Broker/Dealer Branch Offices
There Are Three Types – Can You Name All Three?
by Warren Forest
As anyone who has been in the securities business for any length of time knows, there is nothing simple about this industry. In
fact, some have gone on to say that simplicity and the brokerage business are mutually exclusive terms. One good example of this is how branch offices are defined.
Branch locations, or offices, are often essential in building a vibrant and flourishing business enterprise. McDonalds certainly could not advertise that it has sold billions and billions of hamburgers if it had to rely on just one store. In much the same way, brokerage companies often find it advantageous to have multiple locations.
Multiple offices can do many things for a company. By providing geographic dispersity they allow one to reach many more prospects. Decentralization also allows for sales persons to be physically available to clients that they service. Branding and marketing efforts are enhanced through branch operations. Regional and national presences can be made. Various business models can be employed through branch operations, such as franchising.
Now in every other type of business, a branch office is a branch office, plain and simple. Not so in the world of broker/dealers. For, in this world, there are three distinct types of branch offices. Each type has permitted activities, levels of supervision and required duties attached to it.
The first type of branch office is an Office of Supervisory Jurisdiction, or OSJ. OSJ’s are the highest level of branch office, and therefore, many high level functions are permitted to occur at an OSJ.
There are seven distinct functions that must happen at an OSJ branch: 1) Order Execution and Market Making; 2) Structuring
of Public Offerings or Private Placements; 3) Maintaining Custody of Customer Funds and/or Securities; 4) Final Acceptance/Approval of New Accounts on Behalf of the Member; 5) Review and Endorsement of Customer Orders; 6) Final Approval of Advertising or Sales Literature; and, 7) Responsibility for Supervising the Activities of Persons Associated with the Member. Not every member firm will conduct business in each of these functions, but if you are doing any of them, the location
better be registered as an OSJ.
The second type of office location is simply known as a Branch Office, or non-OSJ. A non-OSJ branch office is defined as 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, and does not conduct any of the seven activities permitted to happen at an OSJ.
If you are selling securities, or are trying to do so, and you are not doing any of the functions that are permitted to occur at an OSJ, then your location is simply a branch office. A little different from the norm, it is a location where sales functions are allowed, and a location where certain activities can never happen.
Now here is where things start to get a little more complicated. The third type of branch location is known as the “Non Branch” location, or NBL.
There are seven exclusions that define an NBL: 1) Any location established solely for customer service and/or back office
functions; 2) Any location that is the associated person’s primary residence; 3) Any location that is used for securities business less than 30 business days per calendar year; 4) Any office of convenience where associated persons occasionally, and exclusively, meet with customers by appointment; 5) Any location from which an associated person effects no more than 25 securities transactions in one calendar year; 6) The Floor of a registered national securities exchange; and, 7) A temporary location established in response to the implementation of a business continuity plan. * Business days are considered to be working at the NBL for four hours or more.
Any office that supervises the activities of associated persons conducting business as an NBL is considered to be a branch office. And each and every branch location must undergo a self inspection by the Member Firm. Exactly how often does the internal inspection have to occur? Well, that depends on how the office location is defined.
OSJ branches and non-OSJ offices that supervise one or more NBL’s must undergo an internal inspection at least once a year. Non-OSJ offices that are not responsible for supervising associated persons must be physically inspected at least every three years. And, NBL’s need to be inspected on a regular periodic schedule with no particular time-frame required.
Opening a branch office is not an automatic event, as firms that desire to have multiple locations must be approved by FINRA to do so. While the rules allow very limited flexibility in this area, typically increasing branch locations, as well as, the number of permitted personnel to staff the locations, is handled pursuant to a Continuing Member Application.
A formal request must be made, and the firm must evidence its ability to implement the changes. This is done by demonstrating
the supervisory system that will be in place, furnishing the procedural changes that will be made and designating specific individuals that can show experience in managing branch office locations.
FINRA also likes to see a minimum level of supervision in place. That minimum level is one designated principal, usually a Series 24 General Securities Principal, for every ten registered representatives that require supervision. Sometimes firms may need a higher level of supervision, such as, one designated principal supervising less than ten individuals.
As the complexities of branch office rules, requirements and regulations indicate, FINRA does not take these activities lightly. Many firms have made the mistake in the past to grow rapidly through geographic dispersion, and neglect to oversee the actions that occur at remote locations.
Firms that make sure that they have qualified experienced branch managers in place, and clearly establish the lines of responsibility, will do much to deflect the adverse actions that could otherwise occur. Coupling the people with quality procedures can do much to ensure that branch office operations will be a successful part of a firm’s business model.
*Please note that these exclusions are highlighted from the FINRA Rule 3010. To ensure that your location meets one of the
standards of an NBL, please seek professional advice.
Posted by: editor May 19, 2011