[Federal Register Volume 89, Number 15 (Tuesday, January 23, 2024)]
[Notices]
[Pages 4355-4357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99383; File No. SR-IEX-2024-02]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Extend
the Temporary Remote Inspection Relief to IEX Members To Include
Calendar Year 2024 Inspection Obligations Through the Earlier of the
Effective Date of the Recently Approved FINRA Pilot Program on Remote
Inspections, or June 30, 2024
January 17, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on January 8, 2024, the Investors Exchange LLC (``IEX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the
Commission a proposed rule change to amend Supplementary Material .15
of IEX Rule 5.110 (Supervision) to extend the temporary remote
inspection relief to IEX Members \6\ to include calendar year 2024
inspection obligations through the earlier of the effective date of the
recently-approved FINRA pilot program on remote inspections (the
``Remote Inspections Pilot Program'') \7\, or June 30, 2024.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ See IEX Rule 1.160(s).
\7\ See Securities Exchange Act Release No. 97398 (April 28,
2023), 88 FR 28620 (May 4, 2023) (``Remote Inspections Pilot Program
Proposal''); Securities Exchange Act Release No. 98982 (November 17,
2023), 88 FR 82464 (November 24, 2023) (``Remote Inspections Pilot
Program Approval Order'') (SR-FINRA-2023-007).
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The Exchange has designated this proposed rule change as ``non-
controversial'' under Section 19(b)(3)(A) of the Act \8\ and provided
the Commission with the notice required by Rule 19b-4(f)(6)
thereunder.\9\
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website at https://www.iexexchange.io/, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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. The self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
IEX proposes to extend the temporary remote inspection relief of
Supplementary Material .15 to IEX Rule 5.110 to IEX Members to include
calendar year 2024 inspection obligations through the earlier of the
effective date of the Remote Inspections Pilot Program, or June 30,
2024. IEX makes this proposal to provide its Members continuity related
to conducting inspections as part of satisfying the obligations of IEX
Rule 5.110(c) (Internal Inspections) at offices and locations requiring
inspection during the first half of calendar year 2024.\10\ IEX
believes the proposed extension is necessary to provide firms the time
to prepare for the implementation of the Remote Inspections Pilot
Program. The SEC approved the Remote Inspections Pilot Program on
November 17, 2023, but FINRA has not yet announced the implementation
timeline.\11\ IEX plans to make a rule filing to incorporate the Remote
Inspections Pilot Program into IEX Rule 5.110 (and specify the end date
of the temporary remote inspection relief of Supplementary Material .15
to IEX Rule 5.110) after FINRA provides details about the
implementation plan in the Pilot Program Regulatory Notice.
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\10\ 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 FINRA Regulatory Notice 11-54 (November 2011) (joint SEC
and FINRA guidance stating, a ``broker-dealer must conduct onsite
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).
\11\ In the Remote Inspections Pilot Program Proposal, FINRA
stated it will announce the effective date of the program in a
Regulatory Notice (``Pilot Program Regulatory Notice''). See Remote
Inspections Pilot Program Proposal, 88 FR 28620, 28635.
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The COVID-19 pandemic caused a host of operational disruptions to
the securities industry and impacted IEX Members, regulators,
investors, and other stakeholders. In response to the pandemic, IEX
adopted Supplementary Material .15 of IEX Rule 5.110 to provide Members
the temporary option of satisfying their inspection obligations for
offices of supervisory jurisdiction, branch offices, or non-branch
locations under IEX Rule 5.110 (Supervision) remotely for calendar
years 2021, 2022, and 2023, subject to specified conditions,\12\ due to
the logistical challenges of going on-site while public health and
safety concerns related to COVID-19 persisted. Supplementary Material
.15 of IEX Rule 5.110 lapsed on December 31, 2023.
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\12\ See Securities Exchange Act Release No. 92222 (June 22,
2021), 86 FR 34069 (June 28, 2021) (SR-IEX-2021-09) (providing
remote inspection relief to Members for calendar year 2021),
Securities Exchange Act Release No. 96460 (December 7, 2022), 87 FR
76222 (December 13, 2022) (SR-IEX-2022-12) (providing remote
inspection relief to Members for calendar year 2022), and Securities
Exchange Act Release No. 96606 (January 6, 2023), 88 FR 2140
(January 12, 2023) (SR-IEX-2022-14) (providing remote inspection
relief to Members for calendar year 2023).
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The pandemic accelerated the industry's adoption of a broad remote
work environment and IEX recognizes that the pandemic has profoundly
changed attitudes on where work can occur. As a result of this change
many firms have adopted, in varying scale, hybrid work models involving
personnel who are working at least part time from alternative work
locations (e.g., private residences). As part of an effort to modernize
its rules to reflect evolving technologies and business models, in
April 2023, FINRA filed the
[[Page 4356]]
Remote Inspections Pilot Program Proposal with the Commission to
establish a voluntary, three-year remote inspections pilot program that
would allow eligible firms to conduct inspections of all or some
offices or locations, remotely, subject to the specified terms
therein.\13\
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\13\ See supra note 7.
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On November 17, 2023, the Commission approved the Remote
Inspections Pilot Program.\14\ The Remote Inspections Pilot Program is
designed to allow both FINRA and the firms that are planning to
participate in the Remote Inspections Pilot Program additional time to
develop the technology and processes that will be essential to
operationalize compliance with the Remote Inspections Pilot Program's
requirements. For example, firms will need to conduct an eligibility
review, and conduct and document a risk assessment for each office and
location that they elect to inspect remotely and implement technology
to collect and report the required data and information to FINRA.
Further, FINRA guidance will be needed to guide implementation in
various circumstances.\15\ Firms that do not elect to participate or
would be excluded from participating in the Remote Inspections Pilot
Program will also be impacted and would need additional time to staff,
schedule, and resume on-site inspections of offices or locations \16\
within the context of some lingering health concerns and fluid work
locations.\17\
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\14\ See supra note 7.
\15\ See supra note 11.
\16\ See supra note 10.
\17\ While the World Health Organization declared an end to
COVID-19 as a public health emergency, COVID-19 remains an ongoing
public health problem. See WHO Director-General, Statement on the
fifteenth meeting of the IHR (2005) Emergency Committee on the
COVID-19 pandemic (May 5, 2023) (stating, in part, that the
``[w]hile the global risk assessment remains high, there is evidence
of reducing risks to human health''), https://www.who.int/news/item/05-05-2023-statement-on-the-fifteenth-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-
coronavirus-disease-(covid-19)-pandemic (last visited January 8,
2024); see also Benjamin J. Silk, et al., COVID-19 Surveillance
After Expiration of the Public Health Emergency Declaration--United
States, May 11, 2023 (stating, among other things, that ``[a]lthough
COVID-19 no longer poses the societal emergency that it did when it
first emerged in late 2019, COVID-19 remains an ongoing public
health challenge. By April 26, 2023, more than 104 million U.S.
COVID-19 cases, 6 million related hospitalizations, and 1.1 million
COVID-19-associated deaths were reported to CDC[.]''), 72 MMWR Morb
Mortal Wkly Rep, 523-528 (2023), https://www.cdc.gov/mmwr/volumes/72/wr/pdfs/mm7219e1-H.pdf (last visited January 8, 2024). Recent
data on hospitalizations from the CDC indicate that the number of
hospitalizations is up 20.4% in the most recent week (as of December
24 to December 30, 2023). See Centers for Disease Control and
Prevents (``CDC''), COVID Data Tracker, Data Update for the United
States, https://covid.cdc.gov/covid-data-tracker/#datatracker-home
(last visited January 8, 2024).
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In sum, as calendar year 2024 begins, the proposed extension of
Supplementary Material .15 to IEX Rule 5.110 would provide firms
continuity in meeting their inspection obligations and would allow
FINRA time to operationalize the Remote Inspections Pilot Program.
Relatedly, the proposed extension would give time for: (1) firms that
are planning to participate in the Remote Inspections Pilot Program to
implement the processes needed to comply with the proposed terms
therein; and (2) firms that are not planning to participate or are
excluded from participating in the Remote Inspections Pilot Program, to
prepare to resume conducting on-site inspections of their offices and
locations as part of satisfying the obligations of IEX Rule 5.110(c).
IEX 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. IEX
continues to believe this temporary remote inspection option is a
reasonable alternative for firms to fulfill their IEX Rule 5.110(c)
obligations under the current circumstances described above. This
proposed extension is designed to maintain the investor protection
objectives of the inspection requirements under these circumstances. As
part of those objectives, firms should consider whether, under their
particular operating conditions, continued reliance on Supplementary
Material .15 to IEX Rule 5.110 to conduct 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. IEX
emphasizes that the inspection requirement is one aspect of a firm's
overall supervisory system, and that the inspection, whether done
remotely under Supplementary Material .15 to IEX Rule 5.110 or in
accordance with the proposed Remote Inspections Pilot Program, or on-
site, would be held to the existing standards of review under
Supplementary Material .12 to IEX Rule 5.110 (Standards for Reasonable
Review).\18\
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\18\ Those standards provide, in part, that based on the factors
set forth under that supplementary material, members ``may need to
provide for more frequent review of certain locations.''
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2. Statutory Basis
IEX believes that the proposed rule change is consistent with the
provisions of Section 6(b) \19\ of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act \20\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The Exchange's rule proposal is intended to harmonize
IEX's supervision rules, specifically with respect to the requirements
for inspections of Members' branch offices and other locations, with
those of FINRA, on which they are based. Consequently, the proposed
change will conform the Exchange's rules to changes made to
corresponding FINRA rules, thus promoting application of consistent
regulatory standards with respect to rules that FINRA enforces pursuant
to its regulatory services agreement with the Exchange. The proposed
rule change would also avoid a potential lapse in the temporary relief
while FINRA prepares the implementation of its recently approved Remote
Inspections Pilot Program and allow firms time to adapt to the pilot
program, and prepare for conducting on-site inspections, as applicable,
while continuing to serve and promote the protection of investors and
the public interest.
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\19\ 15 U.S.C. 78f.
\20\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is not
designed to address any competitive issue but to align the Exchange's
rules with those of FINRA, which will assist FINRA in its oversight
work done pursuant to a regulatory services agreement with IEX. The
proposed rule change will also provide for consistent application of
the Exchange's supervision rules with those of FINRA, on which they are
based. Consequently, the Exchange does not believe that the proposed
change implicates competition at all.
[[Page 4357]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) \21\ of the Act and Rule 19b-4(f)(6) \22\
thereunder. Because the 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 and Rule 19b-
4(f)(6) thereunder. In addition, the Exchange provided the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing.\23\
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f)(6).
\23\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange believes that this filing is non-controversial because
it raises no novel issues and is consistent with FINRA rules previously
approved by or filed with the Commission. In particular, the purpose of
the proposed rule change is to harmonize with and conform to FINRA
rules. The Exchange believes that the proposal promotes the protection
of investors as it will harmonize the Exchange's supervision rules with
those of FINRA, which will simplify the oversight process conducted by
FINRA pursuant to a regulatory services agreement with the Exchange.
Moreover, the Exchange does not believe that the proposed rule change
implicates competition at all because the proposed change aligns the
Exchange's rules with those of FINRA, which will assist it in its
oversight work done pursuant to such regulatory services agreement.
A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay to permit the
Exchange to harmonize its rules with FINRA, as described herein, upon
effectiveness of the proposed rule filing.
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\24\ 17 CFR 240.19b-4(f)(6).
\25\ 17 CFR 240.19b-4(f)(6)(iii).
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Since the proposed rule change would address IEX Members' ability
to conduct remote inspections for any inspections to be conducted
through the earlier of the effective date of the Remote Inspections
Pilot Program, or June 30, 2024, waiving the 30-day operative delay
would help ensure that IEX Members could plan their 2024 inspection
program and conduct remote inspections under a harmonized rule set,
while at the same time helping ensure that its Members continue to
perform their supervisory obligations. The Exchange stated that the
proposed rule change does not present any new or novel issues because
IEX is harmonizing its supervision rules with those of FINRA, on which
they are based. IEX further stated that the proposed rule change would
provide only temporary relief during the period in which IEX harmonizes
its supervision rules with FINRA. For these reasons, the Commission
believes that waiver of the 30-day operative delay for this proposed
rule change is consistent with the protection of investors and the
public interest. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change operative upon
filing.\26\
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\26\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \27\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\27\ 15 U.S.C. 78s(b)(2)(B).
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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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-IEX-2024-02 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-IEX-2024-02. 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 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 the filing also will be available
for inspection and copying at the principal office of the Exchange. 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-IEX-2024-02 and should
be submitted on or before February 13, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01202 Filed 1-22-24; 8:45 am]
BILLING CODE 8011-01-P