Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Temporary Supplementary Material .17 (Temporary Relief To Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) Under FINRA Rule 3110 (Supervision), 75097-75103 [2020-25902]
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Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices
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it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
to make available publicly. All
submissions should refer to File
Number SR–ISE–2020–38, and should
be submitted on or before December 15,
2020.
SECURITIES AND EXCHANGE
COMMISSION
supplementary material, to complete
remotely their calendar year 2020 and
calendar year 2021 inspection
obligations under FINRA Rule 3110(c)
(Internal Inspections), without an onsite visit to the office or location.4 The
temporary rule change is necessitated by
the compelling health and safety
concerns and the operational challenges
member firms are facing due to the
sustained COVID–19 pandemic.5
Below is the text of the proposed rule
change. Proposed new language is
italicized; proposed deletions are
bracketed.
*
*
*
*
*
[Release No. 34–90454; File No. SR–FINRA–
2020–040]
3000. Supervision and Responsibilities
Relating to Associated Persons
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt Temporary
Supplementary Material .17
(Temporary Relief To Allow Remote
Inspections for Calendar Year 2020
and Calendar Year 2021) Under FINRA
Rule 3110 (Supervision)
3100. Supervisory Responsibilities
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
J. Matthew DeLesDernier,
Assistant Secretary.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2020–25899 Filed 11–23–20; 8:45 am]
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2020–38 on the subject line.
Paper Comments:
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2020–38. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
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75097
BILLING CODE 8011–01–P
November 18, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
6, 2020, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by FINRA. FINRA
has designated the proposed rule change
as constituting a ‘‘non-controversial’’
rule change under paragraph (f)(6) of
Rule 19b–4 under the Act,3 which
renders the proposal effective upon
receipt of this filing by the Commission.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt
temporary Supplementary Material .17
(Temporary Relief to Allow Remote
Inspections for Calendar Year 2020 and
Calendar Year 2021) under FINRA Rule
3110 (Supervision) to provide member
firms the option, subject to specified
requirements under the proposed
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
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3110. Supervision
(a) through (f) No Change
• • • Supplementary Material
.01 through .16
No Change
.17 Temporary Relief To Allow
Remote Inspections for Calendar Year
2020 and Calendar Year 2021
(a) Use of Remote Inspections. Each
member obligated to conduct an
inspection of an office of supervisory
jurisdiction, branch office or nonbranch location in calendar year 2020
and calendar year 2021 pursuant to, as
applicable, paragraphs (c)(1)(A), (B) and
(C) under Rule 3110 may, subject to the
requirements of this Rule 3110.17,
satisfy such obligation by conducting
the applicable inspection remotely,
without an on-site visit to the office or
location. In accordance with Rule
3110.16, inspections for calendar year
2020 must be completed on or before
March 31, 2021 and inspections for
4 SEC staff and FINRA have stated in guidance
that inspections must include a physical, on-site
review component. See SEC National Examination
Risk Alert, Volume I, Issue 2 (November 30, 2011)
and Regulatory Notice 11–54 (November 2011)
(‘‘Notice 11–54’’) (joint SEC and FINRA guidance
stating, a ‘‘broker-dealer must conduct on-site
inspections of each of its office locations; Office of
Supervisory Jurisdictions (‘‘OSJs’’) and non-OSJ
branches that supervise non-branch locations at
least annually, all non-supervising branch offices at
least every three years; and non-branch offices
periodically.’’) (footnote defining an OSJ omitted).
See also SEC Division of Market Regulation, Staff
Legal Bulletin No. 17: Remote Office Supervision
(March 19, 2004) (‘‘SLB 17’’) (stating, in part, that
broker-dealers that conduct business through
geographically dispersed offices have not
adequately discharged their supervisory obligations
where there are no on-site routine or ‘‘for cause’’
inspections of those offices).
5 The proposed rule change will automatically
sunset on December 31, 2021. If FINRA seeks to
extend the duration of the temporary proposed rule
beyond December 31, 2021, FINRA will submit a
separate rule filing to further renew the temporary
relief.
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calendar year 2021 must be completed
on or before December 31, 2021.
Notwithstanding Rule 3110.17, a
member shall remain subject to the
other requirements of Rule 3110(c).
(b) Written Supervisory Procedures for
Remote Inspections. Consistent with a
member’s obligation under Rule
3110(b)(1), a member that elects to
conduct each of its calendar year 2020
or calendar year 2021 inspections
remotely must amend or supplement its
written supervisory procedures to
provide for remote inspections that are
reasonably designed to assist in
detecting and preventing violations of
and achieving compliance with
applicable securities laws and
regulations, and with applicable FINRA
rules. Reasonably designed procedures
for conducting remote inspections of
offices or locations should include,
among other things: (1) A description of
the methodology, including technologies
permitted by the member, that may be
used to conduct remote inspections; and
(2) the use of other risk-based systems
employed generally by the member firm
to identify and prioritize for review
those areas that pose the greatest risk of
potential violations of applicable
securities laws and regulations, and of
applicable FINRA rules.
(c) Effective Supervisory System. The
requirement to conduct inspections of
offices and locations is one part of the
member’s overall obligation to have an
effective supervisory system and
therefore, the member must continue
with its ongoing review of the activities
and functions occurring at all offices
and locations, whether or not the
member conducts inspections remotely.
A member’s use of a remote inspection
of an office or location will be held to
the same standards for review as set
forth under Rule 3110.12. Where a
member’s remote inspection of an office
or location identifies any indicators of
irregularities or misconduct (i.e., ‘‘red
flags’’), the member may need to impose
additional supervisory procedures for
that office or location or may need to
provide for more frequent monitoring of
that office or location, including
potentially a subsequent physical, onsite visit on an announced or
unannounced basis when the member’s
operational difficulties associated with
COVID–19 abate, nationally or locally
as relevant, and the challenges a
member is facing in light of the public
health and safety concerns make such
on-site visits feasible using reasonable
best efforts. The temporary relief
provided by this Rule 3110.17 does not
extend to a member’s inspection
requirements beyond calendar year
2021 and such inspections must be
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conducted in compliance with Rule
3110(c).
(d) Documentation Requirement. A
member must maintain and preserve a
centralized record for each of calendar
year 2020 and calendar year 2021 that
separately identifies: (1) All offices or
locations that had inspections that were
conducted remotely; and (2) any offices
or locations for which the member
determined to impose additional
supervisory procedures or more frequent
monitoring, as provided in Rule
3110.17(c). A member’s documentation
of the results of a remote inspection for
an office or location must identify any
additional supervisory procedures or
more frequent monitoring for that office
or location that were imposed as a result
of the remote inspection.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On March 13, 2020 the United States
declared a national emergency in
response to the pandemic.6 Around this
time, many states issued stay-at-home
orders and imposed restrictions on
businesses, social activities, and travel
to slow the spread of COVID–19 and
reduce the burden on the U.S. health
care system in accordance with the
recommendations of public health
experts.7 In response, like many
6 See Centers for Disease Control and Prevention
(‘‘CDC’’), International Classification of Diseases,
Tenth Revision, Clinical Modification, https://
www.cdc.gov/nchs/data/icd/Announcement-NewICD-code-for-coronavirus-3-18-2020.pdf. See also
WHO Director-General, Opening Remarks at the
Media Briefing on COVID–19 (March 11, 2020),
https://www.who.int/dg/speeches/detail/whodirector-general-s-opening-remarks-at-the-mediabriefing-on-covid-19---11-march-2020.
7 See S.J. Lange et al., Potential Indirect Effects of
the COVID–19 Pandemic on Use of Emergency
Departments for Acute Life-Threatening
Conditions—United States, January–May 2020,
Morbidity and Mortality Weekly Report (June 26,
2020), https://www.cdc.gov/mmwr/volumes/69/wr/
mm6925e2.htm.
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employers across the U.S., member
firms closed their offices to the public,
transitioned their employees to telework
arrangements to comply with stay-athome orders, and implemented other
restrictive measures in an effort to slow
the spread of COVID–19 such as
curtailing or eliminating non-essential
business travel, and significantly
limiting or canceling in-person
activities.8 These pandemic-related
operational changes have made it
impracticable for member firms to
conduct the on-site inspection
component of Rule 3110(c) at many or
most locations for calendar year 2020
because this compliance function
requires firm employees to travel to
geographically dispersed OSJs, branch
offices, and non-branch locations. Such
travel not only has been restricted at
times by government orders, but also
puts the health and safety of employees
at great risk of contracting and
spreading COVID–19.9 By mid-year,
with many restrictive measures still in
place, and in some instances additional
quarantine requirements imposed on
interstate travel, on-site inspections of
offices or locations scheduled for
calendar year 2020 continued to remain
in abeyance.10 In recognition of the
logistical challenges firms were facing at
that time to satisfy the on-site regulatory
component of Rule 3110(c), FINRA
adopted Rule 3110.16 (Temporary
Extension of Time to Complete Office
Inspections), extending the time by
which member firms must complete
8 See generally Regulatory Notice 20–16 (May
2020) (‘‘Notice 20–16’’) (describing practices
implemented by firms to transition to, and
supervise in, remote work environment during the
COVID–19 pandemic).
9 See CDC, Travel During the COVID–19
Pandemic (stating in part, ‘‘Travel increases your
chance of getting and spreading COVID–19. Staying
home is the best way to protect yourself and others
from COVID–19.’’), https://www.cdc.gov/
coronavirus/2019-ncov/travelers/travel-duringcovid19.html (updated October 21, 2020).
10 See, e.g., Government of the District of
Columbia, Phase Two (June 22, 2020) (announcing
certain businesses to reopen and activities to
resume under specified conditions and stating that
anyone coming into Washington, DC from states
specified as high-risk is required to self-quarantine
for 14 days), https://coronavirus.dc.gov/phasetwo
(last visited November 6, 2020); New York
Department of Health, Interim Guidance for
Quarantine Restrictions on Travelers Arriving in
New York State Following Out of State Travel
(November 3, 2020), available at https://
coronavirus.health.ny.gov/covid-19-travel-advisory
(last visited November 6, 2020); and Chicago
Department of Public Health, Emergency Travel
Order (issued July 2, 2020) (directing travelers
entering or returning to Chicago from specified
states experiencing a surge in new COVID–19 cases
to quarantine for a 14-day period from the time of
last contact within the identified state), https://
www.chicago.gov/city/en/sites/covid-19/home/
emergency-travel-order.html (updated October 27,
2020).
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their calendar year 2020 inspection
obligations under Rule 3110(c) to March
31, 2021, but emphasizing that the
extension of time did not relieve firms
from conducting the on-site portion of
the inspections of their OSJs, branch
offices, and non-branch locations.11
The acute health and safety concerns
related to COVID–19 persist, with the
number of confirmed cases of COVID–
19 in the U.S. continuing to rise since
March 13, 2020.12 While firms have
continued to supervise OSJs, branch
offices, and non-branch locations by,
among other things, implementing
remote supervisory practices through
novel uses of technology as well as
existing methods of supervision (e.g.,
supervisory checklists, surveillance
tools, incident trackers, email review,
and trade exception reports),13 firms are
still experiencing logistical challenges
related to conducting the on-site portion
of their inspections due to continuing
business and governmental restrictions
and public health concerns.14
Based on feedback described in
Notice 20–16, in comment letters
submitted in response to File No. SR–
FINRA–2020–019,15 and through recent
discussions with FINRA’s advisory
committees and other industry
representatives, FINRA understands that
since approximately March 2020, many
firms have suspended the on-site
component of their inspections
scheduled for calendar year 2020. With
no certainty as to when pandemicrelated health concerns and restrictions
will subside, firms will have a
considerable backlog of 2020
inspections that may be difficult, if not
impossible, to overcome on or before
March 31, 2021, even if restrictions are
lifted sometime between now and then.
Moreover, FINRA recognizes that
planning on-site inspections for
calendar year 2021 for OSJs, branch
offices, and non-branch locations in the
current environment may now be
11 See Securities Exchange Act Release No. 89188
(June 30, 2020), 85 FR 40713 (July 7, 2020) (Notice
of Filing and Immediate Effectiveness of File No
SR–FINRA–2020–019) (stating, among other things,
that FINRA will consider whether additional relief
may be warranted to address any backlog of 2020
inspections that may continue to exist in light of
ongoing public health and safety concerns).
12 See Johns Hopkins, Coronavirus Resource
Center, COVID–19 Dashboard by the Center for
Systems Science and Engineering at Johns Hopkins
University, https://coronavirus.jhu.edu/map.html
(last visited November 6, 2020).
13 See Notice 20–16.
14 See supra note 10.
15 See Submitted Comments to Securities
Exchange Act Release No. 89188 (June 30, 2020), 85
FR 40713 (July 7, 2020) (Notice of Filing and
Immediate Effectiveness of File No SR–FINRA–
2020–019), https://www.sec.gov/comments/sr-finra2020-019/srfinra2020019.htm.
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impacted as well. In light of pandemicrelated developments, including those
since the adoption of Rule 3110.16, and
the approaching end of year 2020,
FINRA believes further sensible and
tailored temporary relief is warranted
for member firms to meet their
inspection obligations under Rule
3110(c) for calendar years 2020 and
2021.
Proposed Supplementary Material .17 to
Rule 3110
In order to proactively address these
concerns, FINRA is proposing to adopt
temporary Supplementary Material .17.
Temporary proposed Supplementary
Material .17 would provide member
firms, subject to specified requirements
therein, the option to conduct remotely
the inspections of their OSJs, branch
offices, and non-branch locations for
calendar year 2020 and calendar year
2021, without the requirement to
conduct an on-site visit to such office or
location. As described further below,
proposed Rule 3110.17 would set forth
the dates by which inspections for
calendar years 2020 and 2021 are due,
the requirement to amend or
supplement written supervisory
procedures for remote inspections, the
use of remote inspections as part of an
effective supervisory system, and
documentation requirements. FINRA
believes this temporary remote
inspection option is a reasonable
alternative to provide to firms to fulfill
their Rule 3110(c) obligations during
these pressing times, and is designed to
achieve the investor protection
objectives of the inspection
requirements under these unique
circumstances.
The responsibility of firms to
supervise their associated persons is a
critical component of broker-dealer
regulation.16 The temporary proposed
supplementary material is not intended
to alter this core responsibility,
embodied in Rule 3110, to establish and
maintain a system to supervise the
activities of each associated person that
is reasonably designed to achieve
compliance with applicable securities
laws and regulations, and with
applicable FINRA rules. The advent of
technology and automation in the
financial industry has significantly
changed the way in which members and
their associated persons conduct their
business, communicate, and meet their
regulatory obligations. FINRA
recognizes that firms generally use an
array of technological tools to facilitate
their supervisory practices (e.g.,
16 See SLB 17. See also Notice 11–54 and Notice
to Members 98–38 (May 1998) (‘‘Notice 98–38’’).
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75099
surveillance systems; electronic tracking
programs or applications; electronic
communications, including video
conferencing tools), which many firms
have leveraged to create and implement
remote inspection plans, on a temporary
basis, in response to pandemic-related
operational challenges.17 FINRA
believes that proposed Rule 3110.17
would provide a sensibly tailored
regulatory alternative for firms to fulfill
their obligations under Rule 3110(c) that
would not materially diminish, and is
reasonably designed to achieve, the
investor protection objectives of the
inspection requirements under these
unique circumstances. FINRA further
notes that the proposed relief would be
limited in duration to align with the
extended dates set forth under Rule
3110.16 of March 31, 2021 for calendar
year 2020 inspections and December 31,
2021 for calendar year 2021
inspections.18
A. Deadlines To Complete Calendar
Year 2020 Inspections and Calendar
Year 2021 Inspections (Proposed Rule
3110.17(a))
Currently, Rule 3110(c)(1) provides
that an inspection of an office or
location must occur on a designated
frequency, and the periodicity of the
required inspection varies depending on
the classification of the location or the
nature of the activities that take place.
OSJs and supervisory branch offices
must be inspected at least annually (on
a calendar-year basis); non-supervisory
branch offices, at least every three years;
and non-branch locations, on a periodic
schedule, presumed to be at least every
three years.19 Under Rule 3110.16, firms
have until March 31, 2021 to complete
their calendar year 2020 inspections in
accordance with the current
requirements of Rule 3110(c) that
include physical, on-site inspections.20
Proposed Rule 3110.17(a) would
provide that a member firm that is
obligated to conduct an inspection of an
OSJ, branch office or non-branch
location in calendar year 2020 and
calendar year 2021 pursuant to the
applicable periodicity set forth under
17 See Notice 20–16. See generally FINRA White
Paper, ‘‘Technology Based Innovations for
Regulatory Compliance (‘‘RegTech’’) in the
Securities Industry’’ (September 2018) (reporting,
among other things, that as financial services firms
seek to keep pace with regulatory compliance
requirements, they are turning to new and
innovative regulatory tools to assist them in
meeting their obligations in an effective and
efficient manner), https://www.finra.org/sites/
default/files/2018_RegTech_Report.pdf.
18 See supra note 5.
19 See generally Rule 3110(c)(1) and Rule 3110.13
(General Presumption of Three-Year Limit for
Periodic Inspection Schedules).
20 See supra note 4.
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Rule 3110(c)(1) may satisfy such
obligation by conducting the applicable
inspection remotely, without an on-site
visit to the office or location subject to
the other requirements set forth under
the proposed supplementary material.
In addition, the proposed
supplementary material would
expressly provide that in accordance
with Rule 3110.16, inspections for
calendar year 2020 must be completed
on or before March 31, 2021 and
inspections for calendar year 2021 must
be completed on or before December 31,
2021. FINRA believes that providing
firms with the option to satisfy the
inspection component of Rule 3110(c)
remotely would enable firms to finish
their 2020 inspections on or before
March 31, 2021, and their upcoming
2021 inspections on or before December
31, 2021, particularly given the
uncertainty surrounding planning
inspections at this time. Further,
proposed Rule 3110.17(a) would affirm
that notwithstanding Rule 3110.17, a
member would remain subject to the
other requirements of Rule 3110(c).21
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B. Written Supervisory Procedures for
Remote Inspections (Proposed Rule
3110.17(b))
FINRA has long emphasized that
member firms have a fundamental
obligation to implement a supervisory
system that is tailored specifically to the
member firm’s business and addresses
the activities of all its associated
persons.22 As part of an effective
supervisory system, a member must
establish and maintain written
procedures.23 Paragraph (1) (General
Requirements) under Rule 3110(b)
(Written Procedures) provides that a
member must establish, maintain, and
enforce written procedures to supervise
21 In addition to requiring firms to conduct
inspections of their offices and locations on a
designated frequency, Rule 3110(c) generally
requires a member to retain a written record of the
date upon which each review and inspection
occurred, reduce a location’s inspection to a written
report and keep each inspection report on file either
for a minimum of three years or, if the location’s
inspection schedule is longer than three years, until
the next inspection report has been written. If
applicable to the location being inspected, the
inspection report must include, without limitation,
the testing and verification of the member’s policies
and procedures, including supervisory policies and
procedures, in specified areas. See Rule 3110(c)(2).
In addition, to prevent compromising the
effectiveness of inspections due to conflicts of
interest, the rule requires a member to ensure that
the person conducting the inspection is not an
associated person assigned to the location or is not
directly or indirectly supervised by, or otherwise
reporting to, an associated person assigned to that
location. See Rule 3110(c)(3).
22 See Notice to Members 99–45 (June 1999)
(‘‘Notice 99–45’’); see generally Regulatory Notice
18–15 (April 2018).
23 See Rule 3110(a)(1).
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the types of business in which it
engages and the activities of its
associated persons that are reasonably
designed to achieve compliance with
applicable securities laws and
regulations, and with applicable FINRA
rules.
To underscore the importance of this
existing requirement in the context of
remote inspections, proposed Rule
3110.17(b) would expressly provide that
consistent with a member’s obligation
under Rule 3110(b)(1), a member that
elects to conduct each of its calendar
year 2020 or calendar year 2021
inspections remotely must amend or
supplement its written supervisory
procedures to provide for remote
inspections that are reasonably designed
to assist in detecting and preventing
violations of and achieving compliance
with applicable securities laws and
regulations, and with applicable FINRA
rules. Under proposed Rule 3110.17(b),
reasonably designed procedures for
conducting remote inspection of offices
or locations should include, among
other things, a description of the
methodology, including technologies
permitted by the member, that may be
used to conduct remote inspections. In
addition, such procedures should
include the use of other risk-based
systems employed generally by the
member firm to identify and prioritize
for review those areas that pose the
greatest risk of potential violations of
applicable securities laws and
regulations, and of applicable FINRA
rules.24
C. An Effective Supervisory System
(Proposed Rule 3110.17(c))
Internal inspections are a critical
component of a member’s fundamental
obligation under Rule 3110 to establish
and maintain a system to supervise the
activities of each associated person that
is reasonably designed to achieve
compliance with applicable securities
laws and regulations, and with
applicable FINRA rules.25 Proposed
Rule 3110.17(c) would expressly affirm
this principle that the requirement to
conduct inspections of offices and
locations is one part of the member’s
overall ongoing obligation to have an
24 Offices or locations that may present a higher
risk profile would include, for example, those that
have associated persons engaging in activities that
involve handling customer funds or securities,
maintaining books and records as described under
applicable federal securities laws and FINRA rules,
order execution or other activities that may be more
susceptible to higher risks of operational or sales
practice wrongdoing, or have associated persons
assigned to an office or location who may be subject
to additional or heightened supervisory procedures.
25 See SLB 17 (stating, in part, ‘‘Inspections are
a vital component of a supervisory system.’’).
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effective supervisory system and
therefore, a member must continue with
its reviews of the activities and
functions occurring at all offices and
locations whether or not such offices or
locations are due for an inspection
under Rule 3110(c) in a given year, and
the member’s election to conduct such
inspections remotely. In addition, under
the proposed supplementary material, a
member’s remote inspection of an office
or location, like the traditional on-site
inspection, would be held to the same
standards for review as set forth under
Rule 3110.12 (Standards for Reasonable
Review).26 Further, in accordance with
this obligation, proposed Rule
3110.17(c) would provide that where a
member’s remote inspection of an office
or location identifies any indicators of
irregularities or misconduct (i.e., ‘‘red
flags’’),27 the member may need to
impose additional supervisory
26 Rule 3110.12 provides: ‘‘In fulfilling its
obligations under Rule 3110(c), each member must
conduct a review, at least annually, of the
businesses in which it engages. The review must be
reasonably designed to assist in detecting and
preventing violations of and achieving compliance
with applicable securities laws and regulations and
with FINRA rules. Each member shall establish and
maintain supervisory procedures that must take
into consideration, among other things, the firm’s
size, organizational structure, scope of business
activities, number and location of the firm’s offices,
the nature and complexity of the products and
services offered by the firm, the volume of business
done, the number of associated persons assigned to
a location, the disciplinary history of registered
representatives or associated persons, and any
indicators of irregularities or misconduct (i.e., ‘‘red
flags’’), etc. The procedures established and reviews
conducted must provide that the quality of
supervision at remote locations is sufficient to
ensure compliance with applicable securities laws
and regulations and with FINRA rules. A member
must be especially diligent in establishing
procedures and conducting reasonable reviews with
respect to a non-branch location where a registered
representative engages in securities activities. Based
on the factors outlined above, members may need
to impose reasonably designed supervisory
procedures for certain locations or may need to
provide for more frequent reviews of certain
locations.’’
27 Red flags that suggest the increased risk or
occurrence of violations may include, among other
events: Customer complaints; an unexplained
increase or change in the types of investments or
trading concentration that a representative is
recommending or trading; an unexpected
improvement in a representative’s production,
lifestyle, or wealth; questionable or frequent
transfers of cash or securities between customer or
third party accounts, or to or from the
representative; a representative that serves as a
power of attorney, trustee or in a similar capacity
for a customer or has discretionary control over a
customer’s account(s); representative with
disciplinary records; customer investments in one
or a few securities or class of securities that is
inconsistent with firm policies related to such
investments; churning; trading that is inconsistent
with customer objectives; numerous trade
corrections, extensions, liquidations; or significant
switching activity of mutual funds or variable
products held for short time periods. See generally
SLB 17. See also Notice 98–38 and Notice 99–45.
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procedures for that office or location, or
may need to provide for more frequent
monitoring or oversight of that office or
location, or both, including potentially
a subsequent physical, on-site visit on
an announced or unannounced basis
when the member’s operational
difficulties associated with COVID–19
meetings abate, nationally or locally as
relevant, and the challenges the member
is facing in light of the public health
and safety concerns make such physical,
on-site visits feasible, using reasonable
best efforts.
Finally, to underscore the limited
duration of proposed Rule 3110.17, the
proposed supplementary material
expressly states that the temporary relief
would not extend to a member’s
inspection requirements beyond
calendar year 2021 and that such
inspections must be conducted in
compliance with Rule 3110(c).
D. Documentation Requirement
(Proposed Rule 3110.17(d))
In general, Rule 3110(c)(2) describes
the documentation requirements
associated with conducting internal
inspections. The rule requires a member
to reduce the inspection and review
conducted under Rule 3110(c)(1) to a
written report and specifies how long
the member must keep the report on
file.28 If applicable to the location being
inspected, Rule 3110(c)(2)(A) specifies
that the inspection report must include,
without limitation, the testing and
verification of the member’s policies
and procedures, including supervisory
policies and procedures for: (1)
Safeguarding of customer funds and
securities; (2) maintaining books and
records; (3) supervision of supervisory
personnel; (4) transmittals of funds from
customers to third party accounts, from
customer accounts to outside entities,
from customer accounts to locations
other than a customer’s primary
residence, and between customers and
registered representatives, including the
hand-delivery of checks; and (5)
changes of customer account
information, including address and
investment objectives changes, and
validation of such changes.29
In addition to the requirements under
Rule 3110(c)(2), proposed Rule
3110.17(d) would require supplemental
documentation by a member that avails
itself of the remote inspection option.
The member must maintain and
preserve a centralized record for each of
calendar year 2020 and calendar year
2021 that separately identifies: (1) All
offices or locations that had inspections
28 See
29 See
supra note 21.
Rule 3110(c)(2)(A)(i)–(v).
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that were conducted remotely; and (2)
any offices or locations that the member
determined to impose additional
supervisory procedures or more
frequent monitoring, as provided in
Rule 3110.17(c). A member’s
documentation of the results of a remote
inspection for an office or location must
identify any additional supervisory
procedures or more frequent monitoring
for that office or location that were
imposed as a result of the remote
inspection. FINRA believes that this
documentation requirement would help
readily distinguish the offices and
locations that underwent remote
inspections and their attendant
supervisory procedures, and their more
frequent monitoring, as applicable.
FINRA notes that even in the current
environment, member firms have an
ongoing obligation to establish and
maintain a system to supervise the
activities of their associated persons that
is reasonably designed to achieve
compliance with applicable securities
laws and regulations, and with
applicable FINRA rules. FINRA
emphasizes that proposed Rule 3110.17
is not intended to lessen the core
obligations prescribed under Rule 3110.
FINRA believes that proposed Rule
3110.17, which would permit firms to
remotely inspect, subject to specified
requirements described above, their
offices and locations for calendar years
2020 and 2021 instead of an on-site visit
to the office or location would provide
firms a way to comply with Rule 3110(c)
that would not materially diminish, and
is reasonably designed to achieve, the
investor protection objectives of the
inspection requirements under these
unique circumstances. FINRA notes that
potential risks that may arise from
providing firms the option to conduct
their inspections remotely are mitigated
by firms’ use of technology to meet their
supervisory obligations on an ongoing
basis, the unique circumstances under
which they are operating, and the
temporary nature of proposed Rule
3110.17, which would be in place
through December 31, 2021.30 FINRA
will continue to monitor the situation
and engage with member firms, other
financial regulators, and governmental
authorities to determine whether further
regulatory relief or guidance related to
Rule 3110(c) may be appropriate. In
addition, during the time that proposed
Rule 3110.17 remains in effect, FINRA
will closely monitor the effectiveness of
remote inspections and their impacts—
positive or negative—on firms’ overall
supervisory systems to assess whether
FINRA should propose to make
30 See
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75101
permanent a remote inspection option
for some or all locations that would not
materially diminish, and is reasonably
designed to achieve, the investor
protection objectives of the requirement
to inspect offices or locations in
accordance with Rule 3110(c).31
FINRA has filed the proposed rule
change for immediate effectiveness and
has requested that the SEC waive the
requirement that the proposed rule
change not become operative for 30 days
after the date of the filing, so FINRA can
implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,32 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. In recognition of the
impact of COVID–19 on performing the
on-site inspection component of Rule
3110(c), the proposed rule change is
intended to provide firms a temporary
regulatory option to conduct inspections
of offices and locations remotely for
calendar year 2020 in accordance with
Rule 3110.16, and for calendar year
2021. This temporary proposed
supplementary material does not relieve
firms from meeting the core regulatory
obligation to establish and maintain a
system to supervise the activities of
each associated person that is
reasonably designed to achieve
compliance with applicable securities
laws and regulations, and with
applicable FINRA rules that directly
serve investor protection. In a time
when faced with unique challenges
resulting from the COVID–19 pandemic,
FINRA believes that the proposed rule
change provides sensibly tailored relief
that will afford firms the ability to
observe the recommendations of public
health officials to provide for the health
and safety of their personnel, while
continuing to serve and promote the
protection of investors and the public
interest.
31 In Regulatory Notice 17–38 (November 2017)
(‘‘Notice 17–38’’), FINRA had requested comment
on a proposed permanent amendment to Rule 3110
that had contemplated providing firms with the
option to conduct remote inspections of ‘‘qualifying
offices’’ that met specified criteria. At this time,
FINRA intends to defer further consideration of the
proposal described in Notice 17–38 and will
reassess that proposal in light of the experience
with and impacts of temporary proposed Rule
3110.17.
32 15 U.S.C. 78o–3(b)(6).
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is intended solely
to provide temporary relief given the
impacts of the COVID–19 pandemic
crisis.33 As a result of the temporary
nature of the proposed relief, an
abbreviated economic impact
assessment is appropriate.
Economic Impact Assessment
1. Regulatory Objective
FINRA is proposing Rule 3110.17 to
address an issue that has arisen due to
the impacts of the coronavirus outbreak
and restrictions related to health and
safety concerns. As pandemic-related
health and safety concerns persist across
the U.S., firms are continuing to face
operational challenges with respect to
fulfilling the on-site review component
of Rule 3110(c). These challenges persist
even with the extended date set forth
under Rule 3110.16 to complete
calendar year 2020 inspections. In
addition, as the end of year 2020 is
approaching, planning efforts for the onsite component of year 2021 inspections
have also likely been impacted.
Proposed Rule 3110.17 is intended to
provide firms a sensibly tailored and
temporary regulatory accomodation to
fulfill their Rule 3110(c) obligation
remotely for calendar year 2020 in
accordance with Rule 3110.16 and for
calendar year 2021, that would not
materially diminish, and is reasonably
designed to achieve, the investor
protection objectives of the requirement
to inspect offices or locations in
accordance with Rule 3110(c). Such
accommodation is needed given the
current pandemic-related limitations
that still remain in place across the U.S.
The temporary proposed rule change
would permit firms to continue to
comply with stay-at-home orders
imposed in various states, and limit
business travel and other in-person
activities for the health and safety of
their employees.
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2. Economic Baseline
The Economic Baseline of the
proposed temporary relief is the
obligation under Rule 3110(c), as
described above, and the current
number and types of FINRA member
locations that require on-site internal
inspections.
33 See
also Regulatory Notice 20–08 (March 2020).
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17:48 Nov 23, 2020
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3. Economic Impact
FINRA initially believes that
economic impacts of the proposal
would result in both benefits and costs
to firms that would not materially
diminish, and is reasonably designed to
achieve, the investor protection
objectives of the requirement to inspect
offices or locations in accordance with
Rule 3110(c). FINRA will undertake an
evaluation of the efficacy of remote
inspections within a reasonable period
following the implementation date. The
aim of such an evaluation is to ensure
that the program is meeting its goals,
without materially diminishing investor
protections or unintentially increasing
regulatory burdens on any relevant
parties.
The temporary proposed relief is
expected to benefit firms by potentially
reducing the costs and health-related
risks and constraints associated with
conducting on-site inspections of offices
or locations. These benefits may also
include reduced travel costs and lost
productivity during travel, as well as
avoiding the health and safety risks
associated with on-site inspections in
the current environment. Firms will be
able to better manage any backlog of
2020 inspections that may continue to
exist in light of ongoing public health
and safety, and upcoming 2021
inspection planning efforts.
In addition to the public safety-related
aspects of the temporary proposed rule
change, the ability to conduct remote
inspections may free up firm resources
that could potentially be allocated to
other risk monitoring and mitigating
programs. For example, firms might
improve existing technologies and
capabilities or invest in new ones. This
could provide long-term benefits by
further enhancing a firm’s ability to
fulfill its ongoing obligation to have an
effective supervisory system that
includes reviewing the activities and
functions occurring at all offices and
locations. The proposed rule change
may also provide the opportunity for a
firm to enhance its risk management
programs, and assess the effectiveness of
remote inspections and impacts on the
firm’s supervisory systems. Finally,
FINRA preliminarily believes that the
temporary proposed rule change would
benefit the investor community. Such
benefits would stem from the
application of a remote monitoring and
supervisory system on the firm’s
activities taking place at the offices and
locations, despite the travel restrictions
and resulting inability to conduct onsite inspections during the pandemic.
FINRA believes that the temporary
proposed rule change would not result
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in additional significant cost burdens on
firms. FINRA recognizes that there may
be some firms that have already
incurred, or will incur short-term
increased costs derived mainly from
having to shift to the remote work
environment (e.g., relying more on
electronic formats and purchasing new
hardware and software). FINRA
anticipates firms would incur some
costs stemming from the proposed
documentation requirements. FINRA
believes that costs stemming from the
need to aggregate branch and office
reports of additional supervisory
procedures or more frequent monitoring
into a centralized record should be
minimal, relying on existing firm
infrastructure and compliance systems.
FINRA additionally believes that the
proposed requirement to maintain a
centralized record may require firms to
incur technology costs to generate such
record and could also result in firms
being more focused on any additional
supervisory procedures or more
frequent monitoring that may be
imposed on a location or office.
Overall, FINRA believes that the
proposal provides a balanced approach
to the potential costs and benefits. As
noted above, the proposed rule change
would be limited in time, and cover the
inspection cycles of calendar year 2020
and 2021, or until the conclusion of any
extension thereof.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 34 and Rule 19b–
4(f)(6) thereunder.35
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
34 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. FINRA has
satisfied this requirement.
35 17
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Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices
become operative for 30 days after the
date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii), the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. In
its filing with the Commission, FINRA
has asked the Commission to waive the
30-day operative delay so that the
proposed rule change may become
operative immediately upon filing. As
noted above, the ongoing extenuating
circumstances of the COVID–19
pandemic make it impractical for
FINRA member firms to conduct the onsite inspection component of Rule
3110(c) at many or most locations.
Consequently, FINRA believes that
firms will have a considerable backlog
of 2020 inspections and that planning
on-site inspections for 2021 may be
impacted as well. FINRA stated that the
temporary proposed rule change would
help FINRA member firms meet their
obligations under Rule 3110(c) using a
regulatory alternative that would not
materially diminish, and is reasonably
designed to achieve, the investor
protection objectives of the inspection
requirements under these unique
circumstances.
The Commission believes that
waiving the operative delay is
consistent with the protection of
investors and the public interest
because it would allow the proposed
change to become operative on the date
of filing and to provide immediate
temporary relief to firms during these
extenuating circumstances. In reaching
this conclusion, the Commission notes
the proposed rule change would provide
only temporary relief based on the
compelling health and safety concerns
and the operational challenges member
firms are facing due to the sustained
COVID–19 pandemic.36 Furthermore,
the Commission notes that the proposed
rule change would not relieve firms
from meeting the core regulatory
obligation to establish and maintain a
system to supervise the activities of
each associated person that is
reasonably designed to achieve
compliance with applicable securities
laws and regulations, and with
applicable FINRA rules that directly
serve investor protection. Accordingly,
the Commission waives the 30-day
operative delay and designates the
proposed rule change operative upon
filing.37
36 See
supra note 5.
purposes only of waiving the operative
delay, the Commission has considered the proposed
rule’s impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
37 For
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17:48 Nov 23, 2020
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75103
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly.
All submissions should refer to File
Number SR–FINRA–2020–040 and
should be submitted on or before
December 15, 2020.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2020–25902 Filed 11–23–20; 8:45 am]
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2020–040 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2020–040. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
PO 00000
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
J. Matthew DeLesDernier,
Assistant Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–177, OMB Control No.
3235–0177]
Proposed Collection; Comment
Request
Extension:
Rule 6e–2 and Form N–6EI–1
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (the
‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Rule 6e–2 (17 CFR 270.6e–2) under
the Investment Company Act of 1940
(‘‘Act’’) (15 U.S.C. 80a) is an exemptive
rule that provides separate accounts
formed by life insurance companies to
fund certain variable life insurance
products, exemptions from certain
provisions of the Act, subject to
conditions set forth in the rule.
Rule 6e–2 provides a separate account
with an exemption from the registration
provisions of section 8(a) of the Act if
the account files with the Commission
Form N–6EI–1, a notification of claim of
exemption.
The rule also exempts a separate
account from a number of other sections
of the Act, provided that the separate
account makes certain disclosure in its
registration statements (in the case of
those separate accounts that elect to
register), reports to contractholders,
proxy solicitations, and submissions to
state regulatory authorities, as
prescribed by the rule.
Since 2008, there have been no filings
of Form N–6EI–1 by separate accounts.
Therefore, there has been no cost or
38 17
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24NON1
]]>Agencies
[Federal Register Volume 85, Number 227 (Tuesday, November 24, 2020)]
[Notices]
[Pages 75097-75103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25902]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90454; File No. SR-FINRA-2020-040]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt Temporary Supplementary Material .17
(Temporary Relief To Allow Remote Inspections for Calendar Year 2020
and Calendar Year 2021) Under FINRA Rule 3110 (Supervision)
November 18, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 6, 2020, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt temporary Supplementary Material .17
(Temporary Relief to Allow Remote Inspections for Calendar Year 2020
and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to provide
member firms the option, subject to specified requirements under the
proposed supplementary material, to complete remotely their calendar
year 2020 and calendar year 2021 inspection obligations under FINRA
Rule 3110(c) (Internal Inspections), without an on-site visit to the
office or location.\4\ The temporary rule change is necessitated by the
compelling health and safety concerns and the operational challenges
member firms are facing due to the sustained COVID-19 pandemic.\5\
---------------------------------------------------------------------------
\4\ SEC staff and FINRA have stated in guidance that inspections
must include a physical, on-site review component. See SEC National
Examination Risk Alert, Volume I, Issue 2 (November 30, 2011) and
Regulatory Notice 11-54 (November 2011) (``Notice 11-54'') (joint
SEC and FINRA guidance stating, a ``broker-dealer must conduct on-
site inspections of each of its office locations; Office of
Supervisory Jurisdictions (``OSJs'') and non-OSJ branches that
supervise non-branch locations at least annually, all non-
supervising branch offices at least every three years; and non-
branch offices periodically.'') (footnote defining an OSJ omitted).
See also SEC Division of Market Regulation, Staff Legal Bulletin No.
17: Remote Office Supervision (March 19, 2004) (``SLB 17'')
(stating, in part, that broker-dealers that conduct business through
geographically dispersed offices have not adequately discharged
their supervisory obligations where there are no on-site routine or
``for cause'' inspections of those offices).
\5\ The proposed rule change will automatically sunset on
December 31, 2021. If FINRA seeks to extend the duration of the
temporary proposed rule beyond December 31, 2021, FINRA will submit
a separate rule filing to further renew the temporary relief.
---------------------------------------------------------------------------
Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are bracketed.
* * * * *
3000. Supervision and Responsibilities Relating to Associated Persons
3100. Supervisory Responsibilities
3110. Supervision
(a) through (f) No Change
Supplementary Material
.01 through .16 No Change
.17 Temporary Relief To Allow Remote Inspections for Calendar Year
2020 and Calendar Year 2021
(a) Use of Remote Inspections. Each member obligated to conduct an
inspection of an office of supervisory jurisdiction, branch office or
non-branch location in calendar year 2020 and calendar year 2021
pursuant to, as applicable, paragraphs (c)(1)(A), (B) and (C) under
Rule 3110 may, subject to the requirements of this Rule 3110.17,
satisfy such obligation by conducting the applicable inspection
remotely, without an on-site visit to the office or location. In
accordance with Rule 3110.16, inspections for calendar year 2020 must
be completed on or before March 31, 2021 and inspections for
[[Page 75098]]
calendar year 2021 must be completed on or before December 31, 2021.
Notwithstanding Rule 3110.17, a member shall remain subject to the
other requirements of Rule 3110(c).
(b) Written Supervisory Procedures for Remote Inspections.
Consistent with a member's obligation under Rule 3110(b)(1), a member
that elects to conduct each of its calendar year 2020 or calendar year
2021 inspections remotely must amend or supplement its written
supervisory procedures to provide for remote inspections that are
reasonably designed to assist in detecting and preventing violations of
and achieving compliance with applicable securities laws and
regulations, and with applicable FINRA rules. Reasonably designed
procedures for conducting remote inspections of offices or locations
should include, among other things: (1) A description of the
methodology, including technologies permitted by the member, that may
be used to conduct remote inspections; and (2) the use of other risk-
based systems employed generally by the member firm to identify and
prioritize for review those areas that pose the greatest risk of
potential violations of applicable securities laws and regulations, and
of applicable FINRA rules.
(c) Effective Supervisory System. The requirement to conduct
inspections of offices and locations is one part of the member's
overall obligation to have an effective supervisory system and
therefore, the member must continue with its ongoing review of the
activities and functions occurring at all offices and locations,
whether or not the member conducts inspections remotely. A member's use
of a remote inspection of an office or location will be held to the
same standards for review as set forth under Rule 3110.12. Where a
member's remote inspection of an office or location identifies any
indicators of irregularities or misconduct (i.e., ``red flags''), the
member may need to impose additional supervisory procedures for that
office or location or may need to provide for more frequent monitoring
of that office or location, including potentially a subsequent
physical, on-site visit on an announced or unannounced basis when the
member's operational difficulties associated with COVID-19 abate,
nationally or locally as relevant, and the challenges a member is
facing in light of the public health and safety concerns make such on-
site visits feasible using reasonable best efforts. The temporary
relief provided by this Rule 3110.17 does not extend to a member's
inspection requirements beyond calendar year 2021 and such inspections
must be conducted in compliance with Rule 3110(c).
(d) Documentation Requirement. A member must maintain and preserve
a centralized record for each of calendar year 2020 and calendar year
2021 that separately identifies: (1) All offices or locations that had
inspections that were conducted remotely; and (2) any offices or
locations for which the member determined to impose additional
supervisory procedures or more frequent monitoring, as provided in Rule
3110.17(c). A member's documentation of the results of a remote
inspection for an office or location must identify any additional
supervisory procedures or more frequent monitoring for that office or
location that were imposed as a result of the remote inspection.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On March 13, 2020 the United States declared a national emergency
in response to the pandemic.\6\ Around this time, many states issued
stay-at-home orders and imposed restrictions on businesses, social
activities, and travel to slow the spread of COVID-19 and reduce the
burden on the U.S. health care system in accordance with the
recommendations of public health experts.\7\ In response, like many
employers across the U.S., member firms closed their offices to the
public, transitioned their employees to telework arrangements to comply
with stay-at-home orders, and implemented other restrictive measures in
an effort to slow the spread of COVID-19 such as curtailing or
eliminating non-essential business travel, and significantly limiting
or canceling in-person activities.\8\ These pandemic-related
operational changes have made it impracticable for member firms to
conduct the on-site inspection component of Rule 3110(c) at many or
most locations for calendar year 2020 because this compliance function
requires firm employees to travel to geographically dispersed OSJs,
branch offices, and non-branch locations. Such travel not only has been
restricted at times by government orders, but also puts the health and
safety of employees at great risk of contracting and spreading COVID-
19.\9\ By mid-year, with many restrictive measures still in place, and
in some instances additional quarantine requirements imposed on
interstate travel, on-site inspections of offices or locations
scheduled for calendar year 2020 continued to remain in abeyance.\10\
In recognition of the logistical challenges firms were facing at that
time to satisfy the on-site regulatory component of Rule 3110(c), FINRA
adopted Rule 3110.16 (Temporary Extension of Time to Complete Office
Inspections), extending the time by which member firms must complete
[[Page 75099]]
their calendar year 2020 inspection obligations under Rule 3110(c) to
March 31, 2021, but emphasizing that the extension of time did not
relieve firms from conducting the on-site portion of the inspections of
their OSJs, branch offices, and non-branch locations.\11\
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\6\ See Centers for Disease Control and Prevention (``CDC''),
International Classification of Diseases, Tenth Revision, Clinical
Modification, https://www.cdc.gov/nchs/data/icd/Announcement-New-ICD-code-for-coronavirus-3-18-2020.pdf. See also WHO Director-
General, Opening Remarks at the Media Briefing on COVID-19 (March
11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
\7\ See S.J. Lange et al., Potential Indirect Effects of the
COVID-19 Pandemic on Use of Emergency Departments for Acute Life-
Threatening Conditions--United States, January-May 2020, Morbidity
and Mortality Weekly Report (June 26, 2020), https://www.cdc.gov/mmwr/volumes/69/wr/mm6925e2.htm.
\8\ See generally Regulatory Notice 20-16 (May 2020) (``Notice
20-16'') (describing practices implemented by firms to transition
to, and supervise in, remote work environment during the COVID-19
pandemic).
\9\ See CDC, Travel During the COVID-19 Pandemic (stating in
part, ``Travel increases your chance of getting and spreading COVID-
19. Staying home is the best way to protect yourself and others from
COVID-19.''), https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html (updated October 21, 2020).
\10\ See, e.g., Government of the District of Columbia, Phase
Two (June 22, 2020) (announcing certain businesses to reopen and
activities to resume under specified conditions and stating that
anyone coming into Washington, DC from states specified as high-risk
is required to self-quarantine for 14 days), https://coronavirus.dc.gov/phasetwo (last visited November 6, 2020); New
York Department of Health, Interim Guidance for Quarantine
Restrictions on Travelers Arriving in New York State Following Out
of State Travel (November 3, 2020), available at https://coronavirus.health.ny.gov/covid-19-travel-advisory (last visited
November 6, 2020); and Chicago Department of Public Health,
Emergency Travel Order (issued July 2, 2020) (directing travelers
entering or returning to Chicago from specified states experiencing
a surge in new COVID-19 cases to quarantine for a 14-day period from
the time of last contact within the identified state), https://www.chicago.gov/city/en/sites/covid-19/home/emergency-travel-order.html (updated October 27, 2020).
\11\ See Securities Exchange Act Release No. 89188 (June 30,
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate
Effectiveness of File No SR-FINRA-2020-019) (stating, among other
things, that FINRA will consider whether additional relief may be
warranted to address any backlog of 2020 inspections that may
continue to exist in light of ongoing public health and safety
concerns).
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The acute health and safety concerns related to COVID-19 persist,
with the number of confirmed cases of COVID-19 in the U.S. continuing
to rise since March 13, 2020.\12\ While firms have continued to
supervise OSJs, branch offices, and non-branch locations by, among
other things, implementing remote supervisory practices through novel
uses of technology as well as existing methods of supervision (e.g.,
supervisory checklists, surveillance tools, incident trackers, email
review, and trade exception reports),\13\ firms are still experiencing
logistical challenges related to conducting the on-site portion of
their inspections due to continuing business and governmental
restrictions and public health concerns.\14\
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\12\ See Johns Hopkins, Coronavirus Resource Center, COVID-19
Dashboard by the Center for Systems Science and Engineering at Johns
Hopkins University, https://coronavirus.jhu.edu/map.html (last
visited November 6, 2020).
\13\ See Notice 20-16.
\14\ See supra note 10.
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Based on feedback described in Notice 20-16, in comment letters
submitted in response to File No. SR-FINRA-2020-019,\15\ and through
recent discussions with FINRA's advisory committees and other industry
representatives, FINRA understands that since approximately March 2020,
many firms have suspended the on-site component of their inspections
scheduled for calendar year 2020. With no certainty as to when
pandemic-related health concerns and restrictions will subside, firms
will have a considerable backlog of 2020 inspections that may be
difficult, if not impossible, to overcome on or before March 31, 2021,
even if restrictions are lifted sometime between now and then.
Moreover, FINRA recognizes that planning on-site inspections for
calendar year 2021 for OSJs, branch offices, and non-branch locations
in the current environment may now be impacted as well. In light of
pandemic-related developments, including those since the adoption of
Rule 3110.16, and the approaching end of year 2020, FINRA believes
further sensible and tailored temporary relief is warranted for member
firms to meet their inspection obligations under Rule 3110(c) for
calendar years 2020 and 2021.
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\15\ See Submitted Comments to Securities Exchange Act Release
No. 89188 (June 30, 2020), 85 FR 40713 (July 7, 2020) (Notice of
Filing and Immediate Effectiveness of File No SR-FINRA-2020-019),
https://www.sec.gov/comments/sr-finra-2020-019/srfinra2020019.htm.
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Proposed Supplementary Material .17 to Rule 3110
In order to proactively address these concerns, FINRA is proposing
to adopt temporary Supplementary Material .17. Temporary proposed
Supplementary Material .17 would provide member firms, subject to
specified requirements therein, the option to conduct remotely the
inspections of their OSJs, branch offices, and non-branch locations for
calendar year 2020 and calendar year 2021, without the requirement to
conduct an on-site visit to such office or location. As described
further below, proposed Rule 3110.17 would set forth the dates by which
inspections for calendar years 2020 and 2021 are due, the requirement
to amend or supplement written supervisory procedures for remote
inspections, the use of remote inspections as part of an effective
supervisory system, and documentation requirements. FINRA believes this
temporary remote inspection option is a reasonable alternative to
provide to firms to fulfill their Rule 3110(c) obligations during these
pressing times, and is designed to achieve the investor protection
objectives of the inspection requirements under these unique
circumstances.
The responsibility of firms to supervise their associated persons
is a critical component of broker-dealer regulation.\16\ The temporary
proposed supplementary material is not intended to alter this core
responsibility, embodied in Rule 3110, to establish and maintain a
system to supervise the activities of each associated person that is
reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules. The advent of
technology and automation in the financial industry has significantly
changed the way in which members and their associated persons conduct
their business, communicate, and meet their regulatory obligations.
FINRA recognizes that firms generally use an array of technological
tools to facilitate their supervisory practices (e.g., surveillance
systems; electronic tracking programs or applications; electronic
communications, including video conferencing tools), which many firms
have leveraged to create and implement remote inspection plans, on a
temporary basis, in response to pandemic-related operational
challenges.\17\ FINRA believes that proposed Rule 3110.17 would provide
a sensibly tailored regulatory alternative for firms to fulfill their
obligations under Rule 3110(c) that would not materially diminish, and
is reasonably designed to achieve, the investor protection objectives
of the inspection requirements under these unique circumstances. FINRA
further notes that the proposed relief would be limited in duration to
align with the extended dates set forth under Rule 3110.16 of March 31,
2021 for calendar year 2020 inspections and December 31, 2021 for
calendar year 2021 inspections.\18\
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\16\ See SLB 17. See also Notice 11-54 and Notice to Members 98-
38 (May 1998) (``Notice 98-38'').
\17\ See Notice 20-16. See generally FINRA White Paper,
``Technology Based Innovations for Regulatory Compliance
(``RegTech'') in the Securities Industry'' (September 2018)
(reporting, among other things, that as financial services firms
seek to keep pace with regulatory compliance requirements, they are
turning to new and innovative regulatory tools to assist them in
meeting their obligations in an effective and efficient manner),
https://www.finra.org/sites/default/files/2018_RegTech_Report.pdf.
\18\ See supra note 5.
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A. Deadlines To Complete Calendar Year 2020 Inspections and Calendar
Year 2021 Inspections (Proposed Rule 3110.17(a))
Currently, Rule 3110(c)(1) provides that an inspection of an office
or location must occur on a designated frequency, and the periodicity
of the required inspection varies depending on the classification of
the location or the nature of the activities that take place. OSJs and
supervisory branch offices must be inspected at least annually (on a
calendar-year basis); non-supervisory branch offices, at least every
three years; and non-branch locations, on a periodic schedule, presumed
to be at least every three years.\19\ Under Rule 3110.16, firms have
until March 31, 2021 to complete their calendar year 2020 inspections
in accordance with the current requirements of Rule 3110(c) that
include physical, on-site inspections.\20\
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\19\ See generally Rule 3110(c)(1) and Rule 3110.13 (General
Presumption of Three-Year Limit for Periodic Inspection Schedules).
\20\ See supra note 4.
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Proposed Rule 3110.17(a) would provide that a member firm that is
obligated to conduct an inspection of an OSJ, branch office or non-
branch location in calendar year 2020 and calendar year 2021 pursuant
to the applicable periodicity set forth under
[[Page 75100]]
Rule 3110(c)(1) may satisfy such obligation by conducting the
applicable inspection remotely, without an on-site visit to the office
or location subject to the other requirements set forth under the
proposed supplementary material. In addition, the proposed
supplementary material would expressly provide that in accordance with
Rule 3110.16, inspections for calendar year 2020 must be completed on
or before March 31, 2021 and inspections for calendar year 2021 must be
completed on or before December 31, 2021. FINRA believes that providing
firms with the option to satisfy the inspection component of Rule
3110(c) remotely would enable firms to finish their 2020 inspections on
or before March 31, 2021, and their upcoming 2021 inspections on or
before December 31, 2021, particularly given the uncertainty
surrounding planning inspections at this time. Further, proposed Rule
3110.17(a) would affirm that notwithstanding Rule 3110.17, a member
would remain subject to the other requirements of Rule 3110(c).\21\
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\21\ In addition to requiring firms to conduct inspections of
their offices and locations on a designated frequency, Rule 3110(c)
generally requires a member to retain a written record of the date
upon which each review and inspection occurred, reduce a location's
inspection to a written report and keep each inspection report on
file either for a minimum of three years or, if the location's
inspection schedule is longer than three years, until the next
inspection report has been written. If applicable to the location
being inspected, the inspection report must include, without
limitation, the testing and verification of the member's policies
and procedures, including supervisory policies and procedures, in
specified areas. See Rule 3110(c)(2). In addition, to prevent
compromising the effectiveness of inspections due to conflicts of
interest, the rule requires a member to ensure that the person
conducting the inspection is not an associated person assigned to
the location or is not directly or indirectly supervised by, or
otherwise reporting to, an associated person assigned to that
location. See Rule 3110(c)(3).
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B. Written Supervisory Procedures for Remote Inspections (Proposed Rule
3110.17(b))
FINRA has long emphasized that member firms have a fundamental
obligation to implement a supervisory system that is tailored
specifically to the member firm's business and addresses the activities
of all its associated persons.\22\ As part of an effective supervisory
system, a member must establish and maintain written procedures.\23\
Paragraph (1) (General Requirements) under Rule 3110(b) (Written
Procedures) provides that a member must establish, maintain, and
enforce written procedures to supervise the types of business in which
it engages and the activities of its associated persons that are
reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules.
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\22\ See Notice to Members 99-45 (June 1999) (``Notice 99-45'');
see generally Regulatory Notice 18-15 (April 2018).
\23\ See Rule 3110(a)(1).
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To underscore the importance of this existing requirement in the
context of remote inspections, proposed Rule 3110.17(b) would expressly
provide that consistent with a member's obligation under Rule
3110(b)(1), a member that elects to conduct each of its calendar year
2020 or calendar year 2021 inspections remotely must amend or
supplement its written supervisory procedures to provide for remote
inspections that are reasonably designed to assist in detecting and
preventing violations of and achieving compliance with applicable
securities laws and regulations, and with applicable FINRA rules. Under
proposed Rule 3110.17(b), reasonably designed procedures for conducting
remote inspection of offices or locations should include, among other
things, a description of the methodology, including technologies
permitted by the member, that may be used to conduct remote
inspections. In addition, such procedures should include the use of
other risk-based systems employed generally by the member firm to
identify and prioritize for review those areas that pose the greatest
risk of potential violations of applicable securities laws and
regulations, and of applicable FINRA rules.\24\
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\24\ Offices or locations that may present a higher risk profile
would include, for example, those that have associated persons
engaging in activities that involve handling customer funds or
securities, maintaining books and records as described under
applicable federal securities laws and FINRA rules, order execution
or other activities that may be more susceptible to higher risks of
operational or sales practice wrongdoing, or have associated persons
assigned to an office or location who may be subject to additional
or heightened supervisory procedures.
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C. An Effective Supervisory System (Proposed Rule 3110.17(c))
Internal inspections are a critical component of a member's
fundamental obligation under Rule 3110 to establish and maintain a
system to supervise the activities of each associated person that is
reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules.\25\ Proposed
Rule 3110.17(c) would expressly affirm this principle that the
requirement to conduct inspections of offices and locations is one part
of the member's overall ongoing obligation to have an effective
supervisory system and therefore, a member must continue with its
reviews of the activities and functions occurring at all offices and
locations whether or not such offices or locations are due for an
inspection under Rule 3110(c) in a given year, and the member's
election to conduct such inspections remotely. In addition, under the
proposed supplementary material, a member's remote inspection of an
office or location, like the traditional on-site inspection, would be
held to the same standards for review as set forth under Rule 3110.12
(Standards for Reasonable Review).\26\ Further, in accordance with this
obligation, proposed Rule 3110.17(c) would provide that where a
member's remote inspection of an office or location identifies any
indicators of irregularities or misconduct (i.e., ``red flags''),\27\
the member may need to impose additional supervisory
[[Page 75101]]
procedures for that office or location, or may need to provide for more
frequent monitoring or oversight of that office or location, or both,
including potentially a subsequent physical, on-site visit on an
announced or unannounced basis when the member's operational
difficulties associated with COVID-19 meetings abate, nationally or
locally as relevant, and the challenges the member is facing in light
of the public health and safety concerns make such physical, on-site
visits feasible, using reasonable best efforts.
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\25\ See SLB 17 (stating, in part, ``Inspections are a vital
component of a supervisory system.'').
\26\ Rule 3110.12 provides: ``In fulfilling its obligations
under Rule 3110(c), each member must conduct a review, at least
annually, of the businesses in which it engages. The review must be
reasonably designed to assist in detecting and preventing violations
of and achieving compliance with applicable securities laws and
regulations and with FINRA rules. Each member shall establish and
maintain supervisory procedures that must take into consideration,
among other things, the firm's size, organizational structure, scope
of business activities, number and location of the firm's offices,
the nature and complexity of the products and services offered by
the firm, the volume of business done, the number of associated
persons assigned to a location, the disciplinary history of
registered representatives or associated persons, and any indicators
of irregularities or misconduct (i.e., ``red flags''), etc. The
procedures established and reviews conducted must provide that the
quality of supervision at remote locations is sufficient to ensure
compliance with applicable securities laws and regulations and with
FINRA rules. A member must be especially diligent in establishing
procedures and conducting reasonable reviews with respect to a non-
branch location where a registered representative engages in
securities activities. Based on the factors outlined above, members
may need to impose reasonably designed supervisory procedures for
certain locations or may need to provide for more frequent reviews
of certain locations.''
\27\ Red flags that suggest the increased risk or occurrence of
violations may include, among other events: Customer complaints; an
unexplained increase or change in the types of investments or
trading concentration that a representative is recommending or
trading; an unexpected improvement in a representative's production,
lifestyle, or wealth; questionable or frequent transfers of cash or
securities between customer or third party accounts, or to or from
the representative; a representative that serves as a power of
attorney, trustee or in a similar capacity for a customer or has
discretionary control over a customer's account(s); representative
with disciplinary records; customer investments in one or a few
securities or class of securities that is inconsistent with firm
policies related to such investments; churning; trading that is
inconsistent with customer objectives; numerous trade corrections,
extensions, liquidations; or significant switching activity of
mutual funds or variable products held for short time periods. See
generally SLB 17. See also Notice 98-38 and Notice 99-45.
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Finally, to underscore the limited duration of proposed Rule
3110.17, the proposed supplementary material expressly states that the
temporary relief would not extend to a member's inspection requirements
beyond calendar year 2021 and that such inspections must be conducted
in compliance with Rule 3110(c).
D. Documentation Requirement (Proposed Rule 3110.17(d))
In general, Rule 3110(c)(2) describes the documentation
requirements associated with conducting internal inspections. The rule
requires a member to reduce the inspection and review conducted under
Rule 3110(c)(1) to a written report and specifies how long the member
must keep the report on file.\28\ If applicable to the location being
inspected, Rule 3110(c)(2)(A) specifies that the inspection report must
include, without limitation, the testing and verification of the
member's policies and procedures, including supervisory policies and
procedures for: (1) Safeguarding of customer funds and securities; (2)
maintaining books and records; (3) supervision of supervisory
personnel; (4) transmittals of funds from customers to third party
accounts, from customer accounts to outside entities, from customer
accounts to locations other than a customer's primary residence, and
between customers and registered representatives, including the hand-
delivery of checks; and (5) changes of customer account information,
including address and investment objectives changes, and validation of
such changes.\29\
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\28\ See supra note 21.
\29\ See Rule 3110(c)(2)(A)(i)-(v).
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In addition to the requirements under Rule 3110(c)(2), proposed
Rule 3110.17(d) would require supplemental documentation by a member
that avails itself of the remote inspection option. The member must
maintain and preserve a centralized record for each of calendar year
2020 and calendar year 2021 that separately identifies: (1) All offices
or locations that had inspections that were conducted remotely; and (2)
any offices or locations that the member determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in Rule 3110.17(c). A member's documentation of the results of
a remote inspection for an office or location must identify any
additional supervisory procedures or more frequent monitoring for that
office or location that were imposed as a result of the remote
inspection. FINRA believes that this documentation requirement would
help readily distinguish the offices and locations that underwent
remote inspections and their attendant supervisory procedures, and
their more frequent monitoring, as applicable.
FINRA notes that even in the current environment, member firms have
an ongoing obligation to establish and maintain a system to supervise
the activities of their associated persons that is reasonably designed
to achieve compliance with applicable securities laws and regulations,
and with applicable FINRA rules. FINRA emphasizes that proposed Rule
3110.17 is not intended to lessen the core obligations prescribed under
Rule 3110. FINRA believes that proposed Rule 3110.17, which would
permit firms to remotely inspect, subject to specified requirements
described above, their offices and locations for calendar years 2020
and 2021 instead of an on-site visit to the office or location would
provide firms a way to comply with Rule 3110(c) that would not
materially diminish, and is reasonably designed to achieve, the
investor protection objectives of the inspection requirements under
these unique circumstances. FINRA notes that potential risks that may
arise from providing firms the option to conduct their inspections
remotely are mitigated by firms' use of technology to meet their
supervisory obligations on an ongoing basis, the unique circumstances
under which they are operating, and the temporary nature of proposed
Rule 3110.17, which would be in place through December 31, 2021.\30\
FINRA will continue to monitor the situation and engage with member
firms, other financial regulators, and governmental authorities to
determine whether further regulatory relief or guidance related to Rule
3110(c) may be appropriate. In addition, during the time that proposed
Rule 3110.17 remains in effect, FINRA will closely monitor the
effectiveness of remote inspections and their impacts--positive or
negative--on firms' overall supervisory systems to assess whether FINRA
should propose to make permanent a remote inspection option for some or
all locations that would not materially diminish, and is reasonably
designed to achieve, the investor protection objectives of the
requirement to inspect offices or locations in accordance with Rule
3110(c).\31\
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\30\ See supra note 5.
\31\ In Regulatory Notice 17-38 (November 2017) (``Notice 17-
38''), FINRA had requested comment on a proposed permanent amendment
to Rule 3110 that had contemplated providing firms with the option
to conduct remote inspections of ``qualifying offices'' that met
specified criteria. At this time, FINRA intends to defer further
consideration of the proposal described in Notice 17-38 and will
reassess that proposal in light of the experience with and impacts
of temporary proposed Rule 3110.17.
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days after the
date of the filing, so FINRA can implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\32\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. In recognition of the impact of COVID-19 on performing
the on-site inspection component of Rule 3110(c), the proposed rule
change is intended to provide firms a temporary regulatory option to
conduct inspections of offices and locations remotely for calendar year
2020 in accordance with Rule 3110.16, and for calendar year 2021. This
temporary proposed supplementary material does not relieve firms from
meeting the core regulatory obligation to establish and maintain a
system to supervise the activities of each associated person that is
reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules that directly
serve investor protection. In a time when faced with unique challenges
resulting from the COVID-19 pandemic, FINRA believes that the proposed
rule change provides sensibly tailored relief that will afford firms
the ability to observe the recommendations of public health officials
to provide for the health and safety of their personnel, while
continuing to serve and promote the protection of investors and the
public interest.
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\32\ 15 U.S.C. 78o-3(b)(6).
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[[Page 75102]]
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is
intended solely to provide temporary relief given the impacts of the
COVID-19 pandemic crisis.\33\ As a result of the temporary nature of
the proposed relief, an abbreviated economic impact assessment is
appropriate.
---------------------------------------------------------------------------
\33\ See also Regulatory Notice 20-08 (March 2020).
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Economic Impact Assessment
1. Regulatory Objective
FINRA is proposing Rule 3110.17 to address an issue that has arisen
due to the impacts of the coronavirus outbreak and restrictions related
to health and safety concerns. As pandemic-related health and safety
concerns persist across the U.S., firms are continuing to face
operational challenges with respect to fulfilling the on-site review
component of Rule 3110(c). These challenges persist even with the
extended date set forth under Rule 3110.16 to complete calendar year
2020 inspections. In addition, as the end of year 2020 is approaching,
planning efforts for the on-site component of year 2021 inspections
have also likely been impacted.
Proposed Rule 3110.17 is intended to provide firms a sensibly
tailored and temporary regulatory accomodation to fulfill their Rule
3110(c) obligation remotely for calendar year 2020 in accordance with
Rule 3110.16 and for calendar year 2021, that would not materially
diminish, and is reasonably designed to achieve, the investor
protection objectives of the requirement to inspect offices or
locations in accordance with Rule 3110(c). Such accommodation is needed
given the current pandemic-related limitations that still remain in
place across the U.S. The temporary proposed rule change would permit
firms to continue to comply with stay-at-home orders imposed in various
states, and limit business travel and other in-person activities for
the health and safety of their employees.
2. Economic Baseline
The Economic Baseline of the proposed temporary relief is the
obligation under Rule 3110(c), as described above, and the current
number and types of FINRA member locations that require on-site
internal inspections.
3. Economic Impact
FINRA initially believes that economic impacts of the proposal
would result in both benefits and costs to firms that would not
materially diminish, and is reasonably designed to achieve, the
investor protection objectives of the requirement to inspect offices or
locations in accordance with Rule 3110(c). FINRA will undertake an
evaluation of the efficacy of remote inspections within a reasonable
period following the implementation date. The aim of such an evaluation
is to ensure that the program is meeting its goals, without materially
diminishing investor protections or unintentially increasing regulatory
burdens on any relevant parties.
The temporary proposed relief is expected to benefit firms by
potentially reducing the costs and health-related risks and constraints
associated with conducting on-site inspections of offices or locations.
These benefits may also include reduced travel costs and lost
productivity during travel, as well as avoiding the health and safety
risks associated with on-site inspections in the current environment.
Firms will be able to better manage any backlog of 2020 inspections
that may continue to exist in light of ongoing public health and
safety, and upcoming 2021 inspection planning efforts.
In addition to the public safety-related aspects of the temporary
proposed rule change, the ability to conduct remote inspections may
free up firm resources that could potentially be allocated to other
risk monitoring and mitigating programs. For example, firms might
improve existing technologies and capabilities or invest in new ones.
This could provide long-term benefits by further enhancing a firm's
ability to fulfill its ongoing obligation to have an effective
supervisory system that includes reviewing the activities and functions
occurring at all offices and locations. The proposed rule change may
also provide the opportunity for a firm to enhance its risk management
programs, and assess the effectiveness of remote inspections and
impacts on the firm's supervisory systems. Finally, FINRA preliminarily
believes that the temporary proposed rule change would benefit the
investor community. Such benefits would stem from the application of a
remote monitoring and supervisory system on the firm's activities
taking place at the offices and locations, despite the travel
restrictions and resulting inability to conduct on-site inspections
during the pandemic.
FINRA believes that the temporary proposed rule change would not
result in additional significant cost burdens on firms. FINRA
recognizes that there may be some firms that have already incurred, or
will incur short-term increased costs derived mainly from having to
shift to the remote work environment (e.g., relying more on electronic
formats and purchasing new hardware and software). FINRA anticipates
firms would incur some costs stemming from the proposed documentation
requirements. FINRA believes that costs stemming from the need to
aggregate branch and office reports of additional supervisory
procedures or more frequent monitoring into a centralized record should
be minimal, relying on existing firm infrastructure and compliance
systems. FINRA additionally believes that the proposed requirement to
maintain a centralized record may require firms to incur technology
costs to generate such record and could also result in firms being more
focused on any additional supervisory procedures or more frequent
monitoring that may be imposed on a location or office.
Overall, FINRA believes that the proposal provides a balanced
approach to the potential costs and benefits. As noted above, the
proposed rule change would be limited in time, and cover the inspection
cycles of calendar year 2020 and 2021, or until the conclusion of any
extension thereof.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \34\ and Rule 19b-
4(f)(6) thereunder.\35\
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\34\ 15 U.S.C. 78s(b)(3)(A).
\35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
FINRA has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not
[[Page 75103]]
become operative for 30 days after the date of filing. However,
pursuant to Rule 19b-4(f)(6)(iii), the Commission may designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing with the Commission,
FINRA has asked the Commission to waive the 30-day operative delay so
that the proposed rule change may become operative immediately upon
filing. As noted above, the ongoing extenuating circumstances of the
COVID-19 pandemic make it impractical for FINRA member firms to conduct
the on-site inspection component of Rule 3110(c) at many or most
locations. Consequently, FINRA believes that firms will have a
considerable backlog of 2020 inspections and that planning on-site
inspections for 2021 may be impacted as well. FINRA stated that the
temporary proposed rule change would help FINRA member firms meet their
obligations under Rule 3110(c) using a regulatory alternative that
would not materially diminish, and is reasonably designed to achieve,
the investor protection objectives of the inspection requirements under
these unique circumstances.
The Commission believes that waiving the operative delay is
consistent with the protection of investors and the public interest
because it would allow the proposed change to become operative on the
date of filing and to provide immediate temporary relief to firms
during these extenuating circumstances. In reaching this conclusion,
the Commission notes the proposed rule change would provide only
temporary relief based on the compelling health and safety concerns and
the operational challenges member firms are facing due to the sustained
COVID-19 pandemic.\36\ Furthermore, the Commission notes that the
proposed rule change would not relieve firms from meeting the core
regulatory obligation to establish and maintain a system to supervise
the activities of each associated person that is reasonably designed to
achieve compliance with applicable securities laws and regulations, and
with applicable FINRA rules that directly serve investor protection.
Accordingly, the Commission waives the 30-day operative delay and
designates the proposed rule change operative upon filing.\37\
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\36\ See supra note 5.
\37\ For purposes only of waiving the operative delay, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2020-040 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2020-040. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to File Number SR-FINRA-2020-040 and
should be submitted on or before December 15, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25902 Filed 11-23-20; 8:45 am]
BILLING CODE 8011-01-P
