[Federal Register Volume 88, Number 131 (Tuesday, July 11, 2023)]
[Notices]
[Pages 44173-44176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14523]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97839; File No. SR-FINRA-2023-006]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order
Instituting Proceedings To Determine Whether To Approve or Disapprove
the Proposed Rule Change, as Modified by Amendment No. 1, To Adopt
Supplementary Material .19 (Residential Supervisory Location) Under
FINRA Rule 3110 (Supervision)
July 5, 2023.
I. Introduction
On March 29, 2023, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') proposed rule change SR-FINRA-2023-006
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to adopt new
Supplementary Material .19 (Residential Supervisory Location) under
FINRA Rule 3110 (Supervision), which would treat a private residence at
which an associated person engages in specified supervisory activities
as a non-branch location, subject to safeguards and limitations.\3\ The
proposed rule change was published for public comment in the Federal
Register on April 6, 2023.\4\ The Commission received thirteen comment
letters related to this filing.\5\ On May 16, 2023, FINRA consented to
an extension of the time period in which the Commission must approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to July 5, 2023.\6\ On July 3, 2023, FINRA filed
an amendment to modify the proposed rule change (``Amendment No.
1'').\7\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 97237 (Mar. 31, 2023), 88 FR
20568 (Apr. 6, 2023) (File No. SR-FINRA-2023-006) (hereinafter, the
``Notice'').
\4\ See id.
\5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-006/srfinra2023006.htm.
\6\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, U.S. Securities and Exchange
Commission (May 16, 2023), available at https://www.finra.org/sites/default/files/2023-05/sr-finra-2023-006-extension-no-1.pdf.
\7\ See Amendment No. 1, available at https://www.finra.org/rules-guidance/rule-filings/sr-finra-2023-006.
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The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \8\ to solicit comments on the proposed
rule change, as modified by Amendment No. 1, and to institute
proceedings to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment No. 1 (hereinafter referred to as
the ``proposed rule change'' unless otherwise specified).
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\8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
A. Background
Currently under FINRA rules, a private residence at which certain
supervisory functions occur would need to be registered and designated
as a branch office or office of supervisory jurisdiction (``OSJ'')
under Rule 3110(a)(3) and inspected at least annually under Rule
3110(c)(1)(A). However, as part of its response to the COVID-19
pandemic, FINRA temporarily suspended the requirement for member firms
to submit branch office registration applications on Form
[[Page 44174]]
BR (Uniform Branch Office Registration Form) for any newly opened
temporary office locations or space-sharing arrangements established as
a result of the pandemic (the ``Form BR Temporary Suspension'').\9\
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\9\ See FINRA Regulatory Notice 20-08 (Mar. 9, 2020)
(``Regulatory Notice 20-08''), available at https://www.finra.org/rules-guidance/notices/20-08; see also Notice at 20569 n.7.
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FINRA stated that absent further regulatory action, once the Form
BR Temporary Suspension is lifted, FINRA rules would require member
firms to ``either curtail activities at residential locations or
register large numbers of residential locations as OSJs or supervisory
branch offices.'' \10\ Registering a private residence as an OSJ or
supervisory branch office would impose a corresponding annual
inspection requirement.\11\ Under the proposed rule change, a new
location designation, Residential Supervisory Location (``RSL''), would
be treated as a non-branch location, subject to inspections on a
regular periodic schedule under Rule 3110(c)(1)(C), presumed to be
every three years.\12\
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\10\ Notice at 20579.
\11\ FINRA Rule 3110(c)(1)(A).
\12\ See FINRA Rules 3110(c)(1)(C), 3110.13; Proposed Rule
3110.19(a).
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B. Proposed Rule Change, as Modified by Amendment No. 1
FINRA is proposing to adopt new Supplementary Material .19 under
Rule 3110 to establish an RSL designation that would treat an eligible
location as a non-branch location (i.e., exclude it from branch office
registration and the corresponding annual inspection requirement),
subject to specified limitations and conditions, as described below.
1. Conditions for Designation as a Residential Supervisory Location
Under proposed Rule 3110.19(a), an associated person's private
residence where supervisory activities are conducted (i.e., an RSL)
shall be considered for those activities a non-branch location (and
thus excluded from branch-office registration and the corresponding
annual inspection requirement), provided that: (1) only one associated
person, or multiple associated persons who reside at that location and
are members of the same immediate family, conduct business at the
location; \13\ (2) the location is not held out to the public as an
office; \14\ (3) the associated person does not meet with customers or
prospective customers at the location; \15\ (4) any sales activity that
takes place at the location complies with the conditions set forth
under Rule 3110(f)(2)(A)(ii) or (iii); \16\ (5) neither customer funds
nor securities are handled at that location; \17\ (6) the associated
person is assigned to a designated branch office, and such designated
branch office is reflected on all business cards, stationery, retail
communications, and other communications to the public by such
associated person; \18\ (7) the associated person's correspondence and
communications with the public are subject to the firm's supervision in
accordance with Rule 3110; \19\ (8) the associated person's electronic
communications (e.g., email) are made through the member's electronic
system; \20\ (9)(A) the member has a recordkeeping system to make and
keep current, and preserved records required to be made and kept
current, and preserved under applicable securities laws and
regulations, FINRA rules, and the member's own written supervisory
procedures under Rule 3110; (9)(B) such records are not physically or
electronically maintained and preserved at the office or location; and
(9)(C) the member has prompt access to such records; \21\ and (10) the
member has determined that its surveillance and technology tools are
appropriate to supervise the types of risks presented by each RSL;
these tools may include but are not limited to: (A) firm-wide tools
such as, an electronic recordkeeping system; electronic surveillance of
email and correspondence; electronic trade blotters; regular activity-
based sampling reviews; and tools for visual inspections; (B) tools
specific to the RSL based on the activities of the associated person
assigned to the location, products offered, and restrictions on the
activity of the RSL; and (C) system tools, such as secure network
connections and effective cybersecurity protocols.\22\
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\13\ See proposed Rule 3110.19(a)(1).
\14\ See proposed Rule 3110.19(a)(2).
\15\ See proposed Rule 3110.19(a)(3).
\16\ See proposed Rule 3110.19(a)(4).
\17\ See proposed Rule 3110.19(a)(5).
\18\ See proposed Rule 3110.19(a)(6).
\19\ See proposed Rule 3110.19(a)(7).
\20\ See proposed Rule 3110.19(a)(8).
\21\ See proposed Rule 3110.19(a)(9).
\22\ See proposed Rule 3110.19(a)(10).
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2. Member Firm Ineligibility Criteria
Under proposed Rule 3110.19(b), a member firm would be ineligible
to designate any of its offices or locations as an RSL if the member:
(1) is currently designated as a Restricted Firm under Rule 4111
(Restricted Firm Obligations); \23\ (2) is currently designated as a
Taping Firm under Rule 3170 (Tape Recording of Registered Persons by
Certain Firms); \24\ (3) is currently undergoing, or is required to
undergo, a review under Rule 1017(a)(7) as a result of one or more
associated persons at such location; \25\ (4) receives a notice from
FINRA pursuant to Rule 9557 (Procedures for Regulating Activities under
Rule 4110 (Capital Compliance), Rule 4120 (Regulatory Notification and
Business Curtailment) or Rule 4130 (Regulation of Activities of Section
15C Members Experiencing Financial and/or Operational Difficulties)),
unless FINRA has otherwise permitted activities in writing pursuant to
such rule; \26\ (5) is or becomes suspended by FINRA; \27\ (6) based on
the date in the Central Registration Depository, had its FINRA
membership become effective within the prior twelve months; \28\ or (7)
is or has been found within the past three years by the SEC or FINRA to
have violated Rule 3110(c).\29\
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\23\ See proposed Rule 3110.19(b)(1).
\24\ See proposed Rule 3110.19(b)(2).
\25\ See proposed Rule 3110.19(b)(3).
\26\ See proposed Rule 3110.19(b)(4).
\27\ See proposed Rule 3110.19(b)(5).
\28\ See proposed Rule 3110.19(b)(6).
\29\ See proposed Rule 3110.19(b)(7).
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3. Location Ineligibility Criteria
As originally proposed, under proposed Rule 3110.19(c), a specific
location of an otherwise eligible member would be ineligible for
designation as an RSL if one or more associated persons at the
location: (1) is a designated supervisor who has less than one year of
direct supervisory experience with the member; \30\ (2) is functioning
as a principal for a limited period in accordance with Rule 1210.04
(Registration Requirements); \31\ (3) is subject to a mandatory
heightened supervisory plan under the rules of the SEC, FINRA, or a
state regulatory agency; \32\ (4) is statutorily disqualified, unless
such disqualified person has been approved (or is otherwise permitted
pursuant to FINRA rules and the federal securities laws) to associate
with a member and is not subject to a mandatory heightened supervisory
plan under proposed Rule 3110.19(c)(3) or otherwise as a condition to
approval or permission for such association; \33\ (5) has an event in
the prior three years that required a ``yes'' response to any item in
Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D, and 14E on
Form U4 (Uniform Application for Securities Industry Registration or
Transfer
[[Page 44175]]
Registration); \34\ or (6) is currently subject to, or has been
notified in writing that it will be subject to, any investigation,
proceeding, complaint or other action by the member, the SEC, a self-
regulatory organization, including FINRA, or state securities
commission (or agency or office performing like functions) alleging
they have failed reasonably to supervise another person subject to
their supervision, with a view to preventing the violation of any
provision of the Securities Act, the Exchange Act, the Investment
Advisers Act, the Investment Company Act, the Commodity Exchange Act,
any state law pertaining to the regulation of securities or any rule or
regulation under any of such Acts or laws, or any of the rules of the
Municipal Securities Rulemaking Board (``MSRB'') or FINRA.\35\
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\30\ See proposed Rule 3110.19(c)(1).
\31\ See proposed Rule 3110.19(c)(2).
\32\ See proposed Rule 3110.19(c)(3).
\33\ See proposed Rule 3110.19(c)(4).
\34\ See proposed Rule 3110.19(c)(5). Form U4's Questions
14A(1)(a) and 2(a), 14B(1)(a) and 2(a) elicit reporting of criminal
convictions, and Questions 14C, 14D, and 14E pertain to regulatory
action disclosures. See Notice 20577 n.97.
\35\ See proposed Rule 3110.19(c)(6).
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Amendment No. 1 would modify two of these six originally proposed
criteria. Specifically, Amendment No. 1 would modify proposed Rule
3110.19(c)(1) to provide that an office or location would be ineligible
for RSL designation if one or more associated persons at such office or
location is a designated supervisor who has less than one year of
direct supervisory experience with the member, or an affiliate or
subsidiary of the member that is registered as a broker-dealer or
investment adviser.\36\
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\36\ See proposed Rule 3110.19(c)(1); Amendment No. 1.
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Amendment No. 1 also would modify proposed Rule 3110.19(c)(6). As
amended, proposed Rule 3110.19(c)(6) would provide that an office or
location would be ineligible for RSL designation if one or more
associated persons at such office or location has been notified in
writing that such associated person is now subject to any Investigation
or Proceeding, as such terms are defined in the Explanation of Terms
for the Form U4, by the SEC, a self-regulatory organization, including
FINRA, or state securities commission (or agency or office performing
like functions) (each, a ``Regulator'') expressly alleging they have
failed reasonably to supervise another person subject to their
supervision, with a view to preventing the violation of any provision
of the Securities Act of 1933, the Exchange Act, the Investment
Advisers Act of 1940, the Investment Company Act of 1940, the Commodity
Exchange Act, any state law pertaining to the regulation of securities
or any rule or regulation under any of such acts or laws, or any of the
rules of the MSRB or other self-regulatory organization, including
FINRA.\37\ Further, Amendment No. 1 would permit such office or
location to be designated or redesignated as an RSL subject to the
requirements of proposed Rule 3110.19 upon the earlier of: (1) the
member's receipt of written notification from the applicable Regulator
that such Investigation has concluded without further action; or (2)
one year from the date of the last communication from such Regulator
relating to such Investigation.\38\
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\37\ See proposed Rule 3110.19(c)(6); Amendment No. 1.
\38\ See id.
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4. Obligation To Provide List of RSLs to FINRA
Under proposed Rule 3110.19(d), any member that elects to designate
any office or location of the member as an RSL pursuant to proposed
Rule 3110.19 shall provide FINRA with a current list of all locations
designated as RSLs by the 15th day of the month following each calendar
quarter in the manner and format (e.g., through an electronic process
or such other process) as FINRA may prescribe.
5. Risk Assessment
Amendment No. 1 would further modify the proposed rule change by
adding proposed Rule 3110.19(e).\39\ This proposed rule change would
require a member--prior to designating an office or location as an
RSL--to develop a reasonable risk-based approach to designating the
office or location as an RSL, and conduct and document a risk
assessment for the associated person assigned to that office or
location.\40\ This proposed rule change would require documentation of
the factors considered, including, among others, whether the associated
person at such office or location is now subject to: (1) customer
complaints, taking into account the volume and nature of the
complaints; (2) heightened supervision other than where such office or
location is ineligible for RSL designation under proposed Rule
3110.19(c)(3); (3) any failure to comply with the member's written
supervisory procedures; (4) any recordkeeping violation; and (5) any
regulatory communications from a Regulator, including but not limited
to, subpoenas, preliminary or routine regulatory inquiries or requests
for information, deficiency letters, ``blue sheet'' requests or other
trading questionnaires, or examinations indicating that the associated
person at such office or location failed reasonably to supervise
another person subject to their supervision.\41\ Furthermore, this
proposed rule change would require the member to account for any higher
risk activities that take place or a higher risk associated person that
is assigned to that office or location.\42\
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\39\ Proposed Rule 3110.19(e); Amendment No. 1.
\40\ Proposed Rule 3110.19(e).
\41\ Id.
\42\ Id.
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Amendment No. 1 also would provide--as part of proposed Rule
3110.19(e)--that (consistent with its obligation under Rule 3110(a))
the member's supervisory system must take into consideration any
indicators of irregularities or misconduct (i.e., ``red flags'') when
designating an office or location as an RSL.\43\ Further, this proposed
rule change would provide that red flags should be reviewed in
determining whether it is reasonable to maintain the RSL designation of
an office or location in accordance with the requirements of proposed
Rule 3110.19, and that the member should consider evidencing steps
taken to address those red flags where appropriate.\44\
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\43\ Id.
\44\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-FINRA-2023-006 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved.\45\ Institution of proceedings is appropriate at this time
in view of the legal and policy issues raised by the proposed rule
change, as modified by Amendment No. 1. Institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to the proposed rule change, as modified by Amendment No. 1.
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\45\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission
is providing notice of the grounds for disapproval under
consideration.\46\ The Commission is instituting proceedings to allow
for additional analysis and input concerning whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Exchange
Act and the rules thereunder.
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\46\ 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
[[Page 44176]]
identified above, as well as any other concerns they may have with the
proposed rule change, as modified by Amendment No. 1. In particular,
the Commission invites the written views of interested persons
concerning whether the proposed rule change, as modified by Amendment
No. 1, is consistent with the Exchange Act and the rules thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\47\
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\47\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved by August 1, 2023.
Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by August 15, 2023.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2023-006 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2023-006. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change, as
modified by Amendment No. 1, that are filed with the Commission, and
all written communications relating to the proposed rule change, as
modified by Amendment No. 1, between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of FINRA.
Do not include personal identifiable information in submissions; you
should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-FINRA-2023-006 and
should be submitted on or before August 1, 2023. If comments are
received, any rebuttal comments should be submitted on or before August
15, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 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. 2023-14523 Filed 7-10-23; 8:45 am]
BILLING CODE 8011-01-P