Self-Regulatory Organizations; NYSE Chicago, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules Concerning Supervision To Adopt Rules Based on NYSE American Rules 3110-Equities and 3120-Equities, 46191-46199 [2024-11576]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 103 (Tuesday, May 28, 2024)]
[Notices]
[Pages 46191-46199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11576]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100187; File No. SR-NYSECHX-2024-18]


Self-Regulatory Organizations; NYSE Chicago, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its 
Rules Concerning Supervision To Adopt Rules Based on NYSE American 
Rules 3110--Equities and 3120--Equities

May 21, 2024.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on May 16, 2024, the NYSE Chicago, Inc. (``NYSE Chicago'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 Exchange proposes to amend its rules concerning supervision to 
adopt rules based on NYSE American Rules 3110--Equities (Supervision) 
and 3120--Equities (Supervisory Control System) and make certain 
conforming changes. The proposed rule change is available on the 
Exchange's website at www.nyse.com, at the principal office of the 
Exchange, 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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend its rules concerning supervision to 
adopt rules based on NYSE American Rules 3110--Equities (Supervision) 
and 3120--Equities (Supervisory Control System) and make certain 
conforming changes. More specifically, the Exchange proposes to (1) 
adopt new rule text that is substantially similar to NYSE American Rule 
3110--Equities and NYSE American Rule 3120--Equities; (2) delete 
Article 6, Rule 5 (Registration, Supervision and Training) except for 
certain text that will be retained as new Rule 11.20 (Adherence to 
Law); and (3) make conforming changes to Rule 10.9217 (Violations 
Appropriate for Disposition Under Rule 9216(b)).
Background and Proposed Rule Change
Current Supervision Rules
    The Exchange's current supervision Rule is Article 6, Rule 5.
    Subsection (a) of Article 6, Rule 5 sets forth a basic declaration 
that Participants are responsible for adherence to federal securities 
laws and Exchange rules, and must reasonably supervise their operations 
and associated persons to prevent violations of thereof.
    Subsection (b) provides for the designation of persons with 
supervisory authority. Specifically, the rule provides that each 
Participant Firm must designate a principal executive officer, general 
partner or managing partner to hold overall authority and 
responsibility

[[Page 46192]]

for the Participant Firm's internal supervision and compliance with 
securities laws and regulations, although under the rule the designated 
supervisor under the rule may formally delegate their supervisory 
duties and authority to other persons within the firm. The rule also 
requires that Participants \4\ maintain, for a period of not less than 
six years (the first two years in an easily accessible place), records 
of the names of all persons who are designated as supervisory personnel 
and the dates for which those designations are effective. In the 
absence of such designation by a Participant Firm, the rule provides 
that the firm's General Partner(s), President, Chief Executive Officer 
or other principal executive officer shall be deemed to be responsible 
for a Firm's internal supervision and compliance function. In addition, 
each Participant Firm shall designate and specifically identify to the 
Exchange on Schedule A of Form BD one or more principals to serve as a 
Chief Compliance Officer.
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    \4\ The term ``Participant'' is defined in Article 1, Rule 1(s) 
to mean, among other things, any Participant Firm that holds a valid 
Trading Permit and that a Participant shall be considered a 
``member'' of the Exchange for purposes of the Act. If a Participant 
is not a natural person, the Participant may also be referred to as 
a Participant Firm, but unless the context requires otherwise, the 
term Participant shall refer to an individual Participant and/or a 
Participant Firm. For the avoidance of doubt, this rule filing will 
use the phrase Participant and/or Participant Firm.
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    Article 6, Rule 5(c) governs written supervisory procedures, and 
provides that each Participant Firm shall establish, maintain and 
enforce written procedures to supervise the types of business in which 
it engages and to supervise the activities of registered and associated 
persons. Such written procedures must be reasonably designed to achieve 
compliance with applicable securities laws and regulations, and with 
the applicable rules of the Exchange. The rule further specifies that 
the Participant Firm's written supervisory procedures must set forth 
the following: the supervisory system established by the Participant 
Firm; the titles, registration status and locations of the required 
supervisory personnel; and the responsibilities of each supervisor as 
they relate to the types of business engaged in, applicable securities 
laws and the rules of the Exchange. Article 6, Rule 5(c) requires that 
a copy of a Participant Firm's written supervisory procedures or the 
relevant portions thereof, be maintained at each location where 
supervisory activities are conducted on behalf of the firm. Each 
Participant Firm is required to periodically review and amend its 
written supervisory procedures as appropriate within a reasonable time, 
including but not limited to, updates required by changes in applicable 
securities laws and regulations, including the rules of the Exchange, 
and as changes occur in the supervisory system. In addition, the rule 
provides that each Participant Firm shall be responsible for 
communicating these amendments within its organization. Finally, the 
rule requires each Participant Firm to maintain records evidencing 
actual review of transactions, systems, programs or other activities by 
the designated supervisory personnel pursuant the written supervisory 
procedures.
    Article 6, Rule 5(d) governs internal controls and training. The 
rule requires that at least annually, each Participant Firm must 
discuss compliance matters with its registered and associated persons 
and must maintain records confirming the dates of these discussions and 
the subject matters that were discussed. Each Participant Firm must 
also establish internal controls to determine that proper supervision 
is being exercised.
    Article 6, Rule 5(e) governs branch and resident offices. Under the 
rule, a Participant Firm for which this Exchange is the Designated 
Examining Authority or which is subject to examination by another self-
regulatory organization not having a comparable rule, shall not open a 
branch or resident office unless it has obtained the prior written 
approval of the Exchange. Application for approval of the opening of a 
branch or resident office must be made on a form provided by the 
Exchange at least one month (or such shorter period as the Exchange may 
approve) prior to the proposed opening date of the office. A 
Participant Firm maintaining branch or resident offices must establish 
procedures providing for close supervision of such offices, and 
maintain a close, responsible relationship with the person in charge of 
such office or offices. A designated partner or officer of the main 
office is personally responsible for proper supervision of such branch 
or resident office.
    Finally, Supplementary Material .01 governs registration of new 
branch offices and sets forth the steps to be taken when registering 
new branch offices as required by Article 6, Rule 5(d). Supplementary 
Material .01 requires each Participant Firm to forward a completed Form 
BR to the Exchange. In addition, prior to approval of the branch 
office, the office manager or the registered representative in charge 
must have completed the Exchange requirements for registration. The 
office may begin operating as a branch on receipt of written approval 
from the Exchange.
Proposed Rule Change
    The Exchange proposes to delete the foregoing rules relating to 
supervision (except as noted below), which are, in main part, either 
duplicative of, or do not align with, the proposed supervision 
requirements discussed below, and adopt the text of NYSE American Rules 
3110--Equities and 3120--Equities, subject to certain technical and 
conforming changes.\5\ The text in current rule Article 6, Rule 5(a) 
following the heading ``Adherence to Law'' would be retained in its 
entirety and moved to Rule 11 governing business conduct without 
substantive change as new Rule 11.20, also titled ``Adherence to Law.'' 
\6\
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    \5\ The technical and conforming changes are that the Exchange 
would substitute ``Participant Firm'' for ``member organization'' 
and change a cross-reference to NYSE American Rules 2210 to Exchange 
Rule 11.2210.
    \6\ The Exchange notes that its affiliate NYSE National, Inc. 
has a similar business conduct rule. See NYSE National Rule 11.3.2 
(Violations Prohibited).
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Proposed Rule 11.3110 (Supervision)
    Proposed Rule 11.3110 is based primarily on requirements in the 
NYSE American and FINRA rulebooks and current Article 6, Rule 5 
relating to, among other things, supervisory systems, written 
procedures, internal inspections, and review of correspondence.
Proposed Rule 11.3110(a)
    Proposed Rule 11.3110(a) would cover supervisory systems and would 
require each Participant Firm 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 Exchange rules. Under the proposed 
rule, final responsibility for proper supervision would rest with the 
Participant Firm. In addition, a Participant Firm's supervisory system 
would need to provide, at a minimum, for the following:
     The establishment and maintenance of written procedures as 
required by proposed Rule 11.3110.
     The designation, where applicable, of an appropriately 
registered principal with authority to carry out the supervisory 
responsibilities of the Participant Firm for each type of business in 
which it engages for which

[[Page 46193]]

registration as a broker-dealer is required.
     The registration and designation as a branch office or an 
office of supervisory jurisdiction (``OSJ'') of each location, 
including the main office, that meets the definitions contained in 
proposed Rule 11.3110(e). The Exchange has not previously designated 
OSJs. As such, the requirements relating to OSJs described hereinafter 
would be new for Participant Firms.
     The designation of one or more appropriately registered 
principals in each OSJ and one or more appropriately registered 
representatives or principals in each non-OSJ branch office with 
authority to carry out the supervisory responsibilities assigned to 
that office by the Participant Firm.
     The assignment of each registered person to an 
appropriately registered representative or principal who would be 
responsible for supervising that person's activities.
     The use of reasonable efforts to determine that all 
supervisory personnel are qualified, either by virtue of experience or 
training, to carry out their assigned responsibilities.
     The participation of each registered representative and 
registered principal, either individually or collectively, no less than 
annually, in an interview or meeting conducted by persons designated by 
the Participant Firm at which compliance matters relevant to the 
activities of the representative and principal are discussed, which may 
occur in conjunction with the discussion of other matters and may be 
conducted at a central or regional location or at the representative's 
or principal's place of business.
Proposed Rule 11.3110(b)
    Proposed Rule 11.3110(b)(1) would address written procedures and 
would require each Participant Firm to establish, maintain, and enforce 
written procedures to supervise the types of business in which it 
engages and the activities of its associated persons that are 
reasonably designed to achieve compliance with applicable securities 
laws and regulations and applicable Exchange rules.
    Under proposed Rule 11.3110(b)(2), the supervisory procedures 
required by proposed Rule 11.3110(b) would need to include procedures 
for the review by a registered principal, evidenced in writing, of all 
transactions relating to the investment banking or securities business 
of the Participant Firm.
    Consistent with NYSE American Rule 3110(b)(3)--Equities, proposed 
Rule 11.3110(b)(3) would be marked ``Reserved.''
    Under proposed Rule 11.3110(b)(4), the supervisory procedures 
required by proposed Rule 11.3110(b) would need to also include 
procedures for the review of incoming and outgoing written (including 
electronic) correspondence and internal communications relating to the 
Participant Firm's investment banking or securities business and be 
appropriate for the Participant Firm's business, size, structure, and 
customers. The supervisory procedures would need to require the 
Participant Firm's review of:
     Incoming and outgoing written (including electronic) 
correspondence to properly identify and handle in accordance with firm 
procedures, customer complaints, instructions, funds and securities, 
and communications that are of a subject matter that require review 
under Exchange rules and federal securities laws.
     Internal communications to properly identify those 
communications that are of a subject matter that require review under 
Exchange rules and federal securities laws.
    Such reviews would need to be conducted by a registered principal 
and evidenced in writing, either electronically or on paper. Those 
communications include (without limitation) certain communications with 
the public that require a principal's preapproval (Rule 11.2210).
    Proposed Rule 11.3110(b)(5) requires a Participant Firm's 
supervisory procedures to include procedures to capture, acknowledge, 
and respond to all written (including electronic) customer complaints.
    Under proposed Rule 11.3110(b)(6), the supervisory procedures 
required by proposed Rule 11.3110(b) would need to set forth the 
supervisory system established by the Participant Firm pursuant to 
proposed Rule 11.3110(a), and would need to include:
     The titles, registration status, and locations of the 
required supervisory personnel and the responsibilities of each 
supervisory person as these relate to the types of business engaged in, 
applicable securities laws and regulations, and Exchange rules.
     A record, preserved by the Participant Firm for a period 
of not less than three years, the first two years in an easily 
accessible place, of the names of all persons who are designated as 
supervisory personnel and the dates for which such designation is or 
was effective.
     Procedures prohibiting associated persons who perform a 
supervisory function from:
    [cir] Supervising their own activities; and
    [cir] Reporting to, or having their compensation or continued 
employment determined by, a person or persons they are supervising.
    [ssquf] If a Participant Firm determines, with respect to any of 
its supervisory personnel, that compliance with the preceding two 
bullets is not possible because of the Participant Firm's size or a 
supervisory personnel's position within the firm, the Participant Firm 
would need to document:
     The factors the Participant Firm used to reach such 
determination; and
     How the supervisory arrangement with respect to such 
supervisory personnel otherwise complies with proposed Rule 11.3110(a).
     Procedures reasonably designed to prevent the supervisory 
system required pursuant to proposed Rule 11.3110(a) from being 
compromised due to the conflicts of interest that may be present with 
respect to the associated person being supervised, including the 
position of such person, the revenue such person generates for the 
firm, or any compensation that the associated person conducting the 
supervision may derive from the associated person being supervised.
    Proposed Rule 11.3110(b)(7) would require a Participant Firm to 
keep and maintain a copy of its written supervisory procedures, or such 
relevant portions, in each OSJ and at each location where supervisory 
activities are conducted on behalf of the Participant Firm. Each 
Participant Firm would need to promptly amend its written supervisory 
procedures to reflect changes in applicable securities laws or 
regulations, including Exchange rules, and as changes occur in its 
supervisory system. Each Participant Firm would be responsible for 
promptly communicating its written supervisory procedures and 
amendments to all associated persons to whom such written supervisory 
procedures and amendments are relevant based on their activities and 
responsibilities.
Proposed Rule 11.3110(c)
    Proposed Rule 11.3110(c) would cover internal inspections. Proposed 
Rule 11.3110(c)(1) would require each Participant Firm to conduct a 
review, at least annually (on a calendar-year basis), of the businesses 
in which it engages. The review would need to be reasonably designed to 
assist the Participant Firm in detecting and preventing violations of, 
and achieving compliance with, applicable securities laws and 
regulations, and with applicable Exchange rules. Each Participant Firm

[[Page 46194]]

would need to review the activities of each office, which would include 
the periodic examination of customer accounts to detect and prevent 
irregularities or abuses. Each Participant Firm would also need to 
retain a written record of the date upon which each review and 
inspection is conducted.
    In addition, proposed Rule 11.3110(c)(1) would require each 
Participant Firm to inspect at least annually (on a calendar-year 
basis) every OSJ and any branch office that supervises one or more non-
branch locations. Each Participant Firm would need to also inspect at 
least every three years every branch office that does not supervise one 
or more non-branch locations. In establishing how often to inspect each 
non-supervisory branch office, the Participant Firm would need to 
consider whether the nature and complexity of the securities activities 
for which the location is responsible, the volume of business done at 
the location, and the number of associated persons assigned to the 
location require the non-supervisory branch office to be inspected more 
frequently than every three years. If a Participant Firm establishes a 
more frequent inspection cycle, the Participant Firm would need to 
ensure that at least every three years, the inspection requirements 
enumerated in proposed Rule 11.3110(c)(2) have been met. The 
Participant Firm's written supervisory and inspection procedures would 
need to set forth the non-supervisory branch office examination cycle, 
an explanation of the factors the Participant Firm used in determining 
the frequency of the examinations in the cycle, and the manner in which 
a Participant Firm will comply with proposed Rule 11.3110(c)(2) if 
using more frequent inspections than every three years. Each 
Participant Firm would need to inspect, on a regular periodic schedule, 
every non-branch location. In establishing such schedule, the 
Participant Firm would need to consider the nature and complexity of 
the securities activities for which the location is responsible and the 
nature and extent of contact with customers. The Participant Firm's 
written supervisory and inspection procedures would also need to set 
forth the schedule and an explanation regarding how the Participant 
Firm determined the frequency of the examination.
    Proposed Rule 11.3110(c)(2) would require the inspection and review 
by a Participant Firm pursuant to proposed Rule 11.3110(c)(1) to be 
reduced to a written report and kept on file by the Participant Firm 
for a minimum of three years, unless the inspection is being conducted 
pursuant to proposed Rule 11.3110(c)(1)(C) and the regular periodic 
schedule is longer than a three-year cycle, in which case the report 
would need to be kept on file at least until the next inspection report 
has been written. Under proposed Rule 11.3110(c)(2)(A), if applicable 
to the location being inspected, that location's written inspection 
report would need to include, without limitation, the testing and 
verification of the Participant Firm's policies and procedures, 
including supervisory policies and procedures in the following areas:
     Safeguarding of customer funds and securities;
     Maintaining books and records;
     Supervision of supervisory personnel;
     Transmittals of funds (e.g., wires or checks, etc.) or 
securities from customers to third party accounts; from customer 
accounts to outside entities (e.g., banks, investment companies, etc.); 
from customer accounts to locations other than a customer's primary 
residence (e.g., post office box, ``in care of'' accounts, alternate 
address, etc.); and between customers and registered representatives, 
including the hand-delivery of checks; and
     Changes of customer account information, including address 
and investment objectives changes and validation of such changes.
    The policies and procedures regarding transmittals of funds would 
need to include a means or method of customer confirmation, 
notification, or follow-up that can be documented. Participant Firm s 
may use reasonable risk-based criteria to determine the authenticity of 
the transmittal instructions. The policies and procedures regarding 
changes of customer account information would need to include, for each 
change processed, a means or method of customer confirmation, 
notification, or follow-up that can be documented and that complies 
with SEA Rules 17a-3(a)(17)(i)(B)(2) and 17a-3(a)(17)(i)(B)(3).
    If a Participant Firm does not engage in all of the activities 
enumerated in the bullets immediately above at the location being 
inspected, the Participant Firm would need to identify those activities 
in the Participant Firm's written supervisory procedures or the 
location's written inspection report and document in the Participant 
Firm's written supervisory procedures or the location's written 
inspection report that supervisory policies and procedures for such 
activities would need to be in place at that location before the 
Participant Firm can engage in them.
    Under proposed Rule 11.3110(c)(3), for each inspection conducted 
pursuant to the proposed rule, a Participant Firm would need to:
     have procedures reasonably designed to prevent the 
effectiveness of inspections from being compromised due to the 
conflicts of interest that may be present with respect to the location 
being inspected, including but not limited to, economic, commercial, or 
financial interests in the associated persons and businesses being 
inspected; and
     ensure that the person conducting an inspection is not an 
associated person assigned to the location or is not directly or 
indirectly supervised by, or otherwise reporting to, an associated 
person assigned to the location. If a Participant Firm determines that 
compliance with this requirement is not possible either because of a 
Participant Firm's size or its business model, the Participant Firm 
would need to document in the inspection report both the factors the 
Participant Firm used to make its determination and how the inspection 
otherwise complies with proposed Rule 11.3110(c)(1).
    The Exchange currently does not have a comparable rule.
Proposed Rule 11.3110(d)
    Section 15(g) of the Act,\7\ adopted as part of the Insider Trading 
and Securities Fraud Enforcement Act of 1988 (``ITSFEA''),\8\ requires 
every registered broker or dealer to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
misuse of material, non-public information by the broker or dealer or 
any associated person of the broker or dealer.
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    \7\ 15 U.S.C. 78o(g).
    \8\ See Insider Trading and Securities Fraud Enforcement Act of 
1988, Public Law 100-704, 102 Stat. 4677.
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    Proposed Rule 11.3110(d) would cover transaction reviews and 
investigations. Proposed Rule 11.3110(d)(1) would require each 
Participant Firm to include in its supervisory procedures a process for 
the review of securities transactions reasonably designed to identify 
trades that may violate the provisions of the Act, the rules 
thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices that are effected for the:
     Accounts of the Participant Firm;
     Accounts introduced or carried by the Participant Firm in 
which a person associated with the Participant Firm has a beneficial 
interest or the authority to make investment decisions;
     Accounts of a person associated with the Participant Firm 
that are

[[Page 46195]]

disclosed to the Participant Firm pursuant to Article 8, Rule 6 
(Prohibited Accounts) or FINRA Rule 3210 (Accounts At Other Broker-
Dealers and Financial Institutions), as applicable; and
     Covered accounts.
    Under proposed Rule 11.3110(d)(2), each Participant Firm would need 
promptly to conduct an internal investigation into any such trade to 
determine whether a violation of those laws or rules has occurred. In 
addition, under proposed Rule 11.3110(d)(3), a Participant Firm 
engaging in investment banking services would need to file with the 
Exchange, written reports, signed by a senior officer of the 
Participant Firm, at such times and, without limitation, including such 
content, as follows:
     Within ten business days of the end of each calendar 
quarter, a written report describing each internal investigation 
initiated in the previous calendar quarter pursuant to proposed Rule 
11.3110(d)(2), including the identity of the Participant Firm, the date 
each internal investigation commenced, the status of each open internal 
investigation, the resolution of any internal investigation reached 
during the previous calendar quarter, and, with respect to each 
internal investigation, the identity of the security, trades, accounts, 
associated persons of the Participant Firm, or associated person of the 
Participant Firm's family members holding a covered account, under 
review, and that includes a copy of the Participant Firm's policies and 
procedures required by proposed Rule 11.3110(d)(1).
     Within five business days of completion of an internal 
investigation pursuant to proposed Rule 11.3110(d)(2) in which it was 
determined that a violation of the provisions of the Act, the rules 
thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices had occurred, a written report 
detailing the completion of the investigation, including the results of 
the investigation, any internal disciplinary action taken, and any 
referral of the matter to the Exchange, another SRO, the SEC, or any 
other federal, state, or international regulatory authority.
    For purposes of proposed Rule 11.3110(d)(4) the following 
definitions would apply:
     The term ``covered account'' would include any account 
introduced or carried by the Participant Firm that is held by:
    [cir] The spouse of a person associated with the Participant Firm;
    [cir] A child of the person associated with the Participant Firm or 
such person's spouse, provided that the child resides in the same 
household as or is financially dependent upon the person associated 
with the Participant Firm;
    [cir] Any other related individual over whose account the person 
associated with the Participant Firm has control; or
    [cir] Any other individual over whose account the associated person 
of the Participant Firm has control and to whose financial support such 
person materially contributes.
     The term ``investment banking services'' would include, 
without limitation, acting as an underwriter, participating in a 
selling group in an offering for the issuer, or otherwise acting in 
furtherance of a public offering of the issuer; acting as a financial 
adviser in a merger or acquisition; providing venture capital or equity 
lines of credit or serving as placement agent for the issuer or 
otherwise acting in furtherance of a private offering of the issuer.
Proposed Rule 11.3110(e) \9\
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    \9\ Like its affiliate NYSE American, the Exchange does not 
propose to adopt current FINRA Rule 3110(e), which governs the 
responsibility to investigate applicants for registration.
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    Proposed Rule 11.3110(e) would define OSJ and branch office. As 
noted above, OSJ would be a new designation for the Exchange and the 
definition of the term would substantially mirror NYSE American's 
definition. The term would mean any office of a Participant Firm at 
which any one or more of the following functions take place:
     Order execution or market making;
     Structuring of public offerings or private placements;
     Maintaining custody of customers' funds or securities;
     Final acceptance (approval) of new accounts on behalf of 
the Participant Firm;
     Review and endorsement of customer orders;
     Final approval of retail communications for use by persons 
associated with the Participant Firm, pursuant to Rule 11.2210(b)(1), 
except for an office that solely conducts final approval of research 
reports; or
     Responsibility for supervising the activities of persons 
associated with the Participant Firm at one or more other branch 
offices of the Participant Firm.
    The definition of ``branch office'' would be new and would mean any 
location where one or more associated persons of a Participant Firm 
regularly conducts the business of effecting any transactions in, or 
inducing or attempting to induce the purchase or sale of, any security, 
or is held out as such, excluding:
     Any location that is established solely for customer 
service or back office type functions where no sales activities are 
conducted and that is not held out to the public as a branch office;
     Any location that is the associated person's primary 
residence, provided that
    [cir] 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;
    [cir] the location is not held out to the public as an office and 
the associated person does not meet with customers at the location;
    [cir] neither customer funds nor securities are handled at that 
location;
    [cir] the associated person is assigned to a designated branch 
office, and such designated branch office is reflected on all business 
cards, stationery, retail communications and other communications to 
the public by such associated person;
    [cir] the associated person's correspondence and communications 
with the public are subject to the firm's supervision in accordance 
with proposed Rule 11.3110;
    [cir] electronic communications (e.g., email) are made through the 
Participant Firm's electronic system;
    [cir] all orders are entered through the designated branch office 
or an electronic system established by the Participant Firm that is 
reviewable at the branch office;
    [cir] written supervisory procedures pertaining to supervision of 
sales activities conducted at the residence are maintained by the 
Participant Firm; and
    [cir] a list of the residence locations is maintained by the 
Participant Firm.
     Any location, other than a primary residence, that is used 
for securities business for less than 30 business days in any one 
calendar year, provided the Participant Firm complies with the first 
eight bullet points immediately above;
     Any office of convenience, where associated persons 
occasionally and exclusively by appointment meet with customers, which 
is not held out to the public as an office;
     Any location that is used primarily to engage in non-
securities activities and from which the associated person(s) effects 
no more than 25 securities transactions in any one calendar year, 
provided that any retail communication identifying such location also 
sets forth the address and telephone number of the location from which 
the associated person(s) conducting business at the non-branch 
locations are directly supervised;

[[Page 46196]]

     The Floor of a registered national securities exchange 
where a Participant Firm conducts a direct access business with public 
customers; or
     A temporary location established in response to the 
implementation of a business continuity plan.
    Notwithstanding the exclusions for branch offices described above, 
any location that is responsible for supervising the activities of 
persons associated with the Participant Firm at one or more non-branch 
locations of the Participant Firm would be considered a branch office.
    The term ``business day'' would not include any partial business 
day provided that the associated person spends at least four hours on 
such business day at his or her designated branch office during the 
hours that such office is normally open for business.
Proposed Supplementary Materials to Rule 11.3110
    Proposed Supplementary Material .01 to Rule 11.3110 would require a 
Participant Firm's main office location to be registered and designated 
as a branch office or OSJ if it meets the definitions of a ``branch 
office'' or ``office of supervisory jurisdiction'' as set forth in 
proposed Rule 11.3110(e). In general, the nature of activities 
conducted at a main office will satisfy the requirements of such terms.
    Proposed Supplementary Material .02 to Rule 11.3110 would provide 
that, in addition to the locations that meet the definition of OSJ in 
proposed Rule 11.3110(e), each Participant Firm would need to also 
register and designate other offices as OSJs as is necessary to 
supervise its associated persons in accordance with the standards set 
forth in proposed Rule 11.3110. In making a determination as to whether 
to designate a location as an OSJ, the Participant Firm should consider 
the following factors:
     Whether registered persons at the location engage in 
retail sales or other activities involving regular contact with public 
customers;
     Whether a substantial number of registered persons conduct 
securities activities at, or are otherwise supervised from, such 
location;
     Whether the location is geographically distant from 
another OSJ of the firm;
     Whether the Participant Firm's registered persons are 
geographically dispersed; and
     Whether the securities activities at such location are 
diverse or complex.
    Proposed Supplementary Material .03 to Rule 11.3110 would provide 
additional guidance relating to proposed Rule 11.3110(a)(4), which 
requires a Participant Firm to designate one or more appropriately 
registered principals in each OSJ with the authority to carry out the 
supervisory responsibilities assigned to that office (``on-site 
principal''). The proposed Supplementary Material would provide that 
the designated on-site principal for each OSJ would need to have a 
physical presence, on a regular and routine basis, at each OSJ for 
which the principal has supervisory responsibilities. Consequently, 
there is a general presumption that a principal will not be designated 
and assigned to be the on-site principal pursuant to proposed Rule 
11.3110(a)(4) to supervise more than one OSJ. If a Participant Firm 
determines it is necessary to designate and assign one appropriately 
registered principal to be the on-site principal pursuant to proposed 
Rule 11.3110(a)(4) to supervise two or more OSJs, the Participant Firm 
would need to take into consideration, among others, the following 
factors:
     Whether the on-site principal is qualified by virtue of 
experience and training to supervise the activities and associated 
persons in each location;
     Whether the on-site principal has the capacity and time to 
supervise the activities and associated persons in each location;
     Whether the on-site principal is a producing registered 
representative;
     Whether the OSJ locations are in sufficiently close 
proximity to ensure that the on-site principal is physically present at 
each location on a regular and routine basis; and
     The nature of activities at each location, including size 
and number of associated persons, scope of business activities, nature 
and complexity of products and services offered, volume of business 
done, the disciplinary history of persons assigned to such locations, 
and any other indicators of irregularities or misconduct.
    The Participant Firm would need to establish, maintain, and enforce 
written supervisory procedures regarding the supervision of all OSJs. 
In all cases where a Participant Firm designates and assigns one on-
site principal to supervise more than one OSJ, the Participant Firm 
would need to document in the Participant Firm's written supervisory 
and inspection procedures the factors used to determine why the 
Participant Firm considers such supervisory structure to be reasonable 
and the determination by the Participant Firm will be subject to 
scrutiny.
    Proposed Supplementary Material .04 to Rule 11.3110 would provide 
that a Participant Firm is not required to conduct in-person meetings 
with each registered person or group of registered persons to comply 
with the annual compliance meeting (or interview) required by proposed 
Rule 11.3110(a)(7). A Participant Firm that chooses to conduct 
compliance meetings using other methods (e.g., on-demand webcast or 
course, video conference, interactive classroom setting, telephone, or 
other electronic means) would need to ensure, at a minimum, that each 
registered person attends the entire meeting (e.g., an on-demand annual 
compliance webcast would require each registered person to use a unique 
user ID and password to gain access and use a technology platform to 
track the time spent on the webcast, provide click-as-you go 
confirmation, and have an attestation of completion at the end of a 
webcast) and is able to ask questions regarding the presentation and 
receive answers in a timely fashion (e.g., an on-demand annual 
compliance webcast that allows registered persons to ask questions via 
an email to a presenter or a centralized address or via a telephone 
hotline and receive timely responses directly or view such responses on 
the Participant Firm's intranet site).
    Proposed Supplementary Material .05 to Rule 11.3110 would provide 
that a Participant Firm may use a risk-based review system to comply 
with proposed Rule 11.3110(b)(2)'s requirement that a registered 
principal review all transactions relating to the investment banking or 
securities business of the Participant Firm. A Participant Firm is not 
required to conduct detailed reviews of each transaction if a 
Participant Firm is using a reasonably designed risk-based review 
system that provides a Participant Firm with sufficient information 
that permits the Participant Firm to focus on the areas that pose the 
greatest numbers and risks of violation.
    Proposed Supplementary Material .06 to Rule 11.3110 would provide 
that, by employing risk-based principles, a Participant Firm would need 
to decide the extent to which additional policies and procedures for 
the review of:
     Incoming and outgoing written (including electronic) 
correspondence that fall outside of the subject matters listed in 
proposed Rule 11.3110(b)(4) are necessary for its business and 
structure. If a Participant Firm's procedures do not require that all 
correspondence be reviewed before use or distribution, the procedures 
would need to provide for:
    [cir] The education and training of associated persons regarding 
the firm's procedures governing correspondence;

[[Page 46197]]

    [cir] The documentation of such education and training; and
    [cir] Surveillance and follow-up to ensure that such procedures are 
implemented and followed.
     Internal communications that are not of a subject matter 
that require review under Exchange rules and federal securities laws 
are necessary for its business and structure.
    Proposed Supplementary Material .07 to Rule 11.3110 would provide 
that the evidence of review required in proposed Rule 11.3110(b)(4) 
would need to be chronicled either electronically or on paper and 
clearly identify the reviewer, the internal communication or 
correspondence that was reviewed, the date of review, and the actions 
taken by the Participant Firm as a result of any significant regulatory 
issues identified during the review. Merely opening a communication 
would not be sufficient review.
    Proposed Supplementary Material .08 to Rule 11.3110 would provide 
that, in the course of the supervision and review of correspondence and 
internal communications required by proposed Rule 11.3110(b)(4), a 
supervisor/principal may delegate certain functions to persons who need 
not be registered. However, the supervisor/principal remains ultimately 
responsible for the performance of all necessary supervisory reviews, 
irrespective of whether he or she delegates functions related to the 
review. Accordingly, supervisors/principals would need to take 
reasonable and appropriate action to ensure delegated functions are 
properly executed and should evidence performance of their procedures 
sufficiently to demonstrate overall supervisory control.
    Proposed Supplementary Material .09 to Rule 11.3110 would provide 
that each Participant Firm would need to retain the internal 
communications and correspondence of associated persons relating to the 
Participant Firm's investment banking or securities business for the 
period of time and accessibility specified in SEA Rule 17a-4(b). The 
names of the persons who prepared outgoing correspondence and who 
reviewed the correspondence would need to be ascertainable from the 
retained records, and the retained records would need to be readily 
available to the Exchange, upon request.
    Proposed Supplementary Material .10 to Rule 11.3110 would provide 
that a Participant Firm's determination that it is not possible to 
comply with proposed Rules 3110(b)(6)(C)(i) or (b)(6)(C)(ii) 
prohibiting supervisory personnel from supervising their own activities 
and from reporting to, or otherwise having compensation or continued 
employment determined by, a person or persons they are supervising 
generally will arise in instances where:
     The Participant Firm is a sole proprietor in a single-
person firm;
     A registered person is the Participant Firm's most senior 
executive officer (or similar position); or
     A registered person is one of several of the Participant 
Firm's most senior executive officers (or similar positions).
    Proposed Supplementary Material .11 to Rule 11.3110 would provide 
that a Participant Firm may use electronic media to satisfy its 
obligation to communicate its written supervisory procedures, and any 
amendment thereto, pursuant to proposed Rule 11.3110(b)(7), provided 
that:
     The written supervisory procedures have been promptly 
communicated to, and are readily accessible by, all associated persons 
to whom such supervisory procedures apply based on their activities and 
responsibilities through, for example, the Participant Firm's intranet 
system;
     All amendments to the written supervisory procedures are 
promptly
    posted to the Participant Firm's electronic media;
     Associated persons are notified that amendments relevant 
to their activities and responsibilities have been made to the written 
supervisory procedures;
     The Participant Firm has reasonable procedures to monitor 
and maintain the security of the material posted to ensure that it 
cannot be altered by unauthorized persons; and
     The Participant Firm retains current and prior versions of 
its written supervisory procedures in compliance with the applicable 
record retention requirements of SEA Rule 17a-4(e)(7).
    Proposed Supplementary Material .12 to Rule 11.3110 would provide 
that, in fulfilling its obligations under proposed Rule 11.3110(c), 
each Participant Firm would need to conduct a review, at least 
annually, of the businesses in which it engages. The review would need 
to be reasonably designed to assist in detecting and preventing 
violations of and achieving compliance with applicable securities laws 
and regulations and with Exchange rules. Each Participant Firm would 
need to establish and maintain supervisory procedures that take into 
consideration, among other things, the firm's size, organizational 
structure, scope of business activities, number and location of the 
firm's offices, the nature and complexity of the products and services 
offered by the firm, the volume of business done, the number of 
associated persons assigned to a location, the disciplinary history of 
registered representatives or associated persons, and any indicators of 
irregularities or misconduct (i.e., ``red flags''), etc. The procedures 
established and reviews conducted would need to provide that the 
quality of supervision at remote locations is sufficient to ensure 
compliance with applicable securities laws and regulations and with 
Exchange rules. A Participant Firm would need to be especially diligent 
in establishing procedures and conducting reasonable reviews with 
respect to a non-branch location where a registered representative 
engages in securities activities. Based on the factors outlined above, 
Participant Firms may need to impose reasonably designed supervisory 
procedures for certain locations or may need to provide for more 
frequent reviews of certain locations.
    Proposed Supplementary Material .13 to Rule 11.3110 would provide 
additional guidance to proposed Rule 11.3110(c)(1)(C), which would 
require a Participant Firm to inspect on a regular periodic schedule 
every non-branch location. In establishing a non-branch location 
inspection schedule, there is a general presumption that a non-branch 
location will be inspected at least every three years, even in the 
absence of any indicators of irregularities or misconduct (i.e., ``red 
flags''). If a Participant Firm establishes a longer periodic 
inspection schedule, the Participant Firm would need to document in its 
written supervisory and inspection procedures the factors used in 
determining that a longer periodic inspection cycle is appropriate.
    Proposed Supplementary Material .14 to Rule 11.3110 would provide 
that a Participant Firm's determination that it is not possible to 
comply with proposed Rule 11.3110(c)(3)(B) with respect to who is not 
allowed to conduct a location's inspection will generally arise in 
instances where:
     The Participant Firm has only one office; or
     The Participant Firm has a business model where small or 
single person offices report directly to an OSJ manager who is also 
considered the offices' branch office manager.
    Proposed Supplementary Material .15 to Rule 11.3110 would provide 
that for purposes of the proposed rule, the term ``associated person'' 
and ``person associated with a Participant Firm'' would have the same 
meaning as the terms ``person associated with a member'' or 
``associated person of a

[[Page 46198]]

member'' as defined in Article I (rr) of the FINRA By-Laws.\10\
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    \10\ Article I (rr) of FINRA's By-Laws provides that ``person 
associated with a member'' or ``associated person of a member'' 
means: (1) a natural person who is registered or has applied for 
registration under FINRA's rules; (2) a sole proprietor, partner, 
officer, director, or branch manager of a member, or other natural 
person occupying a similar status or performing similar functions, 
or a natural person engaged in the investment banking or securities 
business who is directly or indirectly controlling or controlled by 
a member, whether or not any such person is registered or exempt 
from registration with the FINRA under its By-Laws or rules; and (3) 
for purposes of FINRA Rule 8210, any other person listed in Schedule 
A of Form BD of a member.
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    Finally, proposed Supplementary Material .16 to Rule 11.3110 would 
provide that individuals in charge of a group of employees shall 
reasonably discharge their duties and obligations with respect to 
supervision and control of those employees related to the business of 
their employer and compliance with securities laws and regulations and 
Exchange rules.
Proposed Rule 11.3120 (Supervisory Control System)
    Proposed Rule 11.3120(a), which is based on NYSE American Rule 
3120(a)--Equities, would provide that each Participant Firm would need 
to designate and specifically identify to the Exchange one or more 
principals who would need to establish, maintain, and enforce a system 
of supervisory control policies and procedures that:
     Test and verify that the Participant Firm's supervisory 
procedures are reasonably designed with respect to the activities of 
the Participant Firm and its associated persons, to achieve compliance 
with applicable securities laws and regulations, and with applicable 
Exchange rules; and
     Create additional or amend supervisory procedures where 
the need is identified by such testing and verification.
    The designated principal or principals would be required to submit 
to the Participant Firm's senior management no less than annually, a 
report detailing each Participant Firm's system of supervisory 
controls, the summary of the test results and significant identified 
exceptions, and any additional or amended supervisory procedures 
created in response to the test results.
    Proposed Rule 11.3120(b) would provide that each report provided to 
senior management pursuant to proposed Rule 11.3120(a) in the calendar 
year following a calendar year in which a Participant Firm reported 
$200 million or more in gross revenue would need to include, to the 
extent applicable to the Participant Firm's business:
     A tabulation of the reports pertaining to customer 
complaints and internal investigations made to the Exchange during the 
preceding year; and
     Discussion of the preceding year's compliance efforts, 
including procedures and educational programs, in each of the following 
areas:
    [cir] Trading and market activities;
    [cir] Investment banking activities;
    [cir] Antifraud and sales practices;
    [cir] Finance and operations;
    [cir] Supervision; and
    [cir] Anti-money laundering.
    The proposed rule change seeks to mitigate compliance costs and 
burdens with respect to proposed Rule 11.3120's annual reporting 
requirements by requiring that only Participant Firms reporting $200 
million or more in gross revenues in the preceding year include in 
their annual reports supplemental information. The Exchange also 
believes that the proposed threshold strikes the appropriate balance as 
it encompasses larger Participant Firms, Participant Firms engaged in 
significant underwriting activities and substantial trading activities 
or market making business, and Participant Firms with extensive sales 
platforms.
    Proposed Rule 11.3120(c) would provide that, for purposes of 
proposed Rule 11.3120(b), ``gross revenue'' is defined as:
     Total revenue as reported on FOCUS Form Part II or IIA 
(line item 4030) less commodities revenue (line item 3990), if 
applicable; or
     Total revenue as reported on FOCUS Form Part II CSE (line 
item 4030) less, if applicable,
    [cir] Commissions on commodity transactions (line item 3991); and
    [cir] Commodities gains or losses (line items 3924 and 3904).
    Proposed Supplementary Material .01 to Rule 11.3120 would provide 
that for purposes of the proposed rule, the term ``associated person'' 
and ``person associated with a Participant Firm'' would have the same 
meaning as the terms ``person associated with a member'' or 
``associated person of a member'' as defined in Article I (rr) of the 
FINRA By-Laws.\11\
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    \11\ See note 10, supra.
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    Finally, the Exchange proposes conforming changes to Rule 10.9217 
to replace references to Article 6, Rule 5(a) & (b) with proposed Rule 
11.20 and Rule 11.3110(a) as well as references to Article 6, Rule 5(c) 
with Rule 11.3110(b)(1).
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\12\ in general, and furthers the objectives of Section 
6(b)(5),\13\ in particular, because it is designed to promote just and 
equitable principles of trade and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
Specifically, the Exchange believes that the proposed rule change 
supports the objectives of the Act by providing greater harmonization 
between Exchange rules and the rules of its affiliates and FINRA of 
similar purpose, resulting in less burdensome and more efficient 
regulatory compliance. In particular, Exchange Participant Firms that 
are also FINRA members are already subject to Exchange supervisory 
rules and FINRA Rules 3110 and 3120, and harmonizing these rules by 
adopting proposed Rules 11.3110 and 11.3120 would promote just and 
equitable principles of trade by requiring a single standard for 
supervision. To the extent the Exchange has proposed changes that 
differ from the NYSE American version of the Exchange rules, such 
changes are generally technical in nature and do not change the 
substance of the proposed rules. The Exchange also believes that the 
proposed rule change will update and add specificity to the 
requirements governing supervision, which will promote just and 
equitable principles of trade and help to protect investors.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
not intended to address competitive issues but rather to achieve 
greater consistency between the Exchange's rules and the rules of its 
affiliate and FINRA concerning supervision.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \14\ and Rule

[[Page 46199]]

19b-4(f)(6) thereunder.\15\ Because the proposed rule change does not: 
(i) significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative prior to 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, if consistent 
with the protection of investors and the public interest, the proposed 
rule change has become effective pursuant to Section 19(b)(3)(A) of the 
Act and Rule 19b-4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\17\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
---------------------------------------------------------------------------

    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NYSECHX-2024-18 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-NYSECHX-2024-18. 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-NYSECHX-2024-18 and 
should be submitted on or before June 18, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-11576 Filed 5-24-24; 8:45 am]
BILLING CODE 8011-01-P