FINRA has published Regulatory Notice 24-02 announcing the effective dates for the Remote Inspection Pilot Program (Pilot) and the Residential Supervisory Locations (RSLs). In addition, they announced the end to pandemic-related regulatory relief that temporarily suspended the requirement to maintain updated Form U4 and Form BR information regarding the office of employment address for registered persons who temporarily relocated and newly opened temporary office locations or space-sharing arrangements.
Remote Inspection Pilot (Pilot) ~ FINRA Rule 3110.18
The Pilot is expected to kickoff July 1, 2024 and will run through June 30, 2027. Following are the timeframes for each Pilot Year.
- Pilot Year 1 ~ July 1, 2024 to December 31, 2024
- Pilot Year 2 ~ January 1, 2025 to December 31, 2025
- Pilot Year 3 ~ January 1, 2026 to December 31, 2026
- Pilot Year 4 ~ January 1, 2027 to June 30, 2027.
Once the Pilot kicks off, only Pilot participating firms will be able to inspect their locations remotely. All others will be required to fully comply with FINRA Rule 3110(c).
FINRA will provide additional guidance on how to opt-in via the FINRA Gateway once they have completed the technology development.
Residential Supervisory Locations (RSLs) ~ FINRA Rule 3110.19
Beginning June 1, 2024, firms will be able to designate RSLs in accordance with FINRA Rule 3110.19. Firms electing to designate locations as RSLs will be required to provide FINRA with a list of locations designated as RSLs by the 15th day of the month following each calendar quarter. Therefore, the first list of locations designated as RSLs during the period of June 1 and September 30, 2024 will be due to FINRA on October 15, 2024. The list of locations designated as RSLs from October 1 through December 31, 2024 will be due to FINRA January 15, 2025 and so on.
FINRA will provide additional guidance on how firms will be able to identify their locations as RSLs and meet the obligation to provide their quarterly RSL lists to FINRA once they have completed the technology development which is expected to be ready by May 31, 2024.
Pandemic-Related Regulatory Relief Ending ~ FINRA Regulatory Notice 20-08
The regulatory relief extended via FINRA Regulatory Notice 20-08 that temporarily suspended certain Form U4 and Form BR filing requirements will end May 31, 2024.
Be mindful of FINRA Rule 1017 as you prepare for the end to this relief as increases to the number of branch locations could jeopardize safe harbor thresholds. If you’re uncertain whether an increase in the number of branch locations is considered a ‘material change’, you may need to seek a Materiality Consultation with FINRA’s MAP Group.
Implications for Firms
FINRA’s introduction of new rules and the cessation of the pandemic-related regulatory relief signify a pivotal transition in the regulatory landscape. This shift necessitates a multifaceted response from firms to remain compliant and competitive. The sections below outline key areas of impact and the necessary steps for firms to adapt successfully.
Adapting to New Supervisory Structures
The introduction of RSLs and the Pilot necessitates firms to reevaluate and potentially restructure their supervisory approaches. This includes adapting to supervising employees in residential settings and utilizing remote inspection methods or returning to an onsite inspection methodology. Firms must develop internal policies and training programs to ensure that their supervisory practices are effectively documented, implemented and communicated, and compliant with FINRA’s regulations.
Preparation for Compliance and Reporting
The effective dates of the new rules imply a tight timeline for compliance and reporting. Firms must be prepared to designate their RSL locations by June 1, 2024, and submit their first RSL list by October 15, 2024. Similarly, for those opting into the Pilot, readiness is key to ensure compliance from the very start of each pilot year. Firms should allocate resources to ensure timely and accurate reporting to avoid any regulatory breaches. In the context of identifying and designating RSLs, this preparation involves more than just understanding the new regulations. Firms must ensure their internal systems are equipped to accurately track and report these RSLs, a task that could involve significant upgrades or modifications to existing data management systems. The challenge lies in not only integrating new data points into these systems but also ensuring continuous updates and accuracy. This process is critical to provide FINRA with precise and timely information, which is essential for maintaining compliance and avoiding potential penalties.
Review and Update of Registration Forms
The ending of the pandemic-related regulatory relief means firms must review and update Forms U4 and BR to reflect current employment addresses and branch office information. This task might be substantial, especially for firms with a large workforce or multiple branch locations. Ensuring accuracy in these forms is critical, as any discrepancies could lead to compliance issues.
Strategic Decision-Making and Resource Allocation
Deciding whether to opt into the Pilot and designating RSLs are strategic decisions. Firms need to weigh the benefits against the potential challenges, including resource implications. A common concern regarding the Pilot is the reporting of significant findings to FINRA. Many firms are still taking a wait-and-see approach until FINRA provides information regarding the manner and detail with which that data will need to be provided. Allocating appropriate resources, including personnel and budget, and an internal analysis of the firm’s ability and desire to fulfill the Pilot reporting obligations, will be crucial for effective implementation and ongoing management of these new requirements.
Ongoing Training and Education
Given the changes and new requirements, firms will need to invest in ongoing training and education for their staff. This includes understanding the nuances of the new rules, best practices for remote supervision and inspections, and staying updated with any further regulatory changes. Keeping the workforce well-informed and trained will be key to seamless adaptation and compliance.
Proactive Engagement with FINRA
Staying engaged with FINRA, seeking clarifications when needed, and participating in any offered guidance sessions will help firms stay ahead of potential challenges. Proactive engagement can provide insights into best practices and help in understanding the expectations of the regulatory body.
Conclusion
FINRA’s latest updates reflect its commitment to evolving with the changing dynamics of the financial industry while maintaining a robust regulatory framework. Firms should stay informed about the detailed guidance from FINRA and plan accordingly to align with these regulatory changes effectively. This proactive approach will ensure continued compliance and smooth operations in the evolving financial landscape.
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