Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Supplementary Material .18 (Remote Inspections Pilot Program) Under FINRA Rule 3110 (Supervision), 53569-53574 [2023-16878]
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
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
under Section 19(b)(2)(B) 18 of the Act 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:
ddrumheller on DSK120RN23PROD with NOTICES1
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–
NYSEARCA–2023–51 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–NYSEARCA–2023–51. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
18 15
U.S.C. 78s(b)(2)(B).
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20:00 Aug 07, 2023
Jkt 259001
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–NYSEARCA–2023–51 and should be
submitted on or before August 29, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16882 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98040; File No. SR–ISE–
2023–11]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Designation of a
Longer Period for Commission Action
on a Proposed Rule Change To Amend
the Short Term Option Series Program
in Supplementary Material .03 of
Options 4, Section 5
August 2, 2023.
On May 31, 2023, Nasdaq ISE, LLC
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend the Short Term Option Series
Program in Supplementary Material .03
of Options 4, Section 5. The proposed
rule change was published for comment
in the Federal Register on June 20,
2023.3
Section 19(b)(2) of the Act 4 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is August 4, 2023.
The Commission is extending this 45day time period. The Commission finds
that it is appropriate to designate a
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97719
(June 13, 2023), 88 FR 39876.
4 15 U.S.C. 78s(b)(2).
longer period within which to take
action on the proposed rule change so
that it has sufficient time to consider the
proposed rule change. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,5 designates
September 18, 2023, as the date by
which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–ISE–2023–11).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16880 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98046; File No. SR–FINRA–
2023–007]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, To Adopt
Supplementary Material .18 (Remote
Inspections Pilot Program) Under
FINRA Rule 3110 (Supervision)
August 2, 2023.
I. Introduction
On April 14, 2023, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change SR–FINRA–
2023–007 pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4 2
thereunder, to adopt a voluntary, threeyear remote inspections pilot program to
allow eligible broker-dealers to elect to
fulfill their obligation under paragraph
(c) (Internal Inspections) of FINRA Rule
3110 (Supervision) by conducting
inspections of eligible branch offices
and non-branch locations remotely
without an on-site visit to such office or
location, subject to specified safeguards
and limitations (the ‘‘Pilot’’).3 The
proposed rule change was published for
public comment in the Federal Register
19 17
1 15
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53569
5 Id.
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See infra note 4.
1 15
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
on May 4, 2023.4 The Commission
received thirteen comment letters
related to this filing.5 On June 7, 2023,
FINRA consented to an extension of 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 to August 2,
2023.6 On August 1, 2023, FINRA filed
an amendment to modify the proposed
rule change (‘‘Amendment No. 1’’), and
stated it anticipates submitting a
response to comments by separate
letter.7
The Commission is publishing this
order pursuant to Section 19(b)(2)(B) of
the Exchange Act 8 to solicit comments
on the proposed rule change, as
modified by Amendment No. 1, and to
institute proceedings to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 1 (hereinafter referred
to as the ‘‘proposed rule change’’ unless
otherwise specified).
option to conduct inspections of their
OSJs, branch offices, and non-branch
locations remotely, subject to specified
terms.10 Absent further regulatory
action, once this temporary rule expires,
FINRA rules would require member
firms to perform only in-person
inspections. FINRA believes it is
appropriate to assess possible longerterm rule changes regarding its
inspection program and is, therefore,
proposing a voluntary, three-year
Pilot.11
II. Description of the Proposed Rule
Change
a. Risk Assessment (Proposed Rule
3110.18(b))
As originally proposed, proposed
Rule 3110.18(b)(1) would require that
prior to selecting any office or location
for remote inspection, rather than an onsite inspection, the broker-dealer must
develop a reasonable risk-based
approach to using remote inspections
and conduct and document a risk
assessment for that office or location.13
Proposed Rule 3110.18(b)(2) also sets
forth a non-exhaustive list of factors that
the broker-dealer must consider and
document as part of the risk assessment
for each office, including: (1) the
volume and nature of customer
complaints; (2) the volume and nature
of outside business activities,
particularly investment-related; (3) the
volume and complexity of products
offered; (4) the nature of the customer
base, including vulnerable adult
ddrumheller on DSK120RN23PROD with NOTICES1
A. Background
FINRA Rule 3110(c)(1) requires a
broker-dealer to inspect its locations
with a frequency that depends on the
location’s classification as an office of
supervisory jurisdiction (‘‘OSJ’’), branch
office, or non-branch location.9 Rule
3110(c)(2) imposes various
documentation requirements for
inspections, including maintaining a
written record of the date upon which
each inspection is conducted.
As part of its response to the COVID–
19 pandemic, FINRA adopted temporary
Rule 3110.17, effective since November
2020, to provide member firms the
4 Exchange Act Release No. 97398 (Apr. 28, 2023),
88 FR 28620 (May 4, 2023) (File No. SR–FINRA–
2023–007) (‘‘Notice’’).
5 The comment letters are available at https://
www.sec.gov/comments/sr-finra-2023-007/
srfinra2023007.htm.
6 See letter from Sarah Kwak, Associate General
Counsel, Office of General Counsel, FINRA, to
Daniel Fisher, Branch Chief, Division of Trading
and Markets, Commission, dated June 7, 2023,
https://www.finra.org/sites/default/files/2023-06/srfinra-2023-007-extension-no-1.pdf.
7 See Amendment No. 1, https://www.finra.org/
sites/default/files/2023-08/SR-FINRA-2023-007Amendment-1.pdf.
8 15 U.S.C. 78s(b)(2)(B).
9 See also SEC Division of Market Regulation,
Staff Legal Bulletin No. 17: Remote Office
Supervision (March 19, 2004) (SEC guidance on
remote office supervision), https://www.sec.gov/
interps/legal/mrslb17.htm; and Regulatory Notice
11–54 (November 2011) (joint SEC and FINRA
guidance on effective policies and procedures for
broker-dealer branch inspections, interpreting the
inspection rule to require that inspections take
place on-site).
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20:00 Aug 07, 2023
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B. The Proposed Rule Change
Proposed Rule 3110.18(a) would
permit broker-dealers to perform
remotely required inspections of OSJs,
branch offices, and non-branch
locations under the applicable
provisions of Rule 3110(c)(1), subject to
specified safeguards and limitations.
The proposed supplementary material
would automatically sunset on a date
that is three years after the effective
date.12
1. Controls and Safeguards
10 See Exchange Act Release No. 90454 (Nov. 18,
2020), 85 FR 75097 (Nov. 24, 2020) (Notice of Filing
and Immediate Effectiveness of File No. SR–
FINRA–2020–040). See also Exchange Act Release
No. 93002 (Sept. 15, 2021), 86 FR 52508 (Sept. 21,
2021) (Notice of Filing and Immediate Effectiveness
of File No. SR–FINRA–2021–023); Exchange Act
Release No. 94018 (Jan. 20, 2022), 87 FR 4072 (Jan.
26, 2022) (Notice of Filing and Immediate
Effectiveness of File No. SR–FINRA–2022–001);
Exchange Act Release No. 96241 (Nov. 4, 2022)
(Notice of Filing and Immediate Effectiveness of
File No. SR–FINRA–2022–030). See also infra note
12.
11 See Notice at 28624–25.
12 If Rule 3110.17 has not already expired by its
own terms, Rule 3110.17 will automatically sunset
on the effective date of the Pilot. See proposed Rule
3110.18(m); see also Notice at 28634.
13 See proposed Rule 3110.18(b)(1).
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investors; (5) whether associated
persons are subject to heightened
supervision; (6) failures by associated
persons to comply with the member’s
written supervisory procedures; and (7)
any recordkeeping violations.14
Amendment No. 1 modified proposed
Rule 3110.18(b)(2) to add that,
consistent with Rule 3110(a), the
member’s supervisory system must take
into consideration any red flags when
determining whether to conduct a
remote inspection of an office or
location.15
b. Written Supervisory Procedures for
Remote Inspections (Proposed Rule
3110.18(c))
As originally proposed, proposed
Rule 3110.18(c) would require a brokerdealer electing to participate in the Pilot
(‘‘participating broker-dealer’’) to adopt
written supervisory procedures
regarding remote inspections that are
reasonably designed to detect and
prevent violations of, and achieve
compliance with, applicable securities
laws and regulations, and with
applicable FINRA rules. Under the
proposed provision, reasonably
designed procedures for conducting
remote inspections of offices or
locations must address, among other
things: (1) the methodology, including
technology, that may be used to conduct
remote inspections; (2) the factors
considered in the risk assessment made
for each applicable office or location; (3)
the procedures specified in the data and
information collection section of the
proposed rule; and (4) the use of other
risk-based systems employed generally
by the member 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.16 Amendment No. 1 modified
proposed Rule 3110.18(c) to replace the
word ‘‘adopt’’ with ‘‘establish, maintain,
and enforce.’’ 17
c. Effective Supervisory System
(Proposed Rule 3110.18(d))
Proposed Rule 3110.18(d) states that
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 a member must maintain its
ongoing review of the activities and
functions occurring at all offices and
locations, whether or not the member
conducts inspections remotely.
14 See
proposed Rule 3110.18(b)(2).
Amendment No. 1.
16 See proposed Rule 3110.18(c).
17 See Amendment No. 1.
15 See
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
Proposed Rule 3110.18(d) further states
that a member’s use of a remote
inspection of an office or location would
be held to the same standards for review
as set forth in FINRA Rule 3110.12
(Supervision; Standards for Reasonable
Review). Furthermore, proposed Rule
3110.18(d) provides that where a
participating broker-dealer’s remote
inspection of an office or location
identifies any indicators of irregularities
or misconduct (i.e., ‘‘red flags’’), the
participating broker-dealer may need to
impose additional supervisory
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.18
d. Documentation Requirement
(Proposed Rule 3110.18(e))
Proposed Rule 3110.18(e) would
require a participating broker-dealer to
maintain and preserve a centralized
record for each Pilot Year 19 in which it
participates that separately identifies:
(1) all offices or locations that were
inspected remotely; and (2) any offices
or locations for which the member
determined to impose additional
supervisory procedures or more
frequent monitoring, as provided in
proposed rule 3110.18(d) (Effective
Supervisory System). Further, proposed
Rule 3110.18(e) would require a
participating broker-dealers’s
documentation of the results of a remote
inspection for an office or location to
identify any additional supervisory
procedures or more frequent monitoring
for that office or location that were
imposed as a result of the remote
inspection, including whether an on-site
ddrumheller on DSK120RN23PROD with NOTICES1
18 See
proposed Rule 3110.18(d). Additionally,
proposed Rule 3110.18(j) would provide that a
broker-dealer that fails to satisfy the conditions of
Rule 3110.18, including the requirement to timely
collect and submit the data and information to
FINRA as set forth in proposed Rule 3110.18(h),
would be ineligible to participate in the Pilot and
must conduct on-site inspections of each office and
location on the required cycle in accordance with
Rule 3110(c).
19 Proposed Rule 3110.18(l) would set forth the
meanings underlying ‘‘Pilot Year’’ as: (1) Pilot Year
1 would be the period beginning on the effective
date of the proposed pilot program and ending on
December 31 of the same year; (2) Pilot Year 2
would mean the calendar year period following
Pilot Year 1, beginning on January 1 and ending on
December 31; and (3) Pilot Year 3 would mean the
calendar year period following Pilot Year 2,
beginning on January 1 and ending on December 31;
and (4) if applicable, where Pilot Year 1 covers a
period that is less than a full calendar year, then
Pilot Year 4 would mean the period following Pilot
Year 3, beginning on January 1 and ending on a date
that is three years after the effective date. See
proposed Rule 3110.18(l).
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20:00 Aug 07, 2023
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inspection was conducted at such office
or location.20
2. Firm Level Requirements (Proposed
Rule 3110.18(f))
Proposed Rule 3110.18(f) includes a
list of conditions to which a brokerdealer must adhere in order to
participate in the Pilot, as well as a list
of criteria that would render firms
ineligible to participate in the Pilot.21
a. Firm Level Ineligibility Criteria
(Proposed Rule 3110.18(f)(1))
Under proposed Rule 3110.18(f)(1), a
broker-dealer would be ineligible to
conduct remote inspections of any of its
offices or locations if the member, at any
time during the Pilot: (1) is or becomes
designated as a Restricted Firm under
FINRA Rule 4111; 22 (2) is or becomes
designated as a Taping Firm under
FINRA Rule 3170; 23 (3) receives a
notice from FINRA pursuant to Rule
9557 regarding compliance with FINRA
Rule 4110, Rule 4120, or Rule 4130; 24
(4) is or becomes suspended from
membership by FINRA; 25 (5) based on
the date in the Central Registration
Depository (‘‘CRD’’) 26 had its FINRA
membership become effective within
the prior 12 months; 27 or (6) is or has
been found within the past three years
by the Commission or FINRA to have
violated FINRA Rule 3110(c).28
b. Firm Level Conditions (Proposed
Rule 3110.18(f)(2))
i. Recordkeeping
Proposed Rule 3110.18(f)(2)(A) would
require each participating broker-dealer
to have a recordkeeping system that: (1)
makes and keeps current, and preserves
records required to be made and kept
current, and preserved under applicable
securities laws and regulations, FINRA
20 See proposed Rule 3110.18(e). FINRA stated
that Amendment No. 1 also contains nonsubstantive updates to the proposed rule text to
improve readability. See Amendment No. 1.
21 See proposed Rule 3110.18(f).
22 See proposed Rule 3110.18(f)(1)(A).
23 See proposed Rule 3110.18(f)(1)(B).
24 See proposed Rule 3110.18(f)(1)(C).
25 See proposed Rule 3110.18(f)(1)(D).
26 FINRA stated that CRD is the central licensing
and registration system that FINRA operates for the
benefit of the Commission, FINRA and other selfregulatory organizations, state securities regulators,
and broker-dealers. The information maintained in
the CRD system is reported by registered brokerdealers, associated persons and regulatory
authorities in response to questions on specified
uniform registration forms. See Notice at 28629 n.
76; see generally Rule 8312 (FINRA BrokerCheck
Disclosure).
27 See proposed Rule 3110.18(f)(1)(E).
28 See proposed Rule 3110.18(f)(1)(F). FINRA
stated that the term ‘‘found’’ as used in this
proposed criterion would carry the same meaning
as Rule 4530.03 (Meaning of ‘‘Found’’). See Notice
at 28630 n.77.
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53571
rules, and the member’s own
supervisory procedures under FINRA
Rule 3110; (2) ensures such records are
not physically or electronically
maintained and preserved at the office
or location subject to remote inspection;
and (3) gives the member prompt access
to such records.29
ii. Surveillance and Technology Tools
Proposed Rule 3110(f)(2)(B) would
require each participating broker-dealer
to determine that their surveillance and
technology tools are appropriate to
supervise the types of risks presented by
each such remotely supervised office or
location.
3. Location Level Requirements
(Proposed Rule 3110.18(g))
Proposed Rule 3110.18(g) includes a
list of conditions an office or location
must adhere to in order to participate in
the Pilot, as well as a list of criteria that
would render offices or locations
ineligible to participate in the Pilot.
a. Location Level Ineligibility Criteria
(Proposed Rule 3110.18(g)(1))
Under proposed Rule 3110.18(g)(1), a
participating broker-dealer’s office or
location would not be eligible for a
remote inspection if at any time during
the Pilot: (1) one or more associated
persons at such office or location is or
becomes subject to a mandatory
heightened supervisory plan under the
rules of the Commission, FINRA, or a
state regulatory agency; 30 (2) one or
more associated persons at such office
or location is or becomes statutorily
disqualified, unless such disqualified
person has been approved (or is
otherwise permitted pursuant to FINRA
rules and the federal securities laws) to
associate with a member and is not
subject to a mandatory heightened
supervisory plan described above or
otherwise as a condition to approval or
permission for such association; 31 (3)
the firm is or becomes subject to FINRA
Rule 1017(a)(7) as a result of one or
more associated persons at such office
or location; 32 (4) one or more associated
persons at such office or location has an
event in the prior three years that
required a ‘‘yes’’ response to certain
subcategories of Question 14 of Form
U4; 33 (5) one or more associated
persons at such office or location is or
becomes subject to a disciplinary action
29 See
proposed Rule 3110.18(f)(2)(A)
proposed Rule 3110.18(g)(1)(A).
31 See proposed Rule 3110.18(g)(1)(B).
32 See proposed Rule 3110.18(g)(1)(C).
Amendment No. 1 removed the word ‘‘or’’ at the
end of the originally proposed Rule
3110.18(g)(1)(C). See supra note 20.
33 See proposed Rule 3110.18(g)(1)(D).
30 See
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
taken by the member that is or was
reportable under FINRA Rule
4530(a)(2); 34 (6) one or more associated
persons at such office or location is
engaged in proprietary trading,
including the incidental crossing of
customer orders, or the direct
supervision of such activities; 35 or (7)
the office or location handles customer
funds or securities.36
b. Location Level Conditions (Proposed
Rule 3110.18(g)(2))
Proposed Rule 3110.18(g)(2) would
require each specific office or location
that participates in the Pilot to satisfy
the following conditions: (1) electronic
communications would be made
through the broker-dealer’s electronic
system; (2) the associated person’s
correspondence and communications
with the public would be subject to the
broker-dealer’s supervision in
accordance with FINRA Rule 3110; and
(3) no books or records of the member
required to be made and kept current,
and preserved under applicable
securities laws and regulations, FINRA
rules, and the participating brokerdealer’s own written supervisory
procedures under FINRA Rule 3110,
would be physically or electronically
maintained and preserved at such office
or location.37
4. Data and Information Collection
Requirement (Proposed Rule 3110.18(h))
ddrumheller on DSK120RN23PROD with NOTICES1
a. Data and Information (Proposed Rule
3110.18(h)(1))
As originally proposed, proposed
Rule 3110.18(h) would require a
participating broker-dealer to collect
and produce to FINRA on a quarterly
basis the following data and information
about its participating offices or
locations: 38 (1) the total number of
inspections—on-site and remote—
completed during each calendar
quarter; 39 (2) the number of those
offices or locations in each calendar
quarter that were subject to an on-site
inspection because of a ‘‘finding,’’ (as
described under proposed Rule
3110.18(h)(1)); 40 (3) the number of
offices or locations for which a remote
inspection was conducted in the
calendar quarter that identified a
finding, the number of findings, and a
list of the most significant findings; 41
34 See
proposed Rule 3110.18(g)(1)(E).
proposed Rule 3110.18(g)(1)(F).
36 See proposed Rule 3110.18(g)(1)(G).
37 See proposed Rule 3110.18(g)(2).
38 See supra note 20.
39 See proposed Rule 3110.18(h)(1)(A), (B), and
(C).
40 See proposed Rule 3110.18(h)(1)(D).
41 See proposed Rule 3110.18(h)(1)(E). According
to FINRA, a ‘‘significant finding’’ would be one that
35 See
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20:00 Aug 07, 2023
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and (4) the number of offices or
locations for which an on-site
inspection was conducted in the
calendar quarter that identified a
finding, the number of findings, a list of
the most significant findings.42
Amendment No. 1 modified proposed
Rule 3110.18(h) to delete the word
‘‘most’’ from the phrase ‘‘most
significant findings.’’ 43
In addition, at the time a participating
broker-dealer first delivers the data
points described above, the proposed
rule change would require participating
broker-dealers to provide FINRA their
written supervisory procedures for
remote inspections that account for: (1)
escalating significant findings; (2) new
hires; (3) supervising brokers with a
significant history of misconduct; and
(4) outside business activities and
‘‘doing business as’’ designations.44 Any
subsequent amendment to a
participating broker-dealer’s written
supervisory procedures for remote
inspections would need to be included
in the next quarterly data submission to
FINRA.
b. Additional Data and Information for
Pilot Year 1, if Less Than Full Calendar
Year (Proposed Rule 3110.18(h)(2)) 45
As originally proposed, if the first
year of the Pilot covers a period of time
that is less than a full calendar year, the
proposed rule change would require
participating broker-dealers to also
collect and produce to FINRA the
following data and information no later
than December 31 of the first Pilot Year:
(1) the number of offices and locations
with an inspection completed during
the full calendar year of the first Pilot
Year; 46 (2) the number of offices and
locations referenced in proposed Rule
3110.18(h)(2)(A) as originally
should prompt the broker-dealer to take further
action that could include escalation to the
appropriate channels at the firm for further review,
the result of which may be enhanced monitoring or
surveillance of a particular event or activity through
more frequent inspections (remotely or on-site), on
an announced or unannounced basis, of the office
or location, or other targeted reviews of the root
cause of the finding. FINRA states that examples of
some findings that may prompt escalation or further
internal review by the appropriate firm personnel
include, among other things, the use of unapproved
communication mediums, customer complaints, or
undisclosed outside business activities or private
securities transactions. See Amendment No. 1,
citing Notice at 28632 n.92.
42 See proposed Rule 3110.18(h)(1)(F); see also
supra note 20.
43 See Amendment No. 1; see also supra note 41.
44 See proposed Rule 3110.18(h)(1)(G)(i) through
(iv).
45 Amendment No. 1 added the word ‘‘in’’ to
proposed Rule 3110.18(h)(2). See supra note 20.
46 See proposed Rule 3110.18(h)(2)(A) as
originally proposed.
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Fmt 4703
Sfmt 4703
proposed 47 that were inspected
remotely during the full calendar year of
the first Pilot Year; 48 and (3) the
number of offices and locations
referenced in proposed Rule
3110.18(h)(2)(A) as originally
proposed 49 that were inspected on-site
during the full calendar year of the first
Pilot Year.50 Amendment No. 1
modified the time period of the
originally proposed Rule 3110.18(h)(2)
to capture data and information about
inspections that may occur in the time
period preceding the effective date of
the proposed Pilot if such effective date
results in the first Pilot Year covering a
period of time that is less than a full
calendar year. Specifically, a
participating broker-dealer would be
required to collect and provide to
FINRA the following data separately for
OSJs, supervisory branch offices, nonsupervisory branch offices, and nonbranch locations: (1) the number of
offices and locations with an inspection
completed between January 1 of the first
Pilot Year and the day before the
effective date of the Pilot; 51 (2) the
number of offices and locations
referenced in proposed Rule
3110.18(h)(2)(A) 52 that were inspected
remotely between January 1 of the first
Pilot Year and the day before the
effective date of the Pilot; 53 and (3) the
number of offices and locations
referenced in proposed Rule
3110.18(h)(2)(A) 54 that were inspected
on-site between January 1 of first Pilot
Year and the day before the effective
date of the Pilot.55
In addition, Amendment No. 1
modified proposed Rule 3110.18(h)(2) to
impose two new obligations to collect
and produce data and information to
FINRA. Specifically, participating
broker-dealers would be required to
collect and provide to FINRA the
following: (1) the number of offices and
locations referenced in proposed Rule
3110.18(h)(2)(B) 56 where findings were
identified, the number of those findings,
47 See
supra note 46 and accompanying text.
proposed Rule 3110.18(h)(2)(B) as
originally proposed.
49 See supra note 46 and accompanying text.
50 See proposed Rule 3110.18(h)(2)(C) as
originally proposed. For items (1) through (3), a
member would be required to provide separate
counts for OSJs, supervisory branch offices, nonsupervisory branch offices, and non-branch
locations. See proposed Rule 3110.18(h)(2) as
originally proposed.
51 See proposed Rule 3110.18(h)(2)(A); see also
Amendment No. 1.
52 See supra note 51 and accompanying text.
53 See proposed Rule 3110.18(h)(2)(B); see also
Amendment No. 1.
54 See supra note 51 and accompanying text.
55 See proposed Rule 3110.18(h)(2)(C); see also
Amendment No. 1.
56 See supra note 53 and accompanying text.
48 See
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
and a list of the significant findings; 57
and (2) the number of offices and
locations referenced in proposed Rule
3110.18(h)(2)(C) 58 where findings were
identified, the number of those findings,
and a list of the significant findings.59
c. Additional Data and Information for
Calendar Year 2019 (Proposed Rule
3110.18(h)(3)) 60
As originally proposed, proposed
Rule 3110.18(h)(3) would require a
participating broker-dealer to collect
and provide to FINRA the following
calendar year 2019 data and information
no later than December 31 of Pilot Year
1 (as defined under proposed Rule
3110.18(l)): (1) the number of offices
and locations with an inspection
completed during calendar year 2019;
and (2) the number of offices and
locations in item (1) where findings
were identified, the number of those
findings and a list of the most
significant findings.61 Amendment No.
1 modified proposed Rule 3110.18(h)(3)
to require a participating broker-dealer
to ‘‘act in good faith using best efforts’’
to collect and provide to FINRA such
data. Amendment No. 1 also deleted the
word ‘‘most’’ from the phrase ‘‘most
significant findings.’’ 62
d. Written Policies and Procedures
(Proposed Rule 3110.18(h)(4))
Proposed Rule 3110.18(h)(4) would
require a participating broker-dealer to
establish, maintain and enforce written
policies and procedures that are
reasonably designed to comply with the
data and information collection, and
transmission requirements of the
Pilot.63
5. Election to Opt-In and Opt-Out of the
Pilot (Proposed Rule 3110.18(i))
ddrumheller on DSK120RN23PROD with NOTICES1
In general, proposed Rule 3110.18(i)
would require a participating brokerdealer, at least five calendar days before
the beginning of a Pilot Year (as defined
under proposed Rule 3110.18(l)), to
provide FINRA an ‘‘opt-in notice’’ in the
manner and format determined by
FINRA. By providing such opt-in notice
57 See proposed Rule 3110.18(h)(2)(D); see also
Amendment No. 1.
58 See supra note 55 and accompanying text.
59 See proposed Rule 3110.18(h)(2)(E); see also
Amendment No. 1.
60 Amendment No. 1 added the word ‘‘and’’
within Rule 3110.18(h)(3)(A). See supra note 20.
61 See proposed Rule 3110.18(h)(3) as originally
proposed. For items (1) and (2), a member would
be required to provide separate counts for OSJs,
supervisory branch offices, non-supervisory branch
offices, and non-branch locations. See id.
62 See proposed Rule 3110.18(h)(3)(B); see also
Amendment No. 1; see also supra note 43 and
accompanying text.
63 See proposed Rule 3110.18(h)(4).
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20:00 Aug 07, 2023
Jkt 259001
to FINRA, the firm would agree to
participate in the proposed pilot
program for the duration of such Pilot
Year and to comply with the
requirements of Rule 3110.18.64 A firm
that provides the opt-in notice for a
Pilot Year would be automatically
deemed to have elected and agreed to
participate in the Pilot for subsequent
Pilot Years.65 To opt out, proposed Rule
3110.18(i) would require a participating
broker-dealer to provide FINRA with an
‘‘opt-out notice’’ at least five calendar
days before the end of the then current
Pilot Year.66
6. Determination of Ineligibility
(Proposed Rule 3110.18(k))
Proposed Rule 3110.18(k) would
authorize FINRA to make a
determination in the public interest and
for the protection of investors that a
broker-dealer is no longer eligible to
participate in the Pilot if the member
fails to comply with the requirements of
Rule 3110.18.67
III. Proceedings To Determine Whether
To Approve or Disapprove File No. SR–
FINRA–2023–007 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to
determine whether the proposed rule
change should be approved or
disapproved.68 Institution of
proceedings is appropriate at this time
in view of the legal and policy issues
raised by the proposed rule change.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
the proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act,69 the Commission is
providing notice of the grounds for
disapproval under consideration. The
Commission is instituting proceedings
to allow for additional analysis and
input concerning whether the proposed
rule change is consistent with the
Exchange Act and the rules thereunder.
64 As stated in the Notice, a firm that participates
in a Pilot Year would be committed to complying
with the terms of proposed Rule 3110.18 for that
Pilot Year. See Notice at 28633 n.97.
65 See proposed Rule 3110.18(i).
66 See id.
67 In such instances, FINRA will provide written
notice to the member of such determination and the
member would no longer be eligible to participate
in the Pilot and must conduct on-site inspections
of required offices and locations in accordance with
Rule 3110(c). See proposed Rule 3110.18(k).
68 15 U.S.C. 78s(b)(2)(B).
69 Id.
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Fmt 4703
Sfmt 4703
53573
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.70
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change should be
approved or disapproved by August 29,
2023. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
September 12, 2023.
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–
FINRA–2023–007 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–2023–007. 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
70 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\08AUN1.SGM
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53574
Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
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
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection.
All submissions should refer to file
number SR–FINRA–2023–007 and
should be submitted on or before
August 29, 2023. If comments are
received, any rebuttal comments should
be submitted on or before September 12,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.71
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16878 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–094, OMB Control No.
3235–0085]
ddrumheller on DSK120RN23PROD with NOTICES1
Proposed Collection; Comment
Request; Extension: Rule 17a–11
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 17a–11,
Notification Provisions for Brokers and
Dealers (17 CFR 240.17a–11), under the
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) (‘‘Exchange Act’’).
The Commission plans to submit this
71 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
VerDate Sep<11>2014
20:00 Aug 07, 2023
Jkt 259001
existing collection of information to the
Office of Management and Budget
(‘‘OMB’’) for extension and approval.
The Commission adopted Rule 17a–
11 on July 11, 1971 in response to an
operational crisis in the securities
industry between 1967 and 1970. The
rule requires broker-dealers that are
experiencing financial or operational
difficulties to provide notice to the
Commission, the broker-dealer’s
designated examining authority
(‘‘DEA’’), and the Commodity Futures
Trading Commission (‘‘CFTC’’) if the
broker-dealer is registered with the
CFTC as a futures commission
merchant. Rule 17a–11 is an integral
part of the Commission’s financial
responsibility program which enables
the Commission, a broker-dealer’s DEA,
and the CFTC to increase surveillance of
a broker-dealer experiencing difficulties
and to obtain any additional
information necessary to gauge the
broker-dealer’s financial or operational
condition.
Rule 17a–11 also requires over-thecounter derivatives dealers and brokerdealers that are permitted to compute
net capital pursuant to Appendix E to
Exchange Act Rule 15c3–1 to notify the
Commission when their tentative net
capital drops below certain levels.
To ensure the provision of these types
of notices to the Commission, Rule 17a–
11 requires every national securities
exchange or national securities
association to notify the Commission
when it learns that a member brokerdealer has failed to send a notice or
transmit a report required under the
Rule.
Compliance with the Rule is
mandatory. The Commission will
generally not publish or make available
to any person notices or reports received
pursuant to Rule 17a–11. The
Commission believes that information
obtained under Rule 17a–11 relates to a
condition report prepared for the use of
the Commission, other federal
governmental authorities, and securities
industry self-regulatory organizations
responsible for the regulation or
supervision of financial institutions.
The Commission estimates that the
total hour burden under Rule 17a–11 is
approximately 274 hours per year.
Written comments are invited on: (a)
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
(b) the accuracy of the Commission’s
estimates of the burden of the proposed
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information collected; and (d)
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted by
October 10, 2023.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
Please direct your written comments
to: David Bottom, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o John
Pezzullo, 100 F Street NE, Washington,
DC 20549, or send an email to: PRA_
Mailbox@sec.gov.
Dated: August 2, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16861 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 12138]
Imposition of Nonproliferation
Measures Against Foreign Persons,
Including a Ban on U.S. Government
Procurement
ACTION:
Notice.
A determination has been
made that a number of foreign persons
have engaged in activities that warrant
the imposition of measures pursuant to
Section 3 of the Iran, North Korea, and
Syria Nonproliferation Act. The Act
provides for sanctions on foreign
entities and individuals for the transfer
to or acquisition from Iran since January
1, 1999; the transfer to or acquisition
from Syria since January 1, 2005; or the
transfer to or acquisition from North
Korea since January 1, 2006, of goods,
services, or technology controlled under
multilateral control lists (Australia
Group, Chemical Weapons Convention,
Missile Technology Control Regime,
Nuclear Suppliers Group, Wassenaar
Arrangement) or otherwise having the
potential to make a material
contribution to the development of
weapons of mass destruction (WMD) or
cruise or ballistic missile systems. The
latter category includes items of the
same kind as those on multilateral lists
but falling below the control list
parameters when it is determined that
such items have the potential of making
a material contribution to WMD or
cruise or ballistic missile systems, items
on U.S. national control lists for WMD/
SUMMARY:
E:\FR\FM\08AUN1.SGM
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]]>Agencies
[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53569-53574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16878]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98046; File No. SR-FINRA-2023-007]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt
Supplementary Material .18 (Remote Inspections Pilot Program) Under
FINRA Rule 3110 (Supervision)
August 2, 2023.
I. Introduction
On April 14, 2023, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change SR-FINRA-2023-007 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 \2\ thereunder, to adopt a voluntary, three-
year remote inspections pilot program to allow eligible broker-dealers
to elect to fulfill their obligation under paragraph (c) (Internal
Inspections) of FINRA Rule 3110 (Supervision) by conducting inspections
of eligible branch offices and non-branch locations remotely without an
on-site visit to such office or location, subject to specified
safeguards and limitations (the ``Pilot'').\3\ The proposed rule change
was published for public comment in the Federal Register
[[Page 53570]]
on May 4, 2023.\4\ The Commission received thirteen comment letters
related to this filing.\5\ On June 7, 2023, FINRA consented to an
extension of 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 to August 2, 2023.\6\ On August 1, 2023, FINRA filed an
amendment to modify the proposed rule change (``Amendment No. 1''), and
stated it anticipates submitting a response to comments by separate
letter.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See infra note 4.
\4\ Exchange Act Release No. 97398 (Apr. 28, 2023), 88 FR 28620
(May 4, 2023) (File No. SR-FINRA-2023-007) (``Notice'').
\5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-007/srfinra2023007.htm.
\6\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, dated June 7, 2023,
https://www.finra.org/sites/default/files/2023-06/sr-finra-2023-007-extension-no-1.pdf.
\7\ See Amendment No. 1, https://www.finra.org/sites/default/files/2023-08/SR-FINRA-2023-007-Amendment-1.pdf.
---------------------------------------------------------------------------
The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \8\ to solicit comments on the proposed
rule change, as modified by Amendment No. 1, and to institute
proceedings to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment No. 1 (hereinafter referred to as
the ``proposed rule change'' unless otherwise specified).
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
FINRA Rule 3110(c)(1) requires a broker-dealer to inspect its
locations with a frequency that depends on the location's
classification as an office of supervisory jurisdiction (``OSJ''),
branch office, or non-branch location.\9\ Rule 3110(c)(2) imposes
various documentation requirements for inspections, including
maintaining a written record of the date upon which each inspection is
conducted.
---------------------------------------------------------------------------
\9\ See also SEC Division of Market Regulation, Staff Legal
Bulletin No. 17: Remote Office Supervision (March 19, 2004) (SEC
guidance on remote office supervision), https://www.sec.gov/interps/legal/mrslb17.htm; and Regulatory Notice 11-54 (November 2011)
(joint SEC and FINRA guidance on effective policies and procedures
for broker-dealer branch inspections, interpreting the inspection
rule to require that inspections take place on-site).
---------------------------------------------------------------------------
As part of its response to the COVID-19 pandemic, FINRA adopted
temporary Rule 3110.17, effective since November 2020, to provide
member firms the option to conduct inspections of their OSJs, branch
offices, and non-branch locations remotely, subject to specified
terms.\10\ Absent further regulatory action, once this temporary rule
expires, FINRA rules would require member firms to perform only in-
person inspections. FINRA believes it is appropriate to assess possible
longer-term rule changes regarding its inspection program and is,
therefore, proposing a voluntary, three-year Pilot.\11\
---------------------------------------------------------------------------
\10\ See Exchange Act Release No. 90454 (Nov. 18, 2020), 85 FR
75097 (Nov. 24, 2020) (Notice of Filing and Immediate Effectiveness
of File No. SR-FINRA-2020-040). See also Exchange Act Release No.
93002 (Sept. 15, 2021), 86 FR 52508 (Sept. 21, 2021) (Notice of
Filing and Immediate Effectiveness of File No. SR-FINRA-2021-023);
Exchange Act Release No. 94018 (Jan. 20, 2022), 87 FR 4072 (Jan. 26,
2022) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2022-001); Exchange Act Release No. 96241 (Nov. 4, 2022)
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2022-030). See also infra note 12.
\11\ See Notice at 28624-25.
---------------------------------------------------------------------------
B. The Proposed Rule Change
Proposed Rule 3110.18(a) would permit broker-dealers to perform
remotely required inspections of OSJs, branch offices, and non-branch
locations under the applicable provisions of Rule 3110(c)(1), subject
to specified safeguards and limitations. The proposed supplementary
material would automatically sunset on a date that is three years after
the effective date.\12\
---------------------------------------------------------------------------
\12\ If Rule 3110.17 has not already expired by its own terms,
Rule 3110.17 will automatically sunset on the effective date of the
Pilot. See proposed Rule 3110.18(m); see also Notice at 28634.
---------------------------------------------------------------------------
1. Controls and Safeguards
a. Risk Assessment (Proposed Rule 3110.18(b))
As originally proposed, proposed Rule 3110.18(b)(1) would require
that prior to selecting any office or location for remote inspection,
rather than an on-site inspection, the broker-dealer must develop a
reasonable risk-based approach to using remote inspections and conduct
and document a risk assessment for that office or location.\13\
Proposed Rule 3110.18(b)(2) also sets forth a non-exhaustive list of
factors that the broker-dealer must consider and document as part of
the risk assessment for each office, including: (1) the volume and
nature of customer complaints; (2) the volume and nature of outside
business activities, particularly investment-related; (3) the volume
and complexity of products offered; (4) the nature of the customer
base, including vulnerable adult investors; (5) whether associated
persons are subject to heightened supervision; (6) failures by
associated persons to comply with the member's written supervisory
procedures; and (7) any recordkeeping violations.\14\ Amendment No. 1
modified proposed Rule 3110.18(b)(2) to add that, consistent with Rule
3110(a), the member's supervisory system must take into consideration
any red flags when determining whether to conduct a remote inspection
of an office or location.\15\
---------------------------------------------------------------------------
\13\ See proposed Rule 3110.18(b)(1).
\14\ See proposed Rule 3110.18(b)(2).
\15\ See Amendment No. 1.
---------------------------------------------------------------------------
b. Written Supervisory Procedures for Remote Inspections (Proposed Rule
3110.18(c))
As originally proposed, proposed Rule 3110.18(c) would require a
broker-dealer electing to participate in the Pilot (``participating
broker-dealer'') to adopt written supervisory procedures regarding
remote inspections that are reasonably designed to detect and prevent
violations of, and achieve compliance with, applicable securities laws
and regulations, and with applicable FINRA rules. Under the proposed
provision, reasonably designed procedures for conducting remote
inspections of offices or locations must address, among other things:
(1) the methodology, including technology, that may be used to conduct
remote inspections; (2) the factors considered in the risk assessment
made for each applicable office or location; (3) the procedures
specified in the data and information collection section of the
proposed rule; and (4) the use of other risk-based systems employed
generally by the member 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.\16\
Amendment No. 1 modified proposed Rule 3110.18(c) to replace the word
``adopt'' with ``establish, maintain, and enforce.'' \17\
---------------------------------------------------------------------------
\16\ See proposed Rule 3110.18(c).
\17\ See Amendment No. 1.
---------------------------------------------------------------------------
c. Effective Supervisory System (Proposed Rule 3110.18(d))
Proposed Rule 3110.18(d) states that 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 a member must maintain its ongoing review of the activities
and functions occurring at all offices and locations, whether or not
the member conducts inspections remotely.
[[Page 53571]]
Proposed Rule 3110.18(d) further states that a member's use of a remote
inspection of an office or location would be held to the same standards
for review as set forth in FINRA Rule 3110.12 (Supervision; Standards
for Reasonable Review). Furthermore, proposed Rule 3110.18(d) provides
that where a participating broker-dealer's remote inspection of an
office or location identifies any indicators of irregularities or
misconduct (i.e., ``red flags''), the participating broker-dealer may
need to impose additional supervisory 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.\18\
---------------------------------------------------------------------------
\18\ See proposed Rule 3110.18(d). Additionally, proposed Rule
3110.18(j) would provide that a broker-dealer that fails to satisfy
the conditions of Rule 3110.18, including the requirement to timely
collect and submit the data and information to FINRA as set forth in
proposed Rule 3110.18(h), would be ineligible to participate in the
Pilot and must conduct on-site inspections of each office and
location on the required cycle in accordance with Rule 3110(c).
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d. Documentation Requirement (Proposed Rule 3110.18(e))
Proposed Rule 3110.18(e) would require a participating broker-
dealer to maintain and preserve a centralized record for each Pilot
Year \19\ in which it participates that separately identifies: (1) all
offices or locations that were inspected remotely; and (2) any offices
or locations for which the member determined to impose additional
supervisory procedures or more frequent monitoring, as provided in
proposed rule 3110.18(d) (Effective Supervisory System). Further,
proposed Rule 3110.18(e) would require a participating broker-dealers's
documentation of the results of a remote inspection for an office or
location to identify any additional supervisory procedures or more
frequent monitoring for that office or location that were imposed as a
result of the remote inspection, including whether an on-site
inspection was conducted at such office or location.\20\
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\19\ Proposed Rule 3110.18(l) would set forth the meanings
underlying ``Pilot Year'' as: (1) Pilot Year 1 would be the period
beginning on the effective date of the proposed pilot program and
ending on December 31 of the same year; (2) Pilot Year 2 would mean
the calendar year period following Pilot Year 1, beginning on
January 1 and ending on December 31; and (3) Pilot Year 3 would mean
the calendar year period following Pilot Year 2, beginning on
January 1 and ending on December 31; and (4) if applicable, where
Pilot Year 1 covers a period that is less than a full calendar year,
then Pilot Year 4 would mean the period following Pilot Year 3,
beginning on January 1 and ending on a date that is three years
after the effective date. See proposed Rule 3110.18(l).
\20\ See proposed Rule 3110.18(e). FINRA stated that Amendment
No. 1 also contains non-substantive updates to the proposed rule
text to improve readability. See Amendment No. 1.
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2. Firm Level Requirements (Proposed Rule 3110.18(f))
Proposed Rule 3110.18(f) includes a list of conditions to which a
broker-dealer must adhere in order to participate in the Pilot, as well
as a list of criteria that would render firms ineligible to participate
in the Pilot.\21\
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\21\ See proposed Rule 3110.18(f).
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a. Firm Level Ineligibility Criteria (Proposed Rule 3110.18(f)(1))
Under proposed Rule 3110.18(f)(1), a broker-dealer would be
ineligible to conduct remote inspections of any of its offices or
locations if the member, at any time during the Pilot: (1) is or
becomes designated as a Restricted Firm under FINRA Rule 4111; \22\ (2)
is or becomes designated as a Taping Firm under FINRA Rule 3170; \23\
(3) receives a notice from FINRA pursuant to Rule 9557 regarding
compliance with FINRA Rule 4110, Rule 4120, or Rule 4130; \24\ (4) is
or becomes suspended from membership by FINRA; \25\ (5) based on the
date in the Central Registration Depository (``CRD'') \26\ had its
FINRA membership become effective within the prior 12 months; \27\ or
(6) is or has been found within the past three years by the Commission
or FINRA to have violated FINRA Rule 3110(c).\28\
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\22\ See proposed Rule 3110.18(f)(1)(A).
\23\ See proposed Rule 3110.18(f)(1)(B).
\24\ See proposed Rule 3110.18(f)(1)(C).
\25\ See proposed Rule 3110.18(f)(1)(D).
\26\ FINRA stated that CRD is the central licensing and
registration system that FINRA operates for the benefit of the
Commission, FINRA and other self-regulatory organizations, state
securities regulators, and broker-dealers. The information
maintained in the CRD system is reported by registered broker-
dealers, associated persons and regulatory authorities in response
to questions on specified uniform registration forms. See Notice at
28629 n. 76; see generally Rule 8312 (FINRA BrokerCheck Disclosure).
\27\ See proposed Rule 3110.18(f)(1)(E).
\28\ See proposed Rule 3110.18(f)(1)(F). FINRA stated that the
term ``found'' as used in this proposed criterion would carry the
same meaning as Rule 4530.03 (Meaning of ``Found''). See Notice at
28630 n.77.
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b. Firm Level Conditions (Proposed Rule 3110.18(f)(2))
i. Recordkeeping
Proposed Rule 3110.18(f)(2)(A) would require each participating
broker-dealer to have a recordkeeping system that: (1) makes and keeps
current, and preserves records required to be made and kept current,
and preserved under applicable securities laws and regulations, FINRA
rules, and the member's own supervisory procedures under FINRA Rule
3110; (2) ensures such records are not physically or electronically
maintained and preserved at the office or location subject to remote
inspection; and (3) gives the member prompt access to such records.\29\
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\29\ See proposed Rule 3110.18(f)(2)(A)
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ii. Surveillance and Technology Tools
Proposed Rule 3110(f)(2)(B) would require each participating
broker-dealer to determine that their surveillance and technology tools
are appropriate to supervise the types of risks presented by each such
remotely supervised office or location.
3. Location Level Requirements (Proposed Rule 3110.18(g))
Proposed Rule 3110.18(g) includes a list of conditions an office or
location must adhere to in order to participate in the Pilot, as well
as a list of criteria that would render offices or locations ineligible
to participate in the Pilot.
a. Location Level Ineligibility Criteria (Proposed Rule 3110.18(g)(1))
Under proposed Rule 3110.18(g)(1), a participating broker-dealer's
office or location would not be eligible for a remote inspection if at
any time during the Pilot: (1) one or more associated persons at such
office or location is or becomes subject to a mandatory heightened
supervisory plan under the rules of the Commission, FINRA, or a state
regulatory agency; \30\ (2) one or more associated persons at such
office or location is or becomes statutorily disqualified, unless such
disqualified person has been approved (or is otherwise permitted
pursuant to FINRA rules and the federal securities laws) to associate
with a member and is not subject to a mandatory heightened supervisory
plan described above or otherwise as a condition to approval or
permission for such association; \31\ (3) the firm is or becomes
subject to FINRA Rule 1017(a)(7) as a result of one or more associated
persons at such office or location; \32\ (4) one or more associated
persons at such office or location has an event in the prior three
years that required a ``yes'' response to certain subcategories of
Question 14 of Form U4; \33\ (5) one or more associated persons at such
office or location is or becomes subject to a disciplinary action
[[Page 53572]]
taken by the member that is or was reportable under FINRA Rule
4530(a)(2); \34\ (6) one or more associated persons at such office or
location is engaged in proprietary trading, including the incidental
crossing of customer orders, or the direct supervision of such
activities; \35\ or (7) the office or location handles customer funds
or securities.\36\
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\30\ See proposed Rule 3110.18(g)(1)(A).
\31\ See proposed Rule 3110.18(g)(1)(B).
\32\ See proposed Rule 3110.18(g)(1)(C). Amendment No. 1 removed
the word ``or'' at the end of the originally proposed Rule
3110.18(g)(1)(C). See supra note 20.
\33\ See proposed Rule 3110.18(g)(1)(D).
\34\ See proposed Rule 3110.18(g)(1)(E).
\35\ See proposed Rule 3110.18(g)(1)(F).
\36\ See proposed Rule 3110.18(g)(1)(G).
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b. Location Level Conditions (Proposed Rule 3110.18(g)(2))
Proposed Rule 3110.18(g)(2) would require each specific office or
location that participates in the Pilot to satisfy the following
conditions: (1) electronic communications would be made through the
broker-dealer's electronic system; (2) the associated person's
correspondence and communications with the public would be subject to
the broker-dealer's supervision in accordance with FINRA Rule 3110; and
(3) no books or records of the member required to be made and kept
current, and preserved under applicable securities laws and
regulations, FINRA rules, and the participating broker-dealer's own
written supervisory procedures under FINRA Rule 3110, would be
physically or electronically maintained and preserved at such office or
location.\37\
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\37\ See proposed Rule 3110.18(g)(2).
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4. Data and Information Collection Requirement (Proposed Rule
3110.18(h))
a. Data and Information (Proposed Rule 3110.18(h)(1))
As originally proposed, proposed Rule 3110.18(h) would require a
participating broker-dealer to collect and produce to FINRA on a
quarterly basis the following data and information about its
participating offices or locations: \38\ (1) the total number of
inspections--on-site and remote--completed during each calendar
quarter; \39\ (2) the number of those offices or locations in each
calendar quarter that were subject to an on-site inspection because of
a ``finding,'' (as described under proposed Rule 3110.18(h)(1)); \40\
(3) the number of offices or locations for which a remote inspection
was conducted in the calendar quarter that identified a finding, the
number of findings, and a list of the most significant findings; \41\
and (4) the number of offices or locations for which an on-site
inspection was conducted in the calendar quarter that identified a
finding, the number of findings, a list of the most significant
findings.\42\ Amendment No. 1 modified proposed Rule 3110.18(h) to
delete the word ``most'' from the phrase ``most significant findings.''
\43\
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\38\ See supra note 20.
\39\ See proposed Rule 3110.18(h)(1)(A), (B), and (C).
\40\ See proposed Rule 3110.18(h)(1)(D).
\41\ See proposed Rule 3110.18(h)(1)(E). According to FINRA, a
``significant finding'' would be one that should prompt the broker-
dealer to take further action that could include escalation to the
appropriate channels at the firm for further review, the result of
which may be enhanced monitoring or surveillance of a particular
event or activity through more frequent inspections (remotely or on-
site), on an announced or unannounced basis, of the office or
location, or other targeted reviews of the root cause of the
finding. FINRA states that examples of some findings that may prompt
escalation or further internal review by the appropriate firm
personnel include, among other things, the use of unapproved
communication mediums, customer complaints, or undisclosed outside
business activities or private securities transactions. See
Amendment No. 1, citing Notice at 28632 n.92.
\42\ See proposed Rule 3110.18(h)(1)(F); see also supra note 20.
\43\ See Amendment No. 1; see also supra note 41.
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In addition, at the time a participating broker-dealer first
delivers the data points described above, the proposed rule change
would require participating broker-dealers to provide FINRA their
written supervisory procedures for remote inspections that account for:
(1) escalating significant findings; (2) new hires; (3) supervising
brokers with a significant history of misconduct; and (4) outside
business activities and ``doing business as'' designations.\44\ Any
subsequent amendment to a participating broker-dealer's written
supervisory procedures for remote inspections would need to be included
in the next quarterly data submission to FINRA.
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\44\ See proposed Rule 3110.18(h)(1)(G)(i) through (iv).
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b. Additional Data and Information for Pilot Year 1, if Less Than Full
Calendar Year (Proposed Rule 3110.18(h)(2)) \45\
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\45\ Amendment No. 1 added the word ``in'' to proposed Rule
3110.18(h)(2). See supra note 20.
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As originally proposed, if the first year of the Pilot covers a
period of time that is less than a full calendar year, the proposed
rule change would require participating broker-dealers to also collect
and produce to FINRA the following data and information no later than
December 31 of the first Pilot Year: (1) the number of offices and
locations with an inspection completed during the full calendar year of
the first Pilot Year; \46\ (2) the number of offices and locations
referenced in proposed Rule 3110.18(h)(2)(A) as originally proposed
\47\ that were inspected remotely during the full calendar year of the
first Pilot Year; \48\ and (3) the number of offices and locations
referenced in proposed Rule 3110.18(h)(2)(A) as originally proposed
\49\ that were inspected on-site during the full calendar year of the
first Pilot Year.\50\ Amendment No. 1 modified the time period of the
originally proposed Rule 3110.18(h)(2) to capture data and information
about inspections that may occur in the time period preceding the
effective date of the proposed Pilot if such effective date results in
the first Pilot Year covering a period of time that is less than a full
calendar year. Specifically, a participating broker-dealer would be
required to collect and provide to FINRA the following data separately
for OSJs, supervisory branch offices, non-supervisory branch offices,
and non-branch locations: (1) the number of offices and locations with
an inspection completed between January 1 of the first Pilot Year and
the day before the effective date of the Pilot; \51\ (2) the number of
offices and locations referenced in proposed Rule 3110.18(h)(2)(A) \52\
that were inspected remotely between January 1 of the first Pilot Year
and the day before the effective date of the Pilot; \53\ and (3) the
number of offices and locations referenced in proposed Rule
3110.18(h)(2)(A) \54\ that were inspected on-site between January 1 of
first Pilot Year and the day before the effective date of the
Pilot.\55\
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\46\ See proposed Rule 3110.18(h)(2)(A) as originally proposed.
\47\ See supra note 46 and accompanying text.
\48\ See proposed Rule 3110.18(h)(2)(B) as originally proposed.
\49\ See supra note 46 and accompanying text.
\50\ See proposed Rule 3110.18(h)(2)(C) as originally proposed.
For items (1) through (3), a member would be required to provide
separate counts for OSJs, supervisory branch offices, non-
supervisory branch offices, and non-branch locations. See proposed
Rule 3110.18(h)(2) as originally proposed.
\51\ See proposed Rule 3110.18(h)(2)(A); see also Amendment No.
1.
\52\ See supra note 51 and accompanying text.
\53\ See proposed Rule 3110.18(h)(2)(B); see also Amendment No.
1.
\54\ See supra note 51 and accompanying text.
\55\ See proposed Rule 3110.18(h)(2)(C); see also Amendment No.
1.
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In addition, Amendment No. 1 modified proposed Rule 3110.18(h)(2)
to impose two new obligations to collect and produce data and
information to FINRA. Specifically, participating broker-dealers would
be required to collect and provide to FINRA the following: (1) the
number of offices and locations referenced in proposed Rule
3110.18(h)(2)(B) \56\ where findings were identified, the number of
those findings,
[[Page 53573]]
and a list of the significant findings; \57\ and (2) the number of
offices and locations referenced in proposed Rule 3110.18(h)(2)(C) \58\
where findings were identified, the number of those findings, and a
list of the significant findings.\59\
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\56\ See supra note 53 and accompanying text.
\57\ See proposed Rule 3110.18(h)(2)(D); see also Amendment No.
1.
\58\ See supra note 55 and accompanying text.
\59\ See proposed Rule 3110.18(h)(2)(E); see also Amendment No.
1.
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c. Additional Data and Information for Calendar Year 2019 (Proposed
Rule 3110.18(h)(3)) \60\
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\60\ Amendment No. 1 added the word ``and'' within Rule
3110.18(h)(3)(A). See supra note 20.
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As originally proposed, proposed Rule 3110.18(h)(3) would require a
participating broker-dealer to collect and provide to FINRA the
following calendar year 2019 data and information no later than
December 31 of Pilot Year 1 (as defined under proposed Rule
3110.18(l)): (1) the number of offices and locations with an inspection
completed during calendar year 2019; and (2) the number of offices and
locations in item (1) where findings were identified, the number of
those findings and a list of the most significant findings.\61\
Amendment No. 1 modified proposed Rule 3110.18(h)(3) to require a
participating broker-dealer to ``act in good faith using best efforts''
to collect and provide to FINRA such data. Amendment No. 1 also deleted
the word ``most'' from the phrase ``most significant findings.'' \62\
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\61\ See proposed Rule 3110.18(h)(3) as originally proposed. For
items (1) and (2), a member would be required to provide separate
counts for OSJs, supervisory branch offices, non-supervisory branch
offices, and non-branch locations. See id.
\62\ See proposed Rule 3110.18(h)(3)(B); see also Amendment No.
1; see also supra note 43 and accompanying text.
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d. Written Policies and Procedures (Proposed Rule 3110.18(h)(4))
Proposed Rule 3110.18(h)(4) would require a participating broker-
dealer to establish, maintain and enforce written policies and
procedures that are reasonably designed to comply with the data and
information collection, and transmission requirements of the Pilot.\63\
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\63\ See proposed Rule 3110.18(h)(4).
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5. Election to Opt-In and Opt-Out of the Pilot (Proposed Rule
3110.18(i))
In general, proposed Rule 3110.18(i) would require a participating
broker-dealer, at least five calendar days before the beginning of a
Pilot Year (as defined under proposed Rule 3110.18(l)), to provide
FINRA an ``opt-in notice'' in the manner and format determined by
FINRA. By providing such opt-in notice to FINRA, the firm would agree
to participate in the proposed pilot program for the duration of such
Pilot Year and to comply with the requirements of Rule 3110.18.\64\ A
firm that provides the opt-in notice for a Pilot Year would be
automatically deemed to have elected and agreed to participate in the
Pilot for subsequent Pilot Years.\65\ To opt out, proposed Rule
3110.18(i) would require a participating broker-dealer to provide FINRA
with an ``opt-out notice'' at least five calendar days before the end
of the then current Pilot Year.\66\
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\64\ As stated in the Notice, a firm that participates in a
Pilot Year would be committed to complying with the terms of
proposed Rule 3110.18 for that Pilot Year. See Notice at 28633 n.97.
\65\ See proposed Rule 3110.18(i).
\66\ See id.
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6. Determination of Ineligibility (Proposed Rule 3110.18(k))
Proposed Rule 3110.18(k) would authorize FINRA to make a
determination in the public interest and for the protection of
investors that a broker-dealer is no longer eligible to participate in
the Pilot if the member fails to comply with the requirements of Rule
3110.18.\67\
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\67\ In such instances, FINRA will provide written notice to the
member of such determination and the member would no longer be
eligible to participate in the Pilot and must conduct on-site
inspections of required offices and locations in accordance with
Rule 3110(c). See proposed Rule 3110.18(k).
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III. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-FINRA-2023-007 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change should be approved or disapproved.\68\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to the proposed rule change.
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\68\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\69\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis and input concerning whether the proposed rule
change is consistent with the Exchange Act and the rules thereunder.
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\69\ Id.
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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.\70\
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\70\ 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 August 29, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 12, 2023.
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-2023-007 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-2023-007. 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
[[Page 53574]]
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 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection.
All submissions should refer to file number SR-FINRA-2023-007 and
should be submitted on or before August 29, 2023. If comments are
received, any rebuttal comments should be submitted on or before
September 12, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\71\
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\71\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16878 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P
