Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend MSRB Rule G-27, on Dealer Supervision, To Adopt a New Residential Supervisory Location Classification, 43961-43969 [2024-10947]

Download as PDF Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.27 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: lotter on DSK11XQN23PROD 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– MRX–2024–11 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–MRX–2024–11. 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 withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–MRX–2024–11 and should be submitted on or before June 10, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–10954 Filed 5–17–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–100131; File No. SR– MSRB–2024–04] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend MSRB Rule G–27, on Dealer Supervision, To Adopt a New Residential Supervisory Location Classification May 14, 2024. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 10, 2024, the Municipal Securities Rulemaking Board (‘‘MSRB’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the MSRB. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 27 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 PO 00000 Frm 00162 Fmt 4703 Sfmt 4703 43961 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB filed with the Commission a proposed rule change consisting of an amendment to MSRB Rule G–27, on supervision, to adopt new Supplementary Material .04, on residential supervisory locations (‘‘RSLs’’), to allow certain brokers, dealers, and municipal securities dealers (‘‘dealers’’) that are members of a registered securities association (‘‘FINRA-member dealers’’) 3 to designate, as an RSL that is a nonbranch location,4 an associated person’s private residence where specified supervisory activities are conducted,5 which would otherwise be classified as an office of municipal supervisory jurisdiction (‘‘OMSJ’’) 6 or a municipal branch office where certain supervisory activities are conducted (‘‘supervisory 3 The MSRB notes that the Financial Industry Regulatory Authority (‘‘FINRA’’) is currently the only registered securities association and will generally, as such, refer to FINRA specifically in the filing when intending to clarify specific regulatory obligations and/or applicable rule(s). 4 Pursuant to MSRB Rule G–27(g)(ii)(A) a location is excluded from registration as a branch office— that is, it is deemed a non-branch location—in the following instances: (i) a location established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office; (ii) an associated person’s primary residence provided it is not held out to the public as an office and certain other conditions are satisfied; (iii) a location, other than a primary residence, that is used for municipal securities activities for less than 30 business days in any one calendar year and is not held out to the public as an office, and which satisfies certain of the conditions set forth in the primary residence exception; (iv) a location of convenience, where associated persons occasionally and exclusively by appointment meet with customers and is not held out to the public as an office; (v) a location used primarily for nonsecurities activities and from which the associated person(s) effects no more than 25 municipal securities transactions in any one calendar year; (vi) the floor of a registered national securities exchange; and (vii) a temporary location established in response to the implementation of a business continuity plan. 5 Proposed Supplementary Material .04(a). 6 Pursuant to MSRB Rule G–27(g)(i) a branch office is classified as an OMSJ if any one of the following enumerated activities occurs at the location: (i) order execution and/or market making; (ii) structuring of public offerings or private placements; (iii) maintaining custody of customers’ funds and/or municipal securities; (iv) final acceptance (approval) of new accounts on behalf of the member; (v) review and endorsement of customer orders, pursuant to subparagraph (c)(i)(G)(2); (vi) final approval of advertising for use by persons associated with the dealer, pursuant to MSRB Rule G–21(f); or (vii) responsibility for supervising the municipal securities activities of persons associated with the dealer at one or more other municipal branch offices of the dealer. An office that is designated an OMSJ must have a registered principal on-site and be inspected on an annual basis. E:\FR\FM\20MYN1.SGM 20MYN1 43962 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices municipal branch office’’),7 if certain conditions are met (the ‘‘proposed rule change’’). Dealers that are not members of a registered securities association (i.e., FINRA), including bank dealers,8 would be ineligible from designating an associated person’s private residence as an RSL under the proposed rule change. The MSRB has designated the proposed rule change as constituting a ‘‘noncontroversial’’ rule change under Section 19(b)(3)(A) 9 of the Exchange Act and Rule 19b–4(f)(6) 10 thereunder, which renders the proposal effective upon receipt of this filing by the Commission. The MSRB proposes an operative date of June 1, 2024, for the proposed rule change to conform with FINRA’s Rule 3110.19 effective date. The text of the proposed rule change is available on the MSRB’s website at https://msrb.org/2024-SEC-Filings, at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change lotter on DSK11XQN23PROD with NOTICES1 1. Purpose The proposed rule change is meant to more closely conform the MSRB’s dealer supervisory rule to FINRA’s recently approved supervisory requirements to help ensure a coordinated regulatory approach in the area of dealer supervision and to enable FINRA to 7 Pursuant to MSRB Rule G–27(g)(ii)(B), any location that is responsible for supervising the municipal securities activities of persons associated with the dealer at one or more non-branch branch locations of the dealer is considered to be a municipal branch office. A supervisory municipal branch office is generally deemed to be an office that supervises other non-branch locations. 8 A bank dealer is defined under MSRB Rule D– 8 as a municipal securities dealer which is a bank or a separately identifiable department or division of a bank. The MSRB will consider at a later date whether or not to extend the ability to make RSL designations to bank dealers after giving due consideration to how to operationalize such an initiative. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b–4(f)(6). VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 more efficiently inspect those dealers that are subject to both self-regulatory organizations, as well as to promote regulatory consistency for dealers engaging in activities across asset classes. To that end, the MSRB is proposing to amend MSRB Rule G–27 to adopt new Supplementary Material .04, on residential supervisory locations, to allow dealers to designate an associated person’s private residences where specified supervisory activities are conducted as non-branch locations, if certain conditions are met. As such, these locations would not be subject to a dealer’s requirement to register, or notice file their locations 11 in the appropriate participating jurisdictions and/or with self-regulatory organizations. Additionally, designated RSLs would not be subject to an annual inspection of such offices or locations as required of OSMJs and branch office locations. The specific compliance obligations are addressed below. Background MSRB Rule G–27(d) outlines the MSRB’s current requirements for dealers to conduct internal inspections (i.e., office inspections) of their offices and locations. Currently, MSRB Rule G– 27(d)(i)(A) requires dealers to inspect every OMSJ 12 and any supervisory municipal branch office 13 at least annually. MSRB Rules G–27(d)(i)(B) and G–27(d)(i)(C) require dealers to inspect every non-supervisory branch office 14 at least every three years, and every non-branch location on a regular periodic 15 schedule. FINRA and the 11 The Uniform Branch Office Registration Form (Form BR) is the form used for branch office registration, notification, closing or withdrawal. Broker-Dealers must use Form BR to register or notice file their branch offices in the appropriate participating jurisdictions and/or with selfregulatory organizations (SROs). More specifically, firms must register each branch office with, among others, FINRA and states that require branch registration. 12 See MSRB Rule G–27(g)(i). 13 Pursuant to MSRB Rule G–27(g)(ii)(B), notwithstanding the exclusions in MSRB Rule G– 27(ii)(A), any location that is responsible for supervising the municipal securities activities of persons associated with the dealer at one or more non-branch branch locations of the dealer is considered to be a municipal branch office. A supervisory municipal branch location is generally deemed to be an office that supervises other nonbranch locations. 14 A non-supervisory branch office would generally be deemed a location that is not charged with supervising the municipal securities activities of persons associated with the dealer. 15 While MSRB rules do not explicitly establish a specific timeframe for such regular periodic inspections, FINRA Rule 3110.13 sets out a general presumption that a non-branch location will be inspected at least every three years, even in the absence of any red flags, and if a FINRA-member dealer establishes a longer periodic inspection schedule, such member must document in its PO 00000 Frm 00163 Fmt 4703 Sfmt 4703 Commission’s Office of Compliance Inspections and Examinations (now the Division of Examinations) staff have previously issued joint guidance stating that office inspections must be conducted on-site at the office.16 The proposed rule change would amend MSRB Rule G–27 to adopt new Supplementary Material .04 that would treat an associated person’s private residence where specified supervisory activities are conducted,17 subject to certain safeguards and limitations, as a non-branch location (i.e., unregistered office). Because it would be treated as a non-branch location, the RSL would be subject to inspections on a regular periodic schedule instead of the annual inspection currently required for every OMSJ and supervisory municipal branch office. This proposed rule change would align with FINRA’s recently adopted amendments to FINRA Rule 3110 creating an RSL designation.18 The proposed rule change is designed to promote regulatory consistency for dealers that are both FINRA-member dealer and MSRB registrants, allowing limited relief from their inspection requirements under MSRB and FINRA rules under similar circumstances.19 Description of Proposed Rule Change Conditions for Designation as a Residential Supervisory Location (Proposed Supplementary Material .04(a) of MSRB Rule G–27) FINRA Rule 3110.19(a) lists conditions for a FINRA-member dealer to designate an office or location as an RSL.20 Proposed Supplementary written supervisory and inspection procedures the factors used in determining that a longer periodic inspection cycle is appropriate. 16 See FINRA Regulatory Notice 11–54, FINRA and the SEC Issue Joint Guidance on Effective Policies and Procedures for Broker-Dealer Branch Inspections, (November 30, 2011), available at https://www.finra.org/sites/default/files/ NoticeDocument/p125204.pdf. 17 See MSRB Rule G–27(g)(i)(D) through (G) and MSRB Rule G–27(g)(ii)(B). 18 See Exchange Act Release No. 98980 (November 17, 2023), 88 FR 82447 (November 24, 2023) (File No. SR–FINRA–2023–006). See also FINRA Regulatory Notice 24–02, Branch Office Registration, Designation and Inspections, (January 23, 2024), available at https://www.finra.org/sites/ default/files/2024-01/Regulatory_Notice_24-02.pdf. 19 As previously noted, proposed MSRB Rule G– 27 Supplementary Material .04 would be applicable only to dealers that are also FINRA-member dealers. 20 While the MSRB does not define office, in FINRA’s 2005 rulemaking initiative to establish a uniform definition of branch office, FINRA noted that the language of the uniform definition substantially mirrored the Commission’s definition of ‘‘office’’ in its books and records rules under the Exchange Act. Exchange Act Rule 17a–3(g)(i), defines the term as any location where one or more associated persons regularly conducts the business of handling funds or securities or effecting any E:\FR\FM\20MYN1.SGM 20MYN1 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 Material .04(a), on conditions for designation as a residential supervisory location, of MSRB Rule G–27 would mirror the conditions set forth in FINRA Rule 3110.19(a) for dealers to designate a location that is the associated person’s private residence where specified supervisory activities are conducted as an RSL. Specifically, the conditions that must be met for designation as an RSL under proposed Supplementary Material .04(a) would include: (i) only one associated person, or multiple associated persons who reside at that location and are members of the same immediate family, conduct business at the location; 21 (ii) the location is not held out to the public as an office; 22 (iii) the associated person does not meet with customers or prospective customers at the location; 23 (iv) any sales activity that takes place at the location complies with the conditions set forth under subparagraphs (g)(ii)(A)(2) or (3) of MSRB Rule G–27; 24 (v) neither customer funds nor securities are handled at that location; 25 (vi) the associated person is assigned to a designated branch office, in accordance with MSRB Rule G–27(g)(ii), on municipal branch office,26 and such designated branch office is reflected on all business cards, stationery, retail communications and other communications to the public by such associated person; 27 (vii) the associated person’s correspondence and communications with the public are subject to the dealer’s supervision in accordance with MSRB Rule G–27; 28 (viii) the associated person’s electronic communications (e.g., email) transactions in, or inducing or attempting to induce the purchase or sale of, any security (17 CFR 240.17a–3). See NASD Notice to Members 05–67 (October 6, 2005), available at https:// www.finra.org/sites/default/files/NoticeDocument/ p015121.pdf. 21 Proposed Supplementary Material .04(a)(1), mirroring FINRA Rule 3110.19(a)(1). 22 Proposed Supplementary Material .04(a)(2), mirroring FINRA Rule 3110.19(a)(2). 23 Proposed Supplementary Material .04(a)(3), mirroring FINRA Rule 3110.19(a)(3). 24 Proposed Supplementary Material .04(a)(4), mirroring FINRA Rule 3110.19(a)(4) with appropriate cross-reference changes to applicable MSRB rule provisions. 25 Proposed Supplementary Material .04(a)(5), mirroring FINRA Rule 3110.19(a)(5). 26 Branch office for purposes of this Supplementary Material is intended to be consistent with the term municipal branch office under MSRB Rule G–27(g)(ii)(A). 27 Proposed Supplementary Material .04(a)(6), mirroring FINRA Rule 3110.19(a)(6). 28 Proposed Supplementary Material .04(a)(7), mirroring FINRA Rule 3110.19(a)(7) with appropriate cross-reference change to the applicable MSRB rule. VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 are made through the dealer’s electronic system; 29 (ix) (A) the dealer must have a recordkeeping system to make, maintain, and preserve such records required to be made, maintained, and preserved under applicable securities laws and regulations, including applicable MSRB rules, and the dealer’s own written supervisory procedures under MSRB Rule G–27; (B) such records are not physically or electronically maintained and preserved at the office or location; 30 and (C) the dealer has prompt access to such records; 31 and (x) the dealer must determine that its surveillance and technology tools are appropriate to supervise the types of risks presented by each RSL, which may include but are not limited to: (A) firmwide electronic tools for recordkeeping, surveillance of email and correspondence, electronic or other equally effective trade blotter review, regular activity-based sampling reviews, and tools for visual inspections; (B) tools specific to carrying out supervision of such RSL based on the activities of associated persons assigned to the location, products offered, and restrictions on the activity of the RSL; and (C) system security tools such as secure network connections and effective cybersecurity protocols.32 The MSRB believes that its proposed rule change with respect to the conditions for designation as an RSL recognizes modernization within the municipal securities market with respect to hybrid work arrangements while also balancing investor protection. In re-evaluating the current paradigm of the OMSJ and municipal branch office model, the MSRB believes that there are certain supervisory activities that can be conducted outside of an OMSJ or municipal branch office while also providing appropriate investor protection. The conditions set forth in FINRA amended rules for designating an office or location as an RSL, which the MSRB has incorporated into the proposed rule change, are in furtherance of ensuring only certain supervisory activities are undertaken at 29 Proposed Supplementary Material .04(a)(8), mirroring FINRA Rule 3110.19(a)(8). 30 Under Regulation S–P, on privacy of consumer financial information, dealers are required to have policies and procedures addressing the protection of customer information and records. See 17 CFR 248.30. 31 Proposed Supplementary Material .04(a)(9), mirroring FINRA Rule 3110.19(a)(9) with appropriate cross-reference change to the applicable MSRB rule and minor non-substantive terminology changes for consistency with MSRB rule language. 32 Proposed Supplementary Material .04(a)(10), mirroring FINRA Rule 3110.19(a)(10). PO 00000 Frm 00164 Fmt 4703 Sfmt 4703 43963 such offices or locations.33 Additionally, through outreach and engagement, the MSRB has learned from dealers about the significant technology advancements since the establishment of the current OMSJ and municipal branch office definitions, so the MSRB believes it is fitting for dealers to assess whether their technology tools are appropriate to supervise the types of risk that could be presented at an RSL. The MSRB believes that adopting similar provisions to those of FINRA will allow dealers to elect to designate an associated person’s private residence as an RSL while meeting their supervisory obligations under MSRB rules and allowing dealers the ability to comply with consistent regulations. Dealer Ineligibility Criteria (Proposed Supplementary Material .04(b) of MSRB Rule G–27) FINRA Rule 3110.19(b) outlines the conditions that would render its member firms ineligible from designating an office as an RSL, which include, if the member firm: (i) is currently designated as a restricted firm under FINRA Rule 4111; (ii) is currently designated as a taping firm under FINRA Rule 3170; (iii) is currently undergoing, or is required to undergo, a review under FINRA Rule 1017(a)(7) as a result of one or more associated persons at such location; (iv) receives a notice from FINRA, pursuant to FINRA Rule 9557, regarding capital compliance related matters under Rules 4110, 4120 and 4130, unless FINRA has otherwise permitted such activities in writing under its rules; (v) is or becomes suspended by FINRA; (vi) has been a FINRA member for less than 12 months; or (vii) is or has been found by the Commission or FINRA to be in violation of office inspection obligations under FINRA Rule 3110(c) within the past three years. The MSRB believes that the aforementioned categories of ineligibility are events or activities that are more likely to raise investor protection concerns because they expressly account for dealers that pose higher risks and, therefore, should be ineligible to utilize the RSL designation. As such, proposed Supplementary Material .04(b), on dealer ineligibility criteria, of MSRB Rule G–27 would provide that a dealer is ineligible from designating an office or location as an RSL if the dealer is not a FINRAmember dealer or if it fails to satisfy the prescribed requirements relating to firm eligibility for such RSL designation under FINRA Rule 3110.19(b). The 33 See E:\FR\FM\20MYN1.SGM supra note 18. 20MYN1 43964 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices (v) has an event in the prior three years that required a ‘‘yes’’ response to any item contained in Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4 (Uniform Application for Securities Industry Registration or Transfer), or similar form Location Ineligibility Criteria (Proposed by a registered securities association; 39 Supplementary Material .04(c) of MSRB or Rule G–27) (vi) has been notified in writing that such associated person is now subject to FINRA Rule 3110.19(c) lists the any Investigation or Proceeding as such criteria that would render a particular terms are defined in the Explanation of office or location that is an associated Terms for the Form U4, by the person’s private residence where Commission, a self-regulatory specified supervisory activities are organization, or state securities conducted ineligible from designation commission (or agency or office as an RSL. Proposed Supplementary performing like functions) (each, a Material .04(c), on location ineligibility ‘‘Regulator’’) expressly alleging they criteria, of MSRB Rule G–27 would mirror the conditions set forth in FINRA have failed to reasonably supervise another person subject to their Rule 3110.19(c) for ineligibility of supervision, with a view to preventing particular offices or locations to be the violation of any provision of the designated as an RSL. Specifically, the Securities Act, the Exchange Act, the conditions that would make an office ineligible for the RSL designation under Investment Advisers Act, the proposed Supplementary Material .04(c) Investment Company Act, the would include if one or more persons at Commodity Exchange Act, any state law pertaining to the regulation of securities that office or location: (i) is a designated principal 34 who has or any rule or regulation under any of such Acts or laws, or any of the rules less than one year of direct supervisory of the MSRB or other self-regulatory experience with the dealer, or with an organization, including FINRA. affiliate or subsidiary of the dealer that Notwithstanding, such office or location is registered as a dealer or investment may be designated or redesignated as an adviser; 35 RSL subject to the requirements of this (ii) is functioning as a principal for a Supplementary Material upon the limited period without being duly earlier of: (i) the dealer’s receipt of qualified under MSRB Rules G– written notification from the applicable 3(b)(ii)(D), (b)(iv)(B)(4), or (c)(ii)(D); 36 Regulator that such Investigation has (iii) is subject to a mandatory concluded without further action; or (ii) heightened supervisory plan under the one year from the date of the last rules of a registered securities communication from such Regulator association, the Commission, or state relating to such Investigation.40 regulatory agency; 37 Allowing dealers to designate offices (iv) is statutorily disqualified as or locations as an RSL and, therefore, defined in Section 3(a)(39) of the treat them as a non-branch location Exchange Act, unless such disqualified would make such RSL subject to person has been approved to associate inspections on a regular periodic with a dealer, without being subject to schedule, rather than an annual a mandatory heightened supervision inspection requirement required of plan, by a registered securities OMSJs and other supervisory municipal association; 38 branch offices. Additionally, these offices or locations would become 34 MSRB Rule G–27(b)(ii)(C), on appropriate unregistered offices. However, FINRA’s principals, outlines the functional role and responsibilities, under the Rule, that can be engaged Central Registration Depository System in by a principal(s) (i.e., municipal securities provides access to information regarding principal, municipal securities sales principal, offices and locations (registered and general securities principal or municipal fund unregistered), and the affirmative securities limited principal) holding a supervisory designation. requirement for FINRA-member dealers 35 Proposed Supplementary Material .04(c)(1), to provide a list of RSL designation mirroring FINRA Rule 3110.19(c)(1). information would ensure this 36 Proposed Supplementary Material .04(c)(2), information is readily accessible to mirroring FINRA Rule 3110.19(c)(2) with lotter on DSK11XQN23PROD with NOTICES1 MSRB believes that maintaining regulatory consistency regarding RSL designations will provide dealers with clear guidance on how and when they are able to consider designating an office or location as an RSL. appropriate cross-reference changes to applicable MSRB rule provisions. 37 Proposed Supplementary Material .04(c)(3), mirroring FINRA Rule 3110.19(c)(3) with minor non-substantive terminology changes. 38 Proposed Supplementary Material .04(c)(4), mirroring FINRA Rule 3110.19(c)(4) with nonsubstantive terminology changes. VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 39 Proposed Supplementary Material .04(c)(5), mirroring FINRA Rule 3110.19(c)(5). The identified disclosures consist of Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4. 40 Proposed Supplementary Material .04(c)(6) mirrors FINRA Rule 3110.19(c)(6), with nonsubstantive terminology changes. PO 00000 Frm 00165 Fmt 4703 Sfmt 4703 regulators.41 In previous regulatory notices,42 it has been stated that the potential for significant regulatory problems exists when business is conducted at locations that are not subject to regular examination by the member. While the MSRB recognizes that on-site office inspections are only one factor in an overall reasonably designed supervisory system, the ineligibility criteria recognize the necessity for more direct oversight and frequency of examinations of some offices. Therefore, the proposed rule change outlined below aligns with FINRA’s amendments establishing location ineligibility. The MSRB believes that adopting similar provisions to those of FINRA will allow dealers to elect to designate RSLs while still meeting their supervisory obligations under MSRB rules. Obligation To Provide List of RSLs to Registered Securities Association (Proposed Supplementary Material .04(d) of MSRB Rule G–27) Proposed Supplementary Material .04(d), on obligations to provide RSL list, of MSRB Rule G–27 would fully mirror the provisions of FINRA Rule 3110.19(d) and would require dealers electing to designate any office or location of the dealer as an RSL to provide a current list of all offices or locations designated as RSLs by the 15th day of the month following each calendar quarter in the manner and format as required by the registered securities association (i.e., FINRA). The proposed amendments harmonize with FINRA’s requirements to ensure greater regulatory certainty. Risk Assessment (Proposed Supplementary Material .04(e) of MSRB Rule G–27) FINRA Rule 3110.19(e) requires member firms, prior to designating an office or location as an RSL, to develop a reasonable risk-based approach to designating such office or location as an RSL, and conduct and document a risk assessment for the associated person assigned to that office or location. Proposed Supplementary Material .04(e), on risk assessment, of MSRB Rule G–27 would mirror the provisions of FINRA Rule 3110.19(e). Specifically, a 41 See Exchange Act Release No. 98980 (November 17, 2023) 88 FR 82447, 82452 (November 24, 2023) (File No. SR–FINRA–2023– 006). 42 See NASD Notice To Members 88–11, Proposed Amendments to Article III, Section 27 of the NASD Rules of Fair Practice Regarding Supervision and the Definitions of ‘‘Office of Supervisory Jurisdiction’’ and ‘‘Branch Office,’’ (February 8, 1988), available at https://www.finra.org/rulesguidance/notices/88-11. E:\FR\FM\20MYN1.SGM 20MYN1 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 dealer would be required, prior to designating an office or location as an RSL, to develop a reasonable risk-based approach to designating such office or location as an RSL and conduct and document a risk assessment for the associated person(s) assigned to that office or location. In line with FINRA Rule 3110.19(e), proposed Supplementary Material .04(e) of MSRB Rule G–27 would list certain factors, among others, that dealers must consider in the risk assessment that include whether each associated person at such office or location is subject to: (i) customer complaints, taking into account the volume and nature of the complaints; 43 (ii) heightened supervision other than where such office or location is ineligible for RSL designation under paragraph (c)(3) of this Supplementary Material; 44 (iii) any failure to comply with the dealer’s written supervisory procedures; 45 (iv) any recordkeeping violations; 46 and (v) any regulatory communications from a regulator indicating that the associated person at such office or location may have failed reasonably to supervise another person subject to their supervision, including but not limited to, subpoenas, preliminary or routine regulatory inquiries or requests for information, deficiency letters, ‘‘blue sheet’’ requests or other trading questionnaires, or examinations.47 Additionally, pursuant to the proposed rule change and mirroring FINRA Rule 3110.19(e), dealers designating an office as an RSL would be required to take into account any higher-risk activities that take place or a higher-risk associated person that is assigned to that office or location. Finally, under the proposed rule change, dealers would need to take into consideration any indicators of irregularities or misconduct (i.e., ‘‘red flags’’) when designating an office or location as an RSL and review such red flags in determining whether it would 43 Proposed Supplementary Material .04(e)(1), mirroring FINRA Rule 3110.19(e)(1). 44 Proposed Supplementary Material .04(e)(2), mirroring FINRA Rule 3110.19(e)(2). 45 Proposed Supplementary Material .04(e)(3), mirroring FINRA Rule 3110.19(e)(3). 46 Proposed Supplementary Material .04(e)(4), mirroring FINRA Rule 3110.19(e)(4). 47 Proposed Supplementary Material .04(e)(5), mirroring FINRA Rule 3110.19(e)(5). The aforementioned regulatory communications could include but are not limited to, subpoenas, preliminary or routine regulatory inquiries or requests for information, deficiency letters, ‘‘blue sheet’’ requests or other trading questionnaires, or examinations. VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 be reasonable to maintain the RSL designation of such office or location. Dealers would also need to consider evidencing steps taken to address those red flags where appropriate. The MSRB believes that aligning the proposed rule change with FINRA amended rules would create regulatory certainty for dealers. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(C) of the Exchange Act,48 which provides that the MSRB’s rules shall be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated persons, and the public interest. In accordance with Section 15B(b)(2)(C) of the Exchange Act,49 the proposed rule change is designed to prevent fraudulent and manipulative acts and practices because the RSL designation is intended to provide a practical and balanced way for dealers to continue effectively meeting the core regulatory obligation to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable MSRB rules, which directly serves investor protection. The MSRB has noticed that there has been a shift towards adopting work from home models due to carryover from the conditions associated with the COVID– 19 pandemic, and the criteria and conditions contained within the proposed rule change is designed to accommodate this shift while also mitigating any associated risks to investor protections. As such, the proposed rule change is designed to minimize risks by limiting which offices or locations can be considered an RSL while also setting conditions for dealers designating an office or location as an RSL. The robust nature of the criteria that must be satisfied and circumstances that would make a location ineligible for RSL designation serve an important role 48 15 49 15 PO 00000 U.S.C. 78o–4(b)(2)(C). U.S.C. 78o–4(b)(2)(C). Frm 00166 Fmt 4703 Sfmt 4703 43965 in preventing fraud and manipulative acts. For example, a location cannot be designated as an RSL if the principal of the location has less than one year of direct supervisory experience with the dealer or its affiliates or subsidiaries, which is in furtherance of the Exchange Act.50 In the same vein, the terms of the proposed rule change would include important safeguards, such as requiring risk assessments in connection with the RSL designation, which furthers the prevention of manipulative acts and practices and the protection of investors, municipal entities, obligated persons and the public interest. Dealers are required to determine that their surveillance and technology tools are appropriate to supervise RSL designations in furtherance of preventing fraudulent and manipulative acts and practices. By providing that such requirements for the use of the RSL designation are applicable to the municipal securities activities of dealers, in addition to other asset classes, the proposed rule change promotes just and equitable principles of trade by ensuring all FINRA-member dealers are subject to the same regulatory standard under both FINRA and MSRB rules. This regulatory consistency would allow FINRAmember dealers that are subject to FINRA and MSRB rules the ability to utilize the RSL designation in a manner that achieves compliance with both MSRB Rule G–27 and FINRA Rule 3110 without the burden or confusion of differing regulatory requirements. The MSRB believes that the market will benefit from similar supervisory requirements for municipal securities as well as corporate securities that are subject to FINRA rules. Additionally, the proposed rule change is intended to provide a practical and balanced way for dealers to continue to effectively meet their core regulatory obligation to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable MSRB rules, which directly serves investors, municipal entities, obligated persons and public interest protections. The MSRB believes that the proposed rule change would facilitate transactions in municipal securities and remove impediments to a free and open market because, by ensuring a consistent regulatory framework for which dealers can avail themselves of RSL designations, the proposed rule change would alleviate some of the operational 50 Id. E:\FR\FM\20MYN1.SGM 20MYN1 43966 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices challenges dealers would otherwise experience, which will allow them to more effectively allocate resources to the operations that facilitate transactions in municipal securities and municipal financial products. Finally, aligning the proposed rule change with amended FINRA Rule 3110 and thereby making such requirements specifically applicable to FINRAmember dealers’ municipal securities activities fosters cooperation between regulators because it creates as close as possible a uniform standard, with minimal distinction needed between the treatment of municipal securities and other asset classes, enabling FINRA and the Commission to more efficiently inspect FINRA-member dealers subject to the rules of both self-regulatory organizations. B. Self-Regulatory Organization’s Statement on Burden on Competition Section 15B(b)(2)(C) of the Exchange Act 51 requires that MSRB rules be designed not to impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The MSRB has considered the economic impact of the proposed rule change and believes that the proposed rule change would not impose any unnecessary or inappropriate burden on competition, as the proposed rule change would align with the newly approved RSL designation under FINRA Rule 3110. In addition, the proposed rule change would be applied equally to all dealers that are FINRA-member dealers.52 Therefore, the MSRB believes the proposed rule change would not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.53 In determining whether these standards have been met, the MSRB was guided by the MSRB’s Policy on the Use of Economic Analysis in MSRB Rulemaking.54 In accordance with this 51 15 U.S.C. 78o–4(b)(2)(C). previously mentioned, the MSRB will consider amendments to MSRB Rule G–27 at a later date on whether the proposed rule change should be extended to other dealers under MSRB rules, such as bank dealers. 53 15 U.S.C. 78o–4(b)(2)(C). 54 See Policy on the Use of Economic Analysis in MSRB Rulemaking, available at https:// www.msrb.org/Policy-Use-Economic-AnalysisMSRB-Rulemaking. In evaluating whether there was any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act, the MSRB was guided by its principles that required the MSRB to consider costs and benefits of a rule change, its impact on efficiency, capital formation and competition, and the main reasonable alternative regulatory approaches. For those rule changes which the MSRB files for immediate effectiveness under lotter on DSK11XQN23PROD with NOTICES1 52 As VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 policy, the MSRB has evaluated the potential impacts on competition of the proposed rule change. The proposed rule change would amend MSRB Rule G–27 to provide a mechanism for dealers to utilize the RSL designation under MSRB rules.55 The proposed rule change is intended to align MSRB Rule G–27 with amended FINRA Rule 3110, which established the option to treat an associated person’s private residence where supervisory activities are conducted as a non-branch location, subject to safeguards and limitations. The MSRB also believes the proposed rule change would be appropriate as some dealers’ business model and work environment continue to evolve with ongoing technological advancements and the shift to remote working may have accelerated since the COVID–19 pandemic.56 Benefits The MSRB believes that the proposed rule change would benefit FINRAmember dealers by offering the option to treat an associated person’s private residence where specified supervisory activities are conducted as a non-branch location, with the intention of minimizing harm to issuers and investors who benefit from the current supervisory framework. Specifically, the MSRB believes that the criteria for dealers to designate an associated person’s private residence where specified supervisory activities are conducted as an RSL would sufficiently safeguard against potential harm. The proposed rule change would therefore lower costs for dealers that choose the RSL designation, including reduced time and expenses related to on-site Section 19(b)(3)(A) of the Exchange Act (15 U.S.C. 78s(b)(3)(A)), while not subject to the policy, the MSRB usually focuses its examination exclusively on the burden of competition on regulated entities, but may also include any additional economic analysis that the MSRB believes may inform the rulemaking process based on the facts and circumstances. 55 The proposed rule change would apply specifically to dealers that are also FINRA-member dealers. 56 See Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, Head of Municipal Securities, Securities Industry and Financial Markets Association, dated February 26, 2024, at 5 available at https://www.msrb.org/sites/ default/files/2024-02/SIFMA-Notice%20202311.pdf, and Letter from H. Deane Armstrong, CCO, Regional Brokers, Inc., dated February 26, 2024, at 1, available at https://www.msrb.org/sites/default/ files/2024-02/Regional-Brokers-Notice-2023-11.pdf, responding to MSRB Notice 2023–11, Request for Information on Impacts of MSRB Rules on Small Firms (December 4, 2023), available at https:// www.msrb.org/sites/default/files/2023-12/202311.pdf. PO 00000 Frm 00167 Fmt 4703 Sfmt 4703 office inspections, as well as reduced expenses for office leasing.57 In addition, even if dealers choose not to utilize the RSL designation, dealers would still benefit from the alignment of MSRB Rule G–27 with the recently amended FINRA Rule 3110. With an estimated 98% of MSRB-registered dealers subject to FINRA’s supervision rules, a discrepancy between MSRB Rule G–27 and the existing analogous FINRA rules on supervision would create confusion, uncertainty and an unnecessary burden for dealers and result in a less efficient operation. By eliminating potential areas of inconsistency between MSRB and FINRA rules, dealers would have a lower compliance burden and an improved efficiency. A more efficient supervisory system for dealers may ultimately also benefit issuers and investors whom the rules are designed to protect, such as by ensuring dealers are able to focus time, attention and resources on matters related to effecting transactions in municipal securities and advancing a fair and efficient market. The MSRB expects the benefits to accumulate over time. Costs Dealers would need to make a onetime revision to their policies and procedures in accordance with the proposed rule change, including accounting for a risk assessment, eligibility criteria and conditions, written supervisory procedures as well as an effective supervisory system. To clarify, the upfront costs to update policies and procedures and associated training are primarily applicable to dealers that elect to utilize the RSL designation, with such costs being proportionately higher for smaller than larger dealers. However, the MSRB believes the total upfront costs would still be manageable, with an estimated incremental amount of $3,820 for the RSL designation, as shown in Table 1; therefore, the cost should not impose an onerous burden on these dealers that choose this option. The MSRB believes the estimated one-time upfront cost would be offset by the cumulative compliance cost savings as a result of the consistency between MSRB Rule G– 27 and FINRA Rule 3110 over time, as well as the cumulative cost savings from the convenience of RSL designation if a dealer chooses this option.58 57 While the MSRB cannot quantify the reduction in leased premises, the MSRB understands through its outreach and engagement with dealers that expenses from leasing office space have generally decreased since the start of the pandemic. 58 For those dealers that opt for the RSL designation, the changes may impose additional E:\FR\FM\20MYN1.SGM 20MYN1 43967 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices TABLE 1—ESTIMATE OF INCREMENTAL COSTS BASED ON 2024 HOURLY RATES 59 Cost components Upfront Costs—RSL Classification: (a) Revision of Policies and Procedures .............................................................................. (b) Outside Counsel Review ................................................................................................ (c) Training ........................................................................................................................... lotter on DSK11XQN23PROD with NOTICES1 Subtotal ......................................................................................................................... Annual Ongoing Costs For Firms Choosing the RSL Classification: Due Diligence and Continuing Education ............................................................................ 4.0 2.0 1.0 $2,160 1,140 520 ........................ ........................ 3,820 520 3.0 1,560 the proposed rule change would not lessen any flexibility or increase cost that existed pre-pandemic for such offices or locations that were already otherwise excluded from the definition of non-branch location due to the functional activities being carried out, for example, order entry and other backoffice work. On the other hand, if an associated person is conducting order execution from their private residence, especially if only in municipal securities, such office or location would be burdened by needing the individual to be qualified as a principal by taking and passing the Municipal Securities Principal Qualification Examination and its activities supervised by another principal at a separate office or location. This may disproportionately affect smaller dealers that may have a higher proportion of these one-person private residences. However, these dealers do have the choice to revert to their prepandemic arrangement where order execution is conducted only at a municipal branch office, not at an associated person’s private residence. costs on acquiring information technology compliance software and hardware upgrades to ensure adequate supervisory functions remotely. However, dealers likely already made these technology upgrades and incurred cost in establishing supervisory controls appropriate to support mandatory work-from-home orders and shift to hybrid work arrangements during the COVID–19 pandemic. Therefore, the MSRB believes the incremental costs for upgrading the information technology would be negligible. 59 The hourly rates data is gathered from the Commission’s filing on ‘‘Amendments Regarding the Definition of ‘‘Exchange’’ and ‘‘Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities.’’ See Exchange Act Release No. 94062 (January 26, 2022), 87 FR 15496, 15624 (March 18, 2022) (File No. S7–02–22) (‘‘Proposed Rule’’). The Commission’s economic analysis utilizes the Securities Industry and Financial Markets Association, Management & Professional Earnings in the Securities Industry— 2013 Report for the hourly rates of various financial industry market professionals. To compensate for inflation, the data reflects the 2024 hourly rate level after adjusting for the annual cumulative wage inflation rate of 37% between 2013 and 2023, and another 4% between 2023 and 2024. See The Federal Reserve Bank of St. Louis Employment Cost Index: Wages and Salaries Private Industry (available at https://fred.stlouisfed.org/series/ 19:14 May 17, 2024 Jkt 262001 Effect on Competition, Efficiency, and Capital Formation The MSRB believes that the proposed rule change would neither impose a burden on competition nor hinder capital formation, as the proposed rule change is applicable to all FINRAmember dealers choosing to avail themselves of the RSL designation and is not expected to erode protection for investors and issuers. While upfront PO 00000 Frm 00168 Fmt 4703 Sfmt 4703 Cost per firm $540 570 520 The costs of annual ongoing compliance with the proposed rule change would likely be minor. For those dealers that transact in municipal securities only and choose the RSL designation in connection with discharging their supervisory activities, the MSRB estimates about $1,560 annually per dealer to conduct the required risk assessment, submit a list of all locations designated as RSLs to FINRA on a quarterly basis and ensure that a dealer is in compliance with the eligibility requirements, including the office or location eligibility for the RSL designation.60 Finally, in response to comments received 61 as to dealers that have adopted a work-from-home model in response to the COVID–19 pandemic and utilized the previous relief granted by the MSRB,62 if an associated person working from their private residence takes orders (i.e., ‘‘order entry’’) that are then entered through a designated municipal branch office or an electronic system established by the dealer that is reviewable at the municipal branch office, such location would continue to be excluded from the definition of municipal branch office under MSRB Rule G–27(g)(ii)(A)(2)(g), provided that all other conditions are met, and therefore would not require an on-site principal or incur cost related to principal personnel. The MSRB does not believe that the proposed rule change would impose any unnecessary or inappropriate burden or impact on competition for these dealers because VerDate Sep<11>2014 Number of hours Hourly rate costs would be relatively higher for smaller-size dealers than larger-size dealers, the MSRB expects the total onetime upfront costs to be manageable for dealers that elect to utilize the RSL designation. The MSRB believes it is appropriate, in an environment with increased remote working personnel, to allow some residential offices or locations to be treated as non-branch locations. Since bank dealers are not covered in the proposed rule change for now, to the extent that some of those 18 bank dealers, as of 2023, would have chosen the RSL designation, had the option been available to them, such bank dealers may be disadvantaged in their competition with other dealers. The MSRB, however, believes this disadvantage would be minimal because the MSRB understands through its outreach and engagement with some bank dealers that bank dealers generally have fewer OMSJs and branch offices or locations than other dealers, so the use of the RSL designation may not be coveted for most bank dealers when weighing the called for processes and documentation requirements. The MSRB believes that the proposed rule change would improve the municipal securities market’s operational efficiency and promote regulatory consistency. At present, the MSRB is unable to quantitatively evaluate the magnitude of the efficiency gains or losses, but believes the benefits accumulated over time would outweigh the upfront costs of revising policies ECIWAG). The number of hours for each task is based on the MSRB’s internal estimate. 60 Dealers of various sizes may incur different amounts of ongoing costs. Therefore, the $1,560 annually per firm represents an estimate for a midsized firm (‘‘mid-sized’’ is defined by FINRA as a firm with 151–499 registered representatives). The MSRB does not believe the proposed rule change would impose costs on investors. 61 See infra note 64. 62 See Exchange Act Release No. 90621 (December 9, 2020), 85 FR 81254 (December 15, 2020). E:\FR\FM\20MYN1.SGM 20MYN1 43968 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices and procedures and the annual ongoing costs of ensuring compliance. lotter on DSK11XQN23PROD with NOTICES1 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were not directly solicited on the proposed rule change.63 However, the MSRB did receive comments referencing the proposed rule change in response to a request for information on the impact of MSRB rules on small firms (the ‘‘RFI’’).64 The Securities Industry and Financial Markets Association (‘‘SIFMA’’) stated in its response to the RFI that certain aspects of the use of home offices and remote supervision create a disproportionate burden on small firms.65 Specifically, SIFMA stated that many firms utilized the temporary COVID–19 relief ‘‘under which entities were not required to designate the homes of employees working alone from home as offices.’’ 66 Furthermore, SIFMA requested guidance and relief that exempts a municipal branch office from being named as an OMSJ if the orders taken or placed by that person are entered through a designated municipal branch office or electronic system that is reviewable at the municipal branch office. SIFMA went on to request similar relief for municipal finance investment bankers working remotely, and that such locations in which structuring and underwriting activities occur be exempt from the OMSJ definition. Similarly, Regional Brokers, Inc. (‘‘Regional Brokers’’) expressed concern that with the COVID–19 relief ending, many home offices will be required to be designated as an OMSJ due to order taking or market making occurring at such offices.67 As a result, Regional Brokers 63 Comments received in response to FINRA’s recently adopted amendments creating an RSL designation under FINRA Rule 3110.19 can be found at https://www.sec.gov/comments/sr-finra2023-006/srfinra2023006.htm. 64 See MSRB Notice 2023–11, Request for Information on Impacts of MSRB Rules on Small Firms (December 4, 2023) available at https:// www.msrb.org/sites/default/files/2023-12/202311.pdf. 65 See Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, Head of Municipal Securities, Securities Industry and Financial Markets Association, dated February 26, 2024, at 5. 66 Id. The MSRB notes that the COVID–19 relief, among other things, clarified, under MSRB Rule G– 27(g)(ii)(A)(7) that a temporary location established in response to the implementation of a business continuity plan is not deemed a municipal branch office. Hence, the COVID relief did not create a new exemption with respect to the classification of locations. 67 Letter from H. Deane Armstrong, CCO, Regional Brokers, Inc., dated February 26, 2024, at 1. VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 stated that one-person OMSJ’s would be burdened by needing the individual to be qualified as a principal whose activities would need to be supervised by another principal at a separate location. The MSRB notes that primary residences in which orders are entered through a designated municipal branch office or an electronic system established by the dealer that is reviewable at the municipal branch office are excluded from the definition of municipal branch office, if other conditions are met and, as such, among other things, do not require an on-site principal.68 In addition, the MSRB highlights that order execution, market making, and structuring are functional activities related to effecting a transaction in municipal securities that the proposed rule change does not seek to address or include within the RSL designation. FINRA also addressed similar comments in its filing regarding expanding the RSL designation to order execution and noted that the RSL designation is meant to carve out supervisory activities only and declined to expand its proposal to include other activities. As such, the MSRB reminds dealers that the proposed rule change is meant to ensure regulatory consistency in the area of supervision and to facilitate the enforcement thereof, so the MSRB would not be inclined at this point to consider additional amendments to MSRB Rule G–27 in this regard. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Pursuant to Section 19(b)(3)(A) 69 of the Exchange Act and Rule 19b–4(f)(6) 70 thereunder, the MSRB has designated the proposed rule change as one that effects a change that: (i) does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) by its terms, does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate. A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative until 30 days after the date of filing.71 However, Rule 19b– 68 MSRB Rule G–27(g)(ii)(A)(2)(g) outlines the requirements for the primary residence exclusion from the definition of a municipal branch office and MSRB Rule G–27(b)(iv) prescribes the locations in which there must be one or more appropriately registered principals. 69 15 U.S.C. 78s(b)(3)(A). 70 17 CFR 240.19b–4(f)(6). 71 Id. PO 00000 Frm 00169 Fmt 4703 Sfmt 4703 4(f)(6)(iii) 72 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest.73 The MSRB has requested that the Commission designate the proposed rule change operative on June 1, 2024,74 as specified in Rule 19b–4(f)(6)(iii).75 The MSRB notes that the proposed rule change is based on, and materially conforms with, the Commission’s recent approval of FINRA Rule 3110.19 (Residential Supervisory Location), which has an effective date of June 1, 2024.76 The MSRB requests that the Commission waive the requirement that the proposed rule change, by its terms, not become operative for 30 days after the date of the filing as set forth in Rule 19b–4(f)(6)(iii) 77 in order to align with the operative date of FINRA Rule 3110.19. The MSRB states that the proposed rule change is meant to more closely conform the MSRB’s dealer supervisory rule to FINRA’s recently approved supervisory requirements to help ensure a coordinated regulatory approach in the area of dealer supervision and to enable FINRA and the Commission to more efficiently inspect those dealers that are subject to both self-regulatory organizations, as well as to promote regulatory consistency for dealers engaging in activities across asset classes. For dealers that are both FINRA-member dealers and MSRB registrants, the MSRB believes that the proposed rule change will allow limited relief from their inspection requirements under MSRB and FINRA rules under similar circumstances. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. An operative date of June 1, 2024 will alleviate operational challenges and confusion for dealers that are both FINRA-member dealers and MSRB registrants by allowing the proposed rule change to become operative on the same date that FINRA Rule 3110.19 72 17 CFR 240.19b–4(f)(6)(iii). addition, Rule 19b–4(f)(6)(iii) requires a selfregulatory organization to give the Commission written notice of its intent to file a proposed rule change, along with a brief description and text of such proposed rule change, at least five business days prior to the date of filing, or such shorter time as designated by the Commission. 74 See SR–MSRB–2024–04. 75 17 CFR 240.19b–4(f)(6)(iii). 76 See Exchange Act Release No. 98980 (Nov. 17, 2023), 88 FR 82447 (Nov. 24, 2023) (File No. SR– FINRA–2023–006). See also FINRA Regulatory Notice 24–02, Branch Office Registration, Designation and Inspections (Jan. 23, 2024), available at https://www.finra.org/sites/default/ files/2024-01/Regulatory_Notice_24-02.pdf. 77 17 CFR 240.19b–4(f)(6)(iii). 73 In E:\FR\FM\20MYN1.SGM 20MYN1 Federal Register / Vol. 89, No. 98 / Monday, May 20, 2024 / Notices takes effect. Accordingly, the Commission hereby waives the 30-day operative delay specified in Rule 19b– 4(f)(6)(iii) and designates the proposed rule change to be operative on June 1, 2024.78 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the MSRB. 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–MSRB–2024–04 and should be submitted on or before June 10, 2024. 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 Exchange Act. Comments may be submitted by any of the following methods: For the Commission, pursuant to delegated authority.79 Sherry R. Haywood, Assistant Secretary. lotter on DSK11XQN23PROD 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– MSRB–2024–04 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–MSRB–2024–04. 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 78 For the purpose of waiving the 30-day operative delay for this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Sep<11>2014 19:14 May 17, 2024 Jkt 262001 [FR Doc. 2024–10947 Filed 5–17–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–100127; File No. 4–631] Joint Industry Plan; Notice of Designation of a Longer Period for Commission Action on the TwentyThird Amendment to the National Market System Plan To Address Extraordinary Market Volatility May 14, 2024. On October 24, 2023, NYSE Group, Inc., on behalf of the Participants 1 to the National Market System Plan to Address Extraordinary Market Volatility (‘‘Plan’’), filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 11A(a)(3) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 2 and Rule 608 thereunder,3 a proposal (‘‘Proposed Amendment’’) to amend the Plan. The Proposed Amendment was published for comment in the Federal Register on November 21, 2023.4 On February 15, 2024, the Commission instituted proceedings 79 17 CFR 200.30–3(a)(12). Participants are: Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., The Financial Industry Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, ‘‘Participants’’). 2 15 U.S.C. 78k–1(a)(3). 3 17 CFR 242.608. 4 See Securities Exchange Act Release No. 98928 (November 14, 2023), 88 FR 81131 (‘‘Notice’’). Comments received in response to the Notice can be found on the Commission’s website at: https:// www.sec.gov/comments/4-631/4-631.htm. 1 The PO 00000 Frm 00170 Fmt 4703 Sfmt 9990 43969 pursuant to Rule 608(b)(2)(i) of Regulation NMS 5 under the Exchange Act to determine whether to approve or disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment.6 Rule 608(b)(2)(i) of Regulation NMS provides that proceedings to determine whether a plan or amendment should be disapproved shall be concluded within 180 days of the date of publication of notice of the plan or amendment and that the time for conclusion of such proceedings may be extended for up to 60 days (up to 240 days from the date of notice publication) if the Commission determines that a longer period is appropriate and publishes the reasons for such determination or the plan participants consent to a longer period.7 The 180th day after publication of the Notice for the Proposed Amendment is May 19, 2024. The Commission is extending this 180-day period. The Commission finds that it is appropriate to designate a longer period within which to conclude proceedings regarding the Proposed Amendment so that it has sufficient time to consider the Proposed Amendment and the comments received. Accordingly, pursuant to Rule 608(b)(2)(i) of Regulation NMS,8 the Commission designates July 18, 2024 as the date by which the Commission shall conclude the proceedings to determine whether to approve or disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate (File No. 4–631). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–10944 Filed 5–17–24; 8:45 am] BILLING CODE 8011–01–P 5 17 CFR 242.608(b)(2)(i). Securities Exchange Act Release No. 99545 (February 15, 2024), 89 FR 13389 (February 22, 2024) (‘‘OIP’’). Comments received in response to the OIP can be found on the Commission’s website at: https://www.sec.gov/comments/4-631/4-631.htm 7 17 CFR 242.608(b)(2)(i). 8 Id. 9 17 CFR 200.30–3(a)(85). 6 See E:\FR\FM\20MYN1.SGM 20MYN1

Agencies

[Federal Register Volume 89, Number 98 (Monday, May 20, 2024)]
[Notices]
[Pages 43961-43969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10947]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100131; File No. SR-MSRB-2024-04]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend MSRB Rule G-27, on Dealer Supervision, To Adopt a New 
Residential Supervisory Location Classification

May 14, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 10, 2024, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the MSRB. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change 
consisting of an amendment to MSRB Rule G-27, on supervision, to adopt 
new Supplementary Material .04, on residential supervisory locations 
(``RSLs''), to allow certain brokers, dealers, and municipal securities 
dealers (``dealers'') that are members of a registered securities 
association (``FINRA-member dealers'') \3\ to designate, as an RSL that 
is a non-branch location,\4\ an associated person's private residence 
where specified supervisory activities are conducted,\5\ which would 
otherwise be classified as an office of municipal supervisory 
jurisdiction (``OMSJ'') \6\ or a municipal branch office where certain 
supervisory activities are conducted (``supervisory

[[Page 43962]]

municipal branch office''),\7\ if certain conditions are met (the 
``proposed rule change''). Dealers that are not members of a registered 
securities association (i.e., FINRA), including bank dealers,\8\ would 
be ineligible from designating an associated person's private residence 
as an RSL under the proposed rule change.
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    \3\ The MSRB notes that the Financial Industry Regulatory 
Authority (``FINRA'') is currently the only registered securities 
association and will generally, as such, refer to FINRA specifically 
in the filing when intending to clarify specific regulatory 
obligations and/or applicable rule(s).
    \4\ Pursuant to MSRB Rule G-27(g)(ii)(A) a location is excluded 
from registration as a branch office--that is, it is deemed a non-
branch location--in the following instances: (i) a location 
established solely for customer service and/or back office type 
functions where no sales activities are conducted and that is not 
held out to the public as a branch office; (ii) an associated 
person's primary residence provided it is not held out to the public 
as an office and certain other conditions are satisfied; (iii) a 
location, other than a primary residence, that is used for municipal 
securities activities for less than 30 business days in any one 
calendar year and is not held out to the public as an office, and 
which satisfies certain of the conditions set forth in the primary 
residence exception; (iv) a location of convenience, where 
associated persons occasionally and exclusively by appointment meet 
with customers and is not held out to the public as an office; (v) a 
location used primarily for non-securities activities and from which 
the associated person(s) effects no more than 25 municipal 
securities transactions in any one calendar year; (vi) the floor of 
a registered national securities exchange; and (vii) a temporary 
location established in response to the implementation of a business 
continuity plan.
    \5\ Proposed Supplementary Material .04(a).
    \6\ Pursuant to MSRB Rule G-27(g)(i) a branch office is 
classified as an OMSJ if any one of the following enumerated 
activities occurs at the location: (i) order execution and/or market 
making; (ii) structuring of public offerings or private placements; 
(iii) maintaining custody of customers' funds and/or municipal 
securities; (iv) final acceptance (approval) of new accounts on 
behalf of the member; (v) review and endorsement of customer orders, 
pursuant to subparagraph (c)(i)(G)(2); (vi) final approval of 
advertising for use by persons associated with the dealer, pursuant 
to MSRB Rule G-21(f); or (vii) responsibility for supervising the 
municipal securities activities of persons associated with the 
dealer at one or more other municipal branch offices of the dealer. 
An office that is designated an OMSJ must have a registered 
principal on-site and be inspected on an annual basis.
    \7\ Pursuant to MSRB Rule G-27(g)(ii)(B), any location that is 
responsible for supervising the municipal securities activities of 
persons associated with the dealer at one or more non-branch branch 
locations of the dealer is considered to be a municipal branch 
office. A supervisory municipal branch office is generally deemed to 
be an office that supervises other non-branch locations.
    \8\ A bank dealer is defined under MSRB Rule D-8 as a municipal 
securities dealer which is a bank or a separately identifiable 
department or division of a bank. The MSRB will consider at a later 
date whether or not to extend the ability to make RSL designations 
to bank dealers after giving due consideration to how to 
operationalize such an initiative.
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    The MSRB has designated the proposed rule change as constituting a 
``noncontroversial'' rule change under Section 19(b)(3)(A) \9\ of the 
Exchange Act and Rule 19b-4(f)(6) \10\ thereunder, which renders the 
proposal effective upon receipt of this filing by the Commission. The 
MSRB proposes an operative date of June 1, 2024, for the proposed rule 
change to conform with FINRA's Rule 3110.19 effective date.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The text of the proposed rule change is available on the MSRB's 
website at https://msrb.org/2024-SEC-Filings, at the MSRB's principal 
office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change is meant to more closely conform the 
MSRB's dealer supervisory rule to FINRA's recently approved supervisory 
requirements to help ensure a coordinated regulatory approach in the 
area of dealer supervision and to enable FINRA to more efficiently 
inspect those dealers that are subject to both self-regulatory 
organizations, as well as to promote regulatory consistency for dealers 
engaging in activities across asset classes. To that end, the MSRB is 
proposing to amend MSRB Rule G-27 to adopt new Supplementary Material 
.04, on residential supervisory locations, to allow dealers to 
designate an associated person's private residences where specified 
supervisory activities are conducted as non-branch locations, if 
certain conditions are met. As such, these locations would not be 
subject to a dealer's requirement to register, or notice file their 
locations \11\ in the appropriate participating jurisdictions and/or 
with self-regulatory organizations. Additionally, designated RSLs would 
not be subject to an annual inspection of such offices or locations as 
required of OSMJs and branch office locations. The specific compliance 
obligations are addressed below.
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    \11\ The Uniform Branch Office Registration Form (Form BR) is 
the form used for branch office registration, notification, closing 
or withdrawal. Broker-Dealers must use Form BR to register or notice 
file their branch offices in the appropriate participating 
jurisdictions and/or with self-regulatory organizations (SROs). More 
specifically, firms must register each branch office with, among 
others, FINRA and states that require branch registration.
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Background
    MSRB Rule G-27(d) outlines the MSRB's current requirements for 
dealers to conduct internal inspections (i.e., office inspections) of 
their offices and locations. Currently, MSRB Rule G-27(d)(i)(A) 
requires dealers to inspect every OMSJ \12\ and any supervisory 
municipal branch office \13\ at least annually. MSRB Rules G-
27(d)(i)(B) and G-27(d)(i)(C) require dealers to inspect every non-
supervisory branch office \14\ at least every three years, and every 
non-branch location on a regular periodic \15\ schedule. FINRA and the 
Commission's Office of Compliance Inspections and Examinations (now the 
Division of Examinations) staff have previously issued joint guidance 
stating that office inspections must be conducted on-site at the 
office.\16\
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    \12\ See MSRB Rule G-27(g)(i).
    \13\ Pursuant to MSRB Rule G-27(g)(ii)(B), notwithstanding the 
exclusions in MSRB Rule G-27(ii)(A), any location that is 
responsible for supervising the municipal securities activities of 
persons associated with the dealer at one or more non-branch branch 
locations of the dealer is considered to be a municipal branch 
office. A supervisory municipal branch location is generally deemed 
to be an office that supervises other non-branch locations.
    \14\ A non-supervisory branch office would generally be deemed a 
location that is not charged with supervising the municipal 
securities activities of persons associated with the dealer.
    \15\ While MSRB rules do not explicitly establish a specific 
timeframe for such regular periodic inspections, FINRA Rule 3110.13 
sets out a general presumption that a non-branch location will be 
inspected at least every three years, even in the absence of any red 
flags, and if a FINRA-member dealer establishes a longer periodic 
inspection schedule, such member must document in its written 
supervisory and inspection procedures the factors used in 
determining that a longer periodic inspection cycle is appropriate.
    \16\ See FINRA Regulatory Notice 11-54, FINRA and the SEC Issue 
Joint Guidance on Effective Policies and Procedures for Broker-
Dealer Branch Inspections, (November 30, 2011), available at https://www.finra.org/sites/default/files/NoticeDocument/p125204.pdf.
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    The proposed rule change would amend MSRB Rule G-27 to adopt new 
Supplementary Material .04 that would treat an associated person's 
private residence where specified supervisory activities are 
conducted,\17\ subject to certain safeguards and limitations, as a non-
branch location (i.e., unregistered office). Because it would be 
treated as a non-branch location, the RSL would be subject to 
inspections on a regular periodic schedule instead of the annual 
inspection currently required for every OMSJ and supervisory municipal 
branch office. This proposed rule change would align with FINRA's 
recently adopted amendments to FINRA Rule 3110 creating an RSL 
designation.\18\ The proposed rule change is designed to promote 
regulatory consistency for dealers that are both FINRA-member dealer 
and MSRB registrants, allowing limited relief from their inspection 
requirements under MSRB and FINRA rules under similar 
circumstances.\19\
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    \17\ See MSRB Rule G-27(g)(i)(D) through (G) and MSRB Rule G-
27(g)(ii)(B).
    \18\ See Exchange Act Release No. 98980 (November 17, 2023), 88 
FR 82447 (November 24, 2023) (File No. SR-FINRA-2023-006). See also 
FINRA Regulatory Notice 24-02, Branch Office Registration, 
Designation and Inspections, (January 23, 2024), available at 
https://www.finra.org/sites/default/files/2024-01/Regulatory_Notice_24-02.pdf.
    \19\ As previously noted, proposed MSRB Rule G-27 Supplementary 
Material .04 would be applicable only to dealers that are also 
FINRA-member dealers.
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Description of Proposed Rule Change
Conditions for Designation as a Residential Supervisory Location 
(Proposed Supplementary Material .04(a) of MSRB Rule G-27)
    FINRA Rule 3110.19(a) lists conditions for a FINRA-member dealer to 
designate an office or location as an RSL.\20\ Proposed Supplementary

[[Page 43963]]

Material .04(a), on conditions for designation as a residential 
supervisory location, of MSRB Rule G-27 would mirror the conditions set 
forth in FINRA Rule 3110.19(a) for dealers to designate a location that 
is the associated person's private residence where specified 
supervisory activities are conducted as an RSL. Specifically, the 
conditions that must be met for designation as an RSL under proposed 
Supplementary Material .04(a) would include:
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    \20\ While the MSRB does not define office, in FINRA's 2005 
rulemaking initiative to establish a uniform definition of branch 
office, FINRA noted that the language of the uniform definition 
substantially mirrored the Commission's definition of ``office'' in 
its books and records rules under the Exchange Act. Exchange Act 
Rule 17a-3(g)(i), defines the term as any location where one or more 
associated persons regularly conducts the business of handling funds 
or securities or effecting any transactions in, or inducing or 
attempting to induce the purchase or sale of, any security (17 CFR 
240.17a-3). See NASD Notice to Members 05-67 (October 6, 2005), 
available at https://www.finra.org/sites/default/files/NoticeDocument/p015121.pdf.
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    (i) only one associated person, or multiple associated persons who 
reside at that location and are members of the same immediate family, 
conduct business at the location; \21\
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    \21\ Proposed Supplementary Material .04(a)(1), mirroring FINRA 
Rule 3110.19(a)(1).
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    (ii) the location is not held out to the public as an office; \22\
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    \22\ Proposed Supplementary Material .04(a)(2), mirroring FINRA 
Rule 3110.19(a)(2).
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    (iii) the associated person does not meet with customers or 
prospective customers at the location; \23\
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    \23\ Proposed Supplementary Material .04(a)(3), mirroring FINRA 
Rule 3110.19(a)(3).
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    (iv) any sales activity that takes place at the location complies 
with the conditions set forth under subparagraphs (g)(ii)(A)(2) or (3) 
of MSRB Rule G-27; \24\
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    \24\ Proposed Supplementary Material .04(a)(4), mirroring FINRA 
Rule 3110.19(a)(4) with appropriate cross-reference changes to 
applicable MSRB rule provisions.
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    (v) neither customer funds nor securities are handled at that 
location; \25\
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    \25\ Proposed Supplementary Material .04(a)(5), mirroring FINRA 
Rule 3110.19(a)(5).
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    (vi) the associated person is assigned to a designated branch 
office, in accordance with MSRB Rule G-27(g)(ii), on municipal branch 
office,\26\ and such designated branch office is reflected on all 
business cards, stationery, retail communications and other 
communications to the public by such associated person; \27\
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    \26\ Branch office for purposes of this Supplementary Material 
is intended to be consistent with the term municipal branch office 
under MSRB Rule G-27(g)(ii)(A).
    \27\ Proposed Supplementary Material .04(a)(6), mirroring FINRA 
Rule 3110.19(a)(6).
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    (vii) the associated person's correspondence and communications 
with the public are subject to the dealer's supervision in accordance 
with MSRB Rule G-27; \28\
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    \28\ Proposed Supplementary Material .04(a)(7), mirroring FINRA 
Rule 3110.19(a)(7) with appropriate cross-reference change to the 
applicable MSRB rule.
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    (viii) the associated person's electronic communications (e.g., 
email) are made through the dealer's electronic system; \29\
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    \29\ Proposed Supplementary Material .04(a)(8), mirroring FINRA 
Rule 3110.19(a)(8).
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    (ix) (A) the dealer must have a recordkeeping system to make, 
maintain, and preserve such records required to be made, maintained, 
and preserved under applicable securities laws and regulations, 
including applicable MSRB rules, and the dealer's own written 
supervisory procedures under MSRB Rule G-27; (B) such records are not 
physically or electronically maintained and preserved at the office or 
location; \30\ and (C) the dealer has prompt access to such records; 
\31\ and
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    \30\ Under Regulation S-P, on privacy of consumer financial 
information, dealers are required to have policies and procedures 
addressing the protection of customer information and records. See 
17 CFR 248.30.
    \31\ Proposed Supplementary Material .04(a)(9), mirroring FINRA 
Rule 3110.19(a)(9) with appropriate cross-reference change to the 
applicable MSRB rule and minor non-substantive terminology changes 
for consistency with MSRB rule language.
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    (x) the dealer must determine that its surveillance and technology 
tools are appropriate to supervise the types of risks presented by each 
RSL, which may include but are not limited to: (A) firm-wide electronic 
tools for recordkeeping, surveillance of email and correspondence, 
electronic or other equally effective trade blotter review, regular 
activity-based sampling reviews, and tools for visual inspections; (B) 
tools specific to carrying out supervision of such RSL based on the 
activities of associated persons assigned to the location, products 
offered, and restrictions on the activity of the RSL; and (C) system 
security tools such as secure network connections and effective 
cybersecurity protocols.\32\
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    \32\ Proposed Supplementary Material .04(a)(10), mirroring FINRA 
Rule 3110.19(a)(10).
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    The MSRB believes that its proposed rule change with respect to the 
conditions for designation as an RSL recognizes modernization within 
the municipal securities market with respect to hybrid work 
arrangements while also balancing investor protection. In re-evaluating 
the current paradigm of the OMSJ and municipal branch office model, the 
MSRB believes that there are certain supervisory activities that can be 
conducted outside of an OMSJ or municipal branch office while also 
providing appropriate investor protection. The conditions set forth in 
FINRA amended rules for designating an office or location as an RSL, 
which the MSRB has incorporated into the proposed rule change, are in 
furtherance of ensuring only certain supervisory activities are 
undertaken at such offices or locations.\33\ Additionally, through 
outreach and engagement, the MSRB has learned from dealers about the 
significant technology advancements since the establishment of the 
current OMSJ and municipal branch office definitions, so the MSRB 
believes it is fitting for dealers to assess whether their technology 
tools are appropriate to supervise the types of risk that could be 
presented at an RSL.
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    \33\ See supra note 18.
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    The MSRB believes that adopting similar provisions to those of 
FINRA will allow dealers to elect to designate an associated person's 
private residence as an RSL while meeting their supervisory obligations 
under MSRB rules and allowing dealers the ability to comply with 
consistent regulations.
Dealer Ineligibility Criteria (Proposed Supplementary Material .04(b) 
of MSRB Rule G-27)
    FINRA Rule 3110.19(b) outlines the conditions that would render its 
member firms ineligible from designating an office as an RSL, which 
include, if the member firm: (i) is currently designated as a 
restricted firm under FINRA Rule 4111; (ii) is currently designated as 
a taping firm under FINRA Rule 3170; (iii) is currently undergoing, or 
is required to undergo, a review under FINRA Rule 1017(a)(7) as a 
result of one or more associated persons at such location; (iv) 
receives a notice from FINRA, pursuant to FINRA Rule 9557, regarding 
capital compliance related matters under Rules 4110, 4120 and 4130, 
unless FINRA has otherwise permitted such activities in writing under 
its rules; (v) is or becomes suspended by FINRA; (vi) has been a FINRA 
member for less than 12 months; or (vii) is or has been found by the 
Commission or FINRA to be in violation of office inspection obligations 
under FINRA Rule 3110(c) within the past three years.
    The MSRB believes that the aforementioned categories of 
ineligibility are events or activities that are more likely to raise 
investor protection concerns because they expressly account for dealers 
that pose higher risks and, therefore, should be ineligible to utilize 
the RSL designation. As such, proposed Supplementary Material .04(b), 
on dealer ineligibility criteria, of MSRB Rule G-27 would provide that 
a dealer is ineligible from designating an office or location as an RSL 
if the dealer is not a FINRA-member dealer or if it fails to satisfy 
the prescribed requirements relating to firm eligibility for such RSL 
designation under FINRA Rule 3110.19(b). The

[[Page 43964]]

MSRB believes that maintaining regulatory consistency regarding RSL 
designations will provide dealers with clear guidance on how and when 
they are able to consider designating an office or location as an RSL.
Location Ineligibility Criteria (Proposed Supplementary Material .04(c) 
of MSRB Rule G-27)
    FINRA Rule 3110.19(c) lists the criteria that would render a 
particular office or location that is an associated person's private 
residence where specified supervisory activities are conducted 
ineligible from designation as an RSL. Proposed Supplementary Material 
.04(c), on location ineligibility criteria, of MSRB Rule G-27 would 
mirror the conditions set forth in FINRA Rule 3110.19(c) for 
ineligibility of particular offices or locations to be designated as an 
RSL. Specifically, the conditions that would make an office ineligible 
for the RSL designation under proposed Supplementary Material .04(c) 
would include if one or more persons at that office or location:
    (i) is a designated principal \34\ who has less than one year of 
direct supervisory experience with the dealer, or with an affiliate or 
subsidiary of the dealer that is registered as a dealer or investment 
adviser; \35\
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    \34\ MSRB Rule G-27(b)(ii)(C), on appropriate principals, 
outlines the functional role and responsibilities, under the Rule, 
that can be engaged in by a principal(s) (i.e., municipal securities 
principal, municipal securities sales principal, general securities 
principal or municipal fund securities limited principal) holding a 
supervisory designation.
    \35\ Proposed Supplementary Material .04(c)(1), mirroring FINRA 
Rule 3110.19(c)(1).
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    (ii) is functioning as a principal for a limited period without 
being duly qualified under MSRB Rules G-3(b)(ii)(D), (b)(iv)(B)(4), or 
(c)(ii)(D); \36\
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    \36\ Proposed Supplementary Material .04(c)(2), mirroring FINRA 
Rule 3110.19(c)(2) with appropriate cross-reference changes to 
applicable MSRB rule provisions.
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    (iii) is subject to a mandatory heightened supervisory plan under 
the rules of a registered securities association, the Commission, or 
state regulatory agency; \37\
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    \37\ Proposed Supplementary Material .04(c)(3), mirroring FINRA 
Rule 3110.19(c)(3) with minor non-substantive terminology changes.
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    (iv) is statutorily disqualified as defined in Section 3(a)(39) of 
the Exchange Act, unless such disqualified person has been approved to 
associate with a dealer, without being subject to a mandatory 
heightened supervision plan, by a registered securities association; 
\38\
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    \38\ Proposed Supplementary Material .04(c)(4), mirroring FINRA 
Rule 3110.19(c)(4) with non-substantive terminology changes.
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    (v) has an event in the prior three years that required a ``yes'' 
response to any item contained in Questions 14A(1)(a) and 2(a), 
14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4 (Uniform Application 
for Securities Industry Registration or Transfer), or similar form by a 
registered securities association; \39\ or
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    \39\ Proposed Supplementary Material .04(c)(5), mirroring FINRA 
Rule 3110.19(c)(5). The identified disclosures consist of Questions 
14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4.
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    (vi) has been notified in writing that such associated person is 
now subject to any Investigation or Proceeding as such terms are 
defined in the Explanation of Terms for the Form U4, by the Commission, 
a self-regulatory organization, or state securities commission (or 
agency or office performing like functions) (each, a ``Regulator'') 
expressly alleging they have failed to reasonably supervise another 
person subject to their supervision, with a view to preventing the 
violation of any provision of the Securities Act, the Exchange Act, the 
Investment Advisers Act, the Investment Company Act, the Commodity 
Exchange Act, any state law pertaining to the regulation of securities 
or any rule or regulation under any of such Acts or laws, or any of the 
rules of the MSRB or other self-regulatory organization, including 
FINRA. Notwithstanding, such office or location may be designated or 
redesignated as an RSL subject to the requirements of this 
Supplementary Material upon the earlier of: (i) the dealer's receipt of 
written notification from the applicable Regulator that such 
Investigation has concluded without further action; or (ii) one year 
from the date of the last communication from such Regulator relating to 
such Investigation.\40\
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    \40\ Proposed Supplementary Material .04(c)(6) mirrors FINRA 
Rule 3110.19(c)(6), with non-substantive terminology changes.
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    Allowing dealers to designate offices or locations as an RSL and, 
therefore, treat them as a non-branch location would make such RSL 
subject to inspections on a regular periodic schedule, rather than an 
annual inspection requirement required of OMSJs and other supervisory 
municipal branch offices. Additionally, these offices or locations 
would become unregistered offices. However, FINRA's Central 
Registration Depository System provides access to information regarding 
offices and locations (registered and unregistered), and the 
affirmative requirement for FINRA-member dealers to provide a list of 
RSL designation information would ensure this information is readily 
accessible to regulators.\41\ In previous regulatory notices,\42\ it 
has been stated that the potential for significant regulatory problems 
exists when business is conducted at locations that are not subject to 
regular examination by the member. While the MSRB recognizes that on-
site office inspections are only one factor in an overall reasonably 
designed supervisory system, the ineligibility criteria recognize the 
necessity for more direct oversight and frequency of examinations of 
some offices. Therefore, the proposed rule change outlined below aligns 
with FINRA's amendments establishing location ineligibility. The MSRB 
believes that adopting similar provisions to those of FINRA will allow 
dealers to elect to designate RSLs while still meeting their 
supervisory obligations under MSRB rules.
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    \41\ See Exchange Act Release No. 98980 (November 17, 2023) 88 
FR 82447, 82452 (November 24, 2023) (File No. SR-FINRA-2023-006).
    \42\ See NASD Notice To Members 88-11, Proposed Amendments to 
Article III, Section 27 of the NASD Rules of Fair Practice Regarding 
Supervision and the Definitions of ``Office of Supervisory 
Jurisdiction'' and ``Branch Office,'' (February 8, 1988), available 
at https://www.finra.org/rules-guidance/notices/88-11.
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Obligation To Provide List of RSLs to Registered Securities Association 
(Proposed Supplementary Material .04(d) of MSRB Rule G-27)
    Proposed Supplementary Material .04(d), on obligations to provide 
RSL list, of MSRB Rule G-27 would fully mirror the provisions of FINRA 
Rule 3110.19(d) and would require dealers electing to designate any 
office or location of the dealer as an RSL to provide a current list of 
all offices or locations designated as RSLs by the 15th day of the 
month following each calendar quarter in the manner and format as 
required by the registered securities association (i.e., FINRA). The 
proposed amendments harmonize with FINRA's requirements to ensure 
greater regulatory certainty.
Risk Assessment (Proposed Supplementary Material .04(e) of MSRB Rule G-
27)
    FINRA Rule 3110.19(e) requires member firms, prior to designating 
an office or location as an RSL, to develop a reasonable risk-based 
approach to designating such office or location as an RSL, and conduct 
and document a risk assessment for the associated person assigned to 
that office or location. Proposed Supplementary Material .04(e), on 
risk assessment, of MSRB Rule G-27 would mirror the provisions of FINRA 
Rule 3110.19(e). Specifically, a

[[Page 43965]]

dealer would be required, prior to designating an office or location as 
an RSL, to develop a reasonable risk-based approach to designating such 
office or location as an RSL and conduct and document a risk assessment 
for the associated person(s) assigned to that office or location. In 
line with FINRA Rule 3110.19(e), proposed Supplementary Material .04(e) 
of MSRB Rule G-27 would list certain factors, among others, that 
dealers must consider in the risk assessment that include whether each 
associated person at such office or location is subject to:
    (i) customer complaints, taking into account the volume and nature 
of the complaints; \43\
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    \43\ Proposed Supplementary Material .04(e)(1), mirroring FINRA 
Rule 3110.19(e)(1).
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    (ii) heightened supervision other than where such office or 
location is ineligible for RSL designation under paragraph (c)(3) of 
this Supplementary Material; \44\
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    \44\ Proposed Supplementary Material .04(e)(2), mirroring FINRA 
Rule 3110.19(e)(2).
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    (iii) any failure to comply with the dealer's written supervisory 
procedures; \45\
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    \45\ Proposed Supplementary Material .04(e)(3), mirroring FINRA 
Rule 3110.19(e)(3).
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    (iv) any recordkeeping violations; \46\ and
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    \46\ Proposed Supplementary Material .04(e)(4), mirroring FINRA 
Rule 3110.19(e)(4).
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    (v) any regulatory communications from a regulator indicating that 
the associated person at such office or location may have failed 
reasonably to supervise another person subject to their supervision, 
including but not limited to, subpoenas, preliminary or routine 
regulatory inquiries or requests for information, deficiency letters, 
``blue sheet'' requests or other trading questionnaires, or 
examinations.\47\
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    \47\ Proposed Supplementary Material .04(e)(5), mirroring FINRA 
Rule 3110.19(e)(5). The aforementioned regulatory communications 
could include but are not limited to, subpoenas, preliminary or 
routine regulatory inquiries or requests for information, deficiency 
letters, ``blue sheet'' requests or other trading questionnaires, or 
examinations.
---------------------------------------------------------------------------

    Additionally, pursuant to the proposed rule change and mirroring 
FINRA Rule 3110.19(e), dealers designating an office as an RSL would be 
required to take into account any higher-risk activities that take 
place or a higher-risk associated person that is assigned to that 
office or location. Finally, under the proposed rule change, dealers 
would need to take into consideration any indicators of irregularities 
or misconduct (i.e., ``red flags'') when designating an office or 
location as an RSL and review such red flags in determining whether it 
would be reasonable to maintain the RSL designation of such office or 
location. Dealers would also need to consider evidencing steps taken to 
address those red flags where appropriate.
    The MSRB believes that aligning the proposed rule change with FINRA 
amended rules would create regulatory certainty for dealers.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Exchange Act,\48\ which provides that the 
MSRB's rules shall be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in municipal securities and municipal 
financial products, to remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products, and, in general, to protect investors, municipal 
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    In accordance with Section 15B(b)(2)(C) of the Exchange Act,\49\ 
the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices because the RSL designation is intended 
to provide a practical and balanced way for dealers to continue 
effectively meeting the core regulatory obligation to establish and 
maintain a system to supervise the activities of each associated person 
that is reasonably designed to achieve compliance with applicable 
securities laws and regulations and with applicable MSRB rules, which 
directly serves investor protection. The MSRB has noticed that there 
has been a shift towards adopting work from home models due to 
carryover from the conditions associated with the COVID-19 pandemic, 
and the criteria and conditions contained within the proposed rule 
change is designed to accommodate this shift while also mitigating any 
associated risks to investor protections. As such, the proposed rule 
change is designed to minimize risks by limiting which offices or 
locations can be considered an RSL while also setting conditions for 
dealers designating an office or location as an RSL. The robust nature 
of the criteria that must be satisfied and circumstances that would 
make a location ineligible for RSL designation serve an important role 
in preventing fraud and manipulative acts. For example, a location 
cannot be designated as an RSL if the principal of the location has 
less than one year of direct supervisory experience with the dealer or 
its affiliates or subsidiaries, which is in furtherance of the Exchange 
Act.\50\ In the same vein, the terms of the proposed rule change would 
include important safeguards, such as requiring risk assessments in 
connection with the RSL designation, which furthers the prevention of 
manipulative acts and practices and the protection of investors, 
municipal entities, obligated persons and the public interest. Dealers 
are required to determine that their surveillance and technology tools 
are appropriate to supervise RSL designations in furtherance of 
preventing fraudulent and manipulative acts and practices.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-4(b)(2)(C).
    \50\ Id.
---------------------------------------------------------------------------

    By providing that such requirements for the use of the RSL 
designation are applicable to the municipal securities activities of 
dealers, in addition to other asset classes, the proposed rule change 
promotes just and equitable principles of trade by ensuring all FINRA-
member dealers are subject to the same regulatory standard under both 
FINRA and MSRB rules. This regulatory consistency would allow FINRA-
member dealers that are subject to FINRA and MSRB rules the ability to 
utilize the RSL designation in a manner that achieves compliance with 
both MSRB Rule G-27 and FINRA Rule 3110 without the burden or confusion 
of differing regulatory requirements. The MSRB believes that the market 
will benefit from similar supervisory requirements for municipal 
securities as well as corporate securities that are subject to FINRA 
rules. Additionally, the proposed rule change is intended to provide a 
practical and balanced way for dealers to continue to effectively meet 
their core regulatory obligation to establish and maintain a system to 
supervise the activities of each associated person that is reasonably 
designed to achieve compliance with applicable securities laws and 
regulations, and with applicable MSRB rules, which directly serves 
investors, municipal entities, obligated persons and public interest 
protections. The MSRB believes that the proposed rule change would 
facilitate transactions in municipal securities and remove impediments 
to a free and open market because, by ensuring a consistent regulatory 
framework for which dealers can avail themselves of RSL designations, 
the proposed rule change would alleviate some of the operational

[[Page 43966]]

challenges dealers would otherwise experience, which will allow them to 
more effectively allocate resources to the operations that facilitate 
transactions in municipal securities and municipal financial products.
    Finally, aligning the proposed rule change with amended FINRA Rule 
3110 and thereby making such requirements specifically applicable to 
FINRA-member dealers' municipal securities activities fosters 
cooperation between regulators because it creates as close as possible 
a uniform standard, with minimal distinction needed between the 
treatment of municipal securities and other asset classes, enabling 
FINRA and the Commission to more efficiently inspect FINRA-member 
dealers subject to the rules of both self-regulatory organizations.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) of the Exchange Act \51\ requires that MSRB 
rules be designed not to impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. The MSRB has considered the economic impact of the proposed rule 
change and believes that the proposed rule change would not impose any 
unnecessary or inappropriate burden on competition, as the proposed 
rule change would align with the newly approved RSL designation under 
FINRA Rule 3110. In addition, the proposed rule change would be applied 
equally to all dealers that are FINRA-member dealers.\52\ Therefore, 
the MSRB believes the proposed rule change would not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\53\
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78o-4(b)(2)(C).
    \52\ As previously mentioned, the MSRB will consider amendments 
to MSRB Rule G-27 at a later date on whether the proposed rule 
change should be extended to other dealers under MSRB rules, such as 
bank dealers.
    \53\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    In determining whether these standards have been met, the MSRB was 
guided by the MSRB's Policy on the Use of Economic Analysis in MSRB 
Rulemaking.\54\ In accordance with this policy, the MSRB has evaluated 
the potential impacts on competition of the proposed rule change. The 
proposed rule change would amend MSRB Rule G-27 to provide a mechanism 
for dealers to utilize the RSL designation under MSRB rules.\55\ The 
proposed rule change is intended to align MSRB Rule G-27 with amended 
FINRA Rule 3110, which established the option to treat an associated 
person's private residence where supervisory activities are conducted 
as a non-branch location, subject to safeguards and limitations. The 
MSRB also believes the proposed rule change would be appropriate as 
some dealers' business model and work environment continue to evolve 
with ongoing technological advancements and the shift to remote working 
may have accelerated since the COVID-19 pandemic.\56\
---------------------------------------------------------------------------

    \54\ See Policy on the Use of Economic Analysis in MSRB 
Rulemaking, available at https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking. In evaluating whether there was any burden 
on competition that is not necessary or appropriate in furtherance 
of the purposes of the Exchange Act, the MSRB was guided by its 
principles that required the MSRB to consider costs and benefits of 
a rule change, its impact on efficiency, capital formation and 
competition, and the main reasonable alternative regulatory 
approaches. For those rule changes which the MSRB files for 
immediate effectiveness under Section 19(b)(3)(A) of the Exchange 
Act (15 U.S.C. 78s(b)(3)(A)), while not subject to the policy, the 
MSRB usually focuses its examination exclusively on the burden of 
competition on regulated entities, but may also include any 
additional economic analysis that the MSRB believes may inform the 
rulemaking process based on the facts and circumstances.
    \55\ The proposed rule change would apply specifically to 
dealers that are also FINRA-member dealers.
    \56\ See Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Head of Municipal Securities, Securities 
Industry and Financial Markets Association, dated February 26, 2024, 
at 5 available at https://www.msrb.org/sites/default/files/2024-02/SIFMA-Notice%202023-11.pdf, and Letter from H. Deane Armstrong, CCO, 
Regional Brokers, Inc., dated February 26, 2024, at 1, available at 
https://www.msrb.org/sites/default/files/2024-02/Regional-Brokers-Notice-2023-11.pdf, responding to MSRB Notice 2023-11, Request for 
Information on Impacts of MSRB Rules on Small Firms (December 4, 
2023), available at https://www.msrb.org/sites/default/files/2023-12/2023-11.pdf.
---------------------------------------------------------------------------

Benefits
    The MSRB believes that the proposed rule change would benefit 
FINRA-member dealers by offering the option to treat an associated 
person's private residence where specified supervisory activities are 
conducted as a non-branch location, with the intention of minimizing 
harm to issuers and investors who benefit from the current supervisory 
framework. Specifically, the MSRB believes that the criteria for 
dealers to designate an associated person's private residence where 
specified supervisory activities are conducted as an RSL would 
sufficiently safeguard against potential harm. The proposed rule change 
would therefore lower costs for dealers that choose the RSL 
designation, including reduced time and expenses related to on-site 
office inspections, as well as reduced expenses for office leasing.\57\
---------------------------------------------------------------------------

    \57\ While the MSRB cannot quantify the reduction in leased 
premises, the MSRB understands through its outreach and engagement 
with dealers that expenses from leasing office space have generally 
decreased since the start of the pandemic.
---------------------------------------------------------------------------

    In addition, even if dealers choose not to utilize the RSL 
designation, dealers would still benefit from the alignment of MSRB 
Rule G-27 with the recently amended FINRA Rule 3110. With an estimated 
98% of MSRB-registered dealers subject to FINRA's supervision rules, a 
discrepancy between MSRB Rule G-27 and the existing analogous FINRA 
rules on supervision would create confusion, uncertainty and an 
unnecessary burden for dealers and result in a less efficient 
operation. By eliminating potential areas of inconsistency between MSRB 
and FINRA rules, dealers would have a lower compliance burden and an 
improved efficiency. A more efficient supervisory system for dealers 
may ultimately also benefit issuers and investors whom the rules are 
designed to protect, such as by ensuring dealers are able to focus 
time, attention and resources on matters related to effecting 
transactions in municipal securities and advancing a fair and efficient 
market. The MSRB expects the benefits to accumulate over time.
Costs
    Dealers would need to make a one-time revision to their policies 
and procedures in accordance with the proposed rule change, including 
accounting for a risk assessment, eligibility criteria and conditions, 
written supervisory procedures as well as an effective supervisory 
system. To clarify, the upfront costs to update policies and procedures 
and associated training are primarily applicable to dealers that elect 
to utilize the RSL designation, with such costs being proportionately 
higher for smaller than larger dealers. However, the MSRB believes the 
total upfront costs would still be manageable, with an estimated 
incremental amount of $3,820 for the RSL designation, as shown in Table 
1; therefore, the cost should not impose an onerous burden on these 
dealers that choose this option. The MSRB believes the estimated one-
time upfront cost would be offset by the cumulative compliance cost 
savings as a result of the consistency between MSRB Rule G-27 and FINRA 
Rule 3110 over time, as well as the cumulative cost savings from the 
convenience of RSL designation if a dealer chooses this option.\58\
---------------------------------------------------------------------------

    \58\ For those dealers that opt for the RSL designation, the 
changes may impose additional costs on acquiring information 
technology compliance software and hardware upgrades to ensure 
adequate supervisory functions remotely. However, dealers likely 
already made these technology upgrades and incurred cost in 
establishing supervisory controls appropriate to support mandatory 
work-from-home orders and shift to hybrid work arrangements during 
the COVID-19 pandemic. Therefore, the MSRB believes the incremental 
costs for upgrading the information technology would be negligible.

[[Page 43967]]



                     Table 1--Estimate of Incremental Costs Based on 2024 Hourly Rates \59\
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                         Cost components                            Hourly rate        hours       Cost per firm
----------------------------------------------------------------------------------------------------------------
Upfront Costs--RSL Classification:
    (a) Revision of Policies and Procedures.....................            $540             4.0          $2,160
    (b) Outside Counsel Review..................................             570             2.0           1,140
    (c) Training................................................             520             1.0             520
                                                                 -----------------------------------------------
        Subtotal................................................  ..............  ..............           3,820
Annual Ongoing Costs For Firms Choosing the RSL Classification:
    Due Diligence and Continuing Education......................             520             3.0           1,560
----------------------------------------------------------------------------------------------------------------

    The costs of annual ongoing compliance with the proposed rule 
change would likely be minor. For those dealers that transact in 
municipal securities only and choose the RSL designation in connection 
with discharging their supervisory activities, the MSRB estimates about 
$1,560 annually per dealer to conduct the required risk assessment, 
submit a list of all locations designated as RSLs to FINRA on a 
quarterly basis and ensure that a dealer is in compliance with the 
eligibility requirements, including the office or location eligibility 
for the RSL designation.\60\
---------------------------------------------------------------------------

    \59\ The hourly rates data is gathered from the Commission's 
filing on ``Amendments Regarding the Definition of ``Exchange'' and 
``Alternative Trading Systems (ATSs) That Trade U.S. Treasury and 
Agency Securities, National Market System (NMS) Stocks, and Other 
Securities.'' See Exchange Act Release No. 94062 (January 26, 2022), 
87 FR 15496, 15624 (March 18, 2022) (File No. S7-02-22) (``Proposed 
Rule''). The Commission's economic analysis utilizes the Securities 
Industry and Financial Markets Association, Management & 
Professional Earnings in the Securities Industry--2013 Report for 
the hourly rates of various financial industry market professionals. 
To compensate for inflation, the data reflects the 2024 hourly rate 
level after adjusting for the annual cumulative wage inflation rate 
of 37% between 2013 and 2023, and another 4% between 2023 and 2024. 
See The Federal Reserve Bank of St. Louis Employment Cost Index: 
Wages and Salaries Private Industry (available at https://fred.stlouisfed.org/series/ECIWAG). The number of hours for each 
task is based on the MSRB's internal estimate.
    \60\ Dealers of various sizes may incur different amounts of 
ongoing costs. Therefore, the $1,560 annually per firm represents an 
estimate for a mid-sized firm (``mid-sized'' is defined by FINRA as 
a firm with 151-499 registered representatives). The MSRB does not 
believe the proposed rule change would impose costs on investors.
---------------------------------------------------------------------------

    Finally, in response to comments received \61\ as to dealers that 
have adopted a work-from-home model in response to the COVID-19 
pandemic and utilized the previous relief granted by the MSRB,\62\ if 
an associated person working from their private residence takes orders 
(i.e., ``order entry'') that are then entered through a designated 
municipal branch office or an electronic system established by the 
dealer that is reviewable at the municipal branch office, such location 
would continue to be excluded from the definition of municipal branch 
office under MSRB Rule G-27(g)(ii)(A)(2)(g), provided that all other 
conditions are met, and therefore would not require an on-site 
principal or incur cost related to principal personnel. The MSRB does 
not believe that the proposed rule change would impose any unnecessary 
or inappropriate burden or impact on competition for these dealers 
because the proposed rule change would not lessen any flexibility or 
increase cost that existed pre-pandemic for such offices or locations 
that were already otherwise excluded from the definition of non-branch 
location due to the functional activities being carried out, for 
example, order entry and other back-office work. On the other hand, if 
an associated person is conducting order execution from their private 
residence, especially if only in municipal securities, such office or 
location would be burdened by needing the individual to be qualified as 
a principal by taking and passing the Municipal Securities Principal 
Qualification Examination and its activities supervised by another 
principal at a separate office or location. This may disproportionately 
affect smaller dealers that may have a higher proportion of these one-
person private residences. However, these dealers do have the choice to 
revert to their pre-pandemic arrangement where order execution is 
conducted only at a municipal branch office, not at an associated 
person's private residence.
---------------------------------------------------------------------------

    \61\ See infra note 64.
    \62\ See Exchange Act Release No. 90621 (December 9, 2020), 85 
FR 81254 (December 15, 2020).
---------------------------------------------------------------------------

Effect on Competition, Efficiency, and Capital Formation
    The MSRB believes that the proposed rule change would neither 
impose a burden on competition nor hinder capital formation, as the 
proposed rule change is applicable to all FINRA-member dealers choosing 
to avail themselves of the RSL designation and is not expected to erode 
protection for investors and issuers. While upfront costs would be 
relatively higher for smaller-size dealers than larger-size dealers, 
the MSRB expects the total one-time upfront costs to be manageable for 
dealers that elect to utilize the RSL designation. The MSRB believes it 
is appropriate, in an environment with increased remote working 
personnel, to allow some residential offices or locations to be treated 
as non-branch locations. Since bank dealers are not covered in the 
proposed rule change for now, to the extent that some of those 18 bank 
dealers, as of 2023, would have chosen the RSL designation, had the 
option been available to them, such bank dealers may be disadvantaged 
in their competition with other dealers. The MSRB, however, believes 
this disadvantage would be minimal because the MSRB understands through 
its outreach and engagement with some bank dealers that bank dealers 
generally have fewer OMSJs and branch offices or locations than other 
dealers, so the use of the RSL designation may not be coveted for most 
bank dealers when weighing the called for processes and documentation 
requirements. The MSRB believes that the proposed rule change would 
improve the municipal securities market's operational efficiency and 
promote regulatory consistency. At present, the MSRB is unable to 
quantitatively evaluate the magnitude of the efficiency gains or 
losses, but believes the benefits accumulated over time would outweigh 
the upfront costs of revising policies

[[Page 43968]]

and procedures and the annual ongoing costs of ensuring compliance.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were not directly solicited on the proposed rule 
change.\63\ However, the MSRB did receive comments referencing the 
proposed rule change in response to a request for information on the 
impact of MSRB rules on small firms (the ``RFI'').\64\
---------------------------------------------------------------------------

    \63\ Comments received in response to FINRA's recently adopted 
amendments creating an RSL designation under FINRA Rule 3110.19 can 
be found at https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006.htm.
    \64\ See MSRB Notice 2023-11, Request for Information on Impacts 
of MSRB Rules on Small Firms (December 4, 2023) available at https://www.msrb.org/sites/default/files/2023-12/2023-11.pdf.
---------------------------------------------------------------------------

    The Securities Industry and Financial Markets Association 
(``SIFMA'') stated in its response to the RFI that certain aspects of 
the use of home offices and remote supervision create a 
disproportionate burden on small firms.\65\ Specifically, SIFMA stated 
that many firms utilized the temporary COVID-19 relief ``under which 
entities were not required to designate the homes of employees working 
alone from home as offices.'' \66\ Furthermore, SIFMA requested 
guidance and relief that exempts a municipal branch office from being 
named as an OMSJ if the orders taken or placed by that person are 
entered through a designated municipal branch office or electronic 
system that is reviewable at the municipal branch office. SIFMA went on 
to request similar relief for municipal finance investment bankers 
working remotely, and that such locations in which structuring and 
underwriting activities occur be exempt from the OMSJ definition. 
Similarly, Regional Brokers, Inc. (``Regional Brokers'') expressed 
concern that with the COVID-19 relief ending, many home offices will be 
required to be designated as an OMSJ due to order taking or market 
making occurring at such offices.\67\ As a result, Regional Brokers 
stated that one-person OMSJ's would be burdened by needing the 
individual to be qualified as a principal whose activities would need 
to be supervised by another principal at a separate location.
---------------------------------------------------------------------------

    \65\ See Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Head of Municipal Securities, Securities 
Industry and Financial Markets Association, dated February 26, 2024, 
at 5.
    \66\ Id. The MSRB notes that the COVID-19 relief, among other 
things, clarified, under MSRB Rule G-27(g)(ii)(A)(7) that a 
temporary location established in response to the implementation of 
a business continuity plan is not deemed a municipal branch office. 
Hence, the COVID relief did not create a new exemption with respect 
to the classification of locations.
    \67\ Letter from H. Deane Armstrong, CCO, Regional Brokers, 
Inc., dated February 26, 2024, at 1.
---------------------------------------------------------------------------

    The MSRB notes that primary residences in which orders are entered 
through a designated municipal branch office or an electronic system 
established by the dealer that is reviewable at the municipal branch 
office are excluded from the definition of municipal branch office, if 
other conditions are met and, as such, among other things, do not 
require an on-site principal.\68\ In addition, the MSRB highlights that 
order execution, market making, and structuring are functional 
activities related to effecting a transaction in municipal securities 
that the proposed rule change does not seek to address or include 
within the RSL designation. FINRA also addressed similar comments in 
its filing regarding expanding the RSL designation to order execution 
and noted that the RSL designation is meant to carve out supervisory 
activities only and declined to expand its proposal to include other 
activities. As such, the MSRB reminds dealers that the proposed rule 
change is meant to ensure regulatory consistency in the area of 
supervision and to facilitate the enforcement thereof, so the MSRB 
would not be inclined at this point to consider additional amendments 
to MSRB Rule G-27 in this regard.
---------------------------------------------------------------------------

    \68\ MSRB Rule G-27(g)(ii)(A)(2)(g) outlines the requirements 
for the primary residence exclusion from the definition of a 
municipal branch office and MSRB Rule G-27(b)(iv) prescribes the 
locations in which there must be one or more appropriately 
registered principals.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A) \69\ of the Exchange Act and Rule 
19b-4(f)(6) \70\ thereunder, the MSRB has designated the proposed rule 
change as one that effects a change that: (i) does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) by its 
terms, does not become operative for 30 days after the date of the 
filing, or such shorter time as the Commission may designate. A 
proposed rule change filed under Rule 19b-4(f)(6) normally does not 
become operative until 30 days after the date of filing.\71\ However, 
Rule 19b-4(f)(6)(iii) \72\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest.\73\ The MSRB has requested that the 
Commission designate the proposed rule change operative on June 1, 
2024,\74\ as specified in Rule 19b-4(f)(6)(iii).\75\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78s(b)(3)(A).
    \70\ 17 CFR 240.19b-4(f)(6).
    \71\ Id.
    \72\ 17 CFR 240.19b-4(f)(6)(iii).
    \73\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file a proposed rule change, along with a brief 
description and text of such proposed rule change, at least five 
business days prior to the date of filing, or such shorter time as 
designated by the Commission.
    \74\ See SR-MSRB-2024-04.
    \75\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The MSRB notes that the proposed rule change is based on, and 
materially conforms with, the Commission's recent approval of FINRA 
Rule 3110.19 (Residential Supervisory Location), which has an effective 
date of June 1, 2024.\76\ The MSRB requests that the Commission waive 
the requirement that the proposed rule change, by its terms, not become 
operative for 30 days after the date of the filing as set forth in Rule 
19b-4(f)(6)(iii) \77\ in order to align with the operative date of 
FINRA Rule 3110.19. The MSRB states that the proposed rule change is 
meant to more closely conform the MSRB's dealer supervisory rule to 
FINRA's recently approved supervisory requirements to help ensure a 
coordinated regulatory approach in the area of dealer supervision and 
to enable FINRA and the Commission to more efficiently inspect those 
dealers that are subject to both self-regulatory organizations, as well 
as to promote regulatory consistency for dealers engaging in activities 
across asset classes. For dealers that are both FINRA-member dealers 
and MSRB registrants, the MSRB believes that the proposed rule change 
will allow limited relief from their inspection requirements under MSRB 
and FINRA rules under similar circumstances.
---------------------------------------------------------------------------

    \76\ See Exchange Act Release No. 98980 (Nov. 17, 2023), 88 FR 
82447 (Nov. 24, 2023) (File No. SR-FINRA-2023-006). See also FINRA 
Regulatory Notice 24-02, Branch Office Registration, Designation and 
Inspections (Jan. 23, 2024), available at https://www.finra.org/sites/default/files/2024-01/Regulatory_Notice_24-02.pdf.
    \77\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. An 
operative date of June 1, 2024 will alleviate operational challenges 
and confusion for dealers that are both FINRA-member dealers and MSRB 
registrants by allowing the proposed rule change to become operative on 
the same date that FINRA Rule 3110.19

[[Page 43969]]

takes effect. Accordingly, the Commission hereby waives the 30-day 
operative delay specified in Rule 19b-4(f)(6)(iii) and designates the 
proposed rule change to be operative on June 1, 2024.\78\
---------------------------------------------------------------------------

    \78\ For the purpose of waiving the 30-day operative delay for 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Exchange Act.

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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please 
include File Number SR-MSRB-2024-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2024-04. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the MSRB. 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-MSRB-2024-04 and should be submitted on 
or before June 10, 2024.

    For the Commission, pursuant to delegated authority.\79\
---------------------------------------------------------------------------

    \79\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10947 Filed 5-17-24; 8:45 am]
BILLING CODE 8011-01-P
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