[Federal Register Volume 87, Number 217 (Thursday, November 10, 2022)]
[Notices]
[Pages 67969-67972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-24509]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96241; File No. SR-FINRA-2022-030]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Extend Temporary Supplementary Material .17
(Temporary Relief To Allow Remote Inspections for Calendar Years 2020
and 2021, and Through December 31 of Calendar Year 2022) Under FINRA
Rule 3110 (Supervision)
November 4, 2022.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on October 31, 2022, the Financial Industry
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by FINRA. FINRA has designated the proposed rule change
as constituting a ``non-controversial'' rule change under paragraph
(f)(6) of Rule 19b-4 under the Act,\3\ which renders the proposal
effective upon receipt of this filing by the Commission. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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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 extend temporary Supplementary Material .17
(Temporary Relief to Allow Remote Inspections for Calendar Years 2020
and 2021, and Through December 31 of Calendar Year 2022) under FINRA
Rule 3110 (Supervision) to include calendar year 2023 inspection
obligations through the earlier of the effective date of the pilot
program proposed in File No. SR-FINRA-2022-021, if approved, or
December 31, 2023 within the scope of the supplementary material.\4\
The proposed extension of Rule 3110.17 would alleviate the ongoing
operational challenges resulting from the COVID-19 pandemic that many
member firms may continue to face in planning for and timely conducting
the on-site inspection component of Rule 3110(c) (Internal Inspections)
at locations requiring inspection in calendar year 2023.\5\
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\4\ See infra note 15, and accompanying text for further
discussion of the pilot program proposed in File No. SR-FINRA-2022-
021. The proposed rule change will automatically sunset on the
earlier of the effective date of SR-FINRA-2022-021, if approved, or
December 31, 2023. FINRA will submit a separate rule filing if it
seeks to extend the duration of the temporary proposed rule beyond
December 31, 2023.
\5\ SEC staff and FINRA have stated in guidance that inspections
must include a physical, on-site review component. See SEC National
Examination Risk Alert, Volume I, Issue 2 (November 30, 2011) and
Regulatory Notice 11-54 (November 2011) (joint SEC and FINRA
guidance stating, a ``broker-dealer must conduct on-site inspections
of each of its office locations; [OSJs] and non-OSJ branches that
supervise non-branch locations at least annually, all non-
supervising branch offices at least every three years; and non-
branch offices periodically.'') (footnote defining an OSJ omitted).
See also SEC Division of Market Regulation, Staff Legal Bulletin No.
17: Remote Office Supervision (March 19, 2004) (stating, in part,
that broker-dealers that conduct business through geographically
dispersed offices have not adequately discharged their supervisory
obligations where there are no on-site routine or ``for cause''
inspections of those offices).
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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 RESPONSIBILITES RELATING TO ASSOCIATED PERSONS
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
(a) through (f) No Change.
Supplementary Material: --------------
.01 through .16 No Change.
.17 Temporary Relief to Allow Remote Inspections for Calendar Years
2020, [and] 2021, 2022, and [Through December 31 of Calendar Year
2022]2023.
(a) Use of Remote Inspections. Each member obligated to conduct an
inspection of an office of supervisory jurisdiction, branch office or
non-branch location in the calendar years [2020, 2021 and
2022]specified in this supplementary material pursuant to, as
applicable, paragraphs (c)(1)(A), (B) and (C) under Rule 3110 may,
subject to the requirements of this Rule 3110.17, satisfy such
obligation by conducting the applicable inspection remotely, without an
on-site visit to the office or location. In accordance with Rule
3110.16, inspections for calendar year 2020 must be completed on or
before March 31, 2021. [and] [i]Inspections for calendar year 2021 must
be completed on or before December 31, 2021 and inspections for
calendar year 2022 must be completed on or before December 31, 2022.
With respect to a member's obligation to conduct an inspection of an
office or location in calendar year [2022]2023, a member has the option
to conduct those inspections remotely through the earlier of the
effective date of the pilot program proposed in File No. SR-FINRA-2022-
021, if approved, or December 31, [2022]2023. Notwithstanding Rule
3110.17, a member shall remain subject to the other requirements of
Rule 3110(c).
(b) Written Supervisory Procedures for Remote Inspections.
Consistent with a member's obligation under Rule 3110(b)(1), a member
that elects to conduct its inspections remotely for any of the calendar
years specified in this supplementary material must amend or supplement
its written supervisory procedures to provide for remote inspections
that are reasonably designed to assist in detecting and preventing
violations of and achieving compliance with applicable securities laws
and regulations, and with applicable FINRA rules. Reasonably designed
procedures for conducting remote inspections of offices or locations
should include, among other things: (1) a description of the
methodology, including
[[Page 67970]]
technologies permitted by the member, that may be used to conduct
remote inspections; and (2) the use of other risk-based systems
employed generally by the member firm 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.
(c) Effective Supervisory System. The requirement to conduct
inspections of offices and locations is one part of the member's
overall obligation to have an effective supervisory system and
therefore, the member must continue with its ongoing review of the
activities and functions occurring at all offices and locations,
whether or not the member conducts inspections remotely. A member's use
of a remote inspection of an office or location will be held to the
same standards for review as set forth under Rule 3110.12. Where a
member's remote inspection of an office or location identifies any
indicators of irregularities or misconduct (i.e., ``red flags''), the
member may need to impose additional supervisory procedures for that
office or location or may need to provide for more frequent monitoring
of that office or location, including potentially a subsequent
physical, on-site visit on an announced or unannounced basis when the
member's operational difficulties associated with COVID-19 abate,
nationally or locally as relevant, and the challenges a member is
facing in light of the public health and safety concerns make such on-
site visits feasible using reasonable best efforts. The temporary
relief provided by this Rule 3110.17 does not extend to a member's
inspection requirements beyond the earlier of the effective date of the
pilot program proposed in File No. SR-FINRA-2022-021, if approved, or
December 31, [2022]2023, and such inspections must be conducted in
compliance with Rule 3110(c).
(d) Documentation Requirement. A member must maintain and preserve
a centralized record for [each of calendar years 2020 and 2021] the
calendar years specified in this supplementary material[, and for
calendar year 2022 through December 31, 2022] that separately
identifies: (1) all offices or locations that had inspections that were
conducted remotely; and (2) any offices or locations for which the
member determined to impose additional supervisory procedures or more
frequent monitoring, as provided in Rule 3110.17(c). A 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.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In response to the COVID-19 global health crisis and the
corresponding need to restrict in-person activities, FINRA provided
temporary relief to member firms from certain regulatory requirements,
including those set forth under Rule 3110. To help alleviate the
attendant logistical challenges member firms were encountering to
satisfy the on-site inspection component of their Rule 3110(c)
requirements, FINRA adopted Rule 3110.16 (Temporary Extension of Time
to Complete Office Inspections) to extend the time by which member
firms were required to complete their calendar year 2020 inspection
obligations under Rule 3110(c) to March 31, 2021 with the expectation
that the extension did not relieve firms from the on-site portion of
the inspections of their offices and locations.\6\ However, health and
safety concerns remained unabated and with many restrictive measures
still in place as calendar year 2020 was ending, FINRA adopted Rule
3110.17 to provide member firms the option, subject to specified
requirements under the supplementary material, to complete remotely
their calendar year inspection obligations without an on-site visit to
the office or location.\7\ This relief has been extended and currently,
Rule 3110.17 is set to automatically sunset on December 31, 2022.\8\
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\6\ See Securities Exchange Act Release No. 89188 (June 30,
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-019).
\7\ See Securities Exchange Act Release No. 90454 (November 18,
2020), 85 FR 75097 (November 24, 2020) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2020-040).
\8\ See Securities Exchange Act Release No. 93002 (September 15,
2021), 86 FR 52508 (September 21, 2021) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2021-023); and
Securities Exchange Act Release No. 94018 (January 20, 2022), 87 FR
4072 (January 26, 2022) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2022-001).
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Even though it has been more than two years since the World Health
Organization declared COVID-19 a pandemic,\9\ member firms' in-person
staff requirements, which were first developed in response to COVID-19-
related health concerns, have remained in flux. This reflects, in part,
ongoing staff health concerns; according to the CDC, the number of new
deaths from COVID-19 in the United States in September 2022 ranged from
approximately 2,900 to 3,200 deaths per week,\10\ and approximately 20
percent of counties in the United States have a medium or high COVID-19
Community Level based on the CDC's most recent calculations.\11\ While
CDC guidance on managing the risks related to COVID-19 has become more
streamlined,\12\ dissimilar vaccination rates through the U.S.\13\ and
the uncertainty about whether there will be a significant increase in
the number of COVID-19 cases in light of the presence of COVID-19
variants, including Omicron and its lineages,\14\ continues to raise
staff health concerns, particularly with regard to inspections of their
home activities.
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\9\ See Centers for Disease Control and Prevention (``CDC''),
International Classification of Diseases, Tenth Revision, Clinical
Modification, https://www.cdc.gov/nchs/data/icd/Announcement-New-ICD-code-for-coronavirus-3-18-2020.pdf. See also WHO Director-
General, Opening Remarks at the Media Briefing on COVID-19 (March
11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
\10\ See CDC, COVID Data Tracker--Trends in Number of COVID-19
Cases and Deaths in the US Reported to CDC, by State/Territory,
https://covid.cdc.gov/covid-data-tracker/#trends_weeklydeaths_select_00 (last visited October 27, 2022).
\11\ See CDC, COVID Data Tracker--COVID-19 Integrated County
View, https://covid.cdc.gov/covid-data-tracker/#county-view?list_select_state=all_states&data-type=CommunityLevels (last
visited October 27, 2022).
\12\ See generally CDC Press Release, CDC streamlines COVID-19
guidance to help the public better protect themselves and understand
their risk, https://www.cdc.gov/media/releases/2022/p0811-covid-guidance.html (August 11, 2022).
\13\ A state-by-state comparison of vaccination rates is
available at https://covid.cdc.gov/covid-data-tracker/#vaccinations_vacc-people-additionaldose-totalpop.
\14\ Variants of concern include BA.5, BA.4.6, and BQ.1.1, among
others. See CDC, COVID Data Tracker--Variant Proportions, https://covid.cdc.gov/covid-data-tracker/#variant-proportions (last visited
October 27, 2022).
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As year 2022 is in its fourth quarter, firms need to establish
their inspection
[[Page 67971]]
schedules for calendar year 2023 and ensure there is adequate,
experienced staff available to travel and conduct on-site inspections
safely within the context of fluid work locations. This situation
presents complexity for many firms in terms of planning and deploying
resources. Even with increased availability of vaccines, FINRA
understands that many firm personnel are still working at least part
time from alternative work locations (e.g., private residences), while
taking incremental steps to resume in-person activities in some fashion
amid the current environment. With these considerations alone, FINRA
believes there is a continued need for temporary relief beyond December
31, 2022.
FINRA has also filed with the Commission File No. SR-FINRA-2022-
021, a proposed rule change to adopt a voluntary, remote inspections
pilot program that is currently pending Commission review. The review
period may extend well into 2023.\15\ Given the potential length of
that review period, and the pilot program's significant planning
requirements and varying limitations applicable to specific firms and
office locations, FINRA believes that firms that intend to participate
in the pilot program, if approved, will need a significant number of
months to prepare appropriately for the pilot program. Moreover,
further FINRA guidance may be needed to guide implementation in various
circumstances.\16\ Firms that are not eligible, or do not intend, to
participate in the pilot program, if approved, will also need the time
to make any operational adjustments to schedule and conduct the on-site
component of their upcoming inspections once Rule 3110.17 expires on
the effective date of the pilot program, which could come before
December 31, 2023. For these reasons, and to avoid overlapping
provisions, under the proposed rule change herein, temporary Rule
3110.17 would expire on the earlier of the effective date of the pilot
program proposed in File No. SR-FINRA-2022-021 or December 31,
2023.\17\ If the Pilot Proposal is not approved, member firms should
use the time provided in proposed Rule 3110.17 to prepare to fulfill
their Rule 3110(c) obligations through on-site inspections of their
offices and locations.\18\
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\15\ On July 28, 2022, FINRA filed a proposed rule change to
adopt proposed Supplementary Material .18 under Rule 3110 that would
set forth the terms of a voluntary, three-year remote inspections
pilot program to allow member firms to elect to fulfill their
obligation under Rule 3110(c) by conducting inspections of some or
all branch offices and locations remotely without an on-site visit
to such office or location. See Securities Exchange Act Release No.
95452 (August 9, 2022), 87 FR 50144 (August 15, 2022) (Notice of
Filing of File No. SR-FINRA-2022-021) (``Pilot Proposal''). The
Pilot Proposal is currently pending Commission review and under
Section 19(b)(2) of the Exchange Act, the last day for the
Commission to issue an order of approval or disapproval of File No.
SR-FINRA-2022-021 is April 12, 2023. See 15 U.S.C. 78s(b)(2).
\16\ As part of the implementation of the remote inspections
pilot program, FINRA intends to publish a Regulatory Notice or other
guidance about the operational aspects of the pilot program.
\17\ Proposed Rule 3110.18 would expressly provide that if Rule
3110.17 has not already expired by its own terms, it would
automatically sunset on the effective date of the pilot program. See
Pilot Proposal.
\18\ See note 5, supra.
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In sum, proposed Rule 3110.17 would avoid a potential lapse in the
temporary relief while challenges from COVID-19 persist, provide firms
regulatory continuity in meeting their inspection obligations during
the remaining Commission review period of the Pilot Proposal, and allow
firms time to adapt to the pilot program, if approved, and prepare for
conducting on-site inspections, as applicable.
FINRA is not proposing to amend the other conditions of the
temporary rule. The current conditions of the supplementary material
for firms that elect to conduct remote inspections would remain
unchanged: such firms must amend or supplement their written
supervisory procedures for remote inspections, use remote inspections
as part of an effective supervisory system, and maintain the required
documentation. FINRA continues to believe this temporary remote
inspection option is a reasonable alternative to provide to firms to
fulfill their Rule 3110(c) obligations under current conditions while
the Commission considers the Pilot Proposal. This extension is designed
to maintain the investor protection objectives of the inspection
requirements under these circumstances. Firms should consider whether,
under their particular operating conditions, reliance on remote
inspections would be reasonable under the circumstances. For example,
firms with offices that are open to the public or that are otherwise
doing business as usual should consider whether some in-person
inspections would be feasible and add value to the firms' supervisory
program.
FINRA has filed the proposed rule change for immediate
effectiveness. FINRA is proposing to make the proposed rule change
operative on January 1, 2023.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\19\ 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. In recognition of the ongoing impact of COVID-19 on
performing the on-site inspection component of Rule 3110(c), the
proposed rule change is intended to continue providing firms a
temporary regulatory option to conduct inspections of offices and
locations remotely during calendar year 2023. This temporary proposed
supplementary material does not relieve firms from meeting the core
regulatory obligation to establish and maintain a system to supervise
the activities of each associated person that is reasonably designed to
achieve compliance with applicable securities laws and regulations, and
with applicable FINRA rules that directly serve investor protection.
With the ongoing staffing challenges resulting from the lingering
COVID-19 pandemic, FINRA believes that the proposed rule change
provides sensibly tailored relief, while continuing to serve and
promote the protection of investors and the public interest. In
addition, the extended time would give firms clarity around their Rule
3110(c) inspection obligations pending the Commission's review of the
Pilot Proposal.
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\19\ 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 potential economic impacts
of Rule 3110.17 as described in File No. SR-FINRA-2020-040 continue to
have applicability to the proposed rule change herein. The proposed
rule change would extend the temporary relief that provides firms with
the option to fulfill their inspection obligations remotely. The
proposed extension would include calendar year 2023 inspection
obligations through the earlier of the effective date of the pilot
program proposed in File No. SR-FINRA-2022-021, if approved, or
December 31, 2023 within the scope of the supplementary material
without making substantive changes to the other aspects of the
provision. In addition, the proposed temporary extension would avoid a
potential lapse in temporary relief while the Pilot Proposal is pending
Commission action. Further, the
[[Page 67972]]
proposed extension would provide regulatory certainty while firms
continue to manage health and safety concerns, work absences, and the
transition to new workforce arrangements. FINRA believes that this
limited extension in temporary relief, together with the requirements
for using the temporary relief in Rule 3110.17, would not diminish
investor protection.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6).
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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 [email protected]. Please include
File Number SR-FINRA-2022-030 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-2022-030. 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-2022-030
and should be submitted on or before December 1, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24509 Filed 11-9-22; 8:45 am]
BILLING CODE 8011-01-P