Document ID: SEC-2020-1062-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-07-07T04:00Z

[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Notices]
[Pages 40713-40715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14487]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89188; File No. SR-FINRA-2020-019]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Temporarily Extend the Time To Complete Office 
Inspections Under FINRA Rule 3110 (Supervision)

June 30, 2020.
    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 June 19, 2020, 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 and 
II 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt temporary Supplementary Material .16 
(Temporary Extension of Time to Complete Office Inspections) under 
FINRA Rule 3110 (Supervision) that, in light of the operational 
challenges member firms are facing due to the outbreak of the 
coronavirus disease (COVID-19), would extend the time by which member 
firms must complete their calendar year 2020 inspection obligations 
under Rule 3110(c) (Internal Inspections) to March 31, 2021.\4\
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    \4\ The proposed rule change will automatically sunset on March 
31, 2021. If FINRA seeks to provide additional temporary relief from 
the rule requirement identified in this proposal beyond March 31, 
2021, FINRA will submit a separate rule filing to further extend the 
temporary extension of time.
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

3000. SUPERVISION AND RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS

* * * * *

3100. Supervisory Responsibilities

* * * * *

3110. Supervision

* * * * *

(a) through (f) No Change.

   Supplementary Material:------

    .01 through .15 No Change.
    .16 Temporary Extension of Time to Complete Office Inspections. 
Each member obligated to complete an inspection of an office of 
supervisory jurisdiction, branch office or non-branch location in 
calendar year 2020 pursuant to, as applicable, paragraphs (c)(1)(A), 
(B) and (C) under Rule 3110, shall be deemed to have satisfied such 
obligation if the applicable inspection is completed on or before March 
31, 2021.
* * * * *

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
    FINRA is closely monitoring the impact of the COVID-19 pandemic on 
member firms, investors, and other stakeholders. FINRA recognizes that 
firms are experiencing operational challenges with much of their 
personnel working from home due to shelter-in-place orders, 
restrictions on businesses and social activity imposed in various 
states, and adhering to other social distancing guidelines consistent 
with the recommendations of public health officials.\5\ FINRA believes 
that these ongoing extenuating circumstances warrant sensible and 
tailored accommodations for member firms to meet their inspection 
obligations under Rule 3110(c) for calendar year 2020.
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    \5\ See, e.g., Centers for Disease Control and Prevention, How 
to Protect Yourself & Others, https://www.cdc.gov/coronavirus/2019-ncov/prevent-getting-sick/prevention.html (last visited June 17, 
2020).
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    Rule 3110(c) requires on-site inspections of offices of supervisory 
jurisdiction (``OSJs'') and supervisory branch offices at least 
annually (on a calendar-year basis), non-supervisory branch offices at 
least every three years, and non-branch locations on a regular periodic 
schedule, presumed to be every three years.\6\ As a result of the 
compelling health and welfare concerns stemming from the COVID-19 
pandemic, firms are facing potentially significant disruptions to their 
normal business operations that may include staff absenteeism, the 
increased use of remote offices or telework arrangements, travel or 
transportation limitations, and technology interruptions or slowdowns. 
These circumstances make it impracticable for firms in most cases to 
reach and conduct an on-site inspection of office locations. To provide 
firms an opportunity to better manage these operational challenges and 
the resources attendant to fulfilling these supervisory obligations 
during these pressing times, FINRA is proposing to adopt Rule 3110.16 
that would extend the time by which inspections must be completed in 
accordance with Rule 3110(c) for calendar year 2020 to March 31, 
2021.\7\ FINRA emphasizes that this extension of time does not relieve 
firms from the

[[Page 40714]]

on-site inspection requirement of branch offices and non-branch 
locations currently prescribed by the rule. FINRA also notes that this 
proposed extension of time would create further efficiencies for firms 
by aligning with the Municipal Securities Rulemaking Board's (``MSRB'') 
temporary extension for meeting the inspection requirements of offices 
set forth under MSRB Rule G-27 (Supervision) to March 31, 2021.\8\
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    \6\ See Rule 3110(c)(1)(A), (B), and (C). See also Rule 3110.13 
(General Presumption of Three-Year Limit for Periodic Inspection 
Schedules).
    \7\ See supra note 4.
    \8\ See Securities Exchange Act Release No. 88694 (April 20, 
2020), 85 FR 23088 (April 24, 2020) (Notice of Filing and Immediate 
Effectiveness of File No SR-MSRB-2020-01). See also MSRB Notice 
2020-09 (MSRB Amends Certain Rules to Provide Regulatory Relief 
During COVID-19 Pandemic) (April 9, 2020).
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    FINRA believes that this proposed extension of time is tailored to 
address the needs and constraints on a firm's operations during the 
COVID-19 pandemic, without significantly compromising critical investor 
protection. FINRA believes that potential risks that may arise from 
providing firms additional time to comply with their inspection 
obligations due in calendar year 2020 are mitigated by firms' ongoing 
supervisory obligations, off-site monitoring, and the temporary nature 
of the extension. FINRA will continue to monitor the situation and 
engage with member firms, other financial regulators, and governmental 
authorities to determine whether additional regulatory relief or 
guidance related to this rule may be appropriate. In particular, FINRA 
will consider whether additional relief may be warranted to address any 
backlog of 2020 inspections that may continue to exist in light of 
ongoing public health and safety concerns.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 
additional time to comply with their Rule 3110(c) inspection 
obligations due in calendar year 2020 to March 31, 2021, and does not 
relieve firms from completing those obligations or from maintaining, 
under the circumstances, a reasonably designed system to supervise the 
activities of their associated persons to achieve compliance with 
applicable securities laws and regulations, and with applicable FINRA 
rules that directly serve investor protection. In a time when faced 
with unique challenges resulting from the COVID-19 pandemic, FINRA 
believes that the proposed rule change is a sensible accommodation that 
will afford firms the ability to observe the recommendations of public 
health officials to provide for the health and safety of its personnel, 
while continuing to serve and promote the protection of investors and 
the public interest in this unique environment.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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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 proposed rule change is 
intended solely to provide temporary relief given the impacts of the 
COVID-19 pandemic crisis.\10\ As a result of the temporary nature of 
the proposed relief, an abbreviated economic impact assessment is 
appropriate.
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    \10\ See also FINRA Regulatory Notice 20-08.
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Economic Impact Assessment
A. Regulatory Objective
    FINRA is proposing Rule 3110.16 to address an issue that has arisen 
due to the impacts of the coronavirus outbreak and restrictions related 
to health and safety concerns. In addition to social distancing 
requirements that have been implemented across the United States to 
benefit the health and welfare of the populace, firms are facing 
potentially significant business disruptions that may include staff 
absenteeism, increased use of remote offices or telework arrangements, 
travel or transportation limitations, and technology interruptions or 
slowdowns. These limitations pose significant challenges for firms to 
satisfy the on-site inspection component of Rule 3110(c), which 
requires travel to visit offices and non-branch locations. In 
recognition of these circumstances, the proposed rule change would 
provide temporary relief by extending the date by which firms must 
complete their 2020 inspections.
B. Economic Baseline
    The Economic Baseline of the proposed temporary relief is the 
obligation under Rule 3110(c), as described above, and the current 
number and types of FINRA member locations that require inspections.
C. Economic Impact
    Proposed Rule 3110.16 is intended solely to provide an 
accommodation from the timing requirements set forth under Rule 3110(c) 
(as applicable to year 2020) due to the current pandemic-related 
limitations in place across the United States to benefit the health and 
welfare of the populace. FINRA believes that the proposed rule change 
will not impose any new costs on member firms. Moreover, the proposed 
rule change would align with similar temporary relief provided by the 
MSRB (as discussed above), and such coordination among regulators will 
provide for greater clarity and the efficient use of resources by firms 
during this public health crisis.
    FINRA notes that even in the current environment, member firms have 
an ongoing obligation to supervise the activities of their associated 
persons at their branch offices and non-branch locations in a manner 
reasonably designed to achieve compliance with applicable securities 
laws and regulations, and with applicable FINRA rules. Any risks that 
may arise from providing firms additional time to comply with their 
Rule 3110(c) inspection obligations due in calendar year 2020 are 
mitigated by firms' ongoing supervisory obligations, off-site 
monitoring, and the temporary nature of the extension. As noted above, 
the proposed rule change would be limited in time, and in place to 
March 31, 2021, or until the conclusion of any extension thereof.\11\
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    \11\ See supra note 4.
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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

[[Page 40715]]

19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
FINRA has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
pursuant to Rule 19b-4(f)(6)(iii), the Commission may designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. FINRA has asked the Commission to 
waive the 30-day operative delay so that this proposed rule change may 
become operative immediately upon filing. FINRA has stated that the 
requested relief in this proposed rule change is in response to the 
potentially significant disruptions to normal business operations that 
may include staff absenteeism, the increased use of remote offices or 
telework arrangements, travel or transportation limitations, and 
technology interruptions or slowdowns. FINRA notes also that such 
circumstances make it impracticable for firms in most cases to reach 
and conduct an on-site inspection of office locations. FINRA states 
that the temporary relief provided for in the proposed rule change will 
provide firms an opportunity to better manage these operational 
challenges and the resources attendant to fulfilling these supervisory 
obligations. We note that this proposal provides only temporary relief 
from the time required to complete office inspections; as proposed, 
these changes would be in place through March 31, 2021. FINRA also 
stated that the amended rule will revert back to its original state at 
the conclusion of the temporary relief period and, if applicable, any 
extension thereof. For these reasons, the Commission believes that 
waiver of the 30-day operative delay is consistent with the protection 
of investors and the public interest. Accordingly, the Commission 
hereby waives the 30-day operative delay and designates the proposal 
operative upon filing.\14\
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    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-019 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-2020-019. 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 (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. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-FINRA-2020-019 and 
should be submitted on or before July 28, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14487 Filed 7-6-20; 8:45 am]
BILLING CODE 8011-01-P