Download Our Guide: A Step-by-Step Guide for Starting a Residential Supervisory Locations Compliance Program

Effective June 1, 2024, the regulatory landscape for firms with supervisory functions being performed at home offices is set to change significantly. Under the updated rules by the Financial Industry Regulatory Authority (FINRA), locations previously categorized as Office of Supervisory Jurisdiction (OSJ) will no longer need annual inspections or OSJ designation if they meet the new criteria for Residential Supervisory Locations (RSLs). Instead, these sites will now be subject to inspection every three years, aligning them with non-branch and regular branch office protocols.
These changes bring both opportunities and challenges, prompting firms to ask: What steps are necessary to implement a compliant and effective RSL program? To address this need, we have outlined a comprehensive, nine-step guide designed to help firms navigate the transition. These steps cover critical aspects such as determining eligibility, assessing private residences, understanding jurisdictional requirements, and building robust compliance frameworks.
The following sections provide an in-depth exploration of each step, equipping firms with the tools and insights needed to establish RSLs while maintaining regulatory compliance and operational efficiency.

Steps To Implement An RSL Program

For an office to be designated an RSL under the new rule, the firm and the associated person located at each RSL must meet specific conditions and eligibility requirements.

Determine Whether The Firm Is Eligible To Use The RSL Designation

If any of the items below exist, the firm cannot have an RSL designation:

• Restricted Firm under Rule 4111
• Taping Firm under Rule 3170
• FINRA membership is suspended
• FINRA membership has been effective for less than 12 months
• Member firm has been found by the SEC or FINRA to have violated Rule 3110(c) in the past three years
• Member firm is subject to Rule 9557
• Member firm is subject to Rule 1017(a)(7)

If none of these items apply to the firm, then the firm can review the criteria applicable to associated persons as outlined in this document.

Determine Whether Its Associated Person Is Eligible To Work From An RSL

If any of the attributes listed below are present, then the associated person’s office or location cannot use the RSL designation:

• The associated person is a designated supervisor with less than one year of direct supervisory experience with the member, or an affiliate or subsidiary of the member that is registered as broker-dealer or investment adviser
• Associated person is a limited principal under Rule 1012.04
• Associated person is subject to a mandatory heightened supervisory plan under the rules of the SEC, FINRA or state regulatory agency
• Associated person is statutorily disqualified, unless such disqualified person has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to associate with a member and is not subject to a mandatory heightened supervisory plan (as noted above) or otherwise as a condition to approval or permission for such association
• In the prior three years, the associated person has an event that required a “yes” response to any item in Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4 (Uniform Application for Securities Industry Registration or Transfer)
• Associated person has been notified in writing that such person is now subject to, any Investigation or Proceeding, as such terms are defined in the Explanation of Terms for the Form U4 (Uniform Application for Securities Industry Registration or Transfer), by
  the SEC, a self-regulatory organization, including FINRA, or state securities commission (or agency or office performing like functions) (each, a “Regulator”) expressly alleging they have failed reasonably to supervise another person subject to
  their supervision, with a view to preventing the violation of any provision of the Securities Act, the Exchange Act, the Investment Advisers Act, the Investment Company Act, the Commodity Exchange Act, any state law pertaining to the regulation of securities or any rule or regulation under any of such Acts or laws, or any of the rules of the MSRB or other self-regulatory organization, including FINRA; provided, however, such office or location may be designated or redesignated as an RSL subject to the requirements of Rule 3110.19 upon the earlier of: (1) the member’s receipt of written notification from the applicable Regulator that such Investigation has
  concluded without further action; or (2) one year from the date of the last communication from such Regulator relating to such Investigation

If none of these items apply to the associated person at the office or location, then the firm can proceed to the private residence determination.

Determine Whether The Private Residence Satisfies The Conditions To Be Classified As An RSL

The associated person’s private residence may be deemed an RSL subject to the following conditions:

• Only one associated person, or multiple associated persons who reside at that
  location and are members of the same immediate family, conduct business at the location
• Location is not held out to the public as an office
• Associated person does not meet with customers or prospective customers at the location
• Any sales activity that takes place at the location complies with the conditions set forth under Rule 3110(f)(2)(A)(ii) or (iii)
• Neither customer funds nor securities are handled at that location
• Associated person is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, retail communications and other communications to the public by such associated person
• Associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with this Rule the associated person’s electronic communications (e.g., e-mail) are made through the member’s electronic system
• The member must:
  
  
  
  • have a recordkeeping system to make and keep current, and preserve records required to be made and kept current, and preserved under applicable securities laws and regulations, FINRA rules, and the member’s own written supervisory procedures under Rule 3110;
  • not physically or electronically maintain and preserve such records at the office or location; and
  • have prompt access to such records
  
  
  
  
• The member must determine that its surveillance and technology tools are appropriate to supervise the types of risks presented by each RSL, and these tools may include but are not limited to:
  
  
  
  • firm-wide tools such as electronic recordkeeping system; electronic surveillance of e-mail and correspondence; electronic trade blotters; regular activity-based sampling reviews; and tools for visual inspections
  • tools specific to the RSL based on the activities of associated person assigned to the location, products offered, restrictions on the activity of the RSL
  • system tools such as secure network connections and effective cybersecurity protocols
  
  
  
  

Determine Which Jurisdictions Recognizes RSLS

The firm may view the “SRO/Jurisdiction Fee and Setting Schedule, Web CRD” that includes a new “Accepts RSL” column that lists the jurisdictions and the NYSE to indicate the regulators that have accepted the RSL designation. For jurisdictions that do not currently accept the RSL designation, the firm needs to register or “notice file” the location in that particular jurisdiction as a branch office. The instructions are below for filings.

Determine And Document If Map Assessment Needed

The firm must determine if the change in office counts as material in accordance with Rule 1017. For example, where the firm is only adding “second seats” for its associated persons at eligible locations, the firm should review the relevant facts and circumstances, including the degree to which the firm’s existing supervisory and compliance systems can accommodate a more dispersed workforce, and should determine whether the increase in the number of offices (both registered and unregistered) will be a “material change in business operations” for the firm such that it would trigger the need to file a CMA (Continuing Membership Application) with FINRA.

Based on a reasonable review, a firm may be able to conclude that the contemplated increase is not material or that the firm meets the Safe Harbor. As part of the firm’s own “materiality” determination for purposes of compliance with Rule 1017, the firm must document its determination and the factors it reasonably considered in making such determination, including, at a minimum:

• The counts by office type, OSJ, non-OSJ branch office and non-branch location, specifying the RSLs and the other non-branch locations; and
• The relevant facts and circumstances the firm considered in determining the increased office count is not a “material change in business operations.”

Conduct And Document A Risk Assessment

The firm must:

• develop a reasonable risk-based approach to designating such office or location as an RSL, and
• conduct and document a risk assessment for the associated person assigned to that office or location.

The assessment must:

• Document the factors considered, including among others, whether the associated person at such an office or location is now subject to:
• customer complaints, taking into account the volume and nature of the complaints;
• heightened supervision other than where such office or location is ineligible for RSL designation under paragraph (c)(3) of this Supplementary Material;
• any failure to comply with the member’s written supervisory procedures;
• any recordkeeping violation; and
• any regulatory communications from a Regulator, indicating that the associated person at such office or location failed reasonably to supervise another person subject to their supervision, including but not limited to, subpoenas, preliminary or routine regulatory inquiries or requests for information, deficiency letters, “blue sheet” requests or other trading questionnaires, or examinations.
• Take into account any higher risk activities that take place, or a higher risk associated person that is assigned to that office or location.

The firm must take into consideration any indicators of irregularities or misconduct (i.e., “red flags”) when designating an office or location as an RSL. Red flags should also be reviewed in determining whether it is reasonable to maintain the RSL designation of the office or location and the firm should evidence steps taken to address those red flags.

RSL Identification On U4

The firm must answer either “Yes” or “No” to the RSL question on Form U4. A response to Form U4’s new RSL Question will be required when a Form U4 filer marks that an associated person’s office of employment address is a “non-registered” (i.e., non-branch) location and is a private residence through Form U4’s Private Residence Check Box. The RSL Question will prompt the Form U4 filer to respond as either “Yes” or “No” through a radio dial button. A “Yes” response will mean that the member firm has confirmed that the location has been designated as an RSL.

Create A Robust Compliance Program

The firm must evaluate the potential risks associated with remote supervisory activities and implement measures to mitigate these risks.

• Documentation and Compliance: Firms must maintain detailed records of their compliance efforts, documenting how they are managing and supervising activities at these RSLs. While adapting to the changing work landscape, the proposal maintains a high level of regulatory oversight. The transition to RSLs demands that firms:
• Develop Robust Remote Supervision Strategies: Firms must create and implement effective strategies for remotely supervising activities conducted at RSLs. This includes leveraging technology to monitor compliance and maintain communication with remote supervisors.
• Continuous Monitoring and Adaptation: Firms need to continuously monitor the effectiveness of their remote supervision practices, making necessary adjustments to address any emerging risks or challenges.
• Training and Support: Firms should provide adequate training and support for their staff operating from RSLs and those who supervise these individuals, ensuring they understand and adhere to all regulatory requirements.

Maintain Books And Records

The firm is expected to maintain records adequate to demonstrate compliance with the “business day” limitation, including at a minimum, documentation identifying any such locations, the number of “business days” spent at such locations, and the activities of the associated person conducted from such location. Note: a “business day” does not include any partial business day provided that the associated person spends at least four hours on such business day at the associated person’s designated branch office during the hours that such office is normally open for business.

Establishing an effective RSL program requires thoughtful planning and a firm commitment to regulatory compliance. While this guide provides essential information, it is only the beginning for compliance teams tasked with navigating these changes.

If you have specific questions or need personalized support, our Consulting team is ready to assist. Don’t hesitate to reach out for tailored solutions that address your unique compliance needs. Together, we can ensure your firm is prepared to thrive under this new framework.