[Federal Register Volume 88, Number 225 (Friday, November 24, 2023)]
[Notices]
[Pages 82447-82464]
[FR Doc No: 2023-25880]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98980; File No. SR-FINRA-2023-006]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Adopt Supplementary Material .19
(Residential Supervisory Location) Under FINRA Rule 3110 (Supervision)

November 17, 2023.

I. Introduction

    On March 29, 2023, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change (SR-FINRA-2023-006) to adopt new
Supplementary Material .19 (Residential Supervisory Location) under
FINRA Rule 3110 (Supervision). The proposed rule change, as modified by
Amendment Nos. 1 and 2 (hereinafter, the ``proposed rule change''
unless otherwise specified), would treat a private residence in which
an associated person engages in specified supervisory activities,
subject to certain safeguards and limitations, as a non-branch
location.\3\ Treated as non-branch locations, these newly defined
Residential Supervisory Locations (``RSLs'') would be subject to
inspections on a regular periodic schedule (presumed to be at least
every three years) instead of the annual inspection currently required
for ``offices of supervisory jurisdiction'' (``OSJs'') and
``supervisory branch offices.'' \4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 97237 (Mar. 31, 2023), 88 FR
20568, 20568 (Apr. 6, 2023) (File No. SR-FINRA-2023-006 (``Notice'')
(citing FINRA Rules 3110(c)(1)(C) and 3110.13), https://www.govinfo.gov/content/pkg/FR-2023-04-06/pdf/2023-07145.pdf.
    \4\ See id.
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    The proposed rule change was published for public comment in the
Federal Register on April 6, 2023.\5\ On May 16, 2023, FINRA consented
to an extension of the time period in which the Commission must approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to July 5, 2023.\6\ The Commission received
thirteen comment letters in response to the Notice.\7\
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    \5\ Id.
    \6\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, dated May 16, 2023,
https://www.finra.org/sites/default/files/2023-05/sr-finra-2023-006-extension-no-1.pdf.
    \7\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006.htm.
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    On July 3, 2023, FINRA filed an amendment to the proposed rule
change (``Amendment No. 1'').\8\ On July 5, 2023, the Commission
published a notice of filing of Amendment No. 1 and an order
instituting proceedings to determine whether to approve or disapprove
the proposed rule change, as modified by Amendment No. 1.\9\ On July
25, 2023, FINRA responded to the comment letters received in response
to the Notice.\10\ The Commission received twelve comment letters in
response to the notice of Amendment No. 1 and order instituting
proceedings.
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    \8\ See Amendment No. 1, https://www.finra.org/sites/default/files/2023-07/sr-2023-006-amendment-No1.pdf.
    \9\ Exchange Act Release No. 97839 (July 5, 2023), 88 FR 44173
(July 11, 2023) (File No. SR-FINRA-2023-006), https://www.govinfo.gov/content/pkg/FR-2023-07-11/pdf/2023-14523.pdf.
    \10\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated July 25, 2023 (``FINRA Response I''), https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006-235699-491502.pdf.
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    On September 14, 2023, FINRA responded to the comment letters
received in response to the notice of Amendment No. 1 and order
instituting proceedings, and it filed an amendment to the proposed rule
change (``Amendment No. 2'').\11\ On September 22, 2023, FINRA
consented to an extension of the time period in which the Commission
must approve or disapprove the proposed rule change to December 2,
2023.\12\ The Commission is publishing this order to provide notice of
the filing of, and to solicit comments on, Amendment No. 2 from
interested persons and is approving the proposed

rule change, as modified by Amendment Nos. 1 and 2, on an accelerated
basis.
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    \11\ See Amendment No. 2, https://www.finra.org/sites/default/files/2023-09/SR-FINRA-2023-006-Amendment-2.pdf; letter from Kosha
Dalal, Vice President and Associate General Counsel, Office of
General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated Sept. 14, 2023 (``FINRA Response II''), https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006-259039-608182.pdf.
    \12\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, dated Sept. 22, 2023,
https://www.finra.org/sites/default/files/2023-09/sr-finra-2023-006-ext2.pdf.
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II. Description of the Proposed Rule Change

    FINRA stated that technological advancements and an emerging remote
workplace prompted it to reconsider the regulatory framework for the
supervision and inspection of residential locations.\13\ As a result of
this evaluation, FINRA determined to issue the proposed rule change
``to create a regulatory framework in which member firms can capably
continue to carry out their obligation to effectively inspect the
supervisory activities taking place at an office or location . . . on a
regular periodic schedule without diminishing investor protection.''
\14\ After describing the current regulatory framework, the Commission
describes the proposed rule change.
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    \13\ Notice at 20569.
    \14\ Id. at 20573.
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A. Background

1. FINRA Rule 3110 (Supervision)
    FINRA Rule 3110 requires a member firm to establish and maintain a
supervisory system for the activities of its associated persons ``that
is reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules'' (hereinafter, a
``reasonably designed supervisory system'').\15\ The rule identifies
the minimum requirements of a member's supervisory system, including:
(1) the registration and designation as a branch office or an OSJ of
each location,\16\ including the main office, that meets the
definitions contained in FINRA Rule 3110(f); \17\ and (2) inspecting
all offices and locations in accordance with Rule 3110(c).\18\ The rule
also establishes the frequency with which a member firm must inspect
its locations.\19\ The frequency is based, in part, on whether the
location is designated as a supervisory branch office, a non-
supervisory branch office, an OSJ, or a non-branch location.\20\ Each
of these designations is described in turn.
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    \15\ FINRA Rule 3110(a).
    \16\ Unless otherwise specified, the Commission uses the term
``location'' in this order to refer to any location where a firm
does business, such as an OSJ, supervisory branch office, non-
supervisory branch office, or non-branch location, as applicable.
    \17\ See FINRA Rule 3110(a)(3).
    \18\ See FINRA Rule 3110(c). On November 17, 2023, the
Commission issued an approval order for File Number FINRA-2023-007,
which adopted new Supplementary Material .18 (Remote Inspections
Pilot Program) under FINRA Rule 3110 (Supervision). FINRA Rule
3110.18 establishes a voluntary, three-year pilot program to allow
eligible member firms to elect to fulfill their inspection
obligations under FINRA Rule 3110(c) by conducting inspections of
eligible OSJs, branch offices, and non-branch locations remotely
without an on-site visit to such locations, subject to specified
safeguards and limitations.
    \19\ See FINRA Rule 3110(c)(1).
    \20\ See id.
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a. Supervisory and Non-Supervisory Branch Offices
    FINRA Rule 3110(f)(2) defines a ``branch office'' as: (1) any
location where one or more associated persons of a member regularly
conducts the business of effecting any transactions in, or inducing or
attempting to induce the purchase or sale of, any security, or is held
out as such; \21\ or (2) any location that is responsible for
supervising the activities of persons associated with the member at one
or more non-branch locations of the member.\22\ A branch office is
either ``supervisory'' (i.e., it ``supervises one or more non-branch
locations'') or ``non-supervisory'' (i.e., it ``does not supervise one
or more non-branch locations'').\23\ The branch office's type dictates
the frequency of its inspection cycle: a supervisory branch office must
be inspected at least annually,\24\ and a non-supervisory branch office
must be inspected at least every three years.\25\
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    \21\ FINRA Rule 3110(f)(2)(A).
    \22\ FINRA Rule 3110(f)(2)(B).
    \23\ See Notice at 20573 (``[A]ny 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).''); FINRA Rule 3110(c)(1)(B)
(``Each member shall inspect at least every three years every branch
office that does not supervise one or more non-branch locations.'').
    \24\ FINRA Rule 3110(c)(1)(A) (``Each member shall inspect at
least annually . . . any branch office that supervises one or more
non-branch locations.'').
    \25\ FINRA Rule 3110(c)(1)(B) (``Each member shall inspect at
least every three years every branch office that does not supervise
one or more non-branch locations.'').
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b. Office of Supervisory Jurisdiction
    A branch office may be further designated as an OSJ. An OSJ is any
office of a member at which any one or more of the following functions
take place: (1) order execution or market making; (2) structuring of
public offerings or private placements; (3) maintaining custody of
customers' funds or securities; (4) final acceptance (approval) of new
accounts on behalf of the member; (5) review and endorsement of
customer orders pursuant to Rule 3110(b)(2); \26\ (6) final approval of
retail communications for use by persons associated with the member
pursuant to Rule 2210(b)(1), except for an office that solely conducts
final approval of research reports; \27\ or (7) having responsibility
for supervising the activities of persons associated with the member at
one or more other branch offices of the member.\28\ If a location
satisfies any one of those criteria, it is an OSJ that must be
inspected at least annually.\29\
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    \26\ FINRA Rule 3110(b)(2) provides that ``[t]he supervisory
procedures required by [Rule 3110(b) (Written Procedures)] shall
include procedures for the review by a registered principal,
evidenced in writing, of all transactions relating to the investment
banking or securities business of the member.''
    \27\ ``In general, with some exceptions, paragraph (b)(1) of
Rule 2210 (Communications with the Public) requires that an
appropriately qualified registered principal approve each retail
communication prior to use or filing with FINRA.'' Notice at 20574
n.57.
    \28\ FINRA Rule 3110(f)(1).
    \29\ See FINRA Rule 3110(c)(1)(A). In 1988, the National
Association of Securities Dealers (``NASD,'' the predecessor to
FINRA) stated that the amended OSJ definition, among other proposed
amendments, focused on creating a ``supervisory `chain of command,'
in which qualified supervisory personnel are appointed to carry out
the firm's supervisory obligations . . . .'' See Notice at 20572
(quoting NASD Notice to Members 88-11 (Feb. 8, 1988), https://www.finra.org/rules-guidance/notices/88-11).
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c. Non-Branch Locations
    FINRA explained that seven types of locations--often referred to as
``unregistered offices'' or ``non-branch locations''--are excluded from
the definition of ``branch office.'' \30\ Member firms must inspect
their non-branch locations on a regular periodic schedule, presumed to
be at least every three years.\31\
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    \30\ See Notice at 20574; FINRA Rule 3110(f)(2)(A)(i)-(vii)
(identifying seven exclusions from the definition of branch office).
    \31\ See FINRA Rules 3110(c)(1)(C) (stating that ``[i]n
establishing such schedule, the member shall consider the nature and
complexity of the securities activities for which the location is
responsible and the nature and extent of contact with customers. The
member's written supervisory and inspection procedures shall set
forth the schedule and an explanation regarding how the member
determined the frequency of the examination.'') and 3110.13 (stating
that ``[i]n establishing a non-branch location inspection schedule,
there is a general presumption that a non-branch location will be
inspected at least every three years, even in the absence of any
indicators of irregularities or misconduct (i.e., ``red flags''). If
a member establishes a longer periodic inspection schedule, the
member must document in its written supervisory and inspection
procedures the factors used in determining that a longer periodic
inspection cycle is appropriate.'').
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    Two of the seven exclusions address residential locations: the
primary residence exclusion and the non-primary residence exclusion.
The primary residence exclusion \32\ excludes from registration as a
branch office any non-supervisory \33\ location that is an associated
person's primary residence, provided that: (1) only one associated
person, or multiple associated persons who reside at that location and
are

members of the same immediate family, conduct business at the location;
(2) the location is not held out to the public as an office, and the
associated person does not meet with customers at the location; (3)
neither customer funds nor securities are handled at that location; (4)
the associated person is assigned to a designated branch office, and
such designated branch office is reflected on all business cards,
stationery, retail communications, and other communications to the
public by such associated person; (5) the associated person's
correspondence and communications with the public are subject to the
member firm's supervision in accordance with Rule 3110; (6) electronic
communications (e.g., email) are made through the member's electronic
system; (7) all orders are entered through the designated branch office
or an electronic system established by the member that is reviewable at
the branch office; (8) written supervisory procedures pertaining to
supervision of sales activities conducted at the residence are
maintained by the member; and (9) a list of the residence locations is
maintained by the member.\34\
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    \32\ FINRA Rule 3110(f)(2)(A)(ii).
    \33\ See supra note 23 and corresponding text.
    \34\ See FINRA Rule 3110(f)(2)(ii)(a) through (i).
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    The non-primary residence exclusion \35\ excludes from registration
as a branch office any non-supervisory location, ``other than a primary
residence, that is used for securities business for less than 30
business days in any one calendar year, provided [that] the member
complies with'' the conditions described in (1) through (8) of the
primary residence exclusion (detailed above).\36\ FINRA explained that
the non-primary residence exclusion typically applies to a vacation or
second home.\37\
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    \35\ FINRA Rule 3110(f)(2)(A)(iii).
    \36\ Id.
    \37\ See NASD Notice to Members 06-12 (Mar. 21, 2006), https://www.finra.org/rules-guidance/notices/06-12; see also Notice at
20574.
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    Notwithstanding these residential exclusions, a private residence
is considered a branch office if it ``is responsible for supervising
the activities of persons associated with the member at one or more
non-branch locations of the member,'' \38\ and it is an OSJ if it
performs any of the seven functions associated with OSJs.\39\
Therefore, a primary or non-primary residence is subject to
registration and annual inspection if the associated person's
activities at the residence cause it to be an OSJ or supervisory branch
office.\40\
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    \38\ FINRA Rule 3110(f)(2)(B).
    \39\ FINRA Rule 3110(f)(1).
    \40\ See FINRA Rules 3110(a)(3) and 3110(c)(1)(A).
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2. FINRA's Stated Reasons for the Proposed Rule Change
    FINRA stated that during the COVID-19 pandemic, many member firms
developed ``hybrid workforce models'' in which ``some employees may
work permanently in an alternative location[,] such as a private
residence, other employees may spend some time in alternative locations
and some time on-site in a conventional office setting, and some may
work on-site full time.'' \41\ FINRA ``believes this model will
endure'' notwithstanding the end of the COVID-19 Public Health
Emergency in May 2023.\42\ Many of the supervisors who began working
from home during the pandemic continue to do so, at least on a part-
time basis.\43\ Under the current regulatory framework, those
supervisors likely conduct activities that would require the
registration and designation of their private residences as supervisory
branch offices or OSJs under Rule 3110(a)(3) and thus would require
inspections at least annually under Rule 3110(c)(1)(A).\44\
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    \41\ Notice at 20579.
    \42\ See Notice at 20569; Centers for Disease Control and
Prevention, COVID-19: End of Public Health Emergency (PHE)
Declaration (Sept. 12, 2023), https://www.cdc.gov/coronavirus/2019-ncov/your-health/end-of-phe.html.
    \43\ See Notice at 20575 (``Firms responded that they relied
extensively on technology to support their effective transition to
the remote work environment and enhance the supervision of
geographically dispersed associated persons, many of whom have been
working from home since early 2020 and may continue to do so in some
manner in the current environment.''); FINRA Regulatory Notice 21-44
(Dec. 2021), https://www.finra.org/rules-guidance/notices/21-44
(``To mitigate the impacts of the pandemic, member firms have relied
heavily on remote offices and alternative work arrangements (e.g.,
working from home or a backup or recovery location) for a broad
range of personnel.'').
    \44\ See FINRA Rules 3110(a)(3) and 3110(c)(1)(A).
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    During the pandemic, FINRA temporarily suspended members'
requirements to comply with the registration and inspection obligations
applicable to new locations. Specifically, in March 2020, FINRA
temporarily suspended the requirement for member firms to submit branch
office registration applications on Form BR (Uniform Branch Office
Registration Form) for any newly opened temporary office locations or
space-sharing arrangements established because of the pandemic (the
``Form BR Temporary Suspension'').\45\ The Form BR Temporary Suspension
remains in effect. But when it ends, FINRA believes that current FINRA
rules would require member firms to ``either curtail activities at
residential locations or register large numbers of residential
locations as OSJs or supervisory branch offices.'' \46\
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    \45\ See FINRA Regulatory Notice 20-08 (Mar. 2020) (``Regulatory
Notice 20-08''), https://www.finra.org/rules-guidance/notices/20-08;
see also Notice at 20569 n.7.
    \46\ See Notice at 20579.
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    As set forth above, registering a private residence as an OSJ or
supervisory branch office would trigger a corresponding annual
inspection requirement.\47\ FINRA explained that the proposed rule
change would alter the regulatory framework to accommodate hybrid
workforce models and mitigate the costs associated with registering and
inspecting so many private residences.\48\ FINRA stated that the
proposed rule change ``would allow firms to effectively and more
efficiently carry out their supervisory responsibilities to review the
activities of each office or location while preserving investor
protections.'' \49\
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    \47\ FINRA Rule 3110(c)(1)(A).
    \48\ Notice at 20575, 20579 (explaining that the proposed rule
change would reduce, but not eliminate, the need to register and
inspect residential locations as supervisory branch offices or
OSJs).
    \49\ Id. at 20569.
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B. The Proposed Rule Change

    The proposed rule change would adopt new Supplementary Material .19
(Residential Supervisory Location) under FINRA Rule 3110 (Supervision)
and would treat a private residence at which an associated person
engages in certain supervisory activities as a non-branch location,
subjecting it to inspections on a regular periodic schedule (presumed
to be at least every three years) instead of the annual schedule
required for OSJs and supervisory branch offices.\50\ To help mitigate
the potential risks associated with a less frequent inspection cycle,
the proposed rule change also would establish safeguards that limit RSL
designation to certain firms and locations based on criteria designed
to minimize risk.\51\ These safeguards would: (1) exclude certain
member firms from designating any location as an RSL; \52\ (2) exclude
certain locations from designation as an RSL; \53\ (3) impose certain
conditions that a member firm and/or its candidate locations must meet
prior to RSL

designation; \54\ (4) require any member firm that elects to designate
an RSL to provide certain data to FINRA on a regular basis; \55\ and
(5) require any eligible member firm to develop a reasonable risk-based
approach to designating a location as an RSL and conduct and document a
risk assessment for the associated person assigned to that location
prior to designating a location as an RSL.\56\
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    \50\ See id. at 20568.
    \51\ See id. at 20568-69 (``FINRA believes the proposal strikes
an appropriate balance to preserve investor protection while
developing a risk-based approach for designating residential
supervisory locations that includes key safeguards with respect to,
among other things, books and records of the member, while excluding
locations where higher risk activities may take place or associated
persons that may pose higher risk are assigned.'').
    \52\ See proposed Rule 3110.19(b).
    \53\ See proposed Rule 3110.19(c).
    \54\ See proposed Rule 3110.19(a).
    \55\ See proposed Rule 3110.19(d).
    \56\ See proposed Rule 3110.19(e).
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1. Member Firm Ineligibility Criteria
    Under proposed Rule 3110.19(b), a member firm would be ineligible
to designate any of its locations as an RSL if the member: (1) is
currently designated as a Restricted Firm under Rule 4111 (Restricted
Firm Obligations) (hereinafter, a ``Restricted Firm''); \57\ (2) is
currently designated as a Taping Firm under Rule 3170 (Tape Recording
of Registered Persons by Certain Firms) (hereinafter, a ``Taping
Firm''); \58\ (3) is currently undergoing, or is required to undergo, a
review under Rule 1017(a)(7) as a result of one or more associated
persons at such location (hereinafter, a ``continuing membership
review''); \59\ (4) receives a notice from FINRA pursuant to Rule 9557
(Procedures for Regulating Activities under Rule 4110 (Capital
Compliance), Rule 4120 (Regulatory Notification and Business
Curtailment), or Rule 4130 (Regulation of Activities of Section 15C
Members Experiencing Financial and/or Operational Difficulties)),
unless FINRA has otherwise permitted activities in writing pursuant to
such rule; \60\ (5) is or becomes suspended by FINRA (hereinafter, a
``suspended firm''); \61\ (6) based on the date in the Central
Registration Depository (``CRD''), had its FINRA membership become
effective within the prior twelve months; \62\ or (7) is or has been
found within the past three years by the SEC or FINRA to have violated
Rule 3110(c).\63\
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    \57\ See proposed Rule 3110.19(b)(1).
    \58\ See proposed Rule 3110.19(b)(2).
    \59\ See proposed Rule 3110.19(b)(3). FINRA Rule 1017(a)(7)
``requires a member firm to file an application for continuing
membership when a natural person seeking to become an owner, control
person, principal[,] or registered person of the member firm has, in
the prior five years, one or more defined `final criminal matters'
or two or more `specified risk events' unless the member firm has
submitted a written request to FINRA seeking a materiality
consultation for the contemplated activity. Rule 1017(a)(7) applies
whether the person is seeking to become an owner, control person,
principal[,] or registered person at the person's current member
firm or at a new member firm.'' Notice at 20577 n.94 (citing FINRA
Regulatory Notice 21-09 (Mar. 2021) (announcing FINRA's adoption of
rules to address brokers with a significant history of misconduct)).
    \60\ See proposed Rule 3110.19(b)(4).
    \61\ See proposed Rule 3110.19(b)(5).
    \62\ See proposed Rule 3110.19(b)(6).
    \63\ See proposed Rule 3110.19(b)(7).
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    FINRA stated that these exclusions address ``attributes of a member
firm that FINRA believes are more likely to raise investor protection
concerns . . . .'' \64\ For example, FINRA explained that ``a member
firm that is experiencing issues complying with its capital
requirements or that has been suspended by FINRA is more likely to face
significant operational challenges that may negatively impact the
firm's overall supervision of its associated persons.'' \65\ Similarly,
FINRA stated that ``a firm that has been a FINRA member for less than
12 months is often still implementing its business plan and developing
a supervisory system appropriate[ly] tailored to the firm's specific
attributes and structure.'' \66\ FINRA also stated that firms with
recent Rule 3110(c) violations have ``demonstrated challenges in
developing or maintaining a robust inspection program.'' \67\
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    \64\ Notice at 20576.
    \65\ Id. at 20577.
    \66\ Id.
    \67\ Id.
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2. Location Ineligibility Criteria
    A location of an otherwise eligible member firm \68\ would be
ineligible for RSL designation if one or more associated persons at the
location: (1) is a designated supervisor who has less than one year of
direct supervisory experience with the member, or an affiliate or
subsidiary of the member that is registered as a broker-dealer or
investment adviser; \69\ (2) is functioning as a principal for a
limited period in accordance with Rule 1210.04 (Registration
Requirements); \70\ (3) is subject to a mandatory heightened
supervisory plan under the rules of the SEC, FINRA, or a state
regulatory agency; \71\ (4) is statutorily disqualified, unless such
disqualified person (A) has been approved (or is otherwise permitted
pursuant to FINRA rules and the federal securities laws) to associate
with a member and (B) is not subject to a mandatory heightened
supervisory plan under proposed Rule 3110.19(c)(3) or otherwise as a
condition to approval or permission for such association; \72\ (5) has
an event in the prior three years that required a ``yes'' response to
any item in Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D,
and 14E on Form U4 (Uniform Application for Securities Industry
Registration or Transfer Registration) (``Form U4''); \73\ or (6) has
been notified in writing that such associated person is now subject to
any Investigation \74\ or Proceeding,\75\ as such terms are defined for
Form U4, by the SEC, a self-regulatory organization, including FINRA,
or state securities commission (or agency or office performing like
functions) (each, a ``Regulator'') expressly alleging they have failed
reasonably to supervise another person subject to their supervision
with a view to preventing the violation of any provision of the
Securities Act of 1933 (``Securities Act''), the Exchange Act, the
Investment Advisers Act of 1940 (``Investment Advisers Act''), the
Investment Company Act of 1940 (``Investment Company Act''), the
Commodity Exchange Act, any state law pertaining to the regulation of
securities, or any rule or regulation under any of such acts or laws,
or any of the rules of the Municipal Securities Rulemaking Board
(``MSRB'') or other self-regulatory organization, including FINRA.\76\

Nonetheless, this sixth exclusion would permit an affected location to
be designated or redesignated as an RSL upon the earlier of: (1) the
member's receipt of written notification from the applicable Regulator
that such Investigation has concluded without further action; or (2)
one year from the date of the last communication from such Regulator
relating to such Investigation.\77\ This relief would not apply to an
associated person subject to a covered Proceeding.\78\
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    \68\ Id. at 20578 (``Proposed Rule 3110.19 would not be
available to a member firm or private residence that meets any of
the ineligibility criteria in proposed paragraphs (b) or (c),
respectively, under Rule 3110.19 even with the safeguards and
limitations listed in proposed Rule 3110.19(a).'').
    \69\ See proposed Rule 3110.19(c)(1).
    \70\ See proposed Rule 3110.19(c)(2).
    \71\ See proposed Rule 3110.19(c)(3).
    \72\ See proposed Rule 3110.19(c)(4).
    \73\ See proposed Rule 3110.19(c)(5). Form U4's Questions
14A(1)(a), 14A2(a), 14B(1)(a), and 14B2(a) elicit reporting of
criminal convictions, and Questions 14C, 14D, and 14E pertain to
regulatory action disclosures. See Notice 20577 n.97.
    \74\ As defined for purposes of Form U4, an Investigation
``[i]ncludes: (a) grand jury investigations; (b) U.S. Securities and
Exchange Commission investigations after the `Wells' notice has been
given; (c) FINRA investigations after the `Wells' notice has been
given or after a person associated with a member, as defined by The
FINRA By-Laws, has been advised by the staff that it intends to
recommend formal disciplinary action; (d) NYSE Regulation
investigations after the `Wells' notice has been given or after a
person over whom NYSE Regulation has jurisdiction, as defined in the
applicable rules, has been advised by NYSE Regulation that it
intends to recommend formal disciplinary action; (e) formal
investigations by other SROs; or (f) actions or procedures
designated as investigations by jurisdictions. The term
investigation does not include subpoenas, preliminary or routine
regulatory inquiries or requests for information, deficiency
letters, `blue sheet' requests or other trading questionnaires, or
examinations.'' FINRA, Form U4 Explanation of Terms at 2 (Apr.--
Version 2014.1), https://www.finra.org/sites/default/files/AppSupportDoc/p468051.pdf.
    \75\ As defined for purposes of Form U4, a Proceeding is ``[a]
formal administrative or civil action initiated by a governmental
agency, self-regulatory organization or a foreign financial
regulatory authority; a felony criminal indictment or information
(or equivalent formal charge), or a misdemeanor criminal information
(or equivalent formal charge), but does not include an arrest or
similar charge effected in the absence of a formal criminal
indictment or information (or equivalent formal charge).'' Id. at 3.
    \76\ See proposed Rule 3110.19(c)(6); Amendment No. 1.
    \77\ See id.
    \78\ See id.
---------------------------------------------------------------------------

    FINRA stated that these exclusions ``reflect the appropriate
limitations on the private residences that can be designated'' as an
RSL.\79\ For example, FINRA stated that ``specified disclosures on Form
U4 pertaining to criminal convictions[,] . . . final regulatory
action[,] and the imposition of a mandatory heightened supervisory plan
are indicia of increased risk to investors at some firms and locations
. . . .'' \80\ FINRA further explained that requiring one-year of
direct supervisory experience recognizes that ``a new supervisor at the
current member firm may need time to become knowledgeable about that
firm's systems, people, products, and overall compliance culture,''
even if that new supervisor comes to the member firm with prior
supervisory experience from another firm.\81\ But FINRA also stated
that affiliates and subsidiaries of FINRA members ``may share systems
and have similar compliance cultures to meet their obligations under
federal securities laws.'' \82\ For that reason, FINRA stated that the
proposed rule change would ``permit the one-year supervisory experience
minimum to be satisfied by also counting supervisory experience accrued
at an affiliate or subsidiary of the member firm that is registered as
a broker-dealer or investment adviser.'' \83\
---------------------------------------------------------------------------

    \79\ Notice at 20578.
    \80\ Id.
    \81\ Id.
    \82\ Amendment No. 1 at 5.
    \83\ Id. at 4.
---------------------------------------------------------------------------

3. Conditions for Designation as a Residential Supervisory Location
    The proposed rule change includes ten conditions that an eligible
member firm and its eligible location must meet prior to designating
the location as an RSL. Under proposed Rule 3110.19(a), a location that
is the associated person's private residence where supervisory
activities \84\ are conducted would be considered a non-branch
location, provided that: (1) only one associated person, or multiple
associated persons who reside at that location and are members of the
same immediate family, conduct business at the location; \85\ (2) the
location is not held out to the public as an office; \86\ (3) the
associated person does not meet with customers or prospective customers
at the location; \87\ (4) any sales activity that takes place at the
location complies with the conditions set forth under Rule
3110(f)(2)(A)(ii) or (iii); \88\ (5) neither customer funds nor
securities are handled at that location; \89\ (6) the associated person
is assigned to a designated branch office, and such designated branch
office is reflected on all business cards, stationery, retail
communications, and other communications to the public by such
associated person; \90\ (7) the associated person's correspondence and
communications with the public are subject to the member firm's
supervision in accordance with Rule 3110; \91\ (8) the associated
person's electronic communications (e.g., email) are made through the
member's electronic system; \92\ (9)(A) the member has a recordkeeping
system to make, keep current, and preserve records required to be made,
kept current, and preserved under applicable securities laws and
regulations, FINRA rules, and the member's own written supervisory
procedures under Rule 3110, (B) such records are not physically or
electronically maintained and preserved at the office or location, and
(C) the member has prompt access to such records; \93\ and (10) the
member has determined that its surveillance and technology tools are
appropriate to supervise the types of risks presented by each RSL, and
that these tools may include but are not limited to: (A) firm-wide
tools, such as an electronic recordkeeping system, electronic
surveillance of email and correspondence, electronic trade blotters,
regular activity-based sampling reviews, and tools for visual
inspections, (B) tools specific to the RSL based on the activities of
the associated person assigned to the location, products offered, and
restrictions on the activity of the RSL, and (C) system tools, such as
secure network connections and effective cybersecurity protocols.\94\
---------------------------------------------------------------------------

    \84\ Proposed Rule 3110.19(a) indicates that the ``supervisory
activities'' include ``those described in Rule 3110(f)(1)(D) through
(G) or in Rule 3110(f)(2)(B).'' The supervisory activities
identified in FINRA Rule 3110(f)(1)(D) through (G) include: final
acceptance (approval) of new accounts on behalf of the member;
review and endorsement of customer orders, pursuant to FINRA Rule
3110(b)(2); final approval of retail communications for use by
persons associated with the member, pursuant to Rule 2210(b)(1),
except for an office that solely conducts final approval of research
reports; and, responsibility for supervising the activities of
persons associated with the member at one or more other branch
offices of the member. FINRA Rule 3110(f)(2)(B) addresses ``any
location that is responsible for supervising the activities of
persons associated with the member at one or more non-branch
locations of the member . . . .''
    \85\ See proposed Rule 3110.19(a)(1).
    \86\ See proposed Rule 3110.19(a)(2).
    \87\ See proposed Rule 3110.19(a)(3).
    \88\ See proposed Rule 3110.19(a)(4). Rule 3110(f)(2)(A)(ii) and
(iii) identify the conditions for the primary and non-primary
residence exclusions. For a discussion of those exclusions, see
Section II(A)(1)(c) above.
    \89\ See proposed Rule 3110.19(a)(5).
    \90\ See proposed Rule 3110.19(a)(6).
    \91\ See proposed Rule 3110.19(a)(7).
    \92\ See proposed Rule 3110.19(a)(8).
    \93\ See proposed Rule 3110.19(a)(9).
    \94\ See proposed Rule 3110.19(a)(10).
---------------------------------------------------------------------------

    FINRA stated that these conditions ``would strengthen a firm's
ability to monitor the supervisory activities occurring at [an RSL] and
act to lower the overall risks associated with such location . . . .''
\95\ FINRA explained that the first eight conditions are derived from
those for the primary and non-primary residence exclusions, ``which
align with the SEC's Books and Records Rules [and] were developed in
coordination with other [self-regulatory organizations] and state
securities regulators.'' \96\ For that reason, FINRA stated that member
firms have ``experience with monitoring and supervising these
conditions.'' \97\ FINRA coupled those eight conditions with a new
books and records requirement and a condition addressing technology and
surveillance tools.\98\
---------------------------------------------------------------------------

    \95\ Notice at 20576.
    \96\ Id.; see FINRA Rule 3110(f)(2)(A)(ii) and (iii).
    \97\ Notice at 20576.
    \98\ Id.
---------------------------------------------------------------------------

4. Obligation To Provide List of RSLs to FINRA
    Under proposed Rule 3110.19(d), any member that elects to designate
any location of the member as an RSL would be required to ``provide
FINRA with a current list of all locations designated as RSLs by the
15th day of the month following each calendar quarter in the manner and
format (e.g., through an electronic process or such other process) as
FINRA may prescribe.'' \99\ FINRA acknowledged that the CRD system
\100\

currently provides access to ``information regarding the offices and
locations (registered and unregistered) to which associated persons
required to be registered are assigned,'' but it explained that
``requiring member firms to affirmatively provide this information to
FINRA through a scheduled process would make this information more
readily accessible to regulators.'' \101\
---------------------------------------------------------------------------

    \99\ Proposed Rule 3110.19(d). FINRA stated that it is
``exploring ways to provide this information to state regulators in
a practical format.'' Notice at 20578 n.108.
    \100\ The CRD system is the central licensing and registration
system used by the U.S. securities industry and its regulators. In
general, information in the CRD system is obtained through the
uniform registration forms that firms and regulatory authorities
complete as part of the securities industry registration and
licensing process. The uniform registration forms are Form BD
(Uniform Application for Broker-Dealer Registration), Form BDW
(Uniform Request for Broker-Dealer Withdrawal), Form BR (Uniform
Branch Office Registration Form), Form U4, Form U5 (Uniform
Termination Notice for Securities Industry Registration), and Form
U6 (Uniform Disciplinary Action Reporting Form). These forms,
particularly Forms U4 and U5, collect administrative, regulatory,
criminal history, customer complaint, and other information about
brokers, while Form BD collects similar information about broker-
dealer firms. FINRA, state, and other regulatory authorities use
this information in connection with their licensing and regulatory
activities, and member firms use this information to help them make
informed employment decisions. See Exchange Act Release No. 88760
(Apr. 28, 2020), 85 FR 26502, 26503 (May 4, 2020) (File No. SR-
FINRA-2020-012).
    \101\ Notice at 20578.
---------------------------------------------------------------------------

5. Risk Assessment
    Under proposed Rule 3110.19(e), a member would be required to
``develop a reasonable risk-based approach to designating an office or
location as an RSL[] and conduct and document a risk assessment for the
associated person assigned to that office or location'' prior to
designating that location as an RSL (hereinafter, a ``person-specific
risk assessment'').\102\ The proposed rule change would require
documentation of the factors considered, including, among others,
whether the associated person at such office or location is now subject
to: (1) customer complaints, taking into account the volume and nature
of the complaints; (2) heightened supervision other than where such
office or location is ineligible for RSL designation under proposed
Rule 3110.19(c)(3); (3) any failure to comply with the member's written
supervisory procedures; (4) any recordkeeping violation; and (5) any
regulatory communications from a Regulator indicating that the
associated person at such office or location failed reasonably to
supervise another person subject to their supervision, including but
not limited to, subpoenas, preliminary or routine regulatory inquiries
or requests for information, deficiency letters, ``blue sheet''
requests or other trading questionnaires, or examinations.\103\
Furthermore, the proposed rule change would require the member to
account for ``any higher risk activities that take place [at] or a
higher risk associated person that is assigned to that office or
location.'' \104\
---------------------------------------------------------------------------

    \102\ Proposed Rule 3110.19(e).
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

    ``Consistent with [a firm's] obligation under Rule 3110(a),'' the
proposed rule change also would provide that ``the member's supervisory
system must take into consideration any indicators of irregularities or
misconduct (i.e., `red flags') when designating an office or location
as an RSL.'' \105\ Further, the proposed rule change would provide that
``[r]ed flags should . . . be reviewed in determining whether it is
reasonable to maintain the RSL designation of such office or location
in accordance with the requirements of [proposed Rule 3110.19] and
[that] the member should consider evidencing steps taken to address
those red flags where appropriate.'' \106\
---------------------------------------------------------------------------

    \105\ Id.
    \106\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment
letters, and FINRA's responses to the comments, the Commission finds
that the proposed rule change, as modified by Amendment Nos. 1 and 2,
is consistent with the requirements of the Exchange Act and the rules
and regulations thereunder that are applicable to a national securities
association.\107\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange Act,
which requires, among other things, that FINRA rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.\108\
---------------------------------------------------------------------------

    \107\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \108\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Pursuant to FINRA Rule 3110, member firms must ``establish and
maintain a system to supervise the activities of each associated person
that is reasonably designed to achieve compliance with applicable
securities laws and regulations, and with applicable FINRA rules.''
\109\ Rule 3110 provides that ``[e]ach member shall establish and
maintain supervisory procedures that must take into consideration,
among other things, the firm's size, organizational structure, scope of
business activities, number and location of the firm's offices, the
nature and complexity of the products and services offered by the firm,
the volume of business done, the number of associated persons assigned
to a location, the disciplinary history of registered representatives
or associated persons, and any indicators of irregularities or
misconduct (i.e., `red flags'), etc.'' \110\ Rule 3110(c) further
requires member firms to conduct internal inspections of each location,
and it identifies the presumed frequency of inspection for various
types of locations.\111\ Importantly, Rule 3110 provides that ``[f]inal
responsibility for proper supervision . . . rest[s] with the member.''
\112\
---------------------------------------------------------------------------

    \109\ FINRA Rule 3110(a).
    \110\ FINRA Rule 3110.12.
    \111\ FINRA Rule 3110(c)(1).
    \112\ See id. Rule 3110(a)(1) through (7) identify certain
minimum requirements for the reasonably designed supervisory system.
See generally FINRA Rule 3110.
---------------------------------------------------------------------------

    The proposed rule change is consistent with these obligations. It
permits certain eligible firms to inspect certain eligible locations on
a regular periodic schedule (presumed to be at least every three years)
instead of an annual schedule. If an eligible member firm and its
eligible location comply with various conditions and safeguards--
including a person-specific risk assessment--designed to minimize
risks, the proposed rule change would provide this additional
flexibility for the member firm in structuring its reasonably designed
supervisory system. But it does not automatically transform residences
into RSLs subject to less frequent inspection. Nor does it require
firms to treat all residences where certain supervisory activities are
performed as RSLs. It only permits a member firm to consider whether an
RSL designation for a specific location would be appropriate in light
of the rule's requirements and the member firm's broader obligation to
establish and maintain a reasonably designed supervisory system.
Accordingly, and as explained in more detail below, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(6) of the Exchange Act.

A. Residential Supervisory Location Terms and Conditions

    The proposed rule change has various terms and conditions that
limit the RSL designation to certain firms and locations. The
Commission addresses the terms and conditions, and any related
comments, in turn.
1. Member Firm Ineligibility Criteria
    As stated above, under proposed Rule 3110.19(b), a member firm
would be ineligible to designate any of its locations as an RSL if the
member is subject to any of seven firm-level

eligibility exclusions. The seven exclusions address members that are
designated as Restricted Firms under FINRA Rule 4111; members
designated as Taping Firms under FINRA Rule 3170; members undergoing,
or required to undergo, a continuing membership review under FINRA Rule
1017(a)(7) as a result of one or more associated persons at such
location; firms that have received a notice from FINRA pursuant to
FINRA Rule 9557, unless FINRA has otherwise permitted activities in
writing pursuant to such rule; firms suspended by FINRA; firms that
have been FINRA members for less than one year; and firms that have
been found within the past three years by the SEC or FINRA to have
violated Rule 3110(c).\113\
---------------------------------------------------------------------------

    \113\ See supra notes 57 through 63 and accompanying text.
---------------------------------------------------------------------------

    One commenter specifically supported the inclusion of the firm-
level exclusions covering suspended firms and firms that have been
FINRA members for less than one year.\114\ No commenter opposed any of
the proposed seven firm-level eligibility exclusions.
---------------------------------------------------------------------------

    \114\ Theresa J. Manderski, SVP, Chief Compliance Officer--BD,
Davenport & Company LLC, to the Commission, dated Apr. 27, 2023, at
2 (``Davenport'').
---------------------------------------------------------------------------

    FINRA reasonably determined to exclude a member firm from
participation in the Pilot if the member firm is subject to any of the
six proposed firm-level ineligibility criteria. Each of these criteria
identifies--and excludes--member firms with characteristics that may
indicate increased risk of non-compliance. Specifically, Restricted
Firms have a history of misconduct or a high concentration of
registered persons with a significant history of misconduct that gave
rise to the designation,\115\ while Taping Firms are subject to
heightened regulatory oversight because they employ a ``significant
number of registered persons [who] previously worked for firms that
have been expelled from the industry or have had their registrations
revoked for inappropriate sales practices.'' \116\ Moreover, a member
firm that is required to undergo a continuing membership review
pursuant to FINRA Rule 1017(a)(7) has a person at the proposed RSL who
is seeking to become an owner, control person, principal, or registered
person of the member firm who has, in the previous five years, one or
more ``final criminal matters'' or two or more ``specified risk
events.'' \117\ Finally, if the Commission or FINRA has found that a
member firm has violated Rule 3110(c) within the past three years, the
member firm has demonstrated a recent difficultly implementing a
compliant inspection program.\118\ Member firms covered by these
exclusions therefore have a history of non-compliance or have
registered representatives who have a history of (or come from a member
firm with a history of) non-compliance. It is therefore reasonable for
FINRA to determine that member firms that fall into these categories
are not eligible to designate RSLs and exercise the flexibility that
the proposed rule change provides in designing a member firm's
supervisory system.
---------------------------------------------------------------------------

    \115\ Proposed Rule 3110.19(b)(1); see FINRA, Rule 4111
Frequently Asked Questions, https://www.finra.org/rules-guidance/
key-topics/protecting-investors-from-misconduct/
faq#:~:text=A%20Restricted%20Firm%20is20a,such%20in%20a%20Department%
20decision.
    \116\ Proposed Rule 3110.19(b)(2); FINRA, FINRA Taping Rule
(FINRA Rule 3170), https://www.finra.org/rules-guidance/guidance/taping-rule.
    \117\ Proposed Rule 3110.19(b)(3) (exclusion applicable where
the person responsible for triggering a continuing membership review
is located at the proposed RSL); FINRA Rule 1017(a)(7). ``The term
`final criminal matter' means a criminal matter that resulted in a
conviction of, or plea of guilty or nolo contendere (`no contest')
by, a person that is disclosed, or is or was required to be
disclosed, on the applicable Uniform Registration Forms.'' FINRA
Rule 1011(h). ``Specified risk events'' include certain investment-
related, consumer-initiated (1) customer arbitration awards, (2)
civil judgments, (3) customer arbitration settlements, or (4) civil
litigation settlements. FINRA Rule 1011(p)(1), (2). ``Specified risk
events'' also include certain investment-related civil actions or
regulatory actions that result in (1) monetary sanctions for a
dollar amount at or above $15,000 or (2) a bar, expulsion,
revocation, recission, or suspension. See FINRA Rule 1011(p)(3),
(4).
    \118\ Proposed Rule 3110.19(b)(7).
---------------------------------------------------------------------------

    Furthermore, Rule 9557 notices are sent to member firms that are
experiencing financial or operational difficulties.\119\ Additionally,
suspension of a member firm by FINRA would be based on FINRA's
determination that the member firm has failed to comply with its
regulatory requirements or suspension is needed for the safety of
investors, creditors, or other members because of the member firm's
financial or operational difficulties.\120\ Such member firms raise
concerns about their ability to comply with their obligations and may
present risk to others. As such, it is reasonable to conclude that
these member firms should not be eligible for the proposed rule change
that is designed to afford member firms greater flexibility in
designing their supervisory systems.
---------------------------------------------------------------------------

    \119\ Proposed Rule 3110.19(b)(4); see FINRA Rule 9557
(Procedures for Regulating Activities Under Rules 4110, 4120 and
4130 Regarding a Member Experiencing Financial or Operational
Difficulties); see also FINRA Regulatory Notice 09-71 (Dec. 2009)
(announcing SEC approval of consolidated FINRA rules governing
financial responsibility), https://www.finra.org/rules-guidance/notices/09-71.
    \120\ Proposed Rule 3110.19(b)(5); A suspended firm may have
been suspended because of a violation of ``federal securities laws,
rules or regulations thereunder, the rules of the Municipal
Securities Rulemaking Board, or FINRA rules.'' FINRA Rule
8310(a)(3), (5); see FINRA Rule 9550 Series.
---------------------------------------------------------------------------

    Moreover, member firms that have been FINRA members for less than
12 months may need additional time to develop their supervisory and
compliance systems to effectively comply with applicable securities
laws and rules.\121\ This time period also provides FINRA and other
regulators with time to conduct inspections of new member firms to
determine their compliance with their regulatory obligations before
they may be eligible for the flexibility provided in the proposed
rule.\122\ It is therefore reasonable for FINRA to determine that firms
must be operating for a certain amount of time before they can be
eligible to designate RSLs. One year provides a reasonable balance
between providing member firms with the flexibility for supervision
allowed in the proposed rule and concerns that member firms need to
develop experience operating before they are given such flexibility. In
sum, these proposed exclusions limit RSL designation to certain member
firms without indicia that their business operations, supervisory
system, or inspection programs may lack the maturity or safeguards to
fully address the potential risks associated with RSLs.\123\
---------------------------------------------------------------------------

    \121\ Proposed Rule 3110.19(b)(6).
    \122\ See Exchange Act Rule 15b2-2, 17 CFR 240.15b2-2 (generally
requiring inspection of a newly registered broker dealer within six
months for compliance with applicable financial responsibility rules
and within 12 months for all other applicable regulatory
requirements).
    \123\ Cf. Exchange Act Release No. 90635 (Dec. 10, 2020), 85 FR
81540 (Dec. 16, 2020) (Order Approving File No. SR-FINRA-2020-011 to
Address Brokers With a Significant History of Misconduct); Exchange
Act Release No. 92525 (July 30, 2021), 86 FR 42925 (Aug. 5, 2021)
and 86 FR 49589 (Sept. 3, 2021) (Corrected Order Approving File No.
SR-FINRA-2020-041 to Adopt FINRA Rules 4111 (Restricted Firm
Obligations) and 9561 (Procedures for Regulating Activities Under
Rule 4111)).
---------------------------------------------------------------------------

2. Location Ineligibility Criteria
    As stated above, proposed Rule 3110.19(c) would prohibit RSL
designation for any location if one or more associated persons at the
location is subject to any of six location-level eligibility
exclusions.\124\ These six exclusions address associated persons with
less than one year of direct supervisory experience with the member or
its affiliate or subsidiary, who are functioning as a principal for a

limited period in accordance with Rule 1210.04 (Registration
Requirements), who are subject to a mandatory heightened supervisory
plan, who are statutorily disqualified, who are required to make
disclosures about certain criminal and regulatory actions, or who are
subject to a covered regulatory investigation or proceeding.\125\ These
six exclusions are discussed in more detail below.
---------------------------------------------------------------------------

    \124\ Proposed Rule 3110.19(c).
    \125\ See supra notes 69 through 78 and accompanying text.
---------------------------------------------------------------------------

a. Less Than One Year of Supervisory Experience
    As originally proposed in the Notice, proposed Rule 3110.19(c)(1)
would have prohibited an RSL designation for any location with a
designated supervisor with less than one year of direct supervisory
experience with the member firm.\126\ Several commenters urged FINRA to
eliminate this exclusion.\127\ One commenter stated that requiring one
year of supervisory experience is ``not supported by any objective
evidence and can only be characterized as arbitrary.'' \128\ These
commenters indicated that this proposed exclusion would negatively
impact the employment opportunities for ``experienced supervisory
personnel who may switch firms or those associated persons who are
stand-outs at a firm [and secure a] promotion to a supervisory role.''
\129\ Another commenter emphasized that ``there is not a sufficient
investor protection justification for this language to offset the
substantial chilling effect on the transfer of experienced supervisory
personnel from one broker-dealer to another broker-dealer.'' \130\
Although one commenter acknowledged that a member firm could still
permit a new supervisor to work from a residence registered as an OSJ
or supervisory branch office in the first year, that commenter
emphasized that this proposed exclusion would ``create[] an additional
burden that could have a disparate impact on people with years of
experience who are reentering the workforce after time off to care for
children or other family members.'' \131\
---------------------------------------------------------------------------

    \126\ Notice at 20577.
    \127\ Letters from Eversheds Sutherland LLP on behalf of the
Committee of Annuity Insurers, to Secretary, Commission, dated Apr.
27, 2023, at 2 (``CAI''); David T. Bellaire, Esq., Executive Vice
President & General Counsel, Financial Services Institute, to
Secretary, Commission, dated Apr. 27, 2023, at 4-5 (``FSI''); Mark
Quinn, Director of Regulatory Affairs, Cetera Financial Group, to
Sherry Haywood, Assistant Secretary, Commission, dated Apr. 27,
2023, at 2-3 (``Cetera I''); Bernard V. Canepa, Managing Director &
Associate General Counsel, Securities Industry and Financial Markets
Association, to Vanessa Countryman, Secretary, Commission, dated
Apr. 27, 2023, at 2 n.6 (``SIFMA I'').
    \128\ Cetera I at 2.
    \129\ FSI at 4; see Cetera I at 2 (``Branches would be
ineligible for classification as an RSL simply because individual
supervisors who may have been employed by the member firm for many
years but who have previously either performed functions not
directly related to supervision were not formally designated as
supervisors. In addition, branches that house supervisors who have a
lot of experience in supervisory roles with other member firms but
have been employed by the current member firm for less than one year
would be ineligible for RSL status.'').
    \130\ CAI at 2; see FSI at 4 (``this proposed criterion would
place an unnecessary impediment on firms to hire and retain talent
in a competitive job market.''); Cetera I at 3 (``If a member firm
wishes to hire a supervisor in a remote location, the arbitrary one-
year requirement will prevent them from classifying their residence
as an RSL for at least one year, which may prevent the firm from
hiring the individual. [. . .] The benefits of this are minimal and
do not outweigh the burdens.'').
    \131\ FSI at 4.
---------------------------------------------------------------------------

    In the event that FINRA declined to delete the proposed exclusion,
some commenters requested modifications to the provision instead.\132\
For example, some commenters asked FINRA to modify the proposed
exclusion to permit RSL designation for locations with supervisors who
have as little as three months of direct supervisory experience with
the member firm.\133\ Alternatively, some commenters urged FINRA to
permit RSL designation for supervisors with less than one year of
supervisory experience with the member firm so long as the member firm
conducts an inspection of the RSL within the first year of
designation.\134\
---------------------------------------------------------------------------

    \132\ See FSI at 5; letter from Mark Seffinger, Chief Compliance
Officer, LPL Financial, to Vanessa Countryman, Secretary,
Commission, dated May 25, 2023, at 2 (``LPL I''); ASA 3.
    \133\ FSI at 5 (suggesting a ``three or six-month requirement''
if such a requirement remains in the proposed rule change); cf.
Cetera I at 2 (suggesting that the time period ``could as easily be
three months or three years.'').
    \134\ LPL I at 2 (``[W]e support a requirement for such [a]
branch to be inspected within the first year of designation versus
registering that location as an OSJ.''); letter from Christopher A.
Iacovella, President & Chief Executive Officer, American Securities
Association, to Vanessa Countryman, Secretary, Commission, dated May
25, 2023, at 3 (``ASA'') (``Rather than prohibiting new supervisors
from taking advantage of the definition, we believe firms should be
able to perform an onsite branch exam during the supervisor[']s
first year.'').
---------------------------------------------------------------------------

    In response, FINRA amended proposed Rule 3110.19(c)(1) to address
``the comments about the potential adverse impacts [this condition]
could have on hiring efforts.'' \135\ As modified by Amendment No. 1,
the proposed rule change would prohibit RSL designation for any
location with a designated supervisor who has less than one year of
direct supervisory experience with the member or an affiliate or
subsidiary of the member that is registered as a broker-dealer or
investment adviser.\136\ FINRA explained that this modification would
permit RSL designation for a location with a designated supervisor who
has, for example, six months of supervisory experience with the member
firm and six months of supervisory experience at the member's affiliate
or subsidiary that is registered as a broker-dealer or investment
adviser.\137\ FINRA stated that this modification ``recogniz[es] that
such entities may share systems and have similar compliance cultures to
meet their obligations under the federal securities laws.'' \138\ As
such, FINRA indicated that such supervisors should have sufficient
experience with the member firm's compliance systems.\139\
---------------------------------------------------------------------------

    \135\ FINRA Response I at 5.
    \136\ See proposed Rule 3110.19(c)(1); Amendment No. 1 at 4.
    \137\ FINRA Response I at 5.
    \138\ Id.
    \139\ See id. at 4-5.
---------------------------------------------------------------------------

    Five commenters supported the amended exclusion,\140\ and one of
them ``agree[d] that this amendment strikes an appropriate balance
between regulators' interest in high supervisory standards and industry
concerns about the impact on hiring efforts.'' \141\
---------------------------------------------------------------------------

    \140\ Letters from Bernard V. Canepa, Managing Director &
Associate General Counsel, Securities Industry and Financial Markets
Association, to Vanessa Countryman, Secretary, Commission, dated
Aug. 1, 2023, at 2 (``SIFMA II'') (indicating that the modified
language addresses ``concerns raised by the industry''); Gail
Merken, Chief Compliance Officer, Janet Dyer, Chief Compliance
Officer, John McGinty, Chief Compliance Officer, Fidelity
Investments, to Vanessa Countryman, Secretary, Commission, dated
Aug. 1, 2023, at 1 (``Fidelity II''); Jim McHale, Executive Vice
President, Head of WIM Compliance and Peter Macchio, Executive Vice
President, Head of CIB Compliance, Wells Fargo, to Vanessa
Countryman, Secretary, Commission, dated Aug. 1, 2023, at 2 (``Wells
Fargo'') (expressing appreciation for the amended proposal but
encouraging a future reassessment ``for experienced supervisors
[who] are switching to a new supervisory role at an unaffiliated
broker-dealer''); Jennifer Szaro, CRCP, Chief Compliance Officer,
XML Securities, LLC, et al., to Vanessa Countryman, Secretary,
Commission, dated July 29, 2023, at 1 (``XML'') (the amended
proposal ``applies a commonsense approach, in that if an associated
person has been working in either capacity the member will have a
basis to evaluate the associated person's working relationship and
conduct a reasonable risk assessment.''); Andrew Hartnett, NASAA
President and Deputy Commissioner, Iowa Insurance Division, North
American Securities Administrators Association, Inc., to Sherry
Haywood, Assistant Secretary, Commission, dated July 26, 2023, at 4
(``NASAA II'').
    \141\ NASAA II at 4.
---------------------------------------------------------------------------

    Three other commenters, on the other hand, opposed this proposed
exclusion.\142\ One of these three

commenters repeated its request to remove this proposed exclusion,
stating that it ``is arbitrary and not reasonably related to the
objectives it seeks to accomplish.'' \143\ Another of these commenters
preferred the exclusion as originally proposed in the Notice,
explaining that FINRA erroneously assumes that the compliance and
supervisory cultures are the same at all of a member's affiliates and
subsidiaries.\144\ The third commenter asked for a modification that
would permit RSL designation so long as the associated person at the
location has at least one year of any experience--either supervisory or
non-supervisory--with the member, its affiliates, or its
subsidiaries.\145\
---------------------------------------------------------------------------

    \142\ Letters from Michael Friedman, Head of Broker Dealer,
Albert Securities, LLC, to Vanessa Countryman, Secretary,
Commission, dated July 24, 2023, at 1-2 (``Albert''); Mark Quinn,
Director of Regulatory Affairs, Cetera Financial Group, to Vanessa
Countryman, Secretary, Commission, dated July 31, 2023, at 2
(``Cetera II''); Hugh Berkson, President, Public Investors Advocate
Bar Association, to Vanessa Countryman, Secretary, Commission, dated
July 31, 2023, at 3 (``PIABA II'').
    \143\ Cetera II at 2 (stating that ``[o]nce an individual passes
the necessary qualifications examinations, they [should be able to]
begin their duties immediately.'').
    \144\ PIABA II at 3 (``While some firms may share systems and
have similar compliance cultures with affiliates and subsidiaries,
many others [do not], especially given the size and complexity of
numerous financial firms. Yet, FINRA's adjustment permits disparate
entities to combine supervisory experience for meeting the one year
minimum and contains no minimum time requirement at all for the
member itself.'').
    \145\ Albert at 1-2 (``[U]nlike FINRA, we believe a newly-hired
registered principal should be allowed to start the clock on their
one year at their new employer by working remotely in a non-
supervisory capacity prior to becoming a designated supervisor and
qualifying their home as a residential supervisory location.'' . . .
Doing so ``would still require new employees to learn the details of
their new firm before being eligible to supervise remotely . . .
.'').
---------------------------------------------------------------------------

    In response, FINRA declined to further amend the proposed rule
change.\146\ FINRA stated that the amended language ``appropriately
addresses'' the concern that this proposed exclusion is intended to
address: that an associated person at an RSL might otherwise ``not have
the requisite tenure at the member firm to develop experience with the
firm's systems, people, products, and overall compliance culture.''
\147\
---------------------------------------------------------------------------

    \146\ FINRA Response II at 4-5.
    \147\ Id.
---------------------------------------------------------------------------

    The proposed rule change, as modified by Amendment No. 1 (requiring
a level of supervisory experience to permit a member firm to consider
an RSL designation), is reasonable. For new supervisors or supervisors
hired from outside of a member firm's broader organization, the
proposed rule change requires that they operate from a location that is
an OSJ or supervisory branch office (where they would be inspected at
least annually) for at least a year to gain supervisory experience with
the member firm's systems and overall compliance culture.\148\ Because
of the unique nature of each member firm's business, FINRA reasonably
determined that supervisors wishing to exercise the flexibility of this
proposed rule change must first have experience with the member firm's
systems and products, and fully integrate into a member firm's
compliance program and culture. Therefore, just as it is reasonable for
FINRA to exclude supervisors without any direct supervisory experience,
it is also reasonable for FINRA to exclude supervisors with substantial
direct supervisory experience at different member firm(s). This
proposed rule change does not, however, require these categories of
excluded supervisors to work from a non-residential location. A member
firm may permit such a supervisor to work from a residential location
under the current regulatory framework by designating the new
supervisor's residence as an OSJ or supervisory branch office and
subjecting it to an annual inspection. The one-year time period--
whether in a non-residential location or residential location
designated as an OSJ or supervisory branch office--allows supervisors
to develop experience with the member firm's systems, people, products,
and overall compliance culture. This should help to ensure that new
supervisors at a member firm develop the experience necessary to
reasonably carry out their assigned supervisory responsibilities for a
member firm's supervisory system before their residences become
eligible for RSL designation and less frequent inspection.
---------------------------------------------------------------------------

    \148\ See proposed Rule 3110.19(c)(1); supra notes 81 through 83
and accompanying text.
---------------------------------------------------------------------------

    It is reasonable for FINRA to determine that supervisors must have
a certain amount of direct supervisory experience with the member firm,
or an affiliate or subsidiary of the member that is registered as a
broker-dealer or investment adviser, before their residence can be
eligible for RSL designation. The one-year requirement will help ensure
that new supervisors have an opportunity to gain experience with a
member firm's systems and products, and fully integrate into a member
firm's compliance program and culture. This time period also provides
the member firm with time to evaluate the performance of the new
supervisor to determine their compliance with their regulatory
obligations before they may be eligible for the flexibility provided in
the proposed rule. Moreover, one year provides a reasonable balance
between providing member firms with the flexibility for supervision
allowed in the proposed rule and concerns that supervisors need to
spend time directly supervising before they are given such flexibility.
    Regarding the commenter's request to permit RSL designation so long
as the associated person at the proposed RSL has at least one year of
any experience with the member firm, its affiliates, or its
subsidiaries,\149\ it is reasonable for FINRA to conclude that
supervisors without direct supervisory experience at the member firm,
its affiliates, or its subsidiaries may lack the skills and experience
to effectively supervise other people, locations, and business
activities from a residence treated as a non-branch location. For that
reason, it is reasonable that FINRA limited qualifying experience to
direct supervisory experience with the member firm, its affiliates, or
its subsidiaries.
---------------------------------------------------------------------------

    \149\ Albert at 1-2.
---------------------------------------------------------------------------

    Commenters expressed concern that this proposed exclusion would
negatively impact hiring and retention without providing an investor-
protection benefit.\150\ However, member firms retain the flexibility
to permit supervisors to work from a residential location registered as
an OSJ or supervisory branch office. Firms may choose to exercise that
flexibility to attract and retain talent, and the proposed rule change
would provide member firms even more flexibility after the supervisor
has gained at least one year of supervisory experience with the member
firm. In light of these factors, it is reasonable to require new
supervisors or supervisors new to the member firm to work from a
location registered as an OSJ or supervisory branch office that would
be subject to an annual inspection cycle for a set period of time.
---------------------------------------------------------------------------

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

    A commenter opposed the provision providing that the one-year
experience requirement may be satisfied by experience with a member
firm's affiliate or subsidiary that is registered as a broker-dealer or
investment adviser.\151\ This commenter explained that member firms,
affiliates, and subsidiaries do not necessarily share the same
compliance systems and cultures.\152\ However, where a member firm
relies on a supervisor's experience from an affiliate or subsidiary to
satisfy the experience requirement, the supervisor's private residence
would not be automatically designated as an RSL. Rather, as discussed
further below,

proposed Rule 3110.19(e) would require the member firm to conduct and
document a person-specific risk assessment prior to designating the
location as an RSL. If a supervisor lacks comparable supervisory
experience with the member, its affiliates, or its subsidiaries, or if
the member, its affiliates, or its subsidiaries do not have similar
compliance systems and cultures, the member firm may choose to consider
those circumstances to assess whether such an RSL designation is
appropriate.
---------------------------------------------------------------------------

    \151\ PIABA II at 3.
    \152\ See id.
---------------------------------------------------------------------------

b. Heightened Supervisory Plans
    As stated above, proposed Rule 3110.19(c)(3) would prohibit RSL
designation for any location with a designated supervisor who ``is
subject to a mandatory heightened supervisory plan under the rules of
the SEC, FINRA, or a state regulatory agency.'' \153\ One commenter
urged FINRA to modify this proposed exclusion to also cover
``heightened supervision under a plan established by the member in
connection with or in response to any such regulator's recommendation
or finding,'' stating that the rule should not distinguish between
heightened supervisory plans imposed by regulators and those imposed by
member firms.\154\ The commenter explained that a member firm's
decision to impose its own heightened supervisory plan ``in lieu of a
formal regulatory action or order[ ] or in response to a regulatory
examination'' raises ``the same concerns as regulator-mandated plans
and should be addressed accordingly.'' \155\
---------------------------------------------------------------------------

    \153\ See proposed Rule 3110.19(c)(3).
    \154\ See letter from Andrew Hartnett, NASAA President and
Deputy Commissioner, Iowa Insurance Division, North American
Securities Administrators Association, Inc., to Sherry Haywood,
Assistant Secretary, Commission, dated April 27, 2023, at 4-5
(``NASAA I'').
    \155\ Id. at 5.
---------------------------------------------------------------------------

    In response, FINRA declined to extend the proposed exclusion to
cover any heightened supervisory plans imposed by a member.\156\ FINRA
expects that a member may, from time to time, impose voluntary
heightened supervisory plans as part of its supervision program.\157\
FINRA stated that what constitutes a firm-imposed heightened
supervisory plan is ``subjective,'' and it expressed concern that
extending this proposed exclusion to them ``could act to disincentivize
firms from imposing tailored or more specific supervisory controls if
the result [would be] RSL ineligibility.'' \158\ However, FINRA
``agree[d] that there is value in considering heightened supervision as
a risk factor.'' \159\ To balance the commenter's concern with FINRA's
concern about discouraging the use of heightened supervision, FINRA
modified the proposed rule change to require consideration of non-
mandatory heightened supervisory plans in the risk assessment described
in proposed Rule 3110.19(e).\160\
---------------------------------------------------------------------------

    \156\ FINRA Response I at 6.
    \157\ Id. (``[A] firm should routinely evaluate its supervisory
system to ensure it is appropriately tailored to the firm's
business. Such an evaluation may prompt a firm, out of an abundance
of caution and independent of specific regulatory requirements or
mandates, to undertake additional supervisory measures, including
voluntarily imposing a heightened supervisory plan.'').
    \158\ Id.
    \159\ Id.
    \160\ Id.; see proposed Rule 3110.19(e).
---------------------------------------------------------------------------

    The same commenter characterized FINRA's modification as ``an
acceptable balance between [its previous] concerns and FINRA's desire
not to disincentivize firms from taking such steps to proactively
improve their supervisory systems.'' \161\ No commenter opposed the
amended language.
---------------------------------------------------------------------------

    \161\ NASAA II at 4.
---------------------------------------------------------------------------

    Prohibiting locations with an associated person subject to a
regulator-imposed heightened supervisory plan from being designated as
an RSL is reasonable as it is designed to limit compliance risks. If a
regulator has imposed a heightened supervisory plan on a specific
associated person, the regulator has determined that they require
additional supervision to help ensure their compliance with securities
laws, regulations, and rules. It is reasonable for FINRA to determine
that under those circumstances a member firm should not be permitted to
designate that person's residence as an RSL and permit a reduced
inspection cycle. Firm-imposed heightened supervisory plans may, in
some circumstances, indicate similar risks. At the same time, expanding
this exclusion to firm-imposed supervisory plans could disincentivize
firms from using heightened supervision when circumstances would
otherwise counsel such a plan. Under these circumstances, it is
reasonable to require member firms to consider any firm-imposed
heightened supervisory plans as part of the mandatory, person-specific
risk assessment.
c. Investigations and Proceedings Alleging a Failure To Supervise
    As originally proposed in the Notice, proposed Rule 3110.19(c)(6)
would have prohibited RSL designation for any location with an
associated person who is ``currently subject to, or has been notified
in writing that [they] will be subject to, any investigation,
proceeding, complaint or other action by the member, the SEC, a self-
regulatory organization, including FINRA, or state securities
commission (or agency or office performing like functions) alleging
they have failed reasonably to supervise another person subject to
their supervision, with a view to preventing the violation of any
provision of the Securities Act, the Exchange Act, the Investment
Advisers Act, the Investment Company Act, the Commodity Exchange Act,
any state law pertaining to the regulation of securities or any rule or
regulation under any of such Acts or laws, or any of the rules of the
MSRB or FINRA.'' \162\
---------------------------------------------------------------------------

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

    Three commenters supported this proposed exclusion.\163\ One
commenter emphasized the importance of equal treatment for all
regulatory actions alleging a failure to supervise, regardless of
whether federal or state securities laws are at issue.\164\ Another
commenter coupled its support with a recommendation that the proposed
exclusion also extend to associated persons who have been subject to
multiple customer complaints, arbitrations, and civil cases.\165\
---------------------------------------------------------------------------

    \163\ NASAA I at 2; letter from Hugh Berkson, President, Public
Investors Advocate Bar Association, to Vanessa Countryman,
Secretary, Commission, dated Apr. 26, 2023, at 3 (``PIABA I'');
Davenport at 2 (supporting ``[m]aking an office or location
ineligible when an associate[d] person is [the] subject of an
investigation or action relating to a failure to supervise.'').
    \164\ NASAA I at 2 (``State securities laws are an important
part of the regulatory framework and should not be treated
differently with respect to assessments of regulatory and
supervisory risks that the proposed ineligibility criteria are
designed to address.'').
    \165\ PIABA I at 3.
---------------------------------------------------------------------------

    Four commenters opposed the proposed exclusion, citing practical
challenges associated with the tracking, duration, and resolution of
state-level securities investigations.\166\ In particular, three of the
opposing commenters stated that the inclusion of state-law violations
in this proposed exclusion is fundamentally unfair, and one of these
commenters stated that supervisors would ``lose[ ] the privilege

of workplace flexibility for an uncertain and inordinate amount of
time[, disrupting their lives] without any adjudication that they
failed in their supervisory duties.'' \167\ For these reasons, three
opposing commenters urged FINRA to remove state-level securities
investigations from the proposed rule change.\168\ The fourth opposing
commenter similarly recommended that FINRA narrow the proposed
exclusion such that it take effect upon receipt of something akin to a
Wells notice.\169\
---------------------------------------------------------------------------

    \166\ ASA at 2; Cetera I at 3-4; letter from Scott C. Kursman,
Managing Director & Chief Compliance Officer, Citigroup Global
Markets, Inc., to Vanessa Countryman, Secretary, Commission, dated
Apr. 28, 2023, at 1-2 (``Citigroup''); SIFMA I at 1-3. Taken
together, the alleged practical challenges include: state
investigations are difficult to track; state investigations may take
years to commence or conclude; it is difficult to discern when state
investigations commence or conclude; state regulators open
investigations based on varying standards for the evidence required
to open such an investigation; and the phrase ``subject of'' is too
vague to equip firms to effectively comply with the proposed
exclusion. See SIFMA I at 1-3; Citigroup at 1 (noting that it shares
SIFMA's concern); ASA at 2 (taking this position in comments related
to the ``Pilot Program''); Cetera at 3-4.
    \167\ SIFMA I at 3; see Citigroup at 1 (``[T]he fact that the
mere initiation of an investigation, as opposed to some adjudicated
finding, can be the basis for ineligibility seems problematic from
an individual fairness and notice standpoint.''); Cetera at 4 (``It
unfairly shifts the presumption from innocence to guilt without any
form of substantive finding, much less adjudication.'').
    \168\ SIFMA at 3; Citigroup at 1 (``We support the suggestion
made by SIFMA that, rather than lose RSL eligibility, a state
investigation for failure to supervise should be considered by a
firm's preexisting obligations under Rule 3110 to maintain a
reasonably designed supervisory system and to conduct an appropriate
risk assessment.''); ASA at 2 (``We implore federal regulators not
to allow unsubstantiated claims by state regulators trying to
protect their regulatory turf to dictate how the regulation of the
modern broker-dealer business should evolve.'').
    \169\ Cetera I at 4 (``RSL eligibility would only be precluded
if the associated person has been notified by a regulatory agency,
in writing, that the agency intends to take or recommend enforcement
action against the individual for failure to perform supervisory
responsibilities.''). A Wells notice is a communication from SEC
Staff to a person involved in an investigation that: (1) informs the
person the staff has made a preliminary determination to recommend
that the Commission file an action or institute a proceeding against
them; (2) identifies the securities law violations that the staff
has preliminarily determined to include in the recommendation; and
(3) provides notice that the person may make a submission to the
Division and the Commission concerning the proposed recommendation.
See Enforcement Manual, Securities and Exchange Commission, Division
of Enforcement, at 19-20, https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
---------------------------------------------------------------------------

    In response, FINRA amended the proposed exclusion in two ways.\170\
First, FINRA limited its scope to Investigations and Proceedings, as
those terms are defined in Form U4, by a Regulator ``expressly''
alleging a failure to supervise.\171\ FINRA stated that ``using the
definitions from Form U4 provides consistency and clarity not only with
respect to the scope of applicable events subject to the ineligibility
criteria, but also regarding when some events ``begin'' (e.g., after
the `Wells' notice has been given).'' \172\ Second, FINRA included a
temporal element to provide that such locations may be designated or
redesignated as an RSL subject to the requirements of the proposed rule
change, as modified by Amendment No. 1, upon the earlier of: (1) the
member's receipt of written notification from the applicable Regulator
that such Investigation has concluded without further action; or (2)
one year from the date of the last communication from such Regulator
relating to such Investigation.\173\ FINRA explained that the proposed
amendment addresses ``commenters' concerns that unadjudicated
allegations would form the basis of a location's permanent exclusion as
an RSL.'' \174\
---------------------------------------------------------------------------

    \170\ See FINRA Response I at 6-9; proposed Rule 3110.19(c)(6);
Amendment No. 1.
    \171\ FINRA Response I at 7-8; see Amendment No. 1; proposed
Rule 3110.19(c)(6). As modified by Amendment No. 1, the proposed
rule change would prohibit RSL designation for any location with an
associated person who ``has been notified in writing that [he or
she] is now subject to[ ] any Investigation or Proceeding, as such
terms are defined [for Form U4], by [a Regulator] expressly alleging
they have failed reasonably to supervise another person subject to
their supervision with a view to preventing the violation of any
provision of the Securities Act, the Exchange Act, the Investment
Advisers Act, the Investment Company Act, the Commodity Exchange
Act, any state law pertaining to the regulation of securities[,] or
any rule or regulation under any of such [a]cts or laws, or any of
the rules of the MSRB or other self-regulatory organization,
including FINRA.'' Proposed Rule 3110.19(c)(6). The proposed
amendment also broadens the scope of the applicable rules. As
originally proposed in the Notice, the proposed rule change would
have reached the rules of the MSRB and FINRA, but not--as now
proposed--``any'' self-regulatory organization. See Notice at 20577.
    \172\ FINRA Response I at 8-9. FINRA emphasized that this
proposed exclusion would apply ``where a Regulator's written
notification to an associated person describes circumstances and
other allegations that could be reasonably construed to relate to a
failure to reasonably supervise another individual under the
associated person's supervision.'' Id. at 8.
    \173\ See FINRA Response I at 6-9; Proposed Rule 3110.19(c)(6);
Amendment No. 1. As stated above, this proposed modification would
not apply to an associated person who is subject to an ongoing
Proceeding.
    \174\ FINRA Response I at 9.
---------------------------------------------------------------------------

    Three commenters supported the modified exclusion, stressing that
the revisions provide regulatory clarity and address industry concerns
about the uncertain length of some regulatory investigations.\175\ A
fourth commenter ``generally support[ed]'' the modified provision
because it ``reduces the likelihood that a location remains ineligible
for longer than reasonably necessary for a regulator to investigate
potential misconduct[ ] while allowing regulators sufficient
flexibility to conduct a thorough investigation.'' \176\ But this
commenter asked for further modifications to broaden the scope of the
proposed rule change, including to codify FINRA's statement that the
exclusion would apply where circumstances can be reasonably construed
to evidence a covered Investigation, to clarify that a Wells notice or
its equivalent ``is not a prerequisite for ineligibility under this
criterion,'' and to clarify that some regulatory communications,
including subpoenas, may provide notice of a covered investigation
``depending on the information'' they contain.\177\
---------------------------------------------------------------------------

    \175\ SIFMA II at 2 (``[T]he Proposed Rule Change, as amended,
addresses in part concerns raised by the industry. For example,
proposed Rule . . . 3110(c)(6) now allows a firm to designate or
redesignate an RSL location after a specified period of time
following an investigation.''); XML at 1 (the use of the Form U4
definitions for Investigation and Proceeding ``will maintain
consistency within the industry,'' and the revised exclusion ``will
enable members to determine an effective date for designation or
redesignation of an RSL''); Fidelity II at 2 (``Fidelity also
appreciates the clarification provided concerning an associated
person who is the subject of an investigation or proceeding by a
regulator, particularly the ability to resume designating a location
as an RSL either at the closure of the proceeding or after the
matter has been idle for a year.'').
    \176\ NASAA II at 2-3.
    \177\ Id. at 3-4 and n.8.
---------------------------------------------------------------------------

    In response, FINRA declined to further amend the proposed rule
change.\178\ FINRA stated that ``the well-established definitions from
Form U4 provide a clear picture of the scope of applicable events
subject to the proposed eligibility criterion.'' \179\ FINRA also
emphasized that although subpoenas and other regulatory communications
do not necessarily establish the existence of an ``Investigation'' as
defined in Form U4, the proposed rule change separately requires firms
to consider ``any regulatory communications,'' including subpoenas, in
the mandatory risk assessment.\180\
---------------------------------------------------------------------------

    \178\ FINRA Response II at 6.
    \179\ Id.
    \180\ See id.
---------------------------------------------------------------------------

    The proposed rule change, as modified by Amendment No. 1,
reasonably addresses the potential risks indicated by written
communications from a Regulator alleging a failure to supervise. It is
reasonable for FINRA to conclude that, where an associated person's
conduct has resulted in a Regulator notifying the associated person
that they are subject to an Investigation or a Proceeding expressly
alleging that they have failed reasonably to supervise another person
subject to their supervision, the potential risk warrants the
associated person having their residence inspected on a more frequent
basis, and therefore the residence should not be designated as an
RSL.\181\
---------------------------------------------------------------------------

    \181\ NASAA requested that FINRA clarify that a Wells notice or
its equivalent ``is not a prerequisite for ineligibility under this
criterion.'' NASAA II at 3. The proposed rule change, as modified by
Amendment No. 1, makes clear that ``Investigation'' has the same
meaning as it does for Form U4. See supra note 74 and accompanying
text. For purposes of Form U4, some of the circumstances
constituting an ``Investigation'' would not require a Wells notice.
See id.

---------------------------------------------------------------------------

    The proposed exclusion, as modified by Amendment No. 1, also
reasonably addresses commenter concerns with its scope and equips
member firms to comply with its terms. By limiting its scope to certain
Investigations and Proceedings, as those terms are defined for purposes
of Form U4, that ``expressly'' allege a failure to reasonably
supervise, the proposed exclusion clarifies that FINRA does not expect
firms to discern--based on vague or ambiguous information--whether the
exclusion applies. Separately, the proposed rule change addresses
commenter concerns that unadjudicated allegations might permanently
prohibit a location from RSL designation by including a temporal
element that permits the designation or redesignation of affected RSLs
under limited circumstances. Specifically, this provision would permit
RSL designation or redesignation upon (1) the member's receipt of
written notification from the applicable Regulator that such
Investigation has concluded without formal action or (2) one year from
the date of the last communication from such Regulator relating to such
Investigation.\182\ Finally, while the proposed exclusion would not
capture circumstances short of a formal Investigation or Proceeding
that could counsel against an RSL designation, the proposed rule change
separately requires firms to consider--as part of the mandatory,
person-specific risk assessment--any regulatory communications from a
Regulator indicating that the associated person at the proposed RSL
failed reasonably to supervise another person subject to their
supervision.\183\
---------------------------------------------------------------------------

    \182\ Proposed Rule 3110.19(c)(6).
    \183\ Proposed Rule 3110.19(e)(5).
---------------------------------------------------------------------------

d. Customer Complaints, Arbitration Claims, and Civil Actions
    As originally proposed in the Notice, proposed Rule 3110.19(c) did
not include a location-level exclusion addressing any associated person
who is or has been subject to multiple customer complaints or customer-
initiated, investment-related arbitration claims or civil actions.\184\
One commenter recommended that FINRA include a location-level exclusion
covering such associated persons, as these customer-initiated actions
are often the ``canary in the coal mine'' indicating threats to
investor protection.\185\ In response, FINRA modified the proposed rule
change (as described in more detail below) to require a member to
consider the volume and nature of customer complaints as part of the
mandatory, person-specific risk assessment prior to RSL
designation.\186\ Although the proposed risk assessment does not
expressly require the consideration of customer-initiated, investment-
related arbitration or civil litigation, FINRA emphasized that the risk
assessment's list of factors is ``non-exhaustive'' and it ``agree[d]
that the presence of such arbitration[s] or civil litigation[s] would
be a factor for a firm to consider as part of the risk assessment.''
\187\
---------------------------------------------------------------------------

    \184\ See Notice at 20577-78; proposed Rule 3110.19(c).
    \185\ PIABA I at 3.
    \186\ Proposed Rule 3110.19(e); Amendment No. 1 at 6.
    \187\ FINRA Response I at 7.
---------------------------------------------------------------------------

    In response to the Amendment No. 1, the commenter repeated its
request that the location-level exclusions also cover locations of
associated persons who have been subject to multiple customer
complaints or customer-initiated, investment-related arbitrations or
civil actions.\188\ This commenter emphasized that such an associated
person should be disqualified from working from an RSL ``[r]ather than
trusting member firms to conduct and document a risk assessment[ ] that
includes examining the `volume and nature of customer complaints.' ''
\189\
---------------------------------------------------------------------------

    \188\ PIABA II at 3-4.
    \189\ Id. at 4.
---------------------------------------------------------------------------

    In response, FINRA declined to modify the proposed rule change to
include an automatic exclusion for locations with associated persons
who have been the subject of multiple customer complaints.\190\ FINRA
emphasized that customer complaints ``may lack merit,'' and the
proposed rule change's mandatory risk assessment requires the
consideration of the volume and nature of customer complaints prior to
any RSL designation.\191\
---------------------------------------------------------------------------

    \190\ See FINRA Response II at 6.
    \191\ Id.
---------------------------------------------------------------------------

    The proposed rule change takes a reasonable approach to the issue
of customer complaints and customer-initiated, investment-related
arbitration claims and civil actions by requiring firms to consider the
``volume and nature of customer complaints'' in the mandatory risk
assessment prior to RSL designation.\192\ Although the proposed risk
assessment does not explicitly mandate the consideration of customer-
initiated, investment-related arbitration claims and civil actions, the
risk assessment's factors are non-exhaustive. Moreover, FINRA has
stated that such arbitration claims and civil actions would be relevant
factors for consideration during the mandatory risk assessment.\193\
---------------------------------------------------------------------------

    \192\ The Commission addresses the proposed risk assessment in
Section III(A)(5).
    \193\ FINRA Response I at 7.
---------------------------------------------------------------------------

    Such complaints, claims, and actions may, in certain circumstances,
indicate heightened levels of risk. However, they are not formal
investigations or proceedings initiated by a regulator charged with
enforcing securities laws, regulations, and rules. For example, they
may be overly broad in scope or lack the factual development of a
comparable regulatory action. Because assessing the risk associated
with complaints, claims, and actions may require investigation and a
consideration of the totality of the circumstances, it is reasonable
that--in lieu of creating a blanket exclusion for such associated
persons--the volume and nature of customer complaints should be
considered in the mandatory risk assessment.
e. Other Three Location-Level Exclusions
    As stated above, the proposed rule change's location-level
eligibility exclusions also prohibit RSL designation for any location
with an associated person who: (1) is functioning as a principal for a
limited period in accordance with Rule 1210.04 (Registration
Requirements); (2) is statutorily disqualified, unless such
disqualified person (A) has been approved (or is otherwise permitted
pursuant to FINRA rules and the federal securities laws) to associate
with a member and (B) is not subject to a mandatory heightened
supervisory plan under proposed Rule 3110.19(c)(3) or otherwise as a
condition to approval or permission for such association; or (3) has an
event in the prior three years that required a ``yes'' response to any
item in Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D, and
14E on Form U4.\194\ No commenter offered specific support for, or
opposition to, any of these three exclusions.
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    \194\ See proposed Rule 3110.19(c)(2), (4), and (5).
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    Each of these three location-level exclusions is reasonable in
light of the increased risk each category of person might pose. First,
a supervisor acting as a principal for a limited period prior to
passing a qualification examination has not yet acquired the
credentials allowing them to act as a principal on a permanent
basis.\195\ Second, an

individual subject to a statutory disqualification has engaged in
violative conduct that may indicate an increased risk of non-
compliance.\196\ Third, an individual with certain regulatory or
criminal-action disclosures on Form U4 has a history of criminal
conviction(s) or regulatory finding(s) that may indicate an increased
risk of non-compliance.\197\ Because of the heightened risks associated
with these three categories of supervisors, it is reasonable for the
proposed rule change to require such supervisors to operate from an OSJ
or supervisory branch office (where they will be inspected at least
annually) rather than from a location designated as an RSL (where they
would be inspected on a regular periodic schedule, presumed to be at
least every three years).\198\ Therefore, it is reasonable to exclude
such supervisors' residences from RSL designation.
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    \195\ FINRA Rule 1210.04 permits a member to ``designate any
person currently registered, or who becomes registered, with the
member as a representative to function as a principal for a period
of 120 calendar days prior to passing an appropriate principal
qualification examination as specified under Rule 1220(a), provided
that such person has at least 18 months of experience functioning as
a registered representative within the five-year period immediately
preceding the designation and has fulfilled all applicable
prerequisite registration, fee and examination requirements prior to
designation as a principal. However, in no event may such person
function as a principal beyond the initial 120 calendar day period
without having successfully passed an appropriate principal
qualification examination as specified under Rule 1220(a).''
    \196\ Section 3(a)(39) of the Exchange Act identifies a list of
events that disqualify someone from membership in, participation in,
or association with a member of a self-regulatory organization. 15
U.S.C. 78c(a)(39).
    \197\ See supra note 73.
    \198\ See FINRA Rule 3110(c)(1); proposed Rule 3110.19(a).
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3. Conditions for Designation as a Residential Supervisory Location
    As stated above, proposed Rule 3110.19(a) would provide that an
associated person's private residence where supervisory activities are
conducted may be eligible for RSL designation provided that the member
firm and/or location complies with ten conditions.\199\ FINRA stated
that it adapted the first eight conditions from the primary and non-
primary residence exclusions.\200\ It added a ninth condition on
recordkeeping and a tenth condition addressing technology and
surveillance tools.\201\ These ten conditions are discussed in more
detail below.
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    \199\ See proposed Rule 3110.19(a). SEB Securities stated that
the proposed rule change ``does not fully explain how often a home
office would need to be used to be considered a non-branch location
or RSL'' and questioned whether the RSL designation is ``only for
associated persons whose primary place of business is their home.''
Letter from Anonymous, Compliance Officer, SEB Securities, Inc.
(``SEB''), to the Commission, dated July 13, 2023. FINRA responded
that SEB's comment relates to a ``broader question about the branch
office definition'' and that the proposed rule change ``is not
intended to change'' the longstanding definition of ``branch
office,'' which has been in effect since 2006. FINRA Response II at
8.
    \200\ Notice at 20576.
    \201\ Id.
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a. Conditions Adapted From the Primary and Non-Primary Residence
Exclusions
    As stated above, FINRA adapted the first eight conditions of the
proposed rule change from the primary and non-primary residence
exclusions: (1) only one associated person, or multiple associated
persons who reside at that location and are members of the same
immediate family, conduct business at the location; \202\ (2) the
location is not held out to the public as an office; \203\ (3) the
associated person does not meet with customers or prospective customers
at the location; \204\ (4) any sales activity that takes place at the
location complies with the conditions set forth under Rule
3110(f)(2)(A)(ii) or (iii); \205\ (5) neither customer funds nor
securities are handled at that location; \206\ (6) the associated
person is assigned to a designated branch office, and such designated
branch office is reflected on all business cards, stationery, retail
communications, and other communications to the public by such
associated person; \207\ (7) the associated person's correspondence and
communications with the public are subject to the member firm's
supervision in accordance with Rule 3110; \208\ and (8) the associated
person's electronic communications (e.g., email) are made through the
member's electronic system.\209\
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    \202\ See proposed Rule 3110.19(a)(1).
    \203\ See proposed Rule 3110.19(a)(2).
    \204\ See proposed Rule 3110.19(a)(3).
    \205\ See proposed Rule 3110.19(a)(4). Rule 3110(f)(2)(A)(ii)
and (iii) identify the conditions for the primary and non-primary
residence exclusions. For a discussion of those exclusions, see
Section II(A)(1)(c) above.
    \206\ See proposed Rule 3110.19(a)(5).
    \207\ See proposed Rule 3110.19(a)(6).
    \208\ See proposed Rule 3110.19(a)(7).
    \209\ See proposed Rule 3110.19(a)(8).
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    One commenter opposed the requirement, set forth in proposed Rule
3110.19(a)(1), that only one associated person, or multiple associated
persons who reside at that location and are members of the same
immediate family, conduct business at the location.\210\ This commenter
stated that this proposed condition would not provide any meaningful
investor protection safeguards because associated persons who reside
together ``to afford the rising cost of housing'' do not necessarily
pose a higher risk to investor protection.\211\ This commenter further
stated that this proposed condition is ``unnecessarily narrow and
restrictive.'' \212\
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    \210\ CAI at 1-2.
    \211\ See CAI at 1-2, Exhibit A at 2.
    \212\ See CAI, Exhibit A at 2 (``The Committee believes that
this language is unnecessarily narrow and restrictive and would
limit the ability of a location, in several common scenarios, to
claim [RSL] status, without providing any meaningful investor
protection safeguards.'').
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    In response, FINRA declined to modify proposed Rule
3110.19(a)(1).\213\ FINRA emphasized that the proposed rule change ``is
intended to align with one of several conditions to the current''
primary and non-primary residence exclusions.\214\ FINRA also noted
that the proposed rule change aligns with SEC Books and Records rules,
which provide (among other things) that ``a broker dealer is not
required to maintain records at an office that is a private residence
`where only one associated person (or multiple associated persons who
reside at that location and are members of the same immediate family)
regularly conducts business.' '' \215\ Although FINRA declined to
modify this proposed condition, it stated that it would consider
relevant comments ``in connection with future initiatives to consider
the OSJ and branch office definitions more broadly.'' \216\
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    \213\ FINRA Response I at 3-4.
    \214\ Id. at 3.
    \215\ Id. at 3-4 (quoting 17 CFR 240.17a-4(l)).
    \216\ Id. at 4. FINRA acknowledged that Rule 3110(f)(2) does not
define ``immediate family,'' but it noted that this term is defined
in Rule 3241. Id. at 4 n.12.
---------------------------------------------------------------------------

    A second commenter requested that FINRA modify proposed Rule
3110.19(a)(7), which would require that the associated person's
correspondence and communications with the public be subject to the
member firm's supervision in accordance with Rule 3110.\217\ The
commenter stated that this language improperly focuses on the recipient
(as opposed to the subject) of the communications, and its reference to
``the public'' is unclear.\218\ The commenter recommended that the
condition instead require that ``all correspondence and communications
by the associated person related in any way to existing or potential
business activities [be] subject to the firm's supervision in
accordance with [Rule 3110].'' \219\
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    \217\ See proposed Rule 3110.19(a)(7); NASAA I at 1 (``We
reiterate and incorporate our previous comments on [File Number
FINRA-SR-2022-019]''); see also NASAA (8/23/2022) at 12 (addressing
the same provision), https://www.sec.gov/comments/sr-finra-2022-019/srfinra2022019-20137298-307861.pdf.
    \218\ See NASAA I at 1; see also NASAA (8/23/2022) at 12.
    \219\ Id.

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    In response, FINRA declined to modify proposed Rule
3110.19(a)(7).\220\ FINRA explained that the proposed language ``aligns
with existing rule text used in the primary residence exclusion in Rule
3110(f)(2)(A)(ii)[(e)] and aligns with the terminology in FINRA Rule
2210 (Communications with the Public).'' \221\ Adopting the commenter's
proposed alternative would, FINRA stated, ``create an incongruity
within Rule 3110 and raise questions about the difference in
meanings.'' \222\
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    \220\ Letter from Kosha Dalal, Vice President and Associate
General Counsel, Office of General Counsel, FINRA, to Vanessa
Countryman, Secretary, Commission, dated Oct. 31, 2022, at 8,
available as Exhibit 2b to File Number FINRA-SR-2023-006 (addressing
the same provision).
    \221\ Id.
    \222\ Id.
---------------------------------------------------------------------------

    A commenter requested to expand proposed Rule 3110.19(a)(7) to
require that ``all correspondence and communications by the associated
person related in any way to existing or potential business activities
[be] subject to the firm's supervision in accordance with [Rule
3110].'' \223\ However, Rule 3110 already imposes broad supervision
requirements to achieve compliance with applicable securities laws and
regulations, and with applicable FINRA rules, and those obligations
would apply to RSLs.\224\ Moreover, the proposed condition's use of the
term ``communications with the public'' aligns with language in FINRA
Rule 2210, the SEC Books and Records Rule,\225\ and the preexisting
residential exclusions,\226\ and so should be familiar to both firms
and to regulators. For these reasons, it is reasonable for FINRA to
retain the same condition as that for the primary and non-primary
residence exclusions.
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    \223\ See NASAA I at 1; NASAA (8/23/2022) at 12.
    \224\ FINRA Rules 3110(a); see FINRA Rules 3110(b)(4), 3110.06,
and 3110.09.
    \225\ 17 CFR 240.17a-4(b)(4) (requiring preservation of
``[o]riginals of all communications . . . which are subject to the
rules of a self-regulatory organization of which the member,
broker[,] or dealer is a member regarding communications with the
public.'').
    \226\ FINRA Rule 3110(f)(2)(A)(ii)(e).
---------------------------------------------------------------------------

    No other commenter offered specific support for or opposition to
any of the remaining six conditions adapted from the primary and non-
primary residence exclusions.\227\
---------------------------------------------------------------------------

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

    Each of these eight conditions imposes a reasonable limitation on
the designation of an RSL. Limiting an RSL designation to a location
with only one associated person, or multiple associated persons who
reside at that location and are members of the same immediate family,
is a reasonable limitation in light of FINRA's stated intention to
align the condition with the SEC Books and Records rules.\228\
Restrictions on activities that occur at the RSL, such as prohibitions
involving interactions with customers (e.g., not holding the office out
to the public, not meeting customers or prospective customers in-
person, and limitations on sales activities) and the handling of
customer funds and securities,\229\ will limit higher risk activities
occurring at an RSL that may benefit from more frequent inspection of
the location. Furthermore, requiring an associated person to be
assigned to a designated branch office and to name that branch office
on all of their communications with the public \230\ provides investors
with information about the person with whom they are conducting
business. In addition, the affirmative obligations in the conditions,
such as explicitly subjecting the associated person's correspondence
and communication with the public to the member firm's supervision and
requiring the associated person's electronic communications to be made
through the member firm's electronic system,\231\ will help provide the
member firm with enhanced supervisory oversight of certain activities
directly involving investors, and thereby lower risk associated with an
RSL. Moreover, incorporating the conditions from the preexisting
residential exclusions, a rule that FINRA has experience in
administering and that the industry is familiar with, will promote
regulatory consistency and minimize regulatory confusion, thereby
enhancing investor protection.
---------------------------------------------------------------------------

    \228\ See supra note 215 and accompanying text.
    \229\ Proposed Rule 3110.19(a)(2) through (5).
    \230\ Proposed Rule 3110.19(a)(6).
    \231\ Proposed Rule 3110.19(a)(7) and (8).
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b. Books and Records
    As its ninth condition for designation as an RSL, the proposed rule
change would impose the following recordkeeping requirements: (1) the
member must have a recordkeeping system that makes, keeps current, and
preserves records required to be made, kept current, and preserved
under applicable securities laws and regulations, FINRA rules, and the
member's own written supervisory procedures under Rule 3110; (2) such
records must not be physically or electronically maintained and
preserved at the office or location; and (3) the member must have
prompt access to such records.\232\ Because books and records required
to be made and preserved would not be maintained on-site at the RSL,
FINRA believes that this condition ``strengthen[s] a firm's ability to
monitor the supervisory activities occurring'' at an RSL and lowers
overall risk.\233\
---------------------------------------------------------------------------

    \232\ See proposed Rule 3110.19(a)(9).
    \233\ See Notice at 20576.
---------------------------------------------------------------------------

    Two commenters supported this recordkeeping condition.\234\ One
stated that requiring members to have ``prompt access'' to their
records ``would better enable firms to supervise their associated
persons centrally'' and ``protect against misappropriation and misuse
of sensitive customer information.'' \235\ The second commenter agreed
with prohibiting the preservation and maintenance of books and records
at the RSL.\236\ No commenter opposed this proposed condition.
---------------------------------------------------------------------------

    \234\ See NASAA I at 2-3; Davenport at 2.
    \235\ NASAA I at 2-3.
    \236\ Davenport at 2.
---------------------------------------------------------------------------

    The proposed rule change's recordkeeping conditions are reasonable.
Prompt access to an RSL's records from an alternative location
decreases the need for more frequent inspection of the RSL.
Specifically, the proposed rule change couples the prompt-access
requirement with a prohibition on the physical or electronic storage of
records at the RSL location. Because records would not be located at
the RSL, the member firm should have the ability to supervise the RSL
remotely so long as it can promptly access such records, thus
decreasing the need for a more frequent inspection cycle. Consequently,
the recordkeeping condition would help facilitate the timely and
effective supervision of an RSL's business activities.
c. Surveillance and Technology Tools
    The tenth condition for designation as an RSL would require a
member firm to ``determine that its surveillance and technology tools
are appropriate to supervise the types of risk[] presented by each
[RSL].'' \237\ The proposed rule change explains that these tools may
include but are not limited to: (1) firm-wide tools, such as an
electronic recordkeeping system, electronic surveillance of email and
correspondence, electronic trade blotters, regular activity-based
sampling reviews, and tools for visual inspections; (2) tools specific
to the RSL based on the activities of the associated person assigned to
the location, products offered, and restrictions on the activity of the
RSL; and (3) system tools, such as secure network connections and
effective cybersecurity protocols.\238\ No commenter offered specific
support for

or opposition to this proposed condition.
---------------------------------------------------------------------------

    \237\ Proposed Rule 3110.19(a)(10).
    \238\ See proposed Rule 3110.19(a)(10).
---------------------------------------------------------------------------

    FINRA justified the proposed rule change, in part, on technological
advancements that equip firms to supervise employees working from
remote locations.\239\ Therefore, it is reasonable to require any
member firm taking advantage of the proposed rule change--and its less-
frequent inspection cycle--to first determine that its surveillance and
technology tools are appropriate to supervise the types of risks
presented by each RSL. To aid member firms in this assessment, the non-
exhaustive list of tools outlined in the proposed rule change,
including firm-wide tools and tools particular to the RSL based on the
activities of the person assigned to that RSL, help illustrate FINRA's
expectations and will assist firms in implementing robust surveillance
systems.
---------------------------------------------------------------------------

    \239\ Notice at 20575 (``FINRA believes that the structural and
lifestyle changes for member firms and their workforce catalyzed by
the pandemic--along with advances in technology--merit reevaluation
of some aspects of the branch office registration and inspection
requirements.''), 20575 (firms indicated that they responded to the
COVID-19 pandemic by relying ``extensively on technology to support
their effective transition to the remote work environment and
enhance the supervision of geographically dispersed associated
persons, many of whom have been working from home since early 2020
and may continue to do so in some manner in the current environment.
These technological tools facilitating their supervisory practices
include surveillance systems, electronic tracking programs or
applications, and electronic communications, including video
conferencing tools.'').
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4. Obligation To Provide List of RSLs to FINRA
    As stated above, proposed Rule 3110.19(d) would require any member
firm that has designated any RSL locations to provide a current list of
all of its RSL locations to FINRA on a quarterly basis.\240\
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    \240\ Proposed Rule 3110.19(d) (``A member that elects to
designate any office or location of the member as an RSL pursuant to
[proposed Rule 3110.19] shall provide FINRA with a current list of
all locations designated as RSLs by the 15th day of the month
following each calendar quarter in the manner and format (e.g.,
through an electronic process or such other process) as FINRA may
prescribe.'').
---------------------------------------------------------------------------

    Two commenters supported the proposed rule change, and one of them
labeled this quarterly-reporting requirement as ``critical'' to the
ability of regulators ``to effectively oversee firms' important
supervisory functions.'' \241\ Two other commenters opposed the
proposed rule change because of the inefficiency that would
result.\242\ Instead of a quarterly filing that provides intermittent
snapshots of RSL designations, the opposing commenters recommended that
FINRA leverage CRD and the existing branch office registration process