Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Supplementary Material .16 to IEX Rule 5.110 (Supervision), So That IEX Members Who Participate in the Recently Approved FINRA Pilot Program on Remote Inspections Will Also Satisfy the Internal Inspection Requirements Found in IEX's Rules, 77209-77214 [2024-21491]
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Federal Register / Vol. 89, No. 183 / Friday, September 20, 2024 / Notices
provide contrary instructions. In
addition, at least once a year, issuers,
underwriters, or dealers relying on rule
154 for the householding of
prospectuses relating to open-end
management investment companies that
are registered under the Investment
Company Act of 1940 (‘‘mutual funds’’)
and each series thereof must explain to
investors who have provided written or
implied consent how they can revoke
their consent.3 Preparing and sending
the notice and the annual explanation of
the right to revoke are collections of
information.
The rule allows issuers, underwriters,
or dealers to household prospectuses if
certain conditions are met. Among the
conditions with which a person relying
on the rule must comply are providing
notice to each investor that only one
prospectus will be sent to the household
and, in the case of issuers that are
mutual funds and any series thereof,
providing to each investor who consents
to householding an annual explanation
of the right to revoke consent to the
delivery of a single prospectus to
multiple investors sharing an address.
The purpose of the notice and annual
explanation requirements of the rule is
to ensure that investors who wish to
receive individual copies of
prospectuses are able to do so.
Although rule 154 is not limited to
mutual funds, the Commission believes
that it is used mainly by mutual funds
and by broker-dealers that deliver
prospectuses for mutual funds. The
Commission is unable to estimate the
number of issuers other than mutual
funds that rely on the rule.
The Commission estimates that, as of
March 2024, there are approximately
12,118 mutual fund series registered on
Form N–1A, approximately 1,060 of
which are directly sold and therefore
deliver their own prospectuses. Of
these, the Commission estimates that
approximately half (530 mutual fund
series): (i) do not send the implied
consent notice requirement because
they obtain affirmative written consent
to household prospectuses in the fund’s
account opening documentation; or (ii)
do not take advantage of the
householding provision because of
electronic delivery options which lessen
the economic and operational benefits
of rule 154 when compared with the
costs of compliance. Therefore, the
Commission estimates that each of the
530 directly sold mutual fund series
will spend an average of 20 hours per
year complying with the notice
requirement of the rule, for a total of
10,600 burden hours. In addition, of the
3 See
rule 154(c).
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approximately 1,060 mutual fund series
that are directly sold, the Commission
estimates that approximately 75% (or
795) will each spend 1 hour complying
with the annual explanation of the right
to revoke requirement of the rule, for a
total of 795 hours.
The Commission estimates that, as of
March 2024, there were approximately
70 broker-dealers that have customer
accounts with mutual funds, and
therefore may be required to deliver
mutual fund prospectuses. The
Commission estimates that each affected
broker-dealer will spend, on average, 20
hours complying with the notice
requirement of the rule, for a total of
1,400 hours. In addition, each brokerdealer will also spend one hour
complying with the annual explanation
of the right to revoke requirement, for a
total of 70 hours. Therefore, the total
number of respondents for rule 154 is
865 (795 4 mutual fund series plus 70
broker-dealers), and the estimated total
hour burden is approximately 12,865
hours (11,395 hours for mutual fund
series, plus 1,470 hours for brokerdealers).
The estimate of average burden hours
is made solely for the purposes of the
Paperwork Reduction Act and is not
derived from a comprehensive or even
a representative survey or study of the
costs of Commission rules and forms.
An agency may not conduct or sponsor,
and a person is not required to respond
to a collection of information unless it
displays a currently valid OMB control
number.
Written comments are invited on: (a)
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
(b) the accuracy of the Commission’s
estimate of the burden of the collection
of information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
by November 19, 2024.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
4 The
Commission estimates that 530 mutual
funds prepare both the implied consent notice and
the annual explanation of the right to revoke
consent + 265 mutual funds that prepare only the
annual explanation of the right to revoke.
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77209
Please direct your written comments
to: Austin Gerig, Director/Chief Data
Officer, Securities and Exchange
Commission, c/o Oluwaseun Ajayi, 100
F Street NE, Washington, DC 20549 or
send an email to: PRA_Mailbox@
sec.gov.
Dated: September 17, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–21555 Filed 9–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101025; File No. SR–IEX–
2024–16]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt
Supplementary Material .16 to IEX Rule
5.110 (Supervision), So That IEX
Members Who Participate in the
Recently Approved FINRA Pilot
Program on Remote Inspections Will
Also Satisfy the Internal Inspection
Requirements Found in IEX’s Rules
September 16, 2024.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
September 4, 2024, the Investors
Exchange LLC (‘‘IEX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Act,4 and Rule 19b–
4 thereunder,5 the Exchange is filing
with the Commission a proposed rule
change to adopt Supplementary
Material .16 to IEX Rule 5.110
(Supervision), so that IEX Members 6
who participate in the recentlyapproved FINRA pilot program on
remote inspections (the ‘‘Remote
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 15 U.S.C. 78s(b)(1).
5 17 CFR 240.19b–4.
6 See IEX Rule 1.160(s).
2 15
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Federal Register / Vol. 89, No. 183 / Friday, September 20, 2024 / Notices
Inspections Pilot Program’’) 7 will also
satisfy the internal inspection
requirements found in IEX’s rules.
The text of the proposed rule change
is available at the Exchange’s website at
www.iextrading.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 the
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 these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization 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 the
Statutory Basis for, the Proposed Rule
Change
ddrumheller on DSK120RN23PROD with NOTICES1
1. Purpose
IEX proposes to adopt Supplementary
Material .16 to IEX Rule 5.110, which
would provide that any IEX Member
that participates in the FINRA Remote
Inspections Pilot Program,8 thereby
satisfying the internal inspections
requirements in FINRA Rule 3110(c),
would also satisfy the equivalent
internal inspections requirements in IEX
Rule 5.110(c). This proposed rule
change would supplant Supplementary
Material .15 to IEX Rule 5.110, which
allowed Members to fulfill any calendar
year 2024 internal inspection
obligations set forth in IEX Rule 5.110(c)
by conducting remote inspections of the
applicable offices of supervisory
jurisdiction (‘‘OSJs’’),9 branch offices
(both supervisory and nonsupervisory),10 and non-branch
locations.11 This temporary relief,
which was analogous to relief that
FINRA provided for, automatically
7 See Securities Exchange Act Release No. 97398
(April 28, 2023), 88 FR 28620 (May 4, 2023)
(‘‘Remote Inspections Pilot Program Proposal’’);
Securities Exchange Act Release No. 98982
(November 17, 2023), 88 FR 82464 (November 24,
2023) (‘‘Remote Inspections Pilot Program Approval
Order’’) (SR–FINRA–2023–007).
8 See FINRA Rule 3110.18.
9 See IEX Rule 5.110(f)(1).
10 See IEX Rule 5.110(f)(2)(A).
11 See Supplementary Material .15 to IEX Rule
5.110 (‘‘Temporary Relief to Allow Remote
Inspections for Calendar Years 2021, 2022, 2023,
and Through the Earlier of the Effective Date of the
Remote Inspections Pilot Program or June 30,
2024’’).
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16:44 Sep 19, 2024
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sunset on June 30, 2024.12 As described
below, adding Proposed Supplementary
Material .16 to IEX Rule 5.110 would
harmonize IEX’s internal inspections
obligations for its Members with
FINRA’s comparable obligations for its
members, thereby avoiding confusion to
IEX Members with respect to the
applicability of participation in the
FINRA Remote Inspections Pilot
Program with respect to compliance
with IEX Rule 5.110.13 Additionally,
because Proposed Supplementary
Material .16 to IEX Rule 5.110
incorporates by reference FINRA Rule
3110.18, this rule change enables IEX
Rule 5.110 to continue to be
incorporated into the agreement
between IEX and FINRA to allocate
regulatory responsibility for common
rules (the ‘‘17d–2 Agreement’’).14
Standards for Supervision of Remote
Offices
The responsibility of firms to
supervise their associated persons is a
critical component of broker-dealer
regulation.15 Members must supervise
all of their associated persons,
regardless of their location,
compensation or employment
arrangement, or registration status. IEX
Rule 5.110, which is substantially
identical to FINRA Rule 3110(c),
requires any Member, regardless of size
or type, to have a supervisory system for
the activities of its associated persons
that is reasonably designed to achieve
compliance with the applicable
securities laws and regulations and IEX
rules, and that sets forth the minimum
requirements for such supervisory
system.16 The internal inspection
obligation under IEX Rule 5.110(c) and
FINRA Rule 3110(c) is one component
of such system.
IEX Rule 5.110(c) sets forth three
main requirements for inspections.
First, an inspection of an office or
12 See Id. The equivalent temporary relief offered
by FINRA also sunset on June 30, 2024. See FINRA
Rule 3110.17
13 IEX notes that all IEX Members are currently
FINRA members, or in the process of becoming
FINRA members.
14 See Securities Exchange Act Release No. 93324
(October 14, 2021), 86 FR 58110 (October 20, 2021)
(File No. 4–700). The 17d–2 Agreement includes a
certification by IEX that states that the requirements
contained in certain Exchange rules are identical to,
or substantially similar to, certain FINRA rules that
have been identified as comparable.
15 See generally SEC Division of Market
Regulation, Staff Legal Bulletin No. 17: Remote
Office Supervision (March 19, 2004) (‘‘SLB 17’’)
(SEC guidance on remote office supervision),
https://www.sec.gov/interps/legal/mrslb17.htm; and
Regulatory Notice 11–54 (November 2011) (‘‘Notice
11–54’’) (joint SEC and FINRA guidance on
effective policies and procedures for broker-dealer
branch inspections).
16 See IEX Rule 5.110(a)
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location must occur on a designated
frequency. The periodicity of the
required inspection varies depending on
the classification of the location or the
nature of the activities that take place:
OSJs and supervisory branch offices
must be inspected at least annually; 17
non-supervisory branch offices must be
inspected at least every three years; 18
and non-branch locations must be
inspected on a periodic schedule,
presumed to be at least every three
years.19 Second, a Member must retain
a written record of the date upon which
each review and inspection occurred,
reduce a location’s inspection to a
written report and keep each inspection
report on file either for a minimum of
three years or, if the location’s
inspection schedule is longer than three
years, until the next inspection report
has been written.20 If applicable to the
location being inspected, the inspection
report must include the testing and
verification of the Member’s policies
and procedures, including supervisory
policies and procedures, in specified
areas.21 Third, to prevent compromising
the effectiveness of inspections due to
conflicts of interest, the rule requires a
Member to ensure that the person
conducting the inspection is not an
associated person assigned to the
location or is not directly or indirectly
supervised by, or otherwise reporting to,
an associated person assigned to that
location.22 All OSJs, branch offices, and
17 See
IEX Rule 5.110(c)(1)(A).
IEX Rule 5.110(c)(1)(B).
19 See IEX Rule 5.110(c)(1)(C) and Supplementary
Material .13 to IEX Rule 5.110 (‘‘General
Presumption of Three-Year Limit for Periodic
Inspection Schedules’’).
20 See IEX Rule 5.110(c)(2).
21 See IEX Rule 5.110(c)(2)(A) (providing that the
inspection report must include, without limitation,
the testing and verification of the Member’s policies
and procedures, including supervisory policies and
procedures for: (1) safeguarding of customer funds
and securities; (2) maintaining books and records;
(3) supervision of supervisory personnel; (4)
transmittals of funds from customers to third party
accounts, from customer accounts to outside
entities, from customer accounts to locations other
than a customer’s primary residence, and between
customers and registered representatives, including
the hand delivery of checks; and (5) changes of
customer account information, including address
and investment objectives changes, and validation
of such changes).
22 IEX Rule 5.110(c)(3) provides a limited
exception from this requirement if a firm
determines compliance is not possible either
because of the firm’s size or its business model.
Supplementary Material .14 to IEX Rule 5.110
(Exception to Persons Prohibited from Conducting
Inspections) reflects IEX’s expectation that a firm
generally will rely on the exception in instances
where the firm has only one office or 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. However, these
situations are non-exclusive, and a firm may still
rely on the exception in other instances where it
18 See
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non-branch locations are subject to IEX
Rule 5.110(c).
Further, Supplementary Material .12
to IEX Rule 5.110 sets out factors that
constitute a reasonable review. This
provision emphasizes establishing
reasonable supervisory procedures and
conducting reviews of locations, taking
into consideration, among other things,
the Member’s size, organizational
structure, scope of business activities,
number and location of the Member’s
offices, the nature and complexity of the
products and services offered by the
Member, 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’’).23 The provision further states
that the procedures established and
reviews conducted must provide that
the quality of supervision at remote (i.e.,
geographically dispersed) locations is
sufficient to ensure compliance with
applicable securities laws and
regulations and with IEX rules, and that
Members must be especially diligent
with respect to a non-branch location
where a registered representative
engages in securities activities. This
provision incorporates guidance FINRA
has previously issued about supervising
associated persons working in
geographically dispersed offices.24
Notably, all of the above requirements
about supervision and inspections of
OSJs, branch offices, and non-branch
locations reflected a business
environment in which Members
conducted in-person inspections of all
of their offices.25
cannot comply because of its size or business
model, provided the firm complies with the
documentation requirements under the rule.
23 Such red flags may include: customer
complaints; a large number of elderly customers; a
concentration in highly illiquid or risky
investments; an unexplained increase or change in
the types of investments or trading concentration
that a representative is recommending or trading; an
unexpected improvement in a representative’s
production, lifestyle, or wealth; questionable or
frequent transfers of cash or securities between
customer or third party accounts, or to or from the
representative; a representative that serves as a
power of attorney, trustee or in a similar capacity
for a customer or has discretionary control over a
customer’s account(s); a representative with
disciplinary records; customer investments in one
or a few securities or class of securities that is
inconsistent with firm policies related to such
investments; churning; trading that is inconsistent
with customer objectives; numerous trade
corrections, extensions, liquidations; or significant
switching activity of mutual funds or variable
products held for short time periods. See SLB 17,
supra note 15.
24 See NASD [FINRA] Notice to Members 98–38
(May 1998) and 99–45 (June 1999).
25 See SLB 17 and Notice 11–54, supra note 15.
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FINRA’s Recent Attempts To Change the
In-Person Inspection Requirements of
OSJs, Branch Offices, and Non-Branch
Locations
In the Remote Inspections Pilot
Program Proposal, FINRA described its
efforts during the past several years to
offer its members the option of remotely
conducting internal inspections of their
OSJs, branch offices, and non-branch
locations.26 As stated therein, FINRA
believed that as more recordkeeping
moved from paper to electronic records,
and as more meetings were conducted
virtually using platforms such as Zoom
and WebEx, the burden on FINRA
members of conducting in-person
inspections for all their remote office
locations became harder to justify.27
Thus, when the COVID–19 pandemic
required many securities industry
professionals to work from home,
FINRA implemented several forms of
regulatory relief to its members,
including introducing FINRA Rule
3110.17, which IEX also introduced as
Supplementary Material .15 to IEX Rule
5.110, to permit remote internal
inspections of their OSJs, branch offices,
and non-branch locations.
The pandemic accelerated the
industry’s adoption of a broad remote
work environment and IEX recognizes
that the pandemic has profoundly
changed attitudes on where work can
occur. As a result of this change many
firms have adopted, in varying scale,
hybrid work models involving
personnel who are working at least part
time from alternative work locations
(e.g., private residences). As part of an
effort to modernize its rules to reflect
evolving technologies and business
models, in April 2023, FINRA filed the
Remote Inspections Pilot Program
Proposal with the Commission to
establish a voluntary, three-year remote
inspections pilot program that would
allow eligible firms to conduct
inspections of all or some offices or
locations, remotely, subject to the
specified terms therein.28 The SEC
approved the FINRA Remote Inspection
Pilot Program Proposal in November
2023,29 and FINRA commenced the
pilot program on July 1, 2024.30
FINRA’s Remote Inspections Pilot
Program
FINRA’s Remote Inspection Pilot
Program builds on the terms of the
26 See Remote Inspections Pilot Program
Proposal, supra note 7.
27 See Id.
28 See Id.
29 See Remote Inspections Pilot Program
Approval Order, supra note 7.
30 See FINRA Regulatory Notice 24–02.
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77211
temporary relief in FINRA Rule 3110.17,
while requiring members to provide
even more information about their
remote inspections to allow FINRA to
assess the overall impact and
effectiveness of remote inspections.31
The pilot program is designed to
provide broader systemized information
to supplement the information obtained
through the FINRA examination process
in an environment where offices and
locations were closed. The information
firms would be required to produce as
a pilot program participant will help
FINRA more accurately assess the
overall impact and effectiveness of
remote inspections.32
FINRA’s Remote Inspection Pilot
Program includes, among other things,
the following requirements for
participating firms:
• Risk Assessment. Prior to electing a
remote inspection for an office or location,
participating firms must develop a reasonable
risk-based approach to using remote
inspections and conduct and document a risk
assessment for that office or location.33
• Written Supervisory Procedures for
Remote Inspections. Participating firms must
establish, maintain, and enforce written
procedures that are reasonably designed for
conducting remote inspections and
reasonably designed to achieve compliance
with applicable securities laws and
regulations.34
• Effective Supervisory System.
Participating firms must have an effective
supervisory system for remote inspections
that will be held to the same standards of
review (set forth under FINRA Rule 3110.12).
Where a member’s remote inspection of an
office or location identifies any ‘‘red flags,’’
the member may need to impose additional
supervisory procedures for that office or
location or may need to provide for more
frequent monitoring of that office or location,
including potentially a subsequent on-site
visit on an announced or unannounced
basis.35
• Documentation Requirement.
Participating firms must maintain and
preserve a centralized record for each of the
Pilot Years specified in the pilot program that
separately identifies: (1) all offices or
locations that were inspected remotely; and
(2) any offices or locations for which the
member determined to impose additional
supervisory procedures or more frequent
monitoring, as provided in FINRA Rule
3110.18(d). A member’s documentation of
the results of a remote inspection for an
office or location must identify any
additional supervisory procedures or more
frequent monitoring for that office or location
that were imposed as a result of the remote
inspection, including whether an on-site
31 See Remote Inspections Pilot Program
Proposal, supra note 7.
32 See Id.
33 See FINRA Rule 3110.18(b).
34 See FINRA Rule 3110.18(c).
35 See FINRA Rule 3110.18(d).
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inspection was conducted at such office or
location.36
• Firm Level Requirements. Participating
firms must meet certain firm-level eligibility
requirements to participate in the program
set forth in FINRA Rule 3110.18(f)(1). For
example, a firm cannot participate if it is
designated as: (i) Restricted Firm under
FINRA Rule 4111 or (ii) a Taping Firm under
FINRA Rule 3170. Additionally, firms with
suspended or new (effective less than 12
months) FINRA memberships or that have
been found by the SEC or FINRA to have
violated FINRA Rule 3110(c) are ineligible to
participate. Participating firms must also
comply with firm-level conditions to
participate in the program. For example, a
firm must have a recordkeeping system that
keeps records current and promptly
accessible, and that does not maintain
physical or electronic records at the location
subject to remote inspection. Additionally,
participating firms must have firm-wide tools
such as electronic recordkeeping systems,
system security tools such as secure network
connections and effective cybersecurity
protocols, and tools specifically applied to
each office or location based on the activities
of associated persons, products offered, or
any restrictions on the activity of the office
or location.37
• Location Level Requirements.
Participating firms must exclude from
participating in the program any locations
that do not meet the location level eligibility
criteria set forth in FINRA Rule 3110.18(g)(1)
(e.g., the location includes: (i) persons subject
to a disciplinary action, a statutory
disqualification, or a mandated heightened
supervisory plan; (ii) persons engaged in
proprietary trading; or (iii) the handling of
customer funds or securities). Additionally,
eligible locations must use the firm’s
electronic communication system and may
not maintain any original copies of books or
records at the location.38
• Data and Information Collection
Requirement. Participating firms must collect
and on a quarterly basis produce to FINRA
data consisting of separate counts for OSJs,
supervisory branch offices, non-supervisory
branch offices, and non-branch locations.
This data must include information about the
number of remote inspections conducted and
any significant findings. Firms shall
establish, maintain, and enforce written
policies and procedures that are reasonably
designed to comply with the data collection
and transmission requirements.39
• Election to Participate in Remote
Inspections Pilot Program. Participating firms
must opt-in to the pilot program in a manner
specified by FINRA.40
• Failure to Satisfy Conditions and
Determination of Ineligibility. Participating
firms that fail to satisfy terms of the Remote
Inspections Pilot Program will be ineligible
to participate in the pilot program and return
to conducting only on-site inspections.41
36 See
FINRA Rule 3110.18(e).
FINRA Rule 3110.18(f).
38 See FINRA Rule 3110.18(g).
39 See FINRA Rule 3110.18(h).
40 See FINRA Rule 3110.18(i).
41 See FINRA Rule 3110.18(j).
37 See
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FINRA may also make a determination to
revoke a member’s eligibility to participate if
FINRA finds it to be in the public interest.42
• Definitions of Pilot Year periods.
Includes clarifications that Pilot Year 1 is the
second half of 2024, and Pilot Year 4 is the
first half of 2027.43
Proposal
IEX proposes to adopt Supplementary
Material .16 to IEX Rule 5.110. This
proposed new supplementary material
reads as follows:
Members that are obligated to conduct an
inspection of an office of supervisory
jurisdiction, branch office or non-branch
location pursuant to, as applicable,
paragraphs (c)(1)(A), (B) and (C) under IEX
Rule 5.110 may satisfy such obligation by
participating in the FINRA Remote
Inspections Pilot Program, as set forth in
FINRA Rule 3110.18. The FINRA Remote
Inspections Pilot Program shall cover
required inspections of such offices or
locations for a period of three years starting
on September 4, 2024 (‘‘pilot period’’), and
such pilot period shall expire on July 1, 2027.
If the pilot period is not extended, this
Supplementary Material will automatically
sunset on July 1, 2027. Members will not be
able to participate in the FINRA Remote
Inspections Pilot Program after such date.44
As stated in proposed new
Supplementary Material .16 to IEX Rule
5.110, any IEX Member that participates
in the FINRA Remote Inspections Pilot
Program, thereby satisfying the internal
inspections requirements in FINRA Rule
3110(c), will satisfy the equivalent
internal inspections requirements in IEX
Rule 5.110(c).
IEX is not proposing to add the entire
FINRA Remote Inspections Pilot
Program to its rules, because it would be
unnecessarily duplicative and
burdensome for IEX Members to submit
the data and information required as
part of the Remote Inspections Pilot
Program to both IEX and FINRA.45
Based upon conversations with FINRA
staff, IEX understands that adopting
Proposed Supplementary Material .16 to
IEX Rule 5.110 would update IEX Rule
5.110 so that it remains substantially
similar to FINRA Rule 3110, such that
they remain common rules subject to
the 17d–2 Agreement.46 As a result,
regulatory responsibility for IEX Rule
42 See
FINRA Rule 3110.18(k).
FINRA Rule 3110.18(l).
44 Proposed Supplementary Material .16 to IEX
Rule 5.110.
45 Pursuant to this proposed rule change, IEX
Members will be required to collect and on a
quarterly basis produce to FINRA data regarding its
participation in the Remote Inspections Pilot
Program. See FINRA Rule 3110.18(h). But Members
will not be required to produce that information
directly to IEX.
46 See supra note 14.
43 See
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5.110 would continue to be allocated to
FINRA.
As noted above, all IEX Members
were temporarily eligible to conduct
remote office inspections until June 30,
2024. This proposed rule change allows
those Members who have enrolled in
FINRA’s Remote Inspections Pilot
Program to continue to use remote
inspections as part of an effective
supervisory system.47 IEX believes this
Remote Inspections Pilot Program is a
reasonable alternative for firms to fulfill
their IEX Rule 5.110(c) obligations while
permitting FINRA to collect data as the
regulatory authority in this area under
the 17d–2 Agreement to assess the
efficacy and long-term viability of a
permanent remote office inspections
program. IEX emphasizes that the
inspection requirement is one aspect of
a firm’s overall supervisory system, and
that the inspection, whether done in
accordance with the FINRA Remote
Inspections Pilot Program, or on-site,
would be held to the existing standards
of review under Supplementary
Material .12 to IEX Rule 5.110
(Standards for Reasonable Review).48
2. Statutory Basis
IEX believes that the proposed rule
change is consistent with the provisions
of Section 6(b) 49 of the Act in general,
and furthers the objectives of Section
6(b)(5) of the Act 50 in particular, in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
Exchange’s rule proposal is intended to
harmonize IEX’s supervision rules,
specifically with respect to the
requirements for inspections of
Members’ branch offices and other
locations, with those of FINRA, on
which they are based. As discussed in
the Purpose section, because Proposed
Supplementary Material .16 to IEX Rule
5.110 incorporates by reference FINRA
Rule 3110.18, this rule change enables
47 IEX notes that any inspections conducted by its
Members in the brief period between July 1, 2024
and the effective date of this filing will not satisfy
IEX Rule 5.110(c), but believes this will not be an
issue for its Members because the remote
inspections process outlined in the pilot program is
an ongoing process that cannot be completed in the
few days between the start of the FINRA’s pilot
program and the effectiveness of this rule filing.
48 Those standards provide, in part, that based on
the factors set forth under that supplementary
material, Members ‘‘may need to provide for more
frequent review of certain locations.’’
49 15 U.S.C. 78f.
50 15 U.S.C. 78f(b)(5).
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IEX Rule 5.110 to continue to be
incorporated into the 17d–2 Agreement,
resulting in less burdensome and more
efficient regulatory compliance.
Specifically, the proposed change will
conform the Exchange’s rules to changes
made to corresponding FINRA rules
insofar as a Member’s compliance with
FINRA Rule 3110.18 shall mean the
Member is also in compliance with
Supplementary Material .16 to IEX Rule
5.110, thus promoting the application of
consistent regulatory standards with
respect to rules that FINRA enforces
pursuant to the 17d–2 Agreement. As
such, the proposed rule change would
foster cooperation and coordination
with persons engaged in facilitating
transactions in securities and would
remove impediments to and perfect the
mechanism of a free and open market
and a national market system in
accordance with Section 6(b)(5) of the
Act.51
B. Self-Regulatory Organization’s
Statement on Burden on Competition
IEX does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is not designed to
address any competitive issue but rather
to provide greater harmonization among
IEX and FINRA rules of similar purpose,
resulting in less burdensome and more
efficient regulatory compliance for
common members and facilitating
FINRA’s performance of its regulatory
performance on the pending 17d–2
Agreement.
ddrumheller on DSK120RN23PROD with NOTICES1
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments on the proposed
rule change were neither solicited nor
received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule
filing as non-controversial under
Section 19(b)(3)(A) 52 of the Act and
Rule 19b–4(f)(6) 53 thereunder. 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
for 30 days from the date on which it
was filed, or such shorter time as the
Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act and Rule 19b–
4(f)(6) thereunder. In addition, the
Exchange provided the Commission
with written notice of its intent to file
the proposed rule change, along with a
brief description and text of the
proposed rule change, at least five
business days prior to the date of
filing.54
A proposed rule change filed under
Rule 19b–4(f)(6) 55 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),56 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay to permit the Exchange
to harmonize its rules with FINRA, as
described herein, upon effectiveness of
the proposed rule filing.
The Exchange stated that this
proposed rule change is noncontroversial because it does not present
any new or novel issues. In particular,
IEX is harmonizing its supervision rules
with those of FINRA, on which they are
based and which have been previously
approved by the Commission. By
conforming the Exchange’s rules to
FINRA’s, the proposed rule change
would promote the application of
consistent regulatory standards with
respect to rules that FINRA enforces
pursuant to the 17d–2 Agreement. As
such, the Exchange believes that the
proposed rule change would foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities and would
remove impediments to and perfect the
mechanism of a free and open market
and a national market system in
accordance with Exchange Act Section
6(b)(5).
In addition, the Exchange stated that
since the FINRA Remote Inspections
Pilot Program commenced on July 1,
2024, waiving the 30-day operative
delay would provide assurances to IEX
members who enroll in the Remote
Inspections Pilot Program that they can
plan the remainder of their 2024
inspection program under a harmonized
rule set, with just a short window of
time in which the FINRA pilot program
was not part of IEX’s rules,57 while at
the same time helping ensure that IEX
members continue to perform their
supervisory obligations. Further, the
54 17
CFR 240.19b–4(f)(6)(iii).
55 17 CFR 240.19b–4(f)(6).
56 17 CFR 240.19b–4(f)(6)(iii).
57 See supra note 47.
51 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(3)(A).
53 17 CFR 240.19b–4(f)(6).
52 15
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77213
Exchange stated that waiver of the
operative delay should reduce any
potential confusion that may otherwise
occur on the part of IEX members as to
the applicable rules governing
inspections of branch offices and other
locations. For these reasons, the
Commission believes that waiver of the
30-day operative delay for this proposed
rule change is consistent with the
protection of investors and the public
interest. Accordingly, the Commission
hereby waives the 30-day operative
delay and designates the proposed rule
change operative upon filing.58
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 59 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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–
IEX–2024–16 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–IEX–2024–16. 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
58 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule change’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
59 15 U.S.C. 78s(b)(2)(B).
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Federal Register / Vol. 89, No. 183 / Friday, September 20, 2024 / Notices
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–IEX–2024–16 and
should be submitted on or before
October 11, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.60
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–21491 Filed 9–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–172, OMB Control No.
3235–0169]
ddrumheller on DSK120RN23PROD with NOTICES1
Submission for OMB Review;
Comment Request; Extension: Form
N–5
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for extension of the
previously approved collection of
information discussed below.
Form N–5 (17 CFR 239.24 and 274.5)
is the form used by small business
investment companies (‘‘SBICs’’) to
60 17
CFR 200.30–3(a)(12).
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16:44 Sep 19, 2024
Jkt 262001
register their securities under the
Securities Act of 1933 (15 U.S.C. 77a et
seq.) (‘‘Securities Act’’) and the
Investment Company Act of 1940 (15
U.S.C. 80a–1 et seq.) (‘‘Investment
Company Act’’). Form N–5 is the
registration statement form adopted by
the Commission for use by an SBIC that
has been licensed as such under the
Small Business Investment Act of 1958
or which has received the preliminary
approval of the Small Business
Administration (‘‘SBA’’) and has been
notified by the SBA that the company
may submit a license application Form
N–5 is an integrated registration form
and may be used as the registration
statement under both the Securities Act
and the Investment Company Act. The
purpose of Form N–5 is to meet the
filing and disclosure requirements of
both the Securities Act and Investment
Company Act, and to provide investors
with information sufficient to evaluate
an investment in an SBIC. The
information that is required to be filed
with the Commission permits
verification of compliance with
securities law requirements and assures
the public availability and
dissemination of the information.
The Commission did not receive any
filings on Form N–5 in the last three
years (or in the three years before that).
Nevertheless, for purposes of this PRA,
we conservatively estimate that at least
one Form N–5 will be filed in the next
three years, which translates to about
0.333 filings on Form N–5 per year. The
currently approved internal burden of
Form N–5 is 352 hours per response. We
continue to believe this estimate for
Form N–5’s internal hour burden is
appropriate. Therefore, the number of
currently approved aggregate burden
hours, when calculated using the
current estimate for number of filings, is
about 117 internal hours per year.
The currently approved external cost
burden of Form N–5 is $12,524 per
filing. The requested external cost
burden for filing one Form N–5 would
be $14,746 per year. This estimated
burden is based on the estimated wage
rate of $584/hour, for 25.25 hours, for
outside legal services to complete the
form and provide the required
hyperlinks.
Estimates of average burden hours
and costs are made solely for the
purposes of the Paperwork Reduction
Act, and are not derived from a
comprehensive or even representative
survey or study of the costs of
Commission rules and forms.
Compliance with the collection of
information requirements of Form N–5
is mandatory. Responses to the
collection of information will not be
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kept confidential. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice by October 21, 2024 to (i)
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov and (ii) Austin Gerig,
Director/Chief Data Officer, Securities
and Exchange Commission, c/o
Oluwaseun Ajayi, 100 F Street NE,
Washington, DC 20549, or by sending an
email to: PRA_Mailbox@sec.gov.
Dated: September 17, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–21596 Filed 9–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101034; File No. SR–
CboeEDGX–2024–058]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule Relating to Volume Tiers
September 16, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 3, 2024, Cboe EDGX
Exchange, Inc. (‘‘Exchange’’ or ‘‘EDGX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) proposes to
amend its Fee Schedule. The text of the
1 15
2 17
E:\FR\FM\20SEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
20SEN1
]]>Agencies
[Federal Register Volume 89, Number 183 (Friday, September 20, 2024)]
[Notices]
[Pages 77209-77214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-21491]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101025; File No. SR-IEX-2024-16]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Supplementary Material .16 to IEX Rule 5.110 (Supervision), So That IEX
Members Who Participate in the Recently Approved FINRA Pilot Program on
Remote Inspections Will Also Satisfy the Internal Inspection
Requirements Found in IEX's Rules
September 16, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on September 4, 2024, the Investors Exchange LLC (``IEX''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the
Commission a proposed rule change to adopt Supplementary Material .16
to IEX Rule 5.110 (Supervision), so that IEX Members \6\ who
participate in the recently-approved FINRA pilot program on remote
inspections (the ``Remote
[[Page 77210]]
Inspections Pilot Program'') \7\ will also satisfy the internal
inspection requirements found in IEX's rules.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ See IEX Rule 1.160(s).
\7\ See Securities Exchange Act Release No. 97398 (April 28,
2023), 88 FR 28620 (May 4, 2023) (``Remote Inspections Pilot Program
Proposal''); Securities Exchange Act Release No. 98982 (November 17,
2023), 88 FR 82464 (November 24, 2023) (``Remote Inspections Pilot
Program Approval Order'') (SR-FINRA-2023-007).
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The text of the proposed rule change is available at the Exchange's
website at www.iextrading.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 the
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
IEX proposes to adopt Supplementary Material .16 to IEX Rule 5.110,
which would provide that any IEX Member that participates in the FINRA
Remote Inspections Pilot Program,\8\ thereby satisfying the internal
inspections requirements in FINRA Rule 3110(c), would also satisfy the
equivalent internal inspections requirements in IEX Rule 5.110(c). This
proposed rule change would supplant Supplementary Material .15 to IEX
Rule 5.110, which allowed Members to fulfill any calendar year 2024
internal inspection obligations set forth in IEX Rule 5.110(c) by
conducting remote inspections of the applicable offices of supervisory
jurisdiction (``OSJs''),\9\ branch offices (both supervisory and non-
supervisory),\10\ and non-branch locations.\11\ This temporary relief,
which was analogous to relief that FINRA provided for, automatically
sunset on June 30, 2024.\12\ As described below, adding Proposed
Supplementary Material .16 to IEX Rule 5.110 would harmonize IEX's
internal inspections obligations for its Members with FINRA's
comparable obligations for its members, thereby avoiding confusion to
IEX Members with respect to the applicability of participation in the
FINRA Remote Inspections Pilot Program with respect to compliance with
IEX Rule 5.110.\13\ Additionally, because Proposed Supplementary
Material .16 to IEX Rule 5.110 incorporates by reference FINRA Rule
3110.18, this rule change enables IEX Rule 5.110 to continue to be
incorporated into the agreement between IEX and FINRA to allocate
regulatory responsibility for common rules (the ``17d-2
Agreement'').\14\
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\8\ See FINRA Rule 3110.18.
\9\ See IEX Rule 5.110(f)(1).
\10\ See IEX Rule 5.110(f)(2)(A).
\11\ See Supplementary Material .15 to IEX Rule 5.110
(``Temporary Relief to Allow Remote Inspections for Calendar Years
2021, 2022, 2023, and Through the Earlier of the Effective Date of
the Remote Inspections Pilot Program or June 30, 2024'').
\12\ See Id. The equivalent temporary relief offered by FINRA
also sunset on June 30, 2024. See FINRA Rule 3110.17
\13\ IEX notes that all IEX Members are currently FINRA members,
or in the process of becoming FINRA members.
\14\ See Securities Exchange Act Release No. 93324 (October 14,
2021), 86 FR 58110 (October 20, 2021) (File No. 4-700). The 17d-2
Agreement includes a certification by IEX that states that the
requirements contained in certain Exchange rules are identical to,
or substantially similar to, certain FINRA rules that have been
identified as comparable.
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Standards for Supervision of Remote Offices
The responsibility of firms to supervise their associated persons
is a critical component of broker-dealer regulation.\15\ Members must
supervise all of their associated persons, regardless of their
location, compensation or employment arrangement, or registration
status. IEX Rule 5.110, which is substantially identical to FINRA Rule
3110(c), requires any Member, regardless of size or type, to have a
supervisory system for the activities of its associated persons that is
reasonably designed to achieve compliance with the applicable
securities laws and regulations and IEX rules, and that sets forth the
minimum requirements for such supervisory system.\16\ The internal
inspection obligation under IEX Rule 5.110(c) and FINRA Rule 3110(c) is
one component of such system.
---------------------------------------------------------------------------
\15\ See generally SEC Division of Market Regulation, Staff
Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004)
(``SLB 17'') (SEC guidance on remote office supervision), https://www.sec.gov/interps/legal/mrslb17.htm; and Regulatory Notice 11-54
(November 2011) (``Notice 11-54'') (joint SEC and FINRA guidance on
effective policies and procedures for broker-dealer branch
inspections).
\16\ See IEX Rule 5.110(a)
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IEX Rule 5.110(c) sets forth three main requirements for
inspections. First, an inspection of an office or location must occur
on a designated frequency. The periodicity of the required inspection
varies depending on the classification of the location or the nature of
the activities that take place: OSJs and supervisory branch offices
must be inspected at least annually; \17\ non-supervisory branch
offices must be inspected at least every three years; \18\ and non-
branch locations must be inspected on a periodic schedule, presumed to
be at least every three years.\19\ Second, a Member must retain a
written record of the date upon which each review and inspection
occurred, reduce a location's inspection to a written report and keep
each inspection report on file either for a minimum of three years or,
if the location's inspection schedule is longer than three years, until
the next inspection report has been written.\20\ If applicable to the
location being inspected, the inspection report must include the
testing and verification of the Member's policies and procedures,
including supervisory policies and procedures, in specified areas.\21\
Third, to prevent compromising the effectiveness of inspections due to
conflicts of interest, the rule requires a Member to ensure that the
person conducting the inspection is not an associated person assigned
to the location or is not directly or indirectly supervised by, or
otherwise reporting to, an associated person assigned to that
location.\22\ All OSJs, branch offices, and
[[Page 77211]]
non-branch locations are subject to IEX Rule 5.110(c).
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\17\ See IEX Rule 5.110(c)(1)(A).
\18\ See IEX Rule 5.110(c)(1)(B).
\19\ See IEX Rule 5.110(c)(1)(C) and Supplementary Material .13
to IEX Rule 5.110 (``General Presumption of Three-Year Limit for
Periodic Inspection Schedules'').
\20\ See IEX Rule 5.110(c)(2).
\21\ See IEX Rule 5.110(c)(2)(A) (providing that the inspection
report must include, without limitation, the testing and
verification of the Member's policies and procedures, including
supervisory policies and procedures for: (1) safeguarding of
customer funds and securities; (2) maintaining books and records;
(3) supervision of supervisory personnel; (4) transmittals of funds
from customers to third party accounts, from customer accounts to
outside entities, from customer accounts to locations other than a
customer's primary residence, and between customers and registered
representatives, including the hand delivery of checks; and (5)
changes of customer account information, including address and
investment objectives changes, and validation of such changes).
\22\ IEX Rule 5.110(c)(3) provides a limited exception from this
requirement if a firm determines compliance is not possible either
because of the firm's size or its business model. Supplementary
Material .14 to IEX Rule 5.110 (Exception to Persons Prohibited from
Conducting Inspections) reflects IEX's expectation that a firm
generally will rely on the exception in instances where the firm has
only one office or 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. However, these situations are non-
exclusive, and a firm may still rely on the exception in other
instances where it cannot comply because of its size or business
model, provided the firm complies with the documentation
requirements under the rule.
---------------------------------------------------------------------------
Further, Supplementary Material .12 to IEX Rule 5.110 sets out
factors that constitute a reasonable review. This provision emphasizes
establishing reasonable supervisory procedures and conducting reviews
of locations, taking into consideration, among other things, the
Member's size, organizational structure, scope of business activities,
number and location of the Member's offices, the nature and complexity
of the products and services offered by the Member, 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'').\23\ The provision further states that the procedures
established and reviews conducted must provide that the quality of
supervision at remote (i.e., geographically dispersed) locations is
sufficient to ensure compliance with applicable securities laws and
regulations and with IEX rules, and that Members must be especially
diligent with respect to a non-branch location where a registered
representative engages in securities activities. This provision
incorporates guidance FINRA has previously issued about supervising
associated persons working in geographically dispersed offices.\24\
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\23\ Such red flags may include: customer complaints; a large
number of elderly customers; a concentration in highly illiquid or
risky investments; an unexplained increase or change in the types of
investments or trading concentration that a representative is
recommending or trading; an unexpected improvement in a
representative's production, lifestyle, or wealth; questionable or
frequent transfers of cash or securities between customer or third
party accounts, or to or from the representative; a representative
that serves as a power of attorney, trustee or in a similar capacity
for a customer or has discretionary control over a customer's
account(s); a representative with disciplinary records; customer
investments in one or a few securities or class of securities that
is inconsistent with firm policies related to such investments;
churning; trading that is inconsistent with customer objectives;
numerous trade corrections, extensions, liquidations; or significant
switching activity of mutual funds or variable products held for
short time periods. See SLB 17, supra note 15.
\24\ See NASD [FINRA] Notice to Members 98-38 (May 1998) and 99-
45 (June 1999).
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Notably, all of the above requirements about supervision and
inspections of OSJs, branch offices, and non-branch locations reflected
a business environment in which Members conducted in-person inspections
of all of their offices.\25\
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\25\ See SLB 17 and Notice 11-54, supra note 15.
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FINRA's Recent Attempts To Change the In-Person Inspection Requirements
of OSJs, Branch Offices, and Non-Branch Locations
In the Remote Inspections Pilot Program Proposal, FINRA described
its efforts during the past several years to offer its members the
option of remotely conducting internal inspections of their OSJs,
branch offices, and non-branch locations.\26\ As stated therein, FINRA
believed that as more recordkeeping moved from paper to electronic
records, and as more meetings were conducted virtually using platforms
such as Zoom and WebEx, the burden on FINRA members of conducting in-
person inspections for all their remote office locations became harder
to justify.\27\
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\26\ See Remote Inspections Pilot Program Proposal, supra note
7.
\27\ See Id.
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Thus, when the COVID-19 pandemic required many securities industry
professionals to work from home, FINRA implemented several forms of
regulatory relief to its members, including introducing FINRA Rule
3110.17, which IEX also introduced as Supplementary Material .15 to IEX
Rule 5.110, to permit remote internal inspections of their OSJs, branch
offices, and non-branch locations.
The pandemic accelerated the industry's adoption of a broad remote
work environment and IEX recognizes that the pandemic has profoundly
changed attitudes on where work can occur. As a result of this change
many firms have adopted, in varying scale, hybrid work models involving
personnel who are working at least part time from alternative work
locations (e.g., private residences). As part of an effort to modernize
its rules to reflect evolving technologies and business models, in
April 2023, FINRA filed the Remote Inspections Pilot Program Proposal
with the Commission to establish a voluntary, three-year remote
inspections pilot program that would allow eligible firms to conduct
inspections of all or some offices or locations, remotely, subject to
the specified terms therein.\28\ The SEC approved the FINRA Remote
Inspection Pilot Program Proposal in November 2023,\29\ and FINRA
commenced the pilot program on July 1, 2024.\30\
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\28\ See Id.
\29\ See Remote Inspections Pilot Program Approval Order, supra
note 7.
\30\ See FINRA Regulatory Notice 24-02.
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FINRA's Remote Inspections Pilot Program
FINRA's Remote Inspection Pilot Program builds on the terms of the
temporary relief in FINRA Rule 3110.17, while requiring members to
provide even more information about their remote inspections to allow
FINRA to assess the overall impact and effectiveness of remote
inspections.\31\ The pilot program is designed to provide broader
systemized information to supplement the information obtained through
the FINRA examination process in an environment where offices and
locations were closed. The information firms would be required to
produce as a pilot program participant will help FINRA more accurately
assess the overall impact and effectiveness of remote inspections.\32\
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\31\ See Remote Inspections Pilot Program Proposal, supra note
7.
\32\ See Id.
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FINRA's Remote Inspection Pilot Program includes, among other
things, the following requirements for participating firms:
Risk Assessment. Prior to electing a remote inspection
for an office or location, participating firms must develop a
reasonable risk-based approach to using remote inspections and
conduct and document a risk assessment for that office or
location.\33\
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\33\ See FINRA Rule 3110.18(b).
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Written Supervisory Procedures for Remote Inspections.
Participating firms must establish, maintain, and enforce written
procedures that are reasonably designed for conducting remote
inspections and reasonably designed to achieve compliance with
applicable securities laws and regulations.\34\
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\34\ See FINRA Rule 3110.18(c).
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Effective Supervisory System. Participating firms must
have an effective supervisory system for remote inspections that
will be held to the same standards of review (set forth under FINRA
Rule 3110.12). Where a member's remote inspection of an office or
location identifies any ``red flags,'' the member may need to impose
additional supervisory procedures for that office or location or may
need to provide for more frequent monitoring of that office or
location, including potentially a subsequent on-site visit on an
announced or unannounced basis.\35\
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\35\ See FINRA Rule 3110.18(d).
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Documentation Requirement. Participating firms must
maintain and preserve a centralized record for each of the Pilot
Years specified in the pilot program that separately identifies: (1)
all offices or locations that were inspected remotely; and (2) any
offices or locations for which the member determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in FINRA Rule 3110.18(d). A member's documentation of the
results of a remote inspection for an office or location must
identify any additional supervisory procedures or more frequent
monitoring for that office or location that were imposed as a result
of the remote inspection, including whether an on-site
[[Page 77212]]
inspection was conducted at such office or location.\36\
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\36\ See FINRA Rule 3110.18(e).
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Firm Level Requirements. Participating firms must meet
certain firm-level eligibility requirements to participate in the
program set forth in FINRA Rule 3110.18(f)(1). For example, a firm
cannot participate if it is designated as: (i) Restricted Firm under
FINRA Rule 4111 or (ii) a Taping Firm under FINRA Rule 3170.
Additionally, firms with suspended or new (effective less than 12
months) FINRA memberships or that have been found by the SEC or
FINRA to have violated FINRA Rule 3110(c) are ineligible to
participate. Participating firms must also comply with firm-level
conditions to participate in the program. For example, a firm must
have a recordkeeping system that keeps records current and promptly
accessible, and that does not maintain physical or electronic
records at the location subject to remote inspection. Additionally,
participating firms must have firm-wide tools such as electronic
recordkeeping systems, system security tools such as secure network
connections and effective cybersecurity protocols, and tools
specifically applied to each office or location based on the
activities of associated persons, products offered, or any
restrictions on the activity of the office or location.\37\
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\37\ See FINRA Rule 3110.18(f).
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Location Level Requirements. Participating firms must
exclude from participating in the program any locations that do not
meet the location level eligibility criteria set forth in FINRA Rule
3110.18(g)(1) (e.g., the location includes: (i) persons subject to a
disciplinary action, a statutory disqualification, or a mandated
heightened supervisory plan; (ii) persons engaged in proprietary
trading; or (iii) the handling of customer funds or securities).
Additionally, eligible locations must use the firm's electronic
communication system and may not maintain any original copies of
books or records at the location.\38\
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\38\ See FINRA Rule 3110.18(g).
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Data and Information Collection Requirement.
Participating firms must collect and on a quarterly basis produce to
FINRA data consisting of separate counts for OSJs, supervisory
branch offices, non-supervisory branch offices, and non-branch
locations. This data must include information about the number of
remote inspections conducted and any significant findings. Firms
shall establish, maintain, and enforce written policies and
procedures that are reasonably designed to comply with the data
collection and transmission requirements.\39\
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\39\ See FINRA Rule 3110.18(h).
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Election to Participate in Remote Inspections Pilot
Program. Participating firms must opt-in to the pilot program in a
manner specified by FINRA.\40\
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\40\ See FINRA Rule 3110.18(i).
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Failure to Satisfy Conditions and Determination of
Ineligibility. Participating firms that fail to satisfy terms of the
Remote Inspections Pilot Program will be ineligible to participate
in the pilot program and return to conducting only on-site
inspections.\41\ FINRA may also make a determination to revoke a
member's eligibility to participate if FINRA finds it to be in the
public interest.\42\
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\41\ See FINRA Rule 3110.18(j).
\42\ See FINRA Rule 3110.18(k).
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Definitions of Pilot Year periods. Includes
clarifications that Pilot Year 1 is the second half of 2024, and
Pilot Year 4 is the first half of 2027.\43\
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\43\ See FINRA Rule 3110.18(l).
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Proposal
IEX proposes to adopt Supplementary Material .16 to IEX Rule 5.110.
This proposed new supplementary material reads as follows:
Members that are obligated to conduct an inspection of an office
of supervisory jurisdiction, branch office or non-branch location
pursuant to, as applicable, paragraphs (c)(1)(A), (B) and (C) under
IEX Rule 5.110 may satisfy such obligation by participating in the
FINRA Remote Inspections Pilot Program, as set forth in FINRA Rule
3110.18. The FINRA Remote Inspections Pilot Program shall cover
required inspections of such offices or locations for a period of
three years starting on September 4, 2024 (``pilot period''), and
such pilot period shall expire on July 1, 2027. If the pilot period
is not extended, this Supplementary Material will automatically
sunset on July 1, 2027. Members will not be able to participate in
the FINRA Remote Inspections Pilot Program after such date.\44\
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\44\ Proposed Supplementary Material .16 to IEX Rule 5.110.
As stated in proposed new Supplementary Material .16 to IEX Rule
5.110, any IEX Member that participates in the FINRA Remote Inspections
Pilot Program, thereby satisfying the internal inspections requirements
in FINRA Rule 3110(c), will satisfy the equivalent internal inspections
requirements in IEX Rule 5.110(c).
IEX is not proposing to add the entire FINRA Remote Inspections
Pilot Program to its rules, because it would be unnecessarily
duplicative and burdensome for IEX Members to submit the data and
information required as part of the Remote Inspections Pilot Program to
both IEX and FINRA.\45\ Based upon conversations with FINRA staff, IEX
understands that adopting Proposed Supplementary Material .16 to IEX
Rule 5.110 would update IEX Rule 5.110 so that it remains substantially
similar to FINRA Rule 3110, such that they remain common rules subject
to the 17d-2 Agreement.\46\ As a result, regulatory responsibility for
IEX Rule 5.110 would continue to be allocated to FINRA.
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\45\ Pursuant to this proposed rule change, IEX Members will be
required to collect and on a quarterly basis produce to FINRA data
regarding its participation in the Remote Inspections Pilot Program.
See FINRA Rule 3110.18(h). But Members will not be required to
produce that information directly to IEX.
\46\ See supra note 14.
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As noted above, all IEX Members were temporarily eligible to
conduct remote office inspections until June 30, 2024. This proposed
rule change allows those Members who have enrolled in FINRA's Remote
Inspections Pilot Program to continue to use remote inspections as part
of an effective supervisory system.\47\ IEX believes this Remote
Inspections Pilot Program is a reasonable alternative for firms to
fulfill their IEX Rule 5.110(c) obligations while permitting FINRA to
collect data as the regulatory authority in this area under the 17d-2
Agreement to assess the efficacy and long-term viability of a permanent
remote office inspections program. IEX emphasizes that the inspection
requirement is one aspect of a firm's overall supervisory system, and
that the inspection, whether done in accordance with the FINRA Remote
Inspections Pilot Program, or on-site, would be held to the existing
standards of review under Supplementary Material .12 to IEX Rule 5.110
(Standards for Reasonable Review).\48\
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\47\ IEX notes that any inspections conducted by its Members in
the brief period between July 1, 2024 and the effective date of this
filing will not satisfy IEX Rule 5.110(c), but believes this will
not be an issue for its Members because the remote inspections
process outlined in the pilot program is an ongoing process that
cannot be completed in the few days between the start of the FINRA's
pilot program and the effectiveness of this rule filing.
\48\ Those standards provide, in part, that based on the factors
set forth under that supplementary material, Members ``may need to
provide for more frequent review of certain locations.''
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2. Statutory Basis
IEX believes that the proposed rule change is consistent with the
provisions of Section 6(b) \49\ of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act \50\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The Exchange's rule proposal is intended to harmonize
IEX's supervision rules, specifically with respect to the requirements
for inspections of Members' branch offices and other locations, with
those of FINRA, on which they are based. As discussed in the Purpose
section, because Proposed Supplementary Material .16 to IEX Rule 5.110
incorporates by reference FINRA Rule 3110.18, this rule change enables
[[Page 77213]]
IEX Rule 5.110 to continue to be incorporated into the 17d-2 Agreement,
resulting in less burdensome and more efficient regulatory compliance.
Specifically, the proposed change will conform the Exchange's rules to
changes made to corresponding FINRA rules insofar as a Member's
compliance with FINRA Rule 3110.18 shall mean the Member is also in
compliance with Supplementary Material .16 to IEX Rule 5.110, thus
promoting the application of consistent regulatory standards with
respect to rules that FINRA enforces pursuant to the 17d-2 Agreement.
As such, the proposed rule change would foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national market system in accordance with
Section 6(b)(5) of the Act.\51\
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\49\ 15 U.S.C. 78f.
\50\ 15 U.S.C. 78f(b)(5).
\51\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is not
designed to address any competitive issue but rather to provide greater
harmonization among IEX and FINRA rules of similar purpose, resulting
in less burdensome and more efficient regulatory compliance for common
members and facilitating FINRA's performance of its regulatory
performance on the pending 17d-2 Agreement.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) \52\ of the Act and Rule 19b-4(f)(6) \53\
thereunder. 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 for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder. In addition, the Exchange provided the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing.\54\
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\52\ 15 U.S.C. 78s(b)(3)(A).
\53\ 17 CFR 240.19b-4(f)(6).
\54\ 17 CFR 240.19b-4(f)(6)(iii).
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A proposed rule change filed under Rule 19b-4(f)(6) \55\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\56\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay to permit the
Exchange to harmonize its rules with FINRA, as described herein, upon
effectiveness of the proposed rule filing.
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\55\ 17 CFR 240.19b-4(f)(6).
\56\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange stated that this proposed rule change is non-
controversial because it does not present any new or novel issues. In
particular, IEX is harmonizing its supervision rules with those of
FINRA, on which they are based and which have been previously approved
by the Commission. By conforming the Exchange's rules to FINRA's, the
proposed rule change would promote the application of consistent
regulatory standards with respect to rules that FINRA enforces pursuant
to the 17d-2 Agreement. As such, the Exchange believes that the
proposed rule change would foster cooperation and coordination with
persons engaged in facilitating transactions in securities and would
remove impediments to and perfect the mechanism of a free and open
market and a national market system in accordance with Exchange Act
Section 6(b)(5).
In addition, the Exchange stated that since the FINRA Remote
Inspections Pilot Program commenced on July 1, 2024, waiving the 30-day
operative delay would provide assurances to IEX members who enroll in
the Remote Inspections Pilot Program that they can plan the remainder
of their 2024 inspection program under a harmonized rule set, with just
a short window of time in which the FINRA pilot program was not part of
IEX's rules,\57\ while at the same time helping ensure that IEX members
continue to perform their supervisory obligations. Further, the
Exchange stated that waiver of the operative delay should reduce any
potential confusion that may otherwise occur on the part of IEX members
as to the applicable rules governing inspections of branch offices and
other locations. For these reasons, the Commission believes that waiver
of the 30-day operative delay for this proposed rule change is
consistent with the protection of investors and the public interest.
Accordingly, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change operative upon filing.\58\
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\57\ See supra note 47.
\58\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \59\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\59\ 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-IEX-2024-16 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-IEX-2024-16. 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
[[Page 77214]]
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. 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-IEX-2024-16 and should be submitted on
or before October 11, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-21491 Filed 9-19-24; 8:45 am]
BILLING CODE 8011-01-P
