[Federal Register Volume 87, Number 245 (Thursday, December 22, 2022)]
[Notices]
[Pages 78737-78740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27787]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96520; File No. SR-FINRA-2022-021]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Partial Amendment No. 1 to Proposed Rule
Change To Adopt Supplementary Material .18 (Remote Inspections Pilot
Program) Under FINRA Rule 3110 (Supervision)
December 16, 2022.
I. Introduction
On July 28, 2022, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change (SR-FINRA-2022-021) 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 locations
remotely without an on-site visit to such office or location, subject
to specified terms.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for public comment in the
Federal Register on August 15, 2022.\3\ 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.\4\ On
November 9, 2022, FINRA filed a letter stating that it was considering
comments received in response to the Notice, and anticipated submitting
a response and amendments to the proposed rule change in the near
future.\5\ On November 10, 2022, the Commission filed an order
instituting proceedings to determine whether to approve or disapprove
the proposed rule change.\6\ The Commission received several comments
on the proposed rule change.\7\
---------------------------------------------------------------------------
\3\ Exchange Act Release No. 95452 (August 9, 2022), 87 FR 50144
(August 15, 2022) (File No. SR-FINRA-2022-021) (``Notice'').
\4\ 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.
\5\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
SEC, dated November 9, 2022.
\6\ See Exchange Act Release No. 96297 (November 10, 2022), 87
FR 68774 (November 16, 2022) (File No. SR-FINRA-2022-021) (``OIP'').
\7\ Comments received on the Notice and OIP are available on the
Commission's website at https://www.sec.gov/comments/sr-finra-2022-021/srfinra2022021.htm.
---------------------------------------------------------------------------
On December 15, 2022, FINRA responded to the comment letters
received on the Notice and OIP \8\ and filed a partial amendment to the
proposed rule change in response to certain comments on the proposed
rule change (``Partial Amendment No. 1''). Partial Amendment No. 1 is
described in Item II below, which has been substantially prepared by
FINRA.\9\ The Commission is publishing this notice to solicit comments
on Partial Amendment No. 1 from interested persons.\10\
---------------------------------------------------------------------------
\8\ See letter from Kosha Dalal, Vice President and Associate
General Counsel, Office of General Counsel, FINRA, to Vanessa
Countryman, Secretary, Commission, dated December 15, 2022,
available at https://www.sec.gov/comments/sr-finra-2022-021/srfinra2022021-20152889-320539.pdf.
\9\ The Commission has reformatted FINRA's presentation of its
proposed modifications to, and descriptions of, the proposed rule
change.
\10\ Partial Amendment No. 1 is also available on FINRA's
website at https://www.finra.org/sites/default/files/2022-12/sr-finra-2022-021-amendment-no-1-proposed-rule-change.pdf.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Partial Amendment
FINRA is proposing the following amendments to the filing:
1. FINRA Proposes To Amend Proposed Rule 3110.18(b) by Adding Subpart
(2)
In light of concerns raised by commenters that a firm might not
appropriately consider certain higher risk criteria in conducting its
risk assessment, FINRA is proposing to add new paragraph (b)(2) to
proposed Rule 3110.18 that would provide a non-exhaustive list of
factors that a firm must consider and document. In addition, proposed
new paragraph (b)(2) would further provide that consistent with Rule
3110.12, members should conduct on-site inspections or make more
frequent use of unannounced, on-site inspections for high-risk
locations or where there are ``red flags.'' Following are the changes
proposed in this Partial Amendment No. 1, with the proposed changes in
the original filing shown as if adopted. Proposed new language in this
Partial Amendment No. 1 is italicized; proposed deletions in this
Partial Amendment No. 1 are in brackets:
[[Page 78738]]
(2) In conducting the risk assessment of each office or location
in accordance with Rule 3110.18(b)(1), a member shall consider,
among other things, the following in making their risk-based
evaluation of each office or location: (A) the volume and nature of
customer complaints; (B) the volume and nature of outside business
activities, particularly investment-related; (C) the volume and
complexity of products offered; (D) the nature of the customer base,
including vulnerable adult investors; (E) whether associated persons
are subject to heightened supervision; (F) failures by associated
persons to comply with the member's written supervisory procedures;
and (G) any recordkeeping violations. In addition, consistent with
Rule 3110.12, members should conduct on-site inspections or make
more frequent use of unannounced, on-site inspections for high-risk
locations or where there are ``red flags.''
FINRA expects a firm to carefully consider the proposed factors
listed above and Rule 3110.12 for the risk assessment. The outcome of
such assessment may raise red flags that should prompt a firm to
consider, among other things, inspecting, remotely or on-site, its
offices or locations more frequently than the schedule set forth under
Rule 3110(c)(1) (on an announced or unannounced basis). Moreover, FINRA
notes that Rule 3130 (Annual Certification of Compliance and
Supervisory Processes) requires member firms to have processes to
establish, maintain, review, test, and modify written compliance
policies and written supervisory procedures reasonably designed to
achieve compliance with applicable FINRA rules, Municipal Securities
Rulemaking Board rules, and federal securities laws and regulations.
FINRA expects firms to consider Rule 3110.18 as part of their Rule 3130
annual certification process.
2. FINRA Proposes To Amend Proposed Rule 3110.18(c) by Adding Subparts
(1)(A)(iii)-(vi)
As proposed, the proposed rule change would exclude some member
firms and their offices or locations from participating in the proposed
pilot program based on events or activities of a member firm or its
associated persons that FINRA believed were more likely to raise
investor protection concerns based on the firm's or an associated
person's record of specified regulatory or disciplinary events. In
light of concerns raised by the commenters, FINRA is proposing to
expand the list of events that would deem a member firm ineligible to
participate in the pilot program. Following are the changes proposed in
this Partial Amendment No. 1, with the proposed changes in the original
filing shown as if adopted. Proposed new language in this Partial
Amendment No. 1 is italicized; proposed deletions in this Partial
Amendment No. 1 are in brackets:
(c) Eligibility Exclusions and Conditions
(1) Firm Level
[2](A) A member shall not be eligible to conduct remote
inspections of any of its offices or locations in accordance with
this Supplementary Material if any time during the period of this
Remote Inspections Pilot Program, the member[ is or becomes]:
(i) is or becomes designated as Restricted Firm under Rule 4111;
[or]
(ii) is or becomes designated as a Taping Firm under Rule
3170[.];
(iii) receives a notice from FINRA under Rule 9557 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;
(iv) is or becomes suspended by FINRA;
(v) based on the date in the Central Registration Depository
(CRD), had its FINRA membership become effective within the prior 12
months; or
(vi) is or has been found within the past three years by the SEC
or FINRA to have violated Rule 3110(c) (Internal Inspections).
FINRA believes that a member firm that is experiencing issues
complying with its capital requirements or has been suspended by FINRA
is more likely to face significant operational challenges that may
negatively impact the firm's inspection program. FINRA further believes
that a firm that has been a FINRA member for less than 12 months is
often still implementing its business plan and may not have sufficient
experience to develop a sufficiently robust inspection program. With
respect to a firm that is or has been found within the past three years
by the SEC or FINRA to have violated Rule 3110(c), FINRA believes such
firms have demonstrated challenges in developing or maintaining robust
inspection programs. As such, FINRA believes that these proposed
additional ineligibility criteria would appropriately limit the
potential population of member firm pilot program participants to those
firms that may be better positioned to conduct remote inspections.
Moreover, FINRA believes these amendments more appropriately tailor the
proposal to maintain investor protection.
3. FINRA Proposes To Amend Proposed Rule 3110.18(c) by Adding Subpart
(1)(B)
To further address commenters' concerns pertaining to the proposed
controls of the pilot program, FINRA is proposing to enhance those
controls with respect to books and records and surveillance and
technology tools. Following are the changes proposed in this Partial
Amendment No. 1, with the proposed changes in the original filing shown
as if adopted. Proposed new language in this Partial Amendment No. 1 is
italicized; proposed deletions in this Partial Amendment No. 1 are in
brackets:
(c) Eligibility Exclusions and Conditions
(1) Firm Level
* * * * *
(B) In addition to the requirements of this Supplementary
Material, during the period that a member is participating in this
Remote Inspections Pilot Program the member must satisfy the
following conditions to be eligible to conduct remote inspections of
any of its offices or locations in accordance with this
Supplementary Material:
(i)(a) the member must have a recordkeeping system to make and
keep current, and preserve 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; (b) such records are not physically or
electronically maintained and preserved at the office or location
subject to the remote inspection; and (c) the member has prompt
access to such records; and
(ii) as part of the requirement to develop a reasonable risk-
based approach to using remote inspections, and the further
requirement to conduct and document a risk assessment for each
office or location, the member must determine that its surveillance
and technology tools are appropriate to supervise the types of risks
presented by each such office or location. These tools may include
but are not limited to: (a) firm-wide tools such as, 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 that office or location based on the activities of
associated persons, products offered, restrictions on the activity
of the office or location (including holding out to customers and
handling of customer funds or securities); and (c) system tools such
as secure network connections and effective cybersecurity protocols.
FINRA believes these proposed new eligibility conditions are
appropriate to establish reasonable baseline requirements for remote
inspections.
4. FINRA Proposes To Amend Proposed Rule 3110.18(c) by Adding Subparts
(2)(A)(v)-(vii)
In light of the comment letters expressing concern about the
discretion provided to firms to make risk assessments of the criteria
specified earlier of their offices or locations, FINRA is proposing to
expand the list of events or activities that would make specific
offices or locations of a member firm ineligible for remote
inspections.
[[Page 78739]]
Following are the changes proposed in this Partial Amendment No. 1,
with the proposed changes in the original filing shown as if adopted.
Proposed new language in this Partial Amendment No. 1 is italicized;
proposed deletions in this Partial Amendment No. 1 are in brackets:
(c) Eligibility Exclusions and Conditions
(1) Firm Level
* * * * *
[(B)](2) Location Level
(A) A specific office or location of a member shall not be
eligible for a remote inspection in accordance with this
Supplementary Material if any time during the period of this Remote
Inspections Pilot Program[, an associated person at such office or
location is or becomes]:
(i) one or more associated persons at such office or location is
or becomes subject to a mandatory heightened supervisory plan under
the rules of the SEC, FINRA or a state regulatory agency;
(ii) one or more associated persons at such office or location
is or becomes statutorily disqualified, unless such disqualified
person has been approved (or is otherwise permitted pursuant to
FINRA rules and the federal securities laws) to associate with a
member and is not subject to a mandatory heightened supervisory plan
under paragraph [(b)(2)(B)(i)](c)(2)(A)(i) of this Supplementary
Material or otherwise as a condition to approval or permission for
such association;
(iii) the firm is or becomes subject to Rule 1017(a)(7) as a
result of one or more associated persons at such office or location;
or
(iv) one or more associated persons at such office or 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[.];
(v) one or more associated persons at such office or location is
or becomes subject to a disciplinary action taken by the member that
is or was reportable under Rule 4530(a)(2);
(vi) one or more associated persons at such office or location
is a part of the member's trading desk (e.g., engaging in market
making activities or having authority to enter proprietary trades on
behalf of the member or as agent for other parties; or
(vii) the office or location handles customers' funds or
securities.
FINRA believes the expanded list of exclusions for specific offices
or locations of a member further strengthens the terms of the proposed
pilot program by identifying additional offices or locations that may
particularly benefit from in-person inspections and expressly excluding
them, regardless of any individual firm's risk assessment.
5. FINRA Proposes To Amend Proposed Rule 3110.18(c) by Adding Subparts
(2)(B)(i)-(iii)
To further address commenters' concerns regarding the proposed
pilot program's controls, FINRA is proposing to add three new
eligibility conditions to conduct a remote inspection during the pilot
period. Following are the changes proposed in this Partial Amendment
No. 1, with the proposed changes in the original filing shown as if
adopted. Proposed new language in this Partial Amendment No. 1 is
italicized; proposed deletions in this Partial Amendment No. 1 are in
brackets:
(c) Eligibility Exclusions and Conditions
(1) Firm Level
[(B)](2) Location Level
* * * * *
(B) In addition to the requirements of this Supplementary
Material, during the period a member is participating in this Remote
Inspections Pilot Program a specific office or location of the
member must satisfy the following conditions to be eligible for a
remote inspection in accordance with this Supplementary Material:
(i) electronic communications (e.g., email) are made through the
member's electronic system;
(ii) the associated person's correspondence and communications
with the public are subject to the firm's supervision in accordance
with Rule 3110; and
(iii) no books or records of the member required to be made and
kept current, and preserved under applicable securities laws and
regulations, FINRA rules, and the member's own written supervisory
procedures under Rule 3110 are physically or electronically
maintained and preserved at such office or location.
6. FINRA Proposes To Amend Proposed Rule 3110.18 by Adding Subparts (k)
FINRA is also proposing to adopt new paragraph (k) to proposed Rule
3110.18 to allow FINRA to make a determination in the public interest
and for the protection of investors that a member is no longer eligible
to participate in the proposed pilot program if the member fails to
comply with the requirements of Rule 3110.18. If warranted, FINRA would
provide written notice to the member of such determination and such
member would no longer be eligible to participate in the proposed pilot
program and would be required to conduct on-site inspections of
required offices and locations in accordance with Rule 3110(c).
Following are the changes proposed in this Partial Amendment No. 1,
with the proposed changes in the original filing shown as if adopted.
Proposed new language in this Partial Amendment No. 1 is italicized;
proposed deletions in this Partial Amendment No. 1 are in brackets:
(k) Determination of Ineligibility. FINRA may make a
determination in the public interest and for the protection of
investors that a member is no longer eligible to participate in the
Pilot Program if the member fails to comply with the requirements of
Rule 3110.18. In such instances, FINRA will provide written notice
to the member of such determination and the member would no longer
be eligible to participate in the Pilot Program and must conduct on-
site inspections of required offices and locations in accordance
with Rule 3110(c).
FINRA believes this added authority would both align with FINRA's
examination and risk monitoring programs for member firms and
registered persons and allow FINRA to more effectively assess higher
risk.
7. FINRA Proposes To Amend Proposed Rule 3110.18 To Make Other Non-
Substantive, Technical Changes to the Proposed Rule Change
FINRA is also proposing to make other non-substantive, technical
changes to the proposed rule change, including conforming changes to
the numbering of the proposed rules and updating cross-references.
III. Date of Effectiveness of the Proposed Rule Change As Modified By
Partial Amendment No. 1 and Timing for Commission Action
Within 45 days of the date of publication of the initial Notice in
the Federal Register or within such longer period (i) as the Commission
may designate up to 90 days of such date if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, the Commission will
by order approve or disapprove such proposed rule change, as amended by
Partial Amendment No. 1.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended by Partial Amendment No. 1, 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-2022-021 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.
[[Page 78740]]
All submissions should refer to File Number 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 Number SR-FINRA-2022-021 and
should be submitted on or before January 12, 2023.
---------------------------------------------------------------------------
\11\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27787 Filed 12-21-22; 8:45 am]
BILLING CODE 8011-01-P