Document ID: SEC-2023-0715-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-07-11T04:00Z

[Federal Register Volume 88, Number 131 (Tuesday, July 11, 2023)]
[Notices]
[Pages 44173-44176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14523]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97839; File No. SR-FINRA-2023-006]

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 
the Proposed Rule Change, as Modified by Amendment No. 1, To Adopt 
Supplementary Material .19 (Residential Supervisory Location) Under 
FINRA Rule 3110 (Supervision)

July 5, 2023.

I. Introduction

    On March 29, 2023, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') proposed rule change SR-FINRA-2023-006 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to adopt new 
Supplementary Material .19 (Residential Supervisory Location) under 
FINRA Rule 3110 (Supervision), which would treat a private residence at 
which an associated person engages in specified supervisory activities 
as a non-branch location, subject to safeguards and limitations.\3\ The 
proposed rule change was published for public comment in the Federal 
Register on April 6, 2023.\4\ The Commission received thirteen comment 
letters related to this filing.\5\ On May 16, 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 July 5, 2023.\6\ On July 3, 2023, FINRA filed 
an amendment to modify the proposed rule change (``Amendment No. 
1'').\7\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 97237 (Mar. 31, 2023), 88 FR 
20568 (Apr. 6, 2023) (File No. SR-FINRA-2023-006) (hereinafter, the 
``Notice'').
    \4\ See id.
    \5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006.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, U.S. Securities and Exchange 
Commission (May 16, 2023), available at https://www.finra.org/sites/default/files/2023-05/sr-finra-2023-006-extension-no-1.pdf.
    \7\ See Amendment No. 1, available at https://www.finra.org/rules-guidance/rule-filings/sr-finra-2023-006.
---------------------------------------------------------------------------

    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, as Modified by Amendment 
No. 1

A. Background

    Currently under FINRA rules, a private residence at which certain 
supervisory functions occur would need to be registered and designated 
as a branch office or office of supervisory jurisdiction (``OSJ'') 
under Rule 3110(a)(3) and inspected at least annually under Rule 
3110(c)(1)(A). However, as part of its response to the COVID-19 
pandemic, FINRA temporarily suspended the requirement for member firms 
to submit branch office registration applications on Form

[[Page 44174]]

BR (Uniform Branch Office Registration Form) for any newly opened 
temporary office locations or space-sharing arrangements established as 
a result of the pandemic (the ``Form BR Temporary Suspension'').\9\
---------------------------------------------------------------------------

    \9\ See FINRA Regulatory Notice 20-08 (Mar. 9, 2020) 
(``Regulatory Notice 20-08''), available at https://www.finra.org/rules-guidance/notices/20-08; see also Notice at 20569 n.7.
---------------------------------------------------------------------------

    FINRA stated that absent further regulatory action, once the Form 
BR Temporary Suspension is lifted, FINRA rules would require member 
firms to ``either curtail activities at residential locations or 
register large numbers of residential locations as OSJs or supervisory 
branch offices.'' \10\ Registering a private residence as an OSJ or 
supervisory branch office would impose a corresponding annual 
inspection requirement.\11\ Under the proposed rule change, a new 
location designation, Residential Supervisory Location (``RSL''), would 
be treated as a non-branch location, subject to inspections on a 
regular periodic schedule under Rule 3110(c)(1)(C), presumed to be 
every three years.\12\
---------------------------------------------------------------------------

    \10\ Notice at 20579.
    \11\ FINRA Rule 3110(c)(1)(A).
    \12\ See FINRA Rules 3110(c)(1)(C), 3110.13; Proposed Rule 
3110.19(a).
---------------------------------------------------------------------------

B. Proposed Rule Change, as Modified by Amendment No. 1

    FINRA is proposing to adopt new Supplementary Material .19 under 
Rule 3110 to establish an RSL designation that would treat an eligible 
location as a non-branch location (i.e., exclude it from branch office 
registration and the corresponding annual inspection requirement), 
subject to specified limitations and conditions, as described below.
    1. Conditions for Designation as a Residential Supervisory Location
    Under proposed Rule 3110.19(a), an associated person's private 
residence where supervisory activities are conducted (i.e., an RSL) 
shall be considered for those activities a non-branch location (and 
thus excluded from branch-office registration and the corresponding 
annual inspection requirement), provided that: (1) only one associated 
person, or multiple associated persons who reside at that location and 
are members of the same immediate family, conduct business at the 
location; \13\ (2) the location is not held out to the public as an 
office; \14\ (3) the associated person does not meet with customers or 
prospective customers at the location; \15\ (4) any sales activity that 
takes place at the location complies with the conditions set forth 
under Rule 3110(f)(2)(A)(ii) or (iii); \16\ (5) neither customer funds 
nor securities are handled at that location; \17\ (6) the associated 
person is assigned to a designated branch office, and such designated 
branch office is reflected on all business cards, stationery, retail 
communications, and other communications to the public by such 
associated person; \18\ (7) the associated person's correspondence and 
communications with the public are subject to the firm's supervision in 
accordance with Rule 3110; \19\ (8) the associated person's electronic 
communications (e.g., email) are made through the member's electronic 
system; \20\ (9)(A) the member has a recordkeeping system to make and 
keep current, and preserved records required to be made and kept 
current, and preserved under applicable securities laws and 
regulations, FINRA rules, and the member's own written supervisory 
procedures under Rule 3110; (9)(B) such records are not physically or 
electronically maintained and preserved at the office or location; and 
(9)(C) the member has prompt access to such records; \21\ and (10) the 
member has determined that its surveillance and technology tools are 
appropriate to supervise the types of risks presented by each RSL; 
these tools may include but are not limited to: (A) firm-wide tools 
such as, an electronic recordkeeping system; electronic surveillance of 
email and correspondence; electronic trade blotters; regular activity-
based sampling reviews; and tools for visual inspections; (B) tools 
specific to the RSL based on the activities of the associated person 
assigned to the location, products offered, and restrictions on the 
activity of the RSL; and (C) system tools, such as secure network 
connections and effective cybersecurity protocols.\22\
---------------------------------------------------------------------------

    \13\ See proposed Rule 3110.19(a)(1).
    \14\ See proposed Rule 3110.19(a)(2).
    \15\ See proposed Rule 3110.19(a)(3).
    \16\ See proposed Rule 3110.19(a)(4).
    \17\ See proposed Rule 3110.19(a)(5).
    \18\ See proposed Rule 3110.19(a)(6).
    \19\ See proposed Rule 3110.19(a)(7).
    \20\ See proposed Rule 3110.19(a)(8).
    \21\ See proposed Rule 3110.19(a)(9).
    \22\ See proposed Rule 3110.19(a)(10).
---------------------------------------------------------------------------

2. Member Firm Ineligibility Criteria
    Under proposed Rule 3110.19(b), a member firm would be ineligible 
to designate any of its offices or locations as an RSL if the member: 
(1) is currently designated as a Restricted Firm under Rule 4111 
(Restricted Firm Obligations); \23\ (2) is currently designated as a 
Taping Firm under Rule 3170 (Tape Recording of Registered Persons by 
Certain Firms); \24\ (3) is currently undergoing, or is required to 
undergo, a review under Rule 1017(a)(7) as a result of one or more 
associated persons at such location; \25\ (4) receives a notice from 
FINRA pursuant to Rule 9557 (Procedures for Regulating Activities under 
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)), 
unless FINRA has otherwise permitted activities in writing pursuant to 
such rule; \26\ (5) is or becomes suspended by FINRA; \27\ (6) based on 
the date in the Central Registration Depository, had its FINRA 
membership become effective within the prior twelve months; \28\ or (7) 
is or has been found within the past three years by the SEC or FINRA to 
have violated Rule 3110(c).\29\
---------------------------------------------------------------------------

    \23\ See proposed Rule 3110.19(b)(1).
    \24\ See proposed Rule 3110.19(b)(2).
    \25\ See proposed Rule 3110.19(b)(3).
    \26\ See proposed Rule 3110.19(b)(4).
    \27\ See proposed Rule 3110.19(b)(5).
    \28\ See proposed Rule 3110.19(b)(6).
    \29\ See proposed Rule 3110.19(b)(7).
---------------------------------------------------------------------------

3. Location Ineligibility Criteria
    As originally proposed, under proposed Rule 3110.19(c), a specific 
location of an otherwise eligible member would be ineligible for 
designation as an RSL if one or more associated persons at the 
location: (1) is a designated supervisor who has less than one year of 
direct supervisory experience with the member; \30\ (2) is functioning 
as a principal for a limited period in accordance with Rule 1210.04 
(Registration Requirements); \31\ (3) is subject to a mandatory 
heightened supervisory plan under the rules of the SEC, FINRA, or a 
state regulatory agency; \32\ (4) is 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 under proposed Rule 3110.19(c)(3) or otherwise as a condition to 
approval or permission for such association; \33\ (5) 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

[[Page 44175]]

Registration); \34\ or (6) is currently subject to, or has been 
notified in writing that it will be subject to, any investigation, 
proceeding, complaint or other action by the member, the SEC, a self-
regulatory organization, including FINRA, or state securities 
commission (or agency or office performing like functions) alleging 
they have failed reasonably to supervise another person subject to 
their supervision, with a view to preventing the violation of any 
provision of the Securities Act, the Exchange Act, the Investment 
Advisers Act, the Investment Company Act, the Commodity Exchange Act, 
any state law pertaining to the regulation of securities or any rule or 
regulation under any of such Acts or laws, or any of the rules of the 
Municipal Securities Rulemaking Board (``MSRB'') or FINRA.\35\
---------------------------------------------------------------------------

    \30\ See proposed Rule 3110.19(c)(1).
    \31\ See proposed Rule 3110.19(c)(2).
    \32\ See proposed Rule 3110.19(c)(3).
    \33\ See proposed Rule 3110.19(c)(4).
    \34\ See proposed Rule 3110.19(c)(5). Form U4's Questions 
14A(1)(a) and 2(a), 14B(1)(a) and 2(a) elicit reporting of criminal 
convictions, and Questions 14C, 14D, and 14E pertain to regulatory 
action disclosures. See Notice 20577 n.97.
    \35\ See proposed Rule 3110.19(c)(6).
---------------------------------------------------------------------------

    Amendment No. 1 would modify two of these six originally proposed 
criteria. Specifically, Amendment No. 1 would modify proposed Rule 
3110.19(c)(1) to provide that an office or location would be ineligible 
for RSL designation if one or more associated persons at such office or 
location is a designated supervisor who has less than one year of 
direct supervisory experience with the member, or an affiliate or 
subsidiary of the member that is registered as a broker-dealer or 
investment adviser.\36\
---------------------------------------------------------------------------

    \36\ See proposed Rule 3110.19(c)(1); Amendment No. 1.
---------------------------------------------------------------------------

    Amendment No. 1 also would modify proposed Rule 3110.19(c)(6). As 
amended, proposed Rule 3110.19(c)(6) would provide that an office or 
location would be ineligible for RSL designation if one or more 
associated persons at such office or location has been notified in 
writing that such associated person is now subject to any Investigation 
or Proceeding, as such terms are defined in the Explanation of Terms 
for the Form U4, by the SEC, a self-regulatory organization, including 
FINRA, or state securities commission (or agency or office performing 
like functions) (each, a ``Regulator'') expressly alleging they have 
failed reasonably to supervise another person subject to their 
supervision, with a view to preventing the violation of any provision 
of the Securities Act of 1933, the Exchange Act, the Investment 
Advisers Act of 1940, the Investment Company Act of 1940, the Commodity 
Exchange Act, any state law pertaining to the regulation of securities 
or any rule or regulation under any of such acts or laws, or any of the 
rules of the MSRB or other self-regulatory organization, including 
FINRA.\37\ Further, Amendment No. 1 would permit such office or 
location to be designated or redesignated as an RSL subject to the 
requirements of proposed Rule 3110.19 upon the earlier of: (1) the 
member's receipt of written notification from the applicable Regulator 
that such Investigation has concluded without further action; or (2) 
one year from the date of the last communication from such Regulator 
relating to such Investigation.\38\
---------------------------------------------------------------------------

    \37\ See proposed Rule 3110.19(c)(6); Amendment No. 1.
    \38\ See id.
---------------------------------------------------------------------------

4. Obligation To Provide List of RSLs to FINRA
    Under proposed Rule 3110.19(d), any member that elects to designate 
any office or location of the member as an RSL pursuant to proposed 
Rule 3110.19 shall provide FINRA with a current list of all locations 
designated as RSLs by the 15th day of the month following each calendar 
quarter in the manner and format (e.g., through an electronic process 
or such other process) as FINRA may prescribe.
5. Risk Assessment
    Amendment No. 1 would further modify the proposed rule change by 
adding proposed Rule 3110.19(e).\39\ This proposed rule change would 
require a member--prior to designating an office or location as an 
RSL--to develop a reasonable risk-based approach to designating the 
office or location as an RSL, and conduct and document a risk 
assessment for the associated person assigned to that office or 
location.\40\ This proposed rule change would require documentation of 
the factors considered, including, among others, whether the associated 
person at such office or location is now subject to: (1) customer 
complaints, taking into account the volume and nature of the 
complaints; (2) heightened supervision other than where such office or 
location is ineligible for RSL designation under proposed Rule 
3110.19(c)(3); (3) any failure to comply with the member's written 
supervisory procedures; (4) any recordkeeping violation; and (5) any 
regulatory communications from a Regulator, including but not limited 
to, subpoenas, preliminary or routine regulatory inquiries or requests 
for information, deficiency letters, ``blue sheet'' requests or other 
trading questionnaires, or examinations indicating that the associated 
person at such office or location failed reasonably to supervise 
another person subject to their supervision.\41\ Furthermore, this 
proposed rule change would require the member to account for any higher 
risk activities that take place or a higher risk associated person that 
is assigned to that office or location.\42\
---------------------------------------------------------------------------

    \39\ Proposed Rule 3110.19(e); Amendment No. 1.
    \40\ Proposed Rule 3110.19(e).
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    Amendment No. 1 also would provide--as part of proposed Rule 
3110.19(e)--that (consistent with its obligation under Rule 3110(a)) 
the member's supervisory system must take into consideration any 
indicators of irregularities or misconduct (i.e., ``red flags'') when 
designating an office or location as an RSL.\43\ Further, this proposed 
rule change would provide that red flags should be reviewed in 
determining whether it is reasonable to maintain the RSL designation of 
an office or location in accordance with the requirements of proposed 
Rule 3110.19, and that the member should consider evidencing steps 
taken to address those red flags where appropriate.\44\
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2023-006 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, as modified by Amendment No. 1, should be approved or 
disapproved.\45\ Institution of proceedings is appropriate at this time 
in view of the legal and policy issues raised by the proposed rule 
change, as modified by Amendment No. 1. Institution of proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission 
is providing notice of the grounds for disapproval under 
consideration.\46\ The Commission is instituting proceedings to allow 
for additional analysis and input concerning whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Exchange 
Act and the rules thereunder.
---------------------------------------------------------------------------

    \46\ 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

[[Page 44176]]

identified above, as well as any other concerns they may have with the 
proposed rule change, as modified by Amendment No. 1. In particular, 
the Commission invites the written views of interested persons 
concerning whether the proposed rule change, as modified by Amendment 
No. 1, 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.\47\
---------------------------------------------------------------------------

    \47\ 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, as modified by 
Amendment No. 1, should be approved or disapproved by August 1, 2023. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by August 15, 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-2023-006 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-2023-006. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change, as 
modified by Amendment No. 1, that are filed with the Commission, and 
all written communications relating to the proposed rule change, as 
modified by Amendment No. 1, 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-2023-006 and 
should be submitted on or before August 1, 2023. If comments are 
received, any rebuttal comments should be submitted on or before August 
15, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-14523 Filed 7-10-23; 8:45 am]
BILLING CODE 8011-01-P