Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change To Adopt FINRA Rule 4111 (Restricted Firm Obligations) and FINRA Rule 9561 (Procedures for Regulating Activities Under Rule 4111), 13780-13785 [2021-04912]

Download as PDF 13780 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change 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 rule-comments@ sec.gov. Please include File Number SR– MEMX–2021–03 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–MEMX–2021–03. 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 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 to make available publicly. All submissions should refer to File Number SR–MEMX–2021–03, and VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 should be submitted on or before March 31, 2021. whether to approve or disapprove the proposed rule change. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 J. Matthew DeLesDernier, Assistant Secretary. II. Description of the Proposed Rule Change The proposed rule change would: (1) Adopt FINRA Rule 4111 (Restricted Firm Obligations) to require member firms that are identified as ‘‘Restricted Firms’’ to maintain a deposit in a segregated account with withdrawals requiring FINRA’s approval, adhere to specified conditions or restrictions, or comply with a combination of such obligations; and (2) adopt FINRA Rule 9561 (Procedures for Regulating Activities Under Rule 4111), and amend FINRA Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series), to create a new expedited proceeding to implement proposed Rule 4111.6 [FR Doc. 2021–04910 Filed 3–9–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91258; File No. SR–FINRA– 2020–041] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change To Adopt FINRA Rule 4111 (Restricted Firm Obligations) and FINRA Rule 9561 (Procedures for Regulating Activities Under Rule 4111) March 4, 2021. I. Introduction On November 16, 2020, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–FINRA– 2020–041 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 2 thereunder to address the risks that can be posed to investors and the broader market by broker-dealers that have a history of misconduct. The proposed rule change was published for public comment in the Federal Register on December 4, 2020.3 On January 12, 2021, FINRA consented to extend, until March 4, 2021, the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.4 The Commission is publishing this order pursuant to Section 19(b)(2)(B) of the Exchange Act 5 to institute proceedings to determine 21 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Exchange Act Release No. 90527 (Nov. 27, 2020), 85 FR 78540 (Dec. 4, 2020) (File No. SR– FINRA–2020–041) (‘‘Notice’’). 4 See letter from Michael Garawski, Associate General Counsel, OGC Regulatory Practice and Policy, FINRA, to Daniel Fisher, Branch Chief, Division of Trading and Markets, Commission, dated January 12, 2021. 5 15 U.S.C. 78s(b)(2)(B). 1 15 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 Proposed Rule 4111 (Restricted Firm Obligations) Proposed Rule 4111 would establish numeric thresholds based on firm-level and individual-level disclosure events to identify member firms with a significantly higher level of risk-related disclosures as compared to similarlysized peers.7 Following a multi-step process of evaluating a member firm, FINRA’s Department of Member Regulation (‘‘Department’’) would be permitted to impose on member firms it determines pose a high risk to the investing public a ‘‘Restricted Deposit Requirement,’’ 8 conditions or restrictions on the member firm’s operations that are necessary or appropriate to protect investors and the public interest, or both.9 FINRA would conduct the process annually for each member firm, determining whether it should be designated (or re-designated) as a Restricted Firm and whether it should be subject to any obligations.10 Each member firm that is preliminarily identified based on its firm-level and individual-level disclosure events would have several ways to affect outcomes during subsequent steps in the evaluative process, including a onetime opportunity to terminate registered representatives with relevant disclosure events so as to no longer trigger the numeric thresholds.11 The member firm would also be able to explain to the Department why it should not be subject to a Restricted Deposit Requirement or 6 See Notice at 78541–78550. Notice at 78541. 8 See proposed Rule 4111(i)(15) (defining ‘‘Restricted Deposit Requirement’’). 9 See Notice at 78542. 10 Id. 11 Id. 7 See E:\FR\FM\10MRN1.SGM 10MRN1 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices propose alternatives that would still accomplish FINRA’s goal of protecting investors, and could request a hearing before a FINRA Hearing Officer in an expedited proceeding to challenge a Department determination.12 General (Proposed Rule 4111(a)) Under the proposal, any member firm that is designated by the Department as a Restricted Firm would be required to establish a Restricted Deposit Account 13 and maintain within that account deposits of cash or qualified securities with an aggregate value that is not less than the member firm’s Restricted Deposit Requirement, except in certain identified situations.14 Restricted Firms could also be subject to conditions or restrictions on their operations,15 as determined by the Department to be necessary or appropriate to protect investors and the public interest.16 12 Id. 13 See proposed Rule 4111(i)(14)(defining ‘‘Restricted Deposit Account’’). Proposed Rule 4111(i)(14) would require that any Restricted Deposit Account that is established must be in the name of the member firm, at a bank or the member firm’s clearing firm. The account must be subject to an agreement in which the bank or the clearing firm agrees: Not to permit withdrawals from the account absent FINRA’s prior written consent; to keep the account separate from any other accounts maintained by the member firm with the bank or clearing firm; that the cash or qualified securities on deposit will not be used directly or indirectly as security for a loan to the member firm by the bank or the clearing firm, and will not be subject to any set-off, right, charge, security interest, lien, or claim of any kind in favor of the bank, clearing firm or any person claiming through the bank or clearing firm; that if the member firm becomes a former member, the Restricted Deposit Requirement in the account must be maintained, and withdrawals will not be permitted without FINRA’s prior written consent; that FINRA is a third-party beneficiary to the agreement; and that the agreement may not be amended without FINRA’s prior written consent. In addition, the account could not be subject to any right, charge, security interest, lien, or claim of any kind granted by the member. In the event of a liquidation of a Restricted Firm, funds or securities on deposit in the Restricted Deposit Account would be additional financial resources available for the Restricted Firm’s trustee to distribute to those with claims against the Restricted Firm. 14 See Notice at 78542. FINRA is also proposing to include Supplementary Material .01 to proposed Rule 4111 to clarify that due to withdrawal restrictions from a Restricted Deposit Account, deposits in such an account cannot be readily converted to cash and therefore shall be deducted from the member’s net capital under Exchange Act Rule 15c3–1 and FINRA Rule 4110. See Notice at 78548. 15 FINRA has also proposed adopting Supplementary Material .03 to proposed Rule 4111 to provide member firms with a non-exhaustive list of examples of conditions and restrictions that the Department could impose on Restricted Firms. See Notice at 78458. 16 See Notice at 78452. FINRA has also proposed adding Supplementary Material .02 to proposed Rule 4111 to clarify that nothing in proposed Rule VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 Annual Calculation by FINRA of the Preliminary Criteria for Identification (Proposed Rule 4111(b)) The Department would begin a member firm’s Rule 4111 review process by calculating specified ‘‘Preliminary Identification Metrics’’ for that firm across six categories of events or conditions, collectively defined as the ‘‘Disclosure Event and Expelled Firm Association Categories.’’ 17 These six categories include risk events, covering adjudicated and pending actions against firms and their registered representatives, along with metrics addressing registered representatives’ termination and internal review history, and their association with former member firms that were previously expelled by FINRA.18 FINRA would use a formula to identify whether the firm has exceeded certain established thresholds,19 set based on the firm’s size,20 across the six categories, starting by determining the sum of the pertinent disclosure events or, for the Expelled Firm Association category, the sum of the Registered Persons Associated with Previously Expelled Firms as of the calculation date.21 Based on this calculation, the Department would determine whether the particular member firm meets the ‘‘Preliminary Criteria for Identification.’’ 22 FINRA has indicated that it developed the criteria and thresholds for identification with the intent to be replicable and transparent to both FINRA and affected member firms; employ the most complete and accurate data available to FINRA; be objective; account for different firm sizes and business profiles; and target sales practice concerns.23 Initial Department Evaluation (Proposed Rule 4111(c)(1)) The Department would then evaluate whether a member firm that has met the Preliminary Criteria for Identification 4111 would alter a member firm’s obligations under Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations), and the need to submit continuing membership applications as necessary. See Notice at 78458. 17 See proposed Rule 4111(i)(4) (defining ‘‘Disclosure Event and Expelled Firm Association Categories’’). 18 See Notice at 78542. 19 See proposed Rule 4111(i)(11) (defining ‘‘Preliminary Identification Metrics Thresholds’’). 20 Specifically, member firms would be divided into seven firm size categories based on size, ranging from firms with 1–4 ‘‘Registered Persons InScope,’’ defined in proposed Rule 4111(i)(13), to 500 or more Registered Persons In-Scope. See Notice at 78544. 21 See Notice at 78543. 22 See proposed Rule 4111(i)(9) (defining ‘‘Preliminary Criteria for Identification’’). 23 See Notice at 78542. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 13781 warrants further review under Rule 4111.24 This would include consideration of: Whether non-high-risk disclosure events or other conditions should not have been included within the initial calculation of the firm’s Preliminary Identification Metric computations (e.g., because, for example, they were not sales-practice related, or include duplicative events involving the same customer and the same matter, or events involving compliance concerns best addressed by a different regulatory response by FINRA); 25 whether the disclosure events pose risks to investors or market integrity, as opposed to violations of procedural rules; 26 and whether the member firm has already addressed the concerns signaled by the disclosure events or conditions, or has altered its business operations such that the threshold calculation no longer reflects the firm’s current risk profile.27 The Department would then either determine that further review is necessary and continue the Rule 4111 process, or, if the Department concluded that no further review is warranted, close out that member firm’s Rule 4111 process for the year without imposing any restrictions or obligations.28 FINRA originally stated that it would conduct this annual evaluation on the same month and day each year where that date was a business day, and that if that date were a weekend date or federal holiday, the evaluation would shift to the next business day.29 FINRA has since stated that it would announce the date of the first annual evaluation (‘‘Evaluation Date’’) no less than 120 calendar days prior to the first Evaluation Date.30 Subsequent Evaluation Dates would be on the same month and day each year, whether that date certain falls on a business day, a weekend day, or a holiday.31 One-Time Opportunity To Reduce Staffing Levels (Proposed Rule 4111(c)(2)) If the Department determines that a member firm warrants further review under Rule 4111, and such member firm is meeting the Preliminary Criteria for 24 See Notice at 78544. 25 Id. 26 See 27 See Notice at 78544–45. Notice at 78545. 28 Id. 29 See Notice at 78544. 30 Id. 31 See letter from Michael Garawski, Associate General Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, Commission, dated March 4, 2021 (‘‘FINRA March 4 Letter’’). The FINRA March 4 Letter is available at the Commission’s website at https://www.sec.gov/ comments/sr-finra-2020-041/srfinra2020041.htm. E:\FR\FM\10MRN1.SGM 10MRN1 13782 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices Identification for the first time, the member firm would have a one-time opportunity to reduce its staffing levels to no longer meet these criteria, within 30 business days after being informed by the Department.32 The member firm would need to identify the terminated individuals to the Department, and would be prohibited from rehiring any of those terminated persons, in any capacity, for one year.33 Determination of a Maximum Restricted Deposit Requirement (Proposed Rule 4111(i)(15)) For firms still meeting the Preliminary Criteria for Identification, the Department would then determine the firm’s maximum Restricted Deposit Requirement,34 and the member firm would proceed to a ‘‘Consultation’’ with the Department.35 FINRA states that the Department would seek to tailor a firm’s maximum Restricted Deposit Requirement amount to its size, operations and financial conditions, and determine the member firm’s maximum Restricted Deposit Requirement consistent with the objectives of the rule, while not significantly undermining the firm’s continued financial stability and operational capability as an ongoing enterprise over the next 12 months.36 32 See Notice at 78544. If the member firm reduces its staffing levels, and the Department then determines that the member firm no longer meets the Preliminary Criteria for Identification, the Department would close out the firm’s Rule 4111 process for the year without seeking to impose any restrictions or obligations on that firm. However, if the Department determines that the member firm still meets the Preliminary Criteria for Identification (or if the member firm did not opt to reduce staffing levels) the Department would determine the firm’s maximum Restricted Deposit Requirement, and the member firm would proceed to a ‘‘Consultation’’ with the Department. 34 The term ‘‘maximum’’ is used to indicate that a firm’s maximum Restricted Deposit Requirement will be the figure FINRA declares to the firm is the highest deposit requirement it may be subject to during that year’s Rule 4111 process. As discussed below, firms could then seek to demonstrate to FINRA why a lower deposit requirement would be more appropriate, during the Consultation. See FINRA March 4 Letter supra n.31. 35 See Notice at 78545. 36 Id. The proposed factors that the Department would consider when determining a maximum Restricted Deposit Requirement include revenues, net capital, assets, expenses, and liabilities, the firm’s operations and activities, number of registered persons, the nature of the disclosure events included in the numeric thresholds, insurance coverage for customer arbitration awards or settlements concerns raised during FINRA exams, and the amount of any of the firm’s or its associated persons’ ‘‘Covered Pending Arbitration Claims’’ or unpaid arbitration awards. See proposed FINRA Rule 4111(i)(15)(A). 33 Id. VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 Consultation (Proposed Rule 4111(d)) During the Consultation, the Department would give the member firm an opportunity to demonstrate why it does not meet the Preliminary Criteria for Identification, why it should not be designated as a Restricted Firm, and why it should not be subject to the maximum Restricted Deposit Requirement.37 A member firm may overcome the presumption that it should be designated as a Restricted Firm by clearly demonstrating that the Department’s calculation is inaccurate because, among other things, it considered events that should not have been included.38 A member firm also may overcome the presumption that it should be subject to the maximum Restricted Deposit Requirement by clearly demonstrating that such an amount would cause significant undue financial hardship, and that a lesser deposit requirement would satisfy the objectives of Rule 4111 to impose obligations on those firms identified as presenting a higher risk to investors; or that other operational conditions and restrictions on the member and its associated persons would sufficiently protect investors and the public interest.39 To the extent a member firm seeks to claim undue financial hardship, it would bear the burden of supporting that claim with documents and information.40 Department Decision and Notice (Proposed Rule 4111(e)); No Stays After the Consultation, the Department would be required to render a decision, pursuant to one of three paths: (1) If the Department determines that the member firm has rebutted the presumption that it should be designated a Restricted Firm, the Department would not designate the firm as a Restricted Firm that year; (2) if the Department determines that the member firm has not rebutted the presumption that it should be designated as a Restricted Firm, but has rebutted the presumption that it must maintain the maximum Restricted 37 See Notice at 78545. These would include, for example, events that are duplicative, involving the same customer and the same matter, or are not sales-practice related. 39 Id. Proposed Rule 4111(d)(3) provides guidance to member firms on what information the Department would consider during the Consultation, and guidance on how to attempt to overcome the two rebuttable presumptions (that the member firm should be designated as a Restricted Firm, and that it should be subject to the maximum Restricted Deposit Requirement). See Notice at 78546. 40 See Notice at 78545. 38 Id. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 Deposit Requirement, the Department would designate the member firm as a Restricted Firm, but would either impose no Restricted Deposit Requirement on the member firm, or require it to promptly establish a Restricted Deposit Account, and deposit and maintain in that account a lower Restricted Deposit Requirement in such dollar amount as the Department deems necessary or appropriate; and would require the member firm to implement and maintain specified conditions or restrictions on the operations and activities of the member firm and its associated persons, as necessary or appropriate, to address the concerns identified by the Department, and protect investors and the public interest; or (3) if the Department determines that the member firm has rebutted neither presumption, the Department would designate the member firm as a Restricted Firm, require it to promptly establish a Restricted Deposit Account, deposit and maintain in that account the maximum Restricted Deposit Requirement, and implement and maintain specified conditions or restrictions on the firm’s operations and activities, and those of its associated persons, as necessary or appropriate to address the concerns identified by the Department and protect investors and the public interest.41 The Department would provide the member firm with written notice of its decision no later than 30 days from its latest scheduling letter provided to the member firm, stating any obligations to be imposed, and the ability of it to request a hearing with the Office of Hearing Officers in an expedited proceeding.42 Continuation or Termination of Restricted Firm Obligations (Proposed Rule 4111(f)) During the Department’s annual Rule 4111 review, a Restricted Firm could seek to terminate or modify any obligations that continue to be imposed.43 Restricted Firms would only be permitted to seek this result during their annual Consultation, and any ensuing expedited proceedings after a Department decision; no interim termination or modification of any 41 See Notice at 78546. As noted below, any request for a hearing would not stay the effectiveness of the Department’s decision, but would temporarily lower the necessary Required Deposit Requirement for that member firm until the Office of Hearing Officers, or the National Adjudicatory Council (‘‘NAC’’) issues a final written decision, unless that firm was already operating as a Restricted Firm based on a prior year’s Department decision. 43 See Notice at 78547. See also proposed Rule 4111(f)(1). 42 Id. E:\FR\FM\10MRN1.SGM 10MRN1 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices obligations would be permitted.44 A Restricted Firm would not be permitted to withdraw any portion of its Restricted Deposit Requirement, or to seek to terminate or modify any other conditions or obligations that have been imposed, without the prior written consent of the Department.45 Where the Department determines in one year that a member firm is a Restricted Firm, but in the following year(s) determines that the member firm or former member firm 46 either does not meet the Preliminary Criteria for Identification or should not be designated as a Restricted Firm, the member firm or former member firm would no longer be subject to any obligations previously imposed under proposed Rule 4111.47 There would be one exception: A former Restricted Firm would not be permitted to withdraw any portion of its Restricted Deposit Requirement without submitting an application in the manner specified under Rule 4111(f)(3)(A), and obtaining the Department’s prior written consent for the withdrawal.48 In this situation, the Department would be subject to a presumption that it shall approve an application for withdrawal if the member firm, its associated persons, or the former member firm have no Covered Pending Arbitration Claims 49 or unpaid arbitration awards.50 The rule would also establish presumptions that the Department shall: (a) Deny an application for withdrawal if the member firm, the member firm’s associated persons who are owners or control persons, or the former member have any Covered Pending Arbitration Claims or unpaid arbitration awards, or if the member’s associated persons have any Covered Pending Arbitration Claims or unpaid arbitration awards relating to arbitrations that involved conduct or alleged conduct that occurred while associated with the member; but (b) 44 See Notice at 78547. There would be a presumption that the Department shall deny an application by a member firm or former member firm that is currently designated as a Restricted Firm to withdraw all or any portion of its Restricted Deposit Requirement. 46 See Notice at 78547. See also proposed Rule 4111(i)(7) (defining ‘‘Former Member’’). 47 See Notice at 78547. 48 Id. The Department would be required to issue a notice of its decision within 30 days from the date it receives the relevant application. 49 See proposed Rule 4111(i)(2) (defining Covered Pending Arbitration Claim as an investment-related, consumer initiated claim filed against the member or its associated persons in any arbitration forum that is unresolved; and whose claim amount (individually or, if there is more than one claim, in the aggregate) exceeds the member firm’s excess net capital). 50 See Notice at 78547. 45 Id. VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 approve an application by a former member for withdrawal if the former member commits in the manner specified by the Department to use the amount it seeks to withdraw from its Restricted Deposit to pay the former member’s specified unpaid arbitration awards.51 Books and Records (Proposed Rule 4111(g)) Member firms would also be obligated to maintain books and records that evidence its compliance with Rule 4111 and any Restricted Deposit Requirement or other conditions or restrictions imposed under that rule, that the member firm would need to provide to the Department upon request.52 Planned Review of Proposed Rule 4111 FINRA has indicated it intends to conduct a review of proposed Rule 4111 after gaining sufficient experience under Rule 4111 following its effective date.53 FINRA has indicated that it expects to review, among other items, whether the Preliminary Identification Metrics Thresholds remain targeted and effective at identifying member firms that pose higher risks.54 Proposed Rule 9561 (Procedures for Regulating Activities Under Rule 4111) and Amendments to Rule 9559 To Implement the Requirements of Proposed Rule 4111 FINRA is proposing Rule 9561 to establish new expedited proceedings that would: (a) Provide member firms an opportunity to challenge any requirements the Department has imposed, including any Restricted Deposit Requirements, by requesting a prompt review of the Department’s decision in the Rule 4111 process; 55 and (b) address a member firm’s failure to comply with any requirements imposed under Rule 4111.56 Notices Under Proposed Rule 4111 (Proposed Rule 9561(a)) Under proposed Rule 9561(a)(1), the Department would be obligated to serve a notice of its decision following the 51 Id. Proposed Rule 4111(f)(3) provides that the Covered Pending Arbitration Claims and unpaid arbitration awards of a member firm’s associated persons are pertinent to an application for a withdrawal from the Restricted Deposit Requirement. 52 See Notice at 78548. 53 Id. 54 Id. 55 Id. Proposed Rule 9561(a)(1) would define the ‘‘Rule 4111 Requirements’’ to mean the requirements, conditions, or restrictions imposed by a Department determination under proposed Rule 4111. See Notice at 78548. 56 See Notice at 78549. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 13783 Rule 4111 process that provides the specific grounds and factual basis for the Department’s action; states when the action will take effect; informs the member firm that it may request a hearing in an expedited proceeding within seven days after service of the notice; and explains the Hearing Officer’s authority.57 The proposed rule would also provide that, if a member firm does not request a hearing, the decision will constitute final FINRA action.58 Any of the Rule 4111 Requirements imposed in the Department’s decision would be immediately effective.59 In general, a request for a hearing would not stay those requirements.60 There would be one exception: When a member firm requests review of a Department determination to impose a Restricted Deposit Requirement on the member, the firm would be required to deposit the lesser of 25% of its Restricted Deposit Requirement or 25% of its average excess net capital over the prior year, while the expedited proceeding was pending.61 This exception would not be available for a member firm that has been redesignated as a Restricted Firm, and is already subject to a previously imposed Restricted Deposit Requirement, which it will need to maintain in full until the Office of Hearing Officers or NAC issues a written decision.62 Notice for Failure To Comply With the Proposed Rule 4111 Requirements (Proposed Rule 9561(b)) After receiving authorization from FINRA’s chief executive officer (‘‘CEO’’), or such other executive officer as the CEO may designate, the Department would be authorized to serve a notice stating that the member firm’s failure to comply with the Rule 4111 Requirements, within seven days of service of the notice, will result in a suspension or cancellation of membership.63 Proposed Rule 9561(b) 57 Id. 58 See 59 See Notice at 78548–49. Notice at 78549. 60 Id. 61 Id. 62 See Notice at 78546. Thereafter, if a member firm is not in compliance with its Restricted Deposit Requirement or with any conditions or restrictions imposed under proposed Rule 4111, FINRA would be authorized to issue a notice pursuant to proposed Rule 9561 directing a member firm to suspend all or a portion of its business. See Notice at 78548. 63 See Notice at 78549. The notice must identify the requirements with which the member firm is alleged to have not complied; specify the facts involved in the alleged failure; state when the action will take effect; explain what the member firm must do to avoid the suspension or E:\FR\FM\10MRN1.SGM Continued 10MRN1 13784 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices would establish an expedited proceeding to review the Department’s decision to issue a suspension or cancellation notice to a member firm for its failure to comply with requirements of Rule 4111. If a member firm does not request a hearing, the suspension or cancellation will become effective seven days after service of the notice.64 Hearings (Proposed Amendments to the Hearing Procedures Rule) If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series). FINRA is proposing several amendments to Rule 9559 that would be specific to hearings requested pursuant to proposed Rule 9561.65 Effective Date If the proposed rule is approved by the Commission, FINRA has indicated it will announce an effective date for the proposed rule in a Regulatory Notice to be published no later than 60 days following the Commission approval.66 FINRA originally stated that the effective date would be no later than 60 days following publication of the Regulatory Notice announcing Commission approval.67 However, FINRA has since extended the timeline of the effective date to 180 days after the cancellation; inform the member firm that it may file a request for a hearing in an expedited proceeding within seven days after service of the notice under Rule 9559; and explain the Hearing Officer’s authority. 64 Id. After a suspension has been imposed, a member firm could file a request under Rule 9561(b) to terminate the suspension on the ground of full compliance with the notice or decision, and the head of the Department would be permitted to grant relief for good cause shown. 65 Id. Specifically, FINRA has proposed to (a) amend Rule 9559(d) and (n) to establish the authority of a Hearing Officer in expedited proceedings under Rule 9561; (b) amend Rule 9559(f) to set out timing requirements for hearings conducted under Rules 9561(a) and (b); and (c) amend Rule 9559(p)(6) to account for the obligations that may be imposed under proposed Rule 4111 within the content requirements of any decision issued by a Hearing Officer under the Rule 9550 Series. See proposed amended Rules 9559(d), (f), (n), and (p)(6). Additionally, FINRA has noted that in expedited proceedings conducted under proposed Rule 9561(a) to review a Department determination under the Restricted Firm Obligations Rule, a member firm would be permitted to try to demonstrate that the Department incorrectly included disclosure events when calculating whether the member firm meets the Preliminary Criteria for Identification. However, the member firm attempting to do so would not be permitted to collaterally attack the underlying merits of the final actions underlying the disclosure events. See Notice at 78550. 66 See Notice at 78550. 67 Id. VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 Regulatory Notice announcing Commission approval.68 III. Proceedings To Determine Whether To Approve or Disapprove File No. SR– FINRA–2020–041 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings to further consider the proposed rule change and the issues raised by commenters. Specifically, the Commission is providing notice of the following grounds for possible disapproval under consideration: • Whether FINRA has demonstrated how its proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, 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.69 Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed rule change is consistent with the [Exchange Act] and the rules and regulations issued thereunder . . . is on the [SRO] that proposed the rule change.’’ 70 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,71 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations.72 For the reasons discussed above, the Commission believes it is appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act to allow for additional consideration of the issues raised by the proposed rule change as it determines whether the proposed rule change should be approved or disapproved.73 IV. Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the 68 See FINRA March 4 Letter supra n.31. U.S.C. 78o–3(b)(6). 70 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 71 See id. 72 See id. 73 15 U.S.C. 78s(b)(2)(B). 69 15 PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 proposed rule change. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is consistent with the Exchange Act and the rules thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.74 Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule change should be approved or disapproved by March 24, 2021. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by March 31, 2021. 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 rule-comments@ sec.gov. Please include File No. SR– FINRA–2020–041 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 No. SR–FINRA–2020–041. 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 74 Section 19(b)(2) of the Exchange Act, as amended by the Securities Acts Amendments of 1975, Public Law 94–29, 89 Stat. 97 (1975), grants the Commission flexibility to determine what type of proceeding—either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a selfregulatory organization. See Securities Acts Amendments of 1975, Report of the Senate Committee on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). E:\FR\FM\10MRN1.SGM 10MRN1 Federal Register / Vol. 86, No. 45 / Wednesday, March 10, 2021 / Notices 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 No. SR–FINRA–2020–041 and should be submitted on or before March 24, 2021. If comments are received, any rebuttal comments should be submitted on or before March 31, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.75 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–04912 Filed 3–9–21; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice: 11373] Notice of Public Meeting The Department of State will conduct a public meeting at 9:30 a.m. on Tuesday, April 6, 2021, by way of teleconference. Members of the public may participate up to the capacity of the teleconference phone line, which will handle 500 participants. To access the teleconference line, participants should call (804) 469–0625 and use participant Code 974556036#. The primary purpose of the meeting is to prepare for the 8th session of the International Maritime Organization’s (IMO) Sub-Committee on Navigation, Communication, and Search and Rescue to be held remotely, April 19–23, 2021. The agenda items to be considered include: —Adoption of the agenda —Decisions of other IMO bodies —Routing measures and mandatory ship reporting systems —Recognition of the Japanese regional navigation satellite system QuasiZenith Satellite System (QZSS) and development of performance 75 17 CFR 200.30–3(a)(12); 17 CFR 200.30– 3(a)(57). VerDate Sep<11>2014 17:22 Mar 09, 2021 Jkt 253001 standards for shipborne satellite navigation system receiver equipment —Safety measures for non-SOLAS ships operating in polar waters —Revision of SOLAS chapters III and IV for Modernization of the GMDSS, including related and consequential amendments to other existing instruments —Response to matters related to the ITU–R Study Groups and ITU World Radiocommunication Conference —Revision of the Guidelines on places of refuge for ships in need of assistance (resolution A.949(23)) —Developments in GMDSS services, including guidelines on Maritime safety information (MSI) —Development of global maritime SAR services, including harmonization of maritime and aeronautical procedures —Biennial status report and provisional agenda for NCSR 9 —Election of Chair and Vice-Chair for 2022 —Any other business Please note: The Sub-Committee may on short notice, adjust the NCSR 8 agenda to accommodate the constraints associated with the virtual meeting format. Any updates will be provided at the public meeting and in advance, if possible, to anyone who RSVPs. Those who plan to participate may contact the meeting coordinator, George Detweiler, by email at George.H.Detweiler@uscg.mil, by phone at (202) 372–1566, or in writing at 2703 Martin Luther King Jr. Ave. SE, Stop 7418, Washington, DC 20593–7418. A request for reasonable accommodation should be made at the time of RSVP, and not later than April 30. Requests received after that date will be considered, but might not be possible to fulfill. Jeremy M. Greenwood, Coast Guard Liaison Officer, Office of Ocean and Polar Affairs, Department of State. [FR Doc. 2021–04982 Filed 3–9–21; 8:45 am] BILLING CODE 4710–09–P DEPARTMENT OF STATE [Public Notice: 11372] Convening of an Accountability Review Board To Investigate the Murder of an Animal and Plant Health Inspection Service (APHIS) Locally Employed (LE) Staff Member in Tijuana, Mexico Pursuant to Section 301 of the Omnibus Diplomatic Security and Antiterrorism Act of 1986, as amended (22 U.S.C. 4831), the Department of State convened an Accountability PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 13785 Review Board (ARB) to review the October 2020 murder of an APHIS LE Staff member in Tijuana, Mexico. The ARB will examine the facts and circumstances surrounding the incident and submit its findings to the Secretary of State, together with any recommendations as appropriate. The Department has appointed George Staples, a retired U.S. ambassador, as Chair of the Board. The other Board members are retired U.S. Ambassador Janice Jacobs, Mr. Dirk Dijkerman, Mr. John Eustace, and Mr. Kimber Davidson. They bring to their deliberations distinguished backgrounds in government service. The Board will submit its findings and recommendations to the Secretary of State. The Department will report to Congress on any recommendations made by the Board and actions taken with respect to those recommendations. Anyone with information relevant to the Board’s examination of these incidents should contact the Board via email promptly at ARBTijuana2021@ state.gov. Zachary A. Parker, Director, Office of Directives Management. [FR Doc. 2021–05004 Filed 3–9–21; 8:45 am] BILLING CODE 4710–10–P OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE Notice of Product Exclusion Extensions: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Office of the United States Trade Representative (USTR). ACTION: Notice. AGENCY: In prior notices, the U.S. Trade Representative modified the action in the Section 301 investigation of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation by excluding from additional duties certain medical-care products needed to address the COVID–19 pandemic. To support efforts to combat COVID–19, on December 29, 2020, the U.S. Trade Representative announced the extension of certain product exclusions on medical-care and/or COVID response products and further modifications to remove Section 301 duties from additional medical-care and/or COVID response products. This notice announces the U.S. Trade Representative’s determination to extend those exclusions. SUMMARY: E:\FR\FM\10MRN1.SGM 10MRN1

Agencies

[Federal Register Volume 86, Number 45 (Wednesday, March 10, 2021)]
[Notices]
[Pages 13780-13785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-04912]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91258; File No. SR-FINRA-2020-041]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove the Proposed Rule Change To Adopt FINRA Rule 4111 
(Restricted Firm Obligations) and FINRA Rule 9561 (Procedures for 
Regulating Activities Under Rule 4111)

March 4, 2021.

I. Introduction

    On November 16, 2020, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-FINRA-2020-041 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 \2\ thereunder to address the risks that can 
be posed to investors and the broader market by broker-dealers that 
have a history of misconduct. The proposed rule change was published 
for public comment in the Federal Register on December 4, 2020.\3\ On 
January 12, 2021, FINRA consented to extend, until March 4, 2021, the 
time period in which the Commission must approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\4\ The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \5\ to institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 90527 (Nov. 27, 2020), 85 FR 78540 
(Dec. 4, 2020) (File No. SR-FINRA-2020-041) (``Notice'').
    \4\ See letter from Michael Garawski, Associate General Counsel, 
OGC Regulatory Practice and Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated January 
12, 2021.
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    The proposed rule change would: (1) Adopt FINRA Rule 4111 
(Restricted Firm Obligations) to require member firms that are 
identified as ``Restricted Firms'' to maintain a deposit in a 
segregated account with withdrawals requiring FINRA's approval, adhere 
to specified conditions or restrictions, or comply with a combination 
of such obligations; and (2) adopt FINRA Rule 9561 (Procedures for 
Regulating Activities Under Rule 4111), and amend FINRA Rule 9559 
(Hearing Procedures for Expedited Proceedings Under the Rule 9550 
Series), to create a new expedited proceeding to implement proposed 
Rule 4111.\6\
---------------------------------------------------------------------------

    \6\ See Notice at 78541-78550.
---------------------------------------------------------------------------

Proposed Rule 4111 (Restricted Firm Obligations)

    Proposed Rule 4111 would establish numeric thresholds based on 
firm-level and individual-level disclosure events to identify member 
firms with a significantly higher level of risk-related disclosures as 
compared to similarly-sized peers.\7\ Following a multi-step process of 
evaluating a member firm, FINRA's Department of Member Regulation 
(``Department'') would be permitted to impose on member firms it 
determines pose a high risk to the investing public a ``Restricted 
Deposit Requirement,'' \8\ conditions or restrictions on the member 
firm's operations that are necessary or appropriate to protect 
investors and the public interest, or both.\9\
---------------------------------------------------------------------------

    \7\ See Notice at 78541.
    \8\ See proposed Rule 4111(i)(15) (defining ``Restricted Deposit 
Requirement'').
    \9\ See Notice at 78542.
---------------------------------------------------------------------------

    FINRA would conduct the process annually for each member firm, 
determining whether it should be designated (or re-designated) as a 
Restricted Firm and whether it should be subject to any 
obligations.\10\ Each member firm that is preliminarily identified 
based on its firm-level and individual-level disclosure events would 
have several ways to affect outcomes during subsequent steps in the 
evaluative process, including a one-time opportunity to terminate 
registered representatives with relevant disclosure events so as to no 
longer trigger the numeric thresholds.\11\ The member firm would also 
be able to explain to the Department why it should not be subject to a 
Restricted Deposit Requirement or

[[Page 13781]]

propose alternatives that would still accomplish FINRA's goal of 
protecting investors, and could request a hearing before a FINRA 
Hearing Officer in an expedited proceeding to challenge a Department 
determination.\12\
---------------------------------------------------------------------------

    \10\ Id.
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

General (Proposed Rule 4111(a))
    Under the proposal, any member firm that is designated by the 
Department as a Restricted Firm would be required to establish a 
Restricted Deposit Account \13\ and maintain within that account 
deposits of cash or qualified securities with an aggregate value that 
is not less than the member firm's Restricted Deposit Requirement, 
except in certain identified situations.\14\ Restricted Firms could 
also be subject to conditions or restrictions on their operations,\15\ 
as determined by the Department to be necessary or appropriate to 
protect investors and the public interest.\16\
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    \13\ See proposed Rule 4111(i)(14)(defining ``Restricted Deposit 
Account''). Proposed Rule 4111(i)(14) would require that any 
Restricted Deposit Account that is established must be in the name 
of the member firm, at a bank or the member firm's clearing firm. 
The account must be subject to an agreement in which the bank or the 
clearing firm agrees: Not to permit withdrawals from the account 
absent FINRA's prior written consent; to keep the account separate 
from any other accounts maintained by the member firm with the bank 
or clearing firm; that the cash or qualified securities on deposit 
will not be used directly or indirectly as security for a loan to 
the member firm by the bank or the clearing firm, and will not be 
subject to any set-off, right, charge, security interest, lien, or 
claim of any kind in favor of the bank, clearing firm or any person 
claiming through the bank or clearing firm; that if the member firm 
becomes a former member, the Restricted Deposit Requirement in the 
account must be maintained, and withdrawals will not be permitted 
without FINRA's prior written consent; that FINRA is a third-party 
beneficiary to the agreement; and that the agreement may not be 
amended without FINRA's prior written consent. In addition, the 
account could not be subject to any right, charge, security 
interest, lien, or claim of any kind granted by the member.
    In the event of a liquidation of a Restricted Firm, funds or 
securities on deposit in the Restricted Deposit Account would be 
additional financial resources available for the Restricted Firm's 
trustee to distribute to those with claims against the Restricted 
Firm.
    \14\ See Notice at 78542. FINRA is also proposing to include 
Supplementary Material .01 to proposed Rule 4111 to clarify that due 
to withdrawal restrictions from a Restricted Deposit Account, 
deposits in such an account cannot be readily converted to cash and 
therefore shall be deducted from the member's net capital under 
Exchange Act Rule 15c3-1 and FINRA Rule 4110. See Notice at 78548.
    \15\ FINRA has also proposed adopting Supplementary Material .03 
to proposed Rule 4111 to provide member firms with a non-exhaustive 
list of examples of conditions and restrictions that the Department 
could impose on Restricted Firms. See Notice at 78458.
    \16\ See Notice at 78452. FINRA has also proposed adding 
Supplementary Material .02 to proposed Rule 4111 to clarify that 
nothing in proposed Rule 4111 would alter a member firm's 
obligations under Rule 1017 (Application for Approval of Change in 
Ownership, Control, or Business Operations), and the need to submit 
continuing membership applications as necessary. See Notice at 
78458.
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Annual Calculation by FINRA of the Preliminary Criteria for 
Identification (Proposed Rule 4111(b))
    The Department would begin a member firm's Rule 4111 review process 
by calculating specified ``Preliminary Identification Metrics'' for 
that firm across six categories of events or conditions, collectively 
defined as the ``Disclosure Event and Expelled Firm Association 
Categories.'' \17\ These six categories include risk events, covering 
adjudicated and pending actions against firms and their registered 
representatives, along with metrics addressing registered 
representatives' termination and internal review history, and their 
association with former member firms that were previously expelled by 
FINRA.\18\ FINRA would use a formula to identify whether the firm has 
exceeded certain established thresholds,\19\ set based on the firm's 
size,\20\ across the six categories, starting by determining the sum of 
the pertinent disclosure events or, for the Expelled Firm Association 
category, the sum of the Registered Persons Associated with Previously 
Expelled Firms as of the calculation date.\21\ Based on this 
calculation, the Department would determine whether the particular 
member firm meets the ``Preliminary Criteria for Identification.'' \22\ 
FINRA has indicated that it developed the criteria and thresholds for 
identification with the intent to be replicable and transparent to both 
FINRA and affected member firms; employ the most complete and accurate 
data available to FINRA; be objective; account for different firm sizes 
and business profiles; and target sales practice concerns.\23\
---------------------------------------------------------------------------

    \17\ See proposed Rule 4111(i)(4) (defining ``Disclosure Event 
and Expelled Firm Association Categories'').
    \18\ See Notice at 78542.
    \19\ See proposed Rule 4111(i)(11) (defining ``Preliminary 
Identification Metrics Thresholds'').
    \20\ Specifically, member firms would be divided into seven firm 
size categories based on size, ranging from firms with 1-4 
``Registered Persons In-Scope,'' defined in proposed Rule 
4111(i)(13), to 500 or more Registered Persons In-Scope. See Notice 
at 78544.
    \21\ See Notice at 78543.
    \22\ See proposed Rule 4111(i)(9) (defining ``Preliminary 
Criteria for Identification'').
    \23\ See Notice at 78542.
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Initial Department Evaluation (Proposed Rule 4111(c)(1))
    The Department would then evaluate whether a member firm that has 
met the Preliminary Criteria for Identification warrants further review 
under Rule 4111.\24\ This would include consideration of: Whether non-
high-risk disclosure events or other conditions should not have been 
included within the initial calculation of the firm's Preliminary 
Identification Metric computations (e.g., because, for example, they 
were not sales-practice related, or include duplicative events 
involving the same customer and the same matter, or events involving 
compliance concerns best addressed by a different regulatory response 
by FINRA); \25\ whether the disclosure events pose risks to investors 
or market integrity, as opposed to violations of procedural rules; \26\ 
and whether the member firm has already addressed the concerns signaled 
by the disclosure events or conditions, or has altered its business 
operations such that the threshold calculation no longer reflects the 
firm's current risk profile.\27\ The Department would then either 
determine that further review is necessary and continue the Rule 4111 
process, or, if the Department concluded that no further review is 
warranted, close out that member firm's Rule 4111 process for the year 
without imposing any restrictions or obligations.\28\
---------------------------------------------------------------------------

    \24\ See Notice at 78544.
    \25\ Id.
    \26\ See Notice at 78544-45.
    \27\ See Notice at 78545.
    \28\ Id.
---------------------------------------------------------------------------

    FINRA originally stated that it would conduct this annual 
evaluation on the same month and day each year where that date was a 
business day, and that if that date were a weekend date or federal 
holiday, the evaluation would shift to the next business day.\29\ FINRA 
has since stated that it would announce the date of the first annual 
evaluation (``Evaluation Date'') no less than 120 calendar days prior 
to the first Evaluation Date.\30\ Subsequent Evaluation Dates would be 
on the same month and day each year, whether that date certain falls on 
a business day, a weekend day, or a holiday.\31\
---------------------------------------------------------------------------

    \29\ See Notice at 78544.
    \30\ Id.
    \31\ See letter from Michael Garawski, Associate General 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated March 4, 2021 (``FINRA March 4 
Letter''). The FINRA March 4 Letter is available at the Commission's 
website at https://www.sec.gov/comments/sr-finra-2020-041/srfinra2020041.htm.
---------------------------------------------------------------------------

One-Time Opportunity To Reduce Staffing Levels (Proposed Rule 
4111(c)(2))
    If the Department determines that a member firm warrants further 
review under Rule 4111, and such member firm is meeting the Preliminary 
Criteria for

[[Page 13782]]

Identification for the first time, the member firm would have a one-
time opportunity to reduce its staffing levels to no longer meet these 
criteria, within 30 business days after being informed by the 
Department.\32\ The member firm would need to identify the terminated 
individuals to the Department, and would be prohibited from rehiring 
any of those terminated persons, in any capacity, for one year.\33\
---------------------------------------------------------------------------

    \32\ See Notice at 78544.
    \33\ Id. If the member firm reduces its staffing levels, and the 
Department then determines that the member firm no longer meets the 
Preliminary Criteria for Identification, the Department would close 
out the firm's Rule 4111 process for the year without seeking to 
impose any restrictions or obligations on that firm. However, if the 
Department determines that the member firm still meets the 
Preliminary Criteria for Identification (or if the member firm did 
not opt to reduce staffing levels) the Department would determine 
the firm's maximum Restricted Deposit Requirement, and the member 
firm would proceed to a ``Consultation'' with the Department.
---------------------------------------------------------------------------

Determination of a Maximum Restricted Deposit Requirement (Proposed 
Rule 4111(i)(15))
    For firms still meeting the Preliminary Criteria for 
Identification, the Department would then determine the firm's maximum 
Restricted Deposit Requirement,\34\ and the member firm would proceed 
to a ``Consultation'' with the Department.\35\ FINRA states that the 
Department would seek to tailor a firm's maximum Restricted Deposit 
Requirement amount to its size, operations and financial conditions, 
and determine the member firm's maximum Restricted Deposit Requirement 
consistent with the objectives of the rule, while not significantly 
undermining the firm's continued financial stability and operational 
capability as an ongoing enterprise over the next 12 months.\36\
---------------------------------------------------------------------------

    \34\ The term ``maximum'' is used to indicate that a firm's 
maximum Restricted Deposit Requirement will be the figure FINRA 
declares to the firm is the highest deposit requirement it may be 
subject to during that year's Rule 4111 process. As discussed below, 
firms could then seek to demonstrate to FINRA why a lower deposit 
requirement would be more appropriate, during the Consultation. See 
FINRA March 4 Letter supra n.31.
    \35\ See Notice at 78545.
    \36\ Id. The proposed factors that the Department would consider 
when determining a maximum Restricted Deposit Requirement include 
revenues, net capital, assets, expenses, and liabilities, the firm's 
operations and activities, number of registered persons, the nature 
of the disclosure events included in the numeric thresholds, 
insurance coverage for customer arbitration awards or settlements 
concerns raised during FINRA exams, and the amount of any of the 
firm's or its associated persons' ``Covered Pending Arbitration 
Claims'' or unpaid arbitration awards. See proposed FINRA Rule 
4111(i)(15)(A).
---------------------------------------------------------------------------

Consultation (Proposed Rule 4111(d))
    During the Consultation, the Department would give the member firm 
an opportunity to demonstrate why it does not meet the Preliminary 
Criteria for Identification, why it should not be designated as a 
Restricted Firm, and why it should not be subject to the maximum 
Restricted Deposit Requirement.\37\
---------------------------------------------------------------------------

    \37\ See Notice at 78545.
---------------------------------------------------------------------------

    A member firm may overcome the presumption that it should be 
designated as a Restricted Firm by clearly demonstrating that the 
Department's calculation is inaccurate because, among other things, it 
considered events that should not have been included.\38\ A member firm 
also may overcome the presumption that it should be subject to the 
maximum Restricted Deposit Requirement by clearly demonstrating that 
such an amount would cause significant undue financial hardship, and 
that a lesser deposit requirement would satisfy the objectives of Rule 
4111 to impose obligations on those firms identified as presenting a 
higher risk to investors; or that other operational conditions and 
restrictions on the member and its associated persons would 
sufficiently protect investors and the public interest.\39\ To the 
extent a member firm seeks to claim undue financial hardship, it would 
bear the burden of supporting that claim with documents and 
information.\40\
---------------------------------------------------------------------------

    \38\ Id. These would include, for example, events that are 
duplicative, involving the same customer and the same matter, or are 
not sales-practice related.
    \39\ Id. Proposed Rule 4111(d)(3) provides guidance to member 
firms on what information the Department would consider during the 
Consultation, and guidance on how to attempt to overcome the two 
rebuttable presumptions (that the member firm should be designated 
as a Restricted Firm, and that it should be subject to the maximum 
Restricted Deposit Requirement). See Notice at 78546.
    \40\ See Notice at 78545.
---------------------------------------------------------------------------

Department Decision and Notice (Proposed Rule 4111(e)); No Stays
    After the Consultation, the Department would be required to render 
a decision, pursuant to one of three paths: (1) If the Department 
determines that the member firm has rebutted the presumption that it 
should be designated a Restricted Firm, the Department would not 
designate the firm as a Restricted Firm that year; (2) if the 
Department determines that the member firm has not rebutted the 
presumption that it should be designated as a Restricted Firm, but has 
rebutted the presumption that it must maintain the maximum Restricted 
Deposit Requirement, the Department would designate the member firm as 
a Restricted Firm, but would either impose no Restricted Deposit 
Requirement on the member firm, or require it to promptly establish a 
Restricted Deposit Account, and deposit and maintain in that account a 
lower Restricted Deposit Requirement in such dollar amount as the 
Department deems necessary or appropriate; and would require the member 
firm to implement and maintain specified conditions or restrictions on 
the operations and activities of the member firm and its associated 
persons, as necessary or appropriate, to address the concerns 
identified by the Department, and protect investors and the public 
interest; or (3) if the Department determines that the member firm has 
rebutted neither presumption, the Department would designate the member 
firm as a Restricted Firm, require it to promptly establish a 
Restricted Deposit Account, deposit and maintain in that account the 
maximum Restricted Deposit Requirement, and implement and maintain 
specified conditions or restrictions on the firm's operations and 
activities, and those of its associated persons, as necessary or 
appropriate to address the concerns identified by the Department and 
protect investors and the public interest.\41\ The Department would 
provide the member firm with written notice of its decision no later 
than 30 days from its latest scheduling letter provided to the member 
firm, stating any obligations to be imposed, and the ability of it to 
request a hearing with the Office of Hearing Officers in an expedited 
proceeding.\42\
---------------------------------------------------------------------------

    \41\ See Notice at 78546.
    \42\ Id. As noted below, any request for a hearing would not 
stay the effectiveness of the Department's decision, but would 
temporarily lower the necessary Required Deposit Requirement for 
that member firm until the Office of Hearing Officers, or the 
National Adjudicatory Council (``NAC'') issues a final written 
decision, unless that firm was already operating as a Restricted 
Firm based on a prior year's Department decision.
---------------------------------------------------------------------------

Continuation or Termination of Restricted Firm Obligations (Proposed 
Rule 4111(f))
    During the Department's annual Rule 4111 review, a Restricted Firm 
could seek to terminate or modify any obligations that continue to be 
imposed.\43\ Restricted Firms would only be permitted to seek this 
result during their annual Consultation, and any ensuing expedited 
proceedings after a Department decision; no interim termination or 
modification of any

[[Page 13783]]

obligations would be permitted.\44\ A Restricted Firm would not be 
permitted to withdraw any portion of its Restricted Deposit 
Requirement, or to seek to terminate or modify any other conditions or 
obligations that have been imposed, without the prior written consent 
of the Department.\45\
---------------------------------------------------------------------------

    \43\ See Notice at 78547. See also proposed Rule 4111(f)(1).
    \44\ See Notice at 78547.
    \45\ Id. There would be a presumption that the Department shall 
deny an application by a member firm or former member firm that is 
currently designated as a Restricted Firm to withdraw all or any 
portion of its Restricted Deposit Requirement.
---------------------------------------------------------------------------

    Where the Department determines in one year that a member firm is a 
Restricted Firm, but in the following year(s) determines that the 
member firm or former member firm \46\ either does not meet the 
Preliminary Criteria for Identification or should not be designated as 
a Restricted Firm, the member firm or former member firm would no 
longer be subject to any obligations previously imposed under proposed 
Rule 4111.\47\ There would be one exception: A former Restricted Firm 
would not be permitted to withdraw any portion of its Restricted 
Deposit Requirement without submitting an application in the manner 
specified under Rule 4111(f)(3)(A), and obtaining the Department's 
prior written consent for the withdrawal.\48\
---------------------------------------------------------------------------

    \46\ See Notice at 78547. See also proposed Rule 4111(i)(7) 
(defining ``Former Member'').
    \47\ See Notice at 78547.
    \48\ Id. The Department would be required to issue a notice of 
its decision within 30 days from the date it receives the relevant 
application.
---------------------------------------------------------------------------

    In this situation, the Department would be subject to a presumption 
that it shall approve an application for withdrawal if the member firm, 
its associated persons, or the former member firm have no Covered 
Pending Arbitration Claims \49\ or unpaid arbitration awards.\50\ The 
rule would also establish presumptions that the Department shall: (a) 
Deny an application for withdrawal if the member firm, the member 
firm's associated persons who are owners or control persons, or the 
former member have any Covered Pending Arbitration Claims or unpaid 
arbitration awards, or if the member's associated persons have any 
Covered Pending Arbitration Claims or unpaid arbitration awards 
relating to arbitrations that involved conduct or alleged conduct that 
occurred while associated with the member; but (b) approve an 
application by a former member for withdrawal if the former member 
commits in the manner specified by the Department to use the amount it 
seeks to withdraw from its Restricted Deposit to pay the former 
member's specified unpaid arbitration awards.\51\
---------------------------------------------------------------------------

    \49\ See proposed Rule 4111(i)(2) (defining Covered Pending 
Arbitration Claim as an investment-related, consumer initiated claim 
filed against the member or its associated persons in any 
arbitration forum that is unresolved; and whose claim amount 
(individually or, if there is more than one claim, in the aggregate) 
exceeds the member firm's excess net capital).
    \50\ See Notice at 78547.
    \51\ Id. Proposed Rule 4111(f)(3) provides that the Covered 
Pending Arbitration Claims and unpaid arbitration awards of a member 
firm's associated persons are pertinent to an application for a 
withdrawal from the Restricted Deposit Requirement.
---------------------------------------------------------------------------

Books and Records (Proposed Rule 4111(g))
    Member firms would also be obligated to maintain books and records 
that evidence its compliance with Rule 4111 and any Restricted Deposit 
Requirement or other conditions or restrictions imposed under that 
rule, that the member firm would need to provide to the Department upon 
request.\52\
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    \52\ See Notice at 78548.
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Planned Review of Proposed Rule 4111
    FINRA has indicated it intends to conduct a review of proposed Rule 
4111 after gaining sufficient experience under Rule 4111 following its 
effective date.\53\ FINRA has indicated that it expects to review, 
among other items, whether the Preliminary Identification Metrics 
Thresholds remain targeted and effective at identifying member firms 
that pose higher risks.\54\
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    \53\ Id.
    \54\ Id.
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Proposed Rule 9561 (Procedures for Regulating Activities Under Rule 
4111) and Amendments to Rule 9559 To Implement the Requirements of 
Proposed Rule 4111

    FINRA is proposing Rule 9561 to establish new expedited proceedings 
that would: (a) Provide member firms an opportunity to challenge any 
requirements the Department has imposed, including any Restricted 
Deposit Requirements, by requesting a prompt review of the Department's 
decision in the Rule 4111 process; \55\ and (b) address a member firm's 
failure to comply with any requirements imposed under Rule 4111.\56\
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    \55\ Id. Proposed Rule 9561(a)(1) would define the ``Rule 4111 
Requirements'' to mean the requirements, conditions, or restrictions 
imposed by a Department determination under proposed Rule 4111. See 
Notice at 78548.
    \56\ See Notice at 78549.
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Notices Under Proposed Rule 4111 (Proposed Rule 9561(a))
    Under proposed Rule 9561(a)(1), the Department would be obligated 
to serve a notice of its decision following the Rule 4111 process that 
provides the specific grounds and factual basis for the Department's 
action; states when the action will take effect; informs the member 
firm that it may request a hearing in an expedited proceeding within 
seven days after service of the notice; and explains the Hearing 
Officer's authority.\57\ The proposed rule would also provide that, if 
a member firm does not request a hearing, the decision will constitute 
final FINRA action.\58\
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    \57\ Id.
    \58\ See Notice at 78548-49.
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    Any of the Rule 4111 Requirements imposed in the Department's 
decision would be immediately effective.\59\ In general, a request for 
a hearing would not stay those requirements.\60\ There would be one 
exception: When a member firm requests review of a Department 
determination to impose a Restricted Deposit Requirement on the member, 
the firm would be required to deposit the lesser of 25% of its 
Restricted Deposit Requirement or 25% of its average excess net capital 
over the prior year, while the expedited proceeding was pending.\61\ 
This exception would not be available for a member firm that has been 
re-designated as a Restricted Firm, and is already subject to a 
previously imposed Restricted Deposit Requirement, which it will need 
to maintain in full until the Office of Hearing Officers or NAC issues 
a written decision.\62\
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    \59\ See Notice at 78549.
    \60\ Id.
    \61\ Id.
    \62\ See Notice at 78546. Thereafter, if a member firm is not in 
compliance with its Restricted Deposit Requirement or with any 
conditions or restrictions imposed under proposed Rule 4111, FINRA 
would be authorized to issue a notice pursuant to proposed Rule 9561 
directing a member firm to suspend all or a portion of its business. 
See Notice at 78548.
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Notice for Failure To Comply With the Proposed Rule 4111 Requirements 
(Proposed Rule 9561(b))
    After receiving authorization from FINRA's chief executive officer 
(``CEO''), or such other executive officer as the CEO may designate, 
the Department would be authorized to serve a notice stating that the 
member firm's failure to comply with the Rule 4111 Requirements, within 
seven days of service of the notice, will result in a suspension or 
cancellation of membership.\63\ Proposed Rule 9561(b)

[[Page 13784]]

would establish an expedited proceeding to review the Department's 
decision to issue a suspension or cancellation notice to a member firm 
for its failure to comply with requirements of Rule 4111. If a member 
firm does not request a hearing, the suspension or cancellation will 
become effective seven days after service of the notice.\64\
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    \63\ See Notice at 78549. The notice must identify the 
requirements with which the member firm is alleged to have not 
complied; specify the facts involved in the alleged failure; state 
when the action will take effect; explain what the member firm must 
do to avoid the suspension or cancellation; inform the member firm 
that it may file a request for a hearing in an expedited proceeding 
within seven days after service of the notice under Rule 9559; and 
explain the Hearing Officer's authority.
    \64\ Id. After a suspension has been imposed, a member firm 
could file a request under Rule 9561(b) to terminate the suspension 
on the ground of full compliance with the notice or decision, and 
the head of the Department would be permitted to grant relief for 
good cause shown.
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Hearings (Proposed Amendments to the Hearing Procedures Rule)
    If a member firm requests a hearing under proposed Rule 9561, the 
hearing would be subject to Rule 9559 (Hearing Procedures for Expedited 
Proceedings Under the Rule 9550 Series). FINRA is proposing several 
amendments to Rule 9559 that would be specific to hearings requested 
pursuant to proposed Rule 9561.\65\
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    \65\ Id. Specifically, FINRA has proposed to (a) amend Rule 
9559(d) and (n) to establish the authority of a Hearing Officer in 
expedited proceedings under Rule 9561; (b) amend Rule 9559(f) to set 
out timing requirements for hearings conducted under Rules 9561(a) 
and (b); and (c) amend Rule 9559(p)(6) to account for the 
obligations that may be imposed under proposed Rule 4111 within the 
content requirements of any decision issued by a Hearing Officer 
under the Rule 9550 Series. See proposed amended Rules 9559(d), (f), 
(n), and (p)(6). Additionally, FINRA has noted that in expedited 
proceedings conducted under proposed Rule 9561(a) to review a 
Department determination under the Restricted Firm Obligations Rule, 
a member firm would be permitted to try to demonstrate that the 
Department incorrectly included disclosure events when calculating 
whether the member firm meets the Preliminary Criteria for 
Identification. However, the member firm attempting to do so would 
not be permitted to collaterally attack the underlying merits of the 
final actions underlying the disclosure events. See Notice at 78550.
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Effective Date

    If the proposed rule is approved by the Commission, FINRA has 
indicated it will announce an effective date for the proposed rule in a 
Regulatory Notice to be published no later than 60 days following the 
Commission approval.\66\ FINRA originally stated that the effective 
date would be no later than 60 days following publication of the 
Regulatory Notice announcing Commission approval.\67\ However, FINRA 
has since extended the timeline of the effective date to 180 days after 
the Regulatory Notice announcing Commission approval.\68\
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    \66\ See Notice at 78550.
    \67\ Id.
    \68\ See FINRA March 4 Letter supra n.31.
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III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2020-041 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings to further consider the 
proposed rule change and the issues raised by commenters.
    Specifically, the Commission is providing notice of the following 
grounds for possible disapproval under consideration:
     Whether FINRA has demonstrated how its proposed rule 
change is consistent with Section 15A(b)(6) of the Exchange Act, 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.\69\
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    \69\ 15 U.S.C. 78o-3(b)(6).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \70\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\71\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\72\
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    \70\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \71\ See id.
    \72\ See id.
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    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Exchange Act to allow for additional consideration of the issues 
raised by the proposed rule change as it determines whether the 
proposed rule change should be approved or disapproved.\73\
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    \73\ 15 U.S.C. 78s(b)(2)(B).
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change is consistent with the Exchange Act and the rules 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\74\
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    \74\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by March 24, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 31, 2021. 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 No. SR-FINRA-2020-041 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 No. SR-FINRA-2020-041. 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

[[Page 13785]]

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 No. SR-FINRA-2020-041 and 
should be submitted on or before March 24, 2021. If comments are 
received, any rebuttal comments should be submitted on or before March 
31, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
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    \75\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-04912 Filed 3-9-21; 8:45 am]
BILLING CODE 8011-01-P
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