Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Supplementary Material .19 (Residential Supervisory Location) Under FINRA Rule 3110 (Supervision), 20568-20582 [2023-07145]

Download as PDF 20568 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices orders a hearing. Interested persons may request a hearing on any application by emailing the SEC’s Secretary at Secretarys-Office@sec.gov and serving the Applicants with a copy of the request by email, if an email address is listed for the relevant Applicant below, or personally or by mail, if a physical address is listed for the relevant Applicant below. Hearing requests should be received by the Commission by 5:30 p.m. on, April 25, 2023, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by emailing the Commission’s Secretary at Secretarys-Office@sec.gov. The Commission: Secretarys-Office@sec.gov. Applicants: Michael W. Mundt, Esq., Stradley Ronon Stevens & Young, LLP, at MMundt@stradley.com; Matthew R. DiClemente, Esq., Stradley Ronon Stevens & Young, LLP, at MDiClemente@stradley.com; and Melanie Ringold, Esq., Head of Legal, Americas, Invesco Ltd., 11 Greenway Plaza, Suite 1000, Houston, TX 77046. ADDRESSES: FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel, or Terri Jordan, Branch Chief, at (202) 551– 6825 (Division of Investment Management, Chief Counsel’s Office). For Applicants’ representations, legal analysis, and conditions, please refer to Applicants’ second amended and restated application, dated February 16, 2023, which may be obtained via the Commission’s website by searching for the file number at the top of this document, or for an Applicant using the Company name search field, on the SEC’s EDGAR system. The SEC’s EDGAR system may be searched at https://www.sec.gov/edgar/searchedgar/ legacy/companysearch.html. You may also call the SEC’s Public Reference Room at (202) 551–8090. ddrumheller on DSK120RN23PROD with NOTICES1 SUPPLEMENTARY INFORMATION: For the Commission, by the Division of Investment Management, under delegated authority. Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–07157 Filed 4–5–23; 8:45 am] BILLING CODE 8011–01–P VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97235; File No. SR–CBOE– 2022–057] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Withdrawal of Proposed Rule Change To Increase the Position and Exercise Limits for Options on Apple Inc. Stock (‘‘AAPL’’) March 31, 2023. On November 7, 2022, Cboe Exchange, Inc. filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to increase the position and exercise limits for options on Apple Inc. stock (‘‘AAPL’’). The proposed rule change was published for comment in the Federal Register on November 25, 2022.3 The Commission received no comment letters regarding the proposed rule change. On December 22, 2022, pursuant to section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.5 On February 22, 2023, the Commission instituted proceedings under section 19(b)(2)(B) of the Exchange Act 6 to determine whether to approve or disapprove the proposed rule change.7 On March 30, 2023, the Exchange withdrew the proposed rule change (SR–CBOE–2022–057). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.8 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–07143 Filed 4–5–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97237; File No. SR–FINRA– 2023–006] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Supplementary Material .19 (Residential Supervisory Location) Under FINRA Rule 3110 (Supervision) March 31, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 29, 2023, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to adopt new Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision) that would align FINRA’s definition of an office of supervisory jurisdiction (‘‘OSJ’’) and the classification of a location that supervises activities at non-branch locations with the existing residential exclusions set forth in the branch office definition to treat a private residence at which an associated person engages in specified supervisory activities as a nonbranch location, subject to safeguards and limitations. In accordance with Rule 3110(c), as a non-branch location, a Residential Supervisory Location (or ‘‘RSL’’) would become subject to inspections on a regular periodic schedule, which is presumed to be at least every three years,3 rather than an annual inspection requirement required of OSJs and other supervisory branch offices.4 FINRA believes the proposal 1 15 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 96353 (Nov. 18, 2022), 87 FR 72568. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 96570 (Dec. 22, 2022), 87 FR 80212 (Dec. 29, 2022). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 96965 (Feb. 22, 2023), 88 FR 12705 (February 28, 2023). 8 17 CFR 200.30–3(a)(12). PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See FINRA Rules 3110(c)(1)(C) and 3110.13. 4 SEC staff and FINRA have interpreted FINRA rules to require member firms to conduct on-site inspections of branch offices and unregistered offices (i.e., non-branch locations) in accordance with the periodic schedule described under Rule 3110(c)(1). See SEC National Examination Risk Alert, Volume I, Issue 2 (November 30, 2011), https://www.sec.gov/about/offices/ocie/riskalertbdbranchinspections.pdf, and Regulatory Notice 11–54 (November 2011) (joint SEC and FINRA guidance stating, a ‘‘broker-dealer must conduct on2 17 E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices strikes an appropriate balance to preserve investor protection while developing a risk-based approach for designating residential supervisory locations that includes key safeguards with respect to, among other things, books and records of the member, while excluding locations where higher risk activities may take place or associated persons that may pose higher risk are assigned. Subject to further modifications as described further below, the terms of the proposed rule change herein are largely similar to the proposed rule change FINRA filed with the SEC in July 2022.5 FINRA withdrew the 2022 RSL Rule Filing on March 29, 2023 to consider whether modifications and clarifications to the filing would be appropriate in response to concerns raised by commenters.6 The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose a. Background ddrumheller on DSK120RN23PROD with NOTICES1 Early in 2020, the COVID–19 pandemic prompted FINRA and other site inspections of each of its office locations; [OSJs] and non-OSJ branches that supervise non-branch locations at least annually, all non-supervising branch offices at least every three years; and nonbranch offices periodically.’’) (citation defining an OSJ omitted). See also SEC Division of Market Regulation, Staff Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) (stating, in part, that broker-dealers that conduct business through geographically dispersed offices have not adequately discharged their supervisory obligations where there are no on-site routine or ‘‘for cause’’ inspections of those offices), https://www.sec.gov/ interps/legal/mrslb17.htm. 5 See Securities Exchange Act Release No. 95379 (July 27, 2022), 87 FR 47248 (August 2, 2022) (Notice of Filing of File No. SR–FINRA–2022–019) (‘‘2022 RSL Rule Filing’’); see also Exhibit 2a. 6 See Exhibit 2d. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 regulators to provide temporary relief to member firms from certain regulatory requirements to address the public health crisis.7 In response to the pandemic, many private and government employers closed their offices and their employees continued with their work from alternative locations such as private residences. FINRA believes this model will endure, irrespective of the state of the pandemic. The pandemic accelerated reliance on technological advances in surveillance and monitoring capabilities and prompted significant changes in lifestyles and work habits, including the growing expectation for workplace flexibility. Moreover, the technology advancements that facilitated the transition to working outside the conventional office setting on a broad scale has not only effected a profound change in lifestyle and workplace practices for member firms, but provided FINRA an opportunity to consider aspects of Rule 3110 that may benefit from modernization.8 As such, 7 Among the temporary regulatory relief provided, FINRA adopted relief pertaining to branch office registration requirements through Form BR (Uniform Branch Office Registration Form) and FINRA Rule 3110(c) inspection requirements. Specifically, FINRA temporarily suspended the requirement for member firms to submit branch office applications on Form BR for any newly opened temporary office locations or space-sharing arrangements established as a result of the pandemic. See Regulatory Notice 20–08 (March 2020) (‘‘Notice 20–08’’). With respect to inspection obligations, FINRA adopted temporary Rule 3110.16 that provided additional time for member firms to complete their calendar year 2020 inspection obligations. See Securities Exchange Act Release No. 89188 (June 30, 2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2020–019). In response to the ongoing public health crisis, FINRA subsequently adopted temporary FINRA Rule 3110.17, providing member firms the option to conduct inspections of their branch offices and nonbranch locations remotely, subject to specified terms therein. See Securities Exchange Act Release No. 90454 (November 18, 2020), 85 FR 75097 (November 24, 2020) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA– 2020–040). Currently, FINRA Rule 3110.17 expires on December 31, 2023. See Securities Exchange Act Release No. 96241 (November 4, 2022), 87 FR 67969 (November 10, 2022) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA– 2022–030). 8 In general, FINRA has had a longstanding practice of periodically reviewing its rules to ensure that they continue to promote their intended investor protection objectives in a manner that is effective and efficient, without imposing undue burdens, particularly in light of technological, industry and market changes. See generally Special Notices to Members 01–35 (May 2001) (‘‘Notice 01– 35’’) (requesting comment on steps that can be taken to streamline FINRA (then NASD) rules) and 02–10 (January 2002) (‘‘Notice 02–10’’) (requesting information on steps that can be taken to streamline FINRA (then NASD) rules). See also Regulatory Notice 14–14 (April 2014) (requesting comment on the effectiveness and efficiency of FINRA’s communications with the public rules) and PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 20569 FINRA believes measured changes to its regulatory approach would allow firms to effectively and more efficiently carry out their supervisory responsibilities to review the activities of each office or location while preserving investor protections. i. Rule Filing History In the 2022 RSL Rule Filing, FINRA had proposed establishing a new nonbranch location—the Residential Supervisory Location—that would be subject to a host of safeguards and conditions derived from the existing exclusions to the branch office definition under Rule 3110(f)(2)(A). The SEC twice published the 2022 RSL Rule Filing for comment, which elicited responses from many individuals, broker-dealers, and trade organizations and other associations, including the North American Securities Administrators Association, Inc. (‘‘NASAA’’) and the Public Investors Advocate Bar Association (‘‘PIABA’’).9 FINRA submitted two letters responding to the comments received by the SEC but did not amend the filing.10 All commenters supported the overall intent of the 2022 RSL Rule Filing to allow greater flexibility based on the risks presented, except for NASAA and PIABA. Many commenters expressed strong support for FINRA’s willingness to evolve its longstanding branch office definition under Rule 3110(f)(2)(A) based on lessons learned during the COVID–19 pandemic and evolving technology and workforce arrangements. A fundamental concern from NASAA and PIABA, however, pertained more generally to firms’ ability to supervise associated persons who work from remote offices or locations, a permissible arrangement under specified circumstances that predated the pandemic. In particular, NASAA expressed general concern about ‘‘reducing firms’ longstanding supervisory obligations[.]’’ 11 Among others, the comments sought to adjust the terms of some of the safeguards and conditions relating to books and records; create a more formalized system to help firms identify and track Regulatory Notice 14–15 (April 2014) (requesting comment on the effectiveness and efficiency of FINRA’s gifts, gratuities and non-cash compensation rules), both launching FINRA’s Retrospective Rule Review Program. 9 See Submitted Comments to 2022 RSL Rule Filing, https://www.sec.gov/comments/sr-finra2022-019/srfinra2022019.htm. 10 See Exhibits 2b and 2c. 11 See Letter from Andrew Hartnett, President, NASAA, to J. Lynn Taylor, Assistant Secretary, SEC, dated November 25, 2022, (‘‘NASAA II’’) https://www.sec.gov/comments/sr-finra-2022-019/ srfinra2022019-20151667-320142.pdf. E:\FR\FM\06APN1.SGM 06APN1 20570 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices their residential supervisory locations; and broaden the ineligibility criteria, such as the one relating to an associated person’s specified regulatory or disciplinary events to encompass any state law pertaining to securities regulation. March 30, 2023 is the date by which the SEC is required to either approve or disapprove the 2022 RSL Rule Filing. However, on March 29, 2023, FINRA withdrew the 2022 RSL Rule Filing from the SEC in order to consider whether modifications and clarifications to the filing would be appropriate in response to concerns raised by commenters. ddrumheller on DSK120RN23PROD with NOTICES1 ii. Key Changes to Current Proposal While the proposed rule change retains many of the terms of the 2022 RSL Rule Filing, as described further below, this proposal makes key adjustments that take into account the concerns expressed by commenters in the following areas by: (1) enhancing the conditions for RSL designation relating to books and records to provide, among things, that records are not physically or electronically maintained and preserved at the location; (2) expanding the list of criteria that would make a firm ineligible to rely on proposed Rule 3110.19 to include, among other things, a member firm that has been suspended or a firm that has been a FINRA member for less than 12 months; (3) adjusting the ineligibility criterion that would make an office or location ineligible to rely on proposed Rule 3110.19 where an associated person is the subject of an investigation or other action relating to a failure to supervise; and (4) requiring firms to provide, on a quarterly basis, a current list to FINRA of all locations designated as RSLs. iii. Impact on Diversity, Equity and Inclusion (‘‘DEI’’) Efforts Firms have noted that the flexibility hybrid work offers has made a positive impact in attracting more diverse talent, and retaining existing talent.12 These views are consistent with those expressed by several commenters in response to the 2022 RSL Rule Filing as well.13 For example, several firms stated that the move to a hybrid approach for the industry has also allowed them to hire broadly across the entire country instead of localized markets, which profoundly impacts and strengthens a 12 See generally Submitted Comments to Regulatory Notice 20–42 (December 2020) (‘‘Notice 20–42’’), https://www.finra.org/rules-guidance/ notices/20-42#comments. 13 See Exhibit 2b. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 firm’s diversity and inclusion hiring efforts.14 Having the ability to offer workplace flexibility is key to maintaining employee engagement and retention; otherwise, workers with transferrable skills are likely to seek positions in other industries that allow for remote or hybrid work. Similarly, one group of commenters, composed mostly of small member firms, stated that ‘‘[t]he expectations of a modern-day workforce have rapidly evolved from decades old status quo into a modern Work From Anywhere (WFA), DEIenhancing era. Major online job posting portals now have a filter specifically for ‘Remote/Work from Home’.’’ (citation omitted).15 Notably, a report from the U.S. Government Accountability Office highlighted that data from the Equal Employment Opportunity Commission for the period 2018–2020 that showed both minorities and women in management positions in the financial services industry remained underrepresented with Black and Hispanic representation at about 3% and 4%, respectively, and female representation at 32% in that period.16 In proposing to adopt Rule 3110.19, FINRA believes that reducing barriers to entry that may be part of the current regulatory framework can be achieved while continuing to preserve investor protection. iv. Renewal of Proposed Rule Change To Adopt Proposed Rule 3110.19 FINRA reaffirms its belief that the current environment merits a reevaluation of the regulatory benefit of requiring firms to designate a private residence, at which specified supervisory functions occur, as an OSJ or branch office. In recognition of the significant technology and industry changes that have enhanced the efficiencies of day-to-day supervision of associated persons and impacted workplace arrangements, FINRA is renewing its proposal to adopt new Supplementary Material .19 under Rule 3110 to establish a Residential Supervisory Location that would be treated as a non-branch location (i.e., an unregistered office), subject to specified 14 See Exhibit 2b. Letter from Jennifer L. Szaro, Chief Compliance Officer, XML Securities, LLC, et al. (collectively referred to as the ‘‘Group of 16’’), to Vanessa A. Countryman, Secretary, SEC, dated October 25, 2022, https://www.sec.gov/comments/ sr-finra-2022-019/srfinra2022019-20147525313736.pdf. 16 See U.S. Government Accountability Office, Financial Services Industry, Overview of Representation of Minorities and Women and Practices to Promote Diversity (GAO–23–106427) (December 2022), www.gao.gov/assets/gao-23106427.pdf. 15 See PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 investor protection safeguards and limitations. The most significant regulatory effect of the proposed rule change would be that, as a non-branch location, a Residential Supervisory Location would become subject to inspections on a regular periodic schedule, which is presumed to be at least every three years, rather than an annual inspection requirement required of OSJs and other supervisory branch offices.17 v. Evolution of OSJ and Branch Office Definitions FINRA has periodically assessed the manner in which firms may effectively and efficiently carry out their supervisory responsibilities considering evolving business models and practices, advances in technology, and regulatory benefits. As detailed below, since the late 1980s, the OSJ and branch office definitions have undergone several revisions to address regulatory need and efficiency (e.g., rule alignment with other regulators, access to more robust information), evolving with technological and industry changes while also remaining focused on promoting investor protection. Under FINRA’s (then NASD’s) Rules of Fair Practice,18 an OSJ was defined as ‘‘any office designated as directly responsible for the review of the activities of registered representatives or associated persons in such office and/or any other offices of the member[,]’’ and a branch office was one that was ‘‘owned or controlled by a member, and which is engaged in the investment banking or securities business.’’ 19 Further, a place of business of a member firm’s associated person was considered a branch office if the member: ‘‘directly or indirectly contributes a substantial portion of the operating expenses of any place used by a person associated with a member who is engaged in the investment banking or securities business, whether it be commercial office space or a residence. Operating expenses, for purposes of this standard, shall include items normally associated with the cost of operating the business such as rent and taxes.’’ 20 In addition, such location was a branch office if the member ‘‘authorizes a listing in any 17 See note 3, supra. NASD adopted Rules of Fair Practice when it was founded in 1939 under provisions of the 1938 Maloney Act amendments to the Exchange Act. 19 See Notice to Members 87–41 (June 1987) (‘‘Notice 87–41’’) (setting forth the proposed rule text changes to Article III, Section 27 of the NASD Rules of Fair Practice for the OSJ definition and Article I, Section (c) of the NASD By-Laws for the branch office definition, among other provisions). 20 See Notice 87–41. 18 Then E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices publication or any other media, including a professional dealer’s digest or a telephone directory, which listing designates a place as an office or if the member designates a place as an office or if the member designates any such place with an organization as an office.’’ 21 The term ‘‘branch office’’ was established ‘‘merely to designate and identify for registration purposes the various offices of a member other than the main office and as such [were] required to be registered and as to which a registration fee should be paid.’’ 22 Over the years, these terms have undergone several modifications, driven by changes in regulatory need and business models. In particular, the subsequent amendments focused on providing regulators robust information when conducting examinations that readily identified the appropriate individuals and records at a firm. In response to such changes, the OSJ and branch office definitions were refined and exemptions from branch office registration were added. In 1988, as part of several supervisory enhancements, the OSJ and branch office definitions were significantly amended in response to general concerns about member firms’ associated persons engaging in the offer and sale of securities to the public without adequate ongoing supervision and regular examination by member firms.23 The amendments substantially expanded the specificity of FINRA Rule 3110 (formerly, Article III, Section 27 of the NASD Rules of Fair Practice) with respect to a member’s supervisory obligations and the new standards focused on ‘‘the creation of a supervisory ‘chain of command,’ in which qualified supervisory personnel are appointed to carry out the firm’s supervisory obligations[.]’’ 24 The newly amended OSJ definition focused on an office at which ‘‘the approval [of specified functions] that constitutes formal action by the member takes place.’’ 25 The amendments also added 21 See Notice 87–41. Notice 87–41. 23 See Securities Exchange Act Release No. 26177 (October 13, 1988), 53 FR 41008 (October 19, 1988) (Order Approving File No. SR–NASD–88–31). See also Notice to Members 88–84 (November 1988) (‘‘Notice 88–84’’) (announcing SEC approval of File No. SR–NASD–88–31). 24 See Notice to Members 88–11 (February 1988) (‘‘Notice 88–11’’) (requesting comments on proposed amendments to Article III, Section 27 of the NASD Rules of Fair Practice regarding supervision and the OSJ and branch office definitions). 25 See Notice 88–11. Largely similar to current Rule 3110(f)(1)(A) through (G), the specified functions were: ‘‘(1) Order execution and/or market making; (2) Structuring of public offerings or ddrumheller on DSK120RN23PROD with NOTICES1 22 See VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 more prescriptive requirements with respect to OSJs such as requiring a firm to designate as an OSJ an office that meets the OSJ definition and any other location for which such designation would be appropriate; designate one or more registered principals in each OSJ; maintain written supervisory procedures describing the supervisory system implemented and listing the titles, registration status, and locations of the required supervisory personnel and the specific responsibilities associated with each; and keep and maintain the firm’s supervisory procedures, or the relevant parts thereof, at each OSJ and at each other location where supervisory activities are conducted on behalf of the firm.26 With respect to the branch office definition, the amendments also refined it from any location ‘‘owned or controlled by a member, and which [was] engaged in the investment banking or securities business’’ 27 to ‘‘any business location held out to the public or customers by any means as a location at which the investment banking or securities business is conducted on behalf of the member, excluding any location identified solely in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the office of the member responsible for supervising the activities of the identified location.’’ 28 These definitional amendments were intended to address concerns about the absence of on-site supervision by registered principals at a firm’s business location.29 The amendments required a ‘‘minimum supervisory structure that facilitate[d] closer supervision by principals with clear responsibilities.’’ 30 In addition, the revisions required OSJ designation for ‘‘any office at which the approval that constitutes formal action by the member takes place.’’ 31 Further, FINRA noted private placements; (3) Maintaining custody of customers’ funds and/or securities; (4) Final acceptance (approval) of new accounts on behalf of the member, (5) Review and endorsement of customer orders pursuant to the provisions of proposed Article III, Section 27(d); (6) Final approval of advertising or sales literature for use by persons associated with the member, pursuant to Article III, Section 35(b)(l) of the Rules of Fair Practice; or (7) Responsibility for supervising the activities of persons associated with the member at one or more other offices of the member.’’ See Notice 88–84. 26 See Notice 88–84. See generally Rule 3110(a) and (b). 27 See Notice 87–41. 28 See Notice 88–84. 29 See Notice 87–41. 30 See Notice 87–41. 31 See Notice 88–11. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 20571 that the enhancements to the supervisory practices and definitions reflected its ‘‘continuing commitment to facilitate more effective supervision by members while accommodating their diverse modes of operation.’’ 32 FINRA believes the definitional amendments brought focus to where final approval of certain functions was occurring so both the firm and regulators would be able to readily identify the principal who was designated to review a specific function and also where original books and records related to such supervision would be kept. At that time, books and records (e.g., account documents, communications, order tickets, trade blotters) were generally made and preserved in hard copy paper format, not electronically, and stored in files at such offices. In 1992, FINRA further amended the branch office definition to allow additional locations that were not being held out to the public to be exempt from branch office registration.33 FINRA noted that the exclusions were intended as a reasonable accommodation to member firms with widely dispersed sales personnel selling limited product lines such as variable contracts and mutual funds.34 In the approval order, the Commission recognized that the amended definition would eliminate the requirement to register as a branch office unless the securities activity at the office required ‘‘continuous and direct supervision of a principal, or the location is being held out to the public as a place where a full range of securities activity is being conducted. Having considered the proposal, the Commission believe[d] the rule change will assist [FINRA] members in meeting their obligation to supervise off-site registered representatives under applicable securities laws, regulations and [FINRA] rules.’’ 35 In 2001, FINRA launched an initiative to modernize its rules.36 Based on input from member firms, FINRA identified the branch office definition as a rule that could benefit from modernization 32 See Notice 88–11. general, these amendments codified interpretations pertaining to the branch office definitions and their exclusions by clarifying that the address and telephone number of the appropriate OSJ or branch office must be provided in advertisements and sales literature, not the address of a non-branch location. See Securities Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936 (March 31, 1992) (Order Approving File No. SR–NASD–91–42). 34 See Notice to Members 92–18 (April 1992) (announcing SEC approval of File No. SR–NASD– 91–42). 35 See Securities Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936, 10937 (March 31, 1992) (Order Approving File No. SR–NASD–91–42). 36 See Notice 01–35. 33 In E:\FR\FM\06APN1.SGM 06APN1 20572 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 in light of the SEC’s amendment to the term ‘‘office’’ in the SEC’s Books and Records Rules,37 the branch office definition used by the New York Stock Exchange (‘‘NYSE’’) and state regulators, new business practices that were developing based on technological innovations, and the potential to create a uniform branch office registration system.38 FINRA expressly noted that a factor to be considered in modernizing rules included instances ‘‘where the regulatory burden of a rule significantly outweigh[ed] the benefit, or the rule no longer work[ed] efficiently given new technologies.’’ 39 Until 2005, member firms were required to complete Schedule E to the Form BD (‘‘Schedule E’’) to register or report branch offices to the SEC, FINRA, and the state in which they conducted a securities business that required branch office registration. While Schedule E captured certain data with respect to branch offices, it did not adequately fulfill the evolving needs of regulators. For example, Schedule E did not link an individual registered representative with a particular branch office, which made it more difficult for regulators to track the appropriate individuals for examinations. As technology advanced and business models changed, FINRA continued its commitment to modernizing the rule while preserving investor protections. By 2005, this initiative led to the establishment of a national standard, a uniform definition of a branch office, that was the product of a coordinated effort among regulators to reduce inconsistencies in the definitions used by the SEC, FINRA, the NYSE, NASAA, and state securities regulators to identify locations where broker-dealers conduct securities or investment banking business.40 Moreover, the adoption of a uniform definition facilitated the development of a centralized branch office registration system through the Central Registration Depository and the creation of a uniform form to register or report branch offices electronically with multiple regulators.41 With the launch of this new technology, firms and regulators could efficiently identify each branch location, which would be assigned a unique branch office number 37 17 CFR 240.17a–3 and 240.17a–4. See generally Notice to Members 01–80 (December 2001) (describing amendments to the SEC Books and Records Rules). 38 See Notice 02–10. 39 See Notice 01–35. 40 See Securities Exchange Act Release No. 52403 (September 9, 2005), 70 FR 54782 (September 16, 2005) (Order Approving File No. SR–NASD–2003– 104) (‘‘Uniform Definition of Branch Office’’). 41 See Form BR. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 by the system, the individuals assigned to such location, and the designated supervisor(s) for such location. This new centralized branch office registration system allowed firms and regulators to efficiently locate offices and individuals, and moreover closed gaps in information, created significant efficiencies and lessened the burden on firms and regulators. At the time these definitional changes were underway, technology had progressed with the advent of faster internet, Wi-Fi, the emergence of webbased platforms, and more portable computers to enhance workplace connectivity that allowed for expanded remote work options. In recognition of the evolving and growing trend in the financial industry and workforce generally to work from home, the uniform branch office definition adopted numerous exclusions, including the current primary residence exclusion. The limitations on use of a primary residence closely tracks the limitations on the use of a private residence in the SEC’s Books and Records Rules,42 which provide that a broker-dealer is not required to maintain records at an office that is a private residence if only one associated person (or multiple associated persons if members of the same family) regularly conducts business at the office, the office is not held out to the public as an office, and neither customer funds nor securities are handled at the office. At the same time, FINRA adopted IM– 3010–1 (Standards for Reasonable Review) (now Rule 3110.12 (Standards for Reasonable Review)), as a further safeguard.43 That rule clarified the high standards firms must observe regarding supervisory obligations and emphasized the requirement that members already had to establish reasonable supervisory procedures and conduct reviews of locations taking into consideration, among other things: the firm’s size, organizational structure, scope of business activities, number and location of offices, the nature and complexity of products and services offered, the volume of business done, the number of associated persons assigned to a location, whether a location has a principal on-site, whether the office is a non-branch location, and the disciplinary history of the registered person. During the almost two decades since the adoption of the uniform branch office definition and its related exclusions, regulators have utilized advancements in technology to support 42 See 43 See PO 00000 note 37, supra. note 40, supra. Frm 00107 Fmt 4703 Sfmt 4703 their examinations and otherwise further investor protections, and firms have embraced and adopted numerous technologies to enhance their regulatory and compliance programs. The rapid explosion of new technologies in the last 20 years, and the widespread use such of technology (e.g., personal computers, email, mobile phones, electronic communication systems with audio and visual capabilities, cloud storage of books and records), and the ability to use risk-based surveillance and compliance tools and systems, have fundamentally altered the landscape of how the broker-dealer business is conducted. These earlier amendments evidence the need to keep the regulatory framework current. FINRA believes that with evolving changes in business models and the significant advance of technological tools that are now readily available, some functions can be exempt from registration, subject to specified conditions, without compromising a reasonably designed supervisory system. Moreover, FINRA believes the proposed rule change to classify some private residences as non-branch locations, subject to specified controls, will not result in a loss of the important regulatory information that the rules were designed, in part, to provide regarding the locations or associated persons. That information will continue to be collected through our regulatory requirements and systems such as the branch office registration system and Form BR and other uniform registration forms.44 Further, as a non-branch location, an RSL would be subject to an inspection on a regular periodic schedule which FINRA believes would still achieve the purpose of the inspection requirement; that is, to help firms assess whether their supervisory systems and procedures are being followed.45 44 For example, under Form U4 (Uniform Application for Securities Industry Registration or Transfer), if an individual’s ‘‘Office of Employment Address’’ is an unregistered location, the firm must report the address of such location as the individual’s ‘‘located at’’ address and must report the branch office that supervises that non-registered location as the ‘‘supervised from’’ location. See Form U4, Section 1 (General Information). Similar to Form BR, Form U4 solicits information about an individual’s other business activities. See Form U4, Section 13 (Other Business) and Form BR, Section 3 (Other Business Activities/Names/websites). Form BD (Uniform Application for Broker-Dealer Registration) captures the types of business in which a firm is engaged. See Form BD, Item 12; see also Form BR, Section 2 (Registration/Notice Filing/ Type of Office/Activities), Item D. 45 See Notice to Members 99–45 (June 1999) (‘‘Notice 99–45’’). E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 vi. Evolution of the Review and Inspection of Activities Occurring at Offices and Locations Under FINRA’s (then NASD’s) Rules of Fair Practice, a member firm was required to ‘‘review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities and abuses and at least an annual inspection of each [OSJ].’’ 46 Alongside the supervisory enhancements that occurred in the 1980s, including the definitional changes described above, FINRA expanded the review requirement to include not only the activities of each office, but also the businesses in which a member firm engages. The expanded review requirement included a periodic examination of customer accounts to detect and prevent irregularities and abuses, an annual inspection of each OSJ, and inspection of branch offices in accordance with a regular schedule as set forth in the member’s supervisory procedures.47 As with the definitional changes, these enhancements were intended to address concerns about the adequacy of ongoing supervision and regular examination of associated persons engaged in the offer and sale of securities to the public at locations away from a member firm’s office.48 FINRA guidance during this period, moreover, focused on the need for effective supervision of the securitiesrelated activities of ‘‘off-site representatives,’’ and advised firms that an inspection should include, among other things, a ‘‘review of any on-site customer account documentation and other books and records, meetings with individual registered representatives to discuss the products they are selling and their sales methods, and an examination of correspondence and sales literature.’’ 49 This guidance about the effective supervision of ‘‘off-site representatives’’ was pragmatic at a time when business activities were conducted primarily using paper documents 50 that were created and stored locally at an office or location; registered persons were interacting with their customers largely through inperson meetings, paper-based 46 See note 19, supra, and accompanying text for the then existing OSJ definition. 47 See Notice 88–84. 48 See Notice 88–84. 49 See Notice to Members 98–38 (May 1998) (‘‘Notice 98–38’’) and Notice 99–45. 50 Paper-based documents included, for example, customer account opening documents; correspondence with customers; marketing materials; communications from registered persons to the firm; order tickets; checks received and forwarded; and fund transmittal records. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 correspondence transmitted through the postal service, and landline telephone calls; and supervisory personnel were conducting supervision through manual reviews of paper files (e.g., exception reports bearing a supervisor’s handwritten comments and initials). Today, supervisory functions such as approving new customer accounts, reviewing and endorsing customer orders and approving retail communications, in large part, occur through traceable digital channels. Based on FINRA’s examination experience over decades, making and preserving records electronically have increasingly become the norm and the preferred recordkeeping medium rather than paper; communications between and among members, their associated persons and customers commonly take place through email, video or some other electronic means; and customer funds and securities are frequently and increasingly transmitted electronically rather than in physical form. In addition, firms have centralized many aspects of their supervisory, surveillance, compliance, and other control functions that facilitate ongoing, real-time monitoring and supervision of activities of dispersed offices and locations. Changes in business practices and work habits have evolved, but the pandemic experience has accelerated reliance on technological advances in surveillance and monitoring capabilities, and spurred significant changes in lifestyles and work habits, including the growing expectation for workplace flexibility. With these environmental changes, FINRA believes that there is an opportunity to create a regulatory framework in which member firms can capably continue to carry out their obligation to effectively inspect the supervisory activities taking place at an office or location, subject to the proposed controls, on a regular periodic schedule without diminishing investor protection. vii. FINRA Rule 3110 and Current Requirements To Register and Inspect Offices Rule 3110 requires a member firm, regardless of size or type, to have a supervisory system for the activities of its associated persons that is reasonably designed to achieve compliance with applicable securities laws and regulations, and FINRA rules. The rule sets forth the minimum requirements of a member firm’s supervisory system that includes registering a location as an OSJ or branch office that meets the definitions under Rule 3110(f) and inspecting all offices and locations in accordance with Rule 3110(c). The rule PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 20573 categorizes offices or locations as an OSJ or supervisory branch office, a nonsupervisory branch office, or a nonbranch location.51 The requirements to register, inspect and have a principal on-site vary based on the categorization. Specifically, the rule requires the registration and designation as an OSJ or branch office of each location, including the main office, that meets their respective definition under paragraphs (f)(1) and (f)(2) of Rule 3110, as described in more detail below.52 An OSJ is a type of branch office. Rule 3110(f)(2) defines a ‘‘branch office’’ as ‘‘any location where one or more associated persons of a member firm regularly conducts the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or is held out as such[.]’’ 53 In addition, any location that is responsible for supervising the activities of persons associated with the member at one or more non-branch locations of the member is a branch office (i.e., a supervisory branch office).54 A location registered as a branch office must have one or more appropriately registered representatives or principals in each office, and is subject to an inspection at least every three years, unless it is a supervisory branch office in which case it is subject to at least an annual inspection.55 Depending upon the functions occurring at a branch office, it may be further classified as an OSJ, which Rule 3110(f)(1) defines as a member’s business location at which any one or more of the following functions take place: (1) order execution or market making; (2) structuring of public offerings or private placements; (3) maintaining custody of customers’ funds or securities; (4) final acceptance (approval) of new accounts on behalf of the member; (5) review and endorsement of customer orders, pursuant to Rule 3110(b)(2); 56 (6) final 51 See FINRA Rule 3110(c). FINRA Rules 3110(a)(3) and 3110.01. Currently, firms are required to register each branch office and indicate, among other things, whether it is an OSJ, by filing Form BR. See Section 2 of Form BR, requiring the applicant to indicate whether an office is a ‘‘FINRA OSJ’’ or ‘‘non-OSJ branch,’’ https://www.finra.org/sites/default/files/ AppSupportDoc/p465944.pdf. 53 See FINRA Rule 3110(f)(2)(A). 54 See FINRA Rule 3110(f)(2)(B). 55 See FINRA Rule 3110(a)(4), and FINRA Rule 3110(c)(1)(A) and (B). 56 FINRA Rule 3110(b)(2) pertains to the review of a member’s investment banking and securities business and provides that ‘‘[t]he supervisory procedures required by [Rule 3110(b) (Written Procedures)] shall include procedures for the review by a registered principal, evidenced in 52 See E:\FR\FM\06APN1.SGM Continued 06APN1 20574 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 approval of retail communications for use by persons associated with the member, pursuant to Rule 2210(b)(1), except for an office that solely conducts final approval of research reports; 57 or (7) responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member. An office designated as an OSJ must have an appropriately registered principal onsite at the location, and must be inspected at least annually.58 However, subject to specified conditions, an office or location may be deemed a ‘‘non-branch location,’’ and excluded from registration as a branch office. Currently, Rule 3110(f)(2)(A) sets forth seven exclusions—often referred to as unregistered offices or non-branch locations—of which two pertain to residential locations.59 One such exclusion appears under Rule 3110(f)(2)(A)(ii) and exempts from registration as a branch office an associated person’s primary residence subject to the following express conditions: (1) 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; (2) the location is not held out to the public as an office and the associated person does not meet with customers at the location; (3) neither customer funds nor securities are handled at that location; (4) the associated person is assigned to a designated branch office, and such writing, of all transactions relating to the investment banking or securities business of the member.’’ 57 In general, with some exceptions, paragraph (b)(1) of Rule 2210 (Communications with the Public) requires that an appropriately qualified registered principal approve each retail communication prior to use or filing with FINRA. 58 See FINRA Rules 3110(a)(4) and 3110(c)(1)(A). 59 See generally FINRA Rule 3110(f)(2)(A) which, in addition to the primary residence and the nonprimary residence exclusions that are further described, excludes the following from the definition of ‘‘branch office’’: (1) any location that is established solely for customer service or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office; (2) any office of convenience, where associated persons occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office; (3) any location that is used primarily to engage in non-securities activities and from which the associated person(s) effects no more than 25 securities transactions in any one calendar year; provided that any retail communication identifying such location also sets forth the address and telephone number of the location from which the associated person(s) conducting business at the non-branch locations are directly supervised; (4) the Floor of a registered national securities exchange where a member conducts a direct access business with public customers; or (5) a temporary location established in response to the implementation of a business continuity plan. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 designated branch office is reflected on all business cards, stationery, retail communications and other communications to the public by such associated person; (5) the associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with the Rule; (6) electronic communications (e.g., email) are made through the member’s electronic system; (7) all orders are entered through the designated branch office or an electronic system established by the member that is reviewable at the branch office; (8) written supervisory procedures pertaining to supervision of sales activities conducted at the residence are maintained by the member; and (9) a list of the residence locations is maintained by the member (‘‘primary residence exclusion’’).60 The second exclusion that pertains to a residential location appears under Rule 3110(f)(2)(A)(iii) and is any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided that the member complies with the conditions described in (1) through (8) above (‘‘non-primary residence exclusion’’). In general, the non-primary residence exclusion typically refers to a vacation or second home.61 A non-branch location must be inspected on a periodic schedule, presumed to be at least every three years.62 Notwithstanding either of these two residential exclusions or the other exclusions listed under Rule 3110(f)(2)(A),63 a primary or nonprimary residence location that is responsible for either the supervisory activities set forth in the OSJ definition or for supervising the activities of persons associated with the member at one or more non-branch locations of the member is considered an OSJ or (supervisory) branch office, respectively.64 Consequently, such residential supervisory offices are subject to registration, an annual inspection and, in some cases, additional licensing requirements.65 As noted above, the branch office definition and its exclusions, including the conditions for the primary residence and non-primary residence exclusions, is a uniform definition FINRA developed in coordination with the 60 See FINRA Rule 3110(f)(2)(ii)a. through i. Notice to Members 06–12 (March 2006) (‘‘Notice 06–12’’). 62 See note 3, supra. 63 See note 59, supra. 64 See FINRA Rule 3110(f)(1)(D) through (G) and FINRA Rule 3110(f)(2)(B). 65 See note 58, supra. 61 See PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 NYSE and other self-regulatory organizations (‘‘SROs’’), and state securities regulators, and it has been in place since 2005 (collectively, the ‘‘uniform branch office definition’’).66 The codification of the seven exclusions from registration in the uniform branch office definition recognized both practical situations and advances in technology used to conduct and monitor business, the evolving nature of business models, and changing lifestyle and work practices while also preserving investor protection through specified safeguards and limitations such as those appearing in the primary residence exclusion.67 In the approval order for the uniform branch office definition, the Commission noted that the limitations for the primary residence exclusion ‘‘closely track the limitations on the use of a private residence in the Books and Records Rules.’’ 68 The Commission also stated that the seven exclusions ‘‘recognize current business, lifestyle, and surveillance practices and provide associated persons with additional flexibility. For instance, because associated persons may have to work from home due to illness, or to provide childcare or eldercare for certain family members, the Commission believes it is appropriate to except primary residences from the definition of branch office while providing certain safeguards and limitations to protect investors.’’ 69 Further, the Commission stated that ‘‘[g]iven the continued advances in technology used to conduct and monitor businesses and changes in the structure of broker-dealers and in the lifestyles and work habits of the workforce, the Commission believes it is reasonable and appropriate for [FINRA] to reexamine how it determines whether business locations need to be registered as branch offices of broker-dealer 66 See note 40, supra. generally Notice to Members 05–67 (October 2005). 68 See Uniform Definition of Branch Office, supra note 40, 70 FR 54782, 54783 (citation omitted). 69 See Uniform Definition of Branch Office, supra note 40, 70 FR 54782, 54787. See also Securities Exchange Act Release No. 52402 (September 9, 2005), 70 FR 54788, 54795 (September 16, 2005) (Order Approving File No. SR–NYSE–2002–34) (stating, ‘‘the Commission believes that the seven proposed exceptions to registering as a branch office constitute a reasonable approach to recognize current business, lifestyle, and surveillance practices and provide associated persons with flexibility with respect to where they perform their jobs. For instance, because associated persons may have to work from home due to illness, or to provide childcare or eldercare for certain family members, the Commission believes it is appropriate to except primary residences from the definition of branch office.’’). 67 See E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices members.’’ 70 Finally, the Commission expressed the view that the uniform branch office definition ‘‘strikes the right balance between providing flexibility to broker-dealer firms to accommodate the needs of their associated persons, while at the same time setting forth parameters that should ensure that all locations, including home offices, are appropriately supervised.’’ 71 FINRA believes that the Commission’s statements about advances in technology and evolving workplace conventions, and the safeguards and limitations of the primary residence exclusion are apt for this proposed rule change as well. viii. Impact of Technology on Supervision and New Workplace Conventions ddrumheller on DSK120RN23PROD with NOTICES1 In response to the public health crisis, FINRA requested comment regarding pandemic-related issues and questions, including the comment process in connection with the temporary amendments to Rule 3110,72 and discussions with FINRA’s advisory committees and other industry representatives. Firms responded that they relied extensively on technology to support their effective transition to the remote work environment and enhance the supervision of geographically dispersed associated persons, many of whom have been working from home since early 2020 and may continue to do so in some manner in the current environment.73 These technological tools facilitating their supervisory practices include surveillance systems, electronic tracking programs or applications, and electronic communications, including video conferencing tools.74 Commenters that 70 See Uniform Definition of Branch Office, supra note 40, 70 FR 54782, 54787. 71 See note 69, supra. 72 See, e.g., Submitted Comments to Securities Exchange Act Release No. 94018 (January 20, 2022), 87 FR 4072 (January 26, 2022) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA– 2022–001), https://www.sec.gov/comments/sr-finra2022-001/srfinra2022001.htm; and Submitted Comments to Securities Exchange Act Release No. 89188 (June 30, 2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2020–019), https:// www.sec.gov/comments/sr-finra-2020-019/srfinra 2020019.htm. 73 See generally Regulatory Notice 21–44 (December 2021). 74 See generally Regulatory Notice 20–16 (May 2020); see also FINRA White Paper, Technology Based Innovations for Regulatory Compliance (‘‘RegTech’’) in the Securities Industry (September 2018) (reporting, among other things, that as financial services firms seek to keep pace with regulatory compliance requirements, they are turning to new and innovative regulatory tools to assist them in meeting their obligations in an VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 responded to the 2022 RSL Rule Filing conveyed the general view that technology has facilitated remote supervision, with some commenters describing the technology used to effectively supervise associated persons.75 The examples cited included the use of information barriers to safeguard and restrict the flow of confidential and material, non-public information; technology barriers to restrict and control employee access to systems and databases; internal email blocks; internet and social media reviews for evidence of outside business activities or private securities transactions; programs or operating systems to enable firms to conduct computer desktop reviews from another location; web-based communication platforms to communicate with registered persons; video conferencing technology; a centralized repository to retain electronic communications; and software (e.g., DocuSign) to enable customers to digitally sign contracts and other documents such as client attestations and new account documents.76 In addition, some firms have further noted that the flexibility hybrid work offers has made a positive impact in attracting more diverse talent, and retaining existing talent.77 These views are consistent with those expressed by several commenters in response to the 2022 RSL Rule Filing.78 Similar to the changed environment underlying the Commission’s approval order of the uniform branch office definition that codified the existing seven exclusions, FINRA believes that the structural and lifestyle changes for member firms and their workforce catalyzed by the pandemic—along with advances in technology—merit reevaluation of some aspects of the branch office registration and inspection requirements. Specifically, FINRA believes the regulatory benefit of requiring firms to designate a private residence, at which supervisory functions occur, as an OSJ or branch office (i.e., supervisory branch office), subject to an annual inspection schedule, should now be reconsidered where the risk profile of these offices can be effectively controlled through practically based safeguards and limitations. FINRA is therefore proposing to adopt new Supplementary Material .19 under Rule 3110 to establish a Residential effective and efficient manner), https:// www.finra.org/sites/default/files/2018_RegTech_ Report.pdf. 75 See Exhibit 2b. 76 See Exhibit 2b. 77 See generally note 12, supra. 78 See Exhibit 2b. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 20575 Supervisory Location as a non-branch location, subject to specified safeguards and limitations. This proposed new non-branch location would target the subset of residential locations that have many of the attributes contained in the primary residence exclusion, but must be registered as an OSJ or branch office because of the supervisory functions taking place there. b. Proposed Residential Supervisory Location as a Non-Branch Location The proposed definition of an RSL would be based largely on several existing aspects of Rule 3110(f). In particular, FINRA is proposing to incorporate the existing supervisory functions appearing in the OSJ definition (Rule 3110(f)(1)) and branch office definition (Rule 3110(f)(2)(B)) with the existing residential exclusions set forth in the branch office definition to classify a Residential Supervisory Location as a non-branch location. Currently, a private residence at which these supervisory functions occur must be registered and designated as a branch office or OSJ under Rule 3110(a)(3), and inspected at least annually under Rule 3110(c)(1)(A). By treating such location as a non-branch location, the private residence would become subject to inspections on a regular periodic schedule under Rule 3110(c)(1)(C), presumed to be every three years.79 Proposed Rule 3110.19 would incorporate some existing safeguards and limitations firms must already satisfy to rely on the primary residence exclusion 80 as FINRA believes that several of these conditions are also appropriate for the proposed Residential Supervisory Location. FINRA intends for the terms underlying the proposed Residential Supervisory Location to be interpreted consistently with their meaning in Rule 3110(f) and existing related guidance.81 In addition, FINRA is proposing to further augment the conditions for RSL designation and the criteria that would make a firm ineligible to rely on proposed Rule 3110.19 if unmet. i. Conditions for Designation as a Residential Supervisory Location (Proposed Rule 3110.19(a)) As described above, FINRA is proposing to adopt Rule 3110.19 to establish a Residential Supervisory Location as a new non-branch location, but subject to specified conditions, most of which are derived from those 79 See 80 See note 3, supra. Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f, and i. 81 See, E:\FR\FM\06APN1.SGM e.g., Notice 06–12. 06APN1 20576 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices currently required for the primary residence and non-primary residence exclusions. While many of the proposed conditions are similar to those FINRA had proposed in the 2022 RSL Rule Filing, this proposed rule change adjusts the conditions for RSL designation in two key areas. Specifically, this proposed rule change would add conditions pertaining to (1) books and records to include, among other things, clarifying language about a firm’s recordkeeping system and (2) a firm’s surveillance and technology tools to provide, among other things, that the tools are appropriate to supervise the risks presented by each RSL. A. Conditions Derived Largely From Rule 3110 To Remain Substantively Unchanged From the 2022 RSL Rule Filing In the 2022 RSL Rule Filing, FINRA has proposed several conditions for RSL designation that were based on those used for the existing residential exclusions to the branch office definition. Through this proposed rule change, FINRA is proposing to retain those terms subject to some technical adjustments that would align the proposed rule text more closely to the rule text appearing in Rule 3110(f)(2)(A)(ii). Under proposed Rule 3110.19(a), any such location would be considered a non-branch location (and thus excluded from branch office registration), provided that: (1) 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 (proposed Rule 3110.19(a)(1)); 82 (2) the location is not held out to the public as an office (proposed Rule 3110.19(a)(2)); 83 (3) the associated person does not meet with customers or prospective customers at the location (proposed Rule 3110.19(a)(3)); 84 (4) no sales activity takes place at the location other than as permitted and subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or (iii) (proposed Rule 3110.19(a)(4)); 85 (5) neither customer funds nor securities are handled at that ddrumheller on DSK120RN23PROD with NOTICES1 82 See Rule 3110(f)(2)(A)(ii)a. (‘‘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[.]’’). 83 See Rule 3110(f)(2)(A)(ii)b. (‘‘The location is not held out to the public as an office and the associated persons does not meet with customers at the location[.]’’). 84 See note 83, supra. 85 An associated person’s private residence, other than a primary residence, remains subject to the less than 30-business-day in any calendar year limitation on use for securities business. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 location (proposed Rule 3110.19(a)(5)); 86 (6) the 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 (proposed Rule 3110.19(a)(6)); 87 (7) the associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with Rule 3110 (proposed Rule 3110.19(a)(7)); 88 and (8) the associated person’s electronic communications (e.g., email) are made through the member’s electronic system (proposed Rule 3110.19(a)(8)).89 B. Conditions Adjusted From the 2022 RSL Rule Filing 1. Books and Records (Proposed Rule 3110.19(a)(9)) In the 2022 RSL Rule Filing, FINRA had proposed requiring that all books or records required to be made and preserved by the member under the federal securities laws or FINRA rules are maintained by the member other than at the location. FINRA is proposing a clarifying adjustment to the language to provide that: (1) 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; (2) such records are not physically or electronically maintained and preserved at the location; and (3) the member has prompt access to such records. 2. Surveillance and Technology Tools (Proposed Rule 3110.19(a)(10) To further enhance the proposed conditions for RSL designation, FINRA is proposing to include the requirement that a firm must determine that its surveillance and technology tools are appropriate to supervise its RSLs. FINRA believes that specifying baseline expectations with respect to the 86 See Rule 3110(f)(2)(A)(ii)c. (‘‘Neither customer funds nor securities are handled at the location[.]’’). 87 See Rule 3110(f)(2)(A)(ii)d. (‘‘The 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[.]’’). 88 See Rule 3110(f)(2)(A)(ii)e. (‘‘The associated person’s correspondence and communications with the public are subject to the firm’s supervision in accordance with this Rule[.]’’). 89 See Rule 3110(f)(2)(A)(ii)f. (‘‘Electronic communications (e.g., email) are made through the member’s electronic system[.]’’). PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 surveillance and technology tools a firm must have in order to supervise its RSLs would promote investor protection. FINRA believes that these proposed 10 conditions would strengthen a firm’s ability to monitor the supervisory activities occurring at a Residential Supervisory Location and act to lower the overall risks associated with such location because, for example, the books and records required to be made and preserved by the member under the federal securities laws or FINRA rules cannot be physically or electronically maintained and preserved at the location. Moreover, FINRA notes that sales activities would be permissible at a Residential Supervisory Location to the same extent sales activities are permitted currently under such exclusions. As previously noted, the conditions for the current primary and non-primary residence exclusions, which align with the SEC’s Books and Records Rules, were developed in coordination with other SROs and state securities regulators and such exclusions have been in place since 2005.90 As such, firms have developed experience with monitoring and supervising these conditions, and FINRA believes member firms will be able to rely on such experience to reasonably supervise similar conditions for proposed Residential Supervisory Locations. As with any non-branch location, a Residential Supervisory Location would be subject to an inspection on a periodic schedule, presumed to be at least every three years.91 iv. Member Firm Ineligibility Criteria (Proposed Rule 3110.19(b)) FINRA is further proposing several criteria a member firm must meet before it would be eligible to designate an office or location as a Residential Supervisory Location in accordance with proposed Rule 3110.19. As described further below, the proposed seven ineligibility criteria reflect attributes of a member firm that FINRA believes are more likely to raise investor protection concerns based on FINRA rules. Consistent with the 2022 RSL Rule Filing, proposed Rule 3110.19(b) would provide that a location would be ineligible for designation as a Residential Supervisory Location in accordance with Rule 3110.19 if: (1) the member is currently designated as a ‘‘Restricted Firm’’ under Rule 4111 (Restricted Firm Obligations) 92 90 17 CFR 240.17a–4(l); see also note 40, supra. note 3, supra. 92 In general, Rule 4111 requires member firms that are identified as ‘‘Restricted Firms’’ to deposit 91 See E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 (proposed Rule 3110.19(b)(1)); (2) the member is currently designated as a ‘‘Taping Firm’’ under Rule 3170 (Tape Recording of Registered Persons by Certain Firms) 93 (proposed Rule 3110.19(b)(2)); or (3) the member is currently undergoing, or is required to undergo, a review under Rule 1017(a)(7) as a result of one or more associated persons at such location 94 (proposed Rule 3110.19(b)(3)).95 Through this proposed rule change, FINRA is proposing to supplement these criteria to include a member firm: (1) that receives a notice from FINRA pursuant to Rule 9557 (Procedures for Regulating Activities under Rule 4110 (Capital Compliance), Rule 4120 (Regulatory Notification and Business Curtailment) or Rule 4130 (Regulation of Activities of Section 15C Members Experiencing Financial and/or Operational Difficulties)), unless FINRA has otherwise permitted activities in writing pursuant to such rule (proposed Rule 3110.19(b)(4)); (2) is or becomes suspended by FINRA (proposed Rule 3110.19(b)(5)); (3) based on the date in CRD, had its FINRA membership become effective within the prior 12 months (proposed Rule 3110.19(b)(6)); or (4) is or has been found within the past three years by the SEC or FINRA to cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations. See generally Regulatory Notice 21–34 (September 2021) (announcing FINRA’s adoption of rules to address firms with a significant history of misconduct). 93 In general, Rule 3170 requires a member firm to establish, enforce and maintain special written procedures supervising the telemarketing activities of all of its registered persons, including the tape recording of conversations, if the firm has hired more than a specified percentage of registered persons from firms that meet FINRA Rule 3170’s definition of ‘‘disciplined firm.’’ See generally Regulatory Notice 14–10 (March 2014) (announcing FINRA’s adoption of consolidated rules governing supervision). 94 Rule 1017(a)(7) requires a member firm to file an application for continuing membership when a natural person seeking to become an owner, control person, principal or registered person of the member firm has, in the prior five years, one or more defined ‘‘final criminal matters’’ or two or more ‘‘specified risk events’’ unless the member firm has submitted a written request to FINRA seeking a materiality consultation for the contemplated activity. Rule 1017(a)(7) applies whether the person is seeking to become an owner, control person, principal or registered person at the person’s current member firm or at a new member firm. See generally Regulatory Notice 21–09 (March 2021) (announcing FINRA’s adoption of rules to address brokers with a significant history of misconduct). 95 In the 2022 RSL Rule Filing, FINRA had categorized these criteria as ‘‘ineligible locations,’’ but through this proposed rule change, FINRA is proposing to categorize these terms as ‘‘member firm ineligibility criteria.’’ See proposed Rule 3110.19(c). VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 have violated Rule 3110(c) (proposed Rule 3110.19(b)(7)). FINRA believes that a member firm that is experiencing issues complying with its capital requirements or that has been suspended by FINRA is more likely to face significant operational challenges that may negatively impact the firm’s overall supervision of its associated persons. FINRA further believes that a firm that has been a FINRA member for less than 12 months is often still implementing its business plan and developing a supervisory system appropriate tailored to the firm’s specific attributes and structure. With respect to a firm that is or has been found within the past three years by the SEC or FINRA to have violated Rule 3110(c), FINRA believes such a firm has demonstrated challenges in developing or maintaining a robust inspection program. As such, FINRA believes that these proposed ineligibility criteria appropriately account for firms that pose higher risks, and for that reason, would be ineligible to rely on proposed Rule 3110.19. v. Location Ineligibility Criteria (Proposed Rule 3110.19(c)) In the 2022 RSL Rule Filing, FINRA had proposed several criteria applicable to an associated person that if unmet, would make the location of the associated person ineligible for RSL designation. All but one of the terms of proposed Rule 3110.19(c) remain substantively unchanged from those FINRA had proposed in the 2022 RSL Rule Filing. As described below, FINRA is proposing to make a clarifying adjustment to a criterion applicable to a firm’s associated persons. Under proposed Rule 3110.19(c), a location would be ineligible for designation as a Residential Supervisory Location where: (1) one or more associated persons at such location is a designated supervisor who has less than one year of direct supervisory experience with the member (proposed Rule 3110.19(c)(1)); (2) one or more associated persons at such location is functioning as a principal for a limited period in accordance with Rule 1210.04 96 (proposed Rule 3110.19(c)(2)); (3) one or more 96 In general, Rule 1210.04 (Requirements for Registered Persons Functioning as Principals for a Limited Period) imposes an experience requirement (18 months of experience within the preceding fiveyear period) on those registered representatives who are designated by their firms to function in a principal capacity for a fixed 120-day period before having passed an appropriate principal qualification examination. See generally Regulatory Notice 17–30 (October 2017) (announcing FINRA’s adoption of consolidated rules governing qualification and registration). PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 20577 associated persons at such location is subject to a mandatory heightened supervisory plan under the rules of the SEC, FINRA or state regulatory agency (proposed Rule 3110.19(c)(3)); (4) one or more associated persons at such location 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 under paragraph (c)(3) of this proposed Supplementary Material or otherwise as a condition to approval or permission for such association (proposed Rule 3110.19(c)(4)); (5) one or more associated persons at such location has an event in the prior three years 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 97 (proposed Rule 3110.19(c)(5)). These proposed criteria remain substantively unchanged from the 2022 RSL Rule Filing. In addition to the proposed criteria above, an office or location would be ineligible for designation as a Residential Supervisory Location at which one or more associated persons at such location is currently subject to, or has been notified in writing that it will be subject to, any investigation, proceeding, complaint or other action by the member, the SEC, an SRO, including FINRA, or state securities commission (or agency or office performing like functions) 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 Municipal Securities Rulemaking Board or FINRA (proposed Rule 3110.19(c)(6)).98 This proposed criterion, which is similar to the one FINRA had proposed in the 2022 RSL Rule Filing, is a product of integrating aspects of several ‘‘Regulatory Action Disclosure’’ questions from Form U4 97 Form U4’s Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a) elicit reporting of criminal convictions, and Questions 14C, 14D, and 14E pertain to regulatory action disclosures. 98 See Form U4, Questions 14C(6)–(8) and 14E(5)– (7) (referencing the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, and the rules of the Municipal Securities Rulemaking Board). E:\FR\FM\06APN1.SGM 06APN1 20578 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 into a single provision.99 In addition, as adjusted, this proposed criterion is responsive to NASAA’s comment to the 2022 RSL Filing, which recommended broadening the scope of the criterion to include any state laws pertaining to securities regulation, noting that ‘‘state regulators investigate and bring actions for violations of state securities laws[,]’’ 100 and further noted that ‘‘state securities actions typically allege violations of state securities laws and regulations, even if the same conduct could also be a violation of federal securities laws or SRO rules.’’ 101 FINRA had declined to include the reference to state securities laws in order to remain aligned with the provisions listed in Form U4.102 But after further consideration, FINRA is proposing to incorporate NASAA’s recommendation to include a reference to ‘‘any state law pertaining to the regulation of securities’’ within the list of provisions under proposed Rule 3110.19(c)(6) to account for state regulators. FINRA is also proposing to add a reference to FINRA rules. While this proposed adjustment would address NASAA’s recommendation, FINRA notes that Form U4 does not have a specific question that elicits information regarding notice of an investigation or other action for a failure to supervise under state laws or FINRA rules and as such, proposed Rule 3110.19(c)(6) would require further information to monitor. A firm would need to be prepared to provide regulators information related to this proposed criterion upon request. FINRA believes that these proposed six ineligibility criteria applicable to a firm’s associated persons reflect the appropriate limitations on the private residences that can be designated as a Residential Supervisory Location. In particular, FINRA believes that an associated person designated at such location should have more than one 99 See note 97, supra; see also Form U4 Question 14G, which provides: ‘‘Have you been notified, in writing, that you are now the subject of any: (1) regulatory complaint or proceeding that could result in a ‘‘yes’’ answer to any part of 14C, D or E? (If ‘‘yes’’, complete the Regulatory Action Disclosure Reporting Page.); (2) investigation that could result in a ‘‘yes’’ answer to any part of 14A, B, C, D or E? (If ‘‘yes’’, complete the Investigation Disclosure Reporting Page.)’’ 100 See Letter from Melanie Senter Lubin, President, NASAA, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated August 23, 2022 (‘‘NASAA I’’), https://www.sec.gov/comments/srfinra-2022-019/srfinra2022019-20137298307861.pdf. 101 See Letter from Andrew Hartnett, President, NASAA, to J. Lynn Taylor, Assistant Secretary, SEC, dated November 25, 2022 (‘‘NASAA II’’), https://www.sec.gov/comments/sr-finra-2022-019/ srfinra2022019-20151667-320142.pdf. 102 See note 98, supra. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 year of supervisory experience with the member and have passed the appropriate principal level qualification examination before the associated person’s private residence can be treated as a non-branch location under proposed Rule 3110.19(a). While it is possible that an associated person may have prior supervisory experience from another firm, a new supervisor at the current member firm may need time to become knowledgeable about that firm’s systems, people, products, and overall compliance culture. In addition, FINRA believes that the specified disclosures on Form U4 pertaining to criminal convictions and final regulatory action and the imposition of a mandatory heightened supervisory plan are indicia of increased risk to investors at some firms and locations such that they should not be treated as a non-branch location under the proposed supplementary material.103 vi. Obligation To Provide List of RSLs to FINRA (Proposed Rule 3110.19(d)) In the 2022 RSL Rule Filing, FINRA had proposed requiring a firm to maintain a list of residence locations in similar fashion as the existing requirement under Rule 3110(f)(2)(A)(ii)i.104 Two commenters to the 2022 RSL Rule Filing shared their views on this proposed condition.105 In general, their views pertained to the reliability or completeness of such a list, and the creation of a more formal categorization or appropriate system change so firms can identify and track RSLs in the Central Registration Depository (‘‘CRD®’’).106 In further 103 In response to the 2022 RSL Rule Filing, one commenter recommended that a location should be precluded from being designated as an RSL where a firm has implemented its own heightened supervisory plan, suggesting that this additional layer of supervision upon an associated person would warrant an automatic exclusion of such person’s private residence as an RSL. In its second letter responding to comments directed to the 2022 RSL Rule Filing, FINRA indicated that a firm’s routine evaluation of its supervisory system to ensure it is appropriately tailored to the firm’s business may prompt a firm, out of an abundance of caution and independent of specific regulatory requirements or mandates, to undertake additional supervisory measures, including voluntarily imposing a heightened supervisory plan. See Exhibit 2c. FINRA further notes that a ‘‘voluntary heightened supervisory plan’’ is undefined and thus, a firm’s view of ‘‘heightened supervision’’ could differ from that of a regulator. For example, a firm could voluntarily implement ‘‘heightened supervision’’ to review with more frequency the trade blotters of a registered person because the blotters relate to a new product of the firm. 104 See Rule 3110(f)(2)(A)(ii)i. (‘‘A list of the residence locations is maintained by the member[.]’’). 105 See Exhibits 2a and 2b. 106 CRD is the central licensing and registration system that FINRA operates for the benefit of FINRA, the SEC, other SROs, state securities PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 consideration of the comments, FINRA is proposing to require the member to provide FINRA with a list of the residence locations by the 15th day of the month following the calendar quarter through an electronic process or such other process as FINRA may prescribe. FINRA notes that CRD currently provides regulators with information regarding the offices and locations (registered and unregistered) to which associated persons required to be registered are assigned,107 but requiring member firms to affirmatively provide this information to FINRA through a scheduled process would make this information more readily accessible to regulators.108 Proposed Rule 3110.19 would not be available to a member firm or private residence that meets any of the ineligibility criteria in proposed paragraphs (b) or (c), respectively, under Rule 3110.19 even with the safeguards and limitations listed in proposed Rule 3110.19(a). A member firm would be required to designate such private residence as an OSJ or branch office, as applicable, unless the location otherwise meets a branch office exclusion under Rule 3110(f)(2)(A). FINRA believes the proposed ineligibility criteria are appropriately derived from existing rule-based criteria that already have a process to identify firms that may pose greater concern (e.g., Rules 4111 and 3170) or to identify associated persons that may pose greater concerns as supervisors due to the nature of disclosures of regulatory or disciplinary events on the uniform registration forms or where the firm has not yet had the opportunity to gauge such person’s effectiveness as a supervisor due to their limited supervisory experience with the member firm. FINRA believes that these objective categorical restrictions strike the correct balance and are sensible and consistent with a reasonably designed supervisory system while still preserving investor protections. FINRA acknowledges the shift towards a permanent blended or hybrid regulators and broker-dealer firms. The information maintained in the CRD system is reported by registered broker-dealer firms, associated persons and regulatory authorities in response to questions on specified uniform registration forms. See generally Rule 8312 (FINRA BrokerCheck Disclosure). 107 FINRA notes that firms are under a continuing obligation to promptly update, among other things, their uniform forms whenever the information becomes inaccurate or incomplete. Amendments must be filed electronically (unless the filer is an approved paper filer) by promptly updating the appropriate section of such forms. See, e.g., general instructions to Form U4 and Form BR. 108 FINRA is exploring ways to provide this information to state regulators in a practical format. E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices workforce model and therefore believes under the current environment, private residences responsible for the supervisory activities and subject to the safeguards and conditions, and the ineligibility criteria described above should not require registration as branch offices, and calibrating the proposed Residential Supervisory Location to a regular periodic inspection schedule is appropriately tailored to the lower risk profile. FINRA notes that as part of efforts between FINRA and the NYSE to align the interpretations of the uniform branch office definition, FINRA made a definitional change to the OSJ definition to exclude from OSJ designation and treat as a non-branch location an office or location at which final approval of research reports occurred,109 noting that ‘‘the limited nature of such activity [did] not necessitate supervision of such a location as an OSJ[.]’’ 110 The proposed RSL designation is intended to reflect a pragmatic balance between the hybrid workforce model and the parameters that should ensure that all locations, including residential locations, are appropriately supervised. Separate and apart from the classification of the office or location and the attendant inspection obligations, firms will continue to have an ongoing obligation to supervise the activities of each associated person in a manner reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. FINRA emphasizes that member firms have a statutory duty to supervise their associated persons, regardless of their location, compensation or employment arrangement, or registration status, in accordance with the FINRA By-Laws and rules.111 If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice. ddrumheller on DSK120RN23PROD with NOTICES1 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,112 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and Rule 3110(f)(1)(F). Securities Exchange Act Release No. 56585 (October 1, 2007), 72 FR 57081, 57082 (October 5, 2007) (Notice of Filing of File No. SR– FINRA–2007–008). 111 See Exchange Act Section 15(b)(4)(E), 15 U.S.C. 78o(b)(4)(E), and Exchange Act Section 15(b)(6)(A), 15 U.S.C. 78o(b)(6)(A). 112 15 U.S.C. 78o–3(b)(6). equitable principles of trade, and, in general, to protect investors and the public interest. In recognition of the ongoing advances in compliance technology and evolving lifestyle and work practices, FINRA believes that the proposed rule change will reasonably account for evolving work models by excluding from branch office registration a Residential Supervisory Location at which lower risk activities occur, while retaining important investor protections with a set of safeguards and limitations derived largely from the primary residence exclusion. The proposed new nonbranch location is intended to provide a practical and balanced way for firms to continue to effectively meet the core regulatory obligation to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules that directly serve investor protection. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 1. Economic Impact Assessment FINRA has undertaken an economic impact assessment, as set forth below, to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits, and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in assessing how best to meet FINRA’s regulatory objectives. a. Regulatory Need As discussed above, in the wake of the pandemic, many member firms are developing hybrid workforce models for their employees. In these new ways of working, some employees may work permanently in an alternative location such as a private residence, other employees may spend some time in alternative locations and some time onsite in a conventional office setting, and some may work on-site full time.113 109 See 110 See VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 113 According to the Survey of Working Arrangements and Attitudes (SWAA), post-COVID, many employers are planning to allow employees to work from home about 2.2 days per week on average. See Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, SWAA February 2023 (Updates February 12, 2023), https://wfhresearch.com/wpcontent/uploads/2023/02/WFHResearch_updates_ PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 20579 Absent the proposed rule change, when the temporary relief from the requirement to submit branch office applications on Form BR for new office locations ends, many member firms would need to either curtail activities at residential locations or register large numbers of residential locations as OSJs or supervisory branch offices. Either type of adjustment would create potentially significant costs. The proposed rule change would reduce, but not eliminate, the need for such adjustments since the activities conducted at some new residential locations would likely not meet the requirements of the proposed rule change. b. Economic Baseline The economic baseline includes both current and foreseeable workforce arrangements and business practices, including those that were first developed during the pandemic and have been modified since in light of reduced health and safety concerns. In particular, the economic baseline includes the innovations, and investments in communication and surveillance technology, that have supported and continue to support supervision in the remote work environment.114 These innovations and investments have depended in part on the temporary suspension of the requirement to submit branch office applications on Form BR for new office locations, provided in Notice 20–08. However, in order to provide a full accounting of the likely effects of the proposed rule change, the analysis considers the impact of the proposed rule change under the assumption that, going forward, the temporary suspension of the above requirement is no longer in effect. The current supervisory requirements of Rule 3110 will then apply, including the provisions of Rule 3110 that categorize an OSJ, branch office and non-branch location and that establish the supervisory and registration requirements of each office or location. February2023.pdf. The SWAA is a monthly survey with respondents that are working-age persons in the United States that had earnings of at least $10,000 in 2019. Further details about this survey can be found at https://wfhresearch.com. 114 The pandemic propelled increased reliance on technology solutions in the remote work environment. A McKinsey survey in late 2020 found that, overall, firms had accelerated their adoption of technology, with large accelerations in the implementation of changes to increase remote working and collaboration, as well the use of advanced technologies in operations. See McKinsey & Company, How COVID–19 has pushed companies over the technology tipping point—and transformed business forever, October 5, 2020, https://mck.co/ 3nlK8b2. E:\FR\FM\06APN1.SGM 06APN1 20580 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices As discussed above, a location registered as a branch office must have one or more appropriately registered representatives or principals in each office, and is subject to an inspection at least every three years, unless it is a supervisory branch office in which case it is subject to at least an annual inspection. As of December 31, 2022, FINRA’s membership included 3,381 firms 115 with 150,495 registered branch offices. Of these branch offices, 18,564 (12%) are OSJs, with 2,451 of them identified as private residences.116 There are 21,510 principal level registered persons serving as OSJ supervisors, with 2,165 (12%) working at OSJs identified as private residences.117 Data on the number of residential locations at which supervisors are currently working full or part time may be incomplete, due to the temporary suspension of the Form BR requirement for new offices included in Notice 20–08. However, large member firms (500 or more registered persons) account for about 69% of OSJs. By type of business, diversified and retail firms account for 81% of OSJs. To the extent that these member firms account for most supervisory staff, they are potentially currently making broad use of hybrid workforce arrangements involving residential locations. c. Economic Impacts Absent the proposed rule change, if the temporary relief on registering new branches with Form BR, provided during the pandemic, ends, many member firms would likely need to either curtail activities at residential locations or register large numbers of residential locations as OSJs or supervisory branch offices. This potential increase in office count would impact inspection obligations and in some cases, licensing requirements associated with individual locations. These additional requirements would hold even for office locations that bear lower risk characteristics and from which lower risk supervisory functions are conducted. The economic impacts of these changes would be mitigated by the proposed rule change. Changes in the number of different types of offices and locations since the start of the pandemic, along with current data, can provide a rough indication of the potential impact of the proposed rule change on firms. As Table 1 below shows, the number of offices and locations has fallen except for nonbranch locations. Residential nonbranch locations have increased by 17,603 (75%). Some of these new residential non-branch locations would have needed to register as OSJs if not for the temporary suspension of the Form BR requirement and will need to register as OSJs unless the proposed rule change is adopted. Further, some of the 2,451 private residences that are currently registered as OSJs, described above, might be able to become Residential Supervisory Locations if the proposed rule change is adopted. The numbers suggest that the number of offices and locations that may benefit from the proposed rule change is in the thousands. While Form U4 and Form BR can be used to count numbers of work locations and identify high-level activities at registered branch offices, the number of residential locations that would meet the conditions of proposed Rule 3110.19(a) alone would depend on specific information about the activities at residential locations that these forms do not provide.118 TABLE 1—NUMBERS OF OFFICES AND LOCATIONS, PRE-PANDEMIC AND CURRENT December 31, 2019 December 31, 2022 152,682 19,123 134,559 43,678 23,475 150,495 18,564 131,931 59,830 41,078 Registered branch locations .................................................................................................................... OSJs ................................................................................................................................................. Non-OSJs ......................................................................................................................................... Non-branch locations ............................................................................................................................... Residential non-branch locations ..................................................................................................... ddrumheller on DSK120RN23PROD with NOTICES1 i. Anticipated Benefits The proposed rule change would allow some of the work arrangements adopted during the pandemic to continue with only small additional compliance costs. Specifically, as long as the location is a private residence and is not otherwise ineligible under the rule, associated persons could continue to conduct work that meets the requirements of the proposed rule change. Not all new residential locations would qualify as Residential Supervisory Locations, so some would need to register as some type of branch location—and face higher compliance costs—or otherwise meet a branch office exclusion under Rule 3110(f)(2) or stop operating as a work location. The proposed rule change also creates an opportunity for continued innovation in workforce arrangements. The proposed rule change may lead to centralizing tasks in specific OSJs and restructuring of job functions to enable the use of a Residential Supervisory Location on a full or part time basis, and possibly an increase in the number of supervisors. Some current OSJs might qualify as Residential Supervisory Locations with no further adjustments, allowing members to reduce expenses on compliance. Firms would make use of these opportunities if they are beneficial to their operations, and not otherwise. The proposed rule change would also support the competitiveness of the broker-dealer industry for educated individuals who seek professional 115 This count excludes firms with membership pending approval, and withdrawn or terminated from membership. 116 The number of branch offices and OSJs is derived from Form BR, a uniform form that a member firm uses to register with FINRA and as required by the relevant state jurisdictions or other SROs, the firm’s location as a branch office. Form BR’s Section 1 (General Information) provides a place for a firm to indicate whether the branch office is a private residence by checking a ‘‘Private Residence Checkbox.’’ The number of OSJs is derived from Form BR’s Section 2 (Registration/ Notice Filing/Type of Office/Activities), which requires a firm to indicate whether the branch office is an OSJ. Some OSJs have more than one supervisor, and some principals serve as supervisors for more than one OSJ. FINRA’s records from Form U4 show that, altogether, there are about 137,777 registered persons with principal registration categories (including those in OSJ supervisory roles). 117 In addition, FINRA member firms with a single branch account for 1,698 of these OSJs and 2,064 of the supervisors. Sixty-eight FINRA member firms did not have any branches registered at the end of year 2022; these firms are all small member firms. 118 Non-branch locations do not have to be registered with FINRA. The estimates for nonbranch locations are obtained by reviewing Form U4. There may be some double counting of nonbranch locations if members record the address differently on more than one Form U4. For the numbers of non-branch locations in Table 1, FINRA counted, by firm, unique addresses based on the first seven characters of the Form U4 ‘‘Street 1’’ field, city and state. Addresses that matched the address of the main office or of an existing registered branch were excluded. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 positions.119 The expectation of workplace flexibility and remote work by such individuals may lead them away from the broker-dealer industry if other segments of financial services or professional occupations offer more flexible workforce arrangements. As noted above, the pandemic caused firms throughout the financial services sector to accelerate the adoption of technological solutions.120 Technology has been used not only to make remote work possible but also to conduct a range of compliance and regulatory risk management activities. By facilitating hybrid work arrangements, the proposed rule change would support continued adoption and innovation in technological solutions and reductions in the cost of these solutions.121 Finally, the proposed rule change would relieve member firms from paying FINRA branch office registration fees for locations that would be branch offices under the baseline but qualify as Residential Supervisory Locations. Member firms may also find that some existing branch locations become unnecessary given the proposed rule change and could reduce expenses attendant to those locations, including such fees. However, member firms would still need to pay branch office registration fees generally for new residential locations that meet the definition of a ‘‘branch office,’’ and are not covered by the proposed Residential Supervisory Location designation or do not meet a branch office exclusion under Rule 3110(f)(2). 119 See note 113, supra. See also Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, Why Working from Home Will Stick (NBER Working Paper 28731, April 2021), https://wfhresearch.com/ wp-content/uploads/2021/04/w28731-3-May2021.pdf, who point to a lasting effect of the pandemic on work arrangements, in particular for those with higher education and earnings; and Alexander Bick, Adam Blandin & Karel Mertens, Work from Home Before and After the COVID–19 Outbreak, (Working Paper, October 2022), https:// karelmertenscom.files.wordpress.com/2022/11/ wfh_oct_15_paper.pdf, who find consistent results, with a higher adoption rate of work from home jobs in Finance and Insurance, relative to other industries, reflected in Figure 10. Both papers, based on different surveys and, in Bick et al, with added results from a model, conclude that around 22% of full workdays will be provided from home in the long run. 120 See note 114, supra. 121 See Ben Charoenwong, Zachary T. Kowaleski, Alan Kwan, & Andrew Sutherland, RegTech, MIT Sloan Research Paper 6563–22 (September 16, 2022), Available at SSRN: https://ssrn.com/ abstract=4000016. The authors show that brokerdealers that made required compliance technology investments were able to make complementary technology investments in communications and customer relationship management software that resulted in a reduced number of complaints and less employee misconduct. VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 ii. Anticipated Costs The proposed rule change provides firms with a new designation for work locations without removing any designations that are available under the baseline. Firms will therefore use the new Residential Supervisory Location designation only if doing so is beneficial to their operations relative to using one of the existing designations. The cost of complying with the requirements of the new designation for work locations is obviously a factor in this decision. Firms may incur a number of new onetime costs, such as adjusting staffing and activities at existing locations, to initially meet the requirements of proposed Rule 3110.19. Firms may also need to develop new written supervisory procedures and new trainings for staff at Residential Supervisory Locations, and deploy these trainings, so staff are aware of the compliance requirements. Firms may incur new ongoing costs to monitor for compliance and for adjusting staffing and designations if a Residential Supervisory Location becomes ineligible for this designation because an associated person incurs events or actions described in proposed Rule 3110.19(b). Classifying residential locations that would otherwise need to register as OSJs or branch offices as Residential Supervisory Locations will remove certain compliance requirements. Depending on the type of branch, the reduction in compliance requirements may include no longer having to have one or more appropriately registered representatives or principals in each office or to conduct inspections annually or every three years. These reductions in compliance requirements may create risks to member firms and investors. To mitigate these risks, the proposal excludes locations on the basis of inexperience or prior harmful conduct by individuals working at those locations, and limits the activities that can be performed at those locations. The designation of certain locations as ineligible provides minimum standards for staff that are eligible to work in such locations. FINRA expects that most firms would go beyond these minimum standards in selecting staff who would perform supervisory and other sensitive work at Residential Supervisory Locations, and in monitoring their conduct. d. Alternatives Considered FINRA is proposing to provide certain regulatory accommodations for the innovations in business organization PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 20581 and operations that occurred during the pandemic by modeling the Residential Supervisory Locations after the existing primary residence and non-primary residence exclusions, which have been in effect since 2005. FINRA considered adopting a proposed rule with just those exclusions and without the designation of certain locations as ineligible. More locations would qualify as Residential Supervisory Locations without the additional requirements. FINRA expects, however, that the proposed rule change provides a better balance of the potential benefits and the risks that could impose costs on members and investors. In addition, FINRA considered the merits of adapting other requirements similar to those FINRA had proposed in File No. SR–FINRA–2022–021, a proposal to establish a voluntary threeyear remote inspections pilot program.122 In particular, the 2022 Remote Inspections Pilot Program Rule Filing includes the requirement for a firm to conduct and document a risk assessment considering several factors referenced in Rule 3110 and others, for each office or location where a firm determines to conduct a remote inspection. FINRA believes that adding the requirement for a firm to conduct and document a risk assessment for designating an office or location as a Residential Supervisory Location would be largely redundant given other requirements applicable to designating an office or location as an RSL. A firm continues to have a fundamental obligation under Rule 3110(a) to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. This supervisory system would, at least in effect, require the assessment and mitigation of the risk that the activities of associated persons working at Residential Supervisory Locations would not comply with the securities laws. The supervisory system thereby reduces the benefit of a separately conducted and documented risk assessment. Similarly, under Rule 3110(b), a firm is required to establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve 122 See Securities Exchange Act Release No. 96520 (December 16, 2022), 87 FR 78737 (December 22, 2022) (Notice of Partial Amendment No. 1 to File No. SR–FINRA–2022–021) (‘‘2022 Remote Inspections Pilot Program Rule Filing’’). E:\FR\FM\06APN1.SGM 06APN1 20582 Federal Register / Vol. 88, No. 66 / Thursday, April 6, 2023 / Notices compliance with applicable securities laws and regulations, and with applicable FINRA rules. These supervisory procedures would, at least in effect, require the assessment and mitigation of risks of non-compliance posed by the types of business conducted at Residential Supervisory Locations. FINRA determined that requiring a firm to conduct and document a risk assessment for designating an office or location as an RSL would not provide an additional benefit to members or investors. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The SEC published the 2022 RSL Rule Filing for comment and as of the end of the comment period on August 23, 2022, the SEC had received 20 unique comment letters, then subsequently received six more comment letters.123 On October 31, 2022, FINRA responded to the comments and did not propose changing the terms of the 2022 RSL Rule Filing in response to the comments.124 On the same day, the Commission instituted proceedings to determine whether to approve or disapprove the 2022 RSL Rule Filing (‘‘Order’’),125 and the SEC received five comments letters in response to the Order.126 On December 9, 2022, FINRA responded to those comments and did not propose changing the 2022 RSL Rule Filing in response to them.127 Since then, the SEC has received one supplemental comment letter.128 March 30, 2023 was the date by which the SEC was required to either approve or disapprove the 2022 RSL Rule Filing. But on March 29, 2023, FINRA withdrew the 2022 RSL Rule Filing from the SEC to consider whether modifications and clarifications to the filing would be appropriate in response to concerns raised by commenters. While the proposed rule change retains many of the terms of the 2022 RSL Rule Filing, the proposed rule change makes 123 See note 9, supra. note 9, supra; see also Exhibit 2b. 125 See Securities Exchange Act Release No. 96191 (October 31, 2022), 87 FR 66767 (November 4, 2022) (Order Instituting Proceedings to Determine Whether to Approve or Disapprove File No. SR–FINRA–2022–019). 126 See note 9, supra. 127 See note 9, supra; see also Exhibit 2c. 128 See Letter from Bernard V. Canepa, Managing Director & Associate General Counsel, Securities Industry and Financial Markets Association, to Vanessa A. Countryman, Secretary, SEC, dated December 20, 2022, https://www.sec.gov/ comments/sr-finra-2022-019/srfinra202201920153234-320719.pdf. ddrumheller on DSK120RN23PROD with NOTICES1 124 See VerDate Sep<11>2014 21:13 Apr 05, 2023 Jkt 259001 some adjustments, which are discussed in detail above under Item II.A.1.b. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2023–006 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2023–006. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2023–006 and should be submitted on or before April 27, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.129 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–07145 Filed 4–5–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97232; File No. SR–Phlx– 2023–09] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Permit the Listing and Trading of Options on the Nasdaq-100 ESG Index March 31, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 28, 2023, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to permit the listing and trading of options on the Nasdaq-100 ESG Index. The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/phlx/rules, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 129 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\06APN1.SGM 06APN1

Agencies

[Federal Register Volume 88, Number 66 (Thursday, April 6, 2023)]
[Notices]
[Pages 20568-20582]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07145]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97237; File No. SR-FINRA-2023-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
Supplementary Material .19 (Residential Supervisory Location) Under 
FINRA Rule 3110 (Supervision)

March 31, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 29, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt new Supplementary Material .19 
(Residential Supervisory Location) under FINRA Rule 3110 (Supervision) 
that would align FINRA's definition of an office of supervisory 
jurisdiction (``OSJ'') and the classification of a location that 
supervises activities at non-branch locations with the existing 
residential exclusions set forth in the branch office definition to 
treat a private residence at which an associated person engages in 
specified supervisory activities as a non-branch location, subject to 
safeguards and limitations. In accordance with Rule 3110(c), as a non-
branch location, a Residential Supervisory Location (or ``RSL'') would 
become subject to inspections on a regular periodic schedule, which is 
presumed to be at least every three years,\3\ rather than an annual 
inspection requirement required of OSJs and other supervisory branch 
offices.\4\ FINRA believes the proposal

[[Page 20569]]

strikes an appropriate balance to preserve investor protection while 
developing a risk-based approach for designating residential 
supervisory locations that includes key safeguards with respect to, 
among other things, books and records of the member, while excluding 
locations where higher risk activities may take place or associated 
persons that may pose higher risk are assigned. Subject to further 
modifications as described further below, the terms of the proposed 
rule change herein are largely similar to the proposed rule change 
FINRA filed with the SEC in July 2022.\5\ FINRA withdrew the 2022 RSL 
Rule Filing on March 29, 2023 to consider whether modifications and 
clarifications to the filing would be appropriate in response to 
concerns raised by commenters.\6\
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    \3\ See FINRA Rules 3110(c)(1)(C) and 3110.13.
    \4\ SEC staff and FINRA have interpreted FINRA rules to require 
member firms to conduct on-site inspections of branch offices and 
unregistered offices (i.e., non-branch locations) in accordance with 
the periodic schedule described under Rule 3110(c)(1). See SEC 
National Examination Risk Alert, Volume I, Issue 2 (November 30, 
2011), https://www.sec.gov/about/offices/ocie/riskalert-bdbranchinspections.pdf, and Regulatory Notice 11-54 (November 2011) 
(joint SEC and FINRA guidance stating, a ``broker-dealer must 
conduct on-site inspections of each of its office locations; [OSJs] 
and non-OSJ branches that supervise non-branch locations at least 
annually, all non-supervising branch offices at least every three 
years; and non-branch offices periodically.'') (citation defining an 
OSJ omitted). See also SEC Division of Market Regulation, Staff 
Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) 
(stating, in part, that broker-dealers that conduct business through 
geographically dispersed offices have not adequately discharged 
their supervisory obligations where there are no on-site routine or 
``for cause'' inspections of those offices), https://www.sec.gov/interps/legal/mrslb17.htm.
    \5\ See Securities Exchange Act Release No. 95379 (July 27, 
2022), 87 FR 47248 (August 2, 2022) (Notice of Filing of File No. 
SR-FINRA-2022-019) (``2022 RSL Rule Filing''); see also Exhibit 2a.
    \6\ See Exhibit 2d.
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    The text of the proposed rule change is available on FINRA's 
website at https://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Background
    Early in 2020, the COVID-19 pandemic prompted FINRA and other 
regulators to provide temporary relief to member firms from certain 
regulatory requirements to address the public health crisis.\7\ In 
response to the pandemic, many private and government employers closed 
their offices and their employees continued with their work from 
alternative locations such as private residences. FINRA believes this 
model will endure, irrespective of the state of the pandemic. The 
pandemic accelerated reliance on technological advances in surveillance 
and monitoring capabilities and prompted significant changes in 
lifestyles and work habits, including the growing expectation for 
workplace flexibility. Moreover, the technology advancements that 
facilitated the transition to working outside the conventional office 
setting on a broad scale has not only effected a profound change in 
lifestyle and workplace practices for member firms, but provided FINRA 
an opportunity to consider aspects of Rule 3110 that may benefit from 
modernization.\8\ As such, FINRA believes measured changes to its 
regulatory approach would allow firms to effectively and more 
efficiently carry out their supervisory responsibilities to review the 
activities of each office or location while preserving investor 
protections.
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    \7\ Among the temporary regulatory relief provided, FINRA 
adopted relief pertaining to branch office registration requirements 
through Form BR (Uniform Branch Office Registration Form) and FINRA 
Rule 3110(c) inspection requirements. Specifically, FINRA 
temporarily suspended the requirement for member firms to submit 
branch office applications on Form BR for any newly opened temporary 
office locations or space-sharing arrangements established as a 
result of the pandemic. See Regulatory Notice 20-08 (March 2020) 
(``Notice 20-08''). With respect to inspection obligations, FINRA 
adopted temporary Rule 3110.16 that provided additional time for 
member firms to complete their calendar year 2020 inspection 
obligations. See Securities Exchange Act Release No. 89188 (June 30, 
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2020-019). In response to the 
ongoing public health crisis, FINRA subsequently adopted temporary 
FINRA Rule 3110.17, providing member firms the option to conduct 
inspections of their branch offices and non-branch locations 
remotely, subject to specified terms therein. See Securities 
Exchange Act Release No. 90454 (November 18, 2020), 85 FR 75097 
(November 24, 2020) (Notice of Filing and Immediate Effectiveness of 
File No. SR-FINRA-2020-040). Currently, FINRA Rule 3110.17 expires 
on December 31, 2023. See Securities Exchange Act Release No. 96241 
(November 4, 2022), 87 FR 67969 (November 10, 2022) (Notice of 
Filing and Immediate Effectiveness of File No. SR-FINRA-2022-030).
    \8\ In general, FINRA has had a longstanding practice of 
periodically reviewing its rules to ensure that they continue to 
promote their intended investor protection objectives in a manner 
that is effective and efficient, without imposing undue burdens, 
particularly in light of technological, industry and market changes. 
See generally Special Notices to Members 01-35 (May 2001) (``Notice 
01-35'') (requesting comment on steps that can be taken to 
streamline FINRA (then NASD) rules) and 02-10 (January 2002) 
(``Notice 02-10'') (requesting information on steps that can be 
taken to streamline FINRA (then NASD) rules). See also Regulatory 
Notice 14-14 (April 2014) (requesting comment on the effectiveness 
and efficiency of FINRA's communications with the public rules) and 
Regulatory Notice 14-15 (April 2014) (requesting comment on the 
effectiveness and efficiency of FINRA's gifts, gratuities and non-
cash compensation rules), both launching FINRA's Retrospective Rule 
Review Program.
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i. Rule Filing History
    In the 2022 RSL Rule Filing, FINRA had proposed establishing a new 
non-branch location--the Residential Supervisory Location--that would 
be subject to a host of safeguards and conditions derived from the 
existing exclusions to the branch office definition under Rule 
3110(f)(2)(A). The SEC twice published the 2022 RSL Rule Filing for 
comment, which elicited responses from many individuals, broker-
dealers, and trade organizations and other associations, including the 
North American Securities Administrators Association, Inc. (``NASAA'') 
and the Public Investors Advocate Bar Association (``PIABA'').\9\ FINRA 
submitted two letters responding to the comments received by the SEC 
but did not amend the filing.\10\
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    \9\ See Submitted Comments to 2022 RSL Rule Filing, https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019.htm.
    \10\ See Exhibits 2b and 2c.
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    All commenters supported the overall intent of the 2022 RSL Rule 
Filing to allow greater flexibility based on the risks presented, 
except for NASAA and PIABA. Many commenters expressed strong support 
for FINRA's willingness to evolve its longstanding branch office 
definition under Rule 3110(f)(2)(A) based on lessons learned during the 
COVID-19 pandemic and evolving technology and workforce arrangements. A 
fundamental concern from NASAA and PIABA, however, pertained more 
generally to firms' ability to supervise associated persons who work 
from remote offices or locations, a permissible arrangement under 
specified circumstances that predated the pandemic. In particular, 
NASAA expressed general concern about ``reducing firms' longstanding 
supervisory obligations[.]'' \11\ Among others, the comments sought to 
adjust the terms of some of the safeguards and conditions relating to 
books and records; create a more formalized system to help firms 
identify and track

[[Page 20570]]

their residential supervisory locations; and broaden the ineligibility 
criteria, such as the one relating to an associated person's specified 
regulatory or disciplinary events to encompass any state law pertaining 
to securities regulation. March 30, 2023 is the date by which the SEC 
is required to either approve or disapprove the 2022 RSL Rule Filing. 
However, on March 29, 2023, FINRA withdrew the 2022 RSL Rule Filing 
from the SEC in order to consider whether modifications and 
clarifications to the filing would be appropriate in response to 
concerns raised by commenters.
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    \11\ See Letter from Andrew Hartnett, President, NASAA, to J. 
Lynn Taylor, Assistant Secretary, SEC, dated November 25, 2022, 
(``NASAA II'') https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20151667-320142.pdf.
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ii. Key Changes to Current Proposal
    While the proposed rule change retains many of the terms of the 
2022 RSL Rule Filing, as described further below, this proposal makes 
key adjustments that take into account the concerns expressed by 
commenters in the following areas by:
    (1) enhancing the conditions for RSL designation relating to books 
and records to provide, among things, that records are not physically 
or electronically maintained and preserved at the location;
    (2) expanding the list of criteria that would make a firm 
ineligible to rely on proposed Rule 3110.19 to include, among other 
things, a member firm that has been suspended or a firm that has been a 
FINRA member for less than 12 months;
    (3) adjusting the ineligibility criterion that would make an office 
or location ineligible to rely on proposed Rule 3110.19 where an 
associated person is the subject of an investigation or other action 
relating to a failure to supervise; and
    (4) requiring firms to provide, on a quarterly basis, a current 
list to FINRA of all locations designated as RSLs.
iii. Impact on Diversity, Equity and Inclusion (``DEI'') Efforts
    Firms have noted that the flexibility hybrid work offers has made a 
positive impact in attracting more diverse talent, and retaining 
existing talent.\12\ These views are consistent with those expressed by 
several commenters in response to the 2022 RSL Rule Filing as well.\13\ 
For example, several firms stated that the move to a hybrid approach 
for the industry has also allowed them to hire broadly across the 
entire country instead of localized markets, which profoundly impacts 
and strengthens a firm's diversity and inclusion hiring efforts.\14\ 
Having the ability to offer workplace flexibility is key to maintaining 
employee engagement and retention; otherwise, workers with 
transferrable skills are likely to seek positions in other industries 
that allow for remote or hybrid work. Similarly, one group of 
commenters, composed mostly of small member firms, stated that ``[t]he 
expectations of a modern-day workforce have rapidly evolved from 
decades old status quo into a modern Work From Anywhere (WFA), DEI-
enhancing era. Major online job posting portals now have a filter 
specifically for `Remote/Work from Home'.'' (citation omitted).\15\ 
Notably, a report from the U.S. Government Accountability Office 
highlighted that data from the Equal Employment Opportunity Commission 
for the period 2018-2020 that showed both minorities and women in 
management positions in the financial services industry remained 
underrepresented with Black and Hispanic representation at about 3% and 
4%, respectively, and female representation at 32% in that period.\16\ 
In proposing to adopt Rule 3110.19, FINRA believes that reducing 
barriers to entry that may be part of the current regulatory framework 
can be achieved while continuing to preserve investor protection.
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    \12\ See generally Submitted Comments to Regulatory Notice 20-42 
(December 2020) (``Notice 20-42''), https://www.finra.org/rules-guidance/notices/20-42#comments.
    \13\ See Exhibit 2b.
    \14\ See Exhibit 2b.
    \15\ See Letter from Jennifer L. Szaro, Chief Compliance 
Officer, XML Securities, LLC, et al. (collectively referred to as 
the ``Group of 16''), to Vanessa A. Countryman, Secretary, SEC, 
dated October 25, 2022, https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20147525-313736.pdf.
    \16\ See U.S. Government Accountability Office, Financial 
Services Industry, Overview of Representation of Minorities and 
Women and Practices to Promote Diversity (GAO-23-106427) (December 
2022), www.gao.gov/assets/gao-23-106427.pdf.
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iv. Renewal of Proposed Rule Change To Adopt Proposed Rule 3110.19
    FINRA reaffirms its belief that the current environment merits a 
reevaluation of the regulatory benefit of requiring firms to designate 
a private residence, at which specified supervisory functions occur, as 
an OSJ or branch office. In recognition of the significant technology 
and industry changes that have enhanced the efficiencies of day-to-day 
supervision of associated persons and impacted workplace arrangements, 
FINRA is renewing its proposal to adopt new Supplementary Material .19 
under Rule 3110 to establish a Residential Supervisory Location that 
would be treated as a non-branch location (i.e., an unregistered 
office), subject to specified investor protection safeguards and 
limitations. The most significant regulatory effect of the proposed 
rule change would be that, as a non-branch location, a Residential 
Supervisory Location would become subject to inspections on a regular 
periodic schedule, which is presumed to be at least every three years, 
rather than an annual inspection requirement required of OSJs and other 
supervisory branch offices.\17\
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    \17\ See note 3, supra.
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v. Evolution of OSJ and Branch Office Definitions
    FINRA has periodically assessed the manner in which firms may 
effectively and efficiently carry out their supervisory 
responsibilities considering evolving business models and practices, 
advances in technology, and regulatory benefits. As detailed below, 
since the late 1980s, the OSJ and branch office definitions have 
undergone several revisions to address regulatory need and efficiency 
(e.g., rule alignment with other regulators, access to more robust 
information), evolving with technological and industry changes while 
also remaining focused on promoting investor protection.
    Under FINRA's (then NASD's) Rules of Fair Practice,\18\ an OSJ was 
defined as ``any office designated as directly responsible for the 
review of the activities of registered representatives or associated 
persons in such office and/or any other offices of the member[,]'' and 
a branch office was one that was ``owned or controlled by a member, and 
which is engaged in the investment banking or securities business.'' 
\19\ Further, a place of business of a member firm's associated person 
was considered a branch office if the member: ``directly or indirectly 
contributes a substantial portion of the operating expenses of any 
place used by a person associated with a member who is engaged in the 
investment banking or securities business, whether it be commercial 
office space or a residence. Operating expenses, for purposes of this 
standard, shall include items normally associated with the cost of 
operating the business such as rent and taxes.'' \20\ In addition, such 
location was a branch office if the member ``authorizes a listing in 
any

[[Page 20571]]

publication or any other media, including a professional dealer's 
digest or a telephone directory, which listing designates a place as an 
office or if the member designates a place as an office or if the 
member designates any such place with an organization as an office.'' 
\21\ The term ``branch office'' was established ``merely to designate 
and identify for registration purposes the various offices of a member 
other than the main office and as such [were] required to be registered 
and as to which a registration fee should be paid.'' \22\
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    \18\ Then NASD adopted Rules of Fair Practice when it was 
founded in 1939 under provisions of the 1938 Maloney Act amendments 
to the Exchange Act.
    \19\ See Notice to Members 87-41 (June 1987) (``Notice 87-41'') 
(setting forth the proposed rule text changes to Article III, 
Section 27 of the NASD Rules of Fair Practice for the OSJ definition 
and Article I, Section (c) of the NASD By-Laws for the branch office 
definition, among other provisions).
    \20\ See Notice 87-41.
    \21\ See Notice 87-41.
    \22\ See Notice 87-41.
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    Over the years, these terms have undergone several modifications, 
driven by changes in regulatory need and business models. In 
particular, the subsequent amendments focused on providing regulators 
robust information when conducting examinations that readily identified 
the appropriate individuals and records at a firm. In response to such 
changes, the OSJ and branch office definitions were refined and 
exemptions from branch office registration were added.
    In 1988, as part of several supervisory enhancements, the OSJ and 
branch office definitions were significantly amended in response to 
general concerns about member firms' associated persons engaging in the 
offer and sale of securities to the public without adequate ongoing 
supervision and regular examination by member firms.\23\ The amendments 
substantially expanded the specificity of FINRA Rule 3110 (formerly, 
Article III, Section 27 of the NASD Rules of Fair Practice) with 
respect to a member's supervisory obligations and the new standards 
focused on ``the creation of a supervisory `chain of command,' in which 
qualified supervisory personnel are appointed to carry out the firm's 
supervisory obligations[.]'' \24\ The newly amended OSJ definition 
focused on an office at which ``the approval [of specified functions] 
that constitutes formal action by the member takes place.'' \25\ The 
amendments also added more prescriptive requirements with respect to 
OSJs such as requiring a firm to designate as an OSJ an office that 
meets the OSJ definition and any other location for which such 
designation would be appropriate; designate one or more registered 
principals in each OSJ; maintain written supervisory procedures 
describing the supervisory system implemented and listing the titles, 
registration status, and locations of the required supervisory 
personnel and the specific responsibilities associated with each; and 
keep and maintain the firm's supervisory procedures, or the relevant 
parts thereof, at each OSJ and at each other location where supervisory 
activities are conducted on behalf of the firm.\26\
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    \23\ See Securities Exchange Act Release No. 26177 (October 13, 
1988), 53 FR 41008 (October 19, 1988) (Order Approving File No. SR-
NASD-88-31). See also Notice to Members 88-84 (November 1988) 
(``Notice 88-84'') (announcing SEC approval of File No. SR-NASD-88-
31).
    \24\ See Notice to Members 88-11 (February 1988) (``Notice 88-
11'') (requesting comments on proposed amendments to Article III, 
Section 27 of the NASD Rules of Fair Practice regarding supervision 
and the OSJ and branch office definitions).
    \25\ See Notice 88-11. Largely similar to current Rule 
3110(f)(1)(A) through (G), the specified functions were: ``(1) Order 
execution and/or market making; (2) Structuring of public offerings 
or private placements; (3) Maintaining custody of customers' funds 
and/or securities; (4) Final acceptance (approval) of new accounts 
on behalf of the member, (5) Review and endorsement of customer 
orders pursuant to the provisions of proposed Article III, Section 
27(d); (6) Final approval of advertising or sales literature for use 
by persons associated with the member, pursuant to Article III, 
Section 35(b)(l) of the Rules of Fair Practice; or (7) 
Responsibility for supervising the activities of persons associated 
with the member at one or more other offices of the member.'' See 
Notice 88-84.
    \26\ See Notice 88-84. See generally Rule 3110(a) and (b).
---------------------------------------------------------------------------

    With respect to the branch office definition, the amendments also 
refined it from any location ``owned or controlled by a member, and 
which [was] engaged in the investment banking or securities business'' 
\27\ to ``any business location held out to the public or customers by 
any means as a location at which the investment banking or securities 
business is conducted on behalf of the member, excluding any location 
identified solely in a telephone directory line listing or on a 
business card or letterhead, which listing, card, or letterhead also 
sets forth the address and telephone number of the office of the member 
responsible for supervising the activities of the identified 
location.'' \28\
---------------------------------------------------------------------------

    \27\ See Notice 87-41.
    \28\ See Notice 88-84.
---------------------------------------------------------------------------

    These definitional amendments were intended to address concerns 
about the absence of on-site supervision by registered principals at a 
firm's business location.\29\ The amendments required a ``minimum 
supervisory structure that facilitate[d] closer supervision by 
principals with clear responsibilities.'' \30\ In addition, the 
revisions required OSJ designation for ``any office at which the 
approval that constitutes formal action by the member takes place.'' 
\31\ Further, FINRA noted that the enhancements to the supervisory 
practices and definitions reflected its ``continuing commitment to 
facilitate more effective supervision by members while accommodating 
their diverse modes of operation.'' \32\ FINRA believes the 
definitional amendments brought focus to where final approval of 
certain functions was occurring so both the firm and regulators would 
be able to readily identify the principal who was designated to review 
a specific function and also where original books and records related 
to such supervision would be kept. At that time, books and records 
(e.g., account documents, communications, order tickets, trade 
blotters) were generally made and preserved in hard copy paper format, 
not electronically, and stored in files at such offices.
---------------------------------------------------------------------------

    \29\ See Notice 87-41.
    \30\ See Notice 87-41.
    \31\ See Notice 88-11.
    \32\ See Notice 88-11.
---------------------------------------------------------------------------

    In 1992, FINRA further amended the branch office definition to 
allow additional locations that were not being held out to the public 
to be exempt from branch office registration.\33\ FINRA noted that the 
exclusions were intended as a reasonable accommodation to member firms 
with widely dispersed sales personnel selling limited product lines 
such as variable contracts and mutual funds.\34\ In the approval order, 
the Commission recognized that the amended definition would eliminate 
the requirement to register as a branch office unless the securities 
activity at the office required ``continuous and direct supervision of 
a principal, or the location is being held out to the public as a place 
where a full range of securities activity is being conducted. Having 
considered the proposal, the Commission believe[d] the rule change will 
assist [FINRA] members in meeting their obligation to supervise off-
site registered representatives under applicable securities laws, 
regulations and [FINRA] rules.'' \35\
---------------------------------------------------------------------------

    \33\ In general, these amendments codified interpretations 
pertaining to the branch office definitions and their exclusions by 
clarifying that the address and telephone number of the appropriate 
OSJ or branch office must be provided in advertisements and sales 
literature, not the address of a non-branch location. See Securities 
Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936 (March 
31, 1992) (Order Approving File No. SR-NASD-91-42).
    \34\ See Notice to Members 92-18 (April 1992) (announcing SEC 
approval of File No. SR-NASD-91-42).
    \35\ See Securities Exchange Act Release No. 30509 (March 24, 
1992), 57 FR 10936, 10937 (March 31, 1992) (Order Approving File No. 
SR-NASD-91-42).
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    In 2001, FINRA launched an initiative to modernize its rules.\36\ 
Based on input from member firms, FINRA identified the branch office 
definition as a rule that could benefit from modernization

[[Page 20572]]

in light of the SEC's amendment to the term ``office'' in the SEC's 
Books and Records Rules,\37\ the branch office definition used by the 
New York Stock Exchange (``NYSE'') and state regulators, new business 
practices that were developing based on technological innovations, and 
the potential to create a uniform branch office registration 
system.\38\ FINRA expressly noted that a factor to be considered in 
modernizing rules included instances ``where the regulatory burden of a 
rule significantly outweigh[ed] the benefit, or the rule no longer 
work[ed] efficiently given new technologies.'' \39\
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    \36\ See Notice 01-35.
    \37\ 17 CFR 240.17a-3 and 240.17a-4. See generally Notice to 
Members 01-80 (December 2001) (describing amendments to the SEC 
Books and Records Rules).
    \38\ See Notice 02-10.
    \39\ See Notice 01-35.
---------------------------------------------------------------------------

    Until 2005, member firms were required to complete Schedule E to 
the Form BD (``Schedule E'') to register or report branch offices to 
the SEC, FINRA, and the state in which they conducted a securities 
business that required branch office registration. While Schedule E 
captured certain data with respect to branch offices, it did not 
adequately fulfill the evolving needs of regulators. For example, 
Schedule E did not link an individual registered representative with a 
particular branch office, which made it more difficult for regulators 
to track the appropriate individuals for examinations.
    As technology advanced and business models changed, FINRA continued 
its commitment to modernizing the rule while preserving investor 
protections. By 2005, this initiative led to the establishment of a 
national standard, a uniform definition of a branch office, that was 
the product of a coordinated effort among regulators to reduce 
inconsistencies in the definitions used by the SEC, FINRA, the NYSE, 
NASAA, and state securities regulators to identify locations where 
broker-dealers conduct securities or investment banking business.\40\ 
Moreover, the adoption of a uniform definition facilitated the 
development of a centralized branch office registration system through 
the Central Registration Depository and the creation of a uniform form 
to register or report branch offices electronically with multiple 
regulators.\41\ With the launch of this new technology, firms and 
regulators could efficiently identify each branch location, which would 
be assigned a unique branch office number by the system, the 
individuals assigned to such location, and the designated supervisor(s) 
for such location. This new centralized branch office registration 
system allowed firms and regulators to efficiently locate offices and 
individuals, and moreover closed gaps in information, created 
significant efficiencies and lessened the burden on firms and 
regulators.
---------------------------------------------------------------------------

    \40\ See Securities Exchange Act Release No. 52403 (September 9, 
2005), 70 FR 54782 (September 16, 2005) (Order Approving File No. 
SR-NASD-2003-104) (``Uniform Definition of Branch Office'').
    \41\ See Form BR.
---------------------------------------------------------------------------

    At the time these definitional changes were underway, technology 
had progressed with the advent of faster internet, Wi-Fi, the emergence 
of web-based platforms, and more portable computers to enhance 
workplace connectivity that allowed for expanded remote work options. 
In recognition of the evolving and growing trend in the financial 
industry and workforce generally to work from home, the uniform branch 
office definition adopted numerous exclusions, including the current 
primary residence exclusion. The limitations on use of a primary 
residence closely tracks the limitations on the use of a private 
residence in the SEC's Books and Records Rules,\42\ which provide that 
a broker-dealer is not required to maintain records at an office that 
is a private residence if only one associated person (or multiple 
associated persons if members of the same family) regularly conducts 
business at the office, the office is not held out to the public as an 
office, and neither customer funds nor securities are handled at the 
office. At the same time, FINRA adopted IM-3010-1 (Standards for 
Reasonable Review) (now Rule 3110.12 (Standards for Reasonable 
Review)), as a further safeguard.\43\ That rule clarified the high 
standards firms must observe regarding supervisory obligations and 
emphasized the requirement that members already had to establish 
reasonable supervisory procedures and conduct reviews of locations 
taking into consideration, among other things: the firm's size, 
organizational structure, scope of business activities, number and 
location of offices, the nature and complexity of products and services 
offered, the volume of business done, the number of associated persons 
assigned to a location, whether a location has a principal on-site, 
whether the office is a non-branch location, and the disciplinary 
history of the registered person.
---------------------------------------------------------------------------

    \42\ See note 37, supra.
    \43\ See note 40, supra.
---------------------------------------------------------------------------

    During the almost two decades since the adoption of the uniform 
branch office definition and its related exclusions, regulators have 
utilized advancements in technology to support their examinations and 
otherwise further investor protections, and firms have embraced and 
adopted numerous technologies to enhance their regulatory and 
compliance programs. The rapid explosion of new technologies in the 
last 20 years, and the widespread use such of technology (e.g., 
personal computers, email, mobile phones, electronic communication 
systems with audio and visual capabilities, cloud storage of books and 
records), and the ability to use risk-based surveillance and compliance 
tools and systems, have fundamentally altered the landscape of how the 
broker-dealer business is conducted.
    These earlier amendments evidence the need to keep the regulatory 
framework current. FINRA believes that with evolving changes in 
business models and the significant advance of technological tools that 
are now readily available, some functions can be exempt from 
registration, subject to specified conditions, without compromising a 
reasonably designed supervisory system. Moreover, FINRA believes the 
proposed rule change to classify some private residences as non-branch 
locations, subject to specified controls, will not result in a loss of 
the important regulatory information that the rules were designed, in 
part, to provide regarding the locations or associated persons. That 
information will continue to be collected through our regulatory 
requirements and systems such as the branch office registration system 
and Form BR and other uniform registration forms.\44\ Further, as a 
non-branch location, an RSL would be subject to an inspection on a 
regular periodic schedule which FINRA believes would still achieve the 
purpose of the inspection requirement; that is, to help firms assess 
whether their supervisory systems and procedures are being 
followed.\45\
---------------------------------------------------------------------------

    \44\ For example, under Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), if an individual's 
``Office of Employment Address'' is an unregistered location, the 
firm must report the address of such location as the individual's 
``located at'' address and must report the branch office that 
supervises that non-registered location as the ``supervised from'' 
location. See Form U4, Section 1 (General Information). Similar to 
Form BR, Form U4 solicits information about an individual's other 
business activities. See Form U4, Section 13 (Other Business) and 
Form BR, Section 3 (Other Business Activities/Names/websites). Form 
BD (Uniform Application for Broker-Dealer Registration) captures the 
types of business in which a firm is engaged. See Form BD, Item 12; 
see also Form BR, Section 2 (Registration/Notice Filing/Type of 
Office/Activities), Item D.
    \45\ See Notice to Members 99-45 (June 1999) (``Notice 99-45'').

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[[Page 20573]]

vi. Evolution of the Review and Inspection of Activities Occurring at 
Offices and Locations
    Under FINRA's (then NASD's) Rules of Fair Practice, a member firm 
was required to ``review the activities of each office, which shall 
include the periodic examination of customer accounts to detect and 
prevent irregularities and abuses and at least an annual inspection of 
each [OSJ].'' \46\ Alongside the supervisory enhancements that occurred 
in the 1980s, including the definitional changes described above, FINRA 
expanded the review requirement to include not only the activities of 
each office, but also the businesses in which a member firm engages. 
The expanded review requirement included a periodic examination of 
customer accounts to detect and prevent irregularities and abuses, an 
annual inspection of each OSJ, and inspection of branch offices in 
accordance with a regular schedule as set forth in the member's 
supervisory procedures.\47\ As with the definitional changes, these 
enhancements were intended to address concerns about the adequacy of 
ongoing supervision and regular examination of associated persons 
engaged in the offer and sale of securities to the public at locations 
away from a member firm's office.\48\
---------------------------------------------------------------------------

    \46\ See note 19, supra, and accompanying text for the then 
existing OSJ definition.
    \47\ See Notice 88-84.
    \48\ See Notice 88-84.
---------------------------------------------------------------------------

    FINRA guidance during this period, moreover, focused on the need 
for effective supervision of the securities-related activities of 
``off-site representatives,'' and advised firms that an inspection 
should include, among other things, a ``review of any on-site customer 
account documentation and other books and records, meetings with 
individual registered representatives to discuss the products they are 
selling and their sales methods, and an examination of correspondence 
and sales literature.'' \49\ This guidance about the effective 
supervision of ``off-site representatives'' was pragmatic at a time 
when business activities were conducted primarily using paper documents 
\50\ that were created and stored locally at an office or location; 
registered persons were interacting with their customers largely 
through in-person meetings, paper-based correspondence transmitted 
through the postal service, and landline telephone calls; and 
supervisory personnel were conducting supervision through manual 
reviews of paper files (e.g., exception reports bearing a supervisor's 
handwritten comments and initials).
---------------------------------------------------------------------------

    \49\ See Notice to Members 98-38 (May 1998) (``Notice 98-38'') 
and Notice 99-45.
    \50\ Paper-based documents included, for example, customer 
account opening documents; correspondence with customers; marketing 
materials; communications from registered persons to the firm; order 
tickets; checks received and forwarded; and fund transmittal 
records.
---------------------------------------------------------------------------

    Today, supervisory functions such as approving new customer 
accounts, reviewing and endorsing customer orders and approving retail 
communications, in large part, occur through traceable digital 
channels. Based on FINRA's examination experience over decades, making 
and preserving records electronically have increasingly become the norm 
and the preferred recordkeeping medium rather than paper; 
communications between and among members, their associated persons and 
customers commonly take place through email, video or some other 
electronic means; and customer funds and securities are frequently and 
increasingly transmitted electronically rather than in physical form. 
In addition, firms have centralized many aspects of their supervisory, 
surveillance, compliance, and other control functions that facilitate 
ongoing, real-time monitoring and supervision of activities of 
dispersed offices and locations. Changes in business practices and work 
habits have evolved, but the pandemic experience has accelerated 
reliance on technological advances in surveillance and monitoring 
capabilities, and spurred significant changes in lifestyles and work 
habits, including the growing expectation for workplace flexibility. 
With these environmental changes, FINRA believes that there is an 
opportunity to create a regulatory framework in which member firms can 
capably continue to carry out their obligation to effectively inspect 
the supervisory activities taking place at an office or location, 
subject to the proposed controls, on a regular periodic schedule 
without diminishing investor protection.
vii. FINRA Rule 3110 and Current Requirements To Register and Inspect 
Offices
    Rule 3110 requires a member firm, regardless of size or type, to 
have a supervisory system for the activities of its associated persons 
that is reasonably designed to achieve compliance with applicable 
securities laws and regulations, and FINRA rules. The rule sets forth 
the minimum requirements of a member firm's supervisory system that 
includes registering a location as an OSJ or branch office that meets 
the definitions under Rule 3110(f) and inspecting all offices and 
locations in accordance with Rule 3110(c). The rule categorizes offices 
or locations as an OSJ or supervisory branch office, a non-supervisory 
branch office, or a non-branch location.\51\ The requirements to 
register, inspect and have a principal on-site vary based on the 
categorization. Specifically, the rule requires the registration and 
designation as an OSJ or branch office of each location, including the 
main office, that meets their respective definition under paragraphs 
(f)(1) and (f)(2) of Rule 3110, as described in more detail below.\52\
---------------------------------------------------------------------------

    \51\ See FINRA Rule 3110(c).
    \52\ See FINRA Rules 3110(a)(3) and 3110.01. Currently, firms 
are required to register each branch office and indicate, among 
other things, whether it is an OSJ, by filing Form BR. See Section 2 
of Form BR, requiring the applicant to indicate whether an office is 
a ``FINRA OSJ'' or ``non-OSJ branch,'' https://www.finra.org/sites/default/files/AppSupportDoc/p465944.pdf.
---------------------------------------------------------------------------

    An OSJ is a type of branch office. Rule 3110(f)(2) defines a 
``branch office'' as ``any location where one or more associated 
persons of a member firm regularly conducts the business of effecting 
any transactions in, or inducing or attempting to induce the purchase 
or sale of, any security, or is held out as such[.]'' \53\ In addition, 
any location that is responsible for supervising the activities of 
persons associated with the member at one or more non-branch locations 
of the member is a branch office (i.e., a supervisory branch 
office).\54\ A location registered as a branch office must have one or 
more appropriately registered representatives or principals in each 
office, and is subject to an inspection at least every three years, 
unless it is a supervisory branch office in which case it is subject to 
at least an annual inspection.\55\
---------------------------------------------------------------------------

    \53\ See FINRA Rule 3110(f)(2)(A).
    \54\ See FINRA Rule 3110(f)(2)(B).
    \55\ See FINRA Rule 3110(a)(4), and FINRA Rule 3110(c)(1)(A) and 
(B).
---------------------------------------------------------------------------

    Depending upon the functions occurring at a branch office, it may 
be further classified as an OSJ, which Rule 3110(f)(1) defines as a 
member's business location at which any one or more of the following 
functions take place: (1) order execution or market making; (2) 
structuring of public offerings or private placements; (3) maintaining 
custody of customers' funds or securities; (4) final acceptance 
(approval) of new accounts on behalf of the member; (5) review and 
endorsement of customer orders, pursuant to Rule 3110(b)(2); \56\ (6) 
final

[[Page 20574]]

approval of retail communications for use by persons associated with 
the member, pursuant to Rule 2210(b)(1), except for an office that 
solely conducts final approval of research reports; \57\ or (7) 
responsibility for supervising the activities of persons associated 
with the member at one or more other branch offices of the member. An 
office designated as an OSJ must have an appropriately registered 
principal on-site at the location, and must be inspected at least 
annually.\58\
---------------------------------------------------------------------------

    \56\ FINRA Rule 3110(b)(2) pertains to the review of a member's 
investment banking and securities business and provides that ``[t]he 
supervisory procedures required by [Rule 3110(b) (Written 
Procedures)] shall include procedures for the review by a registered 
principal, evidenced in writing, of all transactions relating to the 
investment banking or securities business of the member.''
    \57\ In general, with some exceptions, paragraph (b)(1) of Rule 
2210 (Communications with the Public) requires that an appropriately 
qualified registered principal approve each retail communication 
prior to use or filing with FINRA.
    \58\ See FINRA Rules 3110(a)(4) and 3110(c)(1)(A).
---------------------------------------------------------------------------

    However, subject to specified conditions, an office or location may 
be deemed a ``non-branch location,'' and excluded from registration as 
a branch office. Currently, Rule 3110(f)(2)(A) sets forth seven 
exclusions--often referred to as unregistered offices or non-branch 
locations--of which two pertain to residential locations.\59\ One such 
exclusion appears under Rule 3110(f)(2)(A)(ii) and exempts from 
registration as a branch office an associated person's primary 
residence subject to the following express conditions: (1) 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; (2) the location is not held out to the public as an 
office and the associated person does not meet with customers at the 
location; (3) neither customer funds nor securities are handled at that 
location; (4) the 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; (5) the associated person's 
correspondence and communications with the public are subject to the 
firm's supervision in accordance with the Rule; (6) electronic 
communications (e.g., email) are made through the member's electronic 
system; (7) all orders are entered through the designated branch office 
or an electronic system established by the member that is reviewable at 
the branch office; (8) written supervisory procedures pertaining to 
supervision of sales activities conducted at the residence are 
maintained by the member; and (9) a list of the residence locations is 
maintained by the member (``primary residence exclusion'').\60\ The 
second exclusion that pertains to a residential location appears under 
Rule 3110(f)(2)(A)(iii) and is any location, other than a primary 
residence, that is used for securities business for less than 30 
business days in any one calendar year, provided that the member 
complies with the conditions described in (1) through (8) above (``non-
primary residence exclusion''). In general, the non-primary residence 
exclusion typically refers to a vacation or second home.\61\ A non-
branch location must be inspected on a periodic schedule, presumed to 
be at least every three years.\62\
---------------------------------------------------------------------------

    \59\ See generally FINRA Rule 3110(f)(2)(A) which, in addition 
to the primary residence and the non-primary residence exclusions 
that are further described, excludes the following from the 
definition of ``branch office'': (1) any location that is 
established solely for customer service or back office type 
functions where no sales activities are conducted and that is not 
held out to the public as a branch office; (2) any office of 
convenience, where associated persons occasionally and exclusively 
by appointment meet with customers, which is not held out to the 
public as an office; (3) any location that is used primarily to 
engage in non-securities activities and from which the associated 
person(s) effects no more than 25 securities transactions in any one 
calendar year; provided that any retail communication identifying 
such location also sets forth the address and telephone number of 
the location from which the associated person(s) conducting business 
at the non-branch locations are directly supervised; (4) the Floor 
of a registered national securities exchange where a member conducts 
a direct access business with public customers; or (5) a temporary 
location established in response to the implementation of a business 
continuity plan.
    \60\ See FINRA Rule 3110(f)(2)(ii)a. through i.
    \61\ See Notice to Members 06-12 (March 2006) (``Notice 06-
12'').
    \62\ See note 3, supra.
---------------------------------------------------------------------------

    Notwithstanding either of these two residential exclusions or the 
other exclusions listed under Rule 3110(f)(2)(A),\63\ a primary or non-
primary residence location that is responsible for either the 
supervisory activities set forth in the OSJ definition or for 
supervising the activities of persons associated with the member at one 
or more non-branch locations of the member is considered an OSJ or 
(supervisory) branch office, respectively.\64\ Consequently, such 
residential supervisory offices are subject to registration, an annual 
inspection and, in some cases, additional licensing requirements.\65\
---------------------------------------------------------------------------

    \63\ See note 59, supra.
    \64\ See FINRA Rule 3110(f)(1)(D) through (G) and FINRA Rule 
3110(f)(2)(B).
    \65\ See note 58, supra.
---------------------------------------------------------------------------

    As noted above, the branch office definition and its exclusions, 
including the conditions for the primary residence and non-primary 
residence exclusions, is a uniform definition FINRA developed in 
coordination with the NYSE and other self-regulatory organizations 
(``SROs''), and state securities regulators, and it has been in place 
since 2005 (collectively, the ``uniform branch office 
definition'').\66\ The codification of the seven exclusions from 
registration in the uniform branch office definition recognized both 
practical situations and advances in technology used to conduct and 
monitor business, the evolving nature of business models, and changing 
lifestyle and work practices while also preserving investor protection 
through specified safeguards and limitations such as those appearing in 
the primary residence exclusion.\67\ In the approval order for the 
uniform branch office definition, the Commission noted that the 
limitations for the primary residence exclusion ``closely track the 
limitations on the use of a private residence in the Books and Records 
Rules.'' \68\ The Commission also stated that the seven exclusions 
``recognize current business, lifestyle, and surveillance practices and 
provide associated persons with additional flexibility. For instance, 
because associated persons may have to work from home due to illness, 
or to provide childcare or eldercare for certain family members, the 
Commission believes it is appropriate to except primary residences from 
the definition of branch office while providing certain safeguards and 
limitations to protect investors.'' \69\ Further, the Commission stated 
that ``[g]iven the continued advances in technology used to conduct and 
monitor businesses and changes in the structure of broker-dealers and 
in the lifestyles and work habits of the workforce, the Commission 
believes it is reasonable and appropriate for [FINRA] to reexamine how 
it determines whether business locations need to be registered as 
branch offices of broker-dealer

[[Page 20575]]

members.'' \70\ Finally, the Commission expressed the view that the 
uniform branch office definition ``strikes the right balance between 
providing flexibility to broker-dealer firms to accommodate the needs 
of their associated persons, while at the same time setting forth 
parameters that should ensure that all locations, including home 
offices, are appropriately supervised.'' \71\ FINRA believes that the 
Commission's statements about advances in technology and evolving 
workplace conventions, and the safeguards and limitations of the 
primary residence exclusion are apt for this proposed rule change as 
well.
---------------------------------------------------------------------------

    \66\ See note 40, supra.
    \67\ See generally Notice to Members 05-67 (October 2005).
    \68\ See Uniform Definition of Branch Office, supra note 40, 70 
FR 54782, 54783 (citation omitted).
    \69\ See Uniform Definition of Branch Office, supra note 40, 70 
FR 54782, 54787. See also Securities Exchange Act Release No. 52402 
(September 9, 2005), 70 FR 54788, 54795 (September 16, 2005) (Order 
Approving File No. SR-NYSE-2002-34) (stating, ``the Commission 
believes that the seven proposed exceptions to registering as a 
branch office constitute a reasonable approach to recognize current 
business, lifestyle, and surveillance practices and provide 
associated persons with flexibility with respect to where they 
perform their jobs. For instance, because associated persons may 
have to work from home due to illness, or to provide childcare or 
eldercare for certain family members, the Commission believes it is 
appropriate to except primary residences from the definition of 
branch office.'').
    \70\ See Uniform Definition of Branch Office, supra note 40, 70 
FR 54782, 54787.
    \71\ See note 69, supra.
---------------------------------------------------------------------------

viii. Impact of Technology on Supervision and New Workplace Conventions
    In response to the public health crisis, FINRA requested comment 
regarding pandemic-related issues and questions, including the comment 
process in connection with the temporary amendments to Rule 3110,\72\ 
and discussions with FINRA's advisory committees and other industry 
representatives. Firms responded that they relied extensively on 
technology to support their effective transition to the remote work 
environment and enhance the supervision of geographically dispersed 
associated persons, many of whom have been working from home since 
early 2020 and may continue to do so in some manner in the current 
environment.\73\ These technological tools facilitating their 
supervisory practices include surveillance systems, electronic tracking 
programs or applications, and electronic communications, including 
video conferencing tools.\74\ Commenters that responded to the 2022 RSL 
Rule Filing conveyed the general view that technology has facilitated 
remote supervision, with some commenters describing the technology used 
to effectively supervise associated persons.\75\ The examples cited 
included the use of information barriers to safeguard and restrict the 
flow of confidential and material, non-public information; technology 
barriers to restrict and control employee access to systems and 
databases; internal email blocks; internet and social media reviews for 
evidence of outside business activities or private securities 
transactions; programs or operating systems to enable firms to conduct 
computer desktop reviews from another location; web-based communication 
platforms to communicate with registered persons; video conferencing 
technology; a centralized repository to retain electronic 
communications; and software (e.g., DocuSign) to enable customers to 
digitally sign contracts and other documents such as client 
attestations and new account documents.\76\ In addition, some firms 
have further noted that the flexibility hybrid work offers has made a 
positive impact in attracting more diverse talent, and retaining 
existing talent.\77\ These views are consistent with those expressed by 
several commenters in response to the 2022 RSL Rule Filing.\78\
---------------------------------------------------------------------------

    \72\ See, e.g., Submitted Comments to Securities Exchange Act 
Release No. 94018 (January 20, 2022), 87 FR 4072 (January 26, 2022) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2022-001), https://www.sec.gov/comments/sr-finra-2022-001/srfinra2022001.htm; and Submitted Comments to Securities Exchange 
Act Release No. 89188 (June 30, 2020), 85 FR 40713 (July 7, 2020) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2020-019), https://www.sec.gov/comments/sr-finra-2020-019/srfinra2020019.htm.
    \73\ See generally Regulatory Notice 21-44 (December 2021).
    \74\ See generally Regulatory Notice 20-16 (May 2020); see also 
FINRA White Paper, Technology Based Innovations for Regulatory 
Compliance (``RegTech'') in the Securities Industry (September 2018) 
(reporting, among other things, that as financial services firms 
seek to keep pace with regulatory compliance requirements, they are 
turning to new and innovative regulatory tools to assist them in 
meeting their obligations in an effective and efficient manner), 
https://www.finra.org/sites/default/files/2018_RegTech_Report.pdf.
    \75\ See Exhibit 2b.
    \76\ See Exhibit 2b.
    \77\ See generally note 12, supra.
    \78\ See Exhibit 2b.
---------------------------------------------------------------------------

    Similar to the changed environment underlying the Commission's 
approval order of the uniform branch office definition that codified 
the existing seven exclusions, FINRA believes that the structural and 
lifestyle changes for member firms and their workforce catalyzed by the 
pandemic--along with advances in technology--merit reevaluation of some 
aspects of the branch office registration and inspection requirements. 
Specifically, FINRA believes the regulatory benefit of requiring firms 
to designate a private residence, at which supervisory functions occur, 
as an OSJ or branch office (i.e., supervisory branch office), subject 
to an annual inspection schedule, should now be reconsidered where the 
risk profile of these offices can be effectively controlled through 
practically based safeguards and limitations.
    FINRA is therefore proposing to adopt new Supplementary Material 
.19 under Rule 3110 to establish a Residential Supervisory Location as 
a non-branch location, subject to specified safeguards and limitations. 
This proposed new non-branch location would target the subset of 
residential locations that have many of the attributes contained in the 
primary residence exclusion, but must be registered as an OSJ or branch 
office because of the supervisory functions taking place there.
b. Proposed Residential Supervisory Location as a Non-Branch Location
    The proposed definition of an RSL would be based largely on several 
existing aspects of Rule 3110(f). In particular, FINRA is proposing to 
incorporate the existing supervisory functions appearing in the OSJ 
definition (Rule 3110(f)(1)) and branch office definition (Rule 
3110(f)(2)(B)) with the existing residential exclusions set forth in 
the branch office definition to classify a Residential Supervisory 
Location as a non-branch location. Currently, a private residence at 
which these supervisory functions occur must be registered and 
designated as a branch office or OSJ under Rule 3110(a)(3), and 
inspected at least annually under Rule 3110(c)(1)(A). By treating such 
location as a non-branch location, the private residence would become 
subject to inspections on a regular periodic schedule under Rule 
3110(c)(1)(C), presumed to be every three years.\79\
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    \79\ See note 3, supra.
---------------------------------------------------------------------------

    Proposed Rule 3110.19 would incorporate some existing safeguards 
and limitations firms must already satisfy to rely on the primary 
residence exclusion \80\ as FINRA believes that several of these 
conditions are also appropriate for the proposed Residential 
Supervisory Location. FINRA intends for the terms underlying the 
proposed Residential Supervisory Location to be interpreted 
consistently with their meaning in Rule 3110(f) and existing related 
guidance.\81\ In addition, FINRA is proposing to further augment the 
conditions for RSL designation and the criteria that would make a firm 
ineligible to rely on proposed Rule 3110.19 if unmet.
---------------------------------------------------------------------------

    \80\ See Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f, and i.
    \81\ See, e.g., Notice 06-12.
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i. Conditions for Designation as a Residential Supervisory Location 
(Proposed Rule 3110.19(a))
    As described above, FINRA is proposing to adopt Rule 3110.19 to 
establish a Residential Supervisory Location as a new non-branch 
location, but subject to specified conditions, most of which are 
derived from those

[[Page 20576]]

currently required for the primary residence and non-primary residence 
exclusions. While many of the proposed conditions are similar to those 
FINRA had proposed in the 2022 RSL Rule Filing, this proposed rule 
change adjusts the conditions for RSL designation in two key areas. 
Specifically, this proposed rule change would add conditions pertaining 
to (1) books and records to include, among other things, clarifying 
language about a firm's recordkeeping system and (2) a firm's 
surveillance and technology tools to provide, among other things, that 
the tools are appropriate to supervise the risks presented by each RSL.
A. Conditions Derived Largely From Rule 3110 To Remain Substantively 
Unchanged From the 2022 RSL Rule Filing
    In the 2022 RSL Rule Filing, FINRA has proposed several conditions 
for RSL designation that were based on those used for the existing 
residential exclusions to the branch office definition. Through this 
proposed rule change, FINRA is proposing to retain those terms subject 
to some technical adjustments that would align the proposed rule text 
more closely to the rule text appearing in Rule 3110(f)(2)(A)(ii).
    Under proposed Rule 3110.19(a), any such location would be 
considered a non-branch location (and thus excluded from branch office 
registration), provided that: (1) 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 
(proposed Rule 3110.19(a)(1)); \82\ (2) the location is not held out to 
the public as an office (proposed Rule 3110.19(a)(2)); \83\ (3) the 
associated person does not meet with customers or prospective customers 
at the location (proposed Rule 3110.19(a)(3)); \84\ (4) no sales 
activity takes place at the location other than as permitted and 
subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or 
(iii) (proposed Rule 3110.19(a)(4)); \85\ (5) neither customer funds 
nor securities are handled at that location (proposed Rule 
3110.19(a)(5)); \86\ (6) the 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 (proposed 
Rule 3110.19(a)(6)); \87\ (7) the associated person's correspondence 
and communications with the public are subject to the firm's 
supervision in accordance with Rule 3110 (proposed Rule 3110.19(a)(7)); 
\88\ and (8) the associated person's electronic communications (e.g., 
email) are made through the member's electronic system (proposed Rule 
3110.19(a)(8)).\89\
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    \82\ See Rule 3110(f)(2)(A)(ii)a. (``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[.]'').
    \83\ See Rule 3110(f)(2)(A)(ii)b. (``The location is not held 
out to the public as an office and the associated persons does not 
meet with customers at the location[.]'').
    \84\ See note 83, supra.
    \85\ An associated person's private residence, other than a 
primary residence, remains subject to the less than 30-business-day 
in any calendar year limitation on use for securities business.
    \86\ See Rule 3110(f)(2)(A)(ii)c. (``Neither customer funds nor 
securities are handled at the location[.]'').
    \87\ See Rule 3110(f)(2)(A)(ii)d. (``The 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[.]'').
    \88\ See Rule 3110(f)(2)(A)(ii)e. (``The associated person's 
correspondence and communications with the public are subject to the 
firm's supervision in accordance with this Rule[.]'').
    \89\ See Rule 3110(f)(2)(A)(ii)f. (``Electronic communications 
(e.g., email) are made through the member's electronic system[.]'').
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B. Conditions Adjusted From the 2022 RSL Rule Filing
1. Books and Records (Proposed Rule 3110.19(a)(9))
    In the 2022 RSL Rule Filing, FINRA had proposed requiring that all 
books or records required to be made and preserved by the member under 
the federal securities laws or FINRA rules are maintained by the member 
other than at the location. FINRA is proposing a clarifying adjustment 
to the language to provide that: (1) 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; (2) such records are 
not physically or electronically maintained and preserved at the 
location; and (3) the member has prompt access to such records.
2. Surveillance and Technology Tools (Proposed Rule 3110.19(a)(10)
    To further enhance the proposed conditions for RSL designation, 
FINRA is proposing to include the requirement that a firm must 
determine that its surveillance and technology tools are appropriate to 
supervise its RSLs. FINRA believes that specifying baseline 
expectations with respect to the surveillance and technology tools a 
firm must have in order to supervise its RSLs would promote investor 
protection.
    FINRA believes that these proposed 10 conditions would strengthen a 
firm's ability to monitor the supervisory activities occurring at a 
Residential Supervisory Location and act to lower the overall risks 
associated with such location because, for example, the books and 
records required to be made and preserved by the member under the 
federal securities laws or FINRA rules cannot be physically or 
electronically maintained and preserved at the location. Moreover, 
FINRA notes that sales activities would be permissible at a Residential 
Supervisory Location to the same extent sales activities are permitted 
currently under such exclusions. As previously noted, the conditions 
for the current primary and non-primary residence exclusions, which 
align with the SEC's Books and Records Rules, were developed in 
coordination with other SROs and state securities regulators and such 
exclusions have been in place since 2005.\90\ As such, firms have 
developed experience with monitoring and supervising these conditions, 
and FINRA believes member firms will be able to rely on such experience 
to reasonably supervise similar conditions for proposed Residential 
Supervisory Locations. As with any non-branch location, a Residential 
Supervisory Location would be subject to an inspection on a periodic 
schedule, presumed to be at least every three years.\91\
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    \90\ 17 CFR 240.17a-4(l); see also note 40, supra.
    \91\ See note 3, supra.
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iv. Member Firm Ineligibility Criteria (Proposed Rule 3110.19(b))
    FINRA is further proposing several criteria a member firm must meet 
before it would be eligible to designate an office or location as a 
Residential Supervisory Location in accordance with proposed Rule 
3110.19. As described further below, the proposed seven ineligibility 
criteria reflect attributes of a member firm that FINRA believes are 
more likely to raise investor protection concerns based on FINRA rules. 
Consistent with the 2022 RSL Rule Filing, proposed Rule 3110.19(b) 
would provide that a location would be ineligible for designation as a 
Residential Supervisory Location in accordance with Rule 3110.19 if: 
(1) the member is currently designated as a ``Restricted Firm'' under 
Rule 4111 (Restricted Firm Obligations) \92\

[[Page 20577]]

(proposed Rule 3110.19(b)(1)); (2) the member is currently designated 
as a ``Taping Firm'' under Rule 3170 (Tape Recording of Registered 
Persons by Certain Firms) \93\ (proposed Rule 3110.19(b)(2)); or (3) 
the member is currently undergoing, or is required to undergo, a review 
under Rule 1017(a)(7) as a result of one or more associated persons at 
such location \94\ (proposed Rule 3110.19(b)(3)).\95\ Through this 
proposed rule change, FINRA is proposing to supplement these criteria 
to include a member firm: (1) that receives a notice from FINRA 
pursuant to Rule 9557 (Procedures for Regulating Activities under Rule 
4110 (Capital Compliance), Rule 4120 (Regulatory Notification and 
Business Curtailment) or Rule 4130 (Regulation of Activities of Section 
15C Members Experiencing Financial and/or Operational Difficulties)), 
unless FINRA has otherwise permitted activities in writing pursuant to 
such rule (proposed Rule 3110.19(b)(4)); (2) is or becomes suspended by 
FINRA (proposed Rule 3110.19(b)(5)); (3) based on the date in CRD, had 
its FINRA membership become effective within the prior 12 months 
(proposed Rule 3110.19(b)(6)); or (4) is or has been found within the 
past three years by the SEC or FINRA to have violated Rule 3110(c) 
(proposed Rule 3110.19(b)(7)).
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    \92\ In general, Rule 4111 requires member firms that are 
identified as ``Restricted Firms'' to deposit cash or qualified 
securities in a segregated, restricted account; adhere to specified 
conditions or restrictions; or comply with a combination of such 
obligations. See generally Regulatory Notice 21-34 (September 2021) 
(announcing FINRA's adoption of rules to address firms with a 
significant history of misconduct).
    \93\ In general, Rule 3170 requires a member firm to establish, 
enforce and maintain special written procedures supervising the 
telemarketing activities of all of its registered persons, including 
the tape recording of conversations, if the firm has hired more than 
a specified percentage of registered persons from firms that meet 
FINRA Rule 3170's definition of ``disciplined firm.'' See generally 
Regulatory Notice 14-10 (March 2014) (announcing FINRA's adoption of 
consolidated rules governing supervision).
    \94\ Rule 1017(a)(7) requires a member firm to file an 
application for continuing membership when a natural person seeking 
to become an owner, control person, principal or registered person 
of the member firm has, in the prior five years, one or more defined 
``final criminal matters'' or two or more ``specified risk events'' 
unless the member firm has submitted a written request to FINRA 
seeking a materiality consultation for the contemplated activity. 
Rule 1017(a)(7) applies whether the person is seeking to become an 
owner, control person, principal or registered person at the 
person's current member firm or at a new member firm. See generally 
Regulatory Notice 21-09 (March 2021) (announcing FINRA's adoption of 
rules to address brokers with a significant history of misconduct).
    \95\ In the 2022 RSL Rule Filing, FINRA had categorized these 
criteria as ``ineligible locations,'' but through this proposed rule 
change, FINRA is proposing to categorize these terms as ``member 
firm ineligibility criteria.'' See proposed Rule 3110.19(c).
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    FINRA believes that a member firm that is experiencing issues 
complying with its capital requirements or that has been suspended by 
FINRA is more likely to face significant operational challenges that 
may negatively impact the firm's overall supervision of its associated 
persons. FINRA further believes that a firm that has been a FINRA 
member for less than 12 months is often still implementing its business 
plan and developing a supervisory system appropriate tailored to the 
firm's specific attributes and structure. With respect to a firm that 
is or has been found within the past three years by the SEC or FINRA to 
have violated Rule 3110(c), FINRA believes such a firm has demonstrated 
challenges in developing or maintaining a robust inspection program. As 
such, FINRA believes that these proposed ineligibility criteria 
appropriately account for firms that pose higher risks, and for that 
reason, would be ineligible to rely on proposed Rule 3110.19.
v. Location Ineligibility Criteria (Proposed Rule 3110.19(c))
    In the 2022 RSL Rule Filing, FINRA had proposed several criteria 
applicable to an associated person that if unmet, would make the 
location of the associated person ineligible for RSL designation. All 
but one of the terms of proposed Rule 3110.19(c) remain substantively 
unchanged from those FINRA had proposed in the 2022 RSL Rule Filing. As 
described below, FINRA is proposing to make a clarifying adjustment to 
a criterion applicable to a firm's associated persons.
    Under proposed Rule 3110.19(c), a location would be ineligible for 
designation as a Residential Supervisory Location where: (1) one or 
more associated persons at such location is a designated supervisor who 
has less than one year of direct supervisory experience with the member 
(proposed Rule 3110.19(c)(1)); (2) one or more associated persons at 
such location is functioning as a principal for a limited period in 
accordance with Rule 1210.04 \96\ (proposed Rule 3110.19(c)(2)); (3) 
one or more associated persons at such location is subject to a 
mandatory heightened supervisory plan under the rules of the SEC, FINRA 
or state regulatory agency (proposed Rule 3110.19(c)(3)); (4) one or 
more associated persons at such location 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 under paragraph (c)(3) of this proposed Supplementary 
Material or otherwise as a condition to approval or permission for such 
association (proposed Rule 3110.19(c)(4)); (5) one or more associated 
persons at such location has an event in the prior three years 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 \97\ (proposed 
Rule 3110.19(c)(5)). These proposed criteria remain substantively 
unchanged from the 2022 RSL Rule Filing.
---------------------------------------------------------------------------

    \96\ In general, Rule 1210.04 (Requirements for Registered 
Persons Functioning as Principals for a Limited Period) imposes an 
experience requirement (18 months of experience within the preceding 
five-year period) on those registered representatives who are 
designated by their firms to function in a principal capacity for a 
fixed 120-day period before having passed an appropriate principal 
qualification examination. See generally Regulatory Notice 17-30 
(October 2017) (announcing FINRA's adoption of consolidated rules 
governing qualification and registration).
    \97\ Form U4's Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a) 
elicit reporting of criminal convictions, and Questions 14C, 14D, 
and 14E pertain to regulatory action disclosures.
---------------------------------------------------------------------------

    In addition to the proposed criteria above, an office or location 
would be ineligible for designation as a Residential Supervisory 
Location at which one or more associated persons at such location is 
currently subject to, or has been notified in writing that it will be 
subject to, any investigation, proceeding, complaint or other action by 
the member, the SEC, an SRO, including FINRA, or state securities 
commission (or agency or office performing like functions) 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 
Municipal Securities Rulemaking Board or FINRA (proposed Rule 
3110.19(c)(6)).\98\ This proposed criterion, which is similar to the 
one FINRA had proposed in the 2022 RSL Rule Filing, is a product of 
integrating aspects of several ``Regulatory Action Disclosure'' 
questions from Form U4

[[Page 20578]]

into a single provision.\99\ In addition, as adjusted, this proposed 
criterion is responsive to NASAA's comment to the 2022 RSL Filing, 
which recommended broadening the scope of the criterion to include any 
state laws pertaining to securities regulation, noting that ``state 
regulators investigate and bring actions for violations of state 
securities laws[,]'' \100\ and further noted that ``state securities 
actions typically allege violations of state securities laws and 
regulations, even if the same conduct could also be a violation of 
federal securities laws or SRO rules.'' \101\ FINRA had declined to 
include the reference to state securities laws in order to remain 
aligned with the provisions listed in Form U4.\102\ But after further 
consideration, FINRA is proposing to incorporate NASAA's recommendation 
to include a reference to ``any state law pertaining to the regulation 
of securities'' within the list of provisions under proposed Rule 
3110.19(c)(6) to account for state regulators. FINRA is also proposing 
to add a reference to FINRA rules. While this proposed adjustment would 
address NASAA's recommendation, FINRA notes that Form U4 does not have 
a specific question that elicits information regarding notice of an 
investigation or other action for a failure to supervise under state 
laws or FINRA rules and as such, proposed Rule 3110.19(c)(6) would 
require further information to monitor. A firm would need to be 
prepared to provide regulators information related to this proposed 
criterion upon request.
---------------------------------------------------------------------------

    \98\ See Form U4, Questions 14C(6)-(8) and 14E(5)-(7) 
(referencing the Securities Act of 1933, the Securities Exchange Act 
of 1934, the Investment Advisers Act of 1940, the Investment Company 
Act of 1940, the Commodity Exchange Act, or any rule or regulation 
under any of such Acts, and the rules of the Municipal Securities 
Rulemaking Board).
    \99\ See note 97, supra; see also Form U4 Question 14G, which 
provides: ``Have you been notified, in writing, that you are now the 
subject of any: (1) regulatory complaint or proceeding that could 
result in a ``yes'' answer to any part of 14C, D or E? (If ``yes'', 
complete the Regulatory Action Disclosure Reporting Page.); (2) 
investigation that could result in a ``yes'' answer to any part of 
14A, B, C, D or E? (If ``yes'', complete the Investigation 
Disclosure Reporting Page.)''
    \100\ See Letter from Melanie Senter Lubin, President, NASAA, to 
J. Matthew DeLesDernier, Assistant Secretary, SEC, dated August 23, 
2022 (``NASAA I''), https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20137298-307861.pdf.
    \101\ See Letter from Andrew Hartnett, President, NASAA, to J. 
Lynn Taylor, Assistant Secretary, SEC, dated November 25, 2022 
(``NASAA II''), https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20151667-320142.pdf.
    \102\ See note 98, supra.
---------------------------------------------------------------------------

    FINRA believes that these proposed six ineligibility criteria 
applicable to a firm's associated persons reflect the appropriate 
limitations on the private residences that can be designated as a 
Residential Supervisory Location. In particular, FINRA believes that an 
associated person designated at such location should have more than one 
year of supervisory experience with the member and have passed the 
appropriate principal level qualification examination before the 
associated person's private residence can be treated as a non-branch 
location under proposed Rule 3110.19(a). While it is possible that an 
associated person may have prior supervisory experience from another 
firm, a new supervisor at the current member firm may need time to 
become knowledgeable about that firm's systems, people, products, and 
overall compliance culture. In addition, FINRA believes that the 
specified disclosures on Form U4 pertaining to criminal convictions and 
final regulatory action and the imposition of a mandatory heightened 
supervisory plan are indicia of increased risk to investors at some 
firms and locations such that they should not be treated as a non-
branch location under the proposed supplementary material.\103\
---------------------------------------------------------------------------

    \103\ In response to the 2022 RSL Rule Filing, one commenter 
recommended that a location should be precluded from being 
designated as an RSL where a firm has implemented its own heightened 
supervisory plan, suggesting that this additional layer of 
supervision upon an associated person would warrant an automatic 
exclusion of such person's private residence as an RSL. In its 
second letter responding to comments directed to the 2022 RSL Rule 
Filing, FINRA indicated that a firm's routine evaluation of its 
supervisory system to ensure it is appropriately tailored to the 
firm's business may prompt a firm, out of an abundance of caution 
and independent of specific regulatory requirements or mandates, to 
undertake additional supervisory measures, including voluntarily 
imposing a heightened supervisory plan. See Exhibit 2c. FINRA 
further notes that a ``voluntary heightened supervisory plan'' is 
undefined and thus, a firm's view of ``heightened supervision'' 
could differ from that of a regulator. For example, a firm could 
voluntarily implement ``heightened supervision'' to review with more 
frequency the trade blotters of a registered person because the 
blotters relate to a new product of the firm.
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vi. Obligation To Provide List of RSLs to FINRA (Proposed Rule 
3110.19(d))
    In the 2022 RSL Rule Filing, FINRA had proposed requiring a firm to 
maintain a list of residence locations in similar fashion as the 
existing requirement under Rule 3110(f)(2)(A)(ii)i.\104\ Two commenters 
to the 2022 RSL Rule Filing shared their views on this proposed 
condition.\105\ In general, their views pertained to the reliability or 
completeness of such a list, and the creation of a more formal 
categorization or appropriate system change so firms can identify and 
track RSLs in the Central Registration Depository 
(``CRD[supreg]'').\106\ In further consideration of the comments, FINRA 
is proposing to require the member to provide FINRA with a list of the 
residence locations by the 15th day of the month following the calendar 
quarter through an electronic process or such other process as FINRA 
may prescribe. FINRA notes that CRD currently provides regulators with 
information regarding the offices and locations (registered and 
unregistered) to which associated persons required to be registered are 
assigned,\107\ but requiring member firms to affirmatively provide this 
information to FINRA through a scheduled process would make this 
information more readily accessible to regulators.\108\
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    \104\ See Rule 3110(f)(2)(A)(ii)i. (``A list of the residence 
locations is maintained by the member[.]'').
    \105\ See Exhibits 2a and 2b.
    \106\ CRD is the central licensing and registration system that 
FINRA operates for the benefit of FINRA, the SEC, other SROs, state 
securities regulators and broker-dealer firms. The information 
maintained in the CRD system is reported by registered broker-dealer 
firms, associated persons and regulatory authorities in response to 
questions on specified uniform registration forms. See generally 
Rule 8312 (FINRA BrokerCheck Disclosure).
    \107\ FINRA notes that firms are under a continuing obligation 
to promptly update, among other things, their uniform forms whenever 
the information becomes inaccurate or incomplete. Amendments must be 
filed electronically (unless the filer is an approved paper filer) 
by promptly updating the appropriate section of such forms. See, 
e.g., general instructions to Form U4 and Form BR.
    \108\ FINRA is exploring ways to provide this information to 
state regulators in a practical format.
---------------------------------------------------------------------------

    Proposed Rule 3110.19 would not be available to a member firm or 
private residence that meets any of the ineligibility criteria in 
proposed paragraphs (b) or (c), respectively, under Rule 3110.19 even 
with the safeguards and limitations listed in proposed Rule 3110.19(a). 
A member firm would be required to designate such private residence as 
an OSJ or branch office, as applicable, unless the location otherwise 
meets a branch office exclusion under Rule 3110(f)(2)(A). FINRA 
believes the proposed ineligibility criteria are appropriately derived 
from existing rule-based criteria that already have a process to 
identify firms that may pose greater concern (e.g., Rules 4111 and 
3170) or to identify associated persons that may pose greater concerns 
as supervisors due to the nature of disclosures of regulatory or 
disciplinary events on the uniform registration forms or where the firm 
has not yet had the opportunity to gauge such person's effectiveness as 
a supervisor due to their limited supervisory experience with the 
member firm. FINRA believes that these objective categorical 
restrictions strike the correct balance and are sensible and consistent 
with a reasonably designed supervisory system while still preserving 
investor protections.
    FINRA acknowledges the shift towards a permanent blended or hybrid

[[Page 20579]]

workforce model and therefore believes under the current environment, 
private residences responsible for the supervisory activities and 
subject to the safeguards and conditions, and the ineligibility 
criteria described above should not require registration as branch 
offices, and calibrating the proposed Residential Supervisory Location 
to a regular periodic inspection schedule is appropriately tailored to 
the lower risk profile. FINRA notes that as part of efforts between 
FINRA and the NYSE to align the interpretations of the uniform branch 
office definition, FINRA made a definitional change to the OSJ 
definition to exclude from OSJ designation and treat as a non-branch 
location an office or location at which final approval of research 
reports occurred,\109\ noting that ``the limited nature of such 
activity [did] not necessitate supervision of such a location as an 
OSJ[.]'' \110\
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    \109\ See Rule 3110(f)(1)(F).
    \110\ See Securities Exchange Act Release No. 56585 (October 1, 
2007), 72 FR 57081, 57082 (October 5, 2007) (Notice of Filing of 
File No. SR-FINRA-2007-008).
---------------------------------------------------------------------------

    The proposed RSL designation is intended to reflect a pragmatic 
balance between the hybrid workforce model and the parameters that 
should ensure that all locations, including residential locations, are 
appropriately supervised. Separate and apart from the classification of 
the office or location and the attendant inspection obligations, firms 
will continue to have an ongoing obligation to supervise the activities 
of each associated person in a manner reasonably designed to achieve 
compliance with applicable securities laws and regulations, and with 
applicable FINRA rules. FINRA emphasizes that member firms have a 
statutory duty to supervise their associated persons, regardless of 
their location, compensation or employment arrangement, or registration 
status, in accordance with the FINRA By-Laws and rules.\111\
---------------------------------------------------------------------------

    \111\ See Exchange Act Section 15(b)(4)(E), 15 U.S.C. 
78o(b)(4)(E), and Exchange Act Section 15(b)(6)(A), 15 U.S.C. 
78o(b)(6)(A).
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\112\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. In recognition of the ongoing advances in compliance 
technology and evolving lifestyle and work practices, FINRA believes 
that the proposed rule change will reasonably account for evolving work 
models by excluding from branch office registration a Residential 
Supervisory Location at which lower risk activities occur, while 
retaining important investor protections with a set of safeguards and 
limitations derived largely from the primary residence exclusion. The 
proposed new non-branch location is intended to provide a practical and 
balanced way for firms to continue to effectively meet the core 
regulatory obligation to establish and maintain a system to supervise 
the activities of each associated person that is reasonably designed to 
achieve compliance with applicable securities laws and regulations, and 
with applicable FINRA rules that directly serve investor protection.
---------------------------------------------------------------------------

    \112\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
1. Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated costs, benefits, and 
distributional and competitive effects, relative to the current 
baseline, and the alternatives FINRA considered in assessing how best 
to meet FINRA's regulatory objectives.
a. Regulatory Need
    As discussed above, in the wake of the pandemic, many member firms 
are developing hybrid workforce models for their employees. In these 
new ways of working, some employees may work permanently in an 
alternative location such as a private residence, other employees may 
spend some time in alternative locations and some time on-site in a 
conventional office setting, and some may work on-site full time.\113\ 
Absent the proposed rule change, when the temporary relief from the 
requirement to submit branch office applications on Form BR for new 
office locations ends, many member firms would need to either curtail 
activities at residential locations or register large numbers of 
residential locations as OSJs or supervisory branch offices. Either 
type of adjustment would create potentially significant costs. The 
proposed rule change would reduce, but not eliminate, the need for such 
adjustments since the activities conducted at some new residential 
locations would likely not meet the requirements of the proposed rule 
change.
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    \113\ According to the Survey of Working Arrangements and 
Attitudes (SWAA), post-COVID, many employers are planning to allow 
employees to work from home about 2.2 days per week on average. See 
Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, SWAA February 
2023 (Updates February 12, 2023), https://wfhresearch.com/wp-content/uploads/2023/02/WFHResearch_updates_February2023.pdf. The 
SWAA is a monthly survey with respondents that are working-age 
persons in the United States that had earnings of at least $10,000 
in 2019. Further details about this survey can be found at https://wfhresearch.com.
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b. Economic Baseline
    The economic baseline includes both current and foreseeable 
workforce arrangements and business practices, including those that 
were first developed during the pandemic and have been modified since 
in light of reduced health and safety concerns. In particular, the 
economic baseline includes the innovations, and investments in 
communication and surveillance technology, that have supported and 
continue to support supervision in the remote work environment.\114\ 
These innovations and investments have depended in part on the 
temporary suspension of the requirement to submit branch office 
applications on Form BR for new office locations, provided in Notice 
20-08. However, in order to provide a full accounting of the likely 
effects of the proposed rule change, the analysis considers the impact 
of the proposed rule change under the assumption that, going forward, 
the temporary suspension of the above requirement is no longer in 
effect. The current supervisory requirements of Rule 3110 will then 
apply, including the provisions of Rule 3110 that categorize an OSJ, 
branch office and non-branch location and that establish the 
supervisory and registration requirements of each office or location.

[[Page 20580]]

As discussed above, a location registered as a branch office must have 
one or more appropriately registered representatives or principals in 
each office, and is subject to an inspection at least every three 
years, unless it is a supervisory branch office in which case it is 
subject to at least an annual inspection.
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    \114\ The pandemic propelled increased reliance on technology 
solutions in the remote work environment. A McKinsey survey in late 
2020 found that, overall, firms had accelerated their adoption of 
technology, with large accelerations in the implementation of 
changes to increase remote working and collaboration, as well the 
use of advanced technologies in operations. See McKinsey & Company, 
How COVID-19 has pushed companies over the technology tipping 
point--and transformed business forever, October 5, 2020, https://mck.co/3nlK8b2.
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    As of December 31, 2022, FINRA's membership included 3,381 firms 
\115\ with 150,495 registered branch offices. Of these branch offices, 
18,564 (12%) are OSJs, with 2,451 of them identified as private 
residences.\116\ There are 21,510 principal level registered persons 
serving as OSJ supervisors, with 2,165 (12%) working at OSJs identified 
as private residences.\117\ Data on the number of residential locations 
at which supervisors are currently working full or part time may be 
incomplete, due to the temporary suspension of the Form BR requirement 
for new offices included in Notice 20-08. However, large member firms 
(500 or more registered persons) account for about 69% of OSJs. By type 
of business, diversified and retail firms account for 81% of OSJs. To 
the extent that these member firms account for most supervisory staff, 
they are potentially currently making broad use of hybrid workforce 
arrangements involving residential locations.
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    \115\ This count excludes firms with membership pending 
approval, and withdrawn or terminated from membership.
    \116\ The number of branch offices and OSJs is derived from Form 
BR, a uniform form that a member firm uses to register with FINRA 
and as required by the relevant state jurisdictions or other SROs, 
the firm's location as a branch office. Form BR's Section 1 (General 
Information) provides a place for a firm to indicate whether the 
branch office is a private residence by checking a ``Private 
Residence Checkbox.'' The number of OSJs is derived from Form BR's 
Section 2 (Registration/Notice Filing/Type of Office/Activities), 
which requires a firm to indicate whether the branch office is an 
OSJ. Some OSJs have more than one supervisor, and some principals 
serve as supervisors for more than one OSJ. FINRA's records from 
Form U4 show that, altogether, there are about 137,777 registered 
persons with principal registration categories (including those in 
OSJ supervisory roles).
    \117\ In addition, FINRA member firms with a single branch 
account for 1,698 of these OSJs and 2,064 of the supervisors. Sixty-
eight FINRA member firms did not have any branches registered at the 
end of year 2022; these firms are all small member firms.
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c. Economic Impacts
    Absent the proposed rule change, if the temporary relief on 
registering new branches with Form BR, provided during the pandemic, 
ends, many member firms would likely need to either curtail activities 
at residential locations or register large numbers of residential 
locations as OSJs or supervisory branch offices. This potential 
increase in office count would impact inspection obligations and in 
some cases, licensing requirements associated with individual 
locations. These additional requirements would hold even for office 
locations that bear lower risk characteristics and from which lower 
risk supervisory functions are conducted. The economic impacts of these 
changes would be mitigated by the proposed rule change.
    Changes in the number of different types of offices and locations 
since the start of the pandemic, along with current data, can provide a 
rough indication of the potential impact of the proposed rule change on 
firms. As Table 1 below shows, the number of offices and locations has 
fallen except for non-branch locations. Residential non-branch 
locations have increased by 17,603 (75%). Some of these new residential 
non-branch locations would have needed to register as OSJs if not for 
the temporary suspension of the Form BR requirement and will need to 
register as OSJs unless the proposed rule change is adopted. Further, 
some of the 2,451 private residences that are currently registered as 
OSJs, described above, might be able to become Residential Supervisory 
Locations if the proposed rule change is adopted. The numbers suggest 
that the number of offices and locations that may benefit from the 
proposed rule change is in the thousands. While Form U4 and Form BR can 
be used to count numbers of work locations and identify high-level 
activities at registered branch offices, the number of residential 
locations that would meet the conditions of proposed Rule 3110.19(a) 
alone would depend on specific information about the activities at 
residential locations that these forms do not provide.\118\
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    \118\ Non-branch locations do not have to be registered with 
FINRA. The estimates for non-branch locations are obtained by 
reviewing Form U4. There may be some double counting of non-branch 
locations if members record the address differently on more than one 
Form U4. For the numbers of non-branch locations in Table 1, FINRA 
counted, by firm, unique addresses based on the first seven 
characters of the Form U4 ``Street 1'' field, city and state. 
Addresses that matched the address of the main office or of an 
existing registered branch were excluded.

   Table 1--Numbers of Offices and Locations, Pre-Pandemic and Current
------------------------------------------------------------------------
                                   December 31, 2019   December 31, 2022
------------------------------------------------------------------------
Registered branch locations.....             152,682             150,495
    OSJs........................              19,123              18,564
    Non-OSJs....................             134,559             131,931
Non-branch locations............              43,678              59,830
    Residential non-branch                    23,475              41,078
     locations..................
------------------------------------------------------------------------

i. Anticipated Benefits
    The proposed rule change would allow some of the work arrangements 
adopted during the pandemic to continue with only small additional 
compliance costs. Specifically, as long as the location is a private 
residence and is not otherwise ineligible under the rule, associated 
persons could continue to conduct work that meets the requirements of 
the proposed rule change. Not all new residential locations would 
qualify as Residential Supervisory Locations, so some would need to 
register as some type of branch location--and face higher compliance 
costs--or otherwise meet a branch office exclusion under Rule 
3110(f)(2) or stop operating as a work location.
    The proposed rule change also creates an opportunity for continued 
innovation in workforce arrangements. The proposed rule change may lead 
to centralizing tasks in specific OSJs and restructuring of job 
functions to enable the use of a Residential Supervisory Location on a 
full or part time basis, and possibly an increase in the number of 
supervisors. Some current OSJs might qualify as Residential Supervisory 
Locations with no further adjustments, allowing members to reduce 
expenses on compliance. Firms would make use of these opportunities if 
they are beneficial to their operations, and not otherwise.
    The proposed rule change would also support the competitiveness of 
the broker-dealer industry for educated individuals who seek 
professional

[[Page 20581]]

positions.\119\ The expectation of workplace flexibility and remote 
work by such individuals may lead them away from the broker-dealer 
industry if other segments of financial services or professional 
occupations offer more flexible workforce arrangements.
---------------------------------------------------------------------------

    \119\ See note 113, supra. See also Jose Maria Barrero, Nicholas 
Bloom & Steven J. Davis, Why Working from Home Will Stick (NBER 
Working Paper 28731, April 2021), https://wfhresearch.com/wp-content/uploads/2021/04/w28731-3-May-2021.pdf, who point to a 
lasting effect of the pandemic on work arrangements, in particular 
for those with higher education and earnings; and Alexander Bick, 
Adam Blandin & Karel Mertens, Work from Home Before and After the 
COVID-19 Outbreak, (Working Paper, October 2022), https://karelmertenscom.files.wordpress.com/2022/11/wfh_oct_15_paper.pdf, 
who find consistent results, with a higher adoption rate of work 
from home jobs in Finance and Insurance, relative to other 
industries, reflected in Figure 10. Both papers, based on different 
surveys and, in Bick et al, with added results from a model, 
conclude that around 22% of full workdays will be provided from home 
in the long run.
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    As noted above, the pandemic caused firms throughout the financial 
services sector to accelerate the adoption of technological 
solutions.\120\ Technology has been used not only to make remote work 
possible but also to conduct a range of compliance and regulatory risk 
management activities. By facilitating hybrid work arrangements, the 
proposed rule change would support continued adoption and innovation in 
technological solutions and reductions in the cost of these 
solutions.\121\
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    \120\ See note 114, supra.
    \121\ See Ben Charoenwong, Zachary T. Kowaleski, Alan Kwan, & 
Andrew Sutherland, RegTech, MIT Sloan Research Paper 6563-22 
(September 16, 2022), Available at SSRN: https://ssrn.com/abstract=4000016. The authors show that broker-dealers that made 
required compliance technology investments were able to make 
complementary technology investments in communications and customer 
relationship management software that resulted in a reduced number 
of complaints and less employee misconduct.
---------------------------------------------------------------------------

    Finally, the proposed rule change would relieve member firms from 
paying FINRA branch office registration fees for locations that would 
be branch offices under the baseline but qualify as Residential 
Supervisory Locations. Member firms may also find that some existing 
branch locations become unnecessary given the proposed rule change and 
could reduce expenses attendant to those locations, including such 
fees. However, member firms would still need to pay branch office 
registration fees generally for new residential locations that meet the 
definition of a ``branch office,'' and are not covered by the proposed 
Residential Supervisory Location designation or do not meet a branch 
office exclusion under Rule 3110(f)(2).
ii. Anticipated Costs
    The proposed rule change provides firms with a new designation for 
work locations without removing any designations that are available 
under the baseline. Firms will therefore use the new Residential 
Supervisory Location designation only if doing so is beneficial to 
their operations relative to using one of the existing designations. 
The cost of complying with the requirements of the new designation for 
work locations is obviously a factor in this decision. Firms may incur 
a number of new one-time costs, such as adjusting staffing and 
activities at existing locations, to initially meet the requirements of 
proposed Rule 3110.19. Firms may also need to develop new written 
supervisory procedures and new trainings for staff at Residential 
Supervisory Locations, and deploy these trainings, so staff are aware 
of the compliance requirements. Firms may incur new ongoing costs to 
monitor for compliance and for adjusting staffing and designations if a 
Residential Supervisory Location becomes ineligible for this 
designation because an associated person incurs events or actions 
described in proposed Rule 3110.19(b).
    Classifying residential locations that would otherwise need to 
register as OSJs or branch offices as Residential Supervisory Locations 
will remove certain compliance requirements. Depending on the type of 
branch, the reduction in compliance requirements may include no longer 
having to have one or more appropriately registered representatives or 
principals in each office or to conduct inspections annually or every 
three years. These reductions in compliance requirements may create 
risks to member firms and investors.
    To mitigate these risks, the proposal excludes locations on the 
basis of inexperience or prior harmful conduct by individuals working 
at those locations, and limits the activities that can be performed at 
those locations. The designation of certain locations as ineligible 
provides minimum standards for staff that are eligible to work in such 
locations. FINRA expects that most firms would go beyond these minimum 
standards in selecting staff who would perform supervisory and other 
sensitive work at Residential Supervisory Locations, and in monitoring 
their conduct.
d. Alternatives Considered
    FINRA is proposing to provide certain regulatory accommodations for 
the innovations in business organization and operations that occurred 
during the pandemic by modeling the Residential Supervisory Locations 
after the existing primary residence and non-primary residence 
exclusions, which have been in effect since 2005. FINRA considered 
adopting a proposed rule with just those exclusions and without the 
designation of certain locations as ineligible. More locations would 
qualify as Residential Supervisory Locations without the additional 
requirements. FINRA expects, however, that the proposed rule change 
provides a better balance of the potential benefits and the risks that 
could impose costs on members and investors.
    In addition, FINRA considered the merits of adapting other 
requirements similar to those FINRA had proposed in File No. SR-FINRA-
2022-021, a proposal to establish a voluntary three-year remote 
inspections pilot program.\122\ In particular, the 2022 Remote 
Inspections Pilot Program Rule Filing includes the requirement for a 
firm to conduct and document a risk assessment considering several 
factors referenced in Rule 3110 and others, for each office or location 
where a firm determines to conduct a remote inspection. FINRA believes 
that adding the requirement for a firm to conduct and document a risk 
assessment for designating an office or location as a Residential 
Supervisory Location would be largely redundant given other 
requirements applicable to designating an office or location as an RSL. 
A firm continues to have a fundamental obligation under Rule 3110(a) to 
establish and maintain a system to supervise the activities of each 
associated person that is reasonably designed to achieve compliance 
with applicable securities laws and regulations, and with applicable 
FINRA rules. This supervisory system would, at least in effect, require 
the assessment and mitigation of the risk that the activities of 
associated persons working at Residential Supervisory Locations would 
not comply with the securities laws. The supervisory system thereby 
reduces the benefit of a separately conducted and documented risk 
assessment. Similarly, under Rule 3110(b), a firm is required to 
establish, maintain, and enforce written procedures to supervise the 
types of business in which it engages and the activities of its 
associated persons that are reasonably designed to achieve

[[Page 20582]]

compliance with applicable securities laws and regulations, and with 
applicable FINRA rules. These supervisory procedures would, at least in 
effect, require the assessment and mitigation of risks of non-
compliance posed by the types of business conducted at Residential 
Supervisory Locations. FINRA determined that requiring a firm to 
conduct and document a risk assessment for designating an office or 
location as an RSL would not provide an additional benefit to members 
or investors.
---------------------------------------------------------------------------

    \122\ See Securities Exchange Act Release No. 96520 (December 
16, 2022), 87 FR 78737 (December 22, 2022) (Notice of Partial 
Amendment No. 1 to File No. SR-FINRA-2022-021) (``2022 Remote 
Inspections Pilot Program Rule Filing'').
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The SEC published the 2022 RSL Rule Filing for comment and as of 
the end of the comment period on August 23, 2022, the SEC had received 
20 unique comment letters, then subsequently received six more comment 
letters.\123\ On October 31, 2022, FINRA responded to the comments and 
did not propose changing the terms of the 2022 RSL Rule Filing in 
response to the comments.\124\ On the same day, the Commission 
instituted proceedings to determine whether to approve or disapprove 
the 2022 RSL Rule Filing (``Order''),\125\ and the SEC received five 
comments letters in response to the Order.\126\ On December 9, 2022, 
FINRA responded to those comments and did not propose changing the 2022 
RSL Rule Filing in response to them.\127\ Since then, the SEC has 
received one supplemental comment letter.\128\ March 30, 2023 was the 
date by which the SEC was required to either approve or disapprove the 
2022 RSL Rule Filing. But on March 29, 2023, FINRA withdrew the 2022 
RSL Rule Filing from the SEC to consider whether modifications and 
clarifications to the filing would be appropriate in response to 
concerns raised by commenters. While the proposed rule change retains 
many of the terms of the 2022 RSL Rule Filing, the proposed rule change 
makes some adjustments, which are discussed in detail above under Item 
II.A.1.b.
---------------------------------------------------------------------------

    \123\ See note 9, supra.
    \124\ See note 9, supra; see also Exhibit 2b.
    \125\ See Securities Exchange Act Release No. 96191 (October 31, 
2022), 87 FR 66767 (November 4, 2022) (Order Instituting Proceedings 
to Determine Whether to Approve or Disapprove File No. SR-FINRA-
2022-019).
    \126\ See note 9, supra.
    \127\ See note 9, supra; see also Exhibit 2c.
    \128\ See Letter from Bernard V. Canepa, Managing Director & 
Associate General Counsel, Securities Industry and Financial Markets 
Association, to Vanessa A. Countryman, Secretary, SEC, dated 
December 20, 2022, https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20153234-320719.pdf.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2023-006 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2023-006. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-FINRA-2023-006 and 
should be submitted on or before April 27, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\129\
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    \129\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-07145 Filed 4-5-23; 8:45 am]
BILLING CODE 8011-01-P
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