The Financial Industry Regulatory Authority's new rules to treat home offices as "residential supervisory locations" and for its remote inspections pilot program are "a big deal for the broker-dealer industry," according to Ben Marzouk, partner at Eversheds Sutherland in Washington. "They provide some helpful relief that more or less codifies what a lot of firms had been doing since the pandemic regarding remote work."
That said, there are still unanswered questions around both rules, Marzouk told ThinkAdvisor in a recent phone interview.
FINRA adopted the new rules on Jan. 24. The Securities and Exchange Commission approved the rules in November.
The rules around residential supervisory locations, or RSLs, take effect June 1, while the Remote Inspections Pilot Program begins July 1.
Read on as Marzouk details the rule's impact on broker-dealers and their reps and provides advice on what broker-dealers should be doing now — particularly in terms of answering a "threshold" question about the new RSL rule. He cautions: BDs "may not fully appreciate the limited scope of the relief and the narrow application of the rules to only certain personnel."
THINKADVISOR: How will the new RSL rule affect BDs and their registered representatives and their home offices?
BEN MARZOUK: It's like a new category of offices, essentially.
With respect to the RSL proposal, I think right now, unfortunately, there are still a lot of unanswered implementation questions.
FINRA issued Regulatory Notice 24-02, that provided a little bit of clarity, but that was more or less around the implementation date and when the actual RSL rule change would take effect.
FINRA's rule change would classify RSLs as "non-branch locations," which means that FINRA presumes they would be inspected every three years, whereas OSJs and supervisory branch offices must be inspected annually (non-supervisory branch offices are on a three-year inspection cycle).
What should firms be doing now?
The key thing we do know now is, since the rule is adopted, since we do now have an effective date for the rule, firms are going to have to make a determination of who amongst our remote workers — and individuals who are going to stay remote — meets the definition of a residential supervisory location.
That's the key threshold question, especially firms that have hundreds of people doing supervisory work and even none-supervisory work from home and are only coming to the office once a month for team meetings or the like. That's what a lot of people are doing.
Who meets the definition of a residential supervisory location, but also reviewing the rule to make sure that those who may meet the definition, and those that are likely exclusions; if you have a disciplinary history or a reportable event on your U4 you may not be able to qualify as an RSL and they may have to treat you as a branch or an OSJ [office of supervisory jurisdiction] or have you come into a home office.
That threshold question of who meets the RSL definition is answered in the rule?
That question is answered in the rule as adopted.
The rule itself sets forth the criteria and the definition, so it's now on firms before the rule takes effect that firms call their list of registered reps, see who's working from home, see who's going to avail themselves of this relief, and then adjust their inspection of those offices based on that answer.
That also means incorporating any of those changes in their WSP [written supervisory procedures].
Does the new RSL rule ease firms' compliance in the inspections area?
