A STEP-BY-STEP GUIDE
FOR STARTING A RESIDENTIAL SUPERVISORY
LOCATIONS COMPLIANCE PROGRAM
OVERVIEW
- SUMMARY
This guide outlines a nine-step process for firms to implement a Residential Supervisory Locations (RSLs) compliance program, effective June 1, 2024, under updated FINRA rules. It explains how certain home offices can now be designated as RSLs, moving from annual to triennial inspections, aligning them with other office types. The document details eligibility requirements for both firms and associated persons, conditions for a private residence to qualify as an RSL, and how to address jurisdictional recognition. Additionally, it covers the necessity of a materiality assessment, risk assessments, U4 form identification, and building a robust compliance program with proper recordkeeping to manage these new remote supervisory locations.
CRITICAL QUESTIONS POWERED BY RED OAK
Who is eligible to operate an RSL?
Both the firm and the individual supervisor must meet strict requirements. Firms cannot be restricted under FINRA Rule 4111, suspended, or have recent violations of Rule 3110(c). Supervisors must have at least one year of supervisory experience, no heightened supervision, and a clean Form U4 for the past three years.
What are the key restrictions on an RSL location?
The RSL must be a private residence with only one associated person conducting business (with some family exceptions). It cannot be advertised as an office, no clients can visit, and no handling of customer funds or securities is allowed. All business communications must point to the designated branch office, not the RSL.
How does technology factor into compliance for RSLs?
Firms must conduct and document risk assessments for each RSL and use technology to supervise effectively. This includes electronic recordkeeping, communication surveillance, and data security systems. Training staff to use these tools is critical, and firms must be able to prove their systems are adequate.
TRANSCRIPT (FOR THE ROBOTS)
Speaker 1 Welcome to the deep dive. Today we're digging into something big that's shaking up financial firms.
Speaker 1 Welcome to the deep dive. Today we're digging into something big that's shaking up financial firms.
We’re talking about the move away from those yearly Office of Supervisory Jurisdiction inspections, the OSJ ones, and towards this new model, the Residential supervisory location, or RSL. It kicked in June 1, 2024.
Speaker 2
Right. And the big headline here is the inspection frequency. RSLs only need an inspection every three years that aligns them with regular branch offices. It’s a massive operational opportunity.
Speaker 1
Really a huge potential time and cost saver compared to that annual grind for a supervisor’s home office.
Speaker 2
Exactly. But it’s definitely not a free pass. We’ve looked through the fine RI guidance, the implementation materials. Our goal today is simple. Cut through the noise and give you the absolute must know hurdles to get an RSL program running compliantly.
Speaker 1
Okay, sounds good. So where do we start? Eligibility seems like the first gate you have to get through. Who can even, you know, play this RSL game?
Speaker 2
Yeah, you have to start with the firm itself. There’s some immediate nos. If your firm is labeled a restricted firm under Finera Rule 4111, forget it, you’re out.
Speaker 1
Okay, that makes sense. What else?
Speaker 2
Same goes if the firm’s had its Fentra membership suspended or, and this is key, if they’ve been found violating Rule 31 10c in the last three years.
Speaker 1
That’s the supervision rule, right? Failure to supervise.
Speaker 2
Precisely. So regulators are clearly saying if you have recent supervision issues, this flexibility isn’t for you. Makes sense.
Speaker 1
Okay, so let’s say the firm is clear. Then the focus shifts to the actual supervisor, the person working from home.
Speaker 2
Right on to the individual. And the scrutiny is pretty intense. They can’t just be anyone. First off, they need at least one full year of direct supervisory experience. No newbies allowed in this role remotely.
Speaker 1
Basically, one year minimum. Got it.
Speaker 2
And they can’t be under any kind of mandatory heightened supervision plan. Plus there’s a look back on their form U4 for the previous three years. Certain serious yes answers. Think specific regulatory actions may be significant. Customer complaints. Those can disqualify them too.
Speaker 1
So it’s really about making sure the person supervising remotely has a clean record and some solid experience.
Speaker 2
Exactly. It’s a risk mitigation thing. But even if the person checks out, the place itself, the residence has really strict conditions.
Speaker 1
Ah, okay. What are those? It can’t just be any home office setup.
Speaker 2
No, definitely not. It has to be genuinely private. Key things. Only one associated person conducting business there. Okay. Immediate family members living there who might Also be associated persons are an exception, but generally one supervisor.
Speaker 1
So no shared RSLs typically.
Speaker 2
Right. And the location cannot under any circumstances be held out to the public as an office. No signs, no advertising it as a place of business.
Speaker 1
What about meeting clients?
Speaker 2
Absolutely forbidden at the rsl. No customer meetings, no prospective customer meetings, and definitely no handling of customer funds or securities there. Zero.
Speaker 1
Okay, so it needs to be invisible to the public functionally. What about things like business cards?
Speaker 2
Good question. All communications, business cards, letterhead, email signatures, everything must point to the supervisor’s designated branch office, not the rsl. The RSL effectively doesn’t exist publicly. And maintaining this separation, this sort of regulatory vacuum, as you put it, really relies heavily on supervision, risk assessment and, well, technology.
Speaker 1
Right, the supervision aspect, how does that work remotely?
Speaker 2
Well, firms have to conduct and document a specific risk assessment for each and every rsl. They need to look at things like, you know, the volume and type of business being supervised, the supervisor’s history, any customer complaints tied to that supervisor, any red flags like record keeping issues.
Speaker 1
So it’s not just set it and forget it. You have to actively assess the risk of that remote supervision arrangement constantly and.
Speaker 2
Document that you’re doing it. This ties into the tech requirement. Step eight in the guidance. Firms must have a robust compliance program using technology.
Speaker 1
Technology like, what are we talking about?
Speaker 2
Electronic record keeping is table stakes. But also electronic surveillance systems for communications, ensuring data security. Basically, tools to monitor and supervise remotely just as effectively as if they were in the office.
Speaker 1
That sounds like potentially significant investment for some firms.
Speaker 2
It can be. Yeah. Especially for smaller firms. They need proof the tech is up to snuff for remote supervision.
Speaker 1
Yeah.
Speaker 2
Adequate training on using these systems is also critical.
Speaker 1
Okay, One more potential snag. State rules. Does every state recognize this RSL designation?
Speaker 2
Nope. That’s a crucial check. Just because FINRI says RSL doesn’t mean every state securities regulator agrees. You absolutely have to check the Accepts RSL column on the WebCRD system for the specific state jurisdiction.
Speaker 1
And if the state doesn’t accept it, then you’re stuck.
Speaker 2
You have to register or notice file that location as a regular branch office using form br. Even if it meets all the FI RSL criteria. Kind of defeats the purpose in that state. Right.
Speaker 1
Yeah. Adds complexity back in. Okay, so wrapping this up. The big carrot is getting away from annual inspections, moving to triennial.
Speaker 2
Huge benefit, definitely the main draw.
Speaker 1
But getting there means really careful vetting of the supervisor, making sure the home location meets those strict no public, no funds rules. And invest investing in that tech for supervision and risk assessment.
Speaker 2
Precisely. And maybe the best example of the level of detail required. The final point really is about record keeping. Step nine touches on this. It relates to a limitation on how many business days someone can primarily work from the rsl. Okay, well firms have to keep records demonstrating compliance. And here’s the kicker. If a supervisor spends only part of a day at the rsl, that partial day doesn’t count towards their limit. Only if they also spent at least four hours at their designated branch office that same day.
Speaker 1
Four hours in the branch office to negate a partial RSL day.
Speaker 2
Wow, four hours. It requires detailed time tracking.
Speaker 1
So the provocative thought for you listening is when compliance demands tracking four specific hours in the office just to manage a remote work designation, how much flexibility have we really gained? Or have we just created a more complex digitally monitored version of the old office check in? Something to think about.
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.
| Scenario | Action | ||
| RSL located in a branch participating jurisdiction that does accept RSL |
| ||
| RSL located in a branch participating jurisdiction that does not accept RSL |
| ||
| RSL located in a non-branch participating jurisdiction. |
|
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.
MAINTAIN BOOKS AND RECORDS
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.
Our Industry-Leading Reputation
