by Patrick Labbe, Compliance Associate
I’ll bet you’ve been to Wal-Mart many times and most likely to more than one location. The retail giant started as a small business with one location and is now a house hold name with locations all over the world. This was not an overnight achievement but a long industrious process. There are many benefits to growth but the hurdles involved must be analyzed before making the decision to expand. The same is true when opening a new office in the securities industry but with a few extra hurdles standing in your way. FINRA’s Rule 3110(f), outlines the role of each associated office and registration requirements for each office type. Based on the scope of work performed at an office it will be categorized as either an Office of Supervisory Jurisdiction (OSJ), a Non-OSJ Branch or a non-registered location.
An OSJ is where the highest level functions take place and is responsible for the supervision of associated people and branches of the firm. As stated in Rule 3110(f) OSJ means any office of a member at which any one or more of the following functions take place:
- order execution or market making;
- structuring of public offerings or private placements;
- maintaining custody of customers’ funds or securities;
- final acceptance (approval) of new accounts on behalf of the member;
- review and endorsement of customer orders, pursuant to paragraph (b)(2) above;
- final approval of retail communications for use by persons associated with the member, except for an office that solely conducts final approval of research reports; or
- responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.
One of the questions I’m asked frequently is “So, why is the BD Main office also registered as a branch?” or “Why is this person’s U4 showing they are located at the BD main and a branch office with the same address?” First, the firm’s main office or BD Main is always considered an OSJ and must be registered as such. The BD Main takes part in at least one, but usually more, of the functions allowed to take place at an OSJ, as highlighted above. Pertaining to the second question, a representative may be working from the BD Main but performing functions required to be carried out at an OSJ Branch therefore they must be located there. Yes, it is the same location but it is necessary to be located at the address labelled “branch” if you will be performing relative tasks.
Member firms may have more than one registered OSJ office to adequately supervise the additional non-OSJ branches and non-registered locations. Each OSJ must have at least one qualified principal on-site designated as the supervisor of that office. They will be responsible for all reps at that location and any other branch office(s) under their supervision.
The second, more common type of branch office, is the non-OSJ branch. This type of branch is defined in rule 3110 as “any location where one or more associated persons of a member regularly conducts the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security, or is held out as such…”. Basically, if any sales or solicitation of securities takes place and none of the seven OSJ functions are performed at the office it is a non-OSJ branch.
Lastly, you have the non-registered location. FINRA provides seven possible exemptions from registering an office location as a branch office.
- Any location that is established solely for customer service of back office type functions where no sales activities are conducted and that is not held out to the public as a branch office
- Any location that is the associated person’s residence; provided that:
- The location may not be held out as an office.
- The associated person(s) may not meet with customers at the location.
- Neither customer funds nor securities may be handled at the location.
- The associated person or persons are assigned to a designated branch office, which is reflected on all business cards, stationery, advertisements and other communications to the public. 05-67 NASD NTM OCTOBER 2005
- All communications with the public must be subject to supervisory provisions pursuant to all applicable NASD rules (including, but not limited to, Rule 3010).
- Electronic communications must be transmitted through the member’s electronic system.
- All orders must be entered through the designated branch office or through an electronic system established by the member that is reviewable at such branch office.
- Written procedures relating to the supervision of sales activities conducted at the location must be maintained by the member.
- Any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the member complies with the provisions above;
- Any office of convenience, where associated persons occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office
- Any location that is used primarily to engage in non-securities activities and from which the associated person(s) effects no more than 25 securities transactions in any one calendar year
- The Floor of a registered national securities exchange where a member conducts a direct access business with public customers; or
- A temporary location established in response to the implementation of a business continuity plan.
Growth is good but be mindful that FINRA is your partner and wants to help you during your transition. Any changes you will be making will be by their rules. While the office types and their basic functions were reviewed in this article there are other things that should be considered before opening a new office such as, initial and annual fees, supervision requirements, inspections, manual changes, filings, etc. Something else to question is whether FINRA would approve of the change. Before expanding ask yourself “Do I need to file a Change of Membership application or does this meet the Safe Harbor rule IM-1011-1?” FINRA will be happy to weigh in if you file a Materiality Consultation.
During change, going through the proper channels will prove to be beneficial in the long run. Say what you like about Wal-Mart, but they have successfully grown and expanded their business through proper planning and vetting. The FINRA rules force firms to go through such a process and in the end, the industry is stronger for it. This article may not cover all aspects of branch office requirements but addresses the major details. To fully understand what is required reference FINRA’s rule 3110.
NCS Regulatory Compliance has been assisting broker-dealers and investment advisers with industry critical compliance responsibilities for over 25 years. We continue to provide products and services to thousands of firms in the financial services industry. If you have questions related to compliance obligations, compliance requirements, or other compliance topics, please contact us at 888-734-2667 or firstname.lastname@example.org.