82464 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

277See 15 U.S.C. 78s(b)(2)(C)(iii). 

278See supra notes 258 through 259 and 

accompanying text. 

279 15 U.S.C. 78s(b)(2). 

280 15 U.S.C. 78o–3(b)(6). 

281 15 U.S.C. 78s(b)(2). 

282 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3A ‘‘branch office’’ is defined as: (1) ‘‘any 

location where one or more associated persons of 

a member 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’’; or (2) ‘‘any 

location that is responsible for supervising the 

activities of persons associated with the member at 

one or more non-branch locations of the member.’’ 

FINRA Rule 3110(f)(2)(A) and (B). A branch office 

is either ‘‘supervisory’’ (i.e., it supervises one or 

more non-branch locations) or ‘‘non-supervisory’’ 

(i.e., it does not supervise one or more non-branch 

locations). See FINRA Rule 3110(c)(1). 

4An OSJ is any office of a member firm at which 

any one or more of the following functions take 

place: (1) order execution or market making; (2) 

structuring of public offerings or private 

placements; (3) maintaining custody of customers’ 

funds or securities; (4) final acceptance (approval) 

of new accounts on behalf of the member firm; (5) 

review and endorsement of customer orders, 

pursuant to FINRA Rule 3110(b)(2); (6) final 

approval of retail communications for use by 

persons associated with the member firm, pursuant 

to FINRA Rule 2210(b)(1), except for an office that 

solely conducts final approval of research reports; 

or (7) having responsibility for supervising the 

activities of persons associated with the member 

firm at one or more other branch offices of the 

member firm. See FINRA Rule 3110(f)(1). 

5Seven types of locations—often referred to as 

‘‘unregistered offices’’ or ‘‘non-branch locations’’— 

are excluded from the definition of ‘‘branch office’’: 

(1) 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; (2) any 

location that is the associated person’s primary 

residence, subject to certain conditions; (3) any 

location, other than a primary residence, that is 

used for securities business for less than 30 

business days in any one calendar year, subject to 

certain conditions; (4) 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; (5) 

any location that is used primarily to engage in nonsecurities 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); (6) the ‘‘floor’’ of a registered 

national securities exchange where a member firm 

conducts a direct access business with public 

customers; and (7) a temporary location established 

in response to the implementation of a business 

continuity plan. See FINRA Rule 3110(f)(2)(A)(i)– 

(vii). 6Unless otherwise specified, the Commission 

uses the term ‘‘location’’ in this Order to refer to 

any location where a member firm does business, 

such as an OSJ, supervisory branch office, nonsupervisory branch office, or non-branch location, 

as applicable. 

7See proposed Rule 3110.18. 

8Exchange Act Release No. 97398 (Apr. 28, 2023), 

88 FR 28620 (May 4, 2023) (File No. SR–FINRA– 

2023–007) (‘‘Notice’’). 

9The comment letters are available at https://

www.sec.gov/comments/sr-finra-2023-007/ 

srfinra2023007.htm. 

10See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

should be submitted on or before 

December 15, 2023. 

V. Accelerated Approval of Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 and 2 

The Commission finds good cause to 

approve the proposed rule change, as 

modified by Amendment Nos. 1 and 2, 

prior to the thirtieth day after the date 

of publication of notice of the filing of 

Amendment No. 2 in the Federal 

Register.277 In Amendment No. 2, 

FINRA modified the proposed rule 

change—in direct response to comments 

received—to clarify the substantive 

intent of proposed Rule 3110.19(e)(5). 

FINRA did not propose to change any 

substantive obligation of the proposed 

rule change. To reduce ambiguity 

regarding its scope, FINRA instead 

proposed to reorganize a single sentence 

describing a single factor in the 

mandatory risk assessment.278 The basis 

for this amendment is the same as the 

basis for the original proposed rule 

change, as modified by Amendment No. 

1, which the Commission previously 

noticed for public comment. 

After consideration of the comments 

FINRA received on the proposed rule 

change, the Commission concludes that 

Amendment No. 2 represents a 

reasonable extension of, and is 

substantially similar to, the language 

originally proposed for proposed Rule 

3110.19(e). The Commission also 

concludes that Amendment No. 2 

responds to comments received, adds 

clarity to the proposed rule change, and 

does not raise any novel regulatory 

concerns. Accordingly, the Commission 

finds good cause, pursuant to Section 

19(b)(2) of the Act,279 to approve the 

proposed rule change, as modified by 

Amendment Nos. 1 and 2, on an 

accelerated basis. 

VI. Conclusion 

For the reasons set forth above, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

Nos. 1 and 2, is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and, in general, 

protect investors and the public 

interest.280

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 281

that the proposed rule change (SR– 

FINRA–2023–006), as amended by 

Amendment Nos. 1 and 2, be, and 

hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.282

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25880 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–98982; File No. SR–FINRA– 

2023–007] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change To Adopt 

Supplementary Material .18 (Remote 

Inspections Pilot Program) Under 

FINRA Rule 3110 (Supervision) 

November 17, 2023. 

I. Introduction 

On April 14, 2023, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change SR–FINRA– 

2023–007 pursuant to Section 19(b)(1) 

of the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 1 and Rule 19b–4 2

thereunder, to adopt a voluntary, threeyear remote inspections pilot program to 

allow eligible member firms to elect to 

fulfill their obligation under paragraph 

(c) (Internal Inspections) of FINRA Rule 

3110 (Supervision) by conducting 

inspections of eligible branch offices,3

offices of supervisory jurisdiction 

(‘‘OSJ’’),4 and non-branch locations 5

remotely without an on-site visit to such 

locations,6 subject to specified 

safeguards and limitations (the 

‘‘Pilot’’).7 The proposed rule change was 

published for public comment in the 

Federal Register on May 4, 2023.8 The 

Commission received thirteen comment 

letters in response to the Notice.9 On 

June 7, 2023, FINRA consented to an 

extension of the time period in which 

the Commission must approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change to August 2, 2023.10 On 


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Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 82465 

Daniel Fisher, Branch Chief, Division of Trading 

and Markets, Commission, dated June 7, 2023, 

https://www.finra.org/sites/default/files/2023-06/srfinra-2023-007-extension-no-1.pdf. 

11See Amendment No. 1, https://www.finra.org/ 

sites/default/files/2023-08/SR-FINRA-2023-007- 

Amendment-1.pdf. 

12Exchange Act Release No. 98046 (Aug. 2, 2023), 

88 FR 53569 (Aug. 8, 2023) (File No. SR–FINRA– 

2023–007). 

13See supra note 9. 

14See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

Vanessa Countryman, Secretary, Commission, dated 

August 29, 2023, https://www.sec.gov/comments/srfinra-2023-007/srfinra2023007-252179-579662.pdf 

(‘‘FINRA Response to Comments I’’). 

15See letter from Sarah Kwak, Associate General 

Counsel, Office of General Counsel, FINRA, to 

Daniel Fisher, Branch Chief, Division of Trading 

and Markets, Commission, dated September 22, 

2023, https://www.finra.org/sites/default/files/2023- 

09/sr-finra-2023-007-ext2.pdf. 

16See letter from Kosha Dalal, Vice President and 

Associate General Counsel, Office of General 

Counsel, FINRA, to Vanessa Countryman, Secretary, 

Commission, dated October 25, 2023, https://

www.sec.gov/comments/sr-finra-2023-007/ 

srfinra2023007-281119-686483.pdf (‘‘FINRA 

Response to Comments II’’). 

17See Notice at 28620. 

18See Notice at 28620. 

19See FINRA Rule 3110(a). 

20See FINRA Rule 3110(c)(1). 

21See FINRA Rule 3110(c)(1)(A). 

22See FINRA Rule 3110(c)(1)(B). 

23See FINRA Rules 3110(c)(1)(C) and 3110.13 

(General Presumption of Three-Year Limit for 

Periodic Inspection Schedules). On November 17, 

2023, the Commission issued an approval order for 

File Number FINRA–2023–006, which adopted new 

Supplementary Material .19 (Residential 

Supervisory Location) under FINRA Rule 3110 

(Supervision). FINRA Rule 3110.19 treats a private 

residence at which an associated person engages in 

certain supervisory activities as a non-branch 

location, subjecting it to inspections on a regular 

periodic schedule (presumed to be at least every 

three years) instead of the annual schedule required 

for OSJs and supervisory branch offices. 

24See FINRA Regulatory Notice 17–38 (Nov. 

2017), https://www.finra.org/rules-guidance/ 

notices/17-38. 

25See FINRA Rule 3110(c)(1). 

26See FINRA Rule 3110(c)(2). 

27 Id. 

28See FINRA Rule 3110(c)(2)(A) (providing that 

the inspection report must include, without 

limitation, the testing and verification of the 

member firm’s policies and procedures, including 

supervisory policies and procedures for: (1) 

safeguarding customer funds and securities; (2) 

maintaining books and records; (3) supervising 

supervisory personnel; (4) transmitting 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) changing customer 

account information, including address and 

investment objectives changes and validation of 

such changes). 

29FINRA Rule 3110(c)(3)(A). 

August 1, 2023, FINRA filed an 

amendment to modify the proposed rule 

change (‘‘Amendment No. 1’’).11 On 

August 2, 2023, the Commission 

published a notice of filing of 

Amendment No. 1 and an order 

instituting proceedings to determine 

whether to approve or disapprove the 

proposed rule change, as modified by 

Amendment No. 1 (hereinafter, the 

‘‘proposed rule change’’ unless 

otherwise specified).12 The Commission 

received ten comment letters in 

response to the notice of Amendment 

No. 1 and order instituting 

proceedings.13 On August 29, 2023, 

FINRA responded to the comment 

letters received in response to the 

Notice.14 On September 22, 2023, 

FINRA consented to an extension of the 

time period in which the Commission 

must approve or disapprove the 

proposed rule change to December 30, 

2023.15 On October 25, 2023, FINRA 

responded to comments received in 

response to the notice of Amendment 

No. 1 and order instituting 

proceedings.16

This Order approves the proposed 

rule change. 

A. Description of the Proposed Rule 

Change 

FINRA stated that technological 

advancements and an emerging remote 

workplace prompted FINRA to further 

study the effectiveness of remote 

inspections as part of a reasonably 

designed supervisory system.17 As a 

result of this evaluation, FINRA 

determined the Pilot would provide it 

‘‘the opportunity to gauge the 

effectiveness of remote inspections as 

part of a modernized, reasonably 

designed supervisory system that 

reflects the current work environment 

and availability of technologies that did 

not exist when the on-site inspection 

originally was conceived.’’ 18 After 

describing the current regulatory 

framework and FINRA’s stated reasons 

for proposing the Pilot, the Commission 

describes the proposed rule change. 

B. Background 

1. FINRA Rule 3110 (Supervision) 

FINRA Rule 3110(a) (Supervisory 

System) requires a member 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 applicable FINRA rules 

(hereinafter, a ‘‘reasonably designed 

supervisory system’’).19 As part of a 

reasonably designed supervisory 

system, FINRA Rule 3110(c) (Internal 

Inspections) requires a member firm to 

conduct a review, at least annually, of 

the businesses in which it engages in a 

manner reasonably designed to assist 

the member firm in detecting and 

preventing violations of, and achieving 

compliance with, applicable securities 

laws and regulations, and with 

applicable FINRA rules. FINRA Rule 

3110(c) also requires a review of the 

activities of each of the member firm’s 

locations, including a periodic 

examination of customer accounts to 

detect and prevent irregularities or 

abuses, and each member firm also must 

retain a written record of the date upon 

which each review and inspection is 

conducted.20

FINRA Rule 3110(c) sets forth three 

main components for conducting 

internal inspections. First, a member 

firm must conduct an inspection of each 

location on a designated frequency. The 

designated frequency varies depending 

on the classification of the location and 

the nature of the securities activities for 

which each location is responsible: OSJs 

and supervisory branch offices must be 

inspected at least annually; 21 nonsupervisory branch offices must be 

inspected at least every three years; 22

and non-branch locations must be 

inspected on a periodic schedule, 

presumed to be at least every three 

years.23 FINRA has interpreted the rule 

to require that inspections take place 

on-site, irrespective of the type of 

office.24

Second, a member firm must make 

and retain a written record of each 

inspection. Specifically, a member firm 

must retain a written record of the date 

upon which each review and inspection 

occurred; 25 reduce each location’s 

inspection to a written report; 26 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, at least until the 

next inspection report has been 

written.27 If applicable to the location 

being inspected, the inspection report 

must include the testing and verification 

of the member firm’s policies and 

procedures, including supervisory 

policies and procedures, in specified 

areas.28

Third, a member firm must address 

potential conflicts of interest related to 

inspections of its locations. For 

example, a member firm must: (1) have 

procedures reasonably designed to 

prevent the effectiveness of the 

inspections from being compromised 

due to the conflicts of interest that may 

be present with respect to the 

location; 29 and (2) 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, 


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30FINRA Rule 3110(c)(3)(B). FINRA Rule 

3110(c)(3)(C) provides a limited exception from this 

requirement if a member firm determines 

compliance is not possible either because of its size 

or its business model. FINRA Rule 3110.14 

(Exception to Persons Prohibited from Conducting 

Inspections) reflects FINRA’s expectation that a 

member firm generally will rely on the exception 

in instances where it has only one location or has 

a business model where small or single-person 

locations report directly to an OSJ manager who is 

also considered the location’s branch office 

manager. However, these situations are nonexclusive, and a member firm may still rely on the 

exception in other instances where it cannot 

comply because of its size or business model, 

provided it complies with the documentation 

requirements under the rule. See Notice at 28622 

n.22. 

31Red flags that suggest the existence or 

occurrence of violations, prompting an 

unannounced visit, 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); representatives with 

disciplinary records; customer investments in one 

or a few securities or class of securities that is 

inconsistent with member 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 

Notice at 28622 n.23 (citing SEC Division of Market 

Regulation, Staff Legal Bulletin No. 17: Remote 

Office Supervision (Mar. 19, 2004) (‘‘SLB 17’’), 

https://www.sec.gov/interps/legal/mrslb17.htm); see 

also NASD Notice to Members 98–38 (May 1998) 

(‘‘Notice 98–38’’) and NASD Notice to Members 99– 

45 (Jun. 1999) (‘‘Notice 99–45’’). 

32See Notice at 28625. 

33 Id. 

34 Id. FINRA stated that its overall examination 

findings in recent years across all member firm 

examinations conducted during the period in which 

firms were conducting fully remote inspections or 

operating in a fully remote or hybrid work 

environment have remained within the bounds of 

general norms. See id. 

35See Exchange Act Release No. 98560 (Sept. 27, 

2023), 88 FR 68258 (Oct. 3, 2023) (Notice of Filing 

and Immediate Effectiveness of File No. SR– 

FINRA–2023–012) (‘‘2024 Extension’’); see also 

Exchange Act Release No. 96241 (Nov. 4, 2022), 87 

FR 67969 (Nov. 10, 2022) (Notice of Filing and 

Immediate Effectiveness of File No. SR–FINRA– 

2022–030) (extending the relief through December 

31, 2023); Exchange Act Release No. 94018 (Jan. 20, 

2022), 87 FR 4072 (Jan. 26, 2022) (Notice of Filing 

and Immediate Effectiveness of File No. SR– 

FINRA–2022–001) (extending the relief through 

December 31, 2022); Exchange Act Release No. 

93002 (Sept. 15, 2021), 86 FR 52508 (Sept. 21, 2021) 

(Notice of Filing and Immediate Effectiveness of 

File No. SR–FINRA–2021–023) (extending the relief 

through June 30, 2022). 

36See Notice at 28622. 

37 Id. at 28623. 

38See id. FINRA stated that it observed member 

firms making broad use of technology to supervise 

the activities of their associated persons remotely 

to: identify undisclosed private securities 

transactions and outside business activities; 

identify problematic electronic communications; 

surveil trades and movements of customer assets; 

conduct interviews with supervisors and other 

associated persons assigned to the office or location; 

take and record online office tours; and review 

associated persons’ computers in real-time using 

tools such as remote desktop software. Id. at 28625. 

39See id. at 28624. 

40 Id. FINRA stated that the proposed rule change 

may also support the competitiveness of the brokerdealer industry for individuals who seek 

professional positions in compliance, as ‘‘[t]he 

expectation of workplace flexibility and remote 

work by such individuals may lead them away from 

the broker-dealer industry if other segments of 

financial services or professional occupations offer 

more flexible workforce arrangements, with 

regulatory frameworks that offer more discretion in 

how the supervision is conducted.’’ See id. at 

28637. 

41See id. at 28636–37. 

42See id. at 28637. 

43See id. at 28621. 

an associated person assigned to that 

location.30

FINRA Rule 3110.12 describes the 

components of a reasonable review. In 

particular, the rule requires a member 

firm to establish and maintain 

supervisory procedures that take into 

consideration, among other things, the 

member firm’s size, organizational 

structure, scope of business activities, 

number and location of the member 

firm’s offices, the nature and complexity 

of the products and services offered by 

the member 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’’).31

2. FINRA’s Stated Reasons for the 

Proposed Rule Change 

FINRA has identified, among others, 

three factors supporting consideration of 

this Pilot. First, in response to the 

COVID pandemic, FINRA adopted Rule 

3110.17 to provide member firms the 

option, subject to specified conditions, 

to complete remotely their calendar year 

inspection obligations without an onsite visit to their locations.32 Under 

FINRA Rule 3110.17, member firms 

generally have been performing remote 

inspections to satisfy their inspection 

obligations since 2021.33 FINRA stated 

that during this period, the variance 

between member firms’ rates of 

inspection findings through an on-site 

process and findings through a remote 

process were not material.34 This relief 

was extended on several occasions, and 

is currently scheduled to last until the 

earlier of June 30, 2024, or the effective 

date of the Pilot.35

Second, FINRA stated that 

‘‘developments in technology have 

enhanced firms’ overall and ongoing 

supervision and monitoring of the 

activities occurring at branch offices and 

non-branch locations’’ such that an onsite visit may not be required as part of 

every inspection.36 Specifically, 

recordkeeping, correspondence, opening 

customer accounts, placing trades, and 

transmitting customer funds and 

securities are increasingly done 

electronically.37 As such, a large portion 

of inspection work can be conducted 

electronically, prior to any on-site visit 

to the location, and electronic reviews 

of many locations have become one 

component of a member firm’s overall 

supervisory system of associated 

persons and locations.38

Third, FINRA stated that, in general, 

the U.S. workforce has demanded 

greater workplace flexibility and the 

securities industry is subject to the same 

national pressures as it aims to recruit 

and retain diverse, talented, and 

qualified employees.39 For example, 

FINRA stated that member firms have 

conveyed that the flexibility of hybrid 

work has made a positive impact in 

attracting more diverse talent and 

retaining existing talent.40 However, 

retaining the hybrid workplace model 

means that more locations are subject to 

inspections and, but for this Pilot, those 

locations would have to be physically 

inspected. According to FINRA, ‘‘a 

system of risk-based on-site and remote 

inspections will allow firms to more 

efficiently deploy compliance resources 

and to use an on-site component only 

when appropriate.’’ 41

With the confluence of advances in 

compliance technology and the shift to 

a remote or hybrid work environment 

made more pronounced by the 

pandemic, FINRA stated that the 

optimal use of on-site inspections 

deserves further consideration.42

C. The Proposed Rule Change 

As stated above, FINRA Rule 

3110(c)(1) currently provides that an 

inspection of a location must occur on 

a designated frequency that varies 

depending on the classification of the 

location as an OSJ, branch office, or 

non-branch location.43 FINRA is 

proposing to amend FINRA Rule 3110 to 

adopt a voluntary, three-year pilot 

program to allow eligible member firms 

to elect to fulfill their inspection 

obligations under FINRA Rule 3110(c) 

by conducting inspections of eligible 

OSJs, branch offices, and non-branch 

locations remotely without an on-site 

visit to such locations, subject to 

specified safeguards and limitations 

(such member firms hereinafter referred 

to as ‘‘participating member firms’’). To 

help mitigate the potential risks 

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44See id. (stating that ‘‘FINRA believes that 

proposed Rule 3110.18, on balance, preserves 

investor protection objectives through the proposed 

safeguards while also providing FINRA the 

opportunity to gauge the effectiveness of remote 

inspections as part of a modernized, reasonably 

designed supervisory system that reflects the 

current work environment and availability of 

technologies that did not exist when the on-site 

inspection originally was conceived.’’). 

45See id. at 28620. 

46 In addition, if FINRA Rule 3110.17 (the 

temporary remote inspections relief currently in 

place) has not already expired by its own terms, 

Rule 3110.17 will automatically sunset on the 

effective date of the Pilot. See proposed Rule 

3110.18(m); see also Notice at 28634; 2024 

Extension at 68258. 

47See proposed Rule 3110.18(f). 

48See proposed Rule 3110.18(f)(1)(A). In general, 

FINRA Rule 4111 (Restricted Firm Obligations) 

requires member firms that are identified as 

‘‘Restricted Firms’’ to deposit cash or qualified 

securities in a segregated, restricted account; adhere 

to specified conditions or restrictions; or comply 

with a combination of such obligations. See Notice 

at 28629 n.74. 

49See proposed Rule 3110.18(f)(1)(B). In general, 

FINRA Rule 3170 (Tape Recording of Registered 

Persons by Certain Firms) requires a member firm 

to establish, enforce, and maintain special written 

procedures for supervising the telemarketing 

activities of all of its registered persons, including 

the tape recording of conversations, if the firm has 

hired more than a specified percentage of registered 

persons from firms that meet FINRA Rule 3170’s 

definition of ‘‘disciplined firm.’’ See Notice at 

28629 n.75. 

50See proposed Rule 3110.18(f)(1)(C). 

51See proposed Rule 3110.18(f)(1)(D). 

52See proposed Rule 3110.18(f)(1)(E). FINRA 

stated that CRD is the central licensing and 

registration system that FINRA operates for the 

benefit of the Commission, FINRA and other selfregulatory organizations, state securities regulators, 

and broker-dealers. The information maintained in 

the CRD system is reported by registered brokerdealers, associated persons, and regulatory 

authorities in response to questions on specified 

uniform registration forms. See Notice at 28629 

n.76; see generally FINRA Rule 8312 (FINRA 

BrokerCheck Disclosure). 

53See proposed Rule 3110.18(f)(1)(F). FINRA 

stated that the term ‘‘found’’ as used in this 

proposed criterion would carry the same meaning 

as in FINRA Rule 4530.03 (Meaning of ‘‘Found’’). 

See Notice at 28630 n.77. 

54See proposed Rule 3110.18(f)(2)(A). 

55See proposed Rule 3110.18(g)(1)(A). 

56Section 3(a)(39) of the Exchange Act identifies 

a list of events that disqualify someone from 

Continued 

site inspection of every location, the 

proposed rule change would establish 

safeguards that limit eligibility to 

participate in the Pilot to certain 

member firms and locations based on 

criteria designed to minimize risk.44

These safeguards and limitations would: 

(1) exclude certain member firms from 

participating in the Pilot; (2) exclude 

certain locations of participating 

member firms from participating in the 

Pilot; (3) impose certain conditions that 

a participating member firm and its 

eligible locations would be required to 

meet prior to participating in the Pilot; 

and (4) require any participating 

member firm to provide specified data 

to FINRA on a regular basis.45 These 

safeguards and limitations, as well as 

others, are discussed in more detail 

below. 

1. Length of Pilot 

Proposed Rule 3110.18(a) would 

permit participating member firms to 

perform required inspections of OSJs, 

branch offices, and non-branch 

locations remotely under the applicable 

provisions of FINRA Rule 3110(c)(1), 

subject to specified safeguards and 

limitations. The proposed Pilot would 

automatically sunset on a date that is 

three years after its effective date.46

2. Member Firm-Level Requirements 

Proposed Rule 3110.18(f) would 

establish: (1) a list of criteria that would 

render a member firm ineligible to 

participate in the Pilot; and (2) a list of 

conditions to which participating 

member firms would be required to 

adhere to during the Pilot.47

a. Member Firm-Level Ineligibility 

Criteria 

Under proposed Rule 3110.18(f)(1), a 

member firm would be ineligible to 

conduct remote inspections of any of its 

locations if at any time during the Pilot 

the member firm: (1) is or becomes 

designated as a Restricted Firm under 

FINRA Rule 4111 (‘‘Restricted Firm’’); 48

(2) is or becomes designated as a Taping 

Firm under FINRA Rule 3170 (‘‘Taping 

Firm’’); 49 (3) receives a notice from 

FINRA pursuant to FINRA Rule 9557 

regarding compliance with FINRA Rule 

4110 (Capital Compliance), Rule 4120 

(Regulatory Notification and Business 

Curtailment), or Rule 4130 (Regulation 

of Activities of Section 15C Members 

Experiencing Financial and/or 

Operational Difficulties); 50 (4) is or 

becomes suspended from membership 

by FINRA; 51 (5) had its FINRA 

membership become effective within 

the prior 12 months based on the date 

in the Central Registration Depository 

(‘‘CRD’’); 52 or (6) is or has been found 

within the past three years by the 

Commission or FINRA to have violated 

FINRA Rule 3110(c).53

b. Member Firm-Level Conditions 

i. Recordkeeping System 

Proposed Rule 3110.18(f)(2)(A) would 

require each participating member firm 

to have a recordkeeping system that: (1) 

makes, keeps current, and preserves 

records required to be made, kept 

current, and preserved under applicable 

securities laws and regulations, FINRA 

rules, and the participating member 

firm’s own written supervisory 

procedures under FINRA Rule 3110; (2) 

ensures such records are not physically 

or electronically maintained and 

preserved at the location subject to 

remote inspection; and (3) gives the 

participating member firm prompt 

access to such records.54

ii. Surveillance and Technology Tools 

Proposed Rule 3110.18(f)(2)(B) would 

require each participating member firm 

to determine that its surveillance and 

technology tools are appropriate to 

supervise the types of risks presented by 

each remotely supervised location. 

Proposed Rule 3110.18(f)(2)(B) would 

also set forth a non-exclusive list of 

surveillance and technology tools a 

participating member firm may use, 

including: (1) firm-wide tools, such as 

electronic recordkeeping systems, 

electronic surveillance of email and 

correspondence, electronic trade 

blotters, regular activity-based sampling 

reviews, and tools for visual 

inspections; (2) tools specifically 

applied to such location based on the 

activities of associated persons, 

products offered, restrictions on the 

activity of the location (including 

holding out to customers and handling 

of customer funds or securities); and (3) 

system security tools, such as secure 

network connections and effective 

cybersecurity protocols. 

3. Location-Level Requirements 

Proposed Rule 3110.18(g) would 

establish: (1) a list of criteria that would 

render a location of a participating 

member firm ineligible for remote 

inspection; and (2) a list of conditions 

a location would be required to satisfy 

to be eligible for remote inspection. 

a. Location-Level Ineligibility Criteria 

Under proposed Rule 3110.18(g)(1), a 

participating member firm’s location 

would not be eligible for a remote 

inspection if at any time during the 

Pilot: (1) one or more associated persons 

at such location is or becomes subject to 

a mandatory heightened supervisory 

plan under the rules of the Commission, 

FINRA, or a state regulatory agency; 55

(2) one or more associated persons at 

such location is or becomes statutorily 

disqualified, unless such disqualified 

person (A) has been approved (or is 

otherwise permitted pursuant to FINRA 

rules and the federal securities laws) to 

associate with a member firm and (B) is 

not subject to a mandatory heightened 

supervisory plan described in proposed 

Rule 3110.18(g)(1)(A) or otherwise as a 

condition to approval or permission for 

such association; 56 (3) the member firm 


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membership in, participation in, or association with 

a member of a self-regulatory organization. 15 

U.S.C. 78c(a)(39). 

57See proposed Rule 3110.18(g)(1)(C); see also 

Notice at 28631 n.83. In general, a member firm 

must file a Continuing Membership Application 

when a natural person seeking to become an owner, 

control person, principal or registered person of the 

member firm has, in the prior five years, one or 

more defined ‘‘final criminal matters’’ or two or 

more ‘‘specified risk events’’ unless the member 

firm has submitted a written request to FINRA 

seeking a materiality consultation for the 

contemplated activity. FINRA Rule 1017(a)(7); see 

generally FINRA Regulatory Notice 21–09 (Mar. 

2021) (announcing FINRA’s adoption of rules to 

address brokers with a significant history of 

misconduct), https://www.finra.org/rules-guidance/ 

notices/21-09. 

58See proposed Rule 3110.18(g)(1)(D); see also 

Notice at 28631 n.84. Form U4’s Questions 

14A(1)(a), 14(2)(a), 14B(1)(a), and 14B(2)(a) elicit 

reporting of criminal convictions, and Questions 

14C, 14D, and 14E pertain to regulatory action 

disclosures. See Form U4, https://www.finra.org/ 

sites/default/files/form-u4.pdf. 

59See proposed Rule 3110.18(g)(1)(E); see also 

Notice at 28631 n.85. A member firm must report 

to FINRA if an associated person of the member 

firm is the subject of any disciplinary action taken 

by the member firm involving suspension, 

termination, the withholding of compensation or of 

any other remuneration in excess of $2,500, the 

imposition of fines in excess of $2,500 or is 

otherwise disciplined in any manner that would 

have a significant limitation on the individual’s 

activities on a temporary or permanent basis. See 

FINRA Rule 4530. 

60See proposed Rule 3110.18(g)(1)(F). 

61See proposed Rule 3110.18(g)(1)(G). In 

accordance with existing guidance, the meaning 

and interpretation of the term ‘‘handled’’ that 

currently appears in Rule 3110(f)(2)(A)(ii) would 

remain consistent in the proposed Pilot. See Notice 

at 28631 n.86 (citing NASD Notice to Members 06– 

12 (Mar. 2006)). 

62See proposed Rule 3110.18(g)(2). 

63See proposed Rule 3110.18(b)(1). 

64See proposed Rule 3110.18(b)(2). 

65 Id.; see also supra note 31 and accompanying 

text. 

66See Amendment No. 1. In addition to the 

substantive modifications made by Amendment No. 

1 discussed here and below, FINRA stated that 

Amendment No. 1 contains non-substantive 

updates to the proposed rule text to improve 

readability. See id. 

67Proposed Rule 3110.18(h)(1)(G) requires 

written supervisory procedures in the following 

four areas: (1) procedures for escalating significant 

findings; (2) procedures for new hires; (3) 

procedures for supervising brokers with a 

significant history of misconduct; and (4) 

procedures related to outside business activities 

(‘‘OBAs’’) and doing business as (‘‘DBA’’) 

designations. 

68Proposed Rule 3110.18(h)(4) states that a 

participating member firm shall establish, maintain, 

and enforce written policies and procedures that are 

reasonably designed to comply with the data and 

information collection, and transmission 

requirements of the Pilot. 

69See proposed Rule 3110.18(c). 

is or becomes subject to FINRA Rule 

1017(a)(7) as a result of one or more 

associated persons at such location 

(hereinafter, a ‘‘continuing membership 

review’’); 57 (4) one or more associated 

persons at such location has an event in 

the prior three years that required a 

‘‘yes’’ response to any item in Questions 

14A(1)(a) and (2)(a), 14B(1)(a) and (2)(a), 

14C, 14D and 14E on Form U4 (Uniform 

Application for Securities Industry 

Registration or Transfer Registration) 

(‘‘Form U4’’); 58 (5) one or more 

associated persons at such location is or 

becomes subject to a disciplinary action 

taken by the participating member firm 

that is or was reportable under FINRA 

Rule 4530(a)(2); 59 (6) one or more 

associated persons at such location is 

engaged in proprietary trading, 

including the incidental crossing of 

customer orders, or the direct 

supervision of such activities; 60 or (7) 

the location handles customer funds or 

securities.61

b. Location-Level Conditions 

Proposed Rule 3110.18(g)(2) would 

require a specific location of a 

participating member firm to satisfy 

certain conditions to be eligible for a 

remote inspection. These conditions are: 

(1) electronic communications would be 

required to be made through the 

participating member firm’s electronic 

system; (2) the associated person’s 

correspondence and communications 

with the public would be required to be 

subject to the participating member 

firm’s supervision in accordance with 

FINRA Rule 3110; and (3) no books or 

records of the participating member firm 

required to be made and kept current, 

and preserved under applicable 

securities laws and regulations, FINRA 

rules, and the participating member 

firm’s own written supervisory 

procedures under FINRA Rule 3110, can 

be physically or electronically 

maintained and preserved at such 

location.62

4. Risk Assessment 

Proposed Rule 3110.18(b)(1) 

(Standards for Reasonable Review) 

would require that prior to electing a 

remote inspection for a location, a 

participating member firm would be 

required to develop a reasonable riskbased approach to using remote 

inspections and conduct and document 

a risk assessment for that location. The 

risk assessment would require the 

participating member firm to document 

the factors considered, including the 

factors set forth in FINRA Rule 3110.12 

and would require the participating 

member firm take into account any 

higher-risk activities that take place at, 

or higher-risk associated persons that 

are assigned to, that location.63

Proposed Rule 3110.18(b)(2) (Other 

Factors to Consider for Risk 

Assessment) sets forth a non-exhaustive 

list of factors that a participating 

member firm would be required to 

consider and document as part of the 

risk assessment for each location, 

including: (1) the volume and nature of 

customer complaints; (2) the volume 

and nature of outside business 

activities, particularly investmentrelated; (3) the volume and complexity 

of products offered; (4) the nature of the 

customer base, including vulnerable 

adult investors; (5) whether associated 

persons are subject to heightened 

supervision; (6) failures by associated 

persons to comply with the 

participating member firm’s written 

supervisory procedures; and (7) any 

recordkeeping violations.64 In addition, 

proposed Rule 3110.18(b)(2) states that 

participating member firms should 

conduct on-site inspections or make 

more frequent use of unannounced, onsite inspections for high-risk locations 

or locations where there are red flags.65

Amendment No. 1 modified proposed 

Rule 3110.18(b)(2) to add that, 

consistent with FINRA Rule 3110(a), a 

participating member firm’s supervisory 

system would be required to take into 

consideration any red flags when 

determining whether to conduct a 

remote inspection of a location.66

5. Written Supervisory Procedures for 

Remote Inspections 

As originally proposed, Rule 

3110.18(c) would have required a 

participating member firm to adopt 

written supervisory procedures 

regarding remote inspections that are 

reasonably designed to detect and 

prevent violations of, and achieve 

compliance with, applicable securities 

laws and regulations, and with 

applicable FINRA rules. Under the 

proposed provision, reasonably 

designed procedures for conducting 

remote inspections of locations would 

be required to address, among other 

things: (1) the methodology, including 

technology, that may be used to conduct 

remote inspections; (2) the factors 

considered in the risk assessment made 

for each applicable location; (3) the 

procedures specified in proposed Rules 

3110.18(h)(1)(G) 67 and (h)(4) 68 of the 

data and information collection section 

of the proposed rule; and (4) the use of 

other risk-based systems employed 

generally by the participating member 

firm to identify and prioritize for review 

those areas that pose the greatest risk of 

potential violations of applicable 

securities laws and regulations, and of 

applicable FINRA rules.69 Amendment 

No. 1 modified proposed Rule 

3110.18(c) to state that a participating 

member firm would be required to 

‘‘establish, maintain, and enforce’’ 


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70See Amendment No. 1. 

71See also supra note 31 (discussing red flags). 

72See proposed Rule 3110.18(d). 

73Proposed Rule 3110.18(l) would set forth the 

meanings underlying ‘‘Pilot Year’’ as follows: (1) 

Pilot Year 1 would be the period beginning on the 

effective date of the Pilot and ending on December 

31 of the same year; (2) Pilot Year 2 would mean 

the calendar year period following Pilot Year 1, 

beginning on January 1 and ending on December 31; 

(3) Pilot Year 3 would mean the calendar year 

period following Pilot Year 2, beginning on January 

1 and ending on December 31; and (4) if applicable, 

where Pilot Year 1 covers a period that is less than 

a full calendar year, then Pilot Year 4 would mean 

the period following Pilot Year 3, beginning on 

January 1 and ending on a date that is three years 

after the effective date of the Pilot. See proposed 

Rule 3110.18(l). 

74See proposed Rule 3110.18(e). 

75The participating member firm would be 

required to provide separate counts for OSJs, 

supervisory branch offices, non-supervisory branch 

offices, and non-branch locations consistent with 

FINRA Rule 3110(c)(1)(A)-(C). See proposed Rule 

3110.18(h)(1). 

76See proposed Rule 3110.18(h)(1)(A). 

77See proposed Rule 3110.18(h)(1)(B). 

78See proposed Rule 3110.18(h)(1)(C). 

79See proposed Rule 3110.18(h)(1)(D). For 

purposes of this paragraph, the term ‘‘finding’’ 

means a discovery made during an inspection that 

led to a remedial action or was listed on the 

participating member firm’s inspection report. See 

proposed Rule 3110.18(h)(1). 

80See proposed Rule 3110.18(h)(1)(E). 

81See proposed Rule 3110.18(h)(1)(F). 

82See Amendment No. 1. According to FINRA, a 

‘‘significant finding’’ would be one that should 

prompt the member firm to take further action that 

could include escalation to the appropriate 

channels at the firm for further review, the result 

of which may be enhanced monitoring or 

surveillance of a particular event or activity through 

more frequent inspections (remotely or on-site), on 

an announced or unannounced basis, of the 

location, or other targeted reviews of the root cause 

of the finding. FINRA stated that examples of some 

findings that may prompt escalation or further 

internal review by the appropriate firm personnel 

include, among other things, the use of unapproved 

communication mediums, customer complaints, or 

undisclosed outside business activities or private 

securities transactions. See Amendment No. 1 

(citing Notice at 28632 n.92). 

83See proposed Rule 3110.18(h)(1)(G)(i)–(iv). If a 

participating member firm amends its written 

supervisory procedures for remote inspections, it is 

required to provide such amendments to FINRA 

with its next delivery of quarterly data. See 

proposed Rule 3110.18(h)(1)(G). 

84 ‘‘Pilot Year 1’’ is defined in proposed Rule 

3110.18(l). See also supra note 73. 

85The participating member firm would be 

required to provide separate counts for OSJs, 

supervisory branch offices, non-supervisory branch 

offices, and non-branch locations consistent with 

FINRA Rule 3110(c)(1)(A)-(C). 

86See proposed Rule 3110.18(h)(2)(A) as 

originally proposed. 

87See proposed Rule 3110.18(h)(2)(B) as 

originally proposed. 

written supervisory procedures 

regarding remote inspections rather than 

solely ‘‘adopt’’ such procedures.70

6. Effective Supervisory System 

Proposed Rule 3110.18(d) (Effective 

Supervisory System) states that the 

requirement to conduct inspections of 

locations is one part of the member 

firm’s overall obligation to have an 

effective supervisory system, and 

therefore a member firm would be 

required to maintain its ongoing review 

of the activities and functions occurring 

at all locations, whether or not the 

member firm conducts inspections 

remotely. Proposed Rule 3110.18(d) 

additionally states that a participating 

member firm’s use of a remote 

inspection of a location would be held 

to the same standards for review 

applicable to on-site inspections as set 

forth in FINRA Rule 3110.12 (Standards 

for Reasonable Review), which requires 

that the review must be reasonably 

designed to assist in detecting and 

preventing violations of, and achieving 

compliance with, applicable securities 

laws and regulations and with FINRA 

rules, and that the member firm shall 

establish and maintain supervisory 

procedures that must take into 

consideration, among other things, any 

red flags.71 Finally, proposed Rule 

3110.18(d) would provide that where a 

participating member firm’s remote 

inspection of a location identifies any 

red flags, the participating member firm 

may need to impose additional 

supervisory procedures for that location 

or may need to provide for more 

frequent monitoring or oversight of that 

location, including potentially a 

subsequent physical, on-site visit on an 

announced or unannounced basis.72

7. Documentation Requirement 

Proposed Rule 3110.18(e) would 

require a participating member firm to 

maintain and preserve a centralized 

record for each Pilot Year 73 in which it 

participates that separately identifies: 

(1) all locations that were inspected 

remotely; and (2) any locations for 

which the participating member firm 

determined to impose additional 

supervisory procedures or more 

frequent monitoring, as provided in 

proposed Rule 3110.18(d). Further, 

proposed Rule 3110.18(e) would require 

a participating member firm’s 

documentation of the results of a remote 

inspection for a location to identify any 

additional supervisory procedures or 

more frequent monitoring for that 

location imposed as a result of the 

remote inspection, including whether 

an on-site inspection was conducted at 

such location.74

8. Data and Information Collection 

Requirement 

a. Data and Information During Pilot 

As originally proposed, proposed 

Rule 3110.18(h)(1) would have required 

a participating member firm to collect 

and provide to FINRA on a quarterly 

basis and in the manner and format 

determined by FINRA the following 

data and information:75 (1) the total 

number of locations with an inspection 

completed during each calendar 

quarter; 76 (2) the number of locations 

from that total quarterly number that 

were inspected remotely; 77 (3) the 

number of those locations from that 

total quarterly number that were 

inspected on-site; 78 (4) the number of 

those locations in each calendar quarter 

that were subject to an on-site 

inspection because of a finding; 79 (5) 

the number of locations for which a 

remote inspection was conducted in the 

calendar quarter that identified a 

finding, the number of those findings, 

and a list of the most significant 

findings; 80 and (6) the number of 

locations for which an on-site 

inspection was conducted in the 

calendar quarter that identified a 

finding, the number of those findings, 

and a list of the most significant 

findings.81 Amendment No. 1 modified 

proposed Rule 3110.18(h)(1) to change 

the requirement to provide a list of 

‘‘significant findings’’ by deleting the 

word ‘‘most’’ from the phrase ‘‘most 

significant findings.’’ 82

In addition, at the time a participating 

member firm first delivers the quarterly 

data described above, it would also be 

required to provide to FINRA the 

following written supervisory 

procedures for conducting remote 

inspections: (1) procedures for 

escalating significant findings; (2) 

procedures for new hires; (3) procedures 

for supervising brokers with a 

significant history of misconduct; and 

(4) procedures related to outside 

business activities and ‘‘doing business 

as’’ designations.83

b. Additional Data and Information for 

Pilot Year 1, if Less Than Full Calendar 

Year 

As originally proposed, if the first 

year of the Pilot (‘‘Pilot Year 1’’) 84

would cover a period of time that is less 

than a full calendar year, the proposed 

rule change would have required a 

participating member firm to collect and 

provide to FINRA the following data 

and information no later than December 

31 of Pilot Year 1:85 (1) the number of 

locations with an inspection completed 

during the full calendar year of Pilot 

Year 1; 86 (2) the number of locations 

referenced in item (1) that were 

inspected remotely during the full 

calendar year of Pilot Year 1; 87 and (3) 

the number of locations referenced in 

item (1) that were inspected on-site 


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88See proposed Rule 3110.18(h)(2)(C) as 

originally proposed. 

89See proposed Rule 3110.18(h)(2)(A)-(C); see 

also Amendment No. 1. 

90The participating member firm would be 

required to provide separate counts for OSJs, 

supervisory branch offices, non-supervisory branch 

offices, and non-branch locations consistent with 

FINRA Rule 3110(c)(1)(A)–(C). 

91See proposed Rule 3110.18(h)(2)(A); see also 

Amendment No. 1. 

92See proposed Rule 3110.18(h)(2)(B); see also 

Amendment No. 1. 

93See proposed Rule 3110.18(h)(2)(C); see also 

Amendment No. 1. 

94See proposed Rule 3110.18(h)(2)(D); see also 

Amendment No. 1. 

95See proposed Rule 3110.18(h)(2)(E); see also 

Amendment No. 1. 

96The participating member firm would be 

required to provide separate counts for OSJs, 

supervisory branch offices, non-supervisory branch 

offices, and non-branch locations consistent with 

FINRA Rule 3110(c)(1)(A)–(C). 

97See proposed Rule 3110.18(h)(3)(A) as 

originally proposed. 

98See proposed Rule 3110.18(h)(3)(B) as 

originally proposed. 

99See proposed Rule 3110.18(h)(3); see also 

FINRA Rule 3110(c)(2), stating that an inspection 

report must be kept on file by the member firm for 

a minimum of three years, unless the regular 

periodic schedule is longer than a three-year cycle, 

in which case the report must be kept on file at least 

until the next inspection report has been written. 

100See proposed Rule 3110.18(h)(3)(B); see also 

Amendment No. 1; supra note 82 and 

accompanying text. 

101See proposed Rule 3110.18(h)(4). 

102See supra note 73. 

103As stated in the Notice, a member firm that 

participates in a Pilot Year would be committed to 

complying with the terms of proposed Rule 3110.18 

for that entire Pilot Year. See Notice at 28633 n.97. 

104See proposed Rule 3110.18(i). 

105See id. 

106See id. 

107See proposed Rule 3110.18(j). 

108See proposed Rule 3110.18(k). 

during the full calendar year of Pilot 

Year 1.88

Rule 3110.18(h)(2) as originally 

proposed did not divide data and 

information collection and reporting 

into inspections that occurred prior to, 

and after, the effective date of the Pilot, 

but rather would have required 

reporting for the full calendar year of 

Pilot Year 1. Amendment No. 1 

amended proposed Rule 3110.18(h)(2) 

so that participating member firms 

would be required to collect and 

provide information under this 

provision for the time period between 

January 1 of Pilot Year 1 and the day 

before the effective date of the Pilot, in 

addition to the other data requirements 

set forth in the Pilot.89 More 

specifically, if Pilot Year 1 covers a 

period of time that is less than a full 

calendar year, the proposed rule change, 

as modified by Amendment No. 1, 

would require a participating member 

firm to collect and provide to FINRA the 

following data and information no later 

than December 31 of Pilot Year 1:90 (1) 

the number of locations with an 

inspection completed between January 1 

of Pilot Year 1 and the day before the 

effective date of the Pilot; 91 (2) the 

number of locations referenced in item 

(1) that were inspected remotely 

between January 1 of Pilot Year 1 and 

the day before the effective date of the 

Pilot; 92 and (3) the number of locations 

referenced in item (1) that were 

inspected on-site between January 1 of 

Pilot Year 1 and the day before the 

effective date of the Pilot.93

In addition, Amendment No. 1 

modified proposed Rule 3110.18(h)(2) to 

impose two new obligations for 

participating member firms to collect 

and provide to FINRA certain data and 

information. Specifically, if Pilot Year 1 

covers a period of time that is less than 

a full calendar year, the proposed rule 

change would require a participating 

member firm to collect and provide to 

FINRA the following additional data 

and information no later than December 

31 of Pilot Year 1: (1) the number of 

locations referenced in item (2) above 

where findings were identified, the 

number of those findings, and a list of 

the significant findings; 94 and (2) the 

number of locations referenced in item 

(3) above where findings were 

identified, the number of those findings, 

and a list of the significant findings.95

c. Additional Data and Information for 

Calendar Year 2019 

As originally proposed, Rule 

3110.18(h)(3) would have required a 

participating member firm to collect and 

provide to FINRA the following 

calendar year 2019 data and information 

(‘‘2019 data’’) no later than December 31 

of Pilot Year 1: 96 (1) the number of 

locations with an inspection completed 

during calendar year 2019; 97 and (2) the 

number of locations referenced in item 

(1) where findings were identified, the 

number of those findings, and a list of 

the most significant findings.98

Amendment No. 1 modified the 

proposed rule change to require a 

participating member firm to ‘‘act in 

good faith using best efforts’’ to collect 

and provide to FINRA such data, as 

FINRA rules in general only require that 

member firms preserve these records for 

a period of three years.99 Amendment 

No. 1 also clarified the data and 

information requirement to require that 

participating member firms provide a 

list of ‘‘significant findings’’ by deleting 

the word ‘‘most’’ from the phrase ‘‘most 

significant findings.’’ 100

d. Written Policies and Procedures 

Proposed Rule 3110.18(h)(4) would 

require a participating member firm to 

establish, maintain, and enforce written 

policies and procedures that are 

reasonably designed to comply with the 

data and information collection, and 

transmission requirements of proposed 

Rule 3110.18(h).101

9. Election To Participate in Pilot 

In general, proposed Rule 3110.18(i) 

would require a participating member 

firm, at least five calendar days before 

the beginning of a Pilot Year,102 to 

provide FINRA an opt-in notice in the 

manner and format determined by 

FINRA. The proposed rule states that by 

providing such opt-in notice to FINRA, 

the member firm agrees to participate in 

the Pilot for the duration of such Pilot 

Year and to comply with the 

requirements of Rule 3110.18.103 A 

member firm that provides an opt-in 

notice for a Pilot Year would be 

automatically deemed to have elected 

and agreed to participate in the Pilot for 

subsequent Pilot Years until the Pilot 

expires.104 To opt out, proposed Rule 

3110.18(i) would require a participating 

member firm to provide FINRA with an 

opt-out notice in the manner and format 

determined by FINRA at least five 

calendar days before the end of the then 

current Pilot Year.105 The proposed rule 

change also states that FINRA may, in 

exceptional cases and where good cause 

is shown, waive the applicable 

timeframes for the required opt-in or 

opt-out notices.106

10. Failure To Satisfy Conditions 

Proposed Rule 3110.18(j) states that a 

member firm that fails to satisfy the 

conditions of Rule 3110.18, including 

the requirement to timely collect and 

submit the data and information to 

FINRA as set forth in proposed Rule 

3110.18(h), would be ineligible to 

participate in the Pilot and would be 

required to conduct on-site inspections 

of each location on the required cycle in 

accordance with FINRA Rule 3110(c).107

11. Determination of Ineligibility 

Proposed Rule 3110.18(k) would 

authorize FINRA to make a 

determination in the public interest and 

for the protection of investors that a 

participating member firm is no longer 

eligible to participate in the Pilot if the 

participating member firm fails to 

comply with the requirements of Rule 

3110.18.108 In such instances, FINRA 

would provide written notice to the 

participating member firm of such 

determination and the participating 

member firm would no longer be 

eligible to participate in the Pilot and 


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109See id. 110 In approving this rule change, the Commission 

has considered the rule’s impact on efficiency, 

competition, and capital formation. See 15 U.S.C. 

78c(f). 111 15 U.S.C. 78o–3(b)(6). 112FINRA Rule 3110(a). 

113FINRA Rule 3110.12. 

114FINRA Rule 3110(a)(1)–(7) identify certain 

minimum requirements for the reasonably designed 

supervisory system. See generally FINRA Rule 

3110. 

115Member firms would be generally ineligible to 

participate in the Pilot if at any time during the 

Pilot the member firm: (1) is or becomes designated 

as a Restricted Firm; (2) is or becomes designated 

as a Taping Firm; (3) receives a notice from FINRA 

pursuant to FINRA Rule 9557 regarding compliance 

with FINRA Rule 4110 (Capital Compliance), Rule 

4120 (Regulatory Notification and Business 

Curtailment), or Rule 4130 (Regulation of Activities 

of Section 15C Members Experiencing Financial 

and/or Operational Difficulties); (4) is or becomes 

suspended from membership by FINRA; (5) had its 

FINRA membership become effective within the 

prior 12 months based on the date in the CRD; or 

(6) is or has been found within the past three years 

by the Commission or FINRA to have violated 

FINRA Rule 3110(c) (Internal Inspections). See 

proposed Rule 3110.18(f)(1). 

116See Notice at 28630. 

117 Id. FINRA also stated that rules related to 

Restricted Firms and Taping Firms expressly 

address member firms that pose higher risks, and 

for that reason, they would be ineligible to 

participate in the Pilot. Id. 

118 Id. 

119 Id. 

120Letter from Andrew Hartnett, NASAA 

President and Deputy Commissioner, Iowa 

Insurance Division, North American Securities 

Administrators Association, Inc., to Sherry R. 

Haywood, Assistant Secretary, Commission, dated 

May 25, 2023 (‘‘NASAA I’’) at 6; see also letter from 

Bernard V. Canepa, Managing Director & Associate 

General Counsel, Securities Industry and Financial 

Markets Association, to Vanessa A. Countryman, 

Secretary, Commission, dated May 25, 2023 

(‘‘SIFMA’’) at 2 (describing the Pilot as including 

‘‘numerous safeguards to ensure onsite inspections 

are conducted when appropriate’’ and as ‘‘well 

designed,’’ noting that it scopes out ‘‘certain, 

higher-risk . . . firms’’); letter from Eversheds 

Sutherland LLP on behalf of the Committee of 

Annuity Insurers, to Secretary, Commission, dated 

May 25, 2023 (‘‘CAI’’) at 2–3 (stating that by 

‘‘disallowing certain firms . . . from participating 

in remote inspections if they present a higher risk 

of possible investor harm,’’ FINRA is appropriately 

balancing investor protection and permitting the 

regulatory regime to evolve). See also generally 

letter from David T. Bellaire, Esq., Executive Vice 

President & General Counsel, Financial Services 

Institute, to Secretary, Commission, dated May 25, 

2023 (‘‘FSI’’) at 3–4; Letter from Mark Quinn, 

Director of Regulatory Affairs, Cetera Financial 

Group, to Sherry R. Haywood, Assistant Secretary, 

Commission, dated May 25, 2023 (‘‘Cetera I’’) at 1. 

would be required to conduct on-site 

inspections of required locations in 

accordance with FINRA Rule 3110(c).109

II. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, the comment letters, and 

FINRA’s responses to the comments, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

that are applicable to a national 

securities association.110 Specifically, 

the Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public 

interest.111

Pursuant to FINRA Rule 3110, 

member firms must ‘‘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 FINRA rules.’’ 112 Rule 3110 

provides that ‘‘[e]ach member shall 

establish and maintain supervisory 

procedures that must 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.’’ 113 Importantly, Rule 3110 

provides that ‘‘[f]inal responsibility for 

proper supervision . . . rest[s] with the 

member.’’ 114 A reasonably designed 

supervisory system must include an 

inspection of each location subject to 

supervision. 

The Pilot is consistent with these 

obligations, permitting a participating 

member firm the flexibility to consider 

whether remote inspections of its 

eligible locations would be consistent 

with the member firm’s broader 

obligation to establish and maintain a 

reasonably designed supervisory 

system. At the same time, to help 

mitigate the potential risks associated 

with not conducting an on-site 

inspection of certain locations, the 

proposed rule change would establish 

safeguards that limit eligibility to 

participate in the Pilot to certain 

member firms and locations and that 

impose on member firms electing to 

participate in the Pilot affirmative 

obligations tailored to the risks. 

Similarly, the Pilot would mandate the 

collection of data and information that 

should help FINRA make well-informed 

decisions about improvements to, and 

the prudence of, any permanent rule 

changes. Accordingly, as explained in 

more detail below, the Commission 

finds that the Pilot is consistent with 

Section 15A(b)(6) of the Exchange Act. 

A. Member Firm-Level Requirements 

The proposed rule change would 

impose various safeguards and 

limitations that preclude certain 

member firms from participating in the 

Pilot. The Commission addresses the 

safeguards and limitations, and any 

related comments, in turn. 

1. Member Firm Ineligibility Criteria 

As stated above, under proposed Rule 

3110.18(f)(1), a member firm would be 

ineligible to participate in the Pilot if at 

any time during the pilot period the 

member firm is subject to any of six 

firm-level ineligibility criteria.115

FINRA stated that these proposed 

ineligibility criteria ‘‘would 

appropriately limit the potential 

population of pilot program participants 

to those firms that may be better 

positioned to conduct remote 

inspections.’’ 116 For example, FINRA 

stated that ‘‘a member firm that is 

experiencing issues complying with its 

capital requirements or has been 

suspended from membership by FINRA 

is more likely to face significant 

operational challenges that may 

negatively impact the firm’s inspection 

program.’’ 117 Additionally, FINRA 

stated that new member firms are often 

still implementing business plans and 

‘‘may not have sufficient experience to 

develop a sufficiently robust inspection 

program.’’ 118 Moreover, firms with 

recent FINRA Rule 3110(c) (Internal 

Inspections) violations have 

demonstrated challenges in developing 

or maintaining robust inspection 

programs and should not be able to 

participate, according to FINRA.119

Three commenters offered general 

support for the firm-level ineligibility 

criteria, each expressing the idea that 

these ineligibility criteria ‘‘would help 

to ensure that firms and locations that 

present higher risks to investors would 

remain subject to in-person inspection 

requirements, thereby helping to protect 

investors from unnecessary risks under 

the pilot program.’’ 120 No commenter 

opposed these firm-level ineligibility 

criteria. 

FINRA reasonably determined to 

exclude a member firm from 

participation in the Pilot if the member 

firm is subject to any of the six proposed 

firm-level ineligibility criteria. Each of 

these criteria identifies—and excludes— 

member firms with characteristics that 

may indicate increased risk of noncompliance. Specifically, Restricted 


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121Proposed Rule 3110.18(f)(1)(A); see FINRA, 

Rule 4111 Frequently Asked Questions, https://

www.finra.org/rules-guidance/key-topics/ 

protecting-investors-from-misconduct/faq. 

122Proposed Rule 3110.18(f)(1)(B); see FINRA, 

FINRA Taping Rule (FINRA Rule 3170), https://

www.finra.org/rules-guidance/guidance/taping-rule. 

123Proposed Rule 3110.18(f)(1)(F). 

124Proposed Rule 3110.18(f)(1)(C); see FINRA 

Rule 9557 (Procedures for Regulating Activities 

Under Rules 4110, 4120 and 4130 Regarding a 

Member Experiencing Financial or Operational 

Difficulties); see also FINRA Regulatory Notice 09– 

71 (Dec. 2009) (announcing SEC approval of 

consolidated FINRA rules governing financial 

responsibility), https://www.finra.org/rulesguidance/notices/09-71. 

125Proposed Rule 3110.18(f)(1)(D). A suspended 

firm may have been suspended because of a 

violation of ‘‘federal securities laws, rules or 

regulations thereunder, the rules of the Municipal 

Securities Rulemaking Board, or FINRA rules.’’ 

FINRA Rule 8310(a)(3), (5); see FINRA Rule 9550 

Series. 

126Proposed Rule 3110.18(f)(1)(E). 

127See Exchange Act Rule 15b2–2, 17 CFR 

240.15b2–2 (generally requiring inspection of a 

newly registered broker dealer within six months 

for compliance with applicable financial 

responsibility rules and within 12 months for all 

other applicable regulatory requirements). 

128Cf. Exchange Act Release No. 90635 (Dec. 10, 

2020), 85 FR 81540 (Dec. 16, 2020) (Order 

Approving File No. SR–FINRA–2020–011 to 

Address Brokers With a Significant History of 

Misconduct); Exchange Act Release No. 92525 (July 

30, 2021), 86 FR 42925 (Aug. 5, 2021) and 86 FR 

49589 (Sept. 3, 2021) (Corrected Order Approving 

File No. SR–FINRA–2020–041 to Adopt FINRA 

Rules 4111 (Restricted Firm Obligations) and 9561 

(Procedures for Regulating Activities Under Rule 

4111)). 

129Each participating member firm would be 

required to have a recordkeeping system that: (1) 

makes, keeps current, and preserves records 

required to be made, kept current, and preserved 

under applicable securities laws and regulations, 

FINRA rules, and the participating member firm’s 

own written supervisory procedures under FINRA 

Rule 3110; (2) ensures such records are not 

physically or electronically maintained and 

preserved at the location subject to remote 

inspection; and (3) gives the participating member 

firm prompt access to such records. See proposed 

Rule 3110.18(f)(2)(A). 

130NASAA I at 6–7. In a comment letter related 

to FINRA–2022–021 (the original Pilot proposal), 

NASAA requested that FINRA require participating 

member firms to maintain written supervisory 

procedures for ‘‘technology used to ensure that 

records are maintained within the firm’s access and 

control.’’ See letter from Andrew Hartnett, 

President, NASAA, to Sherry R. Haywood, 

Assistant Secretary, Commission, dated December 

7, 2022 (‘‘NASAA Dec. 2022’’) at 5, https://

www.sec.gov/comments/sr-finra-2022-021/ 

srfinra2022021-20152479-320342.pdf. 

131The participating member firm would be 

required to determine that its surveillance and 

technology tools are appropriate to supervise the 

types of risks presented by each such remotely 

Firms have a history of misconduct or 

a high concentration of registered 

persons with a significant history of 

misconduct that gave rise to the 

designation,121 while Taping Firms are 

subject to heightened regulatory 

oversight because they employ a 

‘‘significant number of registered 

persons [who] previously worked for 

firms that have been expelled from the 

industry or have had their registrations 

revoked for inappropriate sales 

practices.’’ 122 Moreover, if the 

Commission or FINRA has found that a 

member firm has violated FINRA Rule 

3110(c) within the past three years, the 

member firm has demonstrated a recent 

difficulty implementing a compliant 

inspection program.123 Member firms 

covered by these exclusions therefore 

have a history of non-compliance or 

have registered representatives who 

have a history of (or come from a 

member firm with a history of) noncompliance. It is therefore reasonable 

for FINRA to determine that member 

firms that fall into these categories are 

not eligible for participation in the Pilot 

and the flexibility that it provides in 

designing their supervisor systems. 

Furthermore, Rule 9557 notices are 

sent to member firms that are 

experiencing financial or operational 

difficulties.124 Additionally, suspension 

of a member firm by FINRA would be 

based on FINRA’s determination that 

the member firm has failed to comply 

with its regulatory requirements or 

suspension is needed for the safety of 

investors, creditors, or other members 

because of the member firm’s financial 

or operational difficulties.125 Such 

member firms raise concerns about their 

ability to comply with their obligations 

and may present risk to others. As such, 

it is reasonable to conclude that these 

member firms should not be eligible for 

the proposed rule change that is 

designed to afford member firms greater 

flexibility in designing their supervisory 

systems. 

Moreover, member firms that have 

been FINRA members for less than 12 

months may need additional time to 

develop their supervisory and 

compliance systems to effectively 

comply with applicable securities laws 

and rules.126 This time period also 

provides FINRA and other regulators 

with time to conduct inspections of new 

member firms to determine their 

compliance with their regulatory 

obligations before they may be eligible 

for the flexibility provided in the 

proposed rule.127 It is therefore 

reasonable for FINRA to determine that 

firms must be operating for a certain 

amount of time before they can be 

eligible for participation in the Pilot. 

One year provides a reasonable balance 

between providing member firms with 

the flexibility for supervision allowed in 

the proposed rule and concerns that 

member firms need to develop 

experience operating before they are 

given such flexibility. In sum, these 

proposed ineligibility criteria limit Pilot 

participation to certain member firms 

without indicia that their business 

operations, supervisory system, or 

inspection programs may lack the 

maturity or safeguards to fully address 

the potential risks associated with 

remote inspections are reasonable.128

2. Member Firm Conditions for 

Eligibility To Participate in the Pilot 

a. Firm Recordkeeping System 

As stated above, proposed Rule 

3110.18(f)(2)(A) would require a 

participating member firm to meet 

certain requirements regarding its 

recordkeeping system, including that it 

have a recordkeeping system and that 

the participating member firm have 

prompt access to the records required by 

that system and that those records are 

not physically or electronically 

maintained at remotely inspected 

locations.129 One commenter expressed 

support for this provision, stating that it 

is responsive to concerns about a 

participating member firm’s access to 

and control over records and ‘‘will 

better enable firms to supervise their 

associated persons.’’ 130 No commenter 

objected to this provision of the 

proposed rule change. 

The proposed rule change’s 

recordkeeping conditions are 

reasonable. A key component of 

remote—as opposed to on-site— 

inspection is prompt access to the 

records of the remotely inspected 

location from an alternative location. 

Because the proposed rule change 

couples this prompt-access requirement 

with a prohibition of the storage of a 

remotely inspected location’s records at 

the location itself, the member firm 

need not conduct an on-site visit to 

gather and review records during an 

inspection. The proposed rule change 

therefore should facilitate timely and 

effective remote inspection of locations 

participating in the Pilot and decrease, 

though not always eliminate, the need 

for on-site inspections. For these 

reasons, the proposed condition is 

reasonable. 

b. Surveillance and Technology Tools 

As noted above, proposed Rule 

3110.18(f)(2)(B) would require that each 

participating member firm determine 

that its surveillance and technology 

tools are appropriate to supervise the 

types of risks presented by each 

remotely inspected location. These tools 

may include, but are not limited to, 

firm-wide electronic tools, tools 

specifically applied to a location, and 

system security tools.131 FINRA stated 


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supervised location. These tools may include but 

are not limited to: (1) firm-wide tools such as 

electronic recordkeeping systems; electronic 

surveillance of email and correspondence; 

electronic trade blotters; regular activity-based 

sampling reviews; and tools for visual inspections; 

(2) tools specifically applied to such location based 

on the activities of associated persons, products 

offered, restrictions on the activity of the location 

(including holding out to customers and handling 

of customer funds or securities); and (3) system 

security tools such as secure network connections 

and effective cybersecurity protocols. See proposed 

Rule 3110.18(f)(2)(B). 

132See FINRA Response to Comments I at 11. 

133NASAA I at 7; see also, e.g., NASAA Dec. 

2022 at 6. 

134NASAA I at 7. NASAA also added that it 

would not be inconsistent to establish a defined 

floor despite the principle-based standard of 

reasonable supervision. Id. 

135 Id. 

136See letter from Hugh Berkson, President, 

Public Investors Advocate Bar Association, to 

Vanessa Countryman, Commission, dated May 24, 

2023 (‘‘PIABA I’’) at 3; letter from Hugh Berkson, 

President, Public Investors Advocate Bar 

Association, to Vanessa Countryman, Commission, 

dated August 28, 2023 (‘‘PIABA II’’) at 3. 

137See FINRA Response to Comments I at 11. 

138 Id. 

139 Id. at 11 n.27. 

140 Id. at 12; see also proposed Rule 3110.18(c). 

141See Notice at 28622; see also, e.g., letter from 

Raymond James & Associates, Inc. and Raymond 

James Financial Services, Inc. to Vanessa A. 

Countryman, Secretary, Commission, dated May 23, 

2023 (collectively ‘‘Raymond James I’’) at 1. 

142See proposed Rule 3110.18(b)(2) (‘‘In addition, 

consistent with Rule 3110.12, members should 

conduct on-site inspections or make more frequent 

use of unannounced, on-site inspections for highrisk offices or locations or where there are 

indicators of irregularities or misconduct (i.e., ‘red 

flags’).’’); see also proposed Rule 3110.18(d) 

(‘‘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.’’); supra note 31 (discussing red flags). 

that it believes that the absence of 

‘‘adequate surveillance and technology 

tools would raise questions about the 

reasonableness of remote inspections’’ 

and therefore proposed the nonexhaustive list to help set regulatory 

expectations for remote inspections.132

One commenter opposed the 

principle-based nature of the proposed 

condition by stating that the listed 

technology and surveillance tools 

should be ‘‘mandatory, rather than 

permissive.’’ 133 This commenter stated 

that the listed technologies are 

‘‘critical,’’ should be ‘‘standard features 

of all risk assessments and remote 

inspections,’’ and are the ‘‘bare 

minimum necessary for a firm to 

participate safely.’’ 134 In particular, this 

commenter pointed to 

videoconferencing and related 

technology as ‘‘crucial to a rigorous 

inspection.’’ 135 Similarly, another 

commenter who opposed the Pilot 

expressed skepticism in particular about 

FINRA’s reliance on the increased use of 

technology to support approval of the 

proposed rule change, stating that 

remote inspections would leave 

‘‘considerable opportunity for advisors 

to skirt the rules.’’ 136

In response, FINRA stated that, while 

the proposed condition would require 

that a member firm must determine that 

its surveillance and technology tools are 

appropriate, it believes that flexibility 

among the use of specific tools that may 

be used for remote inspections is 

appropriate because these tools may 

vary among member firms depending 

upon their business activities, size, and 

structure.137 FINRA also stated that the 

proposed list of surveillance and 

technology tools is non-exhaustive in 

order to account for ongoing advances 

in technologies.138 For these reasons, 

FINRA declined to modify the proposed 

rule change. However, while FINRA did 

not mandate video conferencing 

technology or portable cameras, as 

suggested, it did include ‘‘visual 

inspection tools’’ as a general 

description of this technology in its 

non-exhaustive list of tools.139

FINRA further noted that the 

proposed rule change would separately 

require a participating member firm to 

adopt reasonably designed written 

supervisory procedures that must 

include, among other things, a 

description of the methodology, 

including the technology, that a 

participating member firm may use to 

conduct remote inspections.140

Given variances in firm size, business 

models, and risk, and the rapid 

development and use of technology 

among member firms, FINRA reasonably 

determined to provide flexibility to each 

participating member firm to determine 

that its surveillance and technology 

tools are appropriate to supervise the 

types of risks presented by each 

remotely inspected location. Requiring a 

member firm to determine that its 

existing surveillance and technology 

tools are appropriate to supervise the 

types of risks presented by each 

remotely inspected location before 

participating in the Pilot is reasonable 

and should help ensure that 

participating member firms employ 

appropriate tools to manage the 

potential risks posed by the remote 

inspection of eligible locations. The 

Commission acknowledges the 

commenter’s request to require that 

participating member firms use the 

technology tools identified by FINRA to 

perform remote inspections. Indeed, a 

number of commenters indicated that 

they already rely extensively on 

technology to supervise their associated 

persons, and FINRA relied broadly on 

technological developments in the 

securities industry in support of this 

proposal.141

However, while the proposed rule 

change takes a principle-based approach 

rather than mandating specific 

surveillance tools, it does set 

expectations for the supervision of 

locations participating in the Pilot. First, 

a participating member firm must 

determine that its surveillance and 

technology tools are appropriate, 

starting by taking stock of the 

methodology, including the technology, 

that the participating member firm may 

use to conduct remote inspections and 

incorporating it into its written 

supervisory procedures. Second, FINRA 

identifies surveillance and technology 

tools that a participating member firm 

may consider, including firm-wide 

electronic tools, tools specifically 

applied to a location, and system 

security tools, which will help clarify 

FINRA’s expectations and assist 

participating member firms with 

operationalizing the rules. These 

requirements, combined with other 

safeguards and limitations, along with a 

participating member firm’s overarching 

obligation under FINRA Rule 3110(a) to 

maintain an effective supervisory 

system, serve a crucial gatekeeping role 

for member firms to participate in the 

Pilot. Furthermore, even a participating 

member firm with state-of-the art tools 

may ultimately determine that an 

unannounced on-site inspection, or 

more frequent inspections, are 

appropriate to discharge its obligation to 

reasonably supervise that location.142

For the reasons set forth above, the 

proposed condition is reasonable. 

B. Location-Level Requirements 

1. Location-Level Ineligibility Criteria 

As noted above, proposed Rule 

3110.18(g)(1) would prohibit remote 

inspections for any location subject to 

any of seven location-level ineligibility 

criteria. Six of these seven location-level 

ineligibility criteria address locations 

with associated persons who: (1) are 

subject to a mandatory heightened 

supervisory plan; (2) are statutorily 

disqualified; (3) have caused the 

participating member firm to undergo a 

continuing membership review 

pursuant to FINRA Rule 1017(a)(7); (4) 

are required to make disclosures about 

certain criminal and regulatory actions; 

(5) are subject to certain disciplinary 

actions taken by the participating 

member firm; or, (6) are engaged in 

proprietary trading. The seventh criteria 


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143See proposed Rule 3110.18(g)(1). 

144See Notice at 28630; see also Notice at 28631 

(‘‘FINRA believes the proposed list of ineligibility 

categories is appropriately derived from existing 

rule-based criteria that are part of processes to 

identify . . . associated persons that may pose 

greater concerns due to the specified activities and 

nature of disclosures of regulatory or disciplinary 

events on the uniform registration forms.’’); FINRA 

Response to Comments II at 10 (‘‘FINRA believes 

that these proposed criteria impose appropriate 

controls and conditions regarding participation in 

the proposed Pilot Program to further promote 

investor protection.’’). 

145Notice at 28631. 

146See SIFMA at 2 (noting that the proposed rule 

change scopes out ‘‘certain, higher-risk locations 

[and] individuals’’); see also CAI at 3. See also 

generally NASAA I at 6 (stating that ‘‘the 

ineligibility criteria would help to ensure that firms 

and locations that present higher risks to investors 

would remain subject to in-person inspection 

requirements, thereby helping to protect investors 

from unnecessary risks under the pilot program.’’). 

147See PIABA I at 4; PIABA II at 4. 

148See letter from Jessica R. Giroux, General 

Counsel & Head of Fixed Income Policy, American 

Securities Association, to Vanessa Countryman, 

Secretary, Commission, dated August 29, 2023 

(‘‘ASA II’’) at 3. 

149See Form U4 Questions 14A(1)(a) and (2)(a), 

14(B)(1)(a) and (2)(a), and Questions 14C, 14D, and 

14E. 

150See PIABA I at 4; PIABA II at 4. PIABA stated 

that FINRA should exclude individuals with ‘‘a 

substantial number’’ of customer complaints but 

did not suggest a particular number or threshold. 

Id. Similarly, PIABA suggested that FINRA exclude 

locations with associated persons who have 

‘‘significant’’ judgments or liens, without 

commenting on a specific amount. Id. 

151 Id. 

152See FINRA Response to Comments I at 12. 

153 Id. at 13. The risk assessment would require 

a participating member firm’s consideration of 

higher-risk activities occurring at a location, higherrisk associated persons that are assigned to a 

location, and the presence of red flags. See 

proposed Rule 3110.18(b). 

154 Id. 

155See proposed Rules 3110.18(g)(1)(F) and (G). 

156See ASA II at 3 (stating that the processing and 

supervisory activities related to accepting funds or 

securities happen at nearly every branch location). 

157FINRA Response to Comments II at 10. 

would make locations that handle 

customer funds or securities ineligible 

for the Pilot.143 FINRA stated that these 

seven location-level ineligibility criteria 

are ‘‘events or activities of an associated 

person of the member firm that . . . 

[are] more likely to raise investor 

protection concerns based on the 

individual’s record of specified 

regulatory or disciplinary events.’’ 144

FINRA stated that it believes that ‘‘these 

objective categorical restrictions will 

provide safeguards that will help ensure 

that firms maintain effective supervisory 

procedures during the pilot period.’’ 145

Two commenters offered general 

support for these exclusions.146 As 

discussed in more detail below, one 

commenter recommended that FINRA 

expand the exclusion for locations with 

associated persons that are required to 

make disclosures about certain criminal 

and regulatory actions set forth in 

proposed Rule 3110.18(g)(1)(D),147 and 

another asked FINRA to clarify the 

exclusions for locations that engage in 

proprietary trading or handle customer 

funds or securities as set forth in 

proposed Rules 3110.18(g)(1)(F) and 

(G).148 No commenter offered specific 

support for, or opposition to, any of the 

remaining ineligibility criteria. 

a. Criminal Convictions and 

Adjudicated Regulatory Actions 

Proposed Rule 3110.18(g)(1)(D) would 

exclude a location from the Pilot where 

one or more associated persons at such 

location is required to disclose certain 

criminal convictions or regulatory 

actions on Form U4.149 One commenter 

recommended that FINRA expand this 

ineligibility criterion to include 

locations with associated persons who: 

have a ‘‘substantial number’’ of 

customer complaints; are subject to 

pending regulatory investigations; have 

been terminated for cause; or have 

‘‘significant’’ judgments or liens.150 The 

commenter stated that such associated 

persons are ‘‘problematic’’ and thus the 

locations at which they work should be 

subject to on-site inspections, which 

offer greater scrutiny.151

In response, FINRA declined to 

expand the location-level ineligibility 

criteria, stating that, as currently 

proposed, the ineligibility criteria are 

based on clear, objective factors.152

Nonetheless, FINRA agreed with the 

commenter that the presence of such 

disclosures would be factors a 

participating member firm should 

consider as part of its required risk 

assessment.153 FINRA concluded that 

the risk assessment, along with other 

provisions of the proposed rule change, 

such as the requirement that a 

participating member firm establish, 

maintain, and enforce written 

supervisory procedures for remote 

inspections, would provide the 

appropriate safeguards related to 

whether a particular location should be 

eligible to undergo a remote 

inspection.154

An individual with certain regulatory 

or criminal-action disclosures on Form 

U4 has a history of criminal 

conviction(s) or regulatory finding(s) 

that may indicate an increased risk of 

non-compliance. Because of the 

heightened risks associated with such 

registered persons, it is reasonable for 

the proposed rule change to exclude 

locations from the Pilot where one or 

more associated persons at such 

location is required to disclose certain 

criminal convictions or regulatory 

actions on Form U4. The Commission 

also recognizes, however, that there may 

be other indicators of heightened risk. 

Customer complaints, investigations, 

terminations, and judgments or liens 

may, in certain circumstances, indicate 

heightened levels of risk. However, they 

are not formal investigations or 

proceedings initiated by a regulator 

charged with enforcing securities laws, 

regulations, and rules. For example, 

they may be overly broad in scope or 

lack the factual development of a 

comparable regulatory action. Because 

assessing the risk associated with 

customer complaints, investigations, 

terminations, and judgments or liens 

may require investigation and a 

consideration of the totality of the 

circumstances, FINRA reasonably 

determined that—in lieu of creating a 

blanket exclusion for such locations— 

these factors could be considered in the 

mandatory risk assessment of each 

location to determine whether a remote 

inspection is appropriate. Specifically, 

it is reasonable for participating member 

firms to gauge the level of risk of a 

location by, among other things, 

requiring participating member firms to: 

(1) consider the ‘‘volume and nature of 

customer complaints’’ in the mandatory 

risk assessment prior to inspecting a 

location remotely; and (2) take into 

consideration any red flags when 

determining whether to conduct a 

remote inspection of a location. For 

these reasons, the proposed ineligibility 

criteria are reasonable. 

b. Proprietary Trading and Handling 

Customer Funds or Securities 

As stated above, locations that engage 

in proprietary trading or handle 

customer funds or securities would be 

excluded from the Pilot.155 One 

supportive commenter requested that 

FINRA provide a clearer definition of 

the types of trading activities that would 

trigger these exclusions, fearing that 

certain common activities could be 

interpreted in a way that would result 

in eliminating a significant number of 

branches from eligibility for remote 

inspections.156

In response, FINRA stated that these 

two ineligibility criteria are based on 

‘‘significant activities potentially 

impacting the operations and financial 

stability of the firm and, as a result, may 

also significantly impact customers and 

the markets generally.’’ 157 In reference 

to the proprietary trading exclusion, 

FINRA stated that providing an 

exhaustive list of the types of trading 

activities that would trigger this 

exclusion ‘‘is not practicable’’ because 

the analysis is fact-specific, but would 

consider providing additional guidance, 


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158 Id. at 11. Because of the fact-specific nature of 

the definition of proprietary trading, FINRA stated 

that it believes that this commenter’s request would 

be better addressed through FINRA’s interpretative 

guidance process so that FINRA has the opportunity 

to fully consider relevant facts and circumstances. 

Id. 

159 Id. at 10–11. FINRA also stated that it has 

previously provided guidance on the meaning and 

interpretation of the term ‘‘handled’’ that currently 

appears in Rule 3110(f)(2)(A)(ii) and such existing 

guidance would apply to the Pilot. Id. at 11. 

160Because additional guidance about the types 

of trading activities that would trigger the 

proprietary trading ineligibility criteria could assist 

participating member firms in complying with the 

Pilot, the Commission notes that FINRA has offered 

to consider issuing such guidance through its 

interpretive guidance process, as appropriate. See 

FINRA Response to Comments II at 11. 

161See proposed Rules 3110.18(g)(1)(A)–(C) and 

(E); see also supra note 59. 

162See FINRA Response to Comments II at 10. 

163Section 3(a)(39) of the Exchange Act identifies 

a list of events that disqualify someone from 

membership in, participation in, or association with 

a member of a self-regulatory organization. 15 

U.S.C. 78c(a)(39). 

164Proposed Rule 3110.18(g)(1)(C) (exclusion 

applicable where the person responsible for 

triggering a continuing membership review is 

located at the location subject to inspection); FINRA 

Rule 1017(a)(7). ‘‘The term ‘final criminal matter’ 

means a criminal matter that resulted in a 

conviction of, or plea of guilty or nolo contendere 

(‘no contest’) by, a person that is disclosed, or is or 

was required to be disclosed, on the applicable 

Uniform Registration Forms.’’ FINRA Rule 1011(h). 

‘‘Specified risk events’’ include certain investmentrelated, consumer-initiated (1) customer arbitration 

awards, (2) civil judgments, (3) customer arbitration 

settlements, or (4) civil litigation settlements. 

FINRA Rule 1011(p)(1), (2). ‘‘Specified risk events’’ 

also include certain investment-related civil actions 

or regulatory actions that result in (1) monetary 

sanctions for a dollar amount at or above $15,000 

or (2) a bar, expulsion, revocation, recission, or 

suspension. See FINRA Rule 1011(p)(3), (4). 

165See proposed Rule 3110.18(g)(1)(E). A member 

firm must report to FINRA if an associated person 

of the member firm is the subject of any 

disciplinary action taken by the member firm 

involving suspension, termination, the withholding 

of compensation or of any other remuneration in 

excess of $2,500, the imposition of fines in excess 

of $2,500 or is otherwise disciplined in any manner 

that would have a significant limitation on the 

individual’s activities on a temporary or permanent 

basis. See FINRA Rule 4530. 

166As part of the requirement to develop a 

reasonably designed risk-based approach to using 

remote inspections, and the requirement to conduct 

and document a risk assessment for each location 

in accordance with the risk assessment provision of 

the Pilot, a specific location of the participating 

member firm would be required to also satisfy the 

following conditions: (1) electronic 

communications (e.g., email) are made through the 

participating member firm’s electronic system; (2) 

the associated person’s correspondence and 

communications with the public are subject to the 

participating member firm’s supervision in 

accordance with FINRA Rule 3110; and (3) no 

books or records of the member firm required to be 

made and kept current, and preserved under 

applicable securities laws and regulations, FINRA 

rules and the participating member firm’s own 

written supervisory procedures under FINRA Rule 

3110 are physically or electronically maintained 

and preserved at such location. See proposed Rule 

3110.18(g)(2). 

167See Notice at 28631. 

as appropriate.158 With regard to the 

handling of customer funds and 

securities, FINRA stated that in addition 

to having the potential for significant 

impact on customers, this ineligibility 

criteria is derived from one of several 

existing conditions that a member firm 

must satisfy in order to deem a primary 

residence as a non-branch location.159

Proprietary trading activities can 

rapidly and adversely impact the 

operational and financial stability of a 

member firm, and the resulting 

instability can pose a significant risk of 

harm to the member firm’s customers. In 

light of this risk, FINRA reasonably 

determined that a location conducting 

propriety trading should remain subject 

to on-site inspection and not be 

permitted to participate in a temporary 

pilot program designed to evaluate the 

prudence of a permanent remoteinspection program. For this reason, the 

proposed exclusion is reasonable.160

Similarly, a member firm handling its 

customers’ funds or securities increases, 

among other things, the risk of loss of 

those customers’ assets. In light of that 

risk, FINRA reasonably determined that 

a location handling customer funds or 

securities should remain subject to onsite inspection and not be permitted to 

participate in a temporary pilot program 

designed to evaluate the prudence of a 

permanent remote-inspection program. 

For this reason, the proposed exclusion 

is reasonable. 

c. Other Location-Level Ineligibility 

Criteria 

The proposed rule change would also 

prohibit remote inspections for any 

location with an associated person who: 

(1) is subject to a mandatory heightened 

supervisory plan under the rules of the 

Commission, FINRA, or a state 

regulatory agency; (2) is statutorily 

disqualified, unless such disqualified 

person (A) has been approved (or is 

otherwise permitted pursuant to FINRA 

rules and the federal securities laws) to 

associate with a member firm and (B) is 

not subject to a mandatory heightened 

supervisory plan under item (1), above, 

or otherwise as a condition to approval 

or permission for such association; (3) 

causes the member firm to undergo a 

continuing membership review 

pursuant to FINRA Rule 1017(a)(7); or, 

(4) is subject to certain disciplinary 

actions by the participating member 

firm.161 FINRA stated that these location 

ineligibility criteria are necessary to 

address the indicia of increased risk 

posed by some locations and represent 

appropriate controls and conditions 

regarding participation in the Pilot.162

No commenter offered specific support 

for, or opposition to, any of these 

exclusions. 

FINRA reasonably determined to 

exclude each of these locations from the 

Pilot given the increased risk each 

category of person could pose. First, if 

a regulator has imposed a heightened 

supervisory plan on a specific 

associated person, the regulator has 

determined that they require additional 

supervision to help ensure their 

compliance with securities laws, 

regulations, and rules. Second, an 

individual subject to a statutory 

disqualification has engaged in violative 

conduct that may indicate an increased 

risk of non-compliance.163 Third, an 

individual who has triggered a 

continuing membership review 

pursuant to FINRA Rule 1017(a)(7) is 

seeking to become an owner, control 

person, principal, or registered person 

of the member firm and has, in the 

previous five years, one or more ‘‘final 

criminal matters’’ or two or more 

‘‘specified risk events.’’ 164 Fourth, an 

individual who is subject to a reportable 

disciplinary action initiated by a 

member firm has necessarily engaged in 

misconduct that warranted the member 

firm’s imposition of significant 

discipline.165 Because each of these 

proposed exclusions identifies a 

category of person who has a history of 

law violations, misconduct, or noncompliance with laws and rules 

designed to protect investors, the 

proposed rule change reasonably 

requires an on-site inspection for each 

location from which such associated 

persons operate, rather than allowing 

those locations to be inspected 

remotely. Therefore, FINRA reasonably 

determined to exclude such locations 

from eligibility in the Pilot. 

2. Location-Level Conditions 

a. Location-Level Recordkeeping System 

The proposed rule change would 

require a participating location to make 

all electronic communications through 

the participating member firm’s 

electronic system, subject all 

communications with the public to the 

firm’s supervision, and preclude books 

and records from being physically or 

electronically maintained and preserved 

at the location.166 FINRA stated that it 

believes this provision ‘‘appropriately 

conveys a reasonable set of conditions 

related to communications of associated 

persons and the creation and 

preservation of books and records at a 

specific office or location.’’ 167 No 

commenter expressly supported or 

objected to these proposed changes. 

The proposed rule change’s locationlevel recordkeeping conditions are 


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168See proposed Rule 3110.18(b)(1); see also 

supra note 63 and accompanying text. 

169See proposed Rule 3110.18(b)(1) and (b)(2); 

see also supra note 64 and accompanying text. 

170See Notice at 28627. 

171 Id. 

172See SIFMA; Raymond James I; Cetera I; 

NASAA I; FSI. 

173See Cetera I at 1 (stating that the Pilot 

‘‘includes significant safeguards that are designed to 

maintain or enhance investor protection’’ including 

requiring participating member firms to conduct 

and document risk-based assessments); SIFMA at 2 

(‘‘[The Pilot] includes numerous safeguards to 

ensure onsite inspections are conducted when 

appropriate, such as requiring firms to perform a 

risk assessment that considers a non-exhaustive list 

of risk factors, and scoping out certain, higher-risk 

locations, individuals, and firms from the pilot.’’); 

FSI at 3–4 (‘‘The required risk-based assessment, 

coupled with restrictions that limit or restrict the 

ability of certain higher-risk firms and firm offices 

from participating in remote inspections, will 

ensure that investors are protected.’’). 

174Raymond James I at 2 (stating that risk 

assessments would also allow participating member 

firms to tailor their inspection programs to attract 

and retain a broader candidate pool who may not 

be interested in, or be able to, travel). 

175NASAA I at 4. 

176FSI; NASAA I. 

177See FSI at 4. 

178FINRA Response to Comments I at 8 (quoting 

Notice 99–45). 

179See id. 

180NASAA I at 4–5. 

181 Id. at 4–5. 

182 Id. at 5. 

183 Id. 

184Proposed Rule 3110.18(b)(2); see also 

Amendment No. 1. 

185FINRA Response to Comments I at 7 (quoting 

Notice at 28634). 

reasonable. As discussed above, a key 

component of remote—as opposed to 

on-site—inspection is prompt access to 

the records of the remotely inspected 

location from an alternative location. 

The proposed location-level 

recordkeeping conditions strengthen 

this component of the Pilot. Prompt 

access should help provide the 

participating member firm with the 

necessary insight into the location’s 

operations, both at the outset and on an 

ongoing basis. Mandating the use of the 

participating member firm’s electronic 

system for the location’s electronic 

communications and requiring the firm 

to supervise the location’s 

correspondence and communications 

help to ensure that the participating 

location’s activities lend themselves to 

remote inspection. Because the 

proposed conditions prohibit the storage 

of a participating location’s records at 

the location itself, the participating 

member firm need not conduct an onsite visit to gather and review records 

during an inspection. The proposed rule 

change therefore should facilitate timely 

and effective remote inspection of 

locations participating in the Pilot and 

decrease, though not always eliminate, 

the need for on-site inspections. 

C. Risk Assessment 

The proposed rule change would 

require a participating member firm to 

conduct and document a risk 

assessment for each location prior to 

choosing to conduct a remote inspection 

for that location.168 The risk assessment 

would require that a participating 

member firm take into account any 

higher risk activities at, or higher risk 

associated persons assigned to, that 

location, as well as mandate 

consideration of a non-exhaustive list of 

factors, including: (1) the volume and 

nature of customer complaints; (2) the 

volume and nature of outside business 

activities, particularly investmentrelated; (3) the volume and complexity 

of products offered; (4) the nature of the 

customer base, including vulnerable 

adult investors; (5) whether associated 

persons are subject to heightened 

supervision; (6) failures by associated 

persons to comply with the 

participating member firm’s written 

supervisory procedures; and (7) any 

recordkeeping violations.169 According 

to FINRA, the inclusion of this nonexhaustive list would help ensure that 

participating member firms consider 

certain high risk criteria when 

determining whether to conduct a 

remote inspection.170 FINRA further 

stated that it ‘‘expects that higher risk 

factors at a particular location would 

cause a firm to conduct on-site 

inspections of such location.’’ 171

Five commenters generally supported 

the proposed risk assessment.172 Three 

of these commenters stated that the 

requirement to conduct risk assessments 

for each location would promote 

investor protection.173 A fourth 

commenter stated that the use of a risk 

assessment would enable a participating 

member firm to dedicate more resources 

to specialized inspections targeting 

higher risk areas.174 The fifth 

commenter expressed general support 

for the provision.175

Two of the five supporting 

commenters also suggested 

modifications to the proposed rule 

change.176 One commenter expressed 

concern that FINRA would use the 

benefit of hindsight to evaluate a 

participating member firm’s 

determination to conduct a remote 

inspection where one of the listed risk 

factors is present.177 In response, FINRA 

disagreed, emphasizing that ‘‘the 

‘reasonably designed’ standard requires 

that the supervisory system, of which an 

inspection program is a part, ‘be a 

product of sound thinking and within 

the bounds of common sense, taking 

into consideration the factors that are 

unique to a member’s business[.]’ ’’ 178

FINRA also noted that the presence of 

one particular enumerated factor or 

others may not be dispositive as to 

whether an on-site or remote inspection 

of a location is appropriate, and such 

factors should be reviewed in their 

totality under the facts and 

circumstances.179

The second commenter sought 

additional conditions to the risk 

assessment. First, this commenter stated 

that a participating member firm should 

be required to conduct and document a 

risk assessment after identifying red 

flags and fully consider any significant 

change in circumstances that may 

warrant higher scrutiny.180 In the 

alternative, this commenter stated that 

FINRA should revise proposed Rule 

3110.18(b)(1) to require a risk 

assessment for each location before 

‘‘each’’ remote inspection of that 

location. The commenter explained its 

concern that participating member firms 

may ignore red flags and rely on a 

previous risk assessment to continue 

inspecting a location remotely because 

the rule would require that a risk 

assessment be conducted ‘‘prior to 

electing a remote inspection.’’ 181

Second, this commenter stated that a 

participating member firm should be 

required to provide FINRA with 

documentation of all risk assessments 

conducted after identifying red flags 

during the Pilot. The commenter 

reasoned that it would ‘‘maintain 

accountability’’ to require a 

participating member firm to articulate 

a sound basis for its decisions upon 

identifying red flags.182 Moreover, this 

commenter stated that the data would 

aid FINRA’s and the Commission’s 

understanding of risk assessment 

practices and consider the merits of any 

potential policy changes around remote 

inspections.183

To address this concern, FINRA 

amended the proposed rule change to 

expressly require that, consistent with 

FINRA Rule 3110(a), a participating 

member firm ‘‘take into consideration 

any red flags when determining whether 

to conduct a remote inspection of an 

office or location.’’ 184 FINRA stated, 

‘‘[w]here there are indications of 

problems or red flags at any office or 

location, FINRA expects members to 

investigate them as they would for any 

other office or location subject to FINRA 

Rule 3110(c), which may include an 

unannounced, on-site inspection of the 

office or location.’’ 185 FINRA also noted 

that red flags ‘‘would be required to be 

considered not only when an office or 

location is first determined to be 


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186FINRA Response to Comments II at 8. 

187Letter from Jim McHale, Executive Vice 

President, Head of WIM Compliance and Peter 

Macchio, Executive Vice President, Head of CIB 

Compliance, Wells Fargo, to Vanessa Countryman, 

Secretary, Commission, dated August 29, 2023 

(‘‘Wells Fargo’’) at 1. 

188See FINRA Response to Comments I at 7. 

189 Id. 

190See proposed Rule 3110.18(c); see also 

proposed Rule 3110.18(h)(1)(G), (h)(4). 

191See id. 192See Notice at 28629. 193NASAA I at 5–6 (stating that ‘‘it is not 

inconsistent with a principle-based approach to 

establish certain minimums or otherwise set 

boundaries around the principle to ensure at least 

a minimum level of efficacy and investor 

protection.’’). 

194FINRA Response to Comments I at 9; see also 

id. at 9 n.21 (quoting Notice 99–45) (‘‘[w]ritten 

supervisory procedures are not static documents 

that can be used for an indefinite period of time 

without modification. A firm’s existing supervisory 

system may become outdated or ineffective as a 

result of changes in the firm’s business lines, 

products, practices, or new or amended securities 

laws.’’). 

appropriate for a remote inspection but, 

consistent with Rule 3110(a)’s overall 

obligation for a firm to establish and 

maintain a reasonably designed 

supervisory system, as part of a firm’s 

ongoing determination to conduct 

subsequent inspections of the office or 

location remotely.’’ 186 One commenter 

expressed support for this amendment, 

stating that it ‘‘strengthen[ed] the Pilot’s 

safeguards.’’ 187

FINRA declined to amend the 

proposed rule change to require 

participating member firms provide 

FINRA the risk assessments conducted 

after identifying red flags. FINRA stated 

that the Pilot already requires 

submission of comprehensive data and 

information to FINRA that is sufficient 

for FINRA to conduct its assessment.188

FINRA also noted that it could obtain 

such assessments during a FINRA 

examination, which should provide 

sufficient accountability.189

As stated above, the proposed rule 

change’s ineligibility criteria, 

safeguards, and limitations prohibit 

member firms and locations from 

participating in the Pilot in certain 

higher-risk circumstances. However, 

other factors not explicitly identified 

among the exclusions can, in certain 

circumstances, indicate heightened 

levels of risk either before or after 

determining whether a remote 

inspection is appropriate. The risk 

assessment required by the proposed 

rule change will help to mitigate 

residual risk not addressed by the 

ineligibility criteria and the affirmative 

conditions imposed to participate in the 

Pilot. Specifically, the proposed rule 

change would require a participating 

member firm to consider certain indicia 

of risk for each candidate location for 

remote inspection, including the 

volume and nature of customer 

complaints; the volume and nature of 

outside business activities, particularly 

investment-related; the volume and 

complexity of products offered; the 

nature of the customer base, including 

vulnerable adult investors; whether 

associated persons are subject to 

heightened supervision; failures by 

associated persons to comply with the 

member’s written supervisory 

procedures; and any recordkeeping 

violations. In addition, the proposed 

rule change would mandate that a 

participating member firm consider 

higher-risk activities, higher-risk 

persons, and red flags occurring at any 

location when determining whether a 

remote inspection is or continues to be 

appropriate. Furthermore, the proposed 

rule change emphasizes consideration of 

red flags as part of a participating 

member firm’s ongoing determination of 

whether to remotely inspect a location. 

In this way, the proposed rule change 

helps to ensure that a participating 

member firm appropriately accounts for 

the full range of risks associated with 

each location throughout the term of the 

Pilot. For these reasons, the proposed 

rule change is reasonable. 

The commenter requested that 

participating member firms submit 

documentation of risk assessments 

following the identification of red flags, 

but FINRA reasonably determined not to 

require such documentation, given that 

it would be required to be maintained 

by the participating member firms and 

be made available to FINRA and the 

Commission during an examination. In 

addition, the proposed rule change 

already contains provisions requiring 

quarterly submission of data and 

information to FINRA, including 

submission of ‘‘significant findings,’’ 

which should help FINRA to study 

trends and promptly identify any 

regulatory oversight concerns, as well as 

provide FINRA with periodic data to 

evaluate a participating member firm’s 

continued participation in the Pilot. For 

these reasons, the proposed risk 

assessment provision is reasonable. 

D. Written Supervisory Procedures 

The proposed rule change would 

require that a participating member firm 

‘‘establish, maintain, and enforce’’ 

certain written supervisory procedures 

for conducting remote inspections.190

Reasonably designed written 

supervisory procedures for conducting 

remote inspections would be required to 

address, among other things: (1) the 

methodology, including technology, that 

may be used to conduct remote 

inspections; (2) the factors considered in 

the risk assessment made for each 

applicable location pursuant to the risk 

assessment provision of the Pilot; (3) the 

procedures specified elsewhere in the 

Pilot regarding escalating significant 

findings, new hires, supervising brokers 

with a significant history of misconduct, 

OBA and DBA designations, and data 

and information collection and 

transmission; and (4) the use of other 

risk-based systems employed generally 

by the participating member firm to 

identify and prioritize for review those 

areas that pose the greatest risk of 

potential violations of applicable 

securities laws and regulations, and of 

applicable FINRA rules.191 FINRA 

stated that it ‘‘expects firms to take into 

account the factors affecting their 

systems and businesses in crafting 

reasonably designed policies and 

procedures’’ to comply with the Pilot.192

One commenter recommended that 

the proposed rule change also require 

each participating member firm’s 

written supervisory procedures to 

include four additional factors: (1) the 

specific technologies that the 

participating member firm would use 

for remote inspections and evidence 

that the participating member firm and 

its supervisory personnel have sufficient 

access to and proficiency with those 

technologies; (2) the circumstances in 

which the participating member firm 

will conduct physical inspections, both 

in the ordinary course and as a result of 

red flags; (3) whether and how the 

participating member firm intends to 

conduct unannounced inspections; and 

(4) how the participating member firm 

will use its remote inspection 

procedures to control for the possibility 

of active deception such as 

concealment, removal, or destruction of 

evidence of misconduct.193

In response, FINRA stated that the 

proposed written supervisory 

procedures provision reflects a balanced 

approach between dictating the content 

of a participating member firm’s written 

supervisory procedures for remote 

inspections and maintaining flexibility 

in alignment with FINRA Rule 3110’s 

principle-based view of what constitutes 

reasonably designed written supervisory 

procedures.194 Nevertheless, FINRA also 

stated that many of this commenter’s 

recommendations are already addressed 

by specific terms in its rules and in the 

proposed rule change. For example, 

proposed Rule 3110.18(c) would require 

a participating member firm’s 

reasonably designed supervisory 

procedures to address the technology 

tools that may be used to conduct 


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195FINRA Response to Comments II at 6. 

196 Id. 

197 Id. 

198FINRA Response to Comments I at 9. 

199See FINRA Rule 3110(a). 200See also FINRA Response to Comments I at 9 

(‘‘FINRA believes that proposed Rule 3110.18(c), 

which must be read with proposed Rule 3110.18(d) 

and Rule 3110, would provide the appropriate 

guardrails that NASAA seeks while also remaining 

aligned with the core tenet of Rule 3110—that is, 

a member firm must have a ‘reasonably designed’ 

supervisory system, including written supervisory 

procedures, to achieve compliance with applicable 

securities laws and regulations, and with applicable 

FINRA rules.’’). 

201Proposed Rule 3110.18(d). 202 Id. 203 Id. FINRA has emphasized, in guidance issued 

to member firms, that a well-designed branch 

inspection program is important to both a firm’s 

supervisory program as well as a firm’s risk 

management program. For example, Regulatory 

Notice 11–54 stated, ‘‘[a]n effective risk assessment 

process will help drive the frequency, intensity and 

focus of branch office inspections; it should also 

serve as an important consideration in the decision 

to conduct the [inspection] on an announced or 

unannounced basis. Therefore, branch offices 

should be continuously monitored with respect to 

changes in their overall business, products, people 

and practices.’’ See FINRA Regulatory Notice 11– 

54 (Nov. 2011), https://www.finra.org/rulesguidance/notices/11-54. 

204See proposed Rule 3110.18(b); see also Notice 

at 28628. 

205Proposed Rule 3110.18(e). A participating 

member firm’s documentation would be required to 

include whether an on-site inspection was 

conducted at such location because of the results 

of a remote inspection. Id. 

206See Notice at 28635. 

remote inspections. FINRA stated that it 

believes that the failure to have 

adequate surveillance and technology 

tools, and the knowledge of and access 

to them, would raise questions about the 

reasonableness of remote inspection.195

Proposed Rule 3110.18(b)(2) also would 

require, among other things, 

participating member firms to conduct 

on-site inspections or more frequent 

unannounced, on-site inspections of a 

location where there are indicators of 

irregularities or misconduct; 196 and 

proposed Rule 3110.18(c) would require 

participating member firms to 

‘‘establish, maintain, and enforce 

written supervisory procedures 

regarding remote inspections that are 

reasonably designed to detect and 

prevent violations of and achieve 

compliance with applicable securities 

and regulations, and with FINRA 

rules.’’ 197 In addition, FINRA stated 

that, overall, FINRA Rule 3110 

established a framework that requires a 

firm to have a reasonably designed 

supervisory system, including written 

supervisory procedures, to achieve 

compliance with applicable securities 

laws and regulations, and with 

applicable FINRA rules. As such, 

FINRA declined to amend the proposed 

rule change to explicitly include the 

commenter’s suggested prescriptive 

elements.198

Requiring participating member firms 

to establish, maintain, and enforce 

written supervisory procedures for 

conducting remote instructions is 

reasonable and should help such 

member firms detect and prevent 

violations of and achieve compliance 

with applicable securities laws and 

regulations, and with applicable FINRA 

rules. In particular, requiring those 

procedures to address technology, risk 

assessment factors, data and information 

collection and transmission, and other 

risk-based systems to identify and 

prioritize for review areas that pose the 

greatest risk should reasonably address 

aspects of remote inspections that may 

raise a threat of heightened risk of 

compliance failures. While the proposed 

rule change prescribes several items that 

would be required to be addressed, 

participating member firms are not 

limited to these items alone and have 

flexibility to tailor their procedures to 

their business activities and other 

relevant factors to meet the obligation 

under FINRA Rule 3110 that the 

procedures be ‘‘reasonably designed to 

detect and prevent violations of and 

achieve compliance with applicable 

securities laws and regulations, and 

with applicable FINRA rules.’’ 199 In 

addition, the proposed rule change 

makes clear that the requirement to 

conduct inspections of locations is only 

one part of the member firms’ overall 

obligation to have an effective 

supervisory system.200 For these 

reasons, the proposed written 

supervisory provisions are reasonable. 

E. Effective Supervisory System 

As stated above, the proposed rule 

change would hold a remote inspection 

of a location to the same standards 

applicable to on-site inspections.201

Specifically, the proposed rule change 

would reiterate that the requirement to 

conduct inspections of locations is one 

part of the member firm’s overall 

obligation to have an effective 

supervisory system and therefore a 

participating member firm would be 

required to maintain its ongoing review 

of the activities and functions occurring 

at all locations, whether or not the 

member firm conducts inspections 

remotely.202 In addition, where a 

participating member firm’s remote 

inspection of a location identifies any 

red flags, the proposed rule states that 

the participating member firm may need 

to impose additional supervisory 

procedures for that location or may need 

to provide for more frequent monitoring 

of that location, including potentially a 

subsequent on-site visit on an 

announced or unannounced basis.203 No 

commenter offered specific support for, 

or opposition to, this proposed 

provision. 

The proposed rule change is 

reasonable and will serve as an 

appropriate reminder to participating 

member firms that any location subject 

to a remote inspection is still subject to 

the same standard for review as that of 

an on-site inspection. As such, there 

should be no diminution in on-going 

supervision, regardless of the method a 

participating member firm uses to 

inspect its locations. The proposed rule 

change should also help ensure that 

participating member firms are aware 

that even if a location is eligible for a 

remote inspection at one point in time, 

a participating member firm may need 

to take additional steps (e.g., an on-site 

visit on an announced or unannounced 

basis) should it become aware of any red 

flags associated with that location.204

For these reasons, the proposed rule 

change is reasonable. 

F. Documentation Requirement 

As stated above, the proposed rule 

change would require that a 

participating member firm maintain and 

preserve a centralized record for each 

year of the Pilot that identifies: (1) all 

locations that were inspected remotely; 

and (2) any locations for which the 

participating member firm determined 

to impose additional supervisory 

procedures or more frequent 

monitoring.205 FINRA stated that 

requiring the retention of such written 

reports would act as an important 

safeguard for the Pilot.206 No 

commenter expressly supported or 

objected to these proposed changes. 

Documenting locations that were 

inspected remotely, as well as locations 

where additional supervisory 

procedures or more frequent monitoring 

were imposed, is reasonable and should 

provide regulators with relevant 

information when conducting their 

examination and risk monitoring 

responsibilities. Specifically, this 

information should help regulators 

assess the reasonableness of a 

participating member firm’s use of 

remote inspection as one component of 

a reasonably designed supervisory 

system. For these reasons, the proposed 

documentation requirement is 

reasonable. 

G. Data Collection 

1. Quarterly Data and Information 

As stated above, the proposed rule 

change would require participating 

member firms to collect and submit 


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207See proposed Rule 3110.18(h)(1). 208Proposed Rule 3110.18(h)(4) is also referenced 

in proposed Rule 3110.18(c) (Written Supervisory 

Procedures), discussed above. 209See Notice at 28632. 210See, e.g., SIFMA at 2; CAI at 3; Wells Fargo 

at 2; Raymond James I at 2; NASAA I at 8; FSI at 

4; letter from Gail Merken, Chief Compliance 

Officer, Janet Dyer, Chief Compliance Officer, John 

McGinty, Chief Compliance Officer, Fidelity 

Investments; Janet Dyer, Chief Compliance Officer, 

National Financial Services LLC; and John 

McGinty, Chief Compliance Officer, Fidelity 

Distributors Company LLC, to Vanessa Countryman, 

Secretary, Commission, dated May 25, 2023, at 1; 

letter from Barbara Armeli, Managing Director, 

Chief Compliance Officer, Charles Schwab & Co., 

Inc. and Lynn Konop, Managing Director, Chief 

Compliance Officer, TD Ameritrade, Inc., to 

Vanessa Countryman, Secretary, Commission, dated 

May 25, 2023, at 1; letter from Gail Merken, Chief 

Compliance Officer, Janet Dyer, Chief Compliance 

Officer, John McGinty, Chief Compliance Officer, 

Fidelity Investments; Janet Dyer, Chief Compliance 

Officer, National Financial Services LLC; and John 

McGinty, Chief Compliance Officer, Fidelity 

Distributors Company LLC, to Vanessa Countryman, 

Secretary, Commission, dated August 29, 2023, at 

1–2. See also generally Cetera I at 1. 

211See letter from Mark Seffinger, Chief 

Compliance Officer; LPL Financial, to Vanessa 

Countryman, Secretary, Commission, dated May 25, 

2023 (‘‘LPL I’’) at 2; letter from Christopher A. 

Iacovella, President & Chief Executive Officer, 

American Securities Association, to Vanessa 

Countryman, Secretary, Commission, dated May 25, 

2023 (‘‘ASA I’’) at 2. 

212ASA I at 2. 

213LPL I at 2. 

214FINRA Response to Comments I at 14. 

215 Id. 

216 Id.; see also FINRA Response to Comments I 

at 14 n.33. 

217See NASAA I at 8–9; see also letter from 

Andrew Hartnett, NASAA President and Deputy 

Commissioner, Iowa Insurance Division, North 

American Securities Administrators Association, 

Inc., to Sherry R. Haywood, Assistant Secretary, 

Commission, dated August 29, 2023 (‘‘NASAA II’’) 

at 2. 

218See NASAA I at 8. 

219 Id. 

220FINRA Response to Comments I at 15; see also 

supra note 82 (describing the definition of 

‘‘significant findings.’’). FINRA has used the same 

definition for ‘‘significant finding’’ in the Notice, 

Amendment No. 1, and FINRA Response to 

Comments I. Id. 

221FINRA Response to Comments I at 15–16; see 

also Notice at 28632. FINRA noted that it could 

obtain any additional findings in a participating 

member firm’s inspection reports during a FINRA 

examination. See FINRA Response to Comments I 

at 16. 

222FINRA Response to Comments I at 15; see also 

supra note 82 (describing the definition of 

‘‘significant findings.’’). 

223NASAA II at 2–3. The commenter stated that, 

without a more precise standard, participating 

member firms will inevitably reach different 

conclusions. Id. at 3. In addition, this commenter 

repeated the request to require participating 

member firms provide ‘‘all findings’’ to FINRA. Id. 

at 2. 

224See FINRA Response to Comments II at 8 n.25. 

225 Id. at 8. 

226 Id. at 9 n.28. 

227 Id. at 8–9. 

228 Id. at 9. 

certain data and information to FINRA 

on a quarterly basis. Specifically, it 

would cover information about the 

number and nature of inspections 

completed during the quarter, and a list 

of the significant findings, among other 

things.207 The proposed rule change 

also would require that a participating 

member firm establish, maintain, and 

enforce written policies and procedures 

that are reasonably designed to comply 

with the data and information 

collection, and transmission 

requirements of the Pilot.208 FINRA 

stated that it believes that ‘‘formalized, 

uniform collection of data is critical’’ for 

it to meaningfully assess the 

effectiveness of remote inspections and 

shape potential permanent amendments 

to FINRA Rule 3110(c).209

Several commenters agreed that the 

data and information requirements 

would benefit the Pilot by providing 

FINRA the information it needs to make 

informed decisions about potential 

future rule changes regarding remote 

inspections.210 Two commenters 

suggested modifications to the proposed 

rule change, stating that requiring 

quarterly reporting was too onerous.211

In particular, one of these commenters 

stated that quarterly reporting ‘‘creates 

an outsized burden on smaller, middlemarket, and regional firms’’ due to the 

detailed data and information 

required.212 The other commenter 

described the expected burden on larger 

firms and requested FINRA change the 

reporting frequency to twice a year.213

In response, FINRA declined to 

amend the required frequency of data 

and information reporting.214 FINRA 

stated that it ‘‘believes that the cadence 

and amount of comprehensive data are 

appropriate and necessary for FINRA to 

effectively study trends and firms’ 

experiences with their remote 

inspection programs in a timely 

manner.’’ 215 However, FINRA also 

stated that it is exploring ways for 

participating member firms to provide 

the data and information to FINRA in a 

more efficient and timely manner.216

One commenter recommended that 

FINRA amend the proposed rule change 

to require participating member firms 

provide ‘‘all findings’’ made during 

remote inspections or, at a minimum, 

‘‘all significant findings’’ as opposed to 

‘‘most significant findings.’’ 217 The 

commenter reasoned that allowing 

subjectivity and discretion in data 

reporting would undermine the 

uniformity of the data and hinder 

FINRA’s ability to assess trends and 

developments.218 The commenter 

maintained that ‘‘all findings’’ would 

therefore be appropriate because any 

finding significant enough to be 

documented in an inspection report 

should be reported.219

In response, FINRA amended the 

proposed rule change to require 

participating member firms to report 

‘‘significant findings’’ rather than ‘‘most 

significant findings.’’ 220 FINRA, 

however, declined to require 

participating member firms to report 

‘‘all findings’’ because it would yield 

overly broad data, making it 

‘‘challenging to discern key trends in a 

meaningful way.’’ 221 FINRA stated that 

providing participating member firms 

‘‘the agency to assess what constitutes 

their significant findings’’ would 

enhance FINRA’s ability to review a 

discrete set of data that would focus on 

key areas of concern, which would help 

it assess the effectiveness of remote 

inspections.222

The same commenter acknowledged 

FINRA’s amendment and requested that 

FINRA define the term ‘‘significant 

findings’’ with more precision to avoid 

varying subjective judgments that might 

skew the data used to evaluate the 

effectiveness of the Pilot.223 In response, 

FINRA stated that it provided several 

clarifying examples of findings that may 

prompt escalation or further internal 

review, including the use of unapproved 

communication mediums, customer 

complaints, or undisclosed outside 

business activities or private securities 

transactions.’’ 224 FINRA further 

explained that it decided to include 

flexibility in the definition of 

‘‘significant findings’’ because a finding 

that is significant for one participating 

member firm ‘‘may differ from another 

participant due to their respective 

attributes (e.g., size, business model, 

organizational structure) and tailored 

supervisory system.’’ 225 Moreover, 

findings that may suggest a pattern 

could be deemed ‘‘significant’’ for 

purposes of the proposed Pilot.226 As a 

result, FINRA stated that it believes that 

participating member firms ‘‘should 

have the ability to exercise their 

reasonable judgment of what findings 

are significant based on the relevant 

facts and circumstances.’’ 227 FINRA 

stated it believes that this proposed 

approach is consistent with the 

principle-based framework of Rule 

3110.228 In addition, while the 

commenter suggested that FINRA take a 

more prescriptive approach, FINRA 

reiterated its belief that the proposed 

rule change’s definition of ‘‘significant 

findings’’ would provide a balanced 

approach to obtain meaningful data and 

information to appropriately assess the 


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229 Id. In particular, the commenter suggested that 

there be a ‘‘more precise standard (or set of 

standards) for when a ‘‘finding’’ is ‘‘significant.’’ 

NASAA II at 3, n.12 (pointing to the ‘‘very clear 

reporting standards in FINRA Rule 4530). In 

response, FINRA declined to change the definition, 

stating the current approach is consistent with the 

principle-based framework of FINRA Rule 3110. 

See FINRA Response to Comments II at 8–9. 

230See supra note 82. 

231See proposed Rule 3110.18(h)(2); see also 

Amendment No. 1. The additional data and 

information would include: (1) the number of 

locations with an inspection completed between 

January 1 of the first Pilot Year and the day before 

the effective date of the Pilot; (2) the number of 

locations referenced in item (1) that were inspected 

remotely between January 1 of the first Pilot Year 

and the day before the effective date of the Pilot; 

and (3) the number of locations referenced in item 

(1) that were inspected on-site between January 1 

of first Pilot Year and the day before the effective 

date of the Pilot. In addition, Amendment No. 1 

imposed two new obligations to collect and 

produce data and information to FINRA. 

Specifically, participating member firms would also 

be required to collect and provide to FINRA the 

following: (4) the number of locations referenced in 

item (2) where findings were identified, the number 

of those findings, and a list of the significant 

findings; and (5) the number of locations referenced 

in item (3) where findings were identified, the 

number of those findings, and a list of the 

significant findings. 

232See Notice at 28632. 

233See proposed Rule 3110.18(h)(3). The data and 

information would include: (1) the number of 

locations with an inspection completed during 

calendar year 2019; and (2) the number of locations 

referenced in item (1) where findings were 

identified, the number of those findings, and a list 

of the most significant findings. Id. As originally 

proposed, the proposed rule change required a list 

of the ‘‘most significant findings,’’ which FINRA 

amended to ‘‘significant findings.’’ See Amendment 

No. 1. 

234NASAA I at 8. 

235See CAI at 3; FSI at 4–5. Both commenters cite 

FINRA Rule 3010(c)(2), which states: ‘‘An 

inspection and review by a member . . . must be 

reduced to a written report and kept on file by the 

member for a minimum of three years, unless the 

inspection is [of a non-branch location] and the 

regular periodic schedule is longer than a three-year 

cycle, in which case the report must be kept on file 

at least until the next inspection report has been 

written.’’ 

236FSI at 5; see also CAI at 3 (‘‘[T]here is concern 

that the requirement to provide such information 

from 2019 may exclude certain firms from being 

able to participate since they may not be able to 

provide information for 2019 inspections.’’). 

effectiveness of a participating member 

firm’s inspection program.229

Quarterly reporting of Pilot data 

should allow FINRA to review and 

assess data about participating member 

firms’ inspection programs in a timely 

manner. While a quarterly reporting 

obligation is more burdensome than a 

less frequent one, participation in the 

Pilot is voluntary, and a quarterly 

schedule should help FINRA to study 

trends in the data and information and 

more promptly identify any regulatory 

oversight concerns than with a less 

frequent reporting interval. A more 

frequent reporting cycle would also 

provide FINRA with more up-to-date 

data to evaluate a participating member 

firm’s continued participation in the 

Pilot. 

A commenter expressed concerns 

about the potential subjectivity of the 

data and information that would be 

collected during the Pilot if parties were 

required to report only ‘‘significant 

findings.’’ However, FINRA has made a 

reasonable distinction between the 

quantity and the quality of the data it 

would seek from participating member 

firms during the Pilot, and narrowing 

the focus to study significant areas of 

concern should help serve the Pilot’s 

purpose to assess the effectiveness of 

remote inspections. Also, to help 

alleviate concerns around subjectivity, 

FINRA defined ‘‘significant finding’’ in 

the proposed rule change and provided 

examples to further clarify its meaning, 

which will help standardize reporting of 

data by participating member firms.230

The proposed principle-based approach 

to this aspect of data reporting should 

allow firms flexibility to determine what 

types of findings need to be reported 

based on their unique business models. 

Further, as FINRA stated, whether a 

finding is significant may change 

depending on the relevant facts and 

circumstances. Moreover, findings that 

may suggest a pattern could be deemed 

‘‘significant’’ for purposes of the 

proposed Pilot even where they might 

not be considered significant 

individually. Thus, having reasonable 

flexibility is beneficial. Accordingly, 

FINRA’s principle-based approach to 

interpreting the term ‘‘significant 

finding’’ is reasonable. For these 

reasons, the Commission finds the 

proposed data and information 

collection provision is reasonable. 

2. Additional Data and Information if 

the First Year of the Pilot is Less Than 

a Full Year 

As stated above, if Pilot Year 1 covers 

less than a full calendar year, the 

proposed rule change would require a 

participating member firm to provide 

additional data and information to cover 

the period of time between January 1 

and the day prior to the effective date 

of the Pilot.231 FINRA stated that this 

would enable it to capture, in the 

aggregate, complete inspection counts 

(including remote and on-site) for the 

entire calendar year in addition to the 

quarterly data it would receive during 

the Pilot.232 Aside from general 

comments in support of the Pilot’s data 

and information requirements discussed 

above, no commenter offered specific 

support for, or opposition to, this 

provision. 

The proposed rule change should 

provide FINRA with a fuller picture of 

the nature, amount, and outcomes of the 

inspections conducted by participating 

member firms and allow FINRA to 

aggregate the data and information 

provided with the quarterly data 

received during the Pilot to obtain a full 

picture of inspections completed for the 

entire calendar year. More specifically, 

the requirement to provide this 

additional data and information to 

FINRA should help address the 

potential gap of time that would result 

in FINRA lacking complete data if the 

first year of the Pilot is less than a full 

calendar year. The data and information 

should also provide FINRA with useful 

information regarding those remote 

inspections conducted under the 

temporary relief of FINRA Rule 3110.17 

if those inspections are completed 

between January 1 and the day before 

the effective date of the Pilot. Therefore, 

the proposed data and information 

collection should improve FINRA’s 

ability to assess the effectiveness of the 

Pilot during its pendency. For these 

reasons, the proposed data and 

information collection provision is 

reasonable. 

3. Additional Data and Information for 

Calendar Year 2019 

As originally proposed, the proposed 

rule change would have required that a 

participating member firm collect and 

provide to FINRA data about 

inspections completed in 2019.233

One commenter expressed support for 

the collection of 2019 data, stating that 

it would ‘‘significantly enhance’’ 

FINRA’s ability to more broadly judge 

the efficacy of remote supervisions.234

Two other commenters similarly 

acknowledged the value in obtaining 

this data and information from 

participating member firms, but raised 

concerns that some member firms may 

no longer maintain inspection reports 

from 2019 since inspection reports are 

generally only required to be 

maintained for a period of three 

years.235 These two commenters stated 

that a member firm should not be 

excluded from participation in the Pilot 

if it is unable to provide the 2019 data 

to FINRA, despite having complied with 

the applicable record retention 

requirement. Instead, they 

recommended that FINRA amend the 

proposed rule change to require 

participating member firms to collect 

and provide to FINRA the 2019 data ‘‘if 

available in the firm’s records’’ and to 

require member firms to make a ‘‘best 

efforts’’ attempt to collect it.236

In response, FINRA amended the 

proposed rule change to require 


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237See proposed Rule 3110.18(h)(3); see also 

Amendment No. 1. 

238FINRA Response to Comments I at 16. 

239NASAA II at 4 (reasoning that it is unlikely 

an exception is needed because firms routinely 

retain data for far longer than is required by rule; 

however, if FINRA keeps this exception, the 

commenter’s suggested language would help protect 

the integrity of the Pilot against firms that are 

‘‘slipshod’’ in their document retention (or are 

actively seeking to evade the Pilot requirements)). 

240See FINRA Response to Comments II at 10. 

241 Id. 

242 Id. 

243See Notice at 28635. 

244See proposed Rule 3110.18(i). A member firm 

seeking to participate would be required to provide 

FINRA an opt-in notice at least five calendar days 

before the beginning of the Pilot Year and agree to 

participate and comply with the Pilot requirements 

for the duration of such Pilot Year. A participating 

member firm would be deemed to have elected and 

agreed to participate in the Pilot in subsequent Pilot 

Years until the Pilot expires. To opt out, a 

participating member firm would need to provide 

FINRA with notice at least five calendar days before 

the end of the current Pilot Year. 

245See Notice at 28633. 

246See proposed Rule 3110.18(j). 

247See proposed Rule 3110.18(k). 

248See Notice at 28633; see also, e.g., letter from 

Melanie Senter Lubin, President, NASAA, to J. 

Matthew DeLesDernier, Assistant Secretary, 

Commission, regarding FINRA–2022–021, dated 

August 23, 2022, at 8–9 (relaying concerns 

regarding FINRA’s ability to monitor the Pilot). 

249See Notice at 28633. 

participating member firms to ‘‘act in 

good faith using best efforts’’ to collect 

and provide the 2019 data to FINRA 

(‘‘good faith exception’’).237 As such, 

FINRA stated that if a participating 

member firm is unable to provide these 

data, the member firm would not 

necessarily be precluded from 

participating in the Pilot. FINRA 

acknowledged that not all member firms 

will have maintained the 2019 data, but 

strongly encouraged firms that plan to 

participate in the Pilot to retain their 

2019 data, as it would enhance the 

value of the Pilot for any future 

rulemaking regarding remote 

inspections.238

One commenter opposed this 

amendment to the proposed rule 

change, stating that it was insufficient. 

This commenter recommended that 

FINRA further amend the proposed rule 

change to require any member firm 

seeking to avail itself of this exception 

to ‘‘document the precise steps in 

support of [its] ‘best efforts in good 

faith’ ’’ to recover its 2019 data.239

In response, FINRA stated that 

because the concepts of ‘‘good faith’’ 

and ‘‘best efforts’’ are commonly 

understood legal standards, there is no 

need to require a participating member 

firm to document the steps it took to 

recover its 2019 data.240 Furthermore, 

FINRA stated that while some 

participating member firms may keep 

their inspection reports beyond the 

minimum rule-based retention period, 

they are not required to do so.241 Thus, 

FINRA declined to amend the proposed 

rule change.242

The proposed rule change is 

reasonable and should help ensure that 

FINRA has the data and information it 

needs to best meet a key objective for 

the Pilot—to determine the effectiveness 

of the Pilot. Since 2019 is the last full 

calendar year that member firms were 

required to include an on-site visit in 

their inspections, the 2019 data should 

represent a baseline of data about onsite inspections against which FINRA 

could measure changes due to using 

remote inspections. Specifically, the 

proposed rule change would enable 

FINRA to compare the 2019 data with 

the quarterly data that would be 

collected during the Pilot to identify 

and assess any differences. Some 

participating member firms may not 

have maintained 2019 inspection 

reports beyond the time period required 

by FINRA Rule 3110(c)(2) and such 

member firms should not be excluded 

from participating in the Pilot for that 

reason. As such, FINRA reasonably 

determined that such member firms may 

continue to participate if they act in 

good faith using best efforts to provide 

the data and information in order to 

maintain a level of accountability and 

mitigate concerns that a participating 

member firm would purposely withhold 

this information. 

H. Other Safeguards and Limitations 

Provisions 

1. Length of Pilot 

As stated above, under the proposed 

rule change the Pilot would expire three 

years after its effective date. FINRA 

stated that it believes the Pilot would 

provide FINRA the appropriate amount 

of time and population sample to better 

evaluate the use of remote inspections 

in the current hybrid work 

environment.243 No commenter 

expressly supported or objected to these 

proposed changes. 

The proposed length of the Pilot 

should suffice to allow FINRA to 

evaluate the efficacy of the Pilot, and to 

consider any adjustments as necessary. 

For these reasons, the scope of the Pilot 

provision is reasonable. 

2. Method of Pilot Participation 

As stated above, the proposed rule 

change would set forth the process for 

opting in and out of the Pilot.244 FINRA 

stated that it believes the proposed 

process would lend continuity to the 

data and information collected during 

the Pilot.245 No commenter expressly 

supported or objected to these proposed 

changes. 

The proposed process for opting in 

and out of the Pilot is reasonable and 

should help FINRA obtain consistent 

data and information from participating 

member firms, helping it assess the 

Pilot’s effectiveness. Specifically, setting 

minimum commitments for 

participation and requiring a set time 

period for opting out should help ensure 

that FINRA will receive a full set of data 

from any participating member firm for 

any given Pilot Year. In addition, such 

commitments should help safeguard 

against a participating member firm 

trying to exit the Pilot in order to avoid 

submitting problematic data or 

complying with other conditions in the 

Pilot. For these reasons, the Pilot 

participation provision is reasonable. 

3. Failure To Satisfy Conditions and 

Determination of Ineligibility 

As stated above, the proposed rule 

change would deem a participating 

member firm that failed to satisfy the 

safeguards and limitations of the Pilot, 

including the requirement to timely 

collect and submit data, ineligible to 

participate in the Pilot, thus requiring it 

to conduct on-site inspections of each 

location.246 In addition, as stated above, 

the proposed rule change would give 

FINRA discretion to make a 

determination in the public interest and 

for the protection of investors that a 

member firm is no longer eligible to 

participate in the Pilot if the member 

firm fails to comply with the Pilot’s 

requirements.247 FINRA stated that it 

proposed this second provision to 

address concerns regarding allowing 

FINRA to more effectively assess 

whether particular member firms pose a 

higher risk when monitoring for 

compliance with the Pilot.248

Specifically, FINRA stated that the 

proposed rule change would permit 

FINRA to exclude higher risk firms and 

locations that were not otherwise 

excluded from participation by the 

Pilot’s other safeguards and 

limitations.249 No commenter expressly 

supported or objected to these proposed 

changes. 

The Pilot’s safeguards and limitations, 

discussed herein, are reasonable and 

should help reduce the potential risk of 

non-compliance among member firms 

participating in the Pilot. Member firms 

who fail to satisfy the conditions of the 

Pilot should not be eligible to 

participate in the Pilot or conduct 

remote inspections and should be 

required to conduct all inspections onsite. Additionally, FINRA would have 

the flexibility to address situations 


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82482 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

250 15 U.S.C. 78o–3(b)(6). 

251 15 U.S.C. 78s(b)(2). 

252 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Targeted returns reflect the aspirational 

performance goals for an investment or investment 

strategy. Projections of performance reflect an 

estimate of the future performance of an investment 

or investment strategy, which is often based on 

historical data and assumptions. Projections of 

performance are commonly established through 

mathematical modeling. See Investment Advisers 

Act Release No. 5653 (December 22, 2020), 86 FR 

13024, 13081 n.699 (March 5, 2021) and 

accompanying text. 

4See FINRA Rule 2210(d)(1)(F). 5See FINRA Rule 2210(d)(1)(F)(i). 6On the other hand, this exception would not 

apply to a calculator that predicted the likelihood 

of achieving these assumed variables and outcomes. 

See Notice to Members 04–86 (November 2004), n.3. 7See FINRA Rule 2210(d)(1)(F)(ii). 8See Notice to Members 04–86, supra note 6. 

where a participating member firm may 

pose a heightened risk of noncompliance but has not been otherwise 

excluded by the safeguards and 

limitations of the Pilot. For these 

reasons, proposed Rule 3110.18(j) and 

proposed Rule 3110.18(k) are 

reasonable. 

III. Conclusion 

For the reasons set forth above, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and, in general, 

protect investors and the public 

interest.250

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 251

that the proposed rule change (SR– 

FINRA–2023–007), as modified by 

Amendment No. 1, be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.252

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25886 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Release No. 34–98977; File No. SR– 

FINRA–2023–016] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of a 

Proposed Rule Change To Amend 

FINRA Rule 2210 (Communications 

With the Public) To Permit Projections 

of Performance of Investment 

Strategies or Single Securities in 

Institutional Communications 

November 17, 2023. 

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 November 

13, 2023, the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by FINRA. 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 

FINRA is proposing to amend FINRA 

Rule 2210 (Communications with the 

Public). Currently Rule 2210 prohibits 

projections of performance or targeted 

returns 3 in member communications, 

subject to specified exceptions. The 

proposed rule change would allow a 

member to project the performance or 

provide a targeted return with respect to 

a security or asset allocation or other 

investment strategy in an institutional 

communication or a communication 

distributed solely to qualified 

purchasers as defined in the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’) that promotes or 

recommends specified non-public 

offerings, subject to stringent conditions 

to ensure these projections are carefully 

derived from a sound basis. 

The text of the proposed rule change 

is available on FINRA’s website at 

http://www.finra.org, at the principal 

office of FINRA 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, 

FINRA 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. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Rule 2210’s General Prohibition of 

Projections and Its Exceptions 

Rule 2210 provides that 

communications may not predict or 

project performance, imply that past 

performance will recur or make any 

exaggerated or unwarranted claim, 

opinion or forecast.4 The general 

prohibition against performance 

projections is intended to protect 

investors who may lack the capacity to 

understand the risks and limitations of 

using projected performance in making 

investment decisions. 

This general standard does not 

prohibit certain types of 

communications, however. First, Rule 

2210 allows a hypothetical illustration 

of mathematical principles, provided it 

does not predict or project the 

performance of an investment or 

investment strategy.5 The ‘‘hypothetical 

illustration of mathematical principles’’ 

exception to the prohibition of 

projections applies to tools that serve 

the function of a calculator that 

computes the mathematical outcome of 

certain assumed variables without 

predicting the likelihood of either the 

assumed variables or the outcome. For 

example, this exception applies to a 

calculator that computes a net amount 

of savings that an investor would earn 

over an assumed period of time with 

assumed variables of rates of returns, 

frequency of compounding, and tax 

rates.6

Second, the general prohibition on 

projections does not preclude a member 

from employing an investment analysis 

tool, or a written report produced by an 

investment analysis tool, that includes 

projections of performance provided it 

meets the requirements of FINRA Rule 

2214 (Requirements for the Use of 

Investment Analysis Tools).7 FINRA 

adopted the predecessor to Rule 2214 in 

2004 to allow members to offer or 

employ technological tools that use a 

mathematical formula to calculate the 

probability that investment outcomes 

(such as reaching a financial goal) 

would occur.8

An ‘‘investment analysis tool’’ is an 

interactive technological tool that 


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