By: Turnkey Trading Partners

In August of 2021, NFA indicated that it would be pursuing a change to how branch offices were defined. The CFTC was in agreement with NFA’s proposal and on September 23, 2021 NFA updated interpretive notice 9002 accordingly.  NFA’s primary intention with the adjustment was to assist member firms in navigating hybrid working environments which have come about due to Covid-19.  As has been the case in many industries, CFTC registrants have encouraged Associated Persons (“APs”) to work from home or other remote office locations as part of their pandemic mitigation protocols. Although the change to how branch offices are considered is long overdue, what NFA has been consistently clear about is that this adjustment should not impact how member firms supervise remote APs working at outside office locations.

For those who are unaware interpretive notice 9002 now excludes outside office locations which meet the following criterion from being listed as branch offices:

  • A location where one or more APs from the same household live or rent/lease provided the location is not held out to the public as an office of the Member; and
  • the AP(s) do/does not meet in-person with customers or physically handle customer funds at the location; and 
  • any CFTC or NFA required records created at the non-branch office location are accessible for inspection at the Member firm’s main or applicable listed branch office as required under CFTC Regulation 1.31 and NFA Compliance Rule 2-10

Turnkey is a leader in outsourced compliance consulting. As a firm we cover hundreds of office locations representing more than a thousand registrants.  Turnkey’s position in the industry affords us a unique view in understanding overall sentiment and company responses to regulatory adjustments such as the new branch office interpretation above. Thus far, it has been our experience, that firms are doing everything they can to release listed branches. Unfortunately we believe this sentiment in many cases is misplaced or inappropriate. Firms with this approach do not appear to be fully considering the additional supervisory mechanisms which may need to be established after a branch location has been de-listed.

Firms that have been quick do de-list branch locations should consider the following:

  • If the firm has one or more locations which remain official branches, a bi-furcated outside office supervisory plan is likely now required. In other words firms in this position must conduct a risk assessment of outside office APs and locations. Within this assessment they then must develop policies and procedures which are designed to properly supervise these APs and locations accordingly.  In Turnkey’s experience this means traditional branch locations and new “outside office” locations are likely to require differing supervisory techniques and corresponding justifications to substantiate the firms approach.
  • Dropping a branch location does not mean the location can operate differently or that a regular review of the location is not required.  Firms most assuredly will have to have supervisory plans in place in which they can somehow verify that de-listed branches continue to meet NFA’s new definitions over time. In the event a location is not properly listed, NFA still retains its ability to take disciplinary action. In Turnkey’s view it seems unlikely that outside office APs should be permitted to operate remotely without ever being visited by main office staff.  While an annual onsite inspection may not necessarily be required or even practical, at a minimum a virtual review conducted on a risk adjusted time frame may be more than appropriate.
  • Firms should consider the liability implications of dropping branch offices and the corresponding Series 30 branch office manager licenses affiliated with them. Holders of a Series 30 license have traditionally been viewed as being more highly trained or “senior”. NFA certainly has taken the position that a Series 30 AP has more supervisory authority than those without such licenses. Having Series 30 registered branch managers can in some ways work to reduce liability to the main office location. If and when an outside office operates as an official branch, a specific Series 30 holder is responsible for that locations operations. This would not be true of an “outside office” per se.  Additionally, in the event a branch location is dropped. it is currently unclear if an APs Series 30 will remain valid after two years time of not being actively utilized.

To date many of Turnkey’s largest and most sophisticated customers have stopped short of simply dropping branch locations due to NFA’s new interpretation. Many of these groups have also determined that “staying the course” within an existing supervisory framework rather than developing a new one makes the most sense for them. Turnkey fully supports and agrees with this approach. In our view, NFA’s guidance on this issue was designed and intended to assist firms in navigating hybrid work environments. It was not designed to eliminate established branch locations or to wholesale rethink or rewrite existing and functional supervisory policies at member firms.  Ultimately the decision to de-list a branch location may be the correct one. However, this decision is one that should be well calculated. Even with the new interpretive notice, firms should continue to consider potential supervisory program adjustments, overall business risk, and company resources both monetarily and with regard to staffing when evaluating their outside office supervisory programs.