Document ID: SEC-2022-1493-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-11-16T05:00Z

[Federal Register Volume 87, Number 220 (Wednesday, November 16, 2022)]
[Notices]
[Pages 68774-68776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-24958]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96297; File No. SR-FINRA-2022-021]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Adopt Supplementary 
Material .18 (Remote Inspections Pilot Program) Under FINRA Rule 3110 
(Supervision)

November 10, 2022.

I. Introduction

    On July 28, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-FINRA-2022-021 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 inspection pilot program (``Pilot'') to allow broker-
dealers to elect to fulfill their obligation under Rule 3110(c) 
(Internal Inspections) by conducting inspections of some or all branch 
offices and non-branch locations remotely without an on-site visit to 
such office or location, subject to specified terms.\3\ The proposed 
rule change was published for public comment in the Federal Register on 
August 15, 2022.\4\ On September 23, 2022, 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 November 11, 2022.\5\ On November 9, 2022, FINRA filed a 
letter stating it was still considering the comments to the Notice, and 
anticipates submitting a response to comments and amendments to the 
Notice in the near future.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 4.
    \4\ Exchange Act Release No. 95452 (Aug. 9, 2022), 87 FR 50144 
(Aug. 15, 2022) (File No. SR-FINRA-2022-021) (``Notice'').
    \5\ 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 September 23, 
2022.
    \6\ See letter from Sarah Kwak, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated November 
9, 2022, available at https://www.finra.org/sites/default/files/2022-11/FINRA-2022-021-Response-to-Comments-11-09-2022.pdf.
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    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \7\ to solicit comments on the proposed 
rule change and to institute proceedings to determine whether to 
approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

A. Background

    As stated in the Notice, the COVID-19 pandemic prompted FINRA to 
provide temporary relief to member firms from certain regulatory 
requirements.\8\ For example, FINRA adopted temporary Rule 3110.17, 
effective since November 2020, to provide member firms the option to 
conduct inspections of their branch offices and non-branch locations 
remotely, subject to specified terms \9\ FINRA stated in the Notice 
that it believes now is the time to assess possible longer-term rule 
changes regarding its inspection program and is, therefore, proposing a 
voluntary, three-year remote inspections pilot program.\10\
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    \8\ See Notice at 50147 and notes 28 and 29.
    \9\ 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). If the proposed rule change is approved, Rule 3110.17 
would automatically sunset on the effective date of proposed Rule 
3110.18, if it has not already expired by its own terms. See Notice 
at 50152.
    \10\ See Notice at 50145.
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B. The Proposed Rule Change

    The Notice states that Rule 3110(c)(1) currently provides that an 
inspection of an office or location must occur on a designated 
frequency, and that the periodicity of the required inspection varies 
depending on the classification of the location as an office of 
supervisory jurisdiction (``OSJ''), branch office, or non-branch 
location.\11\ FINRA is proposing to amend FINRA Rule 3110 (Supervision) 
to adopt a voluntary, three-year remote inspection pilot program to 
allow member firms to elect to fulfill their obligation under Rule 
3110(c) (Internal Inspections) by conducting inspections of some or all 
branch offices and non-branch locations remotely without an on-site 
visit to such office or location, subject to specified terms described 
below (such members hereinafter referred to as ``participating 
members'').
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    \11\ See id. at 50146.
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i. Scope of Pilot
    Proposed Rule 3110.18(b)(1) would provide that a participating 
member may elect to conduct the inspection of an office or location 
during the pilot period remotely when the member reasonably determines 
that the purposes of the rule can be accomplished by conducting such 
required inspection remotely. Proposed Rule 3110.18(b)(1) would require 
a participating member to develop a reasonable risk-based approach to 
using remote inspections and conduct and document a risk assessment for 
an office or location prior to electing to conduct a remote inspection 
for that office or location. The risk assessment must document the 
factors considered, including the factors set forth in Rule 3110.12, 
and must take into account any higher risk activities that take place 
or higher risk associated persons that are assigned to that 
location.\12\
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    \12\ See id. at 50148-49.
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ii. Inelegible Offices and Locations
    Under proposed Rule 3110.18(b)(2)(A), a member firm would be 
ineligible to conduct remote inspections of any of its offices or 
locations if any time during the period of the proposed pilot program, 
the member is or becomes designated as: (1) a Restricted Firm under 
Rule 4111

[[Page 68775]]

(Restricted Firm Obligations); or (2) a Taping Firm under Rule 3170 
(Tape Recording of Registered Persons by Certain Firms). Under proposed 
Rule 3110.18(b)(2)(B), a specific office or location of an otherwise 
eligible member would be ineligible for a remote inspection if at any 
time during the period of the proposed pilot program, an associated 
person at such office or location is or becomes: (1) subject to a 
mandatory heightened supervisory plan under the rules of the 
Commission, FINRA, or state regulatory agency; (2) 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 3110.18(b)(2)(B)(i) or 
otherwise as a condition to approval or permission for such 
association; (3) subject to Rule 1017(a)(7) as a result of one or more 
associated persons at such location; or (4) one or more associated 
persons at such location has an event in the prior three years that 
required a ``yes'' response to any item in Questions 14A(1)(a) and 
2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4.\13\
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    \13\ See id.
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iii. Written Supervisory Procedures
    Proposed Rule 3110.18(c) would require a participating firm to 
adopt written supervisory procedures (``WSPs'') regarding conducting 
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. Proposed Rule 
3110.18(c) also states that reasonably designed procedures for 
conducting remote inspections of offices or locations should include, 
among other things: (1) a description of 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 pursuant to proposed Rule 3110.18(b); and (3) the 
use of other risk-based systems employed generally by the participating 
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.\14\
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    \14\ See id. at 50150.
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iv. Effective Supervisory System
    Proposed Rule 3110.18(d) would reiterate that the requirement to 
conduct inspections of offices and locations is one part of a member's 
overall obligation to have an effective supervisory system, and 
therefore a 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. In addition, 
proposed Rule 3110.18(d) would provide that a participating member's 
remote inspection of an office or location would be held to the same 
standards for review applicable to on-site inspections as set forth 
under Rule 3110.12. Further, proposed Rule 3110.18(d) would provide 
that where a participating 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.\15\
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    \15\ See id.
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v. Documentation
    Proposed Rule 3110.18(e) would require a participating member to 
maintain and preserve a centralized record for each of the ``pilot 
years'' \16\ 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). 
In addition, under proposed Rule 3110.18(e) a participating member's 
documentation of the results of a remote inspection for an office or 
location must 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.\17\
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    \16\ Proposed Rule 3110.18(h) would define the term ``pilot 
year.''
    \17\ See Notice at 50150.
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vi. Data and Information To Be Provided to FINRA
a. Data Collection
    Proposed Rule 3110.18(f)(1) would require a participating member to 
collect separate counts for OSJs, supervisory branch offices, non-
supervisory branch offices, and non-branch locations, consistent with 
Rule 3110(c)(1), of:
    (A) the number of locations with an inspection--on-site or remote--
completed during each calendar quarter;
    (B) the number of locations in item (A) that were inspected 
remotely;
    (C) the number of locations in item (A) that were inspected on-
site;
    (D) the number of locations in item (C) that were inspected on-site 
because of a ``finding''; \18\
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    \18\ Proposed Rule 3110.18(f) would define ``finding'' as an 
item that led to any remedial action or was listed on the member's 
inspection report. See Notice at 50151.
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    (E) the number of locations in item (B) where findings were 
identified, the number of those findings, and a list of the most 
significant findings; and
    (F) the number of locations in item (C) where findings were 
identified, the number of those findings, and a list of the most 
significant findings. (Hereinafter collectively referred to as the 
``Collected Data'').\19\
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    \19\ See Notice at 50150-51. If ``pilot year one'', as defined 
by proposed Rule 3110.18(h), covers a period that is less than a 
full calendar year, proposed Rule 3110.18(f)(2) would require a 
participating member to collect separate counts for OSJs, 
supervisory branch offices, non-supervisory branch offices, and non-
branch locations, consistent with Rule 3110(c)(1), of: (A) the 
number of locations with an inspection completed during the full 
calendar year of pilot year one; (B) the number of locations in item 
(A) that were inspected remotely during the full calendar year of 
pilot year one; and (C) the number of locations in item (A) that 
were inspected on-site during the full calendar year of pilot year 
one. (Hereinafter collectively referred to as the ``Pilot Year One 
Collected Data''). Proposed Rule 3110.18(f)(2) would require a 
participating member to provide Pilot Year One Collected Data to 
FINRA no later than December 31 of such first pilot year, and in a 
manner and format determined by FINRA. See Notice at 50151.
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    Proposed Rule 3110.18(f)(1) would require a participating member to 
provide the Collected Data to FINRA, on a periodic basis (not to exceed 
quarterly), and in a manner and format determined by FINRA.\20\
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    \20\ See Notice at 50150-51.
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b. Written Supervisory Procedures
    Proposed Rule 3110.18(f)(1) would also require participating 
members to provide FINRA the requirements of their WSPs for remote 
inspections that account for: (1) procedures for escalating significant 
findings; (2) procedures for new hires; (3) procedures for supervising 
brokers with a significant history of misconduct; and (4) procedures 
related to outside business activities and ``doing business as'' (DBA) 
designations. Proposed Rule 3110.18(f) would require participating 
members to provide FINRA this information with the first delivery of 
the Collected Data, and thereafter with the first delivery of Collected 
Data made

[[Page 68776]]

after any amendments to their WSPs for remote inspections.\21\
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    \21\ See id. at 50151.
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    In addition, proposed Rule 3110.18(f)(3) would require 
participating members to establish, maintain and enforce written 
policies and procedures that are reasonably designed to comply with the 
data and information collection, and transmission requirements of 
proposed Rule 3110.18(f).\22\
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    \22\ See id.
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vii. Notice of Opting In and Opting Out of Proposed Pilot Program
    Proposed Rule 3110.18(g) would require a participating member, at 
least five calendar days before the beginning each pilot year,\23\ to 
provide FINRA an opt-in notice in the manner and format determined by 
FINRA. By providing such opt-in notice to FINRA, the participating 
member agrees to participate in the proposed pilot program for the 
duration of the pilot year and to comply with the requirements of Rule 
3110.18. A participating member that provides the opt-in notice for a 
pilot year would be automatically deemed to have elected and agreed to 
participate in the proposed pilot program for subsequent pilot years 
until the pilot program expires. Proposed Rule 3110.18(g) would also 
require a participating member withdrawing from subsequent pilot years 
to, at least five calendar days before the end of the then current 
pilot year, provide FINRA with an opt-out notice in the manner and 
format determined by FINRA.\24\
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    \23\ See supra note 16.
    \24\ See Notice at 50151. Proposed Rule 3110.18(g) would give 
FINRA authority to waive the applicable timeframes for the required 
opt-in or opt-out notices in exceptional cases and where good cause 
is shown. See id.
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viii. Failure To Satisfy Conditions
    Under proposed Rule 3110.18(i), a member firm that fails to satisfy 
the conditions of proposed Rule 3110.18 would be ineligible to 
participate in the proposed pilot program and must conduct on-site 
inspections of each office and location on the required cycle in 
accordance with Rule 3110(c).\25\
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    \25\ See Notice at 50151-52.
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III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2022-021 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.\26\ 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.
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    \26\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\27\ 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.
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    \27\ Id.
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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.\28\
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    \28\ 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).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by December 7, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 21, 2022.
    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 No. SR-FINRA-2022-021 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 No. SR-FINRA-2022-021. 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 10:00 a.m. and 
3:00 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 No. SR-FINRA-2022-021 and 
should be submitted on or before December 7, 2022. If comments are 
received, any rebuttal comments should be submitted on or before 
December 21, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-24958 Filed 11-15-22; 8:45 am]
BILLING CODE 8011-01-P