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Russell Sacks

Regulation and Compliance > Federal Regulation > FINRA

FINRA's New Home Office Rules Are Causing Headaches for BDs

By Melanie Waddell

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The Financial Industry Regulatory Authority’s new Residential Supervisory Location rule, which takes effect Saturday, is proving to be a real compliance headache, according to Russell Sacks, a financial services regulatory partner in King & Spalding’s Corporate, Finance and Investments practice.

In a recent email exchange with ThinkAdvisor, Sacks explained that while the new home office rules “are seen as generally positive,” they are “simultaneously increasing the regulatory burden” now that the COVID-19 relief has ended.

In 2020, FINRA suspended the requirement for firms to categorize and register office locations. This allowed broker-dealer employees to work remotely without firms being required to categorize and register their residential locations. That relief ends today.

“The additional compliance hurdles impose many conditions and requirements, creating additional costs for financial institutions,” according to Sacks. “These changes are causing headaches for financial services firms, and have driven some to adjust their hybrid-work policies, especially broker-dealers that engage in investment banking and trading businesses.”

Sacks detailed to ThinkAdvisor where firms stand now and four compliance headaches that are surfacing related to putting the rules into practice.

THINKADVISOR: You’ve said the new FINRA rules regarding remote work are cumbersome and include exclusions that make remote work and remote inspections difficult. Please explain.

RUSSELL SACKS: FINRA’s membership includes virtually all SEC-registered broker-dealers, a category that covers not only traditional brokerage businesses, but also virtually all investment banks.

FINRA’s rules require FINRA-member broker-dealers to both (a) tally and (b) categorize all of the locations from which the business of the broker-dealer is regularly done.

Since 2020, FINRA provided firms with COVID-era relief (the “2020 relief”) that allowed firms to suspend both requirements with respect to remote work arrangements for firm employees.

The 2020 relief is being withdrawn as of May 31, and replaced with amendments to the applicable rules regarding firm offices that are designed to facilitate remote work.

The most important of those amendments are, first, a rule that allows supervisory activity to occur from remote work locations (“residential supervisory location”), and second, a rule that initiates a pilot program allowing office location inspections to occur remotely.

Unfortunately, when adopting those rules, FINRA both omitted and included criteria that are proving difficult for the industry.

For example, the definition of “residential supervisory location” omits anyone engaged in trading or market making, and certain investment banking personnel whose functions include structuring public offerings or private placements. These omissions, which were raised to FINRA’s attention during the rule adoption process, have created compliance challenges for the industry as it adapts to the new rules.

Where do broker-dealers stand now in terms of complying with the new rules?  

In my experience, since these new rules are rules of general applicability, FINRA-member firms have been working hard on compliance, are rolling out new policies and procedures with respect to the end of the 2020 relief, and are generally ready for the change.

Do they see them as helpful in any respects?

In general, the industry understands that FINRA’s overall goal is to facilitate remote work while at the same time promoting reasonable supervision of firm office locations. In that respect the new rules are seen as generally positive, even though they are simultaneously increasing the regulatory burden relative to the environment that was in place with the 2020 relief.

What other headaches are cropping up as it relates to these new rules?  

In general, I would point to four challenges with which firms are dealing.

First, the categorization of remote office locations is raising some difficult interpretive questions, as is to be expected with a large and varied industry workforce.

Second, the new rules raise barriers to remote work for any supervisor who has worked with her or his firm for less than one year; this too is causing compliance challenges.

Third, the remote inspections program requires considerable preparatory work, including a risk assessment of every residential supervisory location, as well as submission to FINRA of detailed data regarding the firm’s 2019 office inspections program.

Finally, firms are grappling with how to efficiently and effectively conduct office inspections for what in some cases is a very large number of newly recognized residential office locations.

Anything else you’d like to point out regarding the rules?  

Because these are rules of general applicability, the entire broker-dealer community is adapting to changes at one time. As with other new rules of wide-ranging applicability, industry best practices will become evident in the first year or two following implementation, and most firms will further adapt their programs to incorporate industry best practices.

Pictured: Russell Sacks

Melanie Waddell

@Think_MelanieW

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