Document ID: SEC-2023-1114-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-10-03T04:00Z

[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68258-68261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21785]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98560; File No. SR-FINRA-2023-012]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Extend Temporary Supplementary Material .17 
(Temporary Relief To Allow Remote Inspections for Calendar Years 2020, 
2021, 2022, and 2023) Under FINRA Rule 3110 (Supervision) To Include 
Calendar Year 2024

September 27, 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 September 22, 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. 
FINRA has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to extend temporary Supplementary Material .17 
(Temporary Relief to Allow Remote Inspections for Calendar Years 2020, 
2021, 2022, and 2023) under FINRA Rule 3110 (Supervision) to include 
calendar year 2024 inspection obligations through the earlier of the 
effective date of the remote inspections pilot program proposed in File 
No. SR-FINRA-2023-007, if approved, or June 30, 2024 within the scope 
of the supplementary material.\4\ FINRA is proposing to extend Rule 
3110.17 to provide member firms continuity related to conducting 
inspections as part of satisfying the obligations of Rule 3110(c) 
(Internal Inspections) at offices and locations requiring inspection 
during the first half of calendar year 2024.\5\ By statute, the 
Commission has until the end of December 2023 to approve or disapprove 
the Remote Inspections Pilot Program Proposal.\6\ Given the uncertainty 
as to whether the Commission will approve or disapprove the Remote 
Inspections Pilot Program Proposal by the end of calendar year 2023, 
FINRA believes that the proposed extension is necessary to provide 
firms the time to prepare for either the resumption of on-site 
inspections if the Commission disapproves the Remote Inspections Pilot 
Program Proposal, or alternatively, the implementation of the proposed 
remote inspections pilot program (``Pilot Program'') if the Commission 
approves the Remote Inspections Pilot Program Proposal.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 97398 (April 28, 
2023), 88 FR 28620 (May 4, 2023) (Notice of Filing of File No. SR-
FINRA-2023-007) and Securities Exchange Act Release No. 98046 
(August 2, 2023), 88 FR 53569 (August 8, 2023) (Notice of Filing of 
Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove File No. SR-FINRA-2023-007) 
(``Remote Inspections Pilot Program Proposal'').
    \5\ SEC staff and FINRA have stated in guidance that inspections 
must include a physical, on-site review component. See SEC National 
Examination Risk Alert, Volume I, Issue 2 (November 30, 2011) and 
Regulatory Notice 11-54 (November 2011) (joint SEC and FINRA 
guidance stating, a ``broker-dealer must conduct on-site inspections 
of each of its office locations; [OSJs] and non-OSJ branches that 
supervise non-branch locations at least annually, all non-
supervising branch offices at least every three years; and non-
branch offices periodically.'') (footnote defining an OSJ omitted). 
See also SEC Division of Market Regulation, Staff Legal Bulletin No. 
17: Remote Office Supervision (March 19, 2004) (stating, in part, 
that broker-dealers that conduct business through geographically 
dispersed offices have not adequately discharged their supervisory 
obligations where there are no on-site routine or ``for cause'' 
inspections of those offices).
    \6\ 15 U.S.C. 78s(b)(2); see also note 4, supra.
---------------------------------------------------------------------------

    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are bracketed.
* * * * *
3000. SUPERVISION AND RESPONSIBILITES RELATING TO ASSOCIATED PERSONS
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
    (a) through (f) No Change.
       Supplementary Material: ----------
    .01 through .16 No Change.
    .17 Temporary Relief to Allow Remote Inspections for Calendar Years 
2020, 2021, 2022, [and] 2023, and Through the Earlier of the Effective 
Date of the Remote Inspections Pilot Program, if Approved, or June 30, 
2024.
    (a) Use of Remote Inspections. Each member obligated to conduct an 
inspection of an office of supervisory jurisdiction, branch office or 
non-branch location in the calendar years specified in this 
supplementary material pursuant to, as applicable, paragraphs 
(c)(1)(A), (B) and (C) under Rule 3110 may, subject to the requirements 
of this Rule 3110.17, satisfy such obligation by conducting the 
applicable inspection remotely, without an on-site visit to the office 
or location. In accordance with Rule 3110.16, inspections for calendar 
year 2020 must [be]have been completed on or before March 31, 2021. 
Inspections for calendar year 2021 must [be]have been completed on or 
before December 31, 2021, [and inspections] for calendar year 2022, 
[must be completed] on or before December 31, 2022, and for calendar 
year 2023, on or before December 31, 2023. With respect to a member's 
obligation to conduct an inspection of an office or location in 
calendar year [2023]2024, a member has the option to conduct those 
inspections remotely through the earlier of the effective date of the 
Remote Inspections [p]Pilot [p]Program proposed in File No. [SR-FINRA-
2022-021]SR-FINRA-2023-007, if approved, or [December 31, 2023]June 30, 
2024. Notwithstanding Rule 3110.17, a member shall remain subject to 
the other requirements of Rule 3110(c).
    (b) No Change.
    (c) Effective Supervisory System. The requirement to conduct 
inspections of offices and locations is one part of the member's 
overall obligation to have an effective supervisory system and 
therefore, the member must continue with its ongoing review of the 
activities and functions occurring at all offices and locations, 
whether or not the member conducts inspections remotely. A member's use 
of a remote inspection of an office or location will be held to the 
same standards for review as set forth under Rule 3110.12. Where a

[[Page 68259]]

member's remote inspection of an office or location identifies any 
indicators of irregularities or misconduct (i.e., ``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 
physical, on-site visit on an announced or unannounced basis [when the 
member's operational difficulties associated with COVID-19 abate, 
nationally or locally as relevant, and the challenges a member is 
facing in light of the public health and safety concerns make such on-
site visits feasible using reasonable best efforts]. The temporary 
relief provided by this Rule 3110.17 does not extend to a member's 
inspection requirements beyond the earlier of the effective date of the 
Remote Inspections [p]Pilot [p]Program proposed in File No. [SR-FINRA-
2022-021]SR-FINRA-2023-007, if approved, or [December 31, 2023]June 30, 
2024, and such inspections must be conducted in compliance with Rule 
3110(c).
    (d) No Change.
* * * * *

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
    In response to the COVID-19 global health crisis and the 
corresponding need to restrict in-person activities, FINRA provided 
temporary relief to member firms from certain regulatory requirements, 
including those set forth under Rule 3110. To help alleviate the 
attendant logistical challenges member firms were encountering to 
satisfy the inspection component of their Rule 3110(c) requirements, 
FINRA adopted Rule 3110.16 (Temporary Extension of Time to Complete 
Office Inspections) to extend the time by which member firms were 
required to complete their calendar year 2020 inspection obligations 
under Rule 3110(c) to March 31, 2021 with the expectation that the 
extension did not relieve firms from the on-site portion of the 
inspections of their offices and locations,\7\ and subsequently adopted 
Rule 3110.17 to provide member firms the option, subject to specified 
requirements under the supplementary material, to complete remotely 
specified calendar year inspection obligations without an on-site visit 
to the office or location.\8\ Rule 3110.17 has been extended and is 
currently set to end on December 31, 2023.\9\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 89188 (June 30, 
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2020-019).
    \8\ See Securities Exchange Act Release No. 90454 (November 18, 
2020), 85 FR 75097 (November 24, 2020) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2020-040).
    \9\ See Securities Exchange Act Release No. 96241 (November 4, 
2022), 87 FR 67969 (November 10, 2022) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2022-030) (extending 
the relief through December 31, 2023); see also Securities Exchange 
Act Release No. 94018 (January 20, 2022), 87 FR 4072 (January 26, 
2022) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2022-001) (extending the relief through December 31, 2022) and 
Securities Exchange Act Release No. 93002 (September 15, 2021), 86 
FR 52508 (September 21, 2021) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2021-023) (extending the relief 
through June 30, 2022).
---------------------------------------------------------------------------

    The pandemic accelerated the industry's adoption of a broad remote 
work environment and FINRA recognizes that the pandemic has profoundly 
changed attitudes on where work can occur. As a result of this change 
many firms have adopted, in varying scale, hybrid work models involving 
personnel who are working at least part time from alternative work 
locations (e.g., private residences). As part of FINRA's overall 
efforts to modernize FINRA rules to reflect evolving technologies and 
business models, in April 2023, FINRA filed the Remote Inspections 
Pilot Program Proposal with the Commission to establish a voluntary, 
three-year remote inspections pilot program that would allow eligible 
firms to conduct inspections of all or some offices or locations, 
remotely, subject to the specified terms therein.\10\
---------------------------------------------------------------------------

    \10\ See note 4, supra.
---------------------------------------------------------------------------

    If the Commission approves the Remote Inspections Pilot Proposal, 
the proposed extension of Rule 3110.17 would allow both FINRA and the 
firms that are planning to participate in the proposed Pilot Program 
additional time to develop the technology and processes that will be 
essential to operationalize compliance with the Pilot Program's 
requirements. For example, firms will need to conduct an eligibility 
review, and conduct and document a risk assessment for each office and 
location that they elect to inspect remotely, and implement technology 
to collect and report the required data and information to FINRA. 
Further, FINRA guidance will be needed to guide implementation in 
various circumstances.\11\ Firms that do not elect to participate or 
would be excluded from participating in the proposed Pilot Program will 
also be impacted and would need additional time to staff, schedule, and 
resume on-site inspections of offices or locations \12\ within the 
context of some lingering health concerns and fluid work 
locations.\13\. If the Commission disapproves the Remote Inspections 
Pilot Program Proposal, all firms would be impacted and would need 
additional time to staff, schedule and resume conducting on-site 
inspections of offices or locations.\14\
---------------------------------------------------------------------------

    \11\ As part of the implementation process, FINRA intends to 
publish a Regulatory Notice or other guidance about the operational 
aspects of the proposed Pilot Program.
    \12\ See note 5, supra.
    \13\ While the World Health Organization declared an end to 
COVID-19 as a public health emergency, COVID-19 remains an ongoing 
public health problem. See WHO Director-General, Opening Remarks at 
the Media Briefing on COVID-19 (May 5, 2023) (stating, in part, that 
the ``virus is here to stay. It is still killing, and it's still 
changing. The risk remains of new variants emerging that cause new 
surges in cases and deaths.''), https://www.who.int/news-room/speeches/item/who-director-general-s-opening-remarks-at-the-media-briefing-5-may-2023; see also Benjamin J. Silk, et al., COVID-19 
Surveillance After Expiration of the Public Health Emergency 
Declaration--United States, May 11, 2023 (stating, among other 
things, that ``[a]lthough COVID-19 no longer poses the societal 
emergency that it did when it first emerged in late 2019, COVID-19 
remains an ongoing public health challenge. By April 26, 2023, more 
than 104 million U.S. COVID-19 cases, 6 million related 
hospitalizations, and 1.1 million COVID-19-associated deaths were 
reported to CDC[.]''), 72 MMWR Morb Mortal Wkly Rep, 523-528 (2023), 
https://www.cdc.gov/mmwr/volumes/72/wr/pdfs/mm7219e1-H.pdf. Recent 
data on hospitalizations from the CDC indicate that the number of 
hospitalizations is up 7.7% (as of September 3 to September 9, 
2023). See Centers for Disease Control and Prevents (``CDC''), COVID 
Data Tracker, Data Update for the United States, https://covid.cdc.gov/covid-data-tracker/#datatracker-home (last visited 
September 22, 2023).
    \14\ See note 5, supra.
---------------------------------------------------------------------------

    In sum, as calendar year 2024 is approaching its fourth quarter, 
the proposed extension of Rule 3110.17 would provide firms continuity 
in meeting their inspection obligations after the end of the 
Commission's statutory deadline to approve or disapprove the Remote 
Inspections Pilot Proposal. If the Commission approves the Remote 
Inspections Pilot Proposal, the proposed additional time would allow 
FINRA to operationalize the Pilot Program. Relatedly, the proposed

[[Page 68260]]

extension would give time for: (1) firms that are planning to 
participate in the proposed Pilot Program to implement the processes 
needed to comply with the proposed terms therein; and (2) firms that 
are not planning to participate or are excluded from participating in 
the proposed Pilot Program, to prepare to resume conducting on-site 
inspections of their offices and locations as part of satisfying the 
obligations of Rule 3110(c).
    FINRA is not proposing to amend the other conditions of the 
temporary rule. The current conditions of the supplementary material 
for firms that elect to conduct remote inspections would remain 
unchanged: such firms must amend or supplement their written 
supervisory procedures for remote inspections, use remote inspections 
as part of an effective supervisory system, and maintain the required 
documentation. FINRA continues to believe this temporary remote 
inspection option is a reasonable alternative for firms to fulfill 
their Rule 3110(c) obligations under the current circumstances 
described above. This proposed extension is designed to maintain the 
investor protection objectives of the inspection requirements under 
these circumstances. As part of those objectives, firms should consider 
whether, under their particular operating conditions, continued 
reliance on Rule 3110.17 to conduct remote inspections would be 
reasonable under the circumstances. For example, firms with offices 
that are open to the public or that are otherwise doing business as 
usual should consider whether some in-person inspections would be 
feasible and add value to the firms' supervisory program. FINRA 
emphasizes that the inspection requirement is one aspect of a firm's 
overall supervisory system, and that the inspection, whether done 
remotely under Rule 3110.17 or in accordance with the proposed Pilot 
Program, or on-site, would be held to the existing standards of review 
under Rule 3110.12 (Standards for Reasonable Review).\15\
---------------------------------------------------------------------------

    \15\ Those standards provide, in part, that based on the factors 
set forth under that supplementary material, members ``may need to 
provide for more frequent review of certain locations.''
---------------------------------------------------------------------------

    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA is proposing to make the proposed rule change 
operative on January 1, 2024.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ which requires, among 
other things, that FINRA rules must 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. The proposed rule change is intended to provide firms 
certainty now as they plan their upcoming calendar year 2024 inspection 
program. This temporary proposed supplementary material does not 
relieve firms from meeting the core regulatory obligation to establish 
and maintain a system to supervise the activities of each associated 
person that is reasonably designed to achieve compliance with 
applicable securities laws and regulations, and with applicable FINRA 
rules that directly serve investor protection. In light of the planning 
associated with firms resuming on-site visits to offices and locations 
to satisfy Rule 3110(c)(1), if the Commission disapproves the Remote 
Inspections Pilot Program Proposal, and the significant planning 
requirements that the proposed Pilot Program, if approved, would entail 
for FINRA and the firms that elect to participate, FINRA believes that 
the proposed rule change provides sensibly tailored relief, while 
continuing to serve and promote the protection of investors and the 
public interest.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The potential economic impacts 
of Rule 3110.17 as described in File No. SR-FINRA-2020-040 continue to 
have applicability to the proposed rule change herein. The proposed 
rule change would extend the temporary relief that provides firms with 
the option to fulfill their inspection obligations remotely. The 
proposed extension would include calendar year 2024 inspection 
obligations through the earlier of the effective date of the Remote 
Inspections Pilot Program Proposal, if approved, or June 30, 2024 
within the scope of the supplementary material without making 
substantive changes to the other aspects of the provision. In addition, 
the proposed extension would provide firms certainty for the reasons 
stated above. FINRA believes that this limited extension in temporary 
relief, together with the requirements for using the temporary relief 
in Rule 3110.17, would not diminish investor protection.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6) thereunder.\18\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2023-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2023-012. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use

[[Page 68261]]

only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection. All submissions should 
refer to File Number SR-FINRA-2023-012 and should be submitted on or 
before October 24, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21785 Filed 10-2-23; 8:45 am]
BILLING CODE 8011-01-P