Do FINRA rules require your broker-dealer to classify locations?
Do you want to ensure your location is properly categorized as an OSJ vs non-OSJ?
Or, since FINRA rules typically require interpretation perhaps you're unsure about picking the correct category.
Our fintech compliance experts weigh in on OSJ’s meaning, the differences between OSJ and non-OSJ branches, and the practical aspects of OSJ branch costs and functions for broker-dealers and other fintechs such as RIAs.
Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts supporting fintech startups and established financial institutions since 2013.
What is an OSJ? OSJ Meaning
An OSJ (Office of Supervisory Jurisdiction) is a type of branch office in the financial services industry with the authority to supervise associated persons' activities, including sales. A designated supervisor oversees the OSJ, which is responsible for compliance with financial industry regulations and can execute trades, manage customer accounts, and approve advertising, among other activities.
What Does OSJ Stand for (FINRA/SEC)?
The Financial Industry Regulatory Authority (FINRA) views Offices of Supervisory Jurisdiction (OSJs) as key locations to ensure compliance with securities laws and regulations. FINRA regulates Member Firms by conducting regular examinations to assess their compliance with FINRA rules and federal securities laws. These examinations focus on areas such as sales practices, recordkeeping, and the supervision of associated persons.
As for the types of companies required to establish an OSJ, any broker-dealer firm that is a FINRA member and conducts a securities business must establish and maintain at least one OSJ.
FINRA requires Member Firms to designate other offices as OSJs to effectively supervise registered representatives. Geographically, an Office of Supervisory Jurisdiction can oversee registered representatives and associated individuals in multiple offices within the same region. Supervision covers activities such as order execution and market making, structuring public offerings or private placements, and maintaining custody of customers' funds and securities.
OSJs are also responsible for the final approval of new accounts and review of customer orders, the final approval of retail communications, and supervision of other non-OSJ office locations.
The distinction between OSJ and non-OSJ branches is important for regulatory purposes, as it determines each broker dealer firm branch’s assigned level of oversight and responsibility.
Is an OSJ a Branch?
Yes, an Office of Supervisory Jurisdiction (OSJ) is a type of branch office with additional supervisory responsibilities and authorities compared to a typical branch office in a financial services or fintech company.
Here are some key differences:
Supervisory Authority: Authority to supervise the activities of other branch offices and associated persons. This includes overseeing sales practices, ensuring regulatory compliance, and customer account management.
Regulatory Compliance: OSJs are directly responsible for ensuring compliance with financial industry regulations and are subject to regular inspections by regulatory bodies like FINRA.
Approval Powers: Authority to approve certain activities, such as advertising and sales literature, that other branches may not have.
Trade Execution: They have the authority to execute trades, a function that may not be available at other non-OSJ branch offices. Executing trades is not to be confused with entering trades in an electronic system, which is allowed in a non-OSJ office.
In a fintech company, typically, an OSJ (Office of Supervisory Jurisdiction) would focus more on regulatory compliance, risk management, and supervision of financial activities. Other non-OSJ branches might direct efforts toward sales activities, customer service, or other operational aspects of the business.
What Is a Non-OSJ Branch?
A non-OSJ branch is a branch office that does not have supervisory authority over other branches. It operates independently and is not responsible for overseeing compliance for other offices. Non-OSJ branches typically report directly to an OSJ office, such as a regional office or headquarters.
What Are the Roles of an OSJ Principal?
An OSJ Principal is typically a senior-level professional with extensive experience in the financial services industry. They must hold specific securities licenses, such as the Series 24 (General Securities Principal) license in the United States, which qualifies them to manage or supervise a firm's securities business.
The roles of an OSJ Principal within a financial services company include:
- Supervising the activities of the office
- Ensuring compliance with regulatory requirements
- Approving advertising and sales literature
- Overseeing customer account management and final approval of new accounts
- Supervising order executions and market making
- Supervising associated individuals located at other office locations
What Are the Benefits of an OSJ?
The decision of whether to affiliate directly with a broker-dealer or join an existing OSJ involves an evaluation of different business criteria, including finances, culture, and contractual relationships.
Key Benefits of an OSJ (Office of Supervisory Jurisdiction)
- Economies of Scale
- Lead Generation
Let's review these key benefits in detail:
1. Economies of Scale
As most Offices of Supervisory Jurisdiction operate scaled businesses, they can negotiate better pricing and level of support from vendors and the broker-dealer on behalf of their advisors. As a result, their advisors receive services at more competitive prices than they would as standalone firms.
In addition to the platform and resources provided by the broker-dealer, OSJs typically offer various forms of support, including marketing, human resources, compliance, operational management, and technology. This dual support model ensures advisors remain focused on revenue-generating tasks.
3. Lead Generation
Some OSJs offer lead-generation programs not offered directly by broker-dealers, such as ones based on geography or specific business niches. For example, The Retirement Group LLC focuses on retirement business and refers individuals retiring from major corporations to affiliated advisers.
OSJ Functions by Fintech Type
In a fintech broker-dealer, an OSJ Advisor would oversee the compliance and supervision of other advisors and associated persons within the office. They would ensure all activities are conducted per regulatory requirements and company policies. They may also have approval powers for advertising and sales literature, as well as the authority to execute trades.
Summary of OSJ Activities at Broker-Dealers
Supervision of Sales Activities
|Oversight of the sales activities of associated persons to ensure they comply with securities laws and regulations.
|The authority to execute trades involves ensuring that trades are conducted following all applicable rules and regulations.
|Review and approve advertising and sales literature to ensure it complies with regulatory standards.
Training and Supervision
|Responsibility for training associated persons in regulatory compliance and supervising their activities.
Customer Account Management
|Oversight of customer account management, including opening new accounts and handling customer complaints.
Registered Investment Advisors (RIAs)
FINRA does not directly oversee Registered Investment Advisors (RIAs). However, they are subject to similar regulatory requirements by the Securities and Exchange Commission (SEC) or state securities regulators. RIAs may also establish OSJs or similar supervisory structures to ensure compliance, including the following functions:
Functions of OSJs for Financial Advisors
|Ensure that the RIA complies with all applicable securities laws and regulations.
Supervision of Advisory Activities
|Supervise associated persons’ advisory activities to ensure they are conducted per the firm's policies and procedures.
Review of Advisory Materials
|Review and approve advisory materials, including investment recommendations and financial plans, to ensure they are in the clients’ best interest.
|Play a key role in managing risk within the RIA, including operational, compliance, and reputational risks.
Training and Supervision
|Similar to broker-dealers, OSJs in RIAs are responsible for training associated persons in regulatory compliance and supervising their activities.
OSJ's Supervision Responsibilities
OSJ's Supervision Responsibilities start with ownership of Written Supervisory Procedures (WSPs).
What are WSPs (Written Supervisory Procedures)?
Written Supervisory Procedures (WSPs) are critical to a firm's Compliance and Supervisory systems. They serve as instructions for both employees and regulators to understand how the firm supervises its business and ensures compliance with securities laws and regulations. WSPs should be "a living document" addressing the supervisory policies and procedures to follow to comply with securities rules and regulations.
FINRA publishes a helpful Written Supervisory Procedures Checklist for Broker-Dealers.
Key Aspects of WSPs
Here are some key aspects of WSPs:
Scope and Detail
WSPs should be comprehensive and detailed, covering the firm's business areas subject to regulatory oversight. This includes supervising associated persons, handling customer complaints, reviewing and approving transactions and procedures to ensure the firm’s records are accurate and complete.
WSPs should be tailored to the firm's specific business model and risk profile. For example, a firm that deals primarily in equities might have different supervisory procedures than one that deals primarily in derivatives.
Regular Review and Updates
WSPs should be reviewed and updated regularly to reflect changes in regulations or the firm's business activities. This ensures that the firm's supervisory procedures remain effective and compliant with current regulations.
Training and Implementation
WSPs are not just documents to create and file. The firm should actively use them to train associated persons, and supervisory personnel should ensure that the WSPs’ outlined procedures are being followed in the firm's day-to-day operations.
During a regulatory examination, one of the first things that regulators request is the firm's WSPs. The regulators review the WSPs to understand the firm's supervisory / organizational structure and procedures, and they compare the WSPs to the firm's actual practice management to assess compliance with its procedures and regulatory requirements.
OSJ Finance: Costs and Business Models
Opening an Office of Supervisory Jurisdiction (OSJ) incurs several costs and can be structured differently depending on the firm’s business model.
OSJ Costs Include:
- Licensing and Registration
- Compliance Infrastructure
- Legal and Consulting Fees
Licensing and Registration
|The OSJ principal must hold specific securities licenses, such as the Series 24 license in the U.S., which involves costs for exam preparation, exam fees, and registration fees.
|The financial firm must invest in compliance infrastructure, including systems for monitoring and recordkeeping, which can involve significant costs.
|The financial firm must hire or designate personnel as the OSJ principal and other supervisory staff. These personnel will likely command higher salaries due to their increased responsibilities and the specialized knowledge required for their roles.
|The financial firm must provide ongoing training to its associated persons on compliance matters, which can involve costs for training materials, external trainers, or time spent on training.
Legal and Consulting Fees
|The financial firm may need to engage legal counsel or compliance consultants to assist with setting up the OSJ (Office of Supervisory Jurisdiction) and ensure compliance with regulatory requirements, which can involve significant fees.
OSJ Business Models
The three OSJ business models are the Independent Model, Affiliated Model, and Hybrid Model. Here are the details of each model:
|In the Independent model, an independent financial advisor or small group of advisors might set up their own OSJ. They would be responsible for all compliance and supervisory functions and keep a larger portion of the OSJ revenues.
|In this model, a larger firm might set up multiple OSJs affiliated with the firm. The firm would provide compliance and other support services to them, and in return, the firm would receive a portion of the OSJ revenues they generated.
|In the Hybrid model, a firm might set up an Office of Supervisory Jurisdiction that operates somewhat independently but still receives some support services from the firm. The firm and the OSJ would negotiate the division of responsibilities and revenues.
The choice of the OSJ business model will depend on various factors, including the firm’s size, business activities, and risk tolerance.
What Does WFH Mean for Banking?
While remote work offers flexibility and convenience, this trend has forced financial institutions to establish clear guidelines to ensure the security, productivity, and compliance of their remote workforce. These guidelines include establishing cybersecurity measures, maintaining communication channels, and incorporating regulatory requirements into remote work policies.
WFH stands for “Work From Home,” referring to employees working remotely from their homes rather than in a traditional office setting. Employees who work from home (WFH) can set up their workspaces in their homes and manage all process components without leaving their houses or going into the office.
Does your Branch Qualify to Be an OSJ?
Firms must indicate on Form BR whether a branch office is an OSJ or a non-OSJ branch. The number of OSJ branches a firm must maintain depends on the nature and scope of the firm's business conducted at the branch office.
We hope these practical OSJ definitions helped you clearly classify your branch.
Should you still require assistance or have related questions, please give us a call at 305-908-1160 or email us at email@example.com.
The Author: InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts, helping fintechs succeed in highly regulated markets since 2013, globally. “InnReg - Compliance and Operations for Technology-Based BDs” is listed in the FINRA Compliance Vendor Directory.
If your fintech needs compliance support, do not hesitate to email us at firstname.lastname@example.org.