FINRA Adopts FINRA Rule 3110.19 (Residential Supervisory Location) and FINRA Rule 3110.18 (Remote Inspections Pilot Program), and Announces End of Temporary Relief Related to Updates of Office Information on Forms U4 and BR

Summary

FINRA is issuing this Notice to announce the effective dates of two new supplementary materials under FINRA Rule 3110 (Supervision) as follows:

• Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1, 2024; and
• Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1, 2024.

FINRA expects to publish additional guidance outlining in greater detail operational processes for compliance with the data and information requirements of Rules 3110.18 and 3110.19.

The rule text for Rules 3110.18 and 3110.19 is available in Attachment A.

In addition, FINRA is announcing May 31, 2024, as the end date of the regulatory relief set forth in Regulatory Notice 20-08 (March 2020) (Notice 20-08 Relief) with respect to the obligation of firms to maintain current information for employment addresses and branch offices on specified uniform registration forms. In light of these changes, firms are encouraged to consult with FINRA’s Membership Application Program (MAP) Group as they consider the materiality of any potential increase in the number of offices or locations.

Questions concerning this Notice should be directed to:

• Kosha Dalal, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-6903 or email;
• Sarah Kwak, Associate General Counsel, OGC, at (202) 728-8471 or email; or
• Patricia Ledesma Liebana, Senior Economist, Office of the Chief Economist, at (202) 728-8461 or email.

Background & Discussion

Residential Supervisory Location Designation (Rule 3110.19) Becomes Effective on June 1, 2024

FINRA recently adopted new Rule 3110.19,¹ which will treat a private residence at which an associated person engages in specified supervisory activities, subject to certain safeguards and limitations, as a non-branch location. As a non-branch location, this newly defined residential supervisory location (or RSL) will be subject to inspections on a regular periodic schedule (presumed to be at least every three years)² instead of the annual inspections currently required for an office of supervisory jurisdiction (OSJ) and “supervisory branch office.”³ To use this RSL designation under Rule 3110.19, a firm and the associated person at each location must meet specified conditions and eligibility requirements. Among other requirements, a firm must conduct and document a risk assessment,⁴ and provide a list of RSLs to FINRA on a periodic basis. Rule 3110.19(d) requires a member firm that elects to designate any of its offices or locations as RSLs to provide FINRA with a current list of them by the 15th day of the month following each calendar quarter in the manner and format (e.g., through an electronic process or such other process) as FINRA may prescribe.

On June 1, 2024, firms may start using the RSL designation in accordance with Rule 3110.19.⁵ The first RSL list is due to FINRA on October 15, 2024, covering all locations firms designate as RSLs during the period June 1, 2024, through September 30, 2024.⁶

FINRA is currently developing a technological process in FINRA Gateway through which firms will be able to identify their RSLs and meet the obligation to provide their quarterly RSL lists to FINRA in an efficient manner. FINRA expects such technological process to be ready no later than May 31, 2024. As noted above, FINRA expects to publish additional guidance detailing the operational process for the submission of the quarterly RSL list to FINRA.⁷

MAP Rules

As firms prepare for the end of the temporary relief provided through Notice 20-08 and the effective date of Rule 3110.19, FINRA reminds firms that they should consider whether any potential increase in the number of offices or locations may implicate Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations), which requires a firm to seek FINRA’s approval for a “material change in business operations,”⁸ or IM-1011-1 (Safe Harbor for Business Expansions). IM-1011-1 specifies the thresholds and conditions for increases in the number of offices (registered or unregistered) that, if met, are presumed not to be material for purposes of Rule 1017. Consistent with guidance provided in Notice to Members 00-73 (October 2000), if a change in a member’s business falls outside of the non-exhaustive list included in the definition of a “material change in business operations” or the terms of the safe harbor provision because, for example, the contemplated expansion exceeds the safe harbor thresholds or the member has a defined “disciplinary history,”⁹ the member must determine whether, based upon all facts and circumstances, the change is material. An assessment of all relevant facts and circumstances may include, among others:

• the nature of the proposed expansion;
• the qualifications and experience of the firm’s personnel; and
• the degree to which the firm’s existing financial, operational, supervisory and compliance systems can accommodate the change.¹⁰

The member firm is responsible for compliance with Rule 1017. If a member firm is uncertain whether an increase in its number of offices or locations is a material change in business operations, it is encouraged to seek guidance from FINRA’s MAP Group through the materiality consultation process.¹¹

Remote Inspections Pilot Program (Rule 3110.18) Becomes Effective on July 1, 2024

In addition to Rule 3110.19, FINRA also adopted new Rule 3110.18.¹² 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 OSJs and non-branch locations remotely, without an on-site visit to such offices or locations, subject to specified terms.

Under Rule 3110.18(i), a firm must affirmatively elect to participate in the Pilot Program by providing FINRA with an “opt-in notice” and once enrolled, must affirmatively elect to withdraw from the Pilot Program by providing FINRA with an “opt-out notice,” in the form and manner prescribed by FINRA. FINRA is currently developing a technological process in FINRA Gateway through which firms will be able to provide FINRA the requisite notices electronically, in an efficient manner. FINRA will provide further details about the manner and format of these notices in subsequent guidance. Notwithstanding the development of this process, the timeframes for firms to opt in or opt out of the Pilot Program are below.¹³

Open Enrollment Periods for Eligible Firms to Opt in to the Pilot Program

An eligible firm that elects to join the Pilot Program in any Pilot Year¹⁴ agrees to participate for the entire duration of that Pilot Year and will be automatically deemed to have elected and agreed to participate in the Pilot Program for each subsequent Pilot Year unless such firm affirmatively notifies FINRA of the firm’s withdrawal from the Pilot Program in such subsequent Pilot Year in accordance with Rule 3110.18(i) and the timeframes outlined below.¹⁵

For Pilot Year 1, which starts on July 1, 2024, and ends on December 31, 2024, the timeframe in which an eligible firm may elect to opt in to the Pilot Program is June 1, 2024, through June 26, 2024.¹⁶

An eligible firm that does not elect to join Pilot Year 1 between June 1, 2024, through June 26, 2024, may choose to join the Pilot Program in accordance with the requirements of Rule 3110.18(i) for a subsequent Pilot Year on or before these dates:

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

Opt-Out Notification Periods for Firm Participants to Withdraw From the Pilot Program

An eligible firm participant that joined in Pilot Year 1 but elects to withdraw or opt out of a subsequent Pilot Year must affirmatively notify FINRA at least five calendar days before that subsequent Pilot Year. Accordingly, FINRA must receive any such notification on or before these dates:

• December 27, 2024, to withdraw from participating in Pilot Year 2;
• December 27, 2025, to withdraw from participating in Pilot Year 3; and
• December 27, 2026, to withdraw from participating in Pilot Year 4.

A firm participant that does not provide such timely notice to FINRA will be deemed to have elected and agreed to participate for the duration of the subsequent Pilot Year.

Data and Information Requirement

In addition to conducting and documenting a risk assessment for using remote inspections,¹⁷ the terms of the Pilot Program include, among others, providing FINRA with specified data and information.

A firm that elects to participate in the Pilot Program for any amount of time will be required to provide the following data and information to FINRA in the form and manner determined by FINRA:

• quarterly data for each Pilot Year as specified in Rule 3110.18(h)(1)(A) – (F);
• supplemental written supervisory procedures for conducting remote inspections in compliance with Rule 3110.18(h)(1)(G), and if applicable, any subsequently amended procedures;¹⁸
• for a firm participating in Pilot Year 1, additional data and information covering January 1, 2024, through June 30, 2024, the period preceding the effective date of Rule 3110.18, as set forth under Rule 3110.18(h)(2); and
• acting in good faith using best efforts, calendar year 2019 inspection data and information as specified under Rule 3110.18(h)(3).

FINRA is currently developing a technological process in FINRA Gateway through which firm participants will be able to provide the aggregated data and information to FINRA in an efficient manner. FINRA will provide further details about the process in subsequent guidance.

Firm participants may conduct remote inspections under the Pilot Program starting on July 1, 2024, subject to compliance with the requirements of Rule 3110.18. As of July 1, 2024, firms will no longer be able to rely on Rule 3110.17 to fulfill their Rule 3110(c)(1) obligations, and firms that are ineligible under Rule 3110.18 or that do not elect to participate in the Pilot Program in any given Pilot Year will not be able to conduct any remote inspections during such Pilot Year.¹⁹

Notice 20-08 Relief Ends on May 31, 2024

At the onset of the COVID-19 pandemic, FINRA issued Regulatory Notice 20-08, which, among other things, temporarily suspended the requirements that member firms: (1) maintain updated Form U4 (Uniform Application for Securities Industry Registration or Transfer) information regarding the office of employment address for registered persons who temporarily relocated due to the pandemic; and (2) submit branch office applications on Form BR (Uniform Branch Office Registration Form) to report any newly opened temporary office locations or space-sharing arrangements established as a result of the pandemic. FINRA also conveyed in Regulatory Notice 20-08 and subsequent guidance that as coronavirus-related risks decreased member firms should expect to return to meeting any regulatory obligations for which relief has been provided and that FINRA would announce the end date for the Notice 20-08 Relief.²⁰

As the public health emergency due to COVID-19 has officially ended,²¹ FINRA is announcing May 31, 2024, as the date on which the Notice 20-08 Relief related to the uniform registration forms will end. Starting on June 1, 2024, a member firm that has been relying on the Notice 20-08 Relief must resume its continuing obligation to: (1) 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-Laws²²; and (2) submit or update branch office applications on Form BR for any office locations or space-sharing arrangements established as a result 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.²³ FINRA reminds member firms and registered persons of the obligation to keep information disclosed on such forms current at all times and that amended forms must be filed with FINRA and other applicable regulators not later than 30 days after learning of the facts or circumstances giving rise to the change.²⁴

For firms that relied on the Notice 20-08 Relief, as of July 1, 2024, Forms U4 and BR must reflect current registration and address information for each office or location.

Key Dates at a Glance

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Endnotes