Document ID: SEC-2022-1028-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-08-02T04:00Z

[Federal Register Volume 87, Number 147 (Tuesday, August 2, 2022)]
[Notices]
[Pages 47248-47259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-16487]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95379; File No. SR-FINRA-2022-019]

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

July 27, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July15, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt new Supplementary Material .19 
(Residential Supervisory Location) under FINRA Rule 3110 (Supervision) 
that would align FINRA's definition of an office of supervisory 
jurisdiction (``OSJ'') and the classification of a location that 
supervises activities at non-branch locations with the existing 
residential exclusions set forth in the branch office definition to 
treat a private residence at which an associated person engages in 
specified supervisory activities as a non-branch location, subject to 
safeguards and limitations. In accordance with Rule 3110(c), as a non-
branch location, a Residential Supervisory Location would become 
subject to inspections on a regular periodic schedule, which is 
presumed to be at least every three years,\3\ rather than an annual 
inspection requirement required of OSJs and other supervisory branch 
offices.\4\
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    \3\ See FINRA Rules 3110(c)(1)(C) and 3110.13.
    \4\ SEC staff and FINRA have interpreted FINRA rules to require 
member firms to conduct on-site inspections of branch offices and 
unregistered offices (i.e., non-branch locations) in accordance with 
the periodic schedule described under Rule 3110(c)(1). See SEC 
National Examination Risk Alert, Volume I, Issue 2 (November 30, 
2011), https://www.sec.gov/about/offices/ocie/riskalert-bdbranchinspections.pdf, and Regulatory Notice 11-54 (November 2011) 
(joint SEC and FINRA guidance stating, a ``broker-dealer must 
conduct on-site inspections of each of its office locations; [OSJs] 
and non-OSJ branches that supervise non-branch locations at least 
annually, all non-supervising branch offices at least every three 
years; and non-branch offices periodically.'') (footnote defining an 
OSJ omitted). See also SEC Division of Market Regulation, Staff 
Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) 
(``SLB 17'') (stating, in part, that broker-dealers that conduct 
business through geographically dispersed offices have not 
adequately discharged their supervisory obligations where there are 
no on-site routine or ``for cause'' inspections of those offices), 
https://www.sec.gov/interps/legal/mrslb17.htm.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are bracketed.
* * * * *
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
    (a) through (f) No Change.

   Supplementary
Material: --------------
.01 through .17 No Change.
.18 Reserved.
.19 Residential Supervisory Location

    (a) Residential Supervisory Location. Notwithstanding any other 
provisions of Rule 3110(f), and subject to paragraph (b) of this 
Supplementary Material, a location that is the associated person's 
private residence where supervisory activities are conducted, including 
those described in Rule 3110(f)(1)(D) through (G) or in Rule 
3110(f)(2)(B), shall be considered for those activities 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;
    (2) the location is not held out to the public as an office;
    (3) the associated person does not meet with customers or 
prospective customers at the location;
    (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);
    (5) neither customer funds nor securities are handled at that 
location;
    (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;
    (7) the associated person's correspondence and communications with 
the public are subject to the firm's supervision in accordance with 
this Rule;
    (8) all electronic communications by the associated person at that 
location are made through the member's electronic system;
    (9) a list of the residence locations is maintained by the member; 
and
    (10) all books or records required to be made and preserved by the 
member under the federal securities laws or FINRA rules are maintained 
by the member other than at the location.
    (b) Ineligible Locations
    A location shall not be eligible for designation as a non-branch 
location in accordance with Rule 3110.19 if:
    (1) the member is designated as a Restricted Firm under Rule 4111;
    (2) the member is designated as a Taping Firm under Rule 3170;
    (3) the member is currently undergoing, or is required to undergo, 
a review under Rule 1017(a)(7) as a result of one or more associated 
persons at such location;
    (4) one or more associated persons at such location is a designated 
supervisor

[[Page 47249]]

who has less than one year of direct supervisory experience with the 
member;
    (5) one or more associated persons at such location is functioning 
as a principal for a limited period in accordance with Rule 1210.04;
    (6) one or more associated persons at such location is subject to a 
mandatory heightened supervisory plan under the rules of the SEC, FINRA 
or state regulatory agency;
    (7) one or more associated persons at such location is statutorily 
disqualified, unless such disqualified person has been approved (or is 
otherwise permitted pursuant to FINRA rules and the federal securities 
laws) to associate with a member and is not subject to a mandatory 
heightened supervisory plan under paragraph (b)(6) of this 
Supplementary Material or otherwise as a condition to approval or 
permission for such association;
    (8) one or more associated persons at such location has an event in 
the prior three years that required a ``yes'' response to any item in 
Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on 
Form U4; or
    (9) one or more associated persons at such location is currently 
subject to, or has been notified in writing that it will be subject to, 
any investigation, proceeding, complaint or other action by the member, 
the SEC, a self-regulatory 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, or any rule or regulation under any of such Acts, or any 
of the rules of the MSRB.
* * * * *

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

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

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

1. Purpose
Background
    Early in 2020, the COVID-19 pandemic prompted FINRA and other 
regulators to provide temporary relief to member firms from certain 
regulatory requirements to address the public health crisis.\5\ In 
response to the pandemic, many private and government employers closed 
their offices and allowed their employees to work from alternative 
worksites (e.g., an employee's residence). As jurisdictions scale back 
pandemic-related restrictions,\6\ many member firms are moving towards 
a blended workforce model, whereby employees work both on-site in a 
conventional office setting and remotely in an alternative location 
such as a private residence. Based on feedback from member firms, FINRA 
believes this model will endure, irrespective of the state of the 
pandemic. The pandemic accelerated reliance on technological advances 
in surveillance and monitoring capabilities and prompted significant 
changes in lifestyles and work habits, including the growing 
expectation for workplace flexibility. These dynamics have persuaded 
FINRA to review aspects of Rule 3110 that may benefit from 
modernization.\7\ The changes brought forth by the pandemic merit a 
reevaluation of the regulatory benefit of requiring firms to designate 
a private residence where lower risk activities are conducted as an OSJ 
or branch office. In recognition of the significant technology and 
industry changes that are impacting workplace arrangements, FINRA is 
proposing to adopt new Supplementary Material .19 under Rule 3110 to 
establish a Residential Supervisory Location that would be treated as a 
non-branch location (i.e., an unregistered office), subject to 
specified investor protection safeguards and limitations. The most 
significant regulatory effect of the proposed rule change would be 
that, as a non-branch location, a Residential Supervisory Location 
would become subject to inspections on a regular periodic schedule, 
which is presumed to be at least every three years, rather than an 
annual inspection requirement required of OSJs and other supervisory 
branch offices.\8\
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    \5\ Among the temporary regulatory relief provided, FINRA 
adopted relief pertaining to branch office registration requirements 
through Form BR (Uniform Branch Office Registration Form) and FINRA 
Rule 3110(c) inspection requirements. Specifically, FINRA 
temporarily suspended the requirement for member firms to submit 
branch office applications on Form BR for any newly opened temporary 
office locations or space-sharing arrangements established as a 
result of the pandemic. See Regulatory Notice 20-08 (March 2020) 
(``Notice 20-08''). With respect to inspection obligations, FINRA 
adopted temporary Rule 3110.16 that provided additional time for 
member firms to complete their calendar year 2020 inspection 
obligations. See Securities Exchange Act Release No. 89188 (June 30, 
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2020-019). In response to the 
ongoing public health crisis, FINRA subsequently adopted temporary 
FINRA Rule 3110.17, providing member firms the option to conduct 
inspections of their branch offices and non-branch locations 
remotely, subject to specified terms therein. See Securities 
Exchange Act Release No. 90454 (November 18, 2020), 85 FR 75097 
(November 24, 2020) (Notice of Filing and Immediate Effectiveness of 
File No. SR-FINRA-2020-040). FINRA Rule 3110.17 expires on December 
31, 2022. See Securities Exchange Act Release No. 94018 (January 20, 
2022), 87 FR 4072 (January 26, 2022) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2022-001).
    \6\ See, e.g., Government of the District of Columbia, Mayor's 
Order 2022-029 (February 14, 2022) (announcing the end of the indoor 
mask mandate at certain venues effective March 1, 2022; and the end 
of the requirement for certain private venues to check vaccination 
status effective February 14, 2022); State of New York, ``Winter 
Toolkit for New Phase of COVID Response: Keep New York Safe, Open 
and Moving Forward'' (Governor Kathy Hochul lifting the statewide 
indoor business mask-or-vaccine requirement starting on February 10, 
2022, and remaining optional for businesses, local governments and 
counties to enforce) (February 9, 2022), https://www.governor.ny.gov/news/governor-hochul-announces-winter-toolkit-new-phase-covid-response-keep-new-york-safe-open-and; and State of 
California, Office of Governor Gavin Newsom, ``Governors Newsom, 
Brown and Inslee Announce Updated Health Guidance,'' (announcing 
that on March 11, 2022, California, Oregon and Washington to adopt 
new indoor mask policies and move from mask requirements to mask 
recommendations in schools) (February 28, 2022).
    \7\ In general, FINRA has had a longstanding practice of 
periodically reviewing its rules to ensure that they continue to 
promote their intended investor protection objectives in a manner 
that is effective and efficient, without imposing undue burdens, 
particularly in light of technological, industry and market changes. 
See generally Special Notices to Members 01-35 (May 2001) (``Notice 
01-35'') (requesting comment on steps that can be taken to 
streamline FINRA rules) and 02-10 (January 2002) (``Notice 02-10'') 
(requesting information on steps that can be taken to streamline 
FINRA rules). See also Regulatory Notice 14-14 (April 2014) 
(requesting comment on the effectiveness and efficiency of FINRA's 
communications with the public rules) and Regulatory Notice 14-15 
(April 2014) (requesting comment on the effectiveness and efficiency 
of FINRA's gifts, gratuities and non-cash compensation rules), both 
launching FINRA's Retrospective Rule Review Program.
    \8\ See note 3, supra.
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Evolution of OSJ and Branch Office Definitions
    FINRA has periodically assessed the manner in which firms may 
effectively and efficiently carry out their supervisory 
responsibilities considering evolving business models and practices, 
advances in technology, and regulatory

[[Page 47250]]

benefits. As detailed below, since the late 1980s, the OSJ and branch 
office definitions have undergone several revisions to address 
regulatory need and efficiency (e.g., rule alignment with other 
regulators, access to more robust information), evolving with 
technological and industry changes while also remaining focused on 
promoting investor protection.
    Under FINRA's (then NASD's) Rules of Fair Practice,\9\ an OSJ was 
defined as ``any office designated as directly responsible for the 
review of the activities of registered representatives or associated 
persons in such office and/or any other offices of the member[,]'' and 
a branch office was one that was ``owned or controlled by a member, and 
which is engaged in the investment banking or securities business.'' 
\10\ Further, a place of business of a member firm's associated person 
was considered a branch office if the member: ``(1) directly or 
indirectly contributes a substantial portion of the operating expenses 
of any place used by a person associated with a member who is engaged 
in the investment banking or securities business, whether it be 
commercial office space or a residence. Operating expenses, for 
purposes of this standard, shall include items normally associated with 
the cost of operating the business such as rent and taxes.'' \11\ In 
addition, such location was a branch office if the member ``authorizes 
a listing in any publication or any other media, including a 
professional dealer's digest or a telephone directory, which listing 
designates a place as an office or if the member designates a place as 
an office or if the member designates any such place with an 
organization as an office.'' \12\ The term ``branch office'' was 
established ``merely to designate and identify for registration 
purposes the various offices of a member other than the main office and 
as such [were] required to be registered and as to which a registration 
fee should be paid.'' \13\
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    \9\ FINRA (then NASD) adopted Rules of Fair Practice when it was 
founded in 1939 under provisions of the 1938 Maloney Act amendments 
to the Exchange Act.
    \10\ See Notice to Members 87-41 (June 1987) (``Notice 87-41'') 
(setting forth the proposed rule text changes to Article III, 
Section 27 of the NASD Rules of Fair Practice for the OSJ definition 
and Article I, Section (c) of the NASD By-Laws for the branch office 
definition, among other provisions).
    \11\ See Notice 87-41.
    \12\ See Notice 87-41.
    \13\ See Notice 87-41.
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    Over the years, these terms have undergone several modifications, 
driven by changes in regulatory need and business models. In 
particular, the subsequent amendments focused on providing regulators 
robust information when conducting examinations that readily identified 
the appropriate individuals and records at a firm. In response to such 
changes, the OSJ and branch office definitions were refined and 
exemptions from branch office registration were added.
    In 1988, as part of several supervisory enhancements, the OSJ and 
branch office definitions were significantly amended in response to 
general concerns about member firms' associated persons engaging in the 
offer and sale of securities to the public without adequate ongoing 
supervision and regular examination by member firms.\14\ The amendments 
substantially expanded the specificity of FINRA Rule 3110 (formerly, 
Article III, Section 27 of the NASD Rules of Fair Practice) with 
respect to a member's supervisory obligations and the new standards 
focused on ``the creation of a supervisory `chain of command,' in which 
qualified supervisory personnel are appointed to carry out the firm's 
supervisory obligations[.]'' \15\ The newly amended OSJ definition 
focused on an office at which ``the approval [of specified functions] 
that constitutes formal action by the member takes place.'' \16\ The 
amendments also added more prescriptive requirements with respect to 
OSJs such as requiring a firm to designate as an OSJ an office that 
meets the OSJ definition and any other location for which such 
designation would be appropriate; designate one or more registered 
principals in each OSJ; maintain written supervisory procedures 
describing the supervisory system implemented and listing the titles, 
registration status, and locations of the required supervisory 
personnel and the specific responsibilities associated with each; and 
keep and maintain the firm's supervisory procedures, or the relevant 
parts thereof, at each OSJ and at each other location where supervisory 
activities are conducted on behalf of the firm.\17\
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    \14\ See Securities Exchange Act Release No. 26177 (October 13, 
1988), 53 FR 41008 (October 19, 1988) (Order Approving File No. SR-
NASD-88-31). See also Notice to Members 88-84 (November 1988) 
(``Notice 88-84'') (announcing SEC approval of File No. SR-NASD-88-
31).
    \15\ See Notice to Members 88-11 (February 1988) (``Notice 88-
11'') (requesting comments on proposed amendments to Article III, 
Section 27 of the NASD Rules of Fair Practice regarding supervision 
and the OSJ and branch office definitions).
    \16\ See Notice 88-11. Largely similar to current Rule 
3110(f)(1)(A) through (G), the specified functions were: ``(1) Order 
execution and/or market making; (2) Structuring of public offerings 
or private placements; (3) Maintaining custody of customers' funds 
and/or securities; (4) Final acceptance (approval) of new accounts 
on behalf of the member, (5) Review and endorsement of customer 
orders pursuant to the provisions of proposed Article III, Section 
27(d); (6) Final approval of advertising or sales literature for use 
by persons associated with the member, pursuant to Article III, 
Section 35(b)(l) of the Rules of Fair Practice; or (7) 
Responsibility for supervising the activities of persons associated 
with the member at one or more other offices of the member.'' See 
Notice 88-84.
    \17\ See Notice 88-84. See generally Rule 3110(a) and (b).
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    With respect to the branch office definition, the amendments also 
refined it from any location ``owned or controlled by a member, and 
which [was] engaged in the investment banking or securities business'' 
\18\ to ``any business location held out to the public or customers by 
any means as a location at which the investment banking or securities 
business is conducted on behalf of the member, excluding any location 
identified solely in a telephone directory line listing or on a 
business card or letterhead, which listing, card, or letterhead also 
sets forth the address and telephone number of the office of the member 
responsible for supervising the activities of the identified 
location.'' \19\
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    \18\ See Notice 87-41.
    \19\ See Notice 88-84.
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    These definitional amendments were intended to address concerns 
about the absence of on-site supervision by registered principals at a 
firm's business location.\20\ The amendments required a ``minimum 
supervisory structure that facilitate[d] closer supervision by 
principals with clear responsibilities.'' \21\ In addition, the 
revisions required OSJ designation for ``any office at which the 
approval that constitutes formal action by the member takes place.'' 
\22\ Further, FINRA noted that the enhancements to the supervisory 
practices and definitions reflected its ``continuing commitment to 
facilitate more effective supervision by members while accommodating 
their diverse modes of operation.'' \23\ FINRA believes the 
definitional amendments brought focus to where final approval of 
certain functions was occurring so both the firm and regulators would 
be able to readily identify the principal who was designated to review 
a specific function and also where original books and records related 
to such supervision would be kept. At that time, books and records 
(e.g., account documents, communications, order tickets, trade 
blotters) were generally made and preserved in hard copy paper format,

[[Page 47251]]

not electronically, and stored in files at such offices.
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    \20\ See Notice 87-41.
    \21\ See Notice 87-41.
    \22\ See Notice 88-11.
    \23\ See Notice 88-11.
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    In 1992, FINRA further amended the branch office definition to 
allow additional locations that were not being held out to the public 
to be exempt from branch office registration.\24\ FINRA noted that the 
exclusions were intended as a reasonable accommodation to member firms 
with widely dispersed sales personnel selling limited product lines 
such as variable contracts and mutual funds.\25\ In the approval order, 
the Commission recognized that the amended definition would eliminate 
the requirement to register as a branch office unless the securities 
activity at the office required ``continuous and direct supervision of 
a principal, or the location is being held out to the public as a place 
where a full range of securities activity is being conducted. Having 
considered the proposal, the Commission believe[d] the rule change will 
assist [FINRA] members in meeting their obligation to supervise off-
site registered representatives under applicable securities laws, 
regulations and [FINRA] rules.'' \26\
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    \24\ In general, these amendments codified interpretations 
pertaining to the branch office definitions and their exclusions by 
clarifying that the address and telephone number of the appropriate 
OSJ or branch office must be provided in advertisements and sales 
literature, not the address of a non-branch location. See Securities 
Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936 (March 
31, 1992) (Order Approving File No. SR-NASD-91-42).
    \25\ See Notice to Members 92-18 (April 1992) (announcing SEC 
approval of File No. SR-NASD-91-42).
    \26\ See Securities Exchange Act Release No. 30509 (March 24, 
1992), 57 FR 10936, 10937 (March 31, 1992) (Order Approving File No. 
SR-NASD-91-42).
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    In 2001, FINRA launched an initiative to modernize its rules.\27\ 
Based on input from member firms, FINRA identified the branch office 
definition as a rule that could benefit from modernization in light of 
the SEC's amendment to the term ``office'' in the SEC's Books and 
Records Rules,\28\ the branch office definition used by the New York 
Stock Exchange (``NYSE'') and state regulators, new business practices 
that were developing based on technological innovations, and the 
potential to create a uniform branch office registration system.\29\ 
FINRA expressly noted that a factor to be considered in modernizing 
rules included instances ``where the regulatory burden of a rule 
significantly outweigh[ed] the benefit, or the rule no longer work[ed] 
efficiently given new technologies.'' \30\
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    \27\ See Notice 01-35.
    \28\ 17 CFR 240.17a-3 and 240.17a-4. See generally Notice to 
Members 01-80 (December 2001) (describing amendments to the SEC 
Books and Records Rules).
    \29\ See Notice 02-10.
    \30\ See Notice 01-35.
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    Until 2005, member firms were required to complete Schedule E to 
the Form BD (``Schedule E'') to register or report branch offices to 
the SEC, FINRA, and the state in which they conducted a securities 
business that required branch office registration. While Schedule E 
captured certain data with respect to branch offices, it did not 
adequately fulfill the evolving needs of regulators. For example, 
Schedule E did not link an individual registered representative with a 
particular branch office, which made it more difficult for regulators 
to track the appropriate individuals for examinations.
    As technology advanced and business models changed, FINRA continued 
its commitment to modernizing the rule while preserving investor 
protections. By 2005, this initiative led to the establishment of a 
national standard, a uniform definition of a branch office, that was 
the product of a coordinated effort among regulators to reduce 
inconsistencies in the definitions used by the SEC, FINRA, the NYSE, 
the North American Securities Administrators Association, and state 
securities regulators to identify locations where broker-dealers 
conduct securities or investment banking business.\31\ Moreover, the 
adoption of a uniform definition facilitated the development of a 
centralized branch office registration system through the Central 
Registration Depository and the creation of a uniform form to register 
or report branch offices electronically with multiple regulators.\32\ 
With the launch of this new technology, firms and regulators could 
efficiently identify each branch location, which would be assigned a 
unique branch office number by the system, the individuals assigned to 
such location, and the designated supervisor(s) for such location. This 
new centralized branch office registration system allowed firms and 
regulators to efficiently locate offices and individuals, and moreover 
closed gaps in information, created significant efficiencies and 
lessened the burden on firms and regulators.
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    \31\ See Securities Exchange Act Release No. 52403 (September 9, 
2005), 70 FR 54782 (September 16, 2005) (Order Approving File No. 
SR-NASD-2003-104).
    \32\ See Form BR.
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    By the 1990s, technology had progressed with the advent of faster 
internet, wifi, the emergence of web-based platforms, and more portable 
computers to enhance workplace connectivity that allowed for expanded 
remote work options. In recognition of the evolving and growing trend 
in the financial industry and workforce generally to work from home, 
the uniform branch office definition adopted numerous exclusions, 
including the current primary residence exclusion. The limitations on 
use of a primary residence closely tracks the limitations on the use of 
a private residence in the SEC's Books and Records Rules,\33\ which 
provide that a broker-dealer is not required to maintain records at an 
office that is a private residence if only one associated person (or 
multiple associated persons if members of the same family) regularly 
conducts business at the office, the office is not held out to the 
public as an office, and neither customer funds nor securities are 
handled at the office. At the same time, FINRA adopted IM-3010-1 
(Standards for Reasonable Review) (now Rule 3110.12 (Standards for 
Reasonable Review)), as a further safeguard. It clarified the high 
standards firms must observe regarding supervisory obligations and 
emphasized the requirement that members already had to establish 
reasonable supervisory procedures and conduct reviews of locations 
taking into consideration, among other things: the firm's size, 
organizational structure, scope of business activities, number and 
location of offices, the nature and complexity of products and services 
offered, the volume of business done, the number of associated persons 
assigned to a location, whether a location has a principal on-site, 
whether the office is a non-branch location, and the disciplinary 
history of the registered person.
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    \33\ See note 28, supra.
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    During the almost two decades since the adoption of the uniform 
branch office definition and its related exclusions, regulators have 
utilized advancements in technology to support their examinations and 
otherwise further investor protections, and firms have embraced and 
adopted numerous technologies to enhance their regulatory and 
compliance programs. The rapid explosion of new technologies in the 
last 20 years, and the widespread use such of technology (e.g., 
computers, email, mobile phones, electronic communication systems with 
audio and visual capabilities, cloud storage of books and records), and 
the ability to use risk-based surveillance and compliance tools and 
systems, have fundamentally altered the landscape of how the broker-
dealer business is conducted.
    These earlier amendments evidence the need to keep the regulatory

[[Page 47252]]

framework current. FINRA believes that with evolving changes in 
business models and the significant advance of technological tools that 
are now readily available, some functions can be exempt from 
registration, subject to specified conditions, without compromising a 
reasonably designed supervisory system. Moreover, FINRA believes the 
proposed rule change to classify some private residences as non-branch 
locations, subject to specified controls, will not result in a loss of 
the important regulatory information that the rules were designed, in 
part, to provide regarding the locations or associated persons. That 
information will continue to be collected through our regulatory 
requirements and systems such as the branch office registration system 
and Form BR (Uniform Branch Office Registration Form) and other uniform 
registration forms.\34\
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    \34\ For example, under Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), if an individual's 
``Office of Employment Address'' is an unregistered location, the 
firm must report the address of such location as the individual's 
``located at'' address and must report the branch office that 
supervises that non-registered location as the ``supervised from'' 
location. See Form U4, Section 1 (General Information). Similar to 
Form BR, Form U4 solicits information about an individual's other 
business activities. See Form U4, Section 13 (Other Business) and 
Form BR, Section 3 (Other Business Activities/Names/Websites). Form 
BD (Uniform Application for Broker-Dealer Registration) captures the 
types of business in which a firm is engaged. See Form BD, Item 12; 
see also Form BR, Section 2 (Registration/Notice Filing/Type of 
Office/Activities), Item D.
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FINRA Rule 3110 and Current Requirements To Register and Inspect 
Offices
    Rule 3110 requires a member firm, regardless of size or type, to 
have a supervisory system for the activities of its associated persons 
that is reasonably designed to achieve compliance with applicable 
securities laws and regulations, and FINRA rules. The rule sets forth 
the minimum requirements of a member firm's supervisory system that 
includes registering a location as an OSJ or branch office that meets 
the definitions under Rule 3110(f) and inspecting all offices and 
locations in accordance with Rule 3110(c). The rule categorizes offices 
or locations as an OSJ or supervisory branch office, a non-supervisory 
branch office, or a non-branch location.\35\ The requirements to 
register, inspect and have a principal on-site vary based on the 
categorization. Specifically, the rule requires the registration and 
designation as an OSJ or branch office of each location, including the 
main office, that meets their respective definition under paragraphs 
(f)(1) and (f)(2) of Rule 3110, as described in more detail below.\36\
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    \35\ See FINRA Rule 3110(c).
    \36\ See FINRA Rules 3110(a)(3) and 3110.01. Currently, firms 
are required to register each branch office and indicate, among 
other things, whether it is an OSJ, by filing Form BR. See Section 2 
of Form BR, requiring the applicant to indicate whether an office is 
a ``FINRA OSJ'' or ``non-OSJ branch,'' https://www.finra.org/sites/default/files/web-crd-form-br-filing.pdf.
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    OSJs are a subset of branch offices. Rule 3110(f)(2) defines a 
``branch office'' as ``any location where one or more associated 
persons of a member firm regularly conducts the business of effecting 
any transactions in, or inducing or attempting to induce the purchase 
or sale of, any security, or is held out as such[.]'' \37\ In addition, 
any location that is responsible for supervising the activities of 
persons associated with the member at one or more non-branch locations 
of the member is a branch office (i.e., a supervisory branch 
office).\38\ A location registered as a branch office must have one or 
more appropriately registered representatives or principals in each 
office, and is subject to an inspection at least every three years, 
unless it is a supervisory branch office in which case it is subject to 
at least an annual inspection.\39\
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    \37\ See FINRA Rule 3110(f)(2)(A).
    \38\ See FINRA Rule 3110(f)(2)(B).
    \39\ See FINRA Rule 3110(a)(4), and FINRA Rule 3110(c)(1)(A) and 
(B).
---------------------------------------------------------------------------

    Depending upon the functions occurring at a branch office, it may 
be further classified as an OSJ, which Rule 3110(f)(1) defines as a 
member's business location at which any one or more of the following 
functions take place: (1) order execution or market making; (2) 
structuring of public offerings or private placements; (3) maintaining 
custody of customers' funds or securities; (4) final acceptance 
(approval) of new accounts on behalf of the member; (5) review and 
endorsement of customer orders, pursuant to Rule 3110(b)(2); \40\ (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; \41\ or (7) 
responsibility for supervising the activities of persons associated 
with the member at one or more other branch offices of the member. An 
office designated as an OSJ must have an appropriately registered 
principal on-site at the location, and must be inspected at least 
annually.\42\
---------------------------------------------------------------------------

    \40\ FINRA Rule 3110(b)(2) pertains to the review of a member's 
investment banking and securities business and provides that ``[t]he 
supervisory procedures required by [Rule 3110(b) (Written 
Procedures)] shall include procedures for the review by a registered 
principal, evidenced in writing, of all transactions relating to the 
investment banking or securities business of the member.''
    \41\ 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.
    \42\ See FINRA Rules 3110(a)(4) and 3110(c)(1)(A).
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    However, subject to specified conditions, an office or location may 
be deemed a ``non-branch location,'' and excluded from registration as 
a branch office. Currently, Rule 3110(f)(2)(A) sets forth seven 
exclusions--often referred to as unregistered offices or non-branch 
locations--of which two pertain to residential locations.\43\ One such 
exclusion appears under Rule 3110(f)(2)(A)(ii) and exempts from 
registration as a branch office an associated person's primary 
residence subject to the following express conditions: (1) only one 
associated person, or multiple associated persons who reside at that 
location and are members of the same immediate family, conduct business 
at the location; (2) the location is not held out to the public as an 
office and the associated person does not meet with customers at the 
location; (3) neither customer funds nor securities are handled at that 
location; (4) the associated person is assigned to a designated branch 
office, and such designated branch office is reflected on all business 
cards, stationery, retail communications and other communications to 
the public by such associated person; (5) the associated person's 
correspondence and communications with the public are subject to the 
firm's supervision in accordance with the Rule; (6) electronic 
communications (e.g., email) are made through the member's electronic 
system; (7) all orders are entered through the designated branch office 
or an electronic

[[Page 47253]]

system established by the member that is reviewable at the branch 
office; (8) written supervisory procedures pertaining to supervision of 
sales activities conducted at the residence are maintained by the 
member; and (9) a list of the residence locations is maintained by the 
member (``primary residence exclusion'').\44\ The second exclusion that 
pertains to a residential location appears under Rule 
3110(f)(2)(A)(iii) and is any location, other than a primary residence, 
that is used for securities business for less than 30 business days in 
any one calendar year, provided that the member complies with the 
conditions described in (1) through (8) above (``non-primary residence 
exclusion''). In general, the non-primary residence exclusion typically 
refers to a vacation or second home.\45\ A non-branch location must be 
inspected on a periodic schedule, presumed to be at least every three 
years.\46\
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    \43\ See generally FINRA Rule 3110(f)(2)(A) which, in addition 
to the primary residence and the non-primary residence exclusions 
that are further described, excludes the following from the 
definition of ``branch office'': (1) any location that is 
established solely for customer service or back office type 
functions where no sales activities are conducted and that is not 
held out to the public as a branch office; (2) any office of 
convenience, where associated persons occasionally and exclusively 
by appointment meet with customers, which is not held out to the 
public as an office; (3) any location that is used primarily to 
engage in non-securities activities and from which the associated 
person(s) effects no more than 25 securities transactions in any one 
calendar year; provided that any retail communication identifying 
such location also sets forth the address and telephone number of 
the location from which the associated person(s) conducting business 
at the non-branch locations are directly supervised; (4) the Floor 
of a registered national securities exchange where a member conducts 
a direct access business with public customers; or (5) a temporary 
location established in response to the implementation of a business 
continuity plan.
    \44\ See FINRA Rule 3110(f)(2)(ii)a. through i.
    \45\ See Notice to Members 06-12 (March 2006) (``Notice 06-
12'').
    \46\ See note 3, supra.
---------------------------------------------------------------------------

    Notwithstanding either of these two residential exclusions or the 
other exclusions listed under Rule 3110(f)(2)(A),\47\ a primary or non-
primary residence location that is responsible for either the 
supervisory activities set forth in the OSJ definition or for 
supervising the activities of persons associated with the member at one 
or more non-branch locations of the member is considered an OSJ or 
(supervisory) branch office, respectively.\48\ Consequently, such 
residential supervisory offices are subject to registration, an annual 
inspection and, in some cases, additional licensing requirements.\49\
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    \47\ See note 43, supra.
    \48\ See FINRA Rule 3110(f)(1)(D) through (G) and FINRA Rule 
3110(f)(2)(B).
    \49\ See note 42, supra.
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    As noted above, the branch office definition and its exclusions, 
including the conditions for the primary residence and non-primary 
residence exclusions, is a uniform definition FINRA developed in 
coordination with the NYSE and other self-regulatory organizations 
(``SROs''), and state securities regulators, and it has been in place 
since 2005 (collectively, the ``uniform branch office 
definition'').\50\ The codification of the seven exclusions from 
registration in the uniform branch office definition recognized both 
practical situations and advances in technology used to conduct and 
monitor business, the evolving nature of business models, and changing 
lifestyle and work practices while also preserving investor protection 
through specified safeguards and limitations such as those appearing in 
the primary residence exclusion.\51\ In the approval order for the 
uniform branch office definition, the Commission noted that the 
limitations for the primary residence exclusion ``closely track the 
limitations on the use of a private residence in the Books and Records 
Rules.'' \52\ The Commission also stated that the seven exclusions 
``recognize current business, lifestyle, and surveillance practices and 
provide associated persons with additional flexibility. For instance, 
because associated persons may have to work from home due to illness, 
or to provide childcare or eldercare for certain family members, the 
Commission believes it is appropriate to except primary residences from 
the definition of branch office while providing certain safeguards and 
limitations to protect investors.'' \53\ Further, the Commission stated 
that ``[g]iven the continued advances in technology used to conduct and 
monitor businesses and changes in the structure of broker-dealers and 
in the lifestyles and work habits of the workforce, the Commission 
believes it is reasonable and appropriate for [FINRA] to reexamine how 
it determines whether business locations need to be registered as 
branch offices of broker-dealer members.'' \54\ Finally, the Commission 
expressed the view that the uniform branch office definition ``strikes 
the right balance between providing flexibility to broker-dealer firms 
to accommodate the needs of their associated persons, while at the same 
time setting forth parameters that should ensure that all locations, 
including home offices, are appropriately supervised.'' \55\ FINRA 
believes that the Commission's statements about advances in technology 
and evolving workplace conventions, and the safeguards and limitations 
of the primary residence exclusion are apt for this proposed rule 
change as well.
---------------------------------------------------------------------------

    \50\ See note 31, supra.
    \51\ See generally Notice to Members 05-67 (October 2005).
    \52\ See 70 FR 54782, 54783 (citation omitted).
    \53\ See 70 FR 54782, 54787. See also Securities Exchange Act 
Release No. 52402 (September 9, 2005), 70 FR 54788, 54795 (September 
16, 2005) (Order Approving File No. SR-NYSE-2002-34) (stating, ``the 
Commission believes that the seven proposed exceptions to 
registering as a branch office constitute a reasonable approach to 
recognize current business, lifestyle, and surveillance practices 
and provide associated persons with flexibility with respect to 
where they perform their jobs. For instance, because associated 
persons may have to work from home due to illness, or to provide 
childcare or eldercare for certain family members, the Commission 
believes it is appropriate to except primary residences from the 
definition of branch office.'').
    \54\ See 70 FR 54782, 54787.
    \55\ See note 53, supra.
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Impact of New Workplace Models
    As noted above, many employers closed their offices and moved to a 
broad remote work environment to contend with the public health crisis. 
In response, FINRA requested comment regarding pandemic-related issues 
and questions, including the comment process in connection with the 
temporary amendments to Rule 3110,\56\ and discussions with FINRA's 
advisory committees and other industry representatives. Firms responded 
that they relied extensively on technology to support their effective 
transition to the remote work environment and enhance the supervision 
of geographically dispersed associated persons, many of whom have been 
working from home since early 2020 and may continue to do so in some 
manner in the current environment.\57\ These technological tools 
facilitating their supervisory practices include surveillance systems, 
electronic tracking programs or applications, and electronic 
communications, including video conferencing tools.\58\ In addition, 
some firms have further noted that the flexibility remote work offers 
has made a positive impact in attracting more diverse talent, and 
retaining existing talent.\59\
---------------------------------------------------------------------------

    \56\ See, e.g., Submitted Comments to Securities Exchange Act 
Release No. 94018 (January 20, 2022), 87 FR 4072 (January 26, 2022) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2022-001), https://www.sec.gov/comments/sr-finra-2022-001/srfinra2022001.htm; and Securities Exchange Act Release No. 89188 
(June 30, 2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2020-019), https://www.sec.gov/comments/sr-finra-2020-019/srfinra2020019.htm.
    \57\ See generally Regulatory Notice 21-44 (December 2021).
    \58\ See generally Regulatory Notice 20-16 (May 2020); see also 
FINRA White Paper, Technology Based Innovations for Regulatory 
Compliance (``RegTech'') in the Securities Industry (September 2018) 
(reporting, among other things, that as financial services firms 
seek to keep pace with regulatory compliance requirements, they are 
turning to new and innovative regulatory tools to assist them in 
meeting their obligations in an effective and efficient manner), 
https://www.finra.org/sites/default/files/2018_RegTech_Report.pdf.
    \59\ See generally Submitted Comments to Regulatory Notice 20-42 
(December 2020), https://www.finra.org/rules-guidance/notices/20-42#comments.
---------------------------------------------------------------------------

    As pandemic-related restrictions are easing,\60\ many member firms 
are moving towards a blended workforce model for their employees, 
consisting of working on-site in a conventional office

[[Page 47254]]

setting and working remotely in an alternative location such as a 
private residence. Similar to the changed environment underlying the 
Commission's approval order of the uniform branch office definition 
that codified the existing seven exclusions, FINRA believes that the 
structural and lifestyle changes for member firms and their workforce 
catalyzed by the pandemic--along with advances in technology--merit 
reevaluation of some aspects of the branch office registration and 
inspection requirements. Specifically, FINRA believes the regulatory 
benefit of requiring firms to designate a private residence as an OSJ 
or branch office should now be reconsidered where the risk profile of 
these offices can be effectively controlled through practically based 
safeguards and limitations. FINRA is therefore proposing to adopt new 
Supplementary Material .19 under Rule 3110 to establish a Residential 
Supervisory Location as a non-branch location, subject to specified 
safeguards and limitations. This proposed new non-branch location would 
target the subset of residential locations that have many of the 
attributes contained in the primary residence exclusion, but must be 
registered as an OSJ or branch office because of the supervisory 
functions taking place there.
---------------------------------------------------------------------------

    \60\ See note 6, supra.
---------------------------------------------------------------------------

Proposed Residential Supervisory Location as a Non-Branch Location
    The proposed definition of a Residential Supervisory Location would 
be based largely on several existing aspects of Rule 3110(f). In 
particular, FINRA is proposing to incorporate the existing supervisory 
functions appearing in the OSJ definition (Rule 3110(f)(1)) and branch 
office definition (Rule 3110(f)(2)(B)) with the existing residential 
exclusions set forth in the branch office definition to classify a 
Residential Supervisory Location as a non-branch location. Currently, a 
private residence at which these supervisory functions occur must be 
registered and designated as a branch office or OSJ under Rule 
3110(a)(3), and inspected at least annually under Rule 3110(c)(1)(A). 
By treating such location as a non-branch location, the private 
residence would become subject to inspections on a regular periodic 
schedule under Rule 3110(c)(1)(C), presumed to be every three 
years.\61\
---------------------------------------------------------------------------

    \61\ See note 3, supra.
---------------------------------------------------------------------------

    Proposed Rule 3110.19 would incorporate some existing safeguards 
and limitations firms must already satisfy to rely on the primary 
residence exclusion \62\ as FINRA believes that several of these 
conditions are also appropriate for the proposed Residential 
Supervisory Location. FINRA intends for the terms underlying the 
proposed Residential Supervisory Location to be interpreted 
consistently with their meaning in Rule 3110(f) and existing related 
guidance.\63\ In addition, FINRA is proposing to further augment the 
safeguards and limitations to describe the locations that would be 
ineligible to rely on proposed Rule 3110.19.
---------------------------------------------------------------------------

    \62\ See Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f, and i.
    \63\ See, e.g., Notice 06-12.
---------------------------------------------------------------------------

A. Safeguards and Conditions To Rely on the Residential Supervisory 
Location Exclusion (Proposed Rule 3110.19(a))

    As described above, FINRA is proposing to adopt Rule 3110.19 to 
establish a Residential Supervisory Location as a new non-branch 
location, but subject to specified conditions, most of which are 
derived from those currently required for the primary residence and 
non-primary residence exclusions. FINRA is proposing to add one new 
condition to a Residential Supervisory Location: a restriction from 
maintaining original books and records at such location.
    Under proposed Rule 3110.19(a), any such location would be 
considered a non-branch location (and thus excluded from branch office 
registration), provided that: (1) only one associated person, or 
multiple associated persons who reside at that location and are members 
of the same immediate family, conduct business at the location 
(proposed Rule 3110.19(a)(1)); \64\ (2) the location is not held out to 
the public as an office (proposed Rule 3110.19(a)(2)); \65\ (3) the 
associated person does not meet with customers or prospective customers 
at the location (proposed Rule 3110.19(a)(3)); \66\ (4) no sales 
activity takes place at the location other than as permitted and 
subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or 
(iii) (proposed Rule 3110.19(a)(4)); \67\ (5) neither customer funds 
nor securities are handled at that location (proposed Rule 
3110.19(a)(5)); \68\ (6) the associated person is assigned to a 
designated branch office, and such designated branch office is 
reflected on all business cards, stationery, retail communications and 
other communications to the public by such associated person (proposed 
Rule 3110.19(a)(6)); \69\ (7) the associated person's correspondence 
and communications with the public are subject to the firm's 
supervision in accordance with Rule 3110 (proposed Rule 3110.19(a)(7)); 
\70\ (8) all electronic communications by the associated person at that 
location are made through the member's electronic system (proposed Rule 
3110.19(a)(8)); \71\ (9) a list of the residence locations is 
maintained by the member (proposed Rule 3110.19(a)(9)); \72\ and (10) 
all books or records required to be made and preserved by the member 
under the federal securities laws or FINRA rules are maintained by the 
member other than at the location (proposed Rule 3110.19(a)(10)).
---------------------------------------------------------------------------

    \64\ See Rule 3110(f)(2)(A)(ii)a. (``Only one associated person, 
or multiple associated persons who reside at that location and are 
members of the same immediate family, conduct business at the 
location[.]'').
    \65\ See Rule 3110(f)(2)(A)(ii)b. (``The location is not held 
out to the public as an office and the associated persons does not 
meet with customers at the location[.]'').
    \66\ See note 65, supra.
    \67\ An associated person's private residence, other than a 
primary residence, remains subject to the less than 30-business-day 
in any calendar year limitation on use for securities business.
    \68\ See Rule 3110(f)(2)(A)(ii)c. (``Neither customer funds nor 
securities are handled at the location[.]'').
    \69\ See Rule 3110(f)(2)(A)(ii)d. (``The associated person is 
assigned to a designated branch office, and such designated branch 
office is reflected on all business cards, stationery, retail 
communications and other communications to the public by such 
associated person[.]'').
    \70\ See Rule 3110(f)(2)(A)(ii)e. (``The associated person's 
correspondence and communications with the public are subject to the 
firm's supervision in accordance with this Rule[.]'').
    \71\ See Rule 3110(f)(2)(A)(ii)f. (``Electronic communications 
(e.g., email) are made through the member's electronic system[.]'').
    \72\ See Rule 3110(f)(2)(A)(ii)i. (``A list of the residence 
locations is maintained by the member[.]'').
---------------------------------------------------------------------------

    FINRA notes that the proposed conditions are substantially similar 
to those applied to the current primary and non-primary residence 
exclusions, and are supplemented by a proposed additional condition 
that would preclude a firm from maintaining any books or records 
required to be made and preserved by the member under the federal 
securities laws or FINRA rules at the Residential Supervisory Location. 
FINRA believes that this proposed new limitation would strengthen a 
firm's ability to monitor the supervisory activities occurring at a 
Residential Supervisory Location and act to lower the overall risks 
associated with such location because the books and records required to 
be made and preserved by the member under the federal securities laws 
or FINRA rules cannot be maintained on-site. Moreover, FINRA notes that 
sales activities would be permissible at a Residential Supervisory 
Location to the same extent sales activities are permitted currently 
under such exclusions. As previously noted,

[[Page 47255]]

the conditions for the current primary and non-primary residence 
exclusions, which align with the SEC's Books and Records Rules, were 
developed in coordination with other SROs and state securities 
regulators and such exclusions have been in place since 2005.\73\ As 
such, firms have developed experience with monitoring and supervising 
these conditions, and FINRA believes member firms will be able to rely 
on such experience to reasonably supervise similar conditions for 
proposed Residential Supervisory Locations. As with any non-branch 
location, a Residential Supervisory Location would be subject to an 
inspection on a periodic schedule, presumed to be at least every three 
years.\74\
---------------------------------------------------------------------------

    \73\ 17 CFR 240.17a-4(l); see also note 31, supra.
    \74\ See note 3, supra.
---------------------------------------------------------------------------

B. Ineligible Locations (Proposed Rule 3110.19(b))

    FINRA is further proposing several location categories that are 
ineligible for designation as a Residential Supervisory Location. The 
nine proposed categories of ineligibility are events or activities of a 
member firm or its associated persons that FINRA believes are more 
likely to raise investor protection concerns based on FINRA rules, an 
associated person's level of supervisory experience with the member 
firm or qualifications, or an associated person's record of specified 
regulatory or disciplinary events.
1. Member Firm Ineligibility
    Under proposed Rule 3110.19(b), a location would be ineligible for 
designation as a Residential Supervisory Location, non-branch location, 
in accordance with Rule 3110.19 if: (i) the member is designated as a 
``Restricted Firm'' under Rule 4111 (Restricted Firm Obligations) \75\ 
(proposed Rule 3110.19(b)(1)); (ii) the member is designated as a 
``Taping Firm'' under Rule 3170 (Tape Recording of Registered Persons 
by Certain Firms) \76\ (proposed Rule 3110.19(b)(2)); or (iii) the 
member is currently undergoing, or is required to undergo, a review 
under Rule 1017(a)(7) as a result of one or more associated persons at 
such location \77\ (proposed Rule 3110.19(b)(3)). These rules expressly 
account for firms that pose higher risks, and for that reason, would be 
ineligible to rely on proposed Rule 3110.19(a).
---------------------------------------------------------------------------

    \75\ In general, Rule 4111 requires member firms that are 
identified as ``Restricted Firms'' to deposit cash or qualified 
securities in a segregated, restricted account; adhere to specified 
conditions or restrictions; or comply with a combination of such 
obligations. See generally Regulatory Notice 21-34 (September 2021) 
(announcing FINRA's adoption of rules to address firms with a 
significant history of misconduct).
    \76\ In general, Rule 3170 requires a member firm to establish, 
enforce and maintain special written procedures supervising the 
telemarketing activities of all of its registered persons, including 
the tape recording of conversations, if the firm has hired more than 
a specified percentage of registered persons from firms that meet 
FINRA Rule 3170's definition of ``disciplined firm.'' See generally 
Regulatory Notice 14-10 (March 2014) (announcing FINRA's adoption of 
consolidated rules governing supervision).
    \77\ Rule 1017(a)(7) requires a member firm to file an 
application for continuing membership when a natural person seeking 
to become an owner, control person, principal or registered person 
of the member firm has, in the prior five years, one or more defined 
``final criminal matters'' or two or more ``specified risk events'' 
unless the member firm has submitted a written request to FINRA 
seeking a materiality consultation for the contemplated activity. 
Rule 1017(a)(7) applies whether the person is seeking to become an 
owner, control person, principal or registered person at the 
person's current member firm or at a new member firm. See generally 
Regulatory Notice 21-09 (March 2021) (announcing FINRA's adoption of 
rules to address brokers with a significant history of misconduct).
---------------------------------------------------------------------------

2. Associated Person Ineligibility
    In addition, under proposed Rule 3110.19(b), a location would be 
ineligible for designation as a Residential Supervisory Location, a 
non-branch location, in accordance with proposed Rule 3110.19 where: 
(i) one or more associated persons at such location is a designated 
supervisor who has less than one year of direct supervisory experience 
with the member (proposed Rule 3110.19(b)(4)); (ii) one or more 
associated persons at such location is functioning as a principal for a 
limited period in accordance with Rule 1210.04 \78\ (proposed Rule 
3110.19(b)(5)); (iii) one or more associated persons at such location 
is subject to a mandatory heightened supervisory plan under the rules 
of the SEC, FINRA or state regulatory agency (proposed Rule 
3110.19(b)(6)); (iv) one or more associated persons at such location is 
statutorily disqualified, unless such disqualified person has been 
approved (or is otherwise permitted pursuant to FINRA rules and the 
federal securities laws) to associate with a member and is not subject 
to a mandatory heightened supervisory plan under paragraph (b)(6) of 
this Supplementary Material or otherwise as a condition to approval or 
permission for such association (proposed Rule 3110.19(b)(7)); (v) one 
or more associated persons at such location has an event in the prior 
three years that required a ``yes'' response to any item in Questions 
14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4 
\79\ (proposed Rule 3110.19(b)(8)); or (vi) one or more associated 
persons at a location is currently subject to, or has been notified in 
writing that it will be subject to, any investigation, proceeding, 
complaint or other action by the member, the SEC, an SRO, including 
FINRA, or state securities commission (or agency or office performing 
like functions) alleging they have failed reasonably to supervise 
another person subject to their supervision, with a view to preventing 
the violation of any provision of the Securities Act, the Exchange Act, 
the Investment Advisers Act, the Investment Company Act, the Commodity 
Exchange Act, or any rule or regulation under any of such Acts, or any 
of the rules of the Municipal Securities Rulemaking Board (proposed 
Rule 3110.19(b)(9)).
---------------------------------------------------------------------------

    \78\ In general, Rule 1210.04 (Requirements for Registered 
Persons Functioning as Principals for a Limited Period) imposes an 
experience requirement (18 months of experience within the preceding 
five-year period) on those registered representatives who are 
designated by their firms to function in a principal capacity for a 
fixed 120-day period before having passed an appropriate principal 
qualification examination. See generally Regulatory Notice 17-30 
(October 2017) (announcing FINRA's adoption of consolidated rules 
governing qualification and registration).
    \79\ Form U4's Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a) 
elicit reporting of criminal convictions, and Questions 14C, 14D, 
and 14E pertain to regulatory action disclosures.
---------------------------------------------------------------------------

    FINRA believes that an associated person designated at such 
location should have more than one year of supervisory experience with 
the member and have passed the appropriate principal level 
qualification examination before the associated person's private 
residence can be treated as a non-branch location under proposed Rule 
3110.19(a). In addition, FINRA believes that the imposition of a 
mandatory heightened supervisory plan and the specified disclosures on 
Form U4 pertaining to criminal convictions and final regulatory action 
are indicia of increased risk to investors at some firms and locations 
such that they should not be treated as a non-branch location under the 
proposed supplementary material.
    A private residence meeting the description of any one of the 
categories in proposed Rule 3110.19(b) would be ineligible for 
designation as a Residential Supervisory Location, even with the 
safeguards and limitations listed in proposed Rule 3110.19(a). A member 
firm would be required to designate such private residence as an OSJ or 
branch office, as applicable, unless the location meets a branch office 
exclusion under Rule 3110(f)(2). FINRA believes the proposed list of 
ineligibility categories is appropriately derived from existing rule-
based criteria that already

[[Page 47256]]

have a process to identify firms that may pose greater concern (e.g., 
Rules 4111 and 3170) or to identify associated persons that may pose 
greater concerns as supervisors due to the nature of disclosures of 
regulatory or disciplinary events on the uniform registration forms or 
where the firm has not yet had the opportunity to gauge such person's 
effectiveness as a supervisor due to their limited supervisory 
experience with the member firm. FINRA believes that these objective 
categorical restrictions strike the correct balance and are sensible 
and consistent with a reasonably designed supervisory system while 
still promoting investor protections.
    FINRA acknowledges the shift towards a permanent blended or hybrid 
workforce model and therefore believes under the current environment, 
private residences responsible for the supervisory activities and 
subject to the conditions described above should not require 
registration as branch offices. The proposed Residential Supervisory 
Location is intended to reflect a pragmatic balance between the hybrid 
workforce model and the parameters that should ensure that all 
locations, including residential locations, are appropriately 
supervised. Separate and apart from the classification of the office or 
location and the attendant inspection obligations, firms will continue 
to have an ongoing obligation to supervise the activities of each 
associated person in a manner reasonably designed to achieve compliance 
with applicable securities laws and regulations, and with applicable 
FINRA rules. FINRA emphasizes that member firms have a statutory duty 
to supervise their associated persons, regardless of their location, 
compensation or employment arrangement, or registration status, in 
accordance with the FINRA By-Laws and rules.\80\
---------------------------------------------------------------------------

    \80\ See Exchange Act Section 15(b)(4)(E), 15 U.S.C. 
78o(b)(4)(E), and Exchange Act Section 15(b)(6)(A), 15 U.S.C. 
78o(b)(6)(A).
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be no later than 90 days following the 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\81\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. In recognition of the ongoing advances in compliance 
technology and evolving lifestyle and work practices, FINRA believes 
that the proposed rule change will reasonably account for evolving work 
models by excluding from branch office registration a Residential 
Supervisory Location at which lower risk activities occur, while 
retaining important investor protections with a set of safeguards and 
limitations derived largely from the primary residence exclusion. The 
proposed new non-branch location is intended to provide a practical and 
balanced way for firms to continue to effectively meet the core 
regulatory obligation to establish and maintain a system to supervise 
the activities of each associated person that is reasonably designed to 
achieve compliance with applicable securities laws and regulations, and 
with applicable FINRA rules that directly serve investor protection.
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    \81\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated costs, benefits, and 
distributional and competitive effects, relative to the current 
baseline, and the alternatives FINRA considered in assessing how best 
to meet FINRA's regulatory objectives.
1. Regulatory Need
    As discussed above, in the wake of the pandemic, many member firms 
are developing hybrid workforce models for their employees. In these 
new ways of working, some employees may work permanently in an 
alternative location such as a private residence, other employees may 
spend some time in alternative locations and some time on-site in a 
conventional office setting, and some may work on-site full time.\82\ 
Absent the proposed rule change, when the temporary relief from the 
requirement to submit branch office applications on Form BR for new 
office locations ends, many member firms would need to either curtail 
activities at residential locations or register large numbers of 
residential locations as OSJs or supervisory branch offices. Either 
type of adjustment would create potentially significant costs. The 
proposed rule change would reduce, but not eliminate, the need for such 
adjustments since the activities conducted at some new residential 
locations would likely not meet the requirements of the proposed rule 
change.
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    \82\ According to the Survey of Working Arrangements and 
Attitudes (SWAA), post-COVID, many employers are planning to allow 
employees to work from home between two and three days per week. See 
Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, SWAA April 
2022 Updates (April 11, 2022), https://wfhresearch.com/wp-content/uploads/2022/04/WFHResearch_updates-April-2022.pdf. The number of 
expected work-from-home days post-pandemic has been increasing 
steadily since the January 2021 survey. The SWAA is monthly survey 
with respondents that are working-age persons in the United States 
that had earnings of at least $20,000 in 2019. Further details about 
this survey can be found at https://wfhresearch.com.

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[[Page 47257]]

2. Economic Baseline
    The economic baseline includes both current and foreseeable 
workforce arrangements and business practices, including those that 
were first developed during the pandemic and have been modified since 
in light of reduced health and safety concerns. In particular, the 
economic baseline includes the innovations, and investments in 
communication and surveillance technology, that have supported and 
continue to support supervision in the remote work environment.\83\ 
These innovations and investments have depended in part on the 
temporary suspension of the requirement to submit branch office 
applications on Form BR for new office locations, provided in Notice 
20-08. However, in order to provide a full accounting of the likely 
effects of the proposed rule change, the analysis considers the impact 
of the proposed rule change under the assumption that, going forward, 
the temporary suspension of the above requirement is no longer in 
effect. The current supervisory requirements of Rule 3110 will then 
apply, including the provisions of Rule 3110 that categorize an OSJ, 
branch office and non-branch location and that establish the 
supervisory and registration requirements of each office or location. 
As discussed above, a location registered as a branch office must have 
one or more appropriately registered representatives or principals in 
each office, and is subject to an inspection at least every three 
years, unless it is a supervisory branch office in which case it is 
subject to at least an annual inspection.
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    \83\ The pandemic propelled increased reliance on technology 
solutions in the remote work environment. A McKinsey survey in late 
2020 found that, overall, firms had accelerated their adoption of 
technology, with large accelerations in the implementation of 
changes to increase remote working and collaboration, as well the 
use of advanced technologies in operations. See McKinsey & Company, 
How COVID-19 has pushed companies over the technology tipping 
point--and transformed business forever, October 5, 2020, https://mck.co/3nlK8b2.
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    As of April 30, 2022, FINRA's membership included 3,365 firms \84\ 
with 151,463 registered branch offices. Of these branch offices, 18,290 
(12%) are OSJs, with 1,910 of them identified as private 
residences.\85\ There are 21,647 principal level registered persons 
serving as OSJ supervisors, with 1,775 (8%) working at OSJs identified 
as private residences.\86\ Data on the number of residential locations 
at which supervisors are currently working full or part time may be 
incomplete, due to the temporary suspension of the Form BR requirement 
for new offices included in Notice 20-08. However, large member firms 
(500 or more registered persons) account for about 69% of OSJs. By type 
of business, diversified and retail firms account for 81% of OSJs. To 
the extent that these member firms account for most supervisory staff, 
they are potentially currently making broad use of hybrid workforce 
arrangements involving residential locations.
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    \84\ This count excludes firms with membership pending approval, 
and withdrawn or terminated from membership.
    \85\ The number of branch offices and OSJs is derived from Form 
BR, a uniform form that a member firm uses to register with FINRA 
and as required by the relevant state jurisdictions or other SROs, 
the firm's location as a branch office. Form BR's Section 1 (General 
Information) provides a place for a firm to indicate whether the 
branch office is a private residence by checking a ``Private 
Residence Checkbox.'' The number of OSJs is derived from Form BR's 
Section 2 (Registration/Notice Filing/Type of Office/Activities), 
which requires a firm to indicate whether the branch office is an 
OSJ. Some OSJs have more than one supervisor, and some principals 
serve as supervisors for more than one OSJ. FINRA's records from 
Form U4 show that, altogether, there are about 138,035 registered 
persons with principal registration categories (including those in 
OSJ supervisory roles).
    \86\ In addition, FINRA member firms with a single branch 
account for 1,744 of these OSJs and 1,967 of the supervisors. Forty-
three FINRA member firms do not have any branches registered; these 
firms are all small member firms and not counted among the 3,365 
firms.
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3. Economic Impacts
    Absent the proposed rule change, if the temporary relief on 
registering new branches with Form BR, provided during the pandemic, 
ends, many member firms would likely need to either curtail activities 
at residential locations or register large numbers of residential 
locations as OSJs or supervisory branch offices. This potential 
increase in office count would impact inspection obligations and in 
some cases, licensing requirements associated with individual 
locations. These additional requirements would hold even for office 
locations that bear lower risk characteristics and from which lower 
risk supervisory functions are conducted. The economic impacts of these 
changes would be mitigated by the proposed rule change.
    Changes in the number of different types of offices and locations 
since the start of the pandemic, along with current data, can provide a 
rough indication of the potential impact of the proposed rule change on 
firms. As Table 1 below shows, the number of offices and locations has 
fallen except for non-branch locations. Residential non-branch 
locations have increased by 12,921 (53%). Some of these new residential 
non-branch locations would have needed to register as OSJs if not for 
the temporary suspension of the Form BR requirement and will need to 
register as OSJs unless the proposed rule change is adopted. Further, 
some of the 1,910 private residences that are currently registered as 
OSJs, described above, might be able to become Residential Supervisory 
Locations if the proposed rule change is adopted. The numbers suggest 
that the number of offices and locations that may benefit from the 
proposed rule change is in the thousands. While Form U4 and Form BR can 
be used to count numbers of work locations and identify high-level 
activities at registered branch offices, the number of residential 
locations that would meet the conditions of proposed Rule 3110.19(a) 
alone would depend on specific information about the activities at 
residential locations that these forms do not provide.\87\
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    \87\ Non-branch locations do not have to be registered with 
FINRA. The estimates for non-branch locations are obtained by 
reviewing Form U4. There may be some double counting of non-branch 
locations if members record the address differently on more than one 
Form U4 (e.g., use ``St.'' on one and ``Street'' on another).

   Table 1--Numbers of Offices and Locations, Pre-Pandemic and Current
------------------------------------------------------------------------
                                     December 31, 2019   April 30, 2022
------------------------------------------------------------------------
Registered branch locations.......             152,682           151,463
    OSJs..........................              19,123            18,290
    Non-OSJs......................             134,559           133,173
Non-branch locations..............              56,317            66,054
    Residential non-branch                      24,369            37,290
     locations....................
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[[Page 47258]]

Anticipated Benefits
    The proposed rule change would allow some of the work arrangements 
adopted during the pandemic to continue with only small additional 
compliance costs. Specifically, as long as the location is a private 
residence and is not otherwise ineligible under the rule, associated 
persons could continue to conduct work that meets the requirements of 
the proposed rule change. Not all new residential locations would 
qualify as Residential Supervisory Locations, so some would need to 
register as some type of branch location--and face higher compliance 
costs--or otherwise meet a branch office exclusion under Rule 
3110(f)(2) or stop operating as a work location.
    The proposed rule change, also creates an opportunity for continued 
innovation in workforce arrangements. The proposed rule change may lead 
to centralizing tasks in specific OSJs and restructuring of job 
functions to enable the use of a Residential Supervisory Location on a 
full or part time basis, and possibly an increase in the number of 
supervisors. Some current OSJs might qualify as Residential Supervisory 
Locations with no further adjustments, allowing members to reduce 
expenses on compliance. Firms would make use of these opportunities if 
they are beneficial to their operations, and not otherwise.
    The proposed rule change would also support the competitiveness of 
the broker-dealer industry for educated individuals who seek 
professional positions.\88\ The expectation of workplace flexibility 
and remote work by such individuals may lead them away from the broker-
dealer industry if other segments of financial services or professional 
occupations offer more flexible workforce arrangements.
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    \88\ See note 82, supra. See also Jose Maria Barrero, Nicholas 
Bloom & Steven J. Davis, Why Working from Home Will Stick (NBER 
Working Paper 28731, April 2021), https://wfhresearch.com/wp-content/uploads/2021/04/w28731-3-May-2021.pdf, who point to a 
lasting effect of the pandemic on work arrangements, in particular 
for those with higher education and earnings; and Alexander Bick, 
Adam Blandin & Karel Mertens, Work from Home Before and After the 
COVID-19 Outbreak, (Working Paper, February 2022), https://karelmertenscom.files.wordpress.com/2022/02/wfh_feb17_2022_paper.pdf 
who find consistent results, with a higher adoption rate of work 
from home jobs in Finance and Insurance, relative to other 
industries, reflected in Figure 10.
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    As noted above, the pandemic caused firms throughout the financial 
services sector to accelerate the adoption of technological 
solutions.\89\ Technology has been used not only to make remote work 
possible but also to conduct a range of compliance and regulatory risk 
management activities. By facilitating hybrid work arrangements, the 
proposed rule change would support continued adoption and innovation in 
technological solutions and reductions in the cost of these solutions.
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    \89\ See note 83, supra.
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    Finally, the proposed rule change would relieve member firms from 
paying FINRA branch office registration fees for locations that would 
be branch offices under the baseline but qualify as Residential 
Supervisory Locations. Member firms may also find that some existing 
branch locations become unnecessary given the proposed rule change and 
could reduce expenses attendant to those locations, including such 
fees. However, member firms would still need to pay branch office 
registration fees generally for new residential locations that meet the 
definition of a ``branch office,'' and are not covered by the proposed 
Residential Supervisory Location designation or do not meet a branch 
office exclusion under Rule 3110(f)(2).
Anticipated Costs
    The proposed rule change provides firms with a new designation for 
work locations without removing any designations that are available 
under the baseline. Firms will therefore use the new Residential 
Supervisory Location designation only if doing so is beneficial to 
their operations relative to using one of the existing designations. 
The cost of complying with the requirements of the new designation for 
work locations is obviously a factor in this decision. Firms may incur 
a number of new one-time costs, such as adjusting staffing and 
activities at existing locations, to initially meet the requirements of 
proposed Rule 3110.19. Firms may also need to develop new written 
supervisory procedures and new trainings for staff at Residential 
Supervisory Locations, and deploy these trainings, so staff are aware 
of the compliance requirements. Firms may incur new ongoing costs to 
monitor for compliance and for adjusting staffing and designations if a 
Residential Supervisory Location becomes ineligible for this 
designation because an associated person incurs events or actions 
described in proposed Rule 3110.19(b).
    Classifying residential locations that would otherwise need to 
register as OSJs or branch offices as Residential Supervisory Locations 
will remove certain compliance requirements. Depending on the type of 
branch, the reduction in compliance requirements may include no longer 
having to have one or more appropriately registered representatives or 
principals in each office or to conduct inspections annually or every 
three years. These reductions in compliance requirements may create 
risks to member firms and investors.
    To mitigate these risks, the proposal excludes locations on the 
basis of inexperience or prior harmful conduct by individuals working 
at those locations, and limits the activities that can be performed at 
those locations. The designation of certain locations as ineligible 
provides minimum standards for staff that are eligible to work in such 
locations. FINRA expects that most firms would go beyond these minimum 
standards in selecting staff who would perform supervisory and other 
sensitive work at Residential Supervisory Locations, and in monitoring 
their conduct.
4. Alternatives Considered
    FINRA is proposing to provide certain regulatory accommodations for 
the innovations in business organization and operations that occurred 
during the pandemic by modeling the Residential Supervisory Locations 
after the existing primary residence and non-primary residence 
exclusions, which have been in effect since 2005. FINRA considered 
adopting a proposed rule with just those exclusions and without the 
designation of certain locations as ineligible. More locations would 
qualify as Residential Supervisory Locations without the additional 
requirements. FINRA expects, however, that the proposed rule change 
provides a better balance of the potential benefits and the risks that 
could impose costs on members and investors.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

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

[[Page 47259]]

    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-019 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-2022-019. 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. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-FINRA-2022-019 and 
should be submitted on or before August 23, 2022.
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    \90\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\90\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-16487 Filed 8-1-22; 8:45 am]
BILLING CODE 8011-01-P