[Federal Register Volume 88, Number 66 (Thursday, April 6, 2023)]
[Notices]
[Pages 20568-20582]
[FR Doc No: 2023-07145]

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SECURITIES AND EXCHANGE COMMISSION

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

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

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

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

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

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

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

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

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

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

publication or any other media, including a professional dealer's
digest or a telephone directory, which listing designates a place as an
office or if the member designates a place as an office or if the
member designates any such place with an organization as an office.''
\21\ The term ``branch office'' was established ``merely to designate
and identify for registration purposes the various offices of a member
other than the main office and as such [were] required to be registered
and as to which a registration fee should be paid.'' \22\
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    \18\ Then NASD adopted Rules of Fair Practice when it was
founded in 1939 under provisions of the 1938 Maloney Act amendments
to the Exchange Act.
    \19\ See Notice to Members 87-41 (June 1987) (``Notice 87-41'')
(setting forth the proposed rule text changes to Article III,
Section 27 of the NASD Rules of Fair Practice for the OSJ definition
and Article I, Section (c) of the NASD By-Laws for the branch office
definition, among other provisions).
    \20\ See Notice 87-41.
    \21\ See Notice 87-41.
    \22\ See Notice 87-41.
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    Over the years, these terms have undergone several modifications,
driven by changes in regulatory need and business models. In
particular, the subsequent amendments focused on providing regulators
robust information when conducting examinations that readily identified
the appropriate individuals and records at a firm. In response to such
changes, the OSJ and branch office definitions were refined and
exemptions from branch office registration were added.
    In 1988, as part of several supervisory enhancements, the OSJ and
branch office definitions were significantly amended in response to
general concerns about member firms' associated persons engaging in the
offer and sale of securities to the public without adequate ongoing
supervision and regular examination by member firms.\23\ The amendments
substantially expanded the specificity of FINRA Rule 3110 (formerly,
Article III, Section 27 of the NASD Rules of Fair Practice) with
respect to a member's supervisory obligations and the new standards
focused on ``the creation of a supervisory `chain of command,' in which
qualified supervisory personnel are appointed to carry out the firm's
supervisory obligations[.]'' \24\ The newly amended OSJ definition
focused on an office at which ``the approval [of specified functions]
that constitutes formal action by the member takes place.'' \25\ The
amendments also added more prescriptive requirements with respect to
OSJs such as requiring a firm to designate as an OSJ an office that
meets the OSJ definition and any other location for which such
designation would be appropriate; designate one or more registered
principals in each OSJ; maintain written supervisory procedures
describing the supervisory system implemented and listing the titles,
registration status, and locations of the required supervisory
personnel and the specific responsibilities associated with each; and
keep and maintain the firm's supervisory procedures, or the relevant
parts thereof, at each OSJ and at each other location where supervisory
activities are conducted on behalf of the firm.\26\
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    \23\ See Securities Exchange Act Release No. 26177 (October 13,
1988), 53 FR 41008 (October 19, 1988) (Order Approving File No. SR-
NASD-88-31). See also Notice to Members 88-84 (November 1988)
(``Notice 88-84'') (announcing SEC approval of File No. SR-NASD-88-
31).
    \24\ See Notice to Members 88-11 (February 1988) (``Notice 88-
11'') (requesting comments on proposed amendments to Article III,
Section 27 of the NASD Rules of Fair Practice regarding supervision
and the OSJ and branch office definitions).
    \25\ See Notice 88-11. Largely similar to current Rule
3110(f)(1)(A) through (G), the specified functions were: ``(1) Order
execution and/or market making; (2) Structuring of public offerings
or private placements; (3) Maintaining custody of customers' funds
and/or securities; (4) Final acceptance (approval) of new accounts
on behalf of the member, (5) Review and endorsement of customer
orders pursuant to the provisions of proposed Article III, Section
27(d); (6) Final approval of advertising or sales literature for use
by persons associated with the member, pursuant to Article III,
Section 35(b)(l) of the Rules of Fair Practice; or (7)
Responsibility for supervising the activities of persons associated
with the member at one or more other offices of the member.'' See
Notice 88-84.
    \26\ See Notice 88-84. See generally Rule 3110(a) and (b).
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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''
\27\ to ``any business location held out to the public or customers by
any means as a location at which the investment banking or securities
business is conducted on behalf of the member, excluding any location
identified solely in a telephone directory line listing or on a
business card or letterhead, which listing, card, or letterhead also
sets forth the address and telephone number of the office of the member
responsible for supervising the activities of the identified
location.'' \28\
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    \27\ See Notice 87-41.
    \28\ 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.\29\ The amendments required a ``minimum
supervisory structure that facilitate[d] closer supervision by
principals with clear responsibilities.'' \30\ In addition, the
revisions required OSJ designation for ``any office at which the
approval that constitutes formal action by the member takes place.''
\31\ Further, FINRA noted that the enhancements to the supervisory
practices and definitions reflected its ``continuing commitment to
facilitate more effective supervision by members while accommodating
their diverse modes of operation.'' \32\ FINRA believes the
definitional amendments brought focus to where final approval of
certain functions was occurring so both the firm and regulators would
be able to readily identify the principal who was designated to review
a specific function and also where original books and records related
to such supervision would be kept. At that time, books and records
(e.g., account documents, communications, order tickets, trade
blotters) were generally made and preserved in hard copy paper format,
not electronically, and stored in files at such offices.
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    \29\ See Notice 87-41.
    \30\ See Notice 87-41.
    \31\ See Notice 88-11.
    \32\ 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.\33\ FINRA noted that the
exclusions were intended as a reasonable accommodation to member firms
with widely dispersed sales personnel selling limited product lines
such as variable contracts and mutual funds.\34\ In the approval order,
the Commission recognized that the amended definition would eliminate
the requirement to register as a branch office unless the securities
activity at the office required ``continuous and direct supervision of
a principal, or the location is being held out to the public as a place
where a full range of securities activity is being conducted. Having
considered the proposal, the Commission believe[d] the rule change will
assist [FINRA] members in meeting their obligation to supervise off-
site registered representatives under applicable securities laws,
regulations and [FINRA] rules.'' \35\
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    \33\ In general, these amendments codified interpretations
pertaining to the branch office definitions and their exclusions by
clarifying that the address and telephone number of the appropriate
OSJ or branch office must be provided in advertisements and sales
literature, not the address of a non-branch location. See Securities
Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936 (March
31, 1992) (Order Approving File No. SR-NASD-91-42).
    \34\ See Notice to Members 92-18 (April 1992) (announcing SEC
approval of File No. SR-NASD-91-42).
    \35\ See Securities Exchange Act Release No. 30509 (March 24,
1992), 57 FR 10936, 10937 (March 31, 1992) (Order Approving File No.
SR-NASD-91-42).
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    In 2001, FINRA launched an initiative to modernize its rules.\36\
Based on input from member firms, FINRA identified the branch office
definition as a rule that could benefit from modernization

in light of the SEC's amendment to the term ``office'' in the SEC's
Books and Records Rules,\37\ the branch office definition used by the
New York Stock Exchange (``NYSE'') and state regulators, new business
practices that were developing based on technological innovations, and
the potential to create a uniform branch office registration
system.\38\ FINRA expressly noted that a factor to be considered in
modernizing rules included instances ``where the regulatory burden of a
rule significantly outweigh[ed] the benefit, or the rule no longer
work[ed] efficiently given new technologies.'' \39\
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    \36\ See Notice 01-35.
    \37\ 17 CFR 240.17a-3 and 240.17a-4. See generally Notice to
Members 01-80 (December 2001) (describing amendments to the SEC
Books and Records Rules).
    \38\ See Notice 02-10.
    \39\ See Notice 01-35.
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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,
NASAA, and state securities regulators to identify locations where
broker-dealers conduct securities or investment banking business.\40\
Moreover, the adoption of a uniform definition facilitated the
development of a centralized branch office registration system through
the Central Registration Depository and the creation of a uniform form
to register or report branch offices electronically with multiple
regulators.\41\ With the launch of this new technology, firms and
regulators could efficiently identify each branch location, which would
be assigned a unique branch office number by the system, the
individuals assigned to such location, and the designated supervisor(s)
for such location. This new centralized branch office registration
system allowed firms and regulators to efficiently locate offices and
individuals, and moreover closed gaps in information, created
significant efficiencies and lessened the burden on firms and
regulators.
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    \40\ See Securities Exchange Act Release No. 52403 (September 9,
2005), 70 FR 54782 (September 16, 2005) (Order Approving File No.
SR-NASD-2003-104) (``Uniform Definition of Branch Office'').
    \41\ See Form BR.
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    At the time these definitional changes were underway, technology
had progressed with the advent of faster internet, Wi-Fi, the emergence
of web-based platforms, and more portable computers to enhance
workplace connectivity that allowed for expanded remote work options.
In recognition of the evolving and growing trend in the financial
industry and workforce generally to work from home, the uniform branch
office definition adopted numerous exclusions, including the current
primary residence exclusion. The limitations on use of a primary
residence closely tracks the limitations on the use of a private
residence in the SEC's Books and Records Rules,\42\ which provide that
a broker-dealer is not required to maintain records at an office that
is a private residence if only one associated person (or multiple
associated persons if members of the same family) regularly conducts
business at the office, the office is not held out to the public as an
office, and neither customer funds nor securities are handled at the
office. At the same time, FINRA adopted IM-3010-1 (Standards for
Reasonable Review) (now Rule 3110.12 (Standards for Reasonable
Review)), as a further safeguard.\43\ That rule clarified the high
standards firms must observe regarding supervisory obligations and
emphasized the requirement that members already had to establish
reasonable supervisory procedures and conduct reviews of locations
taking into consideration, among other things: the firm's size,
organizational structure, scope of business activities, number and
location of offices, the nature and complexity of products and services
offered, the volume of business done, the number of associated persons
assigned to a location, whether a location has a principal on-site,
whether the office is a non-branch location, and the disciplinary
history of the registered person.
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    \42\ See note 37, supra.
    \43\ See note 40, 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.,
personal computers, email, mobile phones, electronic communication
systems with audio and visual capabilities, cloud storage of books and
records), and the ability to use risk-based surveillance and compliance
tools and systems, have fundamentally altered the landscape of how the
broker-dealer business is conducted.
    These earlier amendments evidence the need to keep the regulatory
framework current. FINRA believes that with evolving changes in
business models and the significant advance of technological tools that
are now readily available, some functions can be exempt from
registration, subject to specified conditions, without compromising a
reasonably designed supervisory system. Moreover, FINRA believes the
proposed rule change to classify some private residences as non-branch
locations, subject to specified controls, will not result in a loss of
the important regulatory information that the rules were designed, in
part, to provide regarding the locations or associated persons. That
information will continue to be collected through our regulatory
requirements and systems such as the branch office registration system
and Form BR and other uniform registration forms.\44\ Further, as a
non-branch location, an RSL would be subject to an inspection on a
regular periodic schedule which FINRA believes would still achieve the
purpose of the inspection requirement; that is, to help firms assess
whether their supervisory systems and procedures are being
followed.\45\
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    \44\ For example, under Form U4 (Uniform Application for
Securities Industry Registration or Transfer), if an individual's
``Office of Employment Address'' is an unregistered location, the
firm must report the address of such location as the individual's
``located at'' address and must report the branch office that
supervises that non-registered location as the ``supervised from''
location. See Form U4, Section 1 (General Information). Similar to
Form BR, Form U4 solicits information about an individual's other
business activities. See Form U4, Section 13 (Other Business) and
Form BR, Section 3 (Other Business Activities/Names/websites). Form
BD (Uniform Application for Broker-Dealer Registration) captures the
types of business in which a firm is engaged. See Form BD, Item 12;
see also Form BR, Section 2 (Registration/Notice Filing/Type of
Office/Activities), Item D.
    \45\ See Notice to Members 99-45 (June 1999) (``Notice 99-45'').

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

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

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

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

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

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

    An OSJ is a type of branch office. Rule 3110(f)(2) defines a
``branch office'' as ``any location where one or more associated
persons of a member firm regularly conducts the business of effecting
any transactions in, or inducing or attempting to induce the purchase
or sale of, any security, or is held out as such[.]'' \53\ In addition,
any location that is responsible for supervising the activities of
persons associated with the member at one or more non-branch locations
of the member is a branch office (i.e., a supervisory branch
office).\54\ A location registered as a branch office must have one or
more appropriately registered representatives or principals in each
office, and is subject to an inspection at least every three years,
unless it is a supervisory branch office in which case it is subject to
at least an annual inspection.\55\
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    \53\ See FINRA Rule 3110(f)(2)(A).
    \54\ See FINRA Rule 3110(f)(2)(B).
    \55\ See FINRA Rule 3110(a)(4), and FINRA Rule 3110(c)(1)(A) and
(B).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

    \79\ See note 3, supra.
---------------------------------------------------------------------------

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

    \80\ See Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f, and i.
    \81\ See, e.g., Notice 06-12.
---------------------------------------------------------------------------

i. Conditions for Designation as a Residential Supervisory Location
(Proposed Rule 3110.19(a))
    As described above, FINRA is proposing to adopt Rule 3110.19 to
establish a Residential Supervisory Location as a new non-branch
location, but subject to specified conditions, most of which are
derived from those

currently required for the primary residence and non-primary residence
exclusions. While many of the proposed conditions are similar to those
FINRA had proposed in the 2022 RSL Rule Filing, this proposed rule
change adjusts the conditions for RSL designation in two key areas.
Specifically, this proposed rule change would add conditions pertaining
to (1) books and records to include, among other things, clarifying
language about a firm's recordkeeping system and (2) a firm's
surveillance and technology tools to provide, among other things, that
the tools are appropriate to supervise the risks presented by each RSL.
A. Conditions Derived Largely From Rule 3110 To Remain Substantively
Unchanged From the 2022 RSL Rule Filing
    In the 2022 RSL Rule Filing, FINRA has proposed several conditions
for RSL designation that were based on those used for the existing
residential exclusions to the branch office definition. Through this
proposed rule change, FINRA is proposing to retain those terms subject
to some technical adjustments that would align the proposed rule text
more closely to the rule text appearing in Rule 3110(f)(2)(A)(ii).
    Under proposed Rule 3110.19(a), any such location would be
considered a non-branch location (and thus excluded from branch office
registration), provided that: (1) only one associated person, or
multiple associated persons who reside at that location and are members
of the same immediate family, conduct business at the location
(proposed Rule 3110.19(a)(1)); \82\ (2) the location is not held out to
the public as an office (proposed Rule 3110.19(a)(2)); \83\ (3) the
associated person does not meet with customers or prospective customers
at the location (proposed Rule 3110.19(a)(3)); \84\ (4) no sales
activity takes place at the location other than as permitted and
subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or
(iii) (proposed Rule 3110.19(a)(4)); \85\ (5) neither customer funds
nor securities are handled at that location (proposed Rule
3110.19(a)(5)); \86\ (6) the associated person is assigned to a
designated branch office, and such designated branch office is
reflected on all business cards, stationery, retail communications and
other communications to the public by such associated person (proposed
Rule 3110.19(a)(6)); \87\ (7) the associated person's correspondence
and communications with the public are subject to the firm's
supervision in accordance with Rule 3110 (proposed Rule 3110.19(a)(7));
\88\ and (8) the associated person's electronic communications (e.g.,
email) are made through the member's electronic system (proposed Rule
3110.19(a)(8)).\89\
---------------------------------------------------------------------------

    \82\ See Rule 3110(f)(2)(A)(ii)a. (``Only one associated person,
or multiple associated persons who reside at that location and are
members of the same immediate family, conduct business at the
location[.]'').
    \83\ See Rule 3110(f)(2)(A)(ii)b. (``The location is not held
out to the public as an office and the associated persons does not
meet with customers at the location[.]'').
    \84\ See note 83, supra.
    \85\ An associated person's private residence, other than a
primary residence, remains subject to the less than 30-business-day
in any calendar year limitation on use for securities business.
    \86\ See Rule 3110(f)(2)(A)(ii)c. (``Neither customer funds nor
securities are handled at the location[.]'').
    \87\ See Rule 3110(f)(2)(A)(ii)d. (``The associated person is
assigned to a designated branch office, and such designated branch
office is reflected on all business cards, stationery, retail
communications and other communications to the public by such
associated person[.]'').
    \88\ See Rule 3110(f)(2)(A)(ii)e. (``The associated person's
correspondence and communications with the public are subject to the
firm's supervision in accordance with this Rule[.]'').
    \89\ See Rule 3110(f)(2)(A)(ii)f. (``Electronic communications
(e.g., email) are made through the member's electronic system[.]'').
---------------------------------------------------------------------------

B. Conditions Adjusted From the 2022 RSL Rule Filing
1. Books and Records (Proposed Rule 3110.19(a)(9))
    In the 2022 RSL Rule Filing, FINRA had proposed requiring that all
books or records required to be made and preserved by the member under
the federal securities laws or FINRA rules are maintained by the member
other than at the location. FINRA is proposing a clarifying adjustment
to the language to provide that: (1) the member must have a
recordkeeping system to make and keep current, and preserve records
required to be made, and kept current, and preserved under applicable
securities laws and regulations, FINRA rules, and the member's own
written supervisory procedures under Rule 3110; (2) such records are
not physically or electronically maintained and preserved at the
location; and (3) the member has prompt access to such records.
2. Surveillance and Technology Tools (Proposed Rule 3110.19(a)(10)
    To further enhance the proposed conditions for RSL designation,
FINRA is proposing to include the requirement that a firm must
determine that its surveillance and technology tools are appropriate to
supervise its RSLs. FINRA believes that specifying baseline
expectations with respect to the surveillance and technology tools a
firm must have in order to supervise its RSLs would promote investor
protection.
    FINRA believes that these proposed 10 conditions would strengthen a
firm's ability to monitor the supervisory activities occurring at a
Residential Supervisory Location and act to lower the overall risks
associated with such location because, for example, the books and
records required to be made and preserved by the member under the
federal securities laws or FINRA rules cannot be physically or
electronically maintained and preserved at the location. Moreover,
FINRA notes that sales activities would be permissible at a Residential
Supervisory Location to the same extent sales activities are permitted
currently under such exclusions. As previously noted, the conditions
for the current primary and non-primary residence exclusions, which
align with the SEC's Books and Records Rules, were developed in
coordination with other SROs and state securities regulators and such
exclusions have been in place since 2005.\90\ As such, firms have
developed experience with monitoring and supervising these conditions,
and FINRA believes member firms will be able to rely on such experience
to reasonably supervise similar conditions for proposed Residential
Supervisory Locations. As with any non-branch location, a Residential
Supervisory Location would be subject to an inspection on a periodic
schedule, presumed to be at least every three years.\91\
---------------------------------------------------------------------------

    \90\ 17 CFR 240.17a-4(l); see also note 40, supra.
    \91\ See note 3, supra.
---------------------------------------------------------------------------

iv. Member Firm Ineligibility Criteria (Proposed Rule 3110.19(b))
    FINRA is further proposing several criteria a member firm must meet
before it would be eligible to designate an office or location as a
Residential Supervisory Location in accordance with proposed Rule
3110.19. As described further below, the proposed seven ineligibility
criteria reflect attributes of a member firm that FINRA believes are
more likely to raise investor protection concerns based on FINRA rules.
Consistent with the 2022 RSL Rule Filing, proposed Rule 3110.19(b)
would provide that a location would be ineligible for designation as a
Residential Supervisory Location in accordance with Rule 3110.19 if:
(1) the member is currently designated as a ``Restricted Firm'' under
Rule 4111 (Restricted Firm Obligations) \92\

(proposed Rule 3110.19(b)(1)); (2) the member is currently designated
as a ``Taping Firm'' under Rule 3170 (Tape Recording of Registered
Persons by Certain Firms) \93\ (proposed Rule 3110.19(b)(2)); or (3)
the member is currently undergoing, or is required to undergo, a review
under Rule 1017(a)(7) as a result of one or more associated persons at
such location \94\ (proposed Rule 3110.19(b)(3)).\95\ Through this
proposed rule change, FINRA is proposing to supplement these criteria
to include a member firm: (1) that receives a notice from FINRA
pursuant to Rule 9557 (Procedures for Regulating Activities under Rule
4110 (Capital Compliance), Rule 4120 (Regulatory Notification and
Business Curtailment) or Rule 4130 (Regulation of Activities of Section
15C Members Experiencing Financial and/or Operational Difficulties)),
unless FINRA has otherwise permitted activities in writing pursuant to
such rule (proposed Rule 3110.19(b)(4)); (2) is or becomes suspended by
FINRA (proposed Rule 3110.19(b)(5)); (3) based on the date in CRD, had
its FINRA membership become effective within the prior 12 months
(proposed Rule 3110.19(b)(6)); or (4) is or has been found within the
past three years by the SEC or FINRA to have violated Rule 3110(c)
(proposed Rule 3110.19(b)(7)).
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    \92\ In general, Rule 4111 requires member firms that are
identified as ``Restricted Firms'' to deposit cash or qualified
securities in a segregated, restricted account; adhere to specified
conditions or restrictions; or comply with a combination of such
obligations. See generally Regulatory Notice 21-34 (September 2021)
(announcing FINRA's adoption of rules to address firms with a
significant history of misconduct).
    \93\ In general, Rule 3170 requires a member firm to establish,
enforce and maintain special written procedures supervising the
telemarketing activities of all of its registered persons, including
the tape recording of conversations, if the firm has hired more than
a specified percentage of registered persons from firms that meet
FINRA Rule 3170's definition of ``disciplined firm.'' See generally
Regulatory Notice 14-10 (March 2014) (announcing FINRA's adoption of
consolidated rules governing supervision).
    \94\ Rule 1017(a)(7) requires a member firm to file an
application for continuing membership when a natural person seeking
to become an owner, control person, principal or registered person
of the member firm has, in the prior five years, one or more defined
``final criminal matters'' or two or more ``specified risk events''
unless the member firm has submitted a written request to FINRA
seeking a materiality consultation for the contemplated activity.
Rule 1017(a)(7) applies whether the person is seeking to become an
owner, control person, principal or registered person at the
person's current member firm or at a new member firm. See generally
Regulatory Notice 21-09 (March 2021) (announcing FINRA's adoption of
rules to address brokers with a significant history of misconduct).
    \95\ In the 2022 RSL Rule Filing, FINRA had categorized these
criteria as ``ineligible locations,'' but through this proposed rule
change, FINRA is proposing to categorize these terms as ``member
firm ineligibility criteria.'' See proposed Rule 3110.19(c).
---------------------------------------------------------------------------

    FINRA believes that a member firm that is experiencing issues
complying with its capital requirements or that has been suspended by
FINRA is more likely to face significant operational challenges that
may negatively impact the firm's overall supervision of its associated
persons. FINRA further believes that a firm that has been a FINRA
member for less than 12 months is often still implementing its business
plan and developing a supervisory system appropriate tailored to the
firm's specific attributes and structure. With respect to a firm that
is or has been found within the past three years by the SEC or FINRA to
have violated Rule 3110(c), FINRA believes such a firm has demonstrated
challenges in developing or maintaining a robust inspection program. As
such, FINRA believes that these proposed ineligibility criteria
appropriately account for firms that pose higher risks, and for that
reason, would be ineligible to rely on proposed Rule 3110.19.
v. Location Ineligibility Criteria (Proposed Rule 3110.19(c))
    In the 2022 RSL Rule Filing, FINRA had proposed several criteria
applicable to an associated person that if unmet, would make the
location of the associated person ineligible for RSL designation. All
but one of the terms of proposed Rule 3110.19(c) remain substantively
unchanged from those FINRA had proposed in the 2022 RSL Rule Filing. As
described below, FINRA is proposing to make a clarifying adjustment to
a criterion applicable to a firm's associated persons.
    Under proposed Rule 3110.19(c), a location would be ineligible for
designation as a Residential Supervisory Location where: (1) one or
more associated persons at such location is a designated supervisor who
has less than one year of direct supervisory experience with the member
(proposed Rule 3110.19(c)(1)); (2) one or more associated persons at
such location is functioning as a principal for a limited period in
accordance with Rule 1210.04 \96\ (proposed Rule 3110.19(c)(2)); (3)
one or more associated persons at such location is subject to a
mandatory heightened supervisory plan under the rules of the SEC, FINRA
or state regulatory agency (proposed Rule 3110.19(c)(3)); (4) one or
more associated persons at such location is statutorily disqualified,
unless such disqualified person has been approved (or is otherwise
permitted pursuant to FINRA rules and the federal securities laws) to
associate with a member and is not subject to a mandatory heightened
supervisory plan under paragraph (c)(3) of this proposed Supplementary
Material or otherwise as a condition to approval or permission for such
association (proposed Rule 3110.19(c)(4)); (5) one or more associated
persons at such location has an event in the prior three years that
required a ``yes'' response to any item in Questions 14A(1)(a) and
2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4 \97\ (proposed
Rule 3110.19(c)(5)). These proposed criteria remain substantively
unchanged from the 2022 RSL Rule Filing.
---------------------------------------------------------------------------

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

    In addition to the proposed criteria above, an office or location
would be ineligible for designation as a Residential Supervisory
Location at which one or more associated persons at such location is
currently subject to, or has been notified in writing that it will be
subject to, any investigation, proceeding, complaint or other action by
the member, the SEC, an SRO, including FINRA, or state securities
commission (or agency or office performing like functions) alleging
they have failed reasonably to supervise another person subject to
their supervision, with a view to preventing the violation of any
provision of the Securities Act, the Exchange Act, the Investment
Advisers Act, the Investment Company Act, the Commodity Exchange Act,
any state law pertaining to the regulation of securities or any rule or
regulation under any of such Acts or laws, or any of the rules of the
Municipal Securities Rulemaking Board or FINRA (proposed Rule
3110.19(c)(6)).\98\ This proposed criterion, which is similar to the
one FINRA had proposed in the 2022 RSL Rule Filing, is a product of
integrating aspects of several ``Regulatory Action Disclosure''
questions from Form U4

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

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

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

    \103\ In response to the 2022 RSL Rule Filing, one commenter
recommended that a location should be precluded from being
designated as an RSL where a firm has implemented its own heightened
supervisory plan, suggesting that this additional layer of
supervision upon an associated person would warrant an automatic
exclusion of such person's private residence as an RSL. In its
second letter responding to comments directed to the 2022 RSL Rule
Filing, FINRA indicated that a firm's routine evaluation of its
supervisory system to ensure it is appropriately tailored to the
firm's business may prompt a firm, out of an abundance of caution
and independent of specific regulatory requirements or mandates, to
undertake additional supervisory measures, including voluntarily
imposing a heightened supervisory plan. See Exhibit 2c. FINRA
further notes that a ``voluntary heightened supervisory plan'' is
undefined and thus, a firm's view of ``heightened supervision''
could differ from that of a regulator. For example, a firm could
voluntarily implement ``heightened supervision'' to review with more
frequency the trade blotters of a registered person because the
blotters relate to a new product of the firm.
---------------------------------------------------------------------------

vi. Obligation To Provide List of RSLs to FINRA (Proposed Rule
3110.19(d))
    In the 2022 RSL Rule Filing, FINRA had proposed requiring a firm to
maintain a list of residence locations in similar fashion as the
existing requirement under Rule 3110(f)(2)(A)(ii)i.\104\ Two commenters
to the 2022 RSL Rule Filing shared their views on this proposed
condition.\105\ In general, their views pertained to the reliability or
completeness of such a list, and the creation of a more formal
categorization or appropriate system change so firms can identify and
track RSLs in the Central Registration Depository
(``CRD[supreg]'').\106\ In further consideration of the comments, FINRA
is proposing to require the member to provide FINRA with a list of the
residence locations by the 15th day of the month following the calendar
quarter through an electronic process or such other process as FINRA
may prescribe. FINRA notes that CRD currently provides regulators with
information regarding the offices and locations (registered and
unregistered) to which associated persons required to be registered are
assigned,\107\ but requiring member firms to affirmatively provide this
information to FINRA through a scheduled process would make this
information more readily accessible to regulators.\108\
---------------------------------------------------------------------------

    \104\ See Rule 3110(f)(2)(A)(ii)i. (``A list of the residence
locations is maintained by the member[.]'').
    \105\ See Exhibits 2a and 2b.
    \106\ CRD is the central licensing and registration system that
FINRA operates for the benefit of FINRA, the SEC, other SROs, state
securities regulators and broker-dealer firms. The information
maintained in the CRD system is reported by registered broker-dealer
firms, associated persons and regulatory authorities in response to
questions on specified uniform registration forms. See generally
Rule 8312 (FINRA BrokerCheck Disclosure).
    \107\ FINRA notes that firms are under a continuing obligation
to promptly update, among other things, their uniform forms whenever
the information becomes inaccurate or incomplete. Amendments must be
filed electronically (unless the filer is an approved paper filer)
by promptly updating the appropriate section of such forms. See,
e.g., general instructions to Form U4 and Form BR.
    \108\ FINRA is exploring ways to provide this information to
state regulators in a practical format.
---------------------------------------------------------------------------

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

workforce model and therefore believes under the current environment,
private residences responsible for the supervisory activities and
subject to the safeguards and conditions, and the ineligibility
criteria described above should not require registration as branch
offices, and calibrating the proposed Residential Supervisory Location
to a regular periodic inspection schedule is appropriately tailored to
the lower risk profile. FINRA notes that as part of efforts between
FINRA and the NYSE to align the interpretations of the uniform branch
office definition, FINRA made a definitional change to the OSJ
definition to exclude from OSJ designation and treat as a non-branch
location an office or location at which final approval of research
reports occurred,\109\ noting that ``the limited nature of such
activity [did] not necessitate supervision of such a location as an
OSJ[.]'' \110\
---------------------------------------------------------------------------

    \109\ See Rule 3110(f)(1)(F).
    \110\ See Securities Exchange Act Release No. 56585 (October 1,
2007), 72 FR 57081, 57082 (October 5, 2007) (Notice of Filing of
File No. SR-FINRA-2007-008).
---------------------------------------------------------------------------

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

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

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

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

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

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
1. Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the regulatory need for the proposed rule change, its
potential economic impacts, including anticipated costs, benefits, and
distributional and competitive effects, relative to the current
baseline, and the alternatives FINRA considered in assessing how best
to meet FINRA's regulatory objectives.
a. Regulatory Need
    As discussed above, in the wake of the pandemic, many member firms
are developing hybrid workforce models for their employees. In these
new ways of working, some employees may work permanently in an
alternative location such as a private residence, other employees may
spend some time in alternative locations and some time on-site in a
conventional office setting, and some may work on-site full time.\113\
Absent the proposed rule change, when the temporary relief from the
requirement to submit branch office applications on Form BR for new
office locations ends, many member firms would need to either curtail
activities at residential locations or register large numbers of
residential locations as OSJs or supervisory branch offices. Either
type of adjustment would create potentially significant costs. The
proposed rule change would reduce, but not eliminate, the need for such
adjustments since the activities conducted at some new residential
locations would likely not meet the requirements of the proposed rule
change.
---------------------------------------------------------------------------

    \113\ According to the Survey of Working Arrangements and
Attitudes (SWAA), post-COVID, many employers are planning to allow
employees to work from home about 2.2 days per week on average. See
Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, SWAA February
2023 (Updates February 12, 2023), https://wfhresearch.com/wp-content/uploads/2023/02/WFHResearch_updates_February2023.pdf. The
SWAA is a monthly survey with respondents that are working-age
persons in the United States that had earnings of at least $10,000
in 2019. Further details about this survey can be found at https://wfhresearch.com.
---------------------------------------------------------------------------

b. Economic Baseline
    The economic baseline includes both current and foreseeable
workforce arrangements and business practices, including those that
were first developed during the pandemic and have been modified since
in light of reduced health and safety concerns. In particular, the
economic baseline includes the innovations, and investments in
communication and surveillance technology, that have supported and
continue to support supervision in the remote work environment.\114\
These innovations and investments have depended in part on the
temporary suspension of the requirement to submit branch office
applications on Form BR for new office locations, provided in Notice
20-08. However, in order to provide a full accounting of the likely
effects of the proposed rule change, the analysis considers the impact
of the proposed rule change under the assumption that, going forward,
the temporary suspension of the above requirement is no longer in
effect. The current supervisory requirements of Rule 3110 will then
apply, including the provisions of Rule 3110 that categorize an OSJ,
branch office and non-branch location and that establish the
supervisory and registration requirements of each office or location.

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.
---------------------------------------------------------------------------

    \114\ The pandemic propelled increased reliance on technology
solutions in the remote work environment. A McKinsey survey in late
2020 found that, overall, firms had accelerated their adoption of
technology, with large accelerations in the implementation of
changes to increase remote working and collaboration, as well the
use of advanced technologies in operations. See McKinsey & Company,
How COVID-19 has pushed companies over the technology tipping
point--and transformed business forever, October 5, 2020, https://mck.co/3nlK8b2.
---------------------------------------------------------------------------

    As of December 31, 2022, FINRA's membership included 3,381 firms
\115\ with 150,495 registered branch offices. Of these branch offices,
18,564 (12%) are OSJs, with 2,451 of them identified as private
residences.\116\ There are 21,510 principal level registered persons
serving as OSJ supervisors, with 2,165 (12%) working at OSJs identified
as private residences.\117\ Data on the number of residential locations
at which supervisors are currently working full or part time may be
incomplete, due to the temporary suspension of the Form BR requirement
for new offices included in Notice 20-08. However, large member firms
(500 or more registered persons) account for about 69% of OSJs. By type
of business, diversified and retail firms account for 81% of OSJs. To
the extent that these member firms account for most supervisory staff,
they are potentially currently making broad use of hybrid workforce
arrangements involving residential locations.
---------------------------------------------------------------------------

    \115\ This count excludes firms with membership pending
approval, and withdrawn or terminated from membership.
    \116\ The number of branch offices and OSJs is derived from Form
BR, a uniform form that a member firm uses to register with FINRA
and as required by the relevant state jurisdictions or other SROs,
the firm's location as a branch office. Form BR's Section 1 (General
Information) provides a place for a firm to indicate whether the
branch office is a private residence by checking a ``Private
Residence Checkbox.'' The number of OSJs is derived from Form BR's
Section 2 (Registration/Notice Filing/Type of Office/Activities),
which requires a firm to indicate whether the branch office is an
OSJ. Some OSJs have more than one supervisor, and some principals
serve as supervisors for more than one OSJ. FINRA's records from
Form U4 show that, altogether, there are about 137,777 registered
persons with principal registration categories (including those in
OSJ supervisory roles).
    \117\ In addition, FINRA member firms with a single branch
account for 1,698 of these OSJs and 2,064 of the supervisors. Sixty-
eight FINRA member firms did not have any branches registered at the
end of year 2022; these firms are all small member firms.
---------------------------------------------------------------------------

c. Economic Impacts
    Absent the proposed rule change, if the temporary relief on
registering new branches with Form BR, provided during the pandemic,
ends, many member firms would likely need to either curtail activities
at residential locations or register large numbers of residential
locations as OSJs or supervisory branch offices. This potential
increase in office count would impact inspection obligations and in
some cases, licensing requirements associated with individual
locations. These additional requirements would hold even for office
locations that bear lower risk characteristics and from which lower
risk supervisory functions are conducted. The economic impacts of these
changes would be mitigated by the proposed rule change.
    Changes in the number of different types of offices and locations
since the start of the pandemic, along with current data, can provide a
rough indication of the potential impact of the proposed rule change on
firms. As Table 1 below shows, the number of offices and locations has
fallen except for non-branch locations. Residential non-branch
locations have increased by 17,603 (75%). Some of these new residential
non-branch locations would have needed to register as OSJs if not for
the temporary suspension of the Form BR requirement and will need to
register as OSJs unless the proposed rule change is adopted. Further,
some of the 2,451 private residences that are currently registered as
OSJs, described above, might be able to become Residential Supervisory
Locations if the proposed rule change is adopted. The numbers suggest
that the number of offices and locations that may benefit from the
proposed rule change is in the thousands. While Form U4 and Form BR can
be used to count numbers of work locations and identify high-level
activities at registered branch offices, the number of residential
locations that would meet the conditions of proposed Rule 3110.19(a)
alone would depend on specific information about the activities at
residential locations that these forms do not provide.\118\
---------------------------------------------------------------------------

    \118\ Non-branch locations do not have to be registered with
FINRA. The estimates for non-branch locations are obtained by
reviewing Form U4. There may be some double counting of non-branch
locations if members record the address differently on more than one
Form U4. For the numbers of non-branch locations in Table 1, FINRA
counted, by firm, unique addresses based on the first seven
characters of the Form U4 ``Street 1'' field, city and state.
Addresses that matched the address of the main office or of an
existing registered branch were excluded.

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

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

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

    \119\ See note 113, supra. See also Jose Maria Barrero, Nicholas
Bloom & Steven J. Davis, Why Working from Home Will Stick (NBER
Working Paper 28731, April 2021), https://wfhresearch.com/wp-content/uploads/2021/04/w28731-3-May-2021.pdf, who point to a
lasting effect of the pandemic on work arrangements, in particular
for those with higher education and earnings; and Alexander Bick,
Adam Blandin & Karel Mertens, Work from Home Before and After the
COVID-19 Outbreak, (Working Paper, October 2022), https://karelmertenscom.files.wordpress.com/2022/11/wfh_oct_15_paper.pdf,
who find consistent results, with a higher adoption rate of work
from home jobs in Finance and Insurance, relative to other
industries, reflected in Figure 10. Both papers, based on different
surveys and, in Bick et al, with added results from a model,
conclude that around 22% of full workdays will be provided from home
in the long run.
---------------------------------------------------------------------------

    As noted above, the pandemic caused firms throughout the financial
services sector to accelerate the adoption of technological
solutions.\120\ Technology has been used not only to make remote work
possible but also to conduct a range of compliance and regulatory risk
management activities. By facilitating hybrid work arrangements, the
proposed rule change would support continued adoption and innovation in
technological solutions and reductions in the cost of these
solutions.\121\
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    \120\ See note 114, supra.
    \121\ See Ben Charoenwong, Zachary T. Kowaleski, Alan Kwan, &
Andrew Sutherland, RegTech, MIT Sloan Research Paper 6563-22
(September 16, 2022), Available at SSRN: https://ssrn.com/abstract=4000016. The authors show that broker-dealers that made
required compliance technology investments were able to make
complementary technology investments in communications and customer
relationship management software that resulted in a reduced number
of complaints and less employee misconduct.
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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).
ii. Anticipated Costs
    The proposed rule change provides firms with a new designation for
work locations without removing any designations that are available
under the baseline. Firms will therefore use the new Residential
Supervisory Location designation only if doing so is beneficial to
their operations relative to using one of the existing designations.
The cost of complying with the requirements of the new designation for
work locations is obviously a factor in this decision. Firms may incur
a number of new one-time costs, such as adjusting staffing and
activities at existing locations, to initially meet the requirements of
proposed Rule 3110.19. Firms may also need to develop new written
supervisory procedures and new trainings for staff at Residential
Supervisory Locations, and deploy these trainings, so staff are aware
of the compliance requirements. Firms may incur new ongoing costs to
monitor for compliance and for adjusting staffing and designations if a
Residential Supervisory Location becomes ineligible for this
designation because an associated person incurs events or actions
described in proposed Rule 3110.19(b).
    Classifying residential locations that would otherwise need to
register as OSJs or branch offices as Residential Supervisory Locations
will remove certain compliance requirements. Depending on the type of
branch, the reduction in compliance requirements may include no longer
having to have one or more appropriately registered representatives or
principals in each office or to conduct inspections annually or every
three years. These reductions in compliance requirements may create
risks to member firms and investors.
    To mitigate these risks, the proposal excludes locations on the
basis of inexperience or prior harmful conduct by individuals working
at those locations, and limits the activities that can be performed at
those locations. The designation of certain locations as ineligible
provides minimum standards for staff that are eligible to work in such
locations. FINRA expects that most firms would go beyond these minimum
standards in selecting staff who would perform supervisory and other
sensitive work at Residential Supervisory Locations, and in monitoring
their conduct.
d. Alternatives Considered
    FINRA is proposing to provide certain regulatory accommodations for
the innovations in business organization and operations that occurred
during the pandemic by modeling the Residential Supervisory Locations
after the existing primary residence and non-primary residence
exclusions, which have been in effect since 2005. FINRA considered
adopting a proposed rule with just those exclusions and without the
designation of certain locations as ineligible. More locations would
qualify as Residential Supervisory Locations without the additional
requirements. FINRA expects, however, that the proposed rule change
provides a better balance of the potential benefits and the risks that
could impose costs on members and investors.
    In addition, FINRA considered the merits of adapting other
requirements similar to those FINRA had proposed in File No. SR-FINRA-
2022-021, a proposal to establish a voluntary three-year remote
inspections pilot program.\122\ In particular, the 2022 Remote
Inspections Pilot Program Rule Filing includes the requirement for a
firm to conduct and document a risk assessment considering several
factors referenced in Rule 3110 and others, for each office or location
where a firm determines to conduct a remote inspection. FINRA believes
that adding the requirement for a firm to conduct and document a risk
assessment for designating an office or location as a Residential
Supervisory Location would be largely redundant given other
requirements applicable to designating an office or location as an RSL.
A firm continues to have a fundamental obligation under Rule 3110(a) to
establish and maintain a system to supervise the activities of each
associated person that is reasonably designed to achieve compliance
with applicable securities laws and regulations, and with applicable
FINRA rules. This supervisory system would, at least in effect, require
the assessment and mitigation of the risk that the activities of
associated persons working at Residential Supervisory Locations would
not comply with the securities laws. The supervisory system thereby
reduces the benefit of a separately conducted and documented risk
assessment. Similarly, under Rule 3110(b), a firm is required to
establish, maintain, and enforce written procedures to supervise the
types of business in which it engages and the activities of its
associated persons that are reasonably designed to achieve

compliance with applicable securities laws and regulations, and with
applicable FINRA rules. These supervisory procedures would, at least in
effect, require the assessment and mitigation of risks of non-
compliance posed by the types of business conducted at Residential
Supervisory Locations. FINRA determined that requiring a firm to
conduct and document a risk assessment for designating an office or
location as an RSL would not provide an additional benefit to members
or investors.
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    \122\ See Securities Exchange Act Release No. 96520 (December
16, 2022), 87 FR 78737 (December 22, 2022) (Notice of Partial
Amendment No. 1 to File No. SR-FINRA-2022-021) (``2022 Remote
Inspections Pilot Program Rule Filing'').
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The SEC published the 2022 RSL Rule Filing for comment and as of
the end of the comment period on August 23, 2022, the SEC had received
20 unique comment letters, then subsequently received six more comment
letters.\123\ On October 31, 2022, FINRA responded to the comments and
did not propose changing the terms of the 2022 RSL Rule Filing in
response to the comments.\124\ On the same day, the Commission
instituted proceedings to determine whether to approve or disapprove
the 2022 RSL Rule Filing (``Order''),\125\ and the SEC received five
comments letters in response to the Order.\126\ On December 9, 2022,
FINRA responded to those comments and did not propose changing the 2022
RSL Rule Filing in response to them.\127\ Since then, the SEC has
received one supplemental comment letter.\128\ March 30, 2023 was the
date by which the SEC was required to either approve or disapprove the
2022 RSL Rule Filing. But on March 29, 2023, FINRA withdrew the 2022
RSL Rule Filing from the SEC to consider whether modifications and
clarifications to the filing would be appropriate in response to
concerns raised by commenters. While the proposed rule change retains
many of the terms of the 2022 RSL Rule Filing, the proposed rule change
makes some adjustments, which are discussed in detail above under Item
II.A.1.b.
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    \123\ See note 9, supra.
    \124\ See note 9, supra; see also Exhibit 2b.
    \125\ See Securities Exchange Act Release No. 96191 (October 31,
2022), 87 FR 66767 (November 4, 2022) (Order Instituting Proceedings
to Determine Whether to Approve or Disapprove File No. SR-FINRA-
2022-019).
    \126\ See note 9, supra.
    \127\ See note 9, supra; see also Exhibit 2c.
    \128\ See Letter from Bernard V. Canepa, Managing Director &
Associate General Counsel, Securities Industry and Financial Markets
Association, to Vanessa A. Countryman, Secretary, SEC, dated
December 20, 2022, https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20153234-320719.pdf.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

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

IV. Solicitation of Comments

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

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2023-006. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 the filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
    All submissions should refer to File Number SR-FINRA-2023-006 and
should be submitted on or before April 27, 2023.

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