[Federal Register Volume 89, Number 40 (Wednesday, February 28, 2024)]
[Notices]
[Pages 14728-14731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04072]



[[Page 14728]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99588; File No. SR-FINRA-2023-016]


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 a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend FINRA 
Rule 2210 (Communications With the Public) To Permit Projections of 
Performance of Investment Strategies or Single Securities in 
Institutional Communications

February 22, 2024.

I. Introduction

    On November 13, 2023, 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'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-FINRA-2023-016) to amend 
FINRA Rule 2210 (Communications with the Public).\3\ The proposed rule 
change would allow a member firm to project the performance \4\ of, or 
provide a targeted return \5\ with respect to, a security or asset 
allocation or other investment strategy in an institutional 
communication \6\ or a communication distributed solely to qualified 
purchasers (``QPs'') as defined in the Investment Company Act of 1940 
(``Investment Company Act'') \7\ that promotes or recommends specified 
non-public offerings, subject to conditions to help ensure these 
projections are carefully derived from a sound basis.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 98977 (Nov. 17, 2023), 88 FR 
82482 (Nov. 24, 2023) (File No. SR-FINRA-2023-016) (``Notice''), 
https://www.govinfo.gov/content/pkg/FR-2023-11-24/pdf/2023-25881.pdf.
    \4\ FINRA stated that ``projections of performance reflect an 
estimate of the future performance of an investment or investment 
strategy, which is often based on historical data and assumptions.'' 
Notice at 82482 n.3 (citing Investment Adviser Marketing, Investment 
Advisers Act Release No. 5653 (Dec. 22, 2020), 86 FR 13024, 13081 
n.699 (Mar. 5, 2021) and accompanying text).
    \5\ FINRA stated that ``targeted returns reflect the 
aspirational performance goals for an investment or investment 
strategy.'' Notice at 82482 n.3 (citing Investment Adviser 
Marketing, Investment Advisers Act Release No. 5653 (Dec. 22, 2020), 
86 FR 13024, 13081 n.699 (Mar. 5, 2021) and accompanying text).
    \6\ An ``institutional communication'' means ``any written 
(including electronic) communication that is distributed or made 
available only to institutional investors, but does not include a 
member's internal communications.'' Rule 2210(a)(3). An 
``institutional investor'' means any: ``(A) person described in Rule 
4512(c), regardless of whether the person has an account with a 
member; (B) governmental entity or subdivision thereof; (C) employee 
benefit plan, or multiple employee benefit plans offered to 
employees of the same employer, that meet the requirements of 
Section 403(b) or Section 457 of the Internal Revenue Code and in 
the aggregate have at least 100 participants, but does not include 
any participant of such plans; (D) qualified plan, as defined in 
Section 3(a)(12)(C) of the Exchange Act, or multiple qualified plans 
offered to employees of the same employer, that in the aggregate 
have at least 100 participants, but does not include any participant 
of such plans; (E) member or registered person of such a member; and 
(F) person acting solely on behalf of any such institutional 
investor.'' FINRA Rule 2210(a)(4). FINRA Rule 4512(c) states that 
for purposes of Rule 4512 (Customer Account Information), the term 
``institutional account'' means: a bank, savings and loan 
association, insurance company or registered investment company; an 
investment adviser registered either with the SEC under Section 203 
of the Investment Advisers Act or with a state securities 
commission; or any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of 
at least $50 million.
    \7\ Section 2(a)(51)(A) of the Investment Company Act (15 U.S.C. 
80a-2(a)(51)(A)) defines the term ``qualified purchaser'' as ``(i) 
any natural person (including any person who holds a joint, 
community property, or other similar shared ownership interest in an 
issuer that is excepted under section 80a-3(c)(7) of [the Investment 
Company Act] with that person's qualified purchaser spouse) who owns 
not less than $5,000,000 in investments, as defined by the 
Commission; (ii) any company that owns not less than $5,000,000 in 
investments and that is owned directly or indirectly by or for 2 or 
more natural persons who are related as siblings or spouse 
(including former spouses), or direct lineal descendants by birth or 
adoption, spouses of such persons, the estates of such persons, or 
foundations, charitable organizations, or trusts established by or 
for the benefit of such persons; (iii) any trust that is not covered 
by clause (ii) and that was not formed for the specific purpose of 
acquiring the securities offered, as to which the trustee or other 
person authorized to make decisions with respect to the trust, and 
each settlor or other person who has contributed assets to the 
trust, is a person described in clause (i), (ii), or (iv); or (iv) 
any person, acting for its own account or the accounts of other 
qualified purchasers, who in the aggregate owns and invests on a 
discretionary basis, not less than $25,000,000 in investments.'' 15 
U.S.C. 80a-2(a)(51)(A).
    \8\ See Notice.
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    The proposed rule change was published for public comment in the 
Federal Register on November 24, 2023.\9\ The public comment period 
closed on December 15, 2023. The Commission received comment letters in 
response to the Notice.\10\ On January 5, 2024, 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 February 22, 2024.\11\ On February 22, 2024, FINRA 
responded to the comment letters received in response to the Notice and 
filed an amendment to modify the proposed rule change (``Amendment No. 
1'').\12\
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    \9\ Id.
    \10\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016.htm.
    \11\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Craig Slivka, Division 
of Trading and Markets, Commission, dated January 5, 2024, https://www.finra.org/sites/default/files/2024-01/SR-FINRA-2023-016-extension1.pdf.
    \12\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated February 22, 2024, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016.htm (``FINRA Response 
Letter''); see also Amendment No. 1 https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-433139-1075042.pdf.
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    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \13\ 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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    \13\ 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

1. FINRA Rule 2210 (Communications With the Public)
    FINRA Rule 2210 imposes obligations related to, among other things, 
the approval, review, recordkeeping, filing, and content of member firm 
communications with the public.\14\ Specifically, Rule 2210(d)(1) 
imposes six general standards for the content of a member firm's 
communications with the public.\15\ Among these six standards is a 
general prohibition on predicting or projecting performance, implying 
that past performance will recur, or making any exaggerated or 
unwarranted claim, opinion, or forecast.\16\ However, this general 
prohibition does not apply to three types of communications.\17\ First, 
a member firm may provide ``a hypothetical illustration of mathematical 
principles, provided that it does not predict or project the 
performance of an investment or investment strategy.'' \18\ Second, a 
member firm may publish ``[a]n investment analysis tool, or a written 
report produced by an investment analysis tool, that meets the

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requirements of FINRA Rule 2214 (Requirements for the Use of Investment 
Analysis Tools).'' \19\ Third, a member may communicate ``[a] price 
target contained in a research report on debt or equity securities, 
provided that the price target has a reasonable basis, the report 
discloses the valuation methods used to determine the price target, and 
the price target is accompanied by disclosure concerning the risks that 
may impede achievement of the price target.'' \20\ Unless one of these 
three exceptions applies, no member firm may communicate projected 
performance or targeted return information to the public.\21\
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    \14\ See FINRA Rule 2210.
    \15\ FINRA Rule 2210(d)(1).
    \16\ FINRA Rule 2210(d)(1)(F).
    \17\ FINRA Rule 2210(d)(1)(F)(i)-(iii).
    \18\ FINRA Rule 2210(d)(1)(F)(i).
    \19\ FINRA Rule 2210(d)(1)(F)(ii). An ``investment analysis 
tool'' is ``an interactive technological tool that produces 
simulations and statistical analyses that present the likelihood of 
various investment outcomes if certain investments are made or 
certain investment strategies or styles are undertaken, thereby 
serving as an additional resource to investors in the evaluation of 
the potential risks and returns of investment choices.'' FINRA Rule 
2214(b).
    \20\ FINRA Rule 2210(d)(1)(F)(iii).
    \21\ See FINRA Rule 2210(d)(1)(F).
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B. The Proposed Rule Change, as Modified by Amendment No. 1

    The proposed rule change would create a fourth exception to the 
general prohibition on the communication of projected performance or 
targeted return information, subject to conditions designed to protect 
investors.\22\ Each condition of the proposed rule change is discussed 
in turn.
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    \22\ Proposed Rule 2210(d)(1)(F)(iv); see Notice at 82483.
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1. Institutional and QP Private Placement Communications
    As originally proposed, the proposed rule change would permit the 
use of projected performance or targeted returns with respect to a 
security or asset allocation or other investment strategy only in (1) 
an institutional communication or (2) a communication that is 
distributed or made available only to QPs and that promotes or 
recommends either a ``member private offering'' \23\ that is exempt 
from the requirements of Rule 5122 pursuant to Rule 5122(c)(1)(B),\24\ 
or a private placement that is exempt from the requirements of Rule 
5123 pursuant to Rule 5123(b)(1)(B).\25\ Amendment No. 1 modified 
proposed Rule 2210(d)(1)(F)(iv)(a) to also permit member firms to 
include projections of performance and targeted returns in 
communications that are distributed or made available to persons 
meeting the definition of knowledgeable employee under Investment 
Company Act Rule 3c-5 \26\ and that promote or recommend a private 
placement that is exempt from the requirements of Rule 5123 pursuant to 
Rule 5123(b)(1)(H).
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    \23\ A ``member private offering'' means ``a private placement 
of unregistered securities issued by a member or a control entity.'' 
Rule 5122(a)(1).
    \24\ FINRA Rule 5122 (Private Placements of Securities Issued by 
Members) governs, among other things, the disclosure and filing 
requirements applicable to members that participate in a private 
placement of unregistered securities issued by a member or a control 
entity (``member private offerings''). Rule 5122(c)(1)(B) states 
that member private offerings sold solely to qualified institutional 
buyers, as defined in Rule 144a of the Securities Act of 1933 
(``Securities Act''), are exempt from the requirements of Rule 5122.
    \25\ FINRA Rule 5123 (Private Placement of Securities) governs, 
among other things, the filing requirements applicable to members 
that sell a security in a non-public offering in reliance on an 
available exemption from registration under the Securities Act 
(``private placement''). Rule 5123(b)(1)(B) exempts from the 
requirements of this Rule 5213 offerings sold solely to qualified 
purchasers, as defined in Section 2(a)(51)(A) of the Investment 
Company Act. See supra note 7.
    \26\ For purposes of the proposed rule change, the term 
``knowledgeable employee'' generally means any natural person who is 
an executive officer, director, trustee, general partner, advisory 
board member, or person serving in similar capacity of a private 
fund that relies on Investment Company Act section 3(c)(7) to avoid 
registration under the Investment Company Act or certain of its 
affiliates, and other employees, under certain conditions, who 
participate in the investment activities of the fund or certain of 
the fund's affiliates. See Investment Company Act Rule 3c-5 (17 CFR 
270.3c-5(a)(4)). The ``knowledgeable employee'' definition in Rule 
3c-5 also refers to specified officers, directors, and employees of 
private funds relying on section 3(c)(1) of the Investment Company 
Act. However, because Rules 5122 and 5123 do not exempt section 
3(c)(1) funds that are sold to natural person accredited investors, 
a private offering sold to a knowledgeable employee of a 3(c)(1) 
fund generally would not be eligible for the exemptions from those 
rules. See FINRA Response Letter at note 30.
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    FINRA stated that the proposed rule change, as modified by 
Amendment No. 1, would limit the scope of the new exception to 
specified scenarios involving institutional investors, QPs, or 
knowledgeable employees who are more likely to understand the risks and 
limitations of projections or targeted returns.\27\ Institutional 
investors, QPs, and knowledgeable employees as described above are 
referred to herein collectively as ``Projection-Eligible Investors.'' 
\28\
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    \27\ See Notice at 82483; see also FINRA Response Letter at 6.
    \28\ Proposed Rule 2210(d)(1)(F)(iv)(a).
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2. Written Policies and Procedures
    The proposed rule change would require any member firm that 
communicates projected performance or targeted returns to Projection-
Eligible Investors to ``adopt[ ] and implement[ ] written policies and 
procedures reasonably designed to ensure that the communication is 
relevant to the likely financial situation and investment objectives of 
the investor receiving the communication and to ensure compliance with 
all applicable requirements and obligations.'' \29\ FINRA stated that 
``the mere fact that an investor would be interested in high returns'' 
would not--standing alone--mean that the projected performance or 
targeted return information ``is relevant to the likely financial 
situation and investment objectives.'' \30\ FINRA also stated that each 
member firm should consider its ``audience'' because projected 
performance or targeted return information ``should only be distributed 
where the member reasonably believes the investors have access to 
resources to independently analyze this information or have the 
financial expertise to understand the risk and limitations of such 
presentations.'' \31\
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    \29\ Proposed Rule 2210(d)(1)(F)(iv)(b).
    \30\ Notice at 82484 n.22.
    \31\ Id. at 82484.
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3. Reasonable Basis Requirement
    The proposed rule change would require any member firm that 
communicates projected performance or targeted returns to Projection-
Eligible Investors to have ``a reasonable basis for the criteria used 
and assumptions made in calculating the projected performance or 
targeted return, and retain[ ] written records supporting the basis for 
such criteria and assumptions.'' \32\ Because ``FINRA believes that it 
is important for members to consider appropriate factors in forming a 
reasonable basis for the criteria used and assumptions made in 
calculating projected performance or targeted return,'' \33\ the 
proposed rule change would include a non-exhaustive list of factors 
that members should consider when meeting this obligation.\34\ These 
factors include, but are not limited to: (1) global, regional, and 
country macroeconomic conditions; (2) documented fact-based assumptions 
concerning the future performance of capital markets; (3) in the case 
of a single security issued by an operating company, the issuing 
company's operating and financial history; (4) the industry's and 
sector's current market conditions and the state of the business cycle; 
(5) if available, reliable multi-factor financial models based on 
macroeconomic, fundamental, quantitative, or statistical inputs, taking 
into account the assumptions and potential limitations of such models, 
including the source and time horizon of data inputs; (6) the quality 
of the assets included in a securitization; (7)

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the appropriateness of selected peer-group comparisons; (8) the 
reliability of research sources; (9) the historical performance and 
performance volatility of the same or similar asset classes; (10) for 
managed accounts or funds, the past performance of other accounts or 
funds managed by the same investment adviser or sub-adviser, provided 
such accounts or funds had substantially similar investment objectives, 
policies, and strategies as the account or fund for which the projected 
performance or targeted returns are shown; (11) for fixed income 
investments and holdings, the average weighted duration and maturity; 
(12) the impact of fees, costs, and taxes; and (13) expected 
contribution and withdrawal rates by investors.\35\ The proposed rule 
change also would prohibit members from basing projected performance or 
a targeted return upon (1) hypothetical, back-tested performance or (2) 
the prior performance of a portfolio or model that was created solely 
for the purpose of establishing a track record.\36\
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    \32\ Proposed Rule 2210(d)(1)(F)(iv)(c).
    \33\ Notice at 82484.
    \34\ See Proposed Supplementary Material 2210.01(a) (stating 
that no one factor is determinative).
    \35\ Proposed Supplementary Material 2210.01(a).
    \36\ Proposed Supplementary Material 2210.01(b).
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4. Disclosure Requirements
    The proposed rule change would impose three disclosure-related 
requirements. First, any communication of projected performance or 
targeted return information to a Projection-Eligible Investor must 
``prominently disclose[ ] that the projected performance or targeted 
return is hypothetical in nature and that there is no guarantee that 
the projected or targeted performance will be achieved.'' \37\
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    \37\ Proposed Rule 2210(d)(1)(F)(iv)(d).
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    Second, the proposed rule change would require any member firm 
communicating projected performance or targeted return information to a 
Projection-Eligible Investor to ``provide[ ] sufficient information to 
enable the investor to understand . . . the criteria used and 
assumptions made in calculating the projected performance or targeted 
return, including whether the projected performance or targeted return 
is net of anticipated fees and expenses.'' \38\ FINRA explained that 
this requirement ``is not intended to prescribe any particular 
methodology or calculation of such performance,'' and it does not 
``expect a firm to disclose proprietary or confidential information 
regarding the firm's methodology and criteria.'' \39\ But FINRA 
emphasized that firms ``would be expected . . . to provide a general 
description of the methodology used sufficient to enable the investors 
to understand the basis of the methodology, as well the assumptions 
underlying the projection or targeted return.'' \40\ Absent these 
required disclosures, FINRA explained, ``it is more likely that a 
projection or targeted return would mislead a potential investor.'' 
\41\
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    \38\ Proposed Rule 2210(d)(1)(F)(iv)(e).
    \39\ Notice at 82485.
    \40\ Id.
    \41\ Id.
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    Third, the proposed rule change would require any member firm 
communicating projected performance or targeted return information to a 
Projection-Eligible Investor to ``provide[ ] sufficient information to 
enable the investor to understand . . . the risks and limitations of 
using the projected performance or targeted return in making investment 
decisions, including reasons why the projected performance or targeted 
return might differ from actual performance.'' \42\ FINRA explained 
that this requirement ``is intended to help ensure that such investors 
do not unreasonably rely on a projection or targeted return given its 
uncertainty and risks.'' \43\
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    \42\ Proposed Rule 2210(d)(1)(F)(iv)(e).
    \43\ Notice at 82485.
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III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2023-016 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.\44\ 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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    \44\ 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.\45\ 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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    \45\ Id.
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change, 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.\46\
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    \46\ 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 March 20, 2024. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by April 3, 2024.
    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-2023-016 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-2023-016. 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.

[[Page 14731]]

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-2023-016 and should be submitted on or 
before March 20, 2024. If comments are received, any rebuttal comments 
should be submitted on or before April 3, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-04072 Filed 2-27-24; 8:45 am]
BILLING CODE 8011-01-P