Document ID: SEC-2023-0842-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-08-08T04:00Z

[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53569-53574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16878]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98046; File No. SR-FINRA-2023-007]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt 
Supplementary Material .18 (Remote Inspections Pilot Program) Under 
FINRA Rule 3110 (Supervision)

August 2, 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, three-
year remote inspections pilot program to allow eligible broker-dealers 
to elect to fulfill their obligation under paragraph (c) (Internal 
Inspections) of FINRA Rule 3110 (Supervision) by conducting inspections 
of eligible branch offices and non-branch locations remotely without an 
on-site visit to such office or location, subject to specified 
safeguards and limitations (the ``Pilot'').\3\ The proposed rule change 
was published for public comment in the Federal Register

[[Page 53570]]

on May 4, 2023.\4\ The Commission received thirteen comment letters 
related to this filing.\5\ 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.\6\ On August 1, 2023, FINRA filed an 
amendment to modify the proposed rule change (``Amendment No. 1''), and 
stated it anticipates submitting a response to comments by separate 
letter.\7\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 4.
    \4\ Exchange Act Release No. 97398 (Apr. 28, 2023), 88 FR 28620 
(May 4, 2023) (File No. SR-FINRA-2023-007) (``Notice'').
    \5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-007/srfinra2023007.htm.
    \6\ See letter from Sarah Kwak, Associate General Counsel, 
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief, 
Division of Trading and Markets, Commission, dated June 7, 2023, 
https://www.finra.org/sites/default/files/2023-06/sr-finra-2023-007-extension-no-1.pdf.
    \7\ See Amendment No. 1, https://www.finra.org/sites/default/files/2023-08/SR-FINRA-2023-007-Amendment-1.pdf.
---------------------------------------------------------------------------

    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \8\ to solicit comments on the proposed 
rule change, as modified by Amendment No. 1, and to institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change, as modified by Amendment No. 1 (hereinafter referred to as 
the ``proposed rule change'' unless otherwise specified).
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Background

    FINRA Rule 3110(c)(1) requires a broker-dealer to inspect its 
locations with a frequency that depends on the location's 
classification as an office of supervisory jurisdiction (``OSJ''), 
branch office, or non-branch location.\9\ Rule 3110(c)(2) imposes 
various documentation requirements for inspections, including 
maintaining a written record of the date upon which each inspection is 
conducted.
---------------------------------------------------------------------------

    \9\ See also SEC Division of Market Regulation, Staff Legal 
Bulletin No. 17: Remote Office Supervision (March 19, 2004) (SEC 
guidance on remote office supervision), https://www.sec.gov/interps/legal/mrslb17.htm; and Regulatory Notice 11-54 (November 2011) 
(joint SEC and FINRA guidance on effective policies and procedures 
for broker-dealer branch inspections, interpreting the inspection 
rule to require that inspections take place on-site).
---------------------------------------------------------------------------

    As part of its response to the COVID-19 pandemic, FINRA adopted 
temporary Rule 3110.17, effective since November 2020, to provide 
member firms the option to conduct inspections of their OSJs, branch 
offices, and non-branch locations remotely, subject to specified 
terms.\10\ Absent further regulatory action, once this temporary rule 
expires, FINRA rules would require member firms to perform only in-
person inspections. FINRA believes it is appropriate to assess possible 
longer-term rule changes regarding its inspection program and is, 
therefore, proposing a voluntary, three-year Pilot.\11\
---------------------------------------------------------------------------

    \10\ See Exchange Act Release No. 90454 (Nov. 18, 2020), 85 FR 
75097 (Nov. 24, 2020) (Notice of Filing and Immediate Effectiveness 
of File No. SR-FINRA-2020-040). See also 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); 
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); Exchange Act Release No. 96241 (Nov. 4, 2022) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2022-030). See also infra note 12.
    \11\ See Notice at 28624-25.
---------------------------------------------------------------------------

B. The Proposed Rule Change

    Proposed Rule 3110.18(a) would permit broker-dealers to perform 
remotely required inspections of OSJs, branch offices, and non-branch 
locations under the applicable provisions of Rule 3110(c)(1), subject 
to specified safeguards and limitations. The proposed supplementary 
material would automatically sunset on a date that is three years after 
the effective date.\12\
---------------------------------------------------------------------------

    \12\ If Rule 3110.17 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.
---------------------------------------------------------------------------

1. Controls and Safeguards
a. Risk Assessment (Proposed Rule 3110.18(b))
    As originally proposed, proposed Rule 3110.18(b)(1) would require 
that prior to selecting any office or location for remote inspection, 
rather than an on-site inspection, the broker-dealer must develop a 
reasonable risk-based approach to using remote inspections and conduct 
and document a risk assessment for that office or location.\13\ 
Proposed Rule 3110.18(b)(2) also sets forth a non-exhaustive list of 
factors that the broker-dealer must consider and document as part of 
the risk assessment for each office, including: (1) the volume and 
nature of customer complaints; (2) the volume and nature of outside 
business activities, particularly investment-related; (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 member's written supervisory 
procedures; and (7) any recordkeeping violations.\14\ Amendment No. 1 
modified proposed Rule 3110.18(b)(2) to add that, consistent with Rule 
3110(a), the member's supervisory system must take into consideration 
any red flags when determining whether to conduct a remote inspection 
of an office or location.\15\
---------------------------------------------------------------------------

    \13\ See proposed Rule 3110.18(b)(1).
    \14\ See proposed Rule 3110.18(b)(2).
    \15\ See Amendment No. 1.
---------------------------------------------------------------------------

b. Written Supervisory Procedures for Remote Inspections (Proposed Rule 
3110.18(c))
    As originally proposed, proposed Rule 3110.18(c) would require a 
broker-dealer electing to participate in the Pilot (``participating 
broker-dealer'') 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 offices or locations must 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 office or location; (3) the procedures 
specified in the data and information collection section of the 
proposed rule; and (4) the use of other risk-based systems employed 
generally by the member 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.\16\ 
Amendment No. 1 modified proposed Rule 3110.18(c) to replace the word 
``adopt'' with ``establish, maintain, and enforce.'' \17\
---------------------------------------------------------------------------

    \16\ See proposed Rule 3110.18(c).
    \17\ See Amendment No. 1.
---------------------------------------------------------------------------

c. Effective Supervisory System (Proposed Rule 3110.18(d))
    Proposed Rule 3110.18(d) states that 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 a member must maintain its ongoing review of the activities 
and functions occurring at all offices and locations, whether or not 
the member conducts inspections remotely.

[[Page 53571]]

Proposed Rule 3110.18(d) further states that a member's use of a remote 
inspection of an office or location would be held to the same standards 
for review as set forth in FINRA Rule 3110.12 (Supervision; Standards 
for Reasonable Review). Furthermore, proposed Rule 3110.18(d) provides 
that where a participating broker-dealer's remote inspection of an 
office or location identifies any indicators of irregularities or 
misconduct (i.e., ``red flags''), the participating broker-dealer may 
need to impose additional supervisory procedures for that office or 
location, or may need to provide for more frequent monitoring or 
oversight of that office or location, or both, including potentially a 
subsequent physical, on-site visit on an announced or unannounced 
basis.\18\
---------------------------------------------------------------------------

    \18\ See proposed Rule 3110.18(d). Additionally, proposed Rule 
3110.18(j) would provide that a broker-dealer 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 must conduct on-site inspections of each office and 
location on the required cycle in accordance with Rule 3110(c).
---------------------------------------------------------------------------

d. Documentation Requirement (Proposed Rule 3110.18(e))
    Proposed Rule 3110.18(e) would require a participating broker-
dealer to maintain and preserve a centralized record for each Pilot 
Year \19\ in which it participates that separately identifies: (1) all 
offices or locations that were inspected remotely; and (2) any offices 
or locations for which the member determined to impose additional 
supervisory procedures or more frequent monitoring, as provided in 
proposed rule 3110.18(d) (Effective Supervisory System). Further, 
proposed Rule 3110.18(e) would require a participating broker-dealers's 
documentation of the results of a remote inspection for an office or 
location to identify any additional supervisory procedures or more 
frequent monitoring for that office or location that were imposed as a 
result of the remote inspection, including whether an on-site 
inspection was conducted at such office or location.\20\
---------------------------------------------------------------------------

    \19\ Proposed Rule 3110.18(l) would set forth the meanings 
underlying ``Pilot Year'' as: (1) Pilot Year 1 would be the period 
beginning on the effective date of the proposed pilot program 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; and (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. See proposed Rule 3110.18(l).
    \20\ See proposed Rule 3110.18(e). FINRA stated that Amendment 
No. 1 also contains non-substantive updates to the proposed rule 
text to improve readability. See Amendment No. 1.
---------------------------------------------------------------------------

2. Firm Level Requirements (Proposed Rule 3110.18(f))
    Proposed Rule 3110.18(f) includes a list of conditions to which a 
broker-dealer must adhere in order to participate in the Pilot, as well 
as a list of criteria that would render firms ineligible to participate 
in the Pilot.\21\
---------------------------------------------------------------------------

    \21\ See proposed Rule 3110.18(f).
---------------------------------------------------------------------------

a. Firm Level Ineligibility Criteria (Proposed Rule 3110.18(f)(1))
    Under proposed Rule 3110.18(f)(1), a broker-dealer would be 
ineligible to conduct remote inspections of any of its offices or 
locations if the member, at any time during the Pilot: (1) is or 
becomes designated as a Restricted Firm under FINRA Rule 4111; \22\ (2) 
is or becomes designated as a Taping Firm under FINRA Rule 3170; \23\ 
(3) receives a notice from FINRA pursuant to Rule 9557 regarding 
compliance with FINRA Rule 4110, Rule 4120, or Rule 4130; \24\ (4) is 
or becomes suspended from membership by FINRA; \25\ (5) based on the 
date in the Central Registration Depository (``CRD'') \26\ had its 
FINRA membership become effective within the prior 12 months; \27\ or 
(6) is or has been found within the past three years by the Commission 
or FINRA to have violated FINRA Rule 3110(c).\28\
---------------------------------------------------------------------------

    \22\ See proposed Rule 3110.18(f)(1)(A).
    \23\ See proposed Rule 3110.18(f)(1)(B).
    \24\ See proposed Rule 3110.18(f)(1)(C).
    \25\ See proposed Rule 3110.18(f)(1)(D).
    \26\ FINRA stated that CRD is the central licensing and 
registration system that FINRA operates for the benefit of the 
Commission, FINRA and other self-regulatory organizations, state 
securities regulators, and broker-dealers. The information 
maintained in the CRD system is reported by registered broker-
dealers, associated persons and regulatory authorities in response 
to questions on specified uniform registration forms. See Notice at 
28629 n. 76; see generally Rule 8312 (FINRA BrokerCheck Disclosure).
    \27\ See proposed Rule 3110.18(f)(1)(E).
    \28\ See 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 Rule 4530.03 (Meaning of ``Found''). See Notice at 
28630 n.77.
---------------------------------------------------------------------------

b. Firm Level Conditions (Proposed Rule 3110.18(f)(2))
i. Recordkeeping
    Proposed Rule 3110.18(f)(2)(A) would require each participating 
broker-dealer to have a recordkeeping system that: (1) makes and keeps 
current, and preserves records required to be made and kept current, 
and preserved under applicable securities laws and regulations, FINRA 
rules, and the member's own supervisory procedures under FINRA Rule 
3110; (2) ensures such records are not physically or electronically 
maintained and preserved at the office or location subject to remote 
inspection; and (3) gives the member prompt access to such records.\29\
---------------------------------------------------------------------------

    \29\ See proposed Rule 3110.18(f)(2)(A)
---------------------------------------------------------------------------

ii. Surveillance and Technology Tools
    Proposed Rule 3110(f)(2)(B) would require each participating 
broker-dealer to determine that their surveillance and technology tools 
are appropriate to supervise the types of risks presented by each such 
remotely supervised office or location.
3. Location Level Requirements (Proposed Rule 3110.18(g))
    Proposed Rule 3110.18(g) includes a list of conditions an office or 
location must adhere to in order to participate in the Pilot, as well 
as a list of criteria that would render offices or locations ineligible 
to participate in the Pilot.
a. Location Level Ineligibility Criteria (Proposed Rule 3110.18(g)(1))
    Under proposed Rule 3110.18(g)(1), a participating broker-dealer's 
office or location would not be eligible for a remote inspection if at 
any time during the Pilot: (1) one or more associated persons at such 
office or location is or becomes subject to a mandatory heightened 
supervisory plan under the rules of the Commission, FINRA, or a state 
regulatory agency; \30\ (2) one or more associated persons at such 
office or location is or becomes statutorily disqualified, unless such 
disqualified person has been approved (or is otherwise permitted 
pursuant to FINRA rules and the federal securities laws) to associate 
with a member and is not subject to a mandatory heightened supervisory 
plan described above or otherwise as a condition to approval or 
permission for such association; \31\ (3) the firm is or becomes 
subject to FINRA Rule 1017(a)(7) as a result of one or more associated 
persons at such office or location; \32\ (4) one or more associated 
persons at such office or location has an event in the prior three 
years that required a ``yes'' response to certain subcategories of 
Question 14 of Form U4; \33\ (5) one or more associated persons at such 
office or location is or becomes subject to a disciplinary action

[[Page 53572]]

taken by the member that is or was reportable under FINRA Rule 
4530(a)(2); \34\ (6) one or more associated persons at such office or 
location is engaged in proprietary trading, including the incidental 
crossing of customer orders, or the direct supervision of such 
activities; \35\ or (7) the office or location handles customer funds 
or securities.\36\
---------------------------------------------------------------------------

    \30\ See proposed Rule 3110.18(g)(1)(A).
    \31\ See proposed Rule 3110.18(g)(1)(B).
    \32\ See proposed Rule 3110.18(g)(1)(C). Amendment No. 1 removed 
the word ``or'' at the end of the originally proposed Rule 
3110.18(g)(1)(C). See supra note 20.
    \33\ See proposed Rule 3110.18(g)(1)(D).
    \34\ See proposed Rule 3110.18(g)(1)(E).
    \35\ See proposed Rule 3110.18(g)(1)(F).
    \36\ See proposed Rule 3110.18(g)(1)(G).
---------------------------------------------------------------------------

b. Location Level Conditions (Proposed Rule 3110.18(g)(2))
    Proposed Rule 3110.18(g)(2) would require each specific office or 
location that participates in the Pilot to satisfy the following 
conditions: (1) electronic communications would be made through the 
broker-dealer's electronic system; (2) the associated person's 
correspondence and communications with the public would be subject to 
the broker-dealer's supervision in accordance with FINRA Rule 3110; and 
(3) no books or records of the member required to be made and kept 
current, and preserved under applicable securities laws and 
regulations, FINRA rules, and the participating broker-dealer's own 
written supervisory procedures under FINRA Rule 3110, would be 
physically or electronically maintained and preserved at such office or 
location.\37\
---------------------------------------------------------------------------

    \37\ See proposed Rule 3110.18(g)(2).
---------------------------------------------------------------------------

4. Data and Information Collection Requirement (Proposed Rule 
3110.18(h))
a. Data and Information (Proposed Rule 3110.18(h)(1))
    As originally proposed, proposed Rule 3110.18(h) would require a 
participating broker-dealer to collect and produce to FINRA on a 
quarterly basis the following data and information about its 
participating offices or locations: \38\ (1) the total number of 
inspections--on-site and remote--completed during each calendar 
quarter; \39\ (2) the number of those offices or locations in each 
calendar quarter that were subject to an on-site inspection because of 
a ``finding,'' (as described under proposed Rule 3110.18(h)(1)); \40\ 
(3) the number of offices or locations for which a remote inspection 
was conducted in the calendar quarter that identified a finding, the 
number of findings, and a list of the most significant findings; \41\ 
and (4) the number of offices or locations for which an on-site 
inspection was conducted in the calendar quarter that identified a 
finding, the number of findings, a list of the most significant 
findings.\42\ Amendment No. 1 modified proposed Rule 3110.18(h) to 
delete the word ``most'' from the phrase ``most significant findings.'' 
\43\
---------------------------------------------------------------------------

    \38\ See supra note 20.
    \39\ See proposed Rule 3110.18(h)(1)(A), (B), and (C).
    \40\ See proposed Rule 3110.18(h)(1)(D).
    \41\ See proposed Rule 3110.18(h)(1)(E). According to FINRA, a 
``significant finding'' would be one that should prompt the broker-
dealer 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 office or 
location, or other targeted reviews of the root cause of the 
finding. FINRA states 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.
    \42\ See proposed Rule 3110.18(h)(1)(F); see also supra note 20.
    \43\ See Amendment No. 1; see also supra note 41.
---------------------------------------------------------------------------

    In addition, at the time a participating broker-dealer first 
delivers the data points described above, the proposed rule change 
would require participating broker-dealers to provide FINRA their 
written supervisory procedures for remote inspections that account for: 
(1) escalating significant findings; (2) new hires; (3) supervising 
brokers with a significant history of misconduct; and (4) outside 
business activities and ``doing business as'' designations.\44\ Any 
subsequent amendment to a participating broker-dealer's written 
supervisory procedures for remote inspections would need to be included 
in the next quarterly data submission to FINRA.
---------------------------------------------------------------------------

    \44\ See proposed Rule 3110.18(h)(1)(G)(i) through (iv).
---------------------------------------------------------------------------

b. Additional Data and Information for Pilot Year 1, if Less Than Full 
Calendar Year (Proposed Rule 3110.18(h)(2)) \45\
---------------------------------------------------------------------------

    \45\ Amendment No. 1 added the word ``in'' to proposed Rule 
3110.18(h)(2). See supra note 20.
---------------------------------------------------------------------------

    As originally proposed, if the first year of the Pilot covers a 
period of time that is less than a full calendar year, the proposed 
rule change would require participating broker-dealers to also collect 
and produce to FINRA the following data and information no later than 
December 31 of the first Pilot Year: (1) the number of offices and 
locations with an inspection completed during the full calendar year of 
the first Pilot Year; \46\ (2) the number of offices and locations 
referenced in proposed Rule 3110.18(h)(2)(A) as originally proposed 
\47\ that were inspected remotely during the full calendar year of the 
first Pilot Year; \48\ and (3) the number of offices and locations 
referenced in proposed Rule 3110.18(h)(2)(A) as originally proposed 
\49\ that were inspected on-site during the full calendar year of the 
first Pilot Year.\50\ Amendment No. 1 modified the time period of the 
originally proposed Rule 3110.18(h)(2) to capture data and information 
about inspections that may occur in the time period preceding the 
effective date of the proposed Pilot if such effective date results in 
the first Pilot Year covering a period of time that is less than a full 
calendar year. Specifically, a participating broker-dealer would be 
required to collect and provide to FINRA the following data separately 
for OSJs, supervisory branch offices, non-supervisory branch offices, 
and non-branch locations: (1) the number of offices and locations with 
an inspection completed between January 1 of the first Pilot Year and 
the day before the effective date of the Pilot; \51\ (2) the number of 
offices and locations referenced in proposed Rule 3110.18(h)(2)(A) \52\ 
that were inspected remotely between January 1 of the first Pilot Year 
and the day before the effective date of the Pilot; \53\ and (3) the 
number of offices and locations referenced in proposed Rule 
3110.18(h)(2)(A) \54\ that were inspected on-site between January 1 of 
first Pilot Year and the day before the effective date of the 
Pilot.\55\
---------------------------------------------------------------------------

    \46\ See proposed Rule 3110.18(h)(2)(A) as originally proposed.
    \47\ See supra note 46 and accompanying text.
    \48\ See proposed Rule 3110.18(h)(2)(B) as originally proposed.
    \49\ See supra note 46 and accompanying text.
    \50\ See proposed Rule 3110.18(h)(2)(C) as originally proposed. 
For items (1) through (3), a member would be required to provide 
separate counts for OSJs, supervisory branch offices, non-
supervisory branch offices, and non-branch locations. See proposed 
Rule 3110.18(h)(2) as originally proposed.
    \51\ See proposed Rule 3110.18(h)(2)(A); see also Amendment No. 
1.
    \52\ See supra note 51 and accompanying text.
    \53\ See proposed Rule 3110.18(h)(2)(B); see also Amendment No. 
1.
    \54\ See supra note 51 and accompanying text.
    \55\ See proposed Rule 3110.18(h)(2)(C); see also Amendment No. 
1.
---------------------------------------------------------------------------

    In addition, Amendment No. 1 modified proposed Rule 3110.18(h)(2) 
to impose two new obligations to collect and produce data and 
information to FINRA. Specifically, participating broker-dealers would 
be required to collect and provide to FINRA the following: (1) the 
number of offices and locations referenced in proposed Rule 
3110.18(h)(2)(B) \56\ where findings were identified, the number of 
those findings,

[[Page 53573]]

and a list of the significant findings; \57\ and (2) the number of 
offices and locations referenced in proposed Rule 3110.18(h)(2)(C) \58\ 
where findings were identified, the number of those findings, and a 
list of the significant findings.\59\
---------------------------------------------------------------------------

    \56\ See supra note 53 and accompanying text.
    \57\ See proposed Rule 3110.18(h)(2)(D); see also Amendment No. 
1.
    \58\ See supra note 55 and accompanying text.
    \59\ See proposed Rule 3110.18(h)(2)(E); see also Amendment No. 
1.
---------------------------------------------------------------------------

c. Additional Data and Information for Calendar Year 2019 (Proposed 
Rule 3110.18(h)(3)) \60\
---------------------------------------------------------------------------

    \60\ Amendment No. 1 added the word ``and'' within Rule 
3110.18(h)(3)(A). See supra note 20.
---------------------------------------------------------------------------

    As originally proposed, proposed Rule 3110.18(h)(3) would require a 
participating broker-dealer to collect and provide to FINRA the 
following calendar year 2019 data and information no later than 
December 31 of Pilot Year 1 (as defined under proposed Rule 
3110.18(l)): (1) the number of offices and locations with an inspection 
completed during calendar year 2019; and (2) the number of offices and 
locations in item (1) where findings were identified, the number of 
those findings and a list of the most significant findings.\61\ 
Amendment No. 1 modified proposed Rule 3110.18(h)(3) to require a 
participating broker-dealer to ``act in good faith using best efforts'' 
to collect and provide to FINRA such data. Amendment No. 1 also deleted 
the word ``most'' from the phrase ``most significant findings.'' \62\
---------------------------------------------------------------------------

    \61\ See proposed Rule 3110.18(h)(3) as originally proposed. For 
items (1) and (2), a member would be required to provide separate 
counts for OSJs, supervisory branch offices, non-supervisory branch 
offices, and non-branch locations. See id.
    \62\ See proposed Rule 3110.18(h)(3)(B); see also Amendment No. 
1; see also supra note 43 and accompanying text.
---------------------------------------------------------------------------

d. Written Policies and Procedures (Proposed Rule 3110.18(h)(4))
    Proposed Rule 3110.18(h)(4) would require a participating broker-
dealer 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 the Pilot.\63\
---------------------------------------------------------------------------

    \63\ See proposed Rule 3110.18(h)(4).
---------------------------------------------------------------------------

5. Election to Opt-In and Opt-Out of the Pilot (Proposed Rule 
3110.18(i))
    In general, proposed Rule 3110.18(i) would require a participating 
broker-dealer, at least five calendar days before the beginning of a 
Pilot Year (as defined under proposed Rule 3110.18(l)), to provide 
FINRA an ``opt-in notice'' in the manner and format determined by 
FINRA. By providing such opt-in notice to FINRA, the firm would agree 
to participate in the proposed pilot program for the duration of such 
Pilot Year and to comply with the requirements of Rule 3110.18.\64\ A 
firm that provides the 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.\65\ To opt out, proposed Rule 
3110.18(i) would require a participating broker-dealer to provide FINRA 
with an ``opt-out notice'' at least five calendar days before the end 
of the then current Pilot Year.\66\
---------------------------------------------------------------------------

    \64\ As stated in the Notice, a firm that participates in a 
Pilot Year would be committed to complying with the terms of 
proposed Rule 3110.18 for that Pilot Year. See Notice at 28633 n.97.
    \65\ See proposed Rule 3110.18(i).
    \66\ See id.
---------------------------------------------------------------------------

6. Determination of Ineligibility (Proposed Rule 3110.18(k))
    Proposed Rule 3110.18(k) would authorize FINRA to make a 
determination in the public interest and for the protection of 
investors that a broker-dealer is no longer eligible to participate in 
the Pilot if the member fails to comply with the requirements of Rule 
3110.18.\67\
---------------------------------------------------------------------------

    \67\ In such instances, FINRA will provide written notice to the 
member of such determination and the member would no longer be 
eligible to participate in the Pilot and must conduct on-site 
inspections of required offices and locations in accordance with 
Rule 3110(c). See proposed Rule 3110.18(k).
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2023-007 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule 
change should be approved or disapproved.\68\ Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to the proposed rule change.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\69\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis and input concerning whether the proposed rule 
change is consistent with the Exchange Act and the rules thereunder.
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change is consistent with the Exchange Act and the rules 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\70\
---------------------------------------------------------------------------

    \70\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by August 29, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 12, 2023.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-FINRA-2023-007 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-2023-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements

[[Page 53574]]

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-2023-007 and 
should be submitted on or before August 29, 2023. If comments are 
received, any rebuttal comments should be submitted on or before 
September 12, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\71\
---------------------------------------------------------------------------

    \71\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16878 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P