Navigating FINRA’s New Residential Supervisory Location (RSL) Rule
In response to the growing trend of remote work since the COVID-19 pandemic, FINRA has introduced a new rule under its supervision framework, allowing firms to designate private residences as Residential Supervisory Locations (RSLs). This significant development provides firms with an opportunity to adapt their supervisory practices to a more flexible work environment while ensuring compliance with FINRA’s stringent supervision requirements. Effective June 1, 2024, FINRA Rule 3110.19 enables firms to treat certain residential locations as non-branch locations, offering relief from the annual inspection requirements that apply to branch offices and Offices of Supervisory Jurisdiction (OSJs).
Overview of RSLs
Under Rule 3110.19, an RSL is defined as a private residence from which an associated person conducts supervisory functions, as specified in FINRA Rule 3110(f)(1) and (f)(2). As a non-branch location, the RSL designation exempts the firm from registering the residence as a branch office under Article IV, Section 8 of the FINRA By-Laws. However, firms are still required to inspect RSLs on a regular schedule, typically at least once every three years, in accordance with FINRA Rule 3110(c) and 3110.13.
Eligibility Requirements and Conditions
To designate a private residence as an RSL, firms and associated persons must meet specific eligibility criteria. These include:
The associated person must be the only individual conducting business from the location (or immediate family members residing at the location).
No in-person meetings with clients may take place at the residence.
The location must not be held out to the public as an office.
The associated person must be assigned to a designated branch office, and all business communications must reflect the registered branch office address.
Sales activities at the residence must comply with the limitations set forth in Rule 3110(f)(2).
Customer funds or securities cannot be handled at the location.
The firm must implement appropriate surveillance and recordkeeping systems to monitor the associated person’s activities and comply with applicable securities laws and FINRA rules.
Additionally, firms are required to conduct a risk assessment for each prospective RSL and maintain a list of designated RSLs, which must be submitted to FINRA quarterly.
Inspection and Risk Management Obligations
While the RSL designation offers firms flexibility, it does not eliminate supervisory obligations. Firms must develop a reasonable, risk-based approach to inspect RSLs in line with the periodic inspection requirements of Rule 3110(c). Furthermore, firms must ensure that they have the necessary technology and controls to monitor communications, transactions, and other activities conducted from RSLs.
Reporting and Compliance
Firms designating RSLs must comply with reporting requirements set forth under Rule 3110.19(d). Specifically, firms must provide FINRA with a quarterly list of all RSLs by the 15th day of the month following each calendar quarter, starting with the first report due on October 15, 2024. FINRA is currently developing functionality within the FINRA Gateway to facilitate the submission of these lists. In the interim, firms are advised to maintain an internal list of RSLs and prepare to submit this information once the functionality is available.
Form U4 and Form BR Enhancements
As part of the transition to the new RSL framework, firms must ensure that their Form U4 (Uniform Application for Securities Industry Registration or Transfer) submissions reflect the correct Office of Employment Address (OEA) for associated persons working from RSLs. Starting on June 1, 2024, firms may designate an RSL on Form U4 by including the associated person's private residence as a non-registered office of employment. Form BR (Uniform Branch Office Registration Form) will also be enhanced to accommodate the RSL designation, allowing firms to amend their filings to reflect RSLs where necessary.
Key Takeaways for Firms
The introduction of the RSL designation represents a major shift in FINRA’s supervision rules, providing firms with greater flexibility in managing remote work arrangements. However, with this flexibility comes the responsibility to ensure that supervisory practices remain robust, transparent, and compliant. To take full advantage of the new RSL designation, firms should:
Review Eligibility Criteria: Ensure that any associated persons working from home meet the conditions outlined under Rule 3110.19.
Update Supervisory Procedures: Develop RSL-specific supervisory policies and procedures to monitor activities conducted from RSLs.
Conduct Risk Assessments: Assess the risk associated with each RSL and document the factors considered in making RSL designations.
Prepare for Reporting Requirements: Maintain a current list of RSLs and be prepared to submit quarterly reports to FINRA starting in October 2024.
Monitor Form U4 and BR Updates: Keep an eye on FINRA’s updates to Form U4 and Form BR to ensure proper reporting and compliance.
By staying proactive and aligning supervisory practices with FINRA’s evolving regulatory framework, firms can effectively manage the complexities of remote supervision while minimizing regulatory risks.
Conclusion
FINRA’s new RSL rule provides member firms with the opportunity to adapt to modern work arrangements without compromising regulatory compliance. By understanding the requirements and implementing strong supervisory controls, firms can ensure they remain compliant while offering greater flexibility to their workforce. As the implementation date approaches, firms should begin updating their internal policies, assessing potential RSL candidates, and preparing for the required reporting obligations.
* * *
Attorney Advertising—Anderson P.C. is a U.S. law firm and provides this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Anderson P.C. is a U.S. law firm dedicated to defending clients in government investigations and securities enforcement actions initiated by the SEC, FINRA, DOJ, and other regulatory bodies. We provide focused, strategic counsel and regulatory guidance across the full spectrum of federal laws and regulations affecting broker-dealers, investment advisers, banks, asset managers, private funds, public companies, senior executives, and digital assets. Our deep expertise allows us to navigate complex legal challenges and deliver results-driven solutions tailored to our clients' unique needs.
If you have any questions or need legal assistance related to government investigations, securities enforcement actions, or regulatory compliance, please don't hesitate to contact us. Our team at Anderson P.C. is here to provide the expert guidance and support you need to navigate these complex challenges.
