Merry Christmas, from FINRA: Home office updates due Dec. 26

FINRA has a slightly late Christmas present for broker-dealers: a fast-approaching deadline for designating special home offices where supervisory functions take place.

The Financial Industry Regulatory Authority, the brokerage industry's self-regulator, is reminding firms they have until Dec. 26 to register offices falling under a new classification: residential supervisory locations. RSLs are home offices used primarily by supervisors overseeing other employees rather than brokers engaging in trading activities.

FINRA proposed the RSLs in response to the COVID-19 pandemic, when advisors began working from home in unprecedented numbers. The new designation, approved in November 2023, generally makes supervisors' home offices subject to less frequent review by their firms' headquarters: RSLs only have to be inspected by in-house investigators once every three years, down from a previous requirement of once a year.

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FINRA had initially given the industry until Oct. 15 to register their RSLs. It later extended that deadline after deciding the easiest way for brokers to indicate if they have one of the locations or not is to use the standard industry document known as a Form U4, which is used for registering individual brokerage employees.

Form U4 now contains a new question, "Is this Office of Employment address an RSL?" and a pair of boxes filers can tick to answer either "yes" or "no." FINRA has also put out a short video providing guidance on how to properly respond. 

Russell Sacks, a financial services lawyer at the New York-based firm King & Spalding, said the question of whether a given home office can count as a RSL is by no means any easy one. For starters, FINRA's rules bar brokers from undertaking certain activities at RSLs.

Employees at RSLs can't, for instance, "structure" public offerings or private placements in companies and are prohibited from market making. These prohibitions are somewhat vague, Sacks said, and can be hard to interpret.

He also noted special circumstances can make it hard to know if a given employee qualifies for having an RSL. For instance, Sacks asked, what about brokers who normally work out of the office but stay home for a month or two on maternity or paternity leave? 

"Or what happens if a firm wants to let everybody work from home on Fridays in the summer?" Sacks said.

FINRA has long struggled with trying to achieve the right balance with the remote-work policies it adopted shortly after the COVID19 pandemic hit in March 2020. For years after the initial outbreak, regulators used emergency rules to allow brokers to continue working remotely without necessarily having to register their home offices. 

That ended in May, when FINRA began telling firms that they'd have to start making sure all their remote office registrations were up to date, even if they didn't plan to start hauling employees back into branches. FINRA later added another box to Form U4 that brokers can tick to keep their home addresses from appearing publicly on the BrokerCheck database.

Separately, FINRA is allowing firms to sign up for a three-year pilot program meant to further test out the sorts of remote branch inspections that were common during the pandemic. Before COVID, brokerages had conducted reviews of branch offices using in-person inspectors. 

That system was largely replaced with technology-aided remote inspections in the pandemic. But that allowance also ended this year.

FINRA told firms they would have to end their remote inspections unless they signed up for a three-year pilot program meant to further test if investors could be adequately protected if in-house investigators weren't doing their work in person. The deadline for signing up for the first round of the program was June 26, when about a fifth of FINRA's member firms enrolled.

The deadline for the second phase, which will run for all of 2025, is Dec. 27. Participating firms will have to provide regulators with quarterly reports detailing the number of inspections, both remote and in-person, they conduct of their branch offices.

Any findings — such as regulatory breaches and remedial actions — will then have to be reported to FINRA. The first submissions were due in October.