Rule 3310.19 allows firms to designate a location as an RSL where the associated person performs certain supervisory functions from their private residence on a full-time, part-time or hybrid basis. The specified functions include:

• Final acceptance (approval) of new accounts
• Review & endorsement of customer orders (principal review of transactions relating to investment banking & securities business
• Final approval of retail communications for use by persons associated with the firm (excludes an office that solely conducts final approval of research reports) and/or
• Supervising the activities of persons associated with the firm at one or more other branch offices or non-branch locations.

Residential supervisory location conditions & eligibility requirements

FINRA also detailed conditions for designating a location as an RSL, similar to the exclusions from the branch office definition of FINRA Rule 3110. The conditions include that:

1. Only one associated person or multiple associated persons who reside there conduct business there. For multiple associated persons, they must be members of the same immediate family
2. The location cannot be held out to the public
3. The associated person does not meet current or prospective customers at the location
4. The activity conducted from the location complies with 3110(f)(2)(A)(ii) or (iii)
5. Customer funds/securities are not handled at the location
6. The associated person is assigned to a designated branch office, which is reflected on all business cards, stationery, and communications
7. The associated person’s correspondence/communications with the public are supervised
8. The associated person’s electronic communications are made through the firm’s electronic system
9. The firm has a recordkeeping system to make, keep current and preserve records as required; and
10. The firm has determined that its surveillance & technology tools are adequate to supervise the risks presented by each RSL.

Once the broker-dealer determined that the location meets the conditions to be designated as an RSL, it will need to ensure that the Firm and the associated person are eligible to designate an RSL. The rule includes a list of ineligibility criteria for the firm and location/associated person, respectively. A few events that would make a firm ineligible include if the firm:

• is restricted under FINRA Rule 4111
• has been registered with FINRA for less than 12 months; or
• has violated FINRA Rule 3110(c) in the last 3 years

For an associated person, a few events that would make them ineligible include:

• having less than one year of direct supervisory experience with the firm or an affiliate/subsidiary
• is subject to mandatory heightened supervisory plan by a regulator; or
• has been notified in writing they are the subject of any investigation or proceeding by a regulator advising that they have failed to reasonably supervise another person subject to their supervision.

Please see the FINRA Rule for the complete list of ineligibility criteria.

Residential supervisory location compliance requirement

Suppose the firm determines it and its associated persons are eligible and meet the conditions for RSL. In that case, the firm will be required to update its Written Supervisory Procedures to include RSL as an approved location category and add the regulatory requirements of the rule.

As previously noted, the new rule requires that firms conduct and document a risk assessment of the associated person assigned to the proposed RSL. The rule provides some areas that should be included in the risk assessment which includes:

• an assessment of customer complaints
• heightened supervision
• failures to comply with the firm’s WSPs
• recordkeeping violations
• communications from regulators indicating failure to supervise; and
• high-risk activities conducted at the location

While these areas do not automatically eliminate the ability to designate an RSL, they must be assessed.

Branch Inspection Schedules should be updated to include RSLs which should be inspected periodically (presumed to be at least every three years unless otherwise noted by the firm). Please note that these inspections must be onsite unless the firm has opted into the Remote Inspections Pilot Program pursuant to FINRA Rule 3110.18. The last day to opt in to the pilot program was June 26, 2024, for the 2024 calendar year; however, a firm can join the pilot program in subsequent years.

Finally, FINRA acknowledges that certain jurisdictions and the NYSE have not accepted or adopted the RSL designation and would still require that such locations register or notice file via Form BR. As such, FINRA is working on amending the Form BR to allow registration or notice filing with a jurisdiction or the NYSE if required, but not with FINRA because it is designated as an RSL.

FINRA made an interim fix for this for the initial Form BR’s; however, it is still working on this for Form BR amendments. FINRA maintains an SRO/Jurisdiction Schedule that includes branch registration requirements for each jurisdiction (i.e., notice file, register or neither). As a result of RSL, FINRA has updated the schedule to include a column for RSL acceptance by jurisdiction.

Next steps for compliance support

At Kaufman Rossin, we’re here to assist broker-dealers with navigating residential supervisory locations and any other compliance-related matters. Contact me or another member of our Risk Advisory Services team to learn more about FINRA’s regulations and what they could mean for your firm.