Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 82447 

65See, e.g., 15 U.S.C. 78s(b)(2)(A)(ii) (allowing the 

Commission to extend the period for review by not 

more than 45 days if the Commission determines 

that a longer period is appropriate and publishes 

the reasons for such determination). 

66 15 U.S.C. 78s(b)(2)(C). 

67 17 CFR 240.17Ad–22(e)(17)(i). 

68 In approving this proposed rule change, the 

Commission has considered the proposed rules’ 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

69 15 U.S.C. 78s(b)(2). 

70 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Exchange Act Release No. 97237 (Mar. 31, 

2023), 88 FR 20568, 20568 (Apr. 6, 2023) (File No. 

SR–FINRA–2023–006 (‘‘Notice’’) (citing FINRA 

Rules 3110(c)(1)(C) and 3110.13), https://

www.govinfo.gov/content/pkg/FR-2023-04-06/pdf/ 

2023-07145.pdf. 

4See id. 

5 Id. 

6See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

Daniel Fisher, Branch Chief, Division of Trading 

and Markets, Commission, dated May 16, 2023, 

https://www.finra.org/sites/default/files/2023-05/srfinra-2023-006-extension-no-1.pdf. 

7The comment letters are available at https://

www.sec.gov/comments/sr-finra-2023-006/ 

srfinra2023006.htm. 

8See Amendment No. 1, https://www.finra.org/ 

sites/default/files/2023-07/sr-2023-006-amendmentNo1.pdf. 

9Exchange Act Release No. 97839 (July 5, 2023), 

88 FR 44173 (July 11, 2023) (File No. SR–FINRA– 

2023–006), https://www.govinfo.gov/content/pkg/ 

FR-2023-07-11/pdf/2023-14523.pdf. 

10See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

Vanessa Countryman, Secretary, Commission, dated 

July 25, 2023 (‘‘FINRA Response I’’), https://

www.sec.gov/comments/sr-finra-2023-006/ 

srfinra2023006-235699-491502.pdf. 

11See Amendment No. 2, https://www.finra.org/ 

sites/default/files/2023-09/SR-FINRA-2023-006- 

Amendment-2.pdf; letter from Kosha Dalal, Vice 

President and Associate General Counsel, Office of 

General Counsel, FINRA, to Vanessa Countryman, 

Secretary, Commission, dated Sept. 14, 2023 

(‘‘FINRA Response II’’), https://www.sec.gov/ 

comments/sr-finra-2023-006/srfinra2023006- 

259039-608182.pdf. 

12See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

Daniel Fisher, Branch Chief, Division of Trading 

and Markets, Commission, dated Sept. 22, 2023, 

https://www.finra.org/sites/default/files/2023-09/srfinra-2023-006-ext2.pdf. 

Under the Exchange Act and relevant 

rules thereunder, SROs, including OCC, 

determine for themselves when to file a 

proposed rule change. The Exchange 

Act defines the process and time within 

which the Commission may act,65 and 

Section 19(b)(2)(C) of the Exchange Act 

requires the Commission to approve a 

proposed rule change of a SRO if it finds 

that such change is consistent with the 

Exchange Act and rules and regulations 

thereunder that are applicable to the 

SRO.66 Concerns regarding rules 

proposed by the Commission may be 

presented as comments to such rules so 

that the Commission may consider them 

in determining what, if any, final rule it 

will adopt. 

Based on the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of Rule 17Ad–22(e)(17)(i) 

under the Exchange Act.67

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change, as modified by Partial 

Amendment No. 1, is consistent with 

the requirements of the Exchange Act, 

and in particular, the requirements of 

Section 17A of the Exchange Act 68 and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,69

that the proposed rule change (SR– 

OCC–2023–003), as modified by Partial 

Amendment No. 1, be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.70

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25883 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–98980; File No. SR–FINRA– 

2023–006] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 2 and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 and 2, To Adopt 

Supplementary Material .19 

(Residential Supervisory Location) 

Under FINRA Rule 3110 (Supervision) 

November 17, 2023. 

I. Introduction 

On March 29, 2023, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change (SR–FINRA–2023–006) to adopt 

new Supplementary Material .19 

(Residential Supervisory Location) 

under FINRA Rule 3110 (Supervision). 

The proposed rule change, as modified 

by Amendment Nos. 1 and 2 

(hereinafter, the ‘‘proposed rule change’’ 

unless otherwise specified), would treat 

a private residence in which an 

associated person engages in specified 

supervisory activities, subject to certain 

safeguards and limitations, as a nonbranch location.3 Treated as non-branch 

locations, these newly defined 

Residential Supervisory Locations 

(‘‘RSLs’’) would be subject to 

inspections on a regular periodic 

schedule (presumed to be at least every 

three years) instead of the annual 

inspection currently required for 

‘‘offices of supervisory jurisdiction’’ 

(‘‘OSJs’’) and ‘‘supervisory branch 

offices.’’ 4

The proposed rule change was 

published for public comment in the 

Federal Register on April 6, 2023.5 On 

May 16, 2023, FINRA consented to an 

extension of the time period in which 

the Commission must approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change to July 5, 2023.6 The 

Commission received thirteen comment 

letters in response to the Notice.7

On July 3, 2023, FINRA filed an 

amendment to the proposed rule change 

(‘‘Amendment No. 1’’).8 On July 5, 2023, 

the Commission published a notice of 

filing of Amendment No. 1 and an order 

instituting proceedings to determine 

whether to approve or disapprove the 

proposed rule change, as modified by 

Amendment No. 1.9 On July 25, 2023, 

FINRA responded to the comment 

letters received in response to the 

Notice.10 The Commission received 

twelve comment letters in response to 

the notice of Amendment No. 1 and 

order instituting proceedings. 

On September 14, 2023, FINRA 

responded to the comment letters 

received in response to the notice of 

Amendment No. 1 and order instituting 

proceedings, and it filed an amendment 

to the proposed rule change 

(‘‘Amendment No. 2’’).11 On September 

22, 2023, FINRA consented to an 

extension of the time period in which 

the Commission must approve or 

disapprove the proposed rule change to 

December 2, 2023.12 The Commission is 

publishing this order to provide notice 

of the filing of, and to solicit comments 

on, Amendment No. 2 from interested 

persons and is approving the proposed 


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13Notice at 20569. 

14 Id. at 20573. 

15FINRA Rule 3110(a). 

16Unless otherwise specified, the Commission 

uses the term ‘‘location’’ in this order to refer to any 

location where a firm does business, such as an 

OSJ, supervisory branch office, non-supervisory 

branch office, or non-branch location, as applicable. 

17See FINRA Rule 3110(a)(3). 

18See FINRA Rule 3110(c). On November 17, 

2023, the Commission issued an approval order for 

File Number FINRA–2023–007, which adopted new 

Supplementary Material .18 (Remote Inspections 

Pilot Program) under FINRA Rule 3110 

(Supervision). FINRA Rule 3110.18 establishes a 

voluntary, three-year pilot program to allow eligible 

member firms to elect to fulfill their inspection 

obligations under FINRA Rule 3110(c) by 

conducting inspections of eligible OSJs, branch 

offices, and non-branch locations remotely without 

an on-site visit to such locations, subject to 

specified safeguards and limitations. 

19See FINRA Rule 3110(c)(1). 

20See id. 

21FINRA Rule 3110(f)(2)(A). 

22FINRA Rule 3110(f)(2)(B). 

23See Notice at 20573 (‘‘[A]ny location that is 

responsible for supervising the activities of persons 

associated with the member at one or more nonbranch locations of the member is a branch office 

(i.e., a supervisory branch office).’’); FINRA Rule 

3110(c)(1)(B) (‘‘Each member shall inspect at least 

every three years every branch office that does not 

supervise one or more non-branch locations.’’). 

24FINRA Rule 3110(c)(1)(A) (‘‘Each member shall 

inspect at least annually . . . any branch office that 

supervises one or more non-branch locations.’’). 

25FINRA Rule 3110(c)(1)(B) (‘‘Each member shall 

inspect at least every three years every branch office 

that does not supervise one or more non-branch 

locations.’’). 

26FINRA Rule 3110(b)(2) 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.’’ 

27 ‘‘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.’’ 

Notice at 20574 n.57. 

28FINRA Rule 3110(f)(1). 

29See FINRA Rule 3110(c)(1)(A). In 1988, the 

National Association of Securities Dealers 

(‘‘NASD,’’ the predecessor to FINRA) stated that the 

amended OSJ definition, among other proposed 

amendments, focused on creating a ‘‘supervisory 

‘chain of command,’ in which qualified supervisory 

personnel are appointed to carry out the firm’s 

supervisory obligations . . . .’’ See Notice at 20572 

(quoting NASD Notice to Members 88–11 (Feb. 8, 

1988), https://www.finra.org/rules-guidance/ 

notices/88-11). 

30See Notice at 20574; FINRA Rule 

3110(f)(2)(A)(i)–(vii) (identifying seven exclusions 

from the definition of branch office). 

31See FINRA Rules 3110(c)(1)(C) (stating that 

‘‘[i]n establishing such schedule, the member shall 

consider the nature and complexity of the securities 

activities for which the location is responsible and 

the nature and extent of contact with customers. 

The member’s written supervisory and inspection 

procedures shall set forth the schedule and an 

explanation regarding how the member determined 

the frequency of the examination.’’) and 3110.13 

(stating that ‘‘[i]n establishing a non-branch location 

inspection schedule, there is a general presumption 

that a non-branch location will be inspected at least 

every three years, even in the absence of any 

indicators of irregularities or misconduct (i.e., ‘‘red 

flags’’). If a member establishes a longer periodic 

inspection schedule, the member must document in 

its written supervisory and inspection procedures 

the factors used in determining that a longer 

periodic inspection cycle is appropriate.’’). 

32FINRA Rule 3110(f)(2)(A)(ii). 

33See supra note 23 and corresponding text. 

rule change, as modified by Amendment 

Nos. 1 and 2, on an accelerated basis. 

II. Description of the Proposed Rule 

Change 

FINRA stated that technological 

advancements and an emerging remote 

workplace prompted it to reconsider the 

regulatory framework for the 

supervision and inspection of 

residential locations.13 As a result of 

this evaluation, FINRA determined to 

issue the proposed rule change ‘‘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 . . . on a 

regular periodic schedule without 

diminishing investor protection.’’ 14

After describing the current regulatory 

framework, the Commission describes 

the proposed rule change. 

A. Background 

1. FINRA Rule 3110 (Supervision) 

FINRA Rule 3110 requires a member 

firm to establish and maintain a 

supervisory system for the activities of 

its associated persons ‘‘that is 

reasonably designed to achieve 

compliance with applicable securities 

laws and regulations, and with 

applicable FINRA rules’’ (hereinafter, a 

‘‘reasonably designed supervisory 

system’’).15 The rule identifies the 

minimum requirements of a member’s 

supervisory system, including: (1) the 

registration and designation as a branch 

office or an OSJ of each location,16

including the main office, that meets the 

definitions contained in FINRA Rule 

3110(f); 17 and (2) inspecting all offices 

and locations in accordance with Rule 

3110(c).18 The rule also establishes the 

frequency with which a member firm 

must inspect its locations.19 The 

frequency is based, in part, on whether 

the location is designated as a 

supervisory branch office, a nonsupervisory branch office, an OSJ, or a 

non-branch location.20 Each of these 

designations is described in turn. 

a. Supervisory and Non-Supervisory 

Branch Offices 

FINRA Rule 3110(f)(2) defines a 

‘‘branch office’’ as: (1) any location 

where one or more associated persons of 

a member 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; 21 or (2) 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.22 A branch 

office is either ‘‘supervisory’’ (i.e., it 

‘‘supervises one or more non-branch 

locations’’) or ‘‘non-supervisory’’ (i.e., it 

‘‘does not supervise one or more nonbranch locations’’).23 The branch 

office’s type dictates the frequency of its 

inspection cycle: a supervisory branch 

office must be inspected at least 

annually,24 and a non-supervisory 

branch office must be inspected at least 

every three years.25

b. Office of Supervisory Jurisdiction 

A branch office may be further 

designated as an OSJ. An OSJ is any 

office of a member 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); 26 (6) final 

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; 27 or 

(7) having responsibility for supervising 

the activities of persons associated with 

the member at one or more other branch 

offices of the member.28 If a location 

satisfies any one of those criteria, it is 

an OSJ that must be inspected at least 

annually.29

c. Non-Branch Locations 

FINRA explained that seven types of 

locations—often referred to as 

‘‘unregistered offices’’ or ‘‘non-branch 

locations’’—are excluded from the 

definition of ‘‘branch office.’’ 30 Member 

firms must inspect their non-branch 

locations on a regular periodic schedule, 

presumed to be at least every three 

years.31

Two of the seven exclusions address 

residential locations: the primary 

residence exclusion and the nonprimary residence exclusion. The 

primary residence exclusion 32 excludes 

from registration as a branch office any 

non-supervisory 33 location that is an 

associated person’s primary residence, 

provided that: (1) only one associated 

person, or multiple associated persons 

who reside at that location and are 


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34See FINRA Rule 3110(f)(2)(ii)(a) through (i). 

35FINRA Rule 3110(f)(2)(A)(iii). 

36 Id. 

37See NASD Notice to Members 06–12 (Mar. 21, 

2006), https://www.finra.org/rules-guidance/ 

notices/06-12; see also Notice at 20574. 

38FINRA Rule 3110(f)(2)(B). 

39FINRA Rule 3110(f)(1). 

40See FINRA Rules 3110(a)(3) and 3110(c)(1)(A). 

41Notice at 20579. 

42See Notice at 20569; Centers for Disease 

Control and Prevention, COVID–19: End of Public 

Health Emergency (PHE) Declaration (Sept. 12, 

2023), https://www.cdc.gov/coronavirus/2019-ncov/ 

your-health/end-of-phe.html. 

43See Notice at 20575 (‘‘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.’’); FINRA Regulatory 

Notice 21–44 (Dec. 2021), https://www.finra.org/ 

rules-guidance/notices/21-44 (‘‘To mitigate the 

impacts of the pandemic, member firms have relied 

heavily on remote offices and alternative work 

arrangements (e.g., working from home or a backup 

or recovery location) for a broad range of 

personnel.’’). 

44See FINRA Rules 3110(a)(3) and 3110(c)(1)(A). 

45See FINRA Regulatory Notice 20–08 (Mar. 

2020) (‘‘Regulatory Notice 20–08’’), https://

www.finra.org/rules-guidance/notices/20-08; see 

also Notice at 20569 n.7. 

46See Notice at 20579. 

47FINRA Rule 3110(c)(1)(A). 

48Notice at 20575, 20579 (explaining that the 

proposed rule change would reduce, but not 

eliminate, the need to register and inspect 

residential locations as supervisory branch offices 

or OSJs). 

49 Id. at 20569. 

50See id. at 20568. 

51See id. at 20568–69 (‘‘FINRA believes the 

proposal 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.’’). 

52See proposed Rule 3110.19(b). 

53See proposed Rule 3110.19(c). 

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 member firm’s 

supervision in accordance with Rule 

3110; (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.34

The non-primary residence 

exclusion 35 excludes from registration 

as a branch office any non-supervisory 

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) 

of the primary residence exclusion 

(detailed above).36 FINRA explained 

that the non-primary residence 

exclusion typically applies to a vacation 

or second home.37

Notwithstanding these residential 

exclusions, a private residence is 

considered a branch office if it ‘‘is 

responsible for supervising the activities 

of persons associated with the member 

at one or more non-branch locations of 

the member,’’ 38 and it is an OSJ if it 

performs any of the seven functions 

associated with OSJs.39 Therefore, a 

primary or non-primary residence is 

subject to registration and annual 

inspection if the associated person’s 

activities at the residence cause it to be 

an OSJ or supervisory branch office.40

2. FINRA’s Stated Reasons for the 

Proposed Rule Change 

FINRA stated that during the COVID– 

19 pandemic, many member firms 

developed ‘‘hybrid workforce models’’ 

in which ‘‘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.’’ 41

FINRA ‘‘believes this model will 

endure’’ notwithstanding the end of the 

COVID–19 Public Health Emergency in 

May 2023.42 Many of the supervisors 

who began working from home during 

the pandemic continue to do so, at least 

on a part-time basis.43 Under the current 

regulatory framework, those supervisors 

likely conduct activities that would 

require the registration and designation 

of their private residences as 

supervisory branch offices or OSJs 

under Rule 3110(a)(3) and thus would 

require inspections at least annually 

under Rule 3110(c)(1)(A).44

During the pandemic, FINRA 

temporarily suspended members’ 

requirements to comply with the 

registration and inspection obligations 

applicable to new locations. 

Specifically, in March 2020, FINRA 

temporarily suspended the requirement 

for member firms to submit branch 

office registration applications on Form 

BR (Uniform Branch Office Registration 

Form) for any newly opened temporary 

office locations or space-sharing 

arrangements established because of the 

pandemic (the ‘‘Form BR Temporary 

Suspension’’).45 The Form BR 

Temporary Suspension remains in 

effect. But when it ends, FINRA believes 

that current FINRA rules would require 

member firms to ‘‘either curtail 

activities at residential locations or 

register large numbers of residential 

locations as OSJs or supervisory branch 

offices.’’ 46

As set forth above, registering a 

private residence as an OSJ or 

supervisory branch office would trigger 

a corresponding annual inspection 

requirement.47 FINRA explained that 

the proposed rule change would alter 

the regulatory framework to 

accommodate hybrid workforce models 

and mitigate the costs associated with 

registering and inspecting so many 

private residences.48 FINRA stated that 

the proposed rule change ‘‘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.’’ 49

B. The Proposed Rule Change 

The proposed rule change would 

adopt new Supplementary Material .19 

(Residential Supervisory Location) 

under FINRA Rule 3110 (Supervision) 

and would treat a private residence at 

which an associated person engages in 

certain supervisory activities as a nonbranch location, subjecting it to 

inspections on a regular periodic 

schedule (presumed to be at least every 

three years) instead of the annual 

schedule required for OSJs and 

supervisory branch offices.50 To help 

mitigate the potential risks associated 

with a less frequent inspection cycle, 

the proposed rule change also would 

establish safeguards that limit RSL 

designation to certain firms and 

locations based on criteria designed to 

minimize risk.51 These safeguards 

would: (1) exclude certain member 

firms from designating any location as 

an RSL; 52 (2) exclude certain locations 

from designation as an RSL; 53 (3) 

impose certain conditions that a 

member firm and/or its candidate 

locations must meet prior to RSL 


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54See proposed Rule 3110.19(a). 

55See proposed Rule 3110.19(d). 

56See proposed Rule 3110.19(e). 

57See proposed Rule 3110.19(b)(1). 

58See proposed Rule 3110.19(b)(2). 

59See proposed Rule 3110.19(b)(3). FINRA 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.’’ 

Notice at 20577 n.94 (citing FINRA Regulatory 

Notice 21–09 (Mar. 2021) (announcing FINRA’s 

adoption of rules to address brokers with a 

significant history of misconduct)). 

60See proposed Rule 3110.19(b)(4). 

61See proposed Rule 3110.19(b)(5). 

62See proposed Rule 3110.19(b)(6). 

63See proposed Rule 3110.19(b)(7). 

64Notice at 20576. 

65 Id. at 20577. 

66 Id. 

67 Id. 

68 Id. at 20578 (‘‘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).’’). 

69See proposed Rule 3110.19(c)(1). 

70See proposed Rule 3110.19(c)(2). 

71See proposed Rule 3110.19(c)(3). 

72See proposed Rule 3110.19(c)(4). 

73See proposed Rule 3110.19(c)(5). Form U4’s 

Questions 14A(1)(a), 14A2(a), 14B(1)(a), and 

14B2(a) elicit reporting of criminal convictions, and 

Questions 14C, 14D, and 14E pertain to regulatory 

action disclosures. See Notice 20577 n.97. 

74As defined for purposes of Form U4, an 

Investigation ‘‘[i]ncludes: (a) grand jury 

investigations; (b) U.S. Securities and Exchange 

Commission investigations after the ‘Wells’ notice 

has been given; (c) FINRA investigations after the 

‘Wells’ notice has been given or after a person 

associated with a member, as defined by The 

FINRA By-Laws, has been advised by the staff that 

it intends to recommend formal disciplinary action; 

(d) NYSE Regulation investigations after the ‘Wells’ 

notice has been given or after a person over whom 

NYSE Regulation has jurisdiction, as defined in the 

applicable rules, has been advised by NYSE 

Regulation that it intends to recommend formal 

disciplinary action; (e) formal investigations by 

other SROs; or (f) actions or procedures designated 

as investigations by jurisdictions. The term 

investigation does not include subpoenas, 

preliminary or routine regulatory inquiries or 

requests for information, deficiency letters, ‘blue 

sheet’ requests or other trading questionnaires, or 

examinations.’’ FINRA, Form U4 Explanation of 

Terms at 2 (Apr.—Version 2014.1), https://

www.finra.org/sites/default/files/AppSupportDoc/ 

p468051.pdf. 

75As defined for purposes of Form U4, a 

Proceeding is ‘‘[a] formal administrative or civil 

action initiated by a governmental agency, selfregulatory organization or a foreign financial 

regulatory authority; a felony criminal indictment 

or information (or equivalent formal charge), or a 

misdemeanor criminal information (or equivalent 

formal charge), but does not include an arrest or 

similar charge effected in the absence of a formal 

criminal indictment or information (or equivalent 

formal charge).’’ Id. at 3. 

76See proposed Rule 3110.19(c)(6); Amendment 

No. 1. 

designation; 54 (4) require any member 

firm that elects to designate an RSL to 

provide certain data to FINRA on a 

regular basis; 55 and (5) require any 

eligible member firm to develop a 

reasonable risk-based approach to 

designating a location as an RSL and 

conduct and document a risk 

assessment for the associated person 

assigned to that location prior to 

designating a location as an RSL.56

1. Member Firm Ineligibility Criteria 

Under proposed Rule 3110.19(b), a 

member firm would be ineligible to 

designate any of its locations as an RSL 

if the member: (1) is currently 

designated as a Restricted Firm under 

Rule 4111 (Restricted Firm Obligations) 

(hereinafter, a ‘‘Restricted Firm’’); 57 (2) 

is currently designated as a Taping Firm 

under Rule 3170 (Tape Recording of 

Registered Persons by Certain Firms) 

(hereinafter, a ‘‘Taping Firm’’); 58 (3) 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 (hereinafter, a 

‘‘continuing membership review’’); 59 (4) 

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; 60 (5) is or 

becomes suspended by FINRA 

(hereinafter, a ‘‘suspended firm’’); 61 (6) 

based on the date in the Central 

Registration Depository (‘‘CRD’’), had its 

FINRA membership become effective 

within the prior twelve months; 62 or (7) 

is or has been found within the past 

three years by the SEC or FINRA to have 

violated Rule 3110(c).63

FINRA stated that these exclusions 

address ‘‘attributes of a member firm 

that FINRA believes are more likely to 

raise investor protection concerns 

. . . .’’ 64 For example, FINRA 

explained 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.’’ 65 Similarly, FINRA stated 

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[ly] tailored to the firm’s 

specific attributes and structure.’’ 66

FINRA also stated that firms with recent 

Rule 3110(c) violations have 

‘‘demonstrated challenges in developing 

or maintaining a robust inspection 

program.’’ 67

2. Location Ineligibility Criteria 

A location of an otherwise eligible 

member firm 68 would be ineligible for 

RSL designation if one or more 

associated persons at the location: (1) is 

a designated supervisor who has less 

than one year of direct supervisory 

experience with the member, or an 

affiliate or subsidiary of the member 

that is registered as a broker-dealer or 

investment adviser; 69 (2) is functioning 

as a principal for a limited period in 

accordance with Rule 1210.04 

(Registration Requirements); 70 (3) is 

subject to a mandatory heightened 

supervisory plan under the rules of the 

SEC, FINRA, or a state regulatory 

agency; 71 (4) is statutorily disqualified, 

unless such disqualified person (A) has 

been approved (or is otherwise 

permitted pursuant to FINRA rules and 

the federal securities laws) to associate 

with a member and (B) is not subject to 

a mandatory heightened supervisory 

plan under proposed Rule 3110.19(c)(3) 

or otherwise as a condition to approval 

or permission for such association; 72 (5) 

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 

(Uniform Application for Securities 

Industry Registration or Transfer 

Registration) (‘‘Form U4’’); 73 or (6) has 

been notified in writing that such 

associated person is now subject to any 

Investigation 74 or Proceeding,75 as such 

terms are defined for Form U4, by the 

SEC, a self-regulatory organization, 

including FINRA, or state securities 

commission (or agency or office 

performing like functions) (each, a 

‘‘Regulator’’) expressly 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 of 1933 (‘‘Securities 

Act’’), the Exchange Act, the Investment 

Advisers Act of 1940 (‘‘Investment 

Advisers Act’’), the Investment 

Company Act of 1940 (‘‘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 

(‘‘MSRB’’) or other self-regulatory 

organization, including FINRA.76


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77See id. 

78See id. 

79Notice at 20578. 

80 Id. 

81 Id. 

82Amendment No. 1 at 5. 

83 Id. at 4. 

84Proposed Rule 3110.19(a) indicates that the 

‘‘supervisory activities’’ include ‘‘those described in 

Rule 3110(f)(1)(D) through (G) or in Rule 

3110(f)(2)(B).’’ The supervisory activities identified 

in FINRA Rule 3110(f)(1)(D) through (G) include: 

final acceptance (approval) of new accounts on 

behalf of the member; review and endorsement of 

customer orders, pursuant to FINRA Rule 

3110(b)(2); final 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; 

and, responsibility for supervising the activities of 

persons associated with the member at one or more 

other branch offices of the member. FINRA Rule 

3110(f)(2)(B) addresses ‘‘any location that is 

responsible for supervising the activities of persons 

associated with the member at one or more nonbranch locations of the member . . . .’’ 

85See proposed Rule 3110.19(a)(1). 

86See proposed Rule 3110.19(a)(2). 

87See proposed Rule 3110.19(a)(3). 

88See proposed Rule 3110.19(a)(4). Rule 

3110(f)(2)(A)(ii) and (iii) identify the conditions for 

the primary and non-primary residence exclusions. 

For a discussion of those exclusions, see Section 

II(A)(1)(c) above. 

89See proposed Rule 3110.19(a)(5). 

90See proposed Rule 3110.19(a)(6). 

91See proposed Rule 3110.19(a)(7). 

92See proposed Rule 3110.19(a)(8). 

93See proposed Rule 3110.19(a)(9). 

94See proposed Rule 3110.19(a)(10). 

95Notice at 20576. 

96 Id.; see FINRA Rule 3110(f)(2)(A)(ii) and (iii). 

97Notice at 20576. 

98 Id. 

99Proposed Rule 3110.19(d). FINRA stated that it 

is ‘‘exploring ways to provide this information to 

state regulators in a practical format.’’ Notice at 

20578 n.108. 

100The CRD system is the central licensing and 

registration system used by the U.S. securities 

industry and its regulators. In general, information 

in the CRD system is obtained through the uniform 

registration forms that firms and regulatory 

authorities complete as part of the securities 

industry registration and licensing process. The 

uniform registration forms are Form BD (Uniform 

Application for Broker-Dealer Registration), Form 

Continued 

Nonetheless, this sixth exclusion would 

permit an affected location to be 

designated or redesignated as an RSL 

upon the earlier of: (1) the member’s 

receipt of written notification from the 

applicable Regulator that such 

Investigation has concluded without 

further action; or (2) one year from the 

date of the last communication from 

such Regulator relating to such 

Investigation.77 This relief would not 

apply to an associated person subject to 

a covered Proceeding.78

FINRA stated that these exclusions 

‘‘reflect the appropriate limitations on 

the private residences that can be 

designated’’ as an RSL.79 For example, 

FINRA stated that ‘‘specified disclosures 

on Form U4 pertaining to criminal 

convictions[,] . . . final regulatory 

action[,] and the imposition of a 

mandatory heightened supervisory plan 

are indicia of increased risk to investors 

at some firms and locations . . . .’’ 80

FINRA further explained that requiring 

one-year of direct supervisory 

experience recognizes that ‘‘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,’’ even if that new 

supervisor comes to the member firm 

with prior supervisory experience from 

another firm.81 But FINRA also stated 

that affiliates and subsidiaries of FINRA 

members ‘‘may share systems and have 

similar compliance cultures to meet 

their obligations under federal securities 

laws.’’ 82 For that reason, FINRA stated 

that the proposed rule change would 

‘‘permit the one-year supervisory 

experience minimum to be satisfied by 

also counting supervisory experience 

accrued at an affiliate or subsidiary of 

the member firm that is registered as a 

broker-dealer or investment adviser.’’ 83

3. Conditions for Designation as a 

Residential Supervisory Location 

The proposed rule change includes 

ten conditions that an eligible member 

firm and its eligible location must meet 

prior to designating the location as an 

RSL. Under proposed Rule 3110.19(a), a 

location that is the associated person’s 

private residence where supervisory 

activities 84 are conducted would be 

considered a non-branch location, 

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; 85 (2) 

the location is not held out to the public 

as an office; 86 (3) the associated person 

does not meet with customers or 

prospective customers at the location; 87

(4) any sales activity that takes place at 

the location complies with the 

conditions set forth under Rule 

3110(f)(2)(A)(ii) or (iii); 88 (5) neither 

customer funds nor securities are 

handled at that location; 89 (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; 90 (7) the associated 

person’s correspondence and 

communications with the public are 

subject to the member firm’s 

supervision in accordance with Rule 

3110; 91 (8) the associated person’s 

electronic communications (e.g., email) 

are made through the member’s 

electronic system; 92 (9)(A) the member 

has a recordkeeping system to make, 

keep current, and preserve records 

required to be made, kept current, and 

preserved under applicable securities 

laws and regulations, FINRA rules, and 

the member’s own written supervisory 

procedures under Rule 3110, (B) such 

records are not physically or 

electronically maintained and preserved 

at the office or location, and (C) the 

member has prompt access to such 

records; 93 and (10) the member has 

determined that its surveillance and 

technology tools are appropriate to 

supervise the types of risks presented by 

each RSL, and that these tools may 

include but are not limited to: (A) firmwide tools, such as an electronic 

recordkeeping system, electronic 

surveillance of email and 

correspondence, electronic trade 

blotters, regular activity-based sampling 

reviews, and tools for visual 

inspections, (B) tools specific to the RSL 

based on the activities of the associated 

person assigned to the location, 

products offered, and restrictions on the 

activity of the RSL, and (C) system tools, 

such as secure network connections and 

effective cybersecurity protocols.94

FINRA stated that these conditions 

‘‘would strengthen a firm’s ability to 

monitor the supervisory activities 

occurring at [an RSL] and act to lower 

the overall risks associated with such 

location . . . .’’ 95 FINRA explained 

that the first eight conditions are 

derived from those for the primary and 

non-primary residence exclusions, 

‘‘which align with the SEC’s Books and 

Records Rules [and] were developed in 

coordination with other [self-regulatory 

organizations] and state securities 

regulators.’’ 96 For that reason, FINRA 

stated that member firms have 

‘‘experience with monitoring and 

supervising these conditions.’’ 97 FINRA 

coupled those eight conditions with a 

new books and records requirement and 

a condition addressing technology and 

surveillance tools.98

4. Obligation To Provide List of RSLs to 

FINRA 

Under proposed Rule 3110.19(d), any 

member that elects to designate any 

location of the member as an RSL would 

be required to ‘‘provide FINRA with a 

current list of all locations designated as 

RSLs by the 15th day of the month 

following each calendar quarter in the 

manner and format (e.g., through an 

electronic process or such other process) 

as FINRA may prescribe.’’ 99 FINRA 

acknowledged that the CRD system 100


ddrumheller on DSK120RN23PROD with NOTICES1
82452 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

BDW (Uniform Request for Broker-Dealer 

Withdrawal), Form BR (Uniform Branch Office 

Registration Form), Form U4, Form U5 (Uniform 

Termination Notice for Securities Industry 

Registration), and Form U6 (Uniform Disciplinary 

Action Reporting Form). These forms, particularly 

Forms U4 and U5, collect administrative, 

regulatory, criminal history, customer complaint, 

and other information about brokers, while Form 

BD collects similar information about broker-dealer 

firms. FINRA, state, and other regulatory authorities 

use this information in connection with their 

licensing and regulatory activities, and member 

firms use this information to help them make 

informed employment decisions. See Exchange Act 

Release No. 88760 (Apr. 28, 2020), 85 FR 26502, 

26503 (May 4, 2020) (File No. SR–FINRA–2020– 

012). 

101Notice at 20578. 

102Proposed Rule 3110.19(e). 

103 Id. 

104 Id. 

105 Id. 

106 Id. 

107 In approving this rule change, the Commission 

has considered the rule’s impact on efficiency, 

competition, and capital formation. See 15 U.S.C. 

78c(f). 

108 15 U.S.C. 78o–3(b)(6). 

109FINRA Rule 3110(a). 

110FINRA Rule 3110.12. 

111FINRA Rule 3110(c)(1). 

112See id. Rule 3110(a)(1) through (7) identify 

certain minimum requirements for the reasonably 

designed supervisory system. See generally FINRA 

Rule 3110. 

currently provides access to 

‘‘information regarding the offices and 

locations (registered and unregistered) 

to which associated persons required to 

be registered are assigned,’’ but it 

explained that ‘‘requiring member firms 

to affirmatively provide this information 

to FINRA through a scheduled process 

would make this information more 

readily accessible to regulators.’’ 101

5. Risk Assessment 

Under proposed Rule 3110.19(e), a 

member would be required to ‘‘develop 

a reasonable risk-based approach to 

designating an office or location as an 

RSL[] and conduct and document a risk 

assessment for the associated person 

assigned to that office or location’’ prior 

to designating that location as an RSL 

(hereinafter, a ‘‘person-specific risk 

assessment’’).102 The proposed rule 

change would require documentation of 

the factors considered, including, 

among others, whether the associated 

person at such office or location is now 

subject to: (1) customer complaints, 

taking into account the volume and 

nature of the complaints; (2) heightened 

supervision other than where such 

office or location is ineligible for RSL 

designation under proposed Rule 

3110.19(c)(3); (3) any failure to comply 

with the member’s written supervisory 

procedures; (4) any recordkeeping 

violation; and (5) any regulatory 

communications from a Regulator 

indicating that the associated person at 

such office or location failed reasonably 

to supervise another person subject to 

their supervision, including but not 

limited to, subpoenas, preliminary or 

routine regulatory inquiries or requests 

for information, deficiency letters, ‘‘blue 

sheet’’ requests or other trading 

questionnaires, or examinations.103

Furthermore, the proposed rule change 

would require the member to account 

for ‘‘any higher risk activities that take 

place [at] or a higher risk associated 

person that is assigned to that office or 

location.’’ 104

‘‘Consistent with [a firm’s] obligation 

under Rule 3110(a),’’ the proposed rule 

change also would provide that ‘‘the 

member’s supervisory system must take 

into consideration any indicators of 

irregularities or misconduct (i.e., ‘red 

flags’) when designating an office or 

location as an RSL.’’ 105 Further, the 

proposed rule change would provide 

that ‘‘[r]ed flags should . . . be reviewed 

in determining whether it is reasonable 

to maintain the RSL designation of such 

office or location in accordance with the 

requirements of [proposed Rule 

3110.19] and [that] the member should 

consider evidencing steps taken to 

address those red flags where 

appropriate.’’ 106

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, the comment letters, and 

FINRA’s responses to the comments, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

Nos. 1 and 2, is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

that are applicable to a national 

securities association.107 Specifically, 

the Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules 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.108

Pursuant to FINRA Rule 3110, 

member firms must ‘‘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.’’ 109 Rule 3110 

provides that ‘‘[e]ach member shall 

establish and maintain supervisory 

procedures that must take into 

consideration, among other things, the 

firm’s size, organizational structure, 

scope of business activities, number and 

location of the firm’s offices, the nature 

and complexity of the products and 

services offered by the firm, the volume 

of business done, the number of 

associated persons assigned to a 

location, the disciplinary history of 

registered representatives or associated 

persons, and any indicators of 

irregularities or misconduct (i.e., ‘red 

flags’), etc.’’ 110 Rule 3110(c) further 

requires member firms to conduct 

internal inspections of each location, 

and it identifies the presumed frequency 

of inspection for various types of 

locations.111 Importantly, Rule 3110 

provides that ‘‘[f]inal responsibility for 

proper supervision . . . rest[s] with the 

member.’’ 112

The proposed rule change is 

consistent with these obligations. It 

permits certain eligible firms to inspect 

certain eligible locations on a regular 

periodic schedule (presumed to be at 

least every three years) instead of an 

annual schedule. If an eligible member 

firm and its eligible location comply 

with various conditions and 

safeguards—including a person-specific 

risk assessment—designed to minimize 

risks, the proposed rule change would 

provide this additional flexibility for the 

member firm in structuring its 

reasonably designed supervisory 

system. But it does not automatically 

transform residences into RSLs subject 

to less frequent inspection. Nor does it 

require firms to treat all residences 

where certain supervisory activities are 

performed as RSLs. It only permits a 

member firm to consider whether an 

RSL designation for a specific location 

would be appropriate in light of the 

rule’s requirements and the member 

firm’s broader obligation to establish 

and maintain a reasonably designed 

supervisory system. Accordingly, and as 

explained in more detail below, the 

Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act. 

A. Residential Supervisory Location 

Terms and Conditions 

The proposed rule change has various 

terms and conditions that limit the RSL 

designation to certain firms and 

locations. The Commission addresses 

the terms and conditions, and any 

related comments, in turn. 

1. Member Firm Ineligibility Criteria 

As stated above, under proposed Rule 

3110.19(b), a member firm would be 

ineligible to designate any of its 

locations as an RSL if the member is 

subject to any of seven firm-level 


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113See supra notes 57 through 63 and 

accompanying text. 

114Theresa J. Manderski, SVP, Chief Compliance 

Officer—BD, Davenport & Company LLC, to the 

Commission, dated Apr. 27, 2023, at 2 

(‘‘Davenport’’). 

115Proposed Rule 3110.19(b)(1); see FINRA, Rule 

4111 Frequently Asked Questions, https://

www.finra.org/rules-guidance/key-topics/

protecting-investors-from-misconduct/faq#

:∼:text=A%20Restricted%

20Firm%20is20a,such%20in%20a%20Department

%20decision. 

116Proposed Rule 3110.19(b)(2); FINRA, FINRA 

Taping Rule (FINRA Rule 3170), https://

www.finra.org/rules-guidance/guidance/taping-rule. 

117Proposed Rule 3110.19(b)(3) (exclusion 

applicable where the person responsible for 

triggering a continuing membership review is 

located at the proposed RSL); FINRA Rule 

1017(a)(7). ‘‘The term ‘final criminal matter’ means 

a criminal matter that resulted in a conviction of, 

or plea of guilty or nolo contendere (‘no contest’) 

by, a person that is disclosed, or is or was required 

to be disclosed, on the applicable Uniform 

Registration Forms.’’ FINRA Rule 1011(h). 

‘‘Specified risk events’’ include certain investmentrelated, consumer-initiated (1) customer arbitration 

awards, (2) civil judgments, (3) customer arbitration 

settlements, or (4) civil litigation settlements. 

FINRA Rule 1011(p)(1), (2). ‘‘Specified risk events’’ 

also include certain investment-related civil actions 

or regulatory actions that result in (1) monetary 

sanctions for a dollar amount at or above $15,000 

or (2) a bar, expulsion, revocation, recission, or 

suspension. See FINRA Rule 1011(p)(3), (4). 

118Proposed Rule 3110.19(b)(7). 

119Proposed Rule 3110.19(b)(4); see FINRA Rule 

9557 (Procedures for Regulating Activities Under 

Rules 4110, 4120 and 4130 Regarding a Member 

Experiencing Financial or Operational Difficulties); 

see also FINRA Regulatory Notice 09–71 (Dec. 

2009) (announcing SEC approval of consolidated 

FINRA rules governing financial responsibility), 

https://www.finra.org/rules-guidance/notices/09-71. 

120Proposed Rule 3110.19(b)(5); A suspended 

firm may have been suspended because of a 

violation of ‘‘federal securities laws, rules or 

regulations thereunder, the rules of the Municipal 

Securities Rulemaking Board, or FINRA rules.’’ 

FINRA Rule 8310(a)(3), (5); see FINRA Rule 9550 

Series. 

121Proposed Rule 3110.19(b)(6). 

122See Exchange Act Rule 15b2–2, 17 CFR 

240.15b2–2 (generally requiring inspection of a 

newly registered broker dealer within six months 

for compliance with applicable financial 

responsibility rules and within 12 months for all 

other applicable regulatory requirements). 

123Cf. Exchange Act Release No. 90635 (Dec. 10, 

2020), 85 FR 81540 (Dec. 16, 2020) (Order 

Approving File No. SR–FINRA–2020–011 to 

Address Brokers With a Significant History of 

Misconduct); Exchange Act Release No. 92525 (July 

30, 2021), 86 FR 42925 (Aug. 5, 2021) and 86 FR 

49589 (Sept. 3, 2021) (Corrected Order Approving 

File No. SR–FINRA–2020–041 to Adopt FINRA 

Rules 4111 (Restricted Firm Obligations) and 9561 

(Procedures for Regulating Activities Under Rule 

4111)). 

124Proposed Rule 3110.19(c). 

eligibility exclusions. The seven 

exclusions address members that are 

designated as Restricted Firms under 

FINRA Rule 4111; members designated 

as Taping Firms under FINRA Rule 

3170; members undergoing, or required 

to undergo, a continuing membership 

review under FINRA Rule 1017(a)(7) as 

a result of one or more associated 

persons at such location; firms that have 

received a notice from FINRA pursuant 

to FINRA Rule 9557, unless FINRA has 

otherwise permitted activities in writing 

pursuant to such rule; firms suspended 

by FINRA; firms that have been FINRA 

members for less than one year; and 

firms that have been found within the 

past three years by the SEC or FINRA to 

have violated Rule 3110(c).113

One commenter specifically 

supported the inclusion of the firm-level 

exclusions covering suspended firms 

and firms that have been FINRA 

members for less than one year.114 No 

commenter opposed any of the 

proposed seven firm-level eligibility 

exclusions. 

FINRA reasonably determined to 

exclude a member firm from 

participation in the Pilot if the member 

firm is subject to any of the six proposed 

firm-level ineligibility criteria. Each of 

these criteria identifies—and excludes— 

member firms with characteristics that 

may indicate increased risk of noncompliance. Specifically, Restricted 

Firms have a history of misconduct or 

a high concentration of registered 

persons with a significant history of 

misconduct that gave rise to the 

designation,115 while Taping Firms are 

subject to heightened regulatory 

oversight because they employ a 

‘‘significant number of registered 

persons [who] previously worked for 

firms that have been expelled from the 

industry or have had their registrations 

revoked for inappropriate sales 

practices.’’ 116 Moreover, a member firm 

that is required to undergo a continuing 

membership review pursuant to FINRA 

Rule 1017(a)(7) has a person at the 

proposed RSL who is seeking to become 

an owner, control person, principal, or 

registered person of the member firm 

who has, in the previous five years, one 

or more ‘‘final criminal matters’’ or two 

or more ‘‘specified risk events.’’ 117

Finally, if the Commission or FINRA 

has found that a member firm has 

violated Rule 3110(c) within the past 

three years, the member firm has 

demonstrated a recent difficultly 

implementing a compliant inspection 

program.118 Member firms covered by 

these exclusions therefore have a history 

of non-compliance or have registered 

representatives who have a history of (or 

come from a member firm with a history 

of) non-compliance. It is therefore 

reasonable for FINRA to determine that 

member firms that fall into these 

categories are not eligible to designate 

RSLs and exercise the flexibility that the 

proposed rule change provides in 

designing a member firm’s supervisory 

system. 

Furthermore, Rule 9557 notices are 

sent to member firms that are 

experiencing financial or operational 

difficulties.119 Additionally, suspension 

of a member firm by FINRA would be 

based on FINRA’s determination that 

the member firm has failed to comply 

with its regulatory requirements or 

suspension is needed for the safety of 

investors, creditors, or other members 

because of the member firm’s financial 

or operational difficulties.120 Such 

member firms raise concerns about their 

ability to comply with their obligations 

and may present risk to others. As such, 

it is reasonable to conclude that these 

member firms should not be eligible for 

the proposed rule change that is 

designed to afford member firms greater 

flexibility in designing their supervisory 

systems. 

Moreover, member firms that have 

been FINRA members for less than 12 

months may need additional time to 

develop their supervisory and 

compliance systems to effectively 

comply with applicable securities laws 

and rules.121 This time period also 

provides FINRA and other regulators 

with time to conduct inspections of new 

member firms to determine their 

compliance with their regulatory 

obligations before they may be eligible 

for the flexibility provided in the 

proposed rule.122 It is therefore 

reasonable for FINRA to determine that 

firms must be operating for a certain 

amount of time before they can be 

eligible to designate RSLs. One year 

provides a reasonable balance between 

providing member firms with the 

flexibility for supervision allowed in the 

proposed rule and concerns that 

member firms need to develop 

experience operating before they are 

given such flexibility. In sum, these 

proposed exclusions limit RSL 

designation to certain member firms 

without indicia that their business 

operations, supervisory system, or 

inspection programs may lack the 

maturity or safeguards to fully address 

the potential risks associated with 

RSLs.123

2. Location Ineligibility Criteria 

As stated above, proposed Rule 

3110.19(c) would prohibit RSL 

designation for any location if one or 

more associated persons at the location 

is subject to any of six location-level 

eligibility exclusions.124 These six 

exclusions address associated persons 

with less than one year of direct 

supervisory experience with the 

member or its affiliate or subsidiary, 

who are functioning as a principal for a 


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125See supra notes 69 through 78 and 

accompanying text. 

126Notice at 20577. 

127Letters from Eversheds Sutherland LLP on 

behalf of the Committee of Annuity Insurers, to 

Secretary, Commission, dated Apr. 27, 2023, at 2 

(‘‘CAI’’); David T. Bellaire, Esq., Executive Vice 

President & General Counsel, Financial Services 

Institute, to Secretary, Commission, dated Apr. 27, 

2023, at 4–5 (‘‘FSI’’); Mark Quinn, Director of 

Regulatory Affairs, Cetera Financial Group, to 

Sherry Haywood, Assistant Secretary, Commission, 

dated Apr. 27, 2023, at 2–3 (‘‘Cetera I’’); Bernard V. 

Canepa, Managing Director & Associate General 

Counsel, Securities Industry and Financial Markets 

Association, to Vanessa Countryman, Secretary, 

Commission, dated Apr. 27, 2023, at 2 n.6 (‘‘SIFMA 

I’’). 

128Cetera I at 2. 

129FSI at 4; see Cetera I at 2 (‘‘Branches would 

be ineligible for classification as an RSL simply 

because individual supervisors who may have been 

employed by the member firm for many years but 

who have previously either performed functions not 

directly related to supervision were not formally 

designated as supervisors. In addition, branches 

that house supervisors who have a lot of experience 

in supervisory roles with other member firms but 

have been employed by the current member firm for 

less than one year would be ineligible for RSL 

status.’’). 

130CAI at 2; see FSI at 4 (‘‘this proposed criterion 

would place an unnecessary impediment on firms 

to hire and retain talent in a competitive job 

market.’’); Cetera I at 3 (‘‘If a member firm wishes 

to hire a supervisor in a remote location, the 

arbitrary one-year requirement will prevent them 

from classifying their residence as an RSL for at 

least one year, which may prevent the firm from 

hiring the individual. [. . .] The benefits of this are 

minimal and do not outweigh the burdens.’’). 

131FSI at 4. 

132See FSI at 5; letter from Mark Seffinger, Chief 

Compliance Officer, LPL Financial, to Vanessa 

Countryman, Secretary, Commission, dated May 25, 

2023, at 2 (‘‘LPL I’’); ASA 3. 

133FSI at 5 (suggesting a ‘‘three or six-month 

requirement’’ if such a requirement remains in the 

proposed rule change); cf. Cetera I at 2 (suggesting 

that the time period ‘‘could as easily be three 

months or three years.’’). 

134LPL I at 2 (‘‘[W]e support a requirement for 

such [a] branch to be inspected within the first year 

of designation versus registering that location as an 

OSJ.’’); letter from Christopher A. Iacovella, 

President & Chief Executive Officer, American 

Securities Association, to Vanessa Countryman, 

Secretary, Commission, dated May 25, 2023, at 3 

(‘‘ASA’’) (‘‘Rather than prohibiting new supervisors 

from taking advantage of the definition, we believe 

firms should be able to perform an onsite branch 

exam during the supervisor[’]s first year.’’). 

135FINRA Response I at 5. 

136See proposed Rule 3110.19(c)(1); Amendment 

No. 1 at 4. 

137FINRA Response I at 5. 

138 Id. 

139See id. at 4–5. 

140Letters from Bernard V. Canepa, Managing 

Director & Associate General Counsel, Securities 

Industry and Financial Markets Association, to 

Vanessa Countryman, Secretary, Commission, dated 

Aug. 1, 2023, at 2 (‘‘SIFMA II’’) (indicating that the 

modified language addresses ‘‘concerns raised by 

the industry’’); Gail Merken, Chief Compliance 

Officer, Janet Dyer, Chief Compliance Officer, John 

McGinty, Chief Compliance Officer, Fidelity 

Investments, to Vanessa Countryman, Secretary, 

Commission, dated Aug. 1, 2023, at 1 (‘‘Fidelity II’’); 

Jim McHale, Executive Vice President, Head of 

WIM Compliance and Peter Macchio, Executive 

Vice President, Head of CIB Compliance, Wells 

Fargo, to Vanessa Countryman, Secretary, 

Commission, dated Aug. 1, 2023, at 2 (‘‘Wells 

Fargo’’) (expressing appreciation for the amended 

proposal but encouraging a future reassessment ‘‘for 

experienced supervisors [who] are switching to a 

new supervisory role at an unaffiliated brokerdealer’’); Jennifer Szaro, CRCP, Chief Compliance 

Officer, XML Securities, LLC, et al., to Vanessa 

Countryman, Secretary, Commission, dated July 29, 

2023, at 1 (‘‘XML’’) (the amended proposal ‘‘applies 

a commonsense approach, in that if an associated 

person has been working in either capacity the 

member will have a basis to evaluate the associated 

person’s working relationship and conduct a 

reasonable risk assessment.’’); Andrew Hartnett, 

NASAA President and Deputy Commissioner, Iowa 

Insurance Division, North American Securities 

Administrators Association, Inc., to Sherry 

Haywood, Assistant Secretary, Commission, dated 

July 26, 2023, at 4 (‘‘NASAA II’’). 

141NASAA II at 4. 

142Letters from Michael Friedman, Head of 

Broker Dealer, Albert Securities, LLC, to Vanessa 

Countryman, Secretary, Commission, dated July 24, 

2023, at 1–2 (‘‘Albert’’); Mark Quinn, Director of 

Regulatory Affairs, Cetera Financial Group, to 

Vanessa Countryman, Secretary, Commission, dated 

limited period in accordance with Rule 

1210.04 (Registration Requirements), 

who are subject to a mandatory 

heightened supervisory plan, who are 

statutorily disqualified, who are 

required to make disclosures about 

certain criminal and regulatory actions, 

or who are subject to a covered 

regulatory investigation or 

proceeding.125 These six exclusions are 

discussed in more detail below. 

a. Less Than One Year of Supervisory 

Experience 

As originally proposed in the Notice, 

proposed Rule 3110.19(c)(1) would have 

prohibited an RSL designation for any 

location with a designated supervisor 

with less than one year of direct 

supervisory experience with the 

member firm.126 Several commenters 

urged FINRA to eliminate this 

exclusion.127 One commenter stated that 

requiring one year of supervisory 

experience is ‘‘not supported by any 

objective evidence and can only be 

characterized as arbitrary.’’ 128 These 

commenters indicated that this 

proposed exclusion would negatively 

impact the employment opportunities 

for ‘‘experienced supervisory personnel 

who may switch firms or those 

associated persons who are stand-outs at 

a firm [and secure a] promotion to a 

supervisory role.’’ 129 Another 

commenter emphasized that ‘‘there is 

not a sufficient investor protection 

justification for this language to offset 

the substantial chilling effect on the 

transfer of experienced supervisory 

personnel from one broker-dealer to 

another broker-dealer.’’ 130 Although 

one commenter acknowledged that a 

member firm could still permit a new 

supervisor to work from a residence 

registered as an OSJ or supervisory 

branch office in the first year, that 

commenter emphasized that this 

proposed exclusion would ‘‘create[] an 

additional burden that could have a 

disparate impact on people with years 

of experience who are reentering the 

workforce after time off to care for 

children or other family members.’’ 131

In the event that FINRA declined to 

delete the proposed exclusion, some 

commenters requested modifications to 

the provision instead.132 For example, 

some commenters asked FINRA to 

modify the proposed exclusion to 

permit RSL designation for locations 

with supervisors who have as little as 

three months of direct supervisory 

experience with the member firm.133

Alternatively, some commenters urged 

FINRA to permit RSL designation for 

supervisors with less than one year of 

supervisory experience with the 

member firm so long as the member firm 

conducts an inspection of the RSL 

within the first year of designation.134

In response, FINRA amended 

proposed Rule 3110.19(c)(1) to address 

‘‘the comments about the potential 

adverse impacts [this condition] could 

have on hiring efforts.’’ 135 As modified 

by Amendment No. 1, the proposed rule 

change would prohibit RSL designation 

for any location with a designated 

supervisor who has less than one year 

of direct supervisory experience with 

the member or an affiliate or subsidiary 

of the member that is registered as a 

broker-dealer or investment adviser.136

FINRA explained that this modification 

would permit RSL designation for a 

location with a designated supervisor 

who has, for example, six months of 

supervisory experience with the 

member firm and six months of 

supervisory experience at the member’s 

affiliate or subsidiary that is registered 

as a broker-dealer or investment 

adviser.137 FINRA stated that this 

modification ‘‘recogniz[es] that such 

entities may share systems and have 

similar compliance cultures to meet 

their obligations under the federal 

securities laws.’’ 138 As such, FINRA 

indicated that such supervisors should 

have sufficient experience with the 

member firm’s compliance systems.139

Five commenters supported the 

amended exclusion,140 and one of them 

‘‘agree[d] that this amendment strikes an 

appropriate balance between regulators’ 

interest in high supervisory standards 

and industry concerns about the impact 

on hiring efforts.’’ 141

Three other commenters, on the other 

hand, opposed this proposed 

exclusion.142 One of these three 


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July 31, 2023, at 2 (‘‘Cetera II’’); Hugh Berkson, 

President, Public Investors Advocate Bar 

Association, to Vanessa Countryman, Secretary, 

Commission, dated July 31, 2023, at 3 (‘‘PIABA II’’). 

143Cetera II at 2 (stating that ‘‘[o]nce an 

individual passes the necessary qualifications 

examinations, they [should be able to] begin their 

duties immediately.’’). 

144PIABA II at 3 (‘‘While some firms may share 

systems and have similar compliance cultures with 

affiliates and subsidiaries, many others [do not], 

especially given the size and complexity of 

numerous financial firms. Yet, FINRA’s adjustment 

permits disparate entities to combine supervisory 

experience for meeting the one year minimum and 

contains no minimum time requirement at all for 

the member itself.’’). 

145Albert at 1–2 (‘‘[U]nlike FINRA, we believe a 

newly-hired registered principal should be allowed 

to start the clock on their one year at their new 

employer by working remotely in a non-supervisory 

capacity prior to becoming a designated supervisor 

and qualifying their home as a residential 

supervisory location.’’ . . . Doing so ‘‘would still 

require new employees to learn the details of their 

new firm before being eligible to supervise remotely 

. . . .’’). 

146FINRA Response II at 4–5. 

147 Id. 

148See proposed Rule 3110.19(c)(1); supra notes 

81 through 83 and accompanying text. 

149Albert at 1–2. 

150See FSI at 4, CAI at 2, Cetera I at 2–3. 

151PIABA II at 3. 

152See id. 

commenters repeated its request to 

remove this proposed exclusion, stating 

that it ‘‘is arbitrary and not reasonably 

related to the objectives it seeks to 

accomplish.’’ 143 Another of these 

commenters preferred the exclusion as 

originally proposed in the Notice, 

explaining that FINRA erroneously 

assumes that the compliance and 

supervisory cultures are the same at all 

of a member’s affiliates and 

subsidiaries.144 The third commenter 

asked for a modification that would 

permit RSL designation so long as the 

associated person at the location has at 

least one year of any experience—either 

supervisory or non-supervisory—with 

the member, its affiliates, or its 

subsidiaries.145

In response, FINRA declined to 

further amend the proposed rule 

change.146 FINRA stated that the 

amended language ‘‘appropriately 

addresses’’ the concern that this 

proposed exclusion is intended to 

address: that an associated person at an 

RSL might otherwise ‘‘not have the 

requisite tenure at the member firm to 

develop experience with the firm’s 

systems, people, products, and overall 

compliance culture.’’ 147

The proposed rule change, as 

modified by Amendment No. 1 

(requiring a level of supervisory 

experience to permit a member firm to 

consider an RSL designation), is 

reasonable. For new supervisors or 

supervisors hired from outside of a 

member firm’s broader organization, the 

proposed rule change requires that they 

operate from a location that is an OSJ or 

supervisory branch office (where they 

would be inspected at least annually) 

for at least a year to gain supervisory 

experience with the member firm’s 

systems and overall compliance 

culture.148 Because of the unique nature 

of each member firm’s business, FINRA 

reasonably determined that supervisors 

wishing to exercise the flexibility of this 

proposed rule change must first have 

experience with the member firm’s 

systems and products, and fully 

integrate into a member firm’s 

compliance program and culture. 

Therefore, just as it is reasonable for 

FINRA to exclude supervisors without 

any direct supervisory experience, it is 

also reasonable for FINRA to exclude 

supervisors with substantial direct 

supervisory experience at different 

member firm(s). This proposed rule 

change does not, however, require these 

categories of excluded supervisors to 

work from a non-residential location. A 

member firm may permit such a 

supervisor to work from a residential 

location under the current regulatory 

framework by designating the new 

supervisor’s residence as an OSJ or 

supervisory branch office and subjecting 

it to an annual inspection. The one-year 

time period—whether in a nonresidential location or residential 

location designated as an OSJ or 

supervisory branch office—allows 

supervisors to develop experience with 

the member firm’s systems, people, 

products, and overall compliance 

culture. This should help to ensure that 

new supervisors at a member firm 

develop the experience necessary to 

reasonably carry out their assigned 

supervisory responsibilities for a 

member firm’s supervisory system 

before their residences become eligible 

for RSL designation and less frequent 

inspection. 

It is reasonable for FINRA to 

determine that supervisors must have a 

certain amount of direct supervisory 

experience with the member firm, or an 

affiliate or subsidiary of the member 

that is registered as a broker-dealer or 

investment adviser, before their 

residence can be eligible for RSL 

designation. The one-year requirement 

will help ensure that new supervisors 

have an opportunity to gain experience 

with a member firm’s systems and 

products, and fully integrate into a 

member firm’s compliance program and 

culture. This time period also provides 

the member firm with time to evaluate 

the performance of the new supervisor 

to determine their compliance with 

their regulatory obligations before they 

may be eligible for the flexibility 

provided in the proposed rule. 

Moreover, one year provides a 

reasonable balance between providing 

member firms with the flexibility for 

supervision allowed in the proposed 

rule and concerns that supervisors need 

to spend time directly supervising 

before they are given such flexibility. 

Regarding the commenter’s request to 

permit RSL designation so long as the 

associated person at the proposed RSL 

has at least one year of any experience 

with the member firm, its affiliates, or 

its subsidiaries,149 it is reasonable for 

FINRA to conclude that supervisors 

without direct supervisory experience at 

the member firm, its affiliates, or its 

subsidiaries may lack the skills and 

experience to effectively supervise other 

people, locations, and business 

activities from a residence treated as a 

non-branch location. For that reason, it 

is reasonable that FINRA limited 

qualifying experience to direct 

supervisory experience with the 

member firm, its affiliates, or its 

subsidiaries. 

Commenters expressed concern that 

this proposed exclusion would 

negatively impact hiring and retention 

without providing an investorprotection benefit.150 However, member 

firms retain the flexibility to permit 

supervisors to work from a residential 

location registered as an OSJ or 

supervisory branch office. Firms may 

choose to exercise that flexibility to 

attract and retain talent, and the 

proposed rule change would provide 

member firms even more flexibility after 

the supervisor has gained at least one 

year of supervisory experience with the 

member firm. In light of these factors, it 

is reasonable to require new supervisors 

or supervisors new to the member firm 

to work from a location registered as an 

OSJ or supervisory branch office that 

would be subject to an annual 

inspection cycle for a set period of time. 

A commenter opposed the provision 

providing that the one-year experience 

requirement may be satisfied by 

experience with a member firm’s 

affiliate or subsidiary that is registered 

as a broker-dealer or investment 

adviser.151 This commenter explained 

that member firms, affiliates, and 

subsidiaries do not necessarily share the 

same compliance systems and 

cultures.152 However, where a member 

firm relies on a supervisor’s experience 

from an affiliate or subsidiary to satisfy 

the experience requirement, the 

supervisor’s private residence would 

not be automatically designated as an 

RSL. Rather, as discussed further below, 


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153See proposed Rule 3110.19(c)(3). 154See letter from Andrew Hartnett, NASAA 

President and Deputy Commissioner, Iowa 

Insurance Division, North American Securities 

Administrators Association, Inc., to Sherry 

Haywood, Assistant Secretary, Commission, dated 

April 27, 2023, at 4–5 (‘‘NASAA I’’). 

155 Id. at 5. 

156FINRA Response I at 6. 

157 Id. (‘‘[A] firm should routinely evaluate its 

supervisory system to ensure it is appropriately 

tailored to the firm’s business. Such an evaluation 

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.’’). 

158 Id. 

159 Id. 

160 Id.; see proposed Rule 3110.19(e). 

161NASAA II at 4. 

162Notice at 20577; proposed Rule 3110.19(c)(6). 

163NASAA I at 2; letter from Hugh Berkson, 

President, Public Investors Advocate Bar 

Association, to Vanessa Countryman, Secretary, 

Commission, dated Apr. 26, 2023, at 3 (‘‘PIABA I’’); 

Davenport at 2 (supporting ‘‘[m]aking an office or 

location ineligible when an associate[d] person is 

[the] subject of an investigation or action relating 

to a failure to supervise.’’). 

164NASAA I at 2 (‘‘State securities laws are an 

important part of the regulatory framework and 

should not be treated differently with respect to 

assessments of regulatory and supervisory risks that 

the proposed ineligibility criteria are designed to 

address.’’). 

165PIABA I at 3. 

166ASA at 2; Cetera I at 3–4; letter from Scott C. 

Kursman, Managing Director & Chief Compliance 

Officer, Citigroup Global Markets, Inc., to Vanessa 

Countryman, Secretary, Commission, dated Apr. 28, 

2023, at 1–2 (‘‘Citigroup’’); SIFMA I at 1–3. Taken 

together, the alleged practical challenges include: 

state investigations are difficult to track; state 

investigations may take years to commence or 

conclude; it is difficult to discern when state 

investigations commence or conclude; state 

regulators open investigations based on varying 

standards for the evidence required to open such an 

investigation; and the phrase ‘‘subject of’’ is too 

vague to equip firms to effectively comply with the 

proposed exclusion. See SIFMA I at 1–3; Citigroup 

at 1 (noting that it shares SIFMA’s concern); ASA 

at 2 (taking this position in comments related to the 

‘‘Pilot Program’’); Cetera at 3–4. 

proposed Rule 3110.19(e) would require 

the member firm to conduct and 

document a person-specific risk 

assessment prior to designating the 

location as an RSL. If a supervisor lacks 

comparable supervisory experience with 

the member, its affiliates, or its 

subsidiaries, or if the member, its 

affiliates, or its subsidiaries do not have 

similar compliance systems and 

cultures, the member firm may choose 

to consider those circumstances to 

assess whether such an RSL designation 

is appropriate. 

b. Heightened Supervisory Plans 

As stated above, proposed Rule 

3110.19(c)(3) would prohibit RSL 

designation for any location with a 

designated supervisor who ‘‘is subject to 

a mandatory heightened supervisory 

plan under the rules of the SEC, FINRA, 

or a state regulatory agency.’’ 153 One 

commenter urged FINRA to modify this 

proposed exclusion to also cover 

‘‘heightened supervision under a plan 

established by the member in 

connection with or in response to any 

such regulator’s recommendation or 

finding,’’ stating that the rule should not 

distinguish between heightened 

supervisory plans imposed by regulators 

and those imposed by member firms.154

The commenter explained that a 

member firm’s decision to impose its 

own heightened supervisory plan ‘‘in 

lieu of a formal regulatory action or 

order[ ] or in response to a regulatory 

examination’’ raises ‘‘the same concerns 

as regulator-mandated plans and should 

be addressed accordingly.’’ 155

In response, FINRA declined to 

extend the proposed exclusion to cover 

any heightened supervisory plans 

imposed by a member.156 FINRA 

expects that a member may, from time 

to time, impose voluntary heightened 

supervisory plans as part of its 

supervision program.157 FINRA stated 

that what constitutes a firm-imposed 

heightened supervisory plan is 

‘‘subjective,’’ and it expressed concern 

that extending this proposed exclusion 

to them ‘‘could act to disincentivize 

firms from imposing tailored or more 

specific supervisory controls if the 

result [would be] RSL ineligibility.’’ 158

However, FINRA ‘‘agree[d] that there is 

value in considering heightened 

supervision as a risk factor.’’ 159 To 

balance the commenter’s concern with 

FINRA’s concern about discouraging the 

use of heightened supervision, FINRA 

modified the proposed rule change to 

require consideration of non-mandatory 

heightened supervisory plans in the risk 

assessment described in proposed Rule 

3110.19(e).160

The same commenter characterized 

FINRA’s modification as ‘‘an acceptable 

balance between [its previous] concerns 

and FINRA’s desire not to disincentivize 

firms from taking such steps to 

proactively improve their supervisory 

systems.’’ 161 No commenter opposed 

the amended language. 

Prohibiting locations with an 

associated person subject to a regulatorimposed heightened supervisory plan 

from being designated as an RSL is 

reasonable as it is designed to limit 

compliance risks. If a regulator has 

imposed a heightened supervisory plan 

on a specific associated person, the 

regulator has determined that they 

require additional supervision to help 

ensure their compliance with securities 

laws, regulations, and rules. It is 

reasonable for FINRA to determine that 

under those circumstances a member 

firm should not be permitted to 

designate that person’s residence as an 

RSL and permit a reduced inspection 

cycle. Firm-imposed heightened 

supervisory plans may, in some 

circumstances, indicate similar risks. At 

the same time, expanding this exclusion 

to firm-imposed supervisory plans 

could disincentivize firms from using 

heightened supervision when 

circumstances would otherwise counsel 

such a plan. Under these circumstances, 

it is reasonable to require member firms 

to consider any firm-imposed 

heightened supervisory plans as part of 

the mandatory, person-specific risk 

assessment. 

c. Investigations and Proceedings 

Alleging a Failure To Supervise 

As originally proposed in the Notice, 

proposed Rule 3110.19(c)(6) would have 

prohibited RSL designation for any 

location with an associated person who 

is ‘‘currently subject to, or has been 

notified in writing that [they] will be 

subject to, any investigation, 

proceeding, complaint or other action 

by the member, the SEC, a selfregulatory organization, 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 MSRB or FINRA.’’ 162

Three commenters supported this 

proposed exclusion.163 One commenter 

emphasized the importance of equal 

treatment for all regulatory actions 

alleging a failure to supervise, regardless 

of whether federal or state securities 

laws are at issue.164 Another commenter 

coupled its support with a 

recommendation that the proposed 

exclusion also extend to associated 

persons who have been subject to 

multiple customer complaints, 

arbitrations, and civil cases.165

Four commenters opposed the 

proposed exclusion, citing practical 

challenges associated with the tracking, 

duration, and resolution of state-level 

securities investigations.166 In 

particular, three of the opposing 

commenters stated that the inclusion of 

state-law violations in this proposed 

exclusion is fundamentally unfair, and 

one of these commenters stated that 

supervisors would ‘‘lose[ ] the privilege 


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167SIFMA I at 3; see Citigroup at 1 (‘‘[T]he fact 

that the mere initiation of an investigation, as 

opposed to some adjudicated finding, can be the 

basis for ineligibility seems problematic from an 

individual fairness and notice standpoint.’’); Cetera 

at 4 (‘‘It unfairly shifts the presumption from 

innocence to guilt without any form of substantive 

finding, much less adjudication.’’). 

168SIFMA at 3; Citigroup at 1 (‘‘We support the 

suggestion made by SIFMA that, rather than lose 

RSL eligibility, a state investigation for failure to 

supervise should be considered by a firm’s 

preexisting obligations under Rule 3110 to maintain 

a reasonably designed supervisory system and to 

conduct an appropriate risk assessment.’’); ASA at 

2 (‘‘We implore federal regulators not to allow 

unsubstantiated claims by state regulators trying to 

protect their regulatory turf to dictate how the 

regulation of the modern broker-dealer business 

should evolve.’’). 

169Cetera I at 4 (‘‘RSL eligibility would only be 

precluded if the associated person has been notified 

by a regulatory agency, in writing, that the agency 

intends to take or recommend enforcement action 

against the individual for failure to perform 

supervisory responsibilities.’’). A Wells notice is a 

communication from SEC Staff to a person involved 

in an investigation that: (1) informs the person the 

staff has made a preliminary determination to 

recommend that the Commission file an action or 

institute a proceeding against them; (2) identifies 

the securities law violations that the staff has 

preliminarily determined to include in the 

recommendation; and (3) provides notice that the 

person may make a submission to the Division and 

the Commission concerning the proposed 

recommendation. See Enforcement Manual, 

Securities and Exchange Commission, Division of 

Enforcement, at 19–20, https://www.sec.gov/ 

divisions/enforce/enforcementmanual.pdf. 

170See FINRA Response I at 6–9; proposed Rule 

3110.19(c)(6); Amendment No. 1. 

171FINRA Response I at 7–8; see Amendment No. 

1; proposed Rule 3110.19(c)(6). As modified by 

Amendment No. 1, the proposed rule change would 

prohibit RSL designation for any location with an 

associated person who ‘‘has been notified in writing 

that [he or she] is now subject to[ ] any Investigation 

or Proceeding, as such terms are defined [for Form 

U4], by [a Regulator] expressly 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 [a]cts or laws, or any 

of the rules of the MSRB or other self-regulatory 

organization, including FINRA.’’ Proposed Rule 

3110.19(c)(6). The proposed amendment also 

broadens the scope of the applicable rules. As 

originally proposed in the Notice, the proposed rule 

change would have reached the rules of the MSRB 

and FINRA, but not—as now proposed—‘‘any’’ selfregulatory organization. See Notice at 20577. 

172FINRA Response I at 8–9. FINRA emphasized 

that this proposed exclusion would apply ‘‘where 

a Regulator’s written notification to an associated 

person describes circumstances and other 

allegations that could be reasonably construed to 

relate to a failure to reasonably supervise another 

individual under the associated person’s 

supervision.’’ Id. at 8. 

173See FINRA Response I at 6–9; Proposed Rule 

3110.19(c)(6); Amendment No. 1. As stated above, 

this proposed modification would not apply to an 

associated person who is subject to an ongoing 

Proceeding. 

174FINRA Response I at 9. 

175SIFMA II at 2 (‘‘[T]he Proposed Rule Change, 

as amended, addresses in part concerns raised by 

the industry. For example, proposed Rule . . . 

3110(c)(6) now allows a firm to designate or 

redesignate an RSL location after a specified period 

of time following an investigation.’’); XML at 1 (the 

use of the Form U4 definitions for Investigation and 

Proceeding ‘‘will maintain consistency within the 

industry,’’ and the revised exclusion ‘‘will enable 

members to determine an effective date for 

designation or redesignation of an RSL’’); Fidelity 

II at 2 (‘‘Fidelity also appreciates the clarification 

provided concerning an associated person who is 

the subject of an investigation or proceeding by a 

regulator, particularly the ability to resume 

designating a location as an RSL either at the 

closure of the proceeding or after the matter has 

been idle for a year.’’). 

176NASAA II at 2–3. 

177 Id. at 3–4 and n.8. 

178FINRA Response II at 6. 

179 Id. 

180See id. 

181NASAA requested that FINRA clarify that a 

Wells notice or its equivalent ‘‘is not a prerequisite 

for ineligibility under this criterion.’’ NASAA II at 

3. The proposed rule change, as modified by 

Amendment No. 1, makes clear that ‘‘Investigation’’ 

has the same meaning as it does for Form U4. See 

supra note 74 and accompanying text. For purposes 

of Form U4, some of the circumstances constituting 

Continued 

of workplace flexibility for an uncertain 

and inordinate amount of time[, 

disrupting their lives] without any 

adjudication that they failed in their 

supervisory duties.’’ 167 For these 

reasons, three opposing commenters 

urged FINRA to remove state-level 

securities investigations from the 

proposed rule change.168 The fourth 

opposing commenter similarly 

recommended that FINRA narrow the 

proposed exclusion such that it take 

effect upon receipt of something akin to 

a Wells notice.169

In response, FINRA amended the 

proposed exclusion in two ways.170

First, FINRA limited its scope to 

Investigations and Proceedings, as those 

terms are defined in Form U4, by a 

Regulator ‘‘expressly’’ alleging a failure 

to supervise.171 FINRA stated that 

‘‘using the definitions from Form U4 

provides consistency and clarity not 

only with respect to the scope of 

applicable events subject to the 

ineligibility criteria, but also regarding 

when some events ‘‘begin’’ (e.g., after 

the ‘Wells’ notice has been given).’’ 172

Second, FINRA included a temporal 

element to provide that such locations 

may be designated or redesignated as an 

RSL subject to the requirements of the 

proposed rule change, as modified by 

Amendment No. 1, upon the earlier of: 

(1) the member’s receipt of written 

notification from the applicable 

Regulator that such Investigation has 

concluded without further action; or (2) 

one year from the date of the last 

communication from such Regulator 

relating to such Investigation.173 FINRA 

explained that the proposed amendment 

addresses ‘‘commenters’ concerns that 

unadjudicated allegations would form 

the basis of a location’s permanent 

exclusion as an RSL.’’ 174

Three commenters supported the 

modified exclusion, stressing that the 

revisions provide regulatory clarity and 

address industry concerns about the 

uncertain length of some regulatory 

investigations.175 A fourth commenter 

‘‘generally support[ed]’’ the modified 

provision because it ‘‘reduces the 

likelihood that a location remains 

ineligible for longer than reasonably 

necessary for a regulator to investigate 

potential misconduct[ ] while allowing 

regulators sufficient flexibility to 

conduct a thorough investigation.’’ 176

But this commenter asked for further 

modifications to broaden the scope of 

the proposed rule change, including to 

codify FINRA’s statement that the 

exclusion would apply where 

circumstances can be reasonably 

construed to evidence a covered 

Investigation, to clarify that a Wells 

notice or its equivalent ‘‘is not a 

prerequisite for ineligibility under this 

criterion,’’ and to clarify that some 

regulatory communications, including 

subpoenas, may provide notice of a 

covered investigation ‘‘depending on 

the information’’ they contain.177

In response, FINRA declined to 

further amend the proposed rule 

change.178 FINRA stated that ‘‘the wellestablished definitions from Form U4 

provide a clear picture of the scope of 

applicable events subject to the 

proposed eligibility criterion.’’ 179

FINRA also emphasized that although 

subpoenas and other regulatory 

communications do not necessarily 

establish the existence of an 

‘‘Investigation’’ as defined in Form U4, 

the proposed rule change separately 

requires firms to consider ‘‘any 

regulatory communications,’’ including 

subpoenas, in the mandatory risk 

assessment.180

The proposed rule change, as 

modified by Amendment No. 1, 

reasonably addresses the potential risks 

indicated by written communications 

from a Regulator alleging a failure to 

supervise. It is reasonable for FINRA to 

conclude that, where an associated 

person’s conduct has resulted in a 

Regulator notifying the associated 

person that they are subject to an 

Investigation or a Proceeding expressly 

alleging that they have failed reasonably 

to supervise another person subject to 

their supervision, the potential risk 

warrants the associated person having 

their residence inspected on a more 

frequent basis, and therefore the 

residence should not be designated as 

an RSL.181


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an ‘‘Investigation’’ would not require a Wells 

notice. See id. 182Proposed Rule 3110.19(c)(6). 183Proposed Rule 3110.19(e)(5). 184See Notice at 20577–78; proposed Rule 

3110.19(c). 185PIABA I at 3. 

186Proposed Rule 3110.19(e); Amendment No. 1 

at 6. 

187FINRA Response I at 7. 

188PIABA II at 3–4. 

189 Id. at 4. 

190See FINRA Response II at 6. 

191 Id. 

192The Commission addresses the proposed risk 

assessment in Section III(A)(5). 

193FINRA Response I at 7. 

194See proposed Rule 3110.19(c)(2), (4), and (5). 

195FINRA Rule 1210.04 permits a member to 

‘‘designate any person currently registered, or who 

becomes registered, with the member as a 

representative to function as a principal for a period 

of 120 calendar days prior to passing an appropriate 

principal qualification examination as specified 

under Rule 1220(a), provided that such person has 

at least 18 months of experience functioning as a 

The proposed exclusion, as modified 

by Amendment No. 1, also reasonably 

addresses commenter concerns with its 

scope and equips member firms to 

comply with its terms. By limiting its 

scope to certain Investigations and 

Proceedings, as those terms are defined 

for purposes of Form U4, that 

‘‘expressly’’ allege a failure to 

reasonably supervise, the proposed 

exclusion clarifies that FINRA does not 

expect firms to discern—based on vague 

or ambiguous information—whether the 

exclusion applies. Separately, the 

proposed rule change addresses 

commenter concerns that unadjudicated 

allegations might permanently prohibit 

a location from RSL designation by 

including a temporal element that 

permits the designation or redesignation 

of affected RSLs under limited 

circumstances. Specifically, this 

provision would permit RSL 

designation or redesignation upon (1) 

the member’s receipt of written 

notification from the applicable 

Regulator that such Investigation has 

concluded without formal action or (2) 

one year from the date of the last 

communication from such Regulator 

relating to such Investigation.182

Finally, while the proposed exclusion 

would not capture circumstances short 

of a formal Investigation or Proceeding 

that could counsel against an RSL 

designation, the proposed rule change 

separately requires firms to consider—as 

part of the mandatory, person-specific 

risk assessment—any regulatory 

communications from a Regulator 

indicating that the associated person at 

the proposed RSL failed reasonably to 

supervise another person subject to their 

supervision.183

d. Customer Complaints, Arbitration 

Claims, and Civil Actions 

As originally proposed in the Notice, 

proposed Rule 3110.19(c) did not 

include a location-level exclusion 

addressing any associated person who is 

or has been subject to multiple customer 

complaints or customer-initiated, 

investment-related arbitration claims or 

civil actions.184 One commenter 

recommended that FINRA include a 

location-level exclusion covering such 

associated persons, as these customerinitiated actions are often the ‘‘canary in 

the coal mine’’ indicating threats to 

investor protection.185 In response, 

FINRA modified the proposed rule 

change (as described in more detail 

below) to require a member to consider 

the volume and nature of customer 

complaints as part of the mandatory, 

person-specific risk assessment prior to 

RSL designation.186 Although the 

proposed risk assessment does not 

expressly require the consideration of 

customer-initiated, investment-related 

arbitration or civil litigation, FINRA 

emphasized that the risk assessment’s 

list of factors is ‘‘non-exhaustive’’ and it 

‘‘agree[d] that the presence of such 

arbitration[s] or civil litigation[s] would 

be a factor for a firm to consider as part 

of the risk assessment.’’ 187

In response to the Amendment No. 1, 

the commenter repeated its request that 

the location-level exclusions also cover 

locations of associated persons who 

have been subject to multiple customer 

complaints or customer-initiated, 

investment-related arbitrations or civil 

actions.188 This commenter emphasized 

that such an associated person should 

be disqualified from working from an 

RSL ‘‘[r]ather than trusting member 

firms to conduct and document a risk 

assessment[ ] that includes examining 

the ‘volume and nature of customer 

complaints.’ ’’ 189

In response, FINRA declined to 

modify the proposed rule change to 

include an automatic exclusion for 

locations with associated persons who 

have been the subject of multiple 

customer complaints.190 FINRA 

emphasized that customer complaints 

‘‘may lack merit,’’ and the proposed rule 

change’s mandatory risk assessment 

requires the consideration of the volume 

and nature of customer complaints prior 

to any RSL designation.191

The proposed rule change takes a 

reasonable approach to the issue of 

customer complaints and customerinitiated, investment-related arbitration 

claims and civil actions by requiring 

firms to consider the ‘‘volume and 

nature of customer complaints’’ in the 

mandatory risk assessment prior to RSL 

designation.192 Although the proposed 

risk assessment does not explicitly 

mandate the consideration of customerinitiated, investment-related arbitration 

claims and civil actions, the risk 

assessment’s factors are non-exhaustive. 

Moreover, FINRA has stated that such 

arbitration claims and civil actions 

would be relevant factors for 

consideration during the mandatory risk 

assessment.193

Such complaints, claims, and actions 

may, in certain circumstances, indicate 

heightened levels of risk. However, they 

are not formal investigations or 

proceedings initiated by a regulator 

charged with enforcing securities laws, 

regulations, and rules. For example, 

they may be overly broad in scope or 

lack the factual development of a 

comparable regulatory action. Because 

assessing the risk associated with 

complaints, claims, and actions may 

require investigation and a 

consideration of the totality of the 

circumstances, it is reasonable that—in 

lieu of creating a blanket exclusion for 

such associated persons—the volume 

and nature of customer complaints 

should be considered in the mandatory 

risk assessment. 

e. Other Three Location-Level 

Exclusions 

As stated above, the proposed rule 

change’s location-level eligibility 

exclusions also prohibit RSL 

designation for any location with an 

associated person who: (1) is 

functioning as a principal for a limited 

period in accordance with Rule 1210.04 

(Registration Requirements); (2) is 

statutorily disqualified, unless such 

disqualified person (A) has been 

approved (or is otherwise permitted 

pursuant to FINRA rules and the federal 

securities laws) to associate with a 

member and (B) is not subject to a 

mandatory heightened supervisory plan 

under proposed Rule 3110.19(c)(3) or 

otherwise as a condition to approval or 

permission for such association; or (3) 

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 

U4.194 No commenter offered specific 

support for, or opposition to, any of 

these three exclusions. 

Each of these three location-level 

exclusions is reasonable in light of the 

increased risk each category of person 

might pose. First, a supervisor acting as 

a principal for a limited period prior to 

passing a qualification examination has 

not yet acquired the credentials 

allowing them to act as a principal on 

a permanent basis.195 Second, an 


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registered representative within the five-year period 

immediately preceding the designation and has 

fulfilled all applicable prerequisite registration, fee 

and examination requirements prior to designation 

as a principal. However, in no event may such 

person function as a principal beyond the initial 

120 calendar day period without having 

successfully passed an appropriate principal 

qualification examination as specified under Rule 

1220(a).’’ 

196Section 3(a)(39) of the Exchange Act identifies 

a list of events that disqualify someone from 

membership in, participation in, or association with 

a member of a self-regulatory organization. 15 

U.S.C. 78c(a)(39). 

197See supra note 73. 

198See FINRA Rule 3110(c)(1); proposed Rule 

3110.19(a). 

199See proposed Rule 3110.19(a). SEB Securities 

stated that the proposed rule change ‘‘does not fully 

explain how often a home office would need to be 

used to be considered a non-branch location or 

RSL’’ and questioned whether the RSL designation 

is ‘‘only for associated persons whose primary place 

of business is their home.’’ Letter from Anonymous, 

Compliance Officer, SEB Securities, Inc. (‘‘SEB’’), to 

the Commission, dated July 13, 2023. FINRA 

responded that SEB’s comment relates to a ‘‘broader 

question about the branch office definition’’ and 

that the proposed rule change ‘‘is not intended to 

change’’ the longstanding definition of ‘‘branch 

office,’’ which has been in effect since 2006. FINRA 

Response II at 8. 

200Notice at 20576. 

201 Id. 202See proposed Rule 3110.19(a)(1). 203See proposed Rule 3110.19(a)(2). 204See proposed Rule 3110.19(a)(3). 

205See proposed Rule 3110.19(a)(4). Rule 

3110(f)(2)(A)(ii) and (iii) identify the conditions for 

the primary and non-primary residence exclusions. 

For a discussion of those exclusions, see Section 

II(A)(1)(c) above. 

206See proposed Rule 3110.19(a)(5). 

207See proposed Rule 3110.19(a)(6). 

208See proposed Rule 3110.19(a)(7). 

209See proposed Rule 3110.19(a)(8). 

210CAI at 1–2. 

211See CAI at 1–2, Exhibit A at 2. 

212See CAI, Exhibit A at 2 (‘‘The Committee 

believes that this language is unnecessarily narrow 

and restrictive and would limit the ability of a 

location, in several common scenarios, to claim 

[RSL] status, without providing any meaningful 

investor protection safeguards.’’). 

213FINRA Response I at 3–4. 

214 Id. at 3. 

215 Id. at 3–4 (quoting 17 CFR 240.17a–4(l)). 

216 Id. at 4. FINRA acknowledged that Rule 

3110(f)(2) does not define ‘‘immediate family,’’ but 

it noted that this term is defined in Rule 3241. Id. 

at 4 n.12. 

217See proposed Rule 3110.19(a)(7); NASAA I at 

1 (‘‘We reiterate and incorporate our previous 

comments on [File Number FINRA–SR–2022– 

019]’’); see also NASAA (8/23/2022) at 12 

(addressing the same provision), https://

www.sec.gov/comments/sr-finra-2022-019/ 

srfinra2022019-20137298-307861.pdf. 

218See NASAA I at 1; see also NASAA (8/23/ 

2022) at 12. 

219 Id. 

individual subject to a statutory 

disqualification has engaged in violative 

conduct that may indicate an increased 

risk of non-compliance.196 Third, an 

individual with certain regulatory or 

criminal-action disclosures on Form U4 

has a history of criminal conviction(s) or 

regulatory finding(s) that may indicate 

an increased risk of non-compliance.197

Because of the heightened risks 

associated with these three categories of 

supervisors, it is reasonable for the 

proposed rule change to require such 

supervisors to operate from an OSJ or 

supervisory branch office (where they 

will be inspected at least annually) 

rather than from a location designated 

as an RSL (where they would be 

inspected on a regular periodic 

schedule, presumed to be at least every 

three years).198 Therefore, it is 

reasonable to exclude such supervisors’ 

residences from RSL designation. 

3. Conditions for Designation as a 

Residential Supervisory Location 

As stated above, proposed Rule 

3110.19(a) would provide that an 

associated person’s private residence 

where supervisory activities are 

conducted may be eligible for RSL 

designation provided that the member 

firm and/or location complies with ten 

conditions.199 FINRA stated that it 

adapted the first eight conditions from 

the primary and non-primary residence 

exclusions.200 It added a ninth 

condition on recordkeeping and a tenth 

condition addressing technology and 

surveillance tools.201 These ten 

conditions are discussed in more detail 

below. 

a. Conditions Adapted From the 

Primary and Non-Primary Residence 

Exclusions 

As stated above, FINRA adapted the 

first eight conditions of the proposed 

rule change from the primary and nonprimary residence exclusions: (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; 202 (2) the location is not 

held out to the public as an office; 203 (3) 

the associated person does not meet 

with customers or prospective 

customers at the location; 204 (4) any 

sales activity that takes place at the 

location complies with the conditions 

set forth under Rule 3110(f)(2)(A)(ii) or 

(iii); 205 (5) neither customer funds nor 

securities are handled at that 

location; 206 (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; 207 (7) the 

associated person’s correspondence and 

communications with the public are 

subject to the member firm’s 

supervision in accordance with Rule 

3110; 208 and (8) the associated person’s 

electronic communications (e.g., email) 

are made through the member’s 

electronic system.209

One commenter opposed the 

requirement, set forth in proposed Rule 

3110.19(a)(1), that 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.210 This 

commenter stated that this proposed 

condition would not provide any 

meaningful investor protection 

safeguards because associated persons 

who reside together ‘‘to afford the rising 

cost of housing’’ do not necessarily pose 

a higher risk to investor protection.211

This commenter further stated that this 

proposed condition is ‘‘unnecessarily 

narrow and restrictive.’’ 212

In response, FINRA declined to 

modify proposed Rule 3110.19(a)(1).213

FINRA emphasized that the proposed 

rule change ‘‘is intended to align with 

one of several conditions to the current’’ 

primary and non-primary residence 

exclusions.214 FINRA also noted that the 

proposed rule change aligns with SEC 

Books and Records rules, which provide 

(among other things) that ‘‘a broker 

dealer is not required to maintain 

records at an office that is a private 

residence ‘where only one associated 

person (or multiple associated persons 

who reside at that location and are 

members of the same immediate family) 

regularly conducts business.’ ’’ 215

Although FINRA declined to modify 

this proposed condition, it stated that it 

would consider relevant comments ‘‘in 

connection with future initiatives to 

consider the OSJ and branch office 

definitions more broadly.’’ 216

A second commenter requested that 

FINRA modify proposed Rule 

3110.19(a)(7), which would require that 

the associated person’s correspondence 

and communications with the public be 

subject to the member firm’s 

supervision in accordance with Rule 

3110.217 The commenter stated that this 

language improperly focuses on the 

recipient (as opposed to the subject) of 

the communications, and its reference 

to ‘‘the public’’ is unclear.218 The 

commenter recommended that the 

condition instead require that ‘‘all 

correspondence and communications by 

the associated person related in any way 

to existing or potential business 

activities [be] subject to the firm’s 

supervision in accordance with [Rule 

3110].’’ 219


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220Letter from Kosha Dalal, Vice President and 

Associate General Counsel, Office of General 

Counsel, FINRA, to Vanessa Countryman, Secretary, 

Commission, dated Oct. 31, 2022, at 8, available as 

Exhibit 2b to File Number FINRA–SR–2023–006 

(addressing the same provision). 

221 Id. 

222 Id. 

223See NASAA I at 1; NASAA (8/23/2022) at 12. 

224FINRA Rules 3110(a); see FINRA Rules 

3110(b)(4), 3110.06, and 3110.09. 

225 17 CFR 240.17a–4(b)(4) (requiring preservation 

of ‘‘[o]riginals of all communications . . . which are 

subject to the rules of a self-regulatory organization 

of which the member, broker[,] or dealer is a 

member regarding communications with the 

public.’’). 

226FINRA Rule 3110(f)(2)(A)(ii)(e). 

227Proposed Rule 3110(a)(2) through (6), (8). 

228See supra note 215 and accompanying text. 

229Proposed Rule 3110.19(a)(2) through (5). 

230Proposed Rule 3110.19(a)(6). 

231Proposed Rule 3110.19(a)(7) and (8). 

232See proposed Rule 3110.19(a)(9). 

233See Notice at 20576. 

234See NASAA I at 2–3; Davenport at 2. 

235NASAA I at 2–3. 

236 Davenport at 2. 

237Proposed Rule 3110.19(a)(10). 

238See proposed Rule 3110.19(a)(10). 

In response, FINRA declined to 

modify proposed Rule 3110.19(a)(7).220

FINRA explained that the proposed 

language ‘‘aligns with existing rule text 

used in the primary residence exclusion 

in Rule 3110(f)(2)(A)(ii)[(e)] and aligns 

with the terminology in FINRA Rule 

2210 (Communications with the 

Public).’’ 221 Adopting the commenter’s 

proposed alternative would, FINRA 

stated, ‘‘create an incongruity within 

Rule 3110 and raise questions about the 

difference in meanings.’’ 222

A commenter requested to expand 

proposed Rule 3110.19(a)(7) to require 

that ‘‘all correspondence and 

communications by the associated 

person related in any way to existing or 

potential business activities [be] subject 

to the firm’s supervision in accordance 

with [Rule 3110].’’ 223 However, Rule 

3110 already imposes broad supervision 

requirements to achieve compliance 

with applicable securities laws and 

regulations, and with applicable FINRA 

rules, and those obligations would 

apply to RSLs.224 Moreover, the 

proposed condition’s use of the term 

‘‘communications with the public’’ 

aligns with language in FINRA Rule 

2210, the SEC Books and Records 

Rule,225 and the preexisting residential 

exclusions,226 and so should be familiar 

to both firms and to regulators. For these 

reasons, it is reasonable for FINRA to 

retain the same condition as that for the 

primary and non-primary residence 

exclusions. 

No other commenter offered specific 

support for or opposition to any of the 

remaining six conditions adapted from 

the primary and non-primary residence 

exclusions.227

Each of these eight conditions 

imposes a reasonable limitation on the 

designation of an RSL. Limiting an RSL 

designation to a location with only one 

associated person, or multiple 

associated persons who reside at that 

location and are members of the same 

immediate family, is a reasonable 

limitation in light of FINRA’s stated 

intention to align the condition with the 

SEC Books and Records rules.228

Restrictions on activities that occur at 

the RSL, such as prohibitions involving 

interactions with customers (e.g., not 

holding the office out to the public, not 

meeting customers or prospective 

customers in-person, and limitations on 

sales activities) and the handling of 

customer funds and securities,229 will 

limit higher risk activities occurring at 

an RSL that may benefit from more 

frequent inspection of the location. 

Furthermore, requiring an associated 

person to be assigned to a designated 

branch office and to name that branch 

office on all of their communications 

with the public 230 provides investors 

with information about the person with 

whom they are conducting business. In 

addition, the affirmative obligations in 

the conditions, such as explicitly 

subjecting the associated person’s 

correspondence and communication 

with the public to the member firm’s 

supervision and requiring the associated 

person’s electronic communications to 

be made through the member firm’s 

electronic system,231 will help provide 

the member firm with enhanced 

supervisory oversight of certain 

activities directly involving investors, 

and thereby lower risk associated with 

an RSL. Moreover, incorporating the 

conditions from the preexisting 

residential exclusions, a rule that 

FINRA has experience in administering 

and that the industry is familiar with, 

will promote regulatory consistency and 

minimize regulatory confusion, thereby 

enhancing investor protection. 

b. Books and Records 

As its ninth condition for designation 

as an RSL, the proposed rule change 

would impose the following 

recordkeeping requirements: (1) the 

member must have a recordkeeping 

system that makes, keeps current, and 

preserves records required to be made, 

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 must not be physically or 

electronically maintained and preserved 

at the office or location; and (3) the 

member must have prompt access to 

such records.232 Because books and 

records required to be made and 

preserved would not be maintained onsite at the RSL, FINRA believes that this 

condition ‘‘strengthen[s] a firm’s ability 

to monitor the supervisory activities 

occurring’’ at an RSL and lowers overall 

risk.233

Two commenters supported this 

recordkeeping condition.234 One stated 

that requiring members to have ‘‘prompt 

access’’ to their records ‘‘would better 

enable firms to supervise their 

associated persons centrally’’ and 

‘‘protect against misappropriation and 

misuse of sensitive customer 

information.’’ 235 The second 

commenter agreed with prohibiting the 

preservation and maintenance of books 

and records at the RSL.236 No 

commenter opposed this proposed 

condition. 

The proposed rule change’s 

recordkeeping conditions are 

reasonable. Prompt access to an RSL’s 

records from an alternative location 

decreases the need for more frequent 

inspection of the RSL. Specifically, the 

proposed rule change couples the 

prompt-access requirement with a 

prohibition on the physical or electronic 

storage of records at the RSL location. 

Because records would not be located at 

the RSL, the member firm should have 

the ability to supervise the RSL 

remotely so long as it can promptly 

access such records, thus decreasing the 

need for a more frequent inspection 

cycle. Consequently, the recordkeeping 

condition would help facilitate the 

timely and effective supervision of an 

RSL’s business activities. 

c. Surveillance and Technology Tools 

The tenth condition for designation as 

an RSL would require a member firm to 

‘‘determine that its surveillance and 

technology tools are appropriate to 

supervise the types of risk[] presented 

by each [RSL].’’ 237 The proposed rule 

change explains that these tools may 

include but are not limited to: (1) firmwide tools, such as an electronic 

recordkeeping system, electronic 

surveillance of email and 

correspondence, electronic trade 

blotters, regular activity-based sampling 

reviews, and tools for visual 

inspections; (2) tools specific to the RSL 

based on the activities of the associated 

person assigned to the location, 

products offered, and restrictions on the 

activity of the RSL; and (3) system tools, 

such as secure network connections and 

effective cybersecurity protocols.238 No 

commenter offered specific support for 


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239Notice at 20575 (‘‘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.’’), 20575 

(firms indicated that they responded to the COVID– 

19 pandemic by relying ‘‘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. These technological 

tools facilitating their supervisory practices include 

surveillance systems, electronic tracking programs 

or applications, and electronic communications, 

including video conferencing tools.’’). 

240Proposed Rule 3110.19(d) (‘‘A member that 

elects to designate any office or location of the 

member as an RSL pursuant to [proposed Rule 

3110.19] shall provide FINRA with a current list of 

all locations designated as RSLs by the 15th day of 

the month following each calendar quarter in the 

manner and format (e.g., through an electronic 

process or such other process) as FINRA may 

prescribe.’’). 

241NASAA I at 2; see Davenport at 2. 

242See letter from James Rabenstine, Vice 

President, NISC and NSLLC Chief Compliance 

Officer, Nationwide Office of the Chief Legal 

Officer, Nationwide Financial Services, Inc. and 

Holly Butson, Chief Compliance Officer, 

Nationwide Fund Distributors, LLC, Nationwide 

Financial Services, Inc. to Sherry Haywood, 

Assistant Secretary, Commission, dated Apr. 24, 

2023, at 2 (‘‘Nationwide’’); FSI at 3–4. 

243See Nationwide at 2; FSI at 3–4. 

244FSI at 3–4; see Nationwide at 2 (recommended 

‘‘a separate filing for [an RSL] like a Form BR 2, 

similar to the U4 page 2 process, so that members 

have a way to track and link Registered 

Representatives who are supervised from the [RSL] 

not an OSJ’’). 

245See FINRA Response I at 9. 

246 Id.; FINRA Response II at 7 (FINRA ‘‘is 

exploring ways for firms to provide this information 

to FINRA and state regulators in a more efficient 

and timely manner, including through the use of 

existing uniform registration forms or FINRA 

Gateway.’’). 

247 XML at 2. 

248FINRA indicated that it is exploring ways to 

structure this data-collection requirement, and it 

expressed appreciation for the commenters’ 

suggestions. FINRA Response I at 9; FINRA 

Response II at 7. 

249Proposed Rule 3110.19(e); Amendment No. 1 

at 8; Amendment No. 2 at 4–5. The five mandatory 

factors are: ‘‘(1) customer complaints, taking into 

account the volume and nature of the complaints; 

(2) heightened supervision other than where such 

office or location is ineligible for RSL designation 

under [proposed Rule 3110.19(c)(3)]; (3) any failure 

to comply with the member’s written supervisory 

procedures; (4) any recordkeeping violation; and (5) 

any regulatory communications from a Regulator, 

indicating that the associated person at such office 

or location failed reasonably to supervise another 

person subject to their supervision, including but 

not limited to, subpoenas, preliminary or routine 

regulatory inquiries or requests for information, 

deficiency letters, ‘blue sheet’ requests or other 

trading questionnaires, or examinations.’’ See 

proposed Rule 3110.19(e). 

250See supra note 103 and accompanying text. 

251Proposed Rule 3110.19(e). 

252 Id. 

253FINRA Response I at 9–10; Amendment No. 1 

at 8. 

254Cetera II at 1 (‘‘We endorse the requirement for 

member firms to develop and document a riskbased assessment before designating a location[] as 

an RSL. This approach is both logical and 

proportional.’’); see XML at 2 (‘‘In addition to the 

time needed to address other requirements in Rule 

3110.19, members will need adequate time to 

develop policies and procedures to comply with the 

location assessments and documentation 

requirements of Rule 3110.19(e) and time to 

implement and perform such activities.’’). 

or opposition to this proposed 

condition. 

FINRA justified the proposed rule 

change, in part, on technological 

advancements that equip firms to 

supervise employees working from 

remote locations.239 Therefore, it is 

reasonable to require any member firm 

taking advantage of the proposed rule 

change—and its less-frequent inspection 

cycle—to first determine that its 

surveillance and technology tools are 

appropriate to supervise the types of 

risks presented by each RSL. To aid 

member firms in this assessment, the 

non-exhaustive list of tools outlined in 

the proposed rule change, including 

firm-wide tools and tools particular to 

the RSL based on the activities of the 

person assigned to that RSL, help 

illustrate FINRA’s expectations and will 

assist firms in implementing robust 

surveillance systems. 

4. Obligation To Provide List of RSLs to 

FINRA 

As stated above, proposed Rule 

3110.19(d) would require any member 

firm that has designated any RSL 

locations to provide a current list of all 

of its RSL locations to FINRA on a 

quarterly basis.240

Two commenters supported the 

proposed rule change, and one of them 

labeled this quarterly-reporting 

requirement as ‘‘critical’’ to the ability 

of regulators ‘‘to effectively oversee 

firms’ important supervisory 

functions.’’ 241 Two other commenters 

opposed the proposed rule change 

because of the inefficiency that would 

result.242 Instead of a quarterly filing 

that provides intermittent snapshots of 

RSL designations, the opposing 

commenters recommended that FINRA 

leverage CRD and the existing branch 

office registration process to 

continuously collect timely information 

on RSL designations.243 For example, 

one opposing commenter emphasized 

that using the existing branch-office 

registration process would provide 

FINRA ‘‘with more current information 

. . . because of existing requirements to 

amend and update information within 

30 days.’’ 244

In response, FINRA declined to 

modify the proposed rule change.245

FINRA indicated, however, that it 

appreciates the commenters’ 

recommendations and ‘‘is exploring 

ways for firms to provide this 

information to FINRA and other state 

regulators in a more efficient 

manner.’’ 246 No commenter offered a 

specific response to FINRA’s decision 

not to modify the proposed rule change, 

although one commenter encouraged 

FINRA to seek input from its members 

to avoid creating an ‘‘overly 

burdensome reporting process.’’ 247

Prompt access to information about a 

member firm’s RSL designations should 

improve the ability of FINRA to readily 

identify which of a member firm’s 

locations have been designated as an 

RSL and more efficiently assess the 

reasonableness of a member firm’s RSL 

designations and corresponding 

supervision. Therefore, the proposed 

rule change’s quarterly-reporting 

requirement is reasonable and would 

provide FINRA with the information it 

needs to carry out its regulatory 

obligations.248

5. Risk Assessment 

As stated above, proposed Rule 

3110.19(e) would require a member 

firm—prior to designating any location 

as an RSL—to ‘‘develop a reasonable 

risk-based approach to designating such 

office or location as an RSL, and [to] 

conduct and document a risk 

assessment’’ that considers five 

mandatory factors.249 These factors 

would require consideration of, among 

other things, customer complaints, firmimposed heightened supervisory plans, 

and regulatory communications 

indicating a failure to reasonably 

supervise.250 The proposed rule change 

also would require the member to 

account for any higher risk activities 

occurring at the location, any higher risk 

associated persons assigned to the 

location, and any indicators of 

irregularities or misconduct (i.e., red 

flags) prior to designating a location as 

an RSL.251 Further, the proposed rule 

change would provide that member 

firms should review red flags—and 

consider evidencing their review—in 

determining whether it is reasonable to 

maintain an RSL designation for a 

particular location.252 FINRA explained 

that this risk assessment—and the nonexhaustive list of factors to consider— 

would strengthen supervisory controls 

and further investor protection ‘‘by 

requiring firms to consider higher risk 

criteria in determining whether to 

designate an office or location as an 

RSL.’’ 253

One commenter offered unqualified 

support for the proposed rule change.254

Two other supportive commenters 

asked that FINRA clarify and modify 

one aspect of proposed Rule 


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255SIFMA II at 1–2 (offering general support for 

the proposed rule change); Fidelity II at 2 (‘‘We 

conceptually support the addition of a risk 

assessment and appreciate there may be instances 

where use of the RSL is not appropriate.’’). 

256Proposed Rule 3110.19(e)(5) (emphasis 

added); Amendment No. 1 at 8. 

257SIFMA II at 2–3 (‘‘It is not clear whether the 

emphasized phrase is meant to modify all the listed 

types of communications or only examinations. It 

may be difficult to determine how these noninvestigatory communications indicate a risk 

presented by an RSL absent an indication of 

supervisory concern.’’); Fidelity II at 2 (‘‘It is not 

clear whether the phrase ‘indicating that the 

associated person at such office or location failed 

reasonably to supervise another person subject to 

their supervision’ is meant to modify all the listed 

types of communications or only examinations.’’) 

258FINRA Response II at 8; Amendment No. 2 at 

4. 

259Proposed Rule 3110.19(e)(5); Amendment No. 

2. 

260PIABA II at 4. 

261 Id. 

262 Id. 

263FINRA Response II at 7; see FINRA Response 

I at 7 (‘‘FINRA emphasizes that the enumerated list 

of factors is non-exhaustive. While consumerinitiated, investment-related arbitration or civil 

litigation is not listed as one of the enumerated 

factors under proposed Rule 3110.19(e), FINRA 

agrees that the presence of such arbitration or civil 

litigation would be a factor for a firm to consider 

as part of the risk assessment.’’). 

264PIABA II at 4. 

265Proposed Rule 3110.19(a); FINRA Rules 

3110(c)(1)(C) and 3110.13. Virtu Financial, Inc., and 

Nationwide submitted out-of-scope comments 

regarding the frequency and method of inspections. 

Virtu asked FINRA to modify the proposed rule 

change ‘‘to codify that all personal residences 

where only electronic activities are carried out, 

whether those be supervisory or other securitiesrelated activities, are non-branch locations and 

reconsider the need to conduct any physical 

inspections of an associated person’s residence and 

instead rely on technological monitoring tools and 

electronic recordkeeping.’’ Letter from Thomas M. 

Merritt, Deputy General Counsel, Virtu Financial, 

Inc., to Vanessa Countryman, Secretary, 

Commission, dated Aug. 1, 2023, at 2 (‘‘Virtu’’). 

Nationwide asked FINRA to permit certain limitedpurpose OSJs, supervisory branch offices, and RSLs 

to be inspected remotely and/or on a five-year 

inspection cycle. Nationwide at 1–2. Because the 

proposed rule change is designed to establish a new 

location designation (RSL) for certain personal 

residences at which supervisory activities occur, 

the recommendations regarding the method of 

inspection are outside the scope of the proposed 

rule change. Because Nationwide appears to request 

an amended inspection schedule for any limitedpurpose OSJ, supervisory branch office, or RSL— 

3110.19(e)(5).255 As originally proposed 

in Amendment No. 1, the risk 

assessment would have required 

members to consider, among other 

things, ‘‘any regulatory communications 

from a Regulator, including but not 

limited to, subpoenas, preliminary or 

routine regulatory inquiries or requests 

for information, deficiency letters, ‘blue 

sheet’ requests or other trading 

questionnaires, or examinations 

indicating that the associated person at 

such office or location failed reasonably 

to supervise another person subject to 

their supervision.’’ 256 The commenters 

that asked for modifications both 

questioned whether the italicized 

language modified the preceding 

illustrative list or only 

‘‘examinations.’’ 257

In response to the commenters’ 

concern about ambiguity in the scope of 

proposed Rule 3110.19(e)(5), FINRA 

reorganized the proposed rule text to 

improve its readability.258 As modified 

by Amendment No. 2, proposed Rule 

3110.19(e)(5) reads as follows: ‘‘any 

regulatory communications from a 

Regulator, indicating that the associated 

person at such office or location failed 

to reasonably supervise another person 

subject to their supervision, including 

but not limited to, subpoenas, 

preliminary or routine regulatory 

inquiries or requests for information, 

deficiency letters, ‘blue sheet’ requests 

or other trading questionnaires, or 

examinations.’’ 259

One opposing commenter stated that 

the risk assessment’s requirement ‘‘to 

‘consider’ higher risk criteria’’ is 

insufficient.260 For example, this 

commenter stated that red flags and 

many of the risk assessment’s factors 

should constitute eligibility exclusions, 

not just factors for a member to 

consider.261 In addition, the commenter 

criticized FINRA’s ‘‘complete lack of 

guidance as to how to weigh and assess 

the various risk criteria,’’ including the 

volume and nature of customer 

complaints.262

In response, FINRA stated that it 

‘‘expects that a firm will consider 

customer complaints and weigh their 

volume and nature based on the firm’s 

business, products, and customer base 

among other factors generally 

considered by the firm when making 

risk-based assessments in other 

contexts, such as in how a firm may 

establish and maintain a supervisory 

system that is appropriately tailored to 

the firm’s business and structure, 

whether unannounced visits to an office 

or location may be appropriate, or 

whether heightened supervisory 

procedures may need to be 

imposed.’’ 263

As stated above, the proposed rule 

change’s member- and location-level 

exclusions prohibit the designation of 

RSLs in certain circumstances that may 

indicate a higher potential risk of noncompliance. But other factors not 

explicitly identified among the 

exclusions can, in certain 

circumstances, indicate heightened 

levels of risk either before or after RSL 

designation. Proposed Rule 3110.19(e) 

will help to mitigate residual risk not 

explicitly addressed in the conditions, 

firm-level exclusions, and location-level 

exclusions. Specifically, the proposed 

rule change would require a member 

firm to assess and document for each 

associated person at a candidate RSL 

certain indicia of risk, including the 

volume and nature of customer 

complaints, any firm-imposed 

heightened supervisory plans, and any 

regulatory communications indicating 

that the associated person failed 

reasonably to supervise another person 

subject to their supervision, prior to RSL 

designation. In addition, the proposed 

rule change would require a member to 

account for any higher risk activities 

occurring at the location, any higher risk 

associated persons assigned to the 

location, and any red flags when 

designating a location as an RSL. 

Furthermore, the proposed rule change 

emphasizes consideration of red flags as 

part of a member firm’s ongoing 

determination of whether it is 

reasonable to maintain an RSL 

designation. In this way, the proposed 

rule change helps to ensure that a 

member firm designating RSLs 

appropriately accounts for the full range 

of risks associated with each proposed 

RSL. For these reasons, the proposed 

rule change is reasonable. 

A commenter asserted that the five 

factors in the risk assessment should 

instead be eligibility exclusions and 

noted the absence of guidance as to how 

to weigh and assess the various risk 

factors.264 As an assessment of the risk 

associated with each factor will depend 

on the facts and circumstances of each 

case, no single factor lends itself to an 

automatic exclusion. For example, 

customer complaints may, in certain 

cases, indicate an unacceptable level of 

risk, but in other cases, complaints may 

be overly broad or lack factual 

development to indicate the level of 

risk. Moreover, as discussed below, this 

is an ongoing risk assessment, and its 

outcome could change with new 

circumstances or as the member firm 

obtains additional information. 

Therefore, it is reasonable for FINRA to 

instead require that firms consider each 

factor as part of a person-specific risk 

assessment prior to RSL designation. 

Similarly, it is reasonable that the 

proposed rule change provides member 

firms flexibility as to how to weigh and 

assess the various risk factors. 

6. Frequency of Inspections 

RSL designation would permit firms 

to inspect the location on a regular 

periodic schedule (presumed to be at 

least every three years) instead of the 

annual schedule otherwise required for 

OSJs and supervisory branch offices.265


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regardless of its status as a personal residence—the 

request to for a five-year inspection cycle is 

likewise outside the scope of the proposed rule 

change. FINRA stated, however, that it would 

consider these recommendation ‘‘more generally as 

part of any future initiatives to consider the OSJ and 

branch office definitions more broadly.’’ FINRA 

Response I at 13; FINRA Response II at 9. 

266NASAA I at 3; NASAA II at 5; PIABA I at 3 

(‘‘[R]esidential supervisory locations should at 

minimum be subject to annual in person audits, if 

not more frequent unannounced visits, rather than 

periodic inspections every three years.’’). 

267NASAA I at 3. 

268 Id. at 4. 

269 Id. at 3; see NASAA II at 5. 

270FINRA Response I at 10–12. 

271 Id. at 12. 

272 Id. 

273 Id. at 11. 

274Proposed Rule 3110.19(b), (c). 

275Proposed Rule 3110.19(a). 

276Proposed Rule 3110.19(e). 

Two commenters opposed this lessfrequent inspection cycle and 

contended that RSLs should be 

inspected annually.266 Emphasizing the 

importance of effective supervision, one 

commenter stated that ‘‘[l]ax or 

otherwise ineffective supervision can 

result in the failure to stop preventable 

harms before they occur, or even 

exacerbate harms that have already 

begun.’’ 267 Although the commenter did 

not dispute the emergence of the hybrid 

work environment and supervision 

technologies, it contended that those 

developments have no ‘‘bearing on the 

appropriate frequency or depth of 

scrutiny of supervisory activities.’’ 268 It 

also contended that ‘‘FINRA has not 

shown that supervisory functions 

present sufficiently ‘lower risk’ to 

warrant loosening oversight of 

individuals performing those 

functions.’’ 269

In response, FINRA declined to 

require annual inspections for RSLs, 

explaining that ‘‘impos[ing] an annual 

inspection cycle on an RSL would 

adversely impact the utility’’ of the 

proposed rule change.270 FINRA 

stressed that ‘‘the inspection 

requirement is only one part’’ of a 

member firm’s ‘‘ongoing obligation’’ to 

supervise under Rule 3110, and ‘‘a 

firm’s inspection of an office or location 

is not the only occasion during which 

a firm supervises its associated 

persons.’’ 271 Indeed, FINRA stated that 

Rule 3110 ‘‘does not preclude a firm 

from conducting inspections of its 

offices or locations more frequently or 

conducting unannounced visits.’’ 272

FINRA also stated that the proposed 

rule change includes ‘‘a rigorous set of 

safeguards and conditions that . . . 

align with the regulatory purposes of 

Rule 3110.’’ 273

The proposed rule change permits— 

but does not require—member firms to 

inspect their RSLs on a less frequent 

inspection cycle. This proposed rule 

change is reasonable for two reasons. 

First, the proposed rule change is 

reasonable in light of Rule 3110’s 

general obligation to establish and 

maintain a reasonably designed 

supervisory system that is tailored to its 

unique business operations and 

associated risks. Although an RSL 

designation would permit a member 

firm to inspect a location on a less 

frequent schedule, the proposed rule 

change would not limit inspections to 

this less frequent schedule. Instead, 

Rule 3110 contemplates that a member 

firm may, in certain circumstances, 

choose to conduct more frequent or 

unannounced visits to an RSL in 

furtherance of its obligation to supervise 

effectively. In this way, the proposed 

rule change is consistent with that 

obligation. 

Relatedly, the Rule 3110 requirement 

to maintain a reasonably designed 

supervisory system is an ongoing 

obligation. A firm may need to 

reconsider a residence’s RSL 

designation, and the corresponding 

relief from annual inspection, if 

circumstances suggest that the 

designation may no longer be 

appropriate. Importantly, proposed Rule 

3110.19(e) indicates that firms should 

review red flags when determining 

whether it is reasonable to maintain an 

RSL designation. The various terms and 

conditions associated with initial RSL 

designation therefore are only the 

beginning of an ongoing assessment of 

a location’s qualification for RSL 

designation and less frequent 

inspections. 

Second, the proposed rule change is 

reasonable in light of its terms and 

conditions. The member- and locationlevel eligibility exclusions would 

identify—and exclude—certain firms 

and locations with characteristics that 

may indicate a higher potential risk of 

non-compliance.274 Additionally, an 

eligible member firm may designate its 

eligible location as an RSL only if it 

complies with ten conditions, such as 

limitations on customer interactions, a 

recordkeeping requirement, and a 

mandatory technology assessment.275

Even if an eligible member firm is 

prepared to comply with those ten 

conditions, it must still ‘‘develop a 

reasonable risk-based approach to 

designating [the eligible location] as an 

RSL, and conduct and document a risk 

assessment for the associated person 

assigned to’’ the proposed RSL.276 These 

layers of protection are designed to limit 

RSL designation (and its less-frequent 

inspection cycle) to locations without 

indicia of increased potential risk of 

non-compliance. With those safeguards, 

a regular periodic inspection schedule is 

reasonable for those locations that can 

comply with the proposed rule change’s 

various terms and conditions. 

IV. Solicitation of Comments on 

Amendment No. 2 

Interested persons are invited to 

submit written data, views, and 

arguments concerning whether 

Amendment No. 2 is consistent with the 

Exchange Act. Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://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 (http://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 such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. Do not include personal 

identifiable information in submissions; 

you should submit only information 

that you wish to make available 

publicly. We may redact in part or 

withhold entirely from publication 

submitted material that is obscene or 

subject to copyright protection. All 

submissions should refer to File 

Number SR–FINRA–2023–006 and 


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277See 15 U.S.C. 78s(b)(2)(C)(iii). 

278See supra notes 258 through 259 and 

accompanying text. 

279 15 U.S.C. 78s(b)(2). 

280 15 U.S.C. 78o–3(b)(6). 

281 15 U.S.C. 78s(b)(2). 

282 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3A ‘‘branch office’’ is defined as: (1) ‘‘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’’; or (2) ‘‘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.’’ 

FINRA Rule 3110(f)(2)(A) and (B). A branch office 

is either ‘‘supervisory’’ (i.e., it supervises one or 

more non-branch locations) or ‘‘non-supervisory’’ 

(i.e., it does not supervise one or more non-branch 

locations). See FINRA Rule 3110(c)(1). 

4An OSJ is any office of a member firm 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 firm; (5) 

review and endorsement of customer orders, 

pursuant to FINRA Rule 3110(b)(2); (6) final 

approval of retail communications for use by 

persons associated with the member firm, pursuant 

to FINRA Rule 2210(b)(1), except for an office that 

solely conducts final approval of research reports; 

or (7) having responsibility for supervising the 

activities of persons associated with the member 

firm at one or more other branch offices of the 

member firm. See FINRA Rule 3110(f)(1). 

5Seven types of locations—often referred to as 

‘‘unregistered offices’’ or ‘‘non-branch locations’’— 

are excluded 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 

location that is the associated person’s primary 

residence, subject to certain conditions; (3) any 

location, other than a primary residence, that is 

used for securities business for less than 30 

business days in any one calendar year, subject to 

certain conditions; (4) 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; (5) 

any location that is used primarily to engage in nonsecurities 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); (6) the ‘‘floor’’ of a registered 

national securities exchange where a member firm 

conducts a direct access business with public 

customers; and (7) a temporary location established 

in response to the implementation of a business 

continuity plan. See FINRA Rule 3110(f)(2)(A)(i)– 

(vii). 6Unless otherwise specified, the Commission 

uses the term ‘‘location’’ in this Order to refer to 

any location where a member firm does business, 

such as an OSJ, supervisory branch office, nonsupervisory branch office, or non-branch location, 

as applicable. 

7See proposed Rule 3110.18. 

8Exchange Act Release No. 97398 (Apr. 28, 2023), 

88 FR 28620 (May 4, 2023) (File No. SR–FINRA– 

2023–007) (‘‘Notice’’). 

9The comment letters are available at https://

www.sec.gov/comments/sr-finra-2023-007/ 

srfinra2023007.htm. 

10See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

should be submitted on or before 

December 15, 2023. 

V. Accelerated Approval of Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 and 2 

The Commission finds good cause to 

approve the proposed rule change, as 

modified by Amendment Nos. 1 and 2, 

prior to the thirtieth day after the date 

of publication of notice of the filing of 

Amendment No. 2 in the Federal 

Register.277 In Amendment No. 2, 

FINRA modified the proposed rule 

change—in direct response to comments 

received—to clarify the substantive 

intent of proposed Rule 3110.19(e)(5). 

FINRA did not propose to change any 

substantive obligation of the proposed 

rule change. To reduce ambiguity 

regarding its scope, FINRA instead 

proposed to reorganize a single sentence 

describing a single factor in the 

mandatory risk assessment.278 The basis 

for this amendment is the same as the 

basis for the original proposed rule 

change, as modified by Amendment No. 

1, which the Commission previously 

noticed for public comment. 

After consideration of the comments 

FINRA received on the proposed rule 

change, the Commission concludes that 

Amendment No. 2 represents a 

reasonable extension of, and is 

substantially similar to, the language 

originally proposed for proposed Rule 

3110.19(e). The Commission also 

concludes that Amendment No. 2 

responds to comments received, adds 

clarity to the proposed rule change, and 

does not raise any novel regulatory 

concerns. Accordingly, the Commission 

finds good cause, pursuant to Section 

19(b)(2) of the Act,279 to approve the 

proposed rule change, as modified by 

Amendment Nos. 1 and 2, on an 

accelerated basis. 

VI. Conclusion 

For the reasons set forth above, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

Nos. 1 and 2, is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and, in general, 

protect investors and the public 

interest.280

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 281

that the proposed rule change (SR– 

FINRA–2023–006), as amended by 

Amendment Nos. 1 and 2, be, and 

hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.282

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25880 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–98982; File No. SR–FINRA– 

2023–007] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change To Adopt 

Supplementary Material .18 (Remote 

Inspections Pilot Program) Under 

FINRA Rule 3110 (Supervision) 

November 17, 2023. 

I. Introduction 

On April 14, 2023, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change SR–FINRA– 

2023–007 pursuant to Section 19(b)(1) 

of the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 1 and Rule 19b–4 2

thereunder, to adopt a voluntary, threeyear remote inspections pilot program to 

allow eligible member firms to elect to 

fulfill their obligation under paragraph 

(c) (Internal Inspections) of FINRA Rule 

3110 (Supervision) by conducting 

inspections of eligible branch offices,3

offices of supervisory jurisdiction 

(‘‘OSJ’’),4 and non-branch locations 5

remotely without an on-site visit to such 

locations,6 subject to specified 

safeguards and limitations (the 

‘‘Pilot’’).7 The proposed rule change was 

published for public comment in the 

Federal Register on May 4, 2023.8 The 

Commission received thirteen comment 

letters in response to the Notice.9 On 

June 7, 2023, FINRA consented to an 

extension of the time period in which 

the Commission must approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change to August 2, 2023.10 On 


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