Another deadline, another amendment for FINRA's remote work rule

In the latest sign of regulators' ongoing struggle to accommodate financial planners' newfound love for remote work, FINRA is again tweaking its residential office proposal for branch supervisors.

The broker-dealer self-regulator submitted an amendment Wednesday to a previous proposal that would allow supervisors' homes to be designated as "non-branch offices" that are subject to in-house inspections once every three years rather than the current requirement of once a year. Among other things, the latest tweaks add to the criteria that would disqualify a residence from being classified as a non-branch office and would require firms to conduct a risk assessment before allowing less frequent internal inspections of supervisors' home offices.

The amendment is just the latest change to the Financial Industry Regulatory Authority's rule for branch supervisors' home offices, also known as residential supervisory locations. FINRA's remote work proposal was first submitted in July 2022. 

Following deadline extensions, the proposal was rescinded on March 29 and replaced with a rule that would prevent firms from having a residential supervisory location if they were the subject of a regulatory investigation or were registered with FINRA only in the past 12 months, among other things

As a result of yet another deadline extension, that rule was scheduled for approval by the Securities and Exchange Commission on Wednesday. The new amendment now gives the public another 35 days to comment on the proposal following its publication in the Federal Register.

Jennifer Szaro, the chief compliance officer at brokerage firm XML Securities in Falls Church, Virginia, said she's optimistic this latest round of tweaks mean the rule is on the verge of adoption.

"I've already started the process of reviewing the terms and trying to comply with the amendment to the rule," Szaro said.

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Szaro said the proposal would modernize regulations that were designed for a "brick-and-mortar" world. It would prevent firms from having to expend time and internal resources every year on essentially supervising their own supervisors. 

"That really pulls our attention from things we need to focus on," she said.

As in many industries, remote work became common for brokers and investment advisors during the COVID-19 pandemic. FINRA and other industry watchdogs responded to social-distancing mandates and business shutdowns imposed to slow the spread of the disease by adopting various emergency measures meant to encourage remote work. But regulators have since struggled to find ways to make those policies permanent.

FINRA's amendment says this latest round of tweaks come largely in response to 13 letters it received on the newest version of the proposed rule. In one comment, Mark Quinn, the director of regulatory affairs at Cetera Financial Group, expressed general support for FINRA's plans but said the current language was too vague about what sorts of regulatory actions could disqualify firms from having residential supervisory locations. 

An unsubstantiated customer complaint, Quinn wrote, could be enough.

"The securities industry is unusual in that it requires associated persons to report allegations of securities-related matters without regard to their accuracy or veracity, without formal adjudication, and with public notice that may last years past dismissal or resolution," he wrote.

FINRA's amendment responded to this criticism and others like it by stating that firms could not have residential supervisory locations only if they are subject to an investigation or proceeding "alleging that they have failed to reasonably supervise another person." 

Quinn also questioned a provision that would disqualify someone from working in a residential supervisory location if they had been working as a supervisor for less than a year with their current firm. Quinn said many firm employees have oversight experience from previous employers and shouldn't suffer for having switched jobs recently.

FINRA's amendment would allow supervisors to count experience from a firm's affiliate or subsidiary "that is registered as a broker-dealer or investment adviser."

Even while loosening the requirements for residential supervisory locations in some ways, FINRA's amendment would tighten them in others. For instance, it would disqualify firms that have decided on their own to subject their employees to heightened supervision from having residential supervisory locations. The previous version had only excluded brokerages subjected to heightened supervision by outside regulators.

The amendment would also prevent firms from designating home offices as residential supervisory locations unless they've first conducted a risk assessment. Among other things, the assessments would take into account how many customer complaints the firms has received, record keeping violations or other regulatory "red flags."

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Those tightened requirements would come on top of other prohibitions on what sorts of work supervisors could conduct in remote offices. Anyone working in a residential supervisory location, for instance, could not use it to store records or documents required by FINRA or federal rules.  

They would also have to abide by existing rules including prohibitions on meeting with customers at a remote office, on conducting certain types of transactions at home and on using anything but the parent firm's computer system for electronic communications.

Many of these restrictions come in response to criticisms lobbed by groups like Public Investors Advocate Bar Association, an investor protection group, and the North American Securities Administrators Association, which represents state regulators. Hugh Berkson, the president of PIABA, wrote in a letter to the SEC on April 26 that he remains skeptical of the industry's ability to police itself from a distance.

"PIABA submits this comment because the bar association believes the amendment runs counter to FINRA's stated objective of investor protection," Berkson wrote. "While it is understood that FINRA is attempting to change with the increased use of virtual technology, it leaves considerable opportunity for advisors working from home to skirt the rules and fosters new opportunities for those advisors to engage in sales abuses."