In January of this year, FINRA published Regulatory Notice 24-02 announcing the effective dates for the Remote Inspection Pilot Program (Pilot) and the Residential Supervisory Locations (RSLs). Those dates are now rapidly approaching and firms must make decisions on whether to participate in the Pilot Program this year and how to apply the RSL rule. A primary driver in the Pilot decision is whether the technology the firm uses will allow the firm to meet the tracking, findings, and reporting intricacies under the Rules. RegEd’s Branch Audit Management solution enables Pilot-participating firms to meet the new requirements. It also allows firms which are evaluating whether to participate in the future to enable the same features to help them make their decisions.
FINRA Regulatory Notice 24-02 | https://www.finra.org/rules-guidance/notices/24-02
- Effective Date of Rule 3110.19 (Residential Supervisory Location): June 1, 2024
- Effective Date of Rule 3110.18 (Remote Inspections Pilot Program): July 1, 2024
Remote Inspection Pilot (Pilot) ~ FINRA Rule 3110.18
The Pilot will begin July 1, 2024 and will run through June 30, 2027. The following are the timeframes for each Pilot Year.
- Pilot Year 1 ~ July 1, 2024 to December 31, 2024
- Pilot Year 2 ~ January 1, 2025 to December 31, 2025
- Pilot Year 3 ~ January 1, 2026 to December 31, 2026
- Pilot Year 4 ~ January 1, 2027 to June 30, 2027
Once the Pilot commences, only Pilot-participating firms will be able to inspect their locations remotely. All others will be required to fully comply with FINRA Rule 3110(c). Firms do have the option of opting into the Pilot in future years, and many firms will be evaluating that decision over the remainder of this year.
Additional guidance on how to opt-in via the FINRA Gateway, as well as other information on the pilot program is available by clicking here.
RegEd Enhancements to Audit Management to Support the FINRA Remote Inspection Pilot Program
Regardless of whether your firm elects to participate in the FINRA Remote Inspection Pilot Program, recent and ongoing enhancements to RegEd’s Audit Management solution will ease the process of planning and conducting your branch inspections/exams, whether remotely or onsite.
- Designate, track and manage onsite vs. remote inspections with added support for categorization, organization, tracking and reporting
- Easily identify, track, remediate and report on Significant Findings (as defined by your firm)
- Enhancements to reporting allow increased flexibility to meet the new regulatory reporting requirements (i.e., aggregate # of onsite versus remote inspections, # of inspections by office type, number of findings and Significant Findings, audit tasks and escalations, comprehensive stage, scoring and deficiency detail reports, etc.)
- Future enhancements in support of the Pilot program and for conducting remote inspections are also planned
- Prior audit risk scoring and ratings can be incorporated into future risk assessments along with prior findings for WSP violations, recordkeeping violations, and more in support of your pre-audit planning and scheduling processes.
- Leverage our Best Practices inspection module resulting from the collaboration of industry leading firm branch inspection programs
Residential Supervisory Locations (RSLs) ~ FINRA Rule 3110.19
Beginning June 1, 2024, firms will be able to designate RSLs in accordance with FINRA Rule 3110.19. Firms electing to designate locations as RSLs will be required to provide FINRA with a list of locations designated as RSLs by the 15th day of the month following each calendar quarter. Therefore, the first list of locations designated as RSLs during the period of June 1 and September 30, 2024 will be due to FINRA on October 15, 2024. The list of locations designated as RSLs from October 1 through December 31, 2024 will be due to FINRA January 15, 2025 and so on.
Implications for Firms
FINRA’s introduction of new rules and the cessation of the pandemic-related regulatory relief signify a pivotal transition in the regulatory landscape. This shift necessitates a multifaceted response from firms to remain compliant and competitive. The sections below outline key areas of impact and the necessary steps for firms to adapt successfully.
Adapting to New Supervisory Structures
The introduction of RSLs and the Pilot necessitates firms reevaluate and potentially restructure their supervisory approaches. This includes adapting to supervising employees in residential settings and utilizing remote inspection methods or returning to an onsite inspection methodology. Firms must develop internal policies and training programs to ensure that their supervisory practices are effectively documented, implemented and communicated, and compliant with FINRA’s regulations.
Preparation for Compliance and Reporting
The effective dates of the new rules create a tight timeline for compliance and reporting. Firms should allocate resources to ensure timely and accurate reporting to avoid any regulatory issues. In the context of identifying and designating RSLs, this preparation involves more than just understanding the new regulations. Firms must ensure their internal systems are equipped to accurately track and report these RSLs, a task that could involve significant upgrades or modifications to existing data management systems. The challenge lies in not only integrating new data points into these systems but also ensuring continuous updates and accuracy. This process is critical to provide FINRA with precise and timely information, which is essential for maintaining compliance and avoiding potential penalties.
Strategic Decision-Making and Resource Allocation
Deciding whether to opt into the Pilot and designating RSLs are strategic decisions. Firms need to weigh the benefits against the potential challenges, including resource implications. A common concern regarding the Pilot is the reporting of significant findings to FINRA. Many firms are still taking a wait-and-see approach and will evaluate the manner and detail with which that data will need to be provided. Allocating appropriate resources, including personnel and budget, and an internal analysis of the firm’s ability and desire to fulfill the Pilot reporting obligations, will be crucial for effective implementation and ongoing management of these new requirements.
Ongoing Training and Education
Given the changes and new requirements, firms will need to invest in ongoing training and education for their staff. This includes understanding the nuances of the new rules, best practices for remote supervision and inspections, and staying updated with any further regulatory changes. Keeping the workforce well-informed and trained will be key to seamless adaptation and compliance.
Proactive Engagement with FINRA
Staying engaged with FINRA, seeking clarifications when needed, and participating in any offered guidance sessions will help firms stay ahead of potential challenges. Proactive engagement can provide insights into best practices and help in understanding the expectations of the regulatory body.
Conclusion
FINRA’s latest updates reflect its commitment to evolving with the changing dynamics of the financial industry while maintaining a robust regulatory framework. Firms should stay informed about the detailed guidance from FINRA and plan accordingly to align with these regulatory changes effectively. This proactive approach will ensure continued compliance and smooth operations in the evolving financial landscape.
Additional RegEd Resources / Recent Events
- RegEd hosted a webinar in early 2024 for Branch Inspection Regulatory Developments and the Latest Best Practices.: View the replay at RegEd.com
- RegEd has a white paper on Trends in Branch Office Inspection Programs which is available to download
- Click here to learn more about the capabilities of RegEd’s Audit Management solution to support your firm in complying with the new FINRA rules, whether you are participating in the Remote Inspection Pilot Program or are considering future participation. A free consultation is available by clicking this link to determine the best path forward for your firm and compliance program(s) or to receive a demonstration.
About RegEd
RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.
Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.
Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please visit www.reged.com.