Trading watchdog FINRA's new post-COVID work-from-home rules 'causing headaches'

By Steve Gelsi

Industry members say changes are confusing financial services firms

The securities industry regulator of stockbrokers and bond traders has sowed some confusion over its new work-from-home rules, market insiders told MarketWatch.

During COVID-19, the Financial Industry Regulatory Authority, or FINRA, lifted some requirements governing work-from-home practices in its universe of more than 4,200 brokerage firms and nearly 630,000 brokers at about 149,000 branch offices.

But that reprieve ended this month, with an updated set of workplace rules that were three years in the making. Starting July 1, FINRA-registered firms would be required to resume in-person inspections of remote offices, unless they sign up for a pilot program that requires the industry to conduct inspections to regulate itself at a distance.

"FINRA adopted rules that are intended to facilitate remote work, but those rules are cumbersome, and have exclusions that may make remote work, and remote inspections of home offices, difficult," Russell Sacks, a financial services regulatory partner at King & Spalding, told MarketWatch. "These changes are causing headaches for financial services firms, and have driven some to adjust their hybrid-work policies, especially broker-dealers that engage in investment banking and trading businesses."

A source at a major U.S. bank said bond and stockbrokers have been working from the office five days a week for a while now, but that complications around working from home have become a "real issue" for bankers outside of the trading room floors.

A FINRA spokesperson said member firms have "largely expressed strong support" for these new rules after "extensive conversations."

The rules offer a "practical and balanced way for firms to meet their regulatory obligations, while protecting investors, and acknowledging the need for greater workplace flexibility," the spokesperson said.

In order to supervise trading activities, FINRA requires firms to list every one of their remote locations and for firms to review paperwork to register individual employees and offices to see if information is current.

FINRA has said that some brokers have wrongly assumed they were being required to go into the office every day.

The new rules "are intended to provide member firms greater flexibility - not less - to allow eligible registered persons to work from home," FINRA said.

FINRA has said locations used for securities business on behalf of a member firm, including a home office, have "always been subject to possible disclosure, registration and inspection" under its rules, except during the pandemic.

Home office designation gets pushback

As part of its main purpose to help foster a fair and open securities marketplace, FINRA has historically had sets of rules around three workplace scenarios: a branch office, an office supervisory jurisdiction (OSJ), and a non-branch location.

FINRA has now launched a fourth office category called residential supervisory location, or RSL, for home offices.

RSLs are not allowed to be used for trading or market-making. So that would mean someone doing trading or investment banking from home would have to register as an OSJ, which requires routine home inspections.

"If your job in life is to be on a trading desk, now you can't probably do it from home and call your home an RSL, unless you agree to have your home inspected annually," King & Spalding lawyer Sacks said.

Despite the clarification from FINRA, many remain confused.

"Some people are saying that FINRA is forcing people back to work-but what they're really saying and it's technical-they're saying FINRA's new rule has a gap in the definition of RSL that excludes what I do for a living and would force my house to be an OSJ," Sacks said. "For various reasons, some firms do not want to categorize employee homes as OSJs."

Some firms are hiring consultants to do remote inspections. Others are seeking to hire additional compliance personnel to beef up inspections of people's houses.

"What you're seeing as you see with the response to any rule adopting, is a whole patchwork of solutions that the industry is putting into place," Sacks said. "Some firms are requiring market makers to come into the office. Others are OK calling a home office an OSJ and have decided that they're willing to absorb inspection costs."

FINRA was founded in 2007 as a non-profit industry group with the approval of the Securities and Exchange Commission. It currently operates as the largest non-governmental regulatory organization for securities brokers and dealers in the United States.

In one recent example of its work, FINRA documented Wells Fargo & Co.'s (WFC) move to fire more than a dozen employees in the bank's wealth management unit on claims they were using fake keyboard movements to make it seem like they were working.

Wells Fargo terminated the workers following a "review of allegations involving simulation of keyboard activity creating impression of active work," FINRA filings.

Also read: Wells Fargo fires staff for faking keyboard activity

-Steve Gelsi

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06-15-24 0734ET

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