[Federal Register Volume 89, Number 80 (Wednesday, April 24, 2024)]
[Notices]
[Pages 31242-31245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08681]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99988; File No. SR-FINRA-2024-001]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Amend FINRA Rule 3240 
(Borrowing From or Lending to Customers) To Strengthen the General 
Prohibition Against Borrowing and Lending Arrangements

April 18, 2024.

I. Introduction

    On January 2, 2024, 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-2024-001) to amend 
FINRA Rule 3240 (Borrowing From or Lending to Customers). As stated in 
the Notice, the proposed rule change would strengthen the general 
prohibition against borrowing and lending arrangements, narrow some of 
the existing exceptions to that general prohibition, modernize the 
immediate family exception, and enhance the requirements for giving 
notice to members and obtaining members' approval of such 
arrangements.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 99351 (Jan. 16, 2024), 89 FR 3968 
(Jan. 22, 2024) (File No. SR-FINRA-2024-001) (``Notice''), https://www.govinfo.gov/content/pkg/FR-2024-01-22/pdf/2024-01068.pdf.
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    The proposed rule change was published for public comment in the 
Federal Register on January 22, 2024.\4\ The public comment period 
closed on February 12, 2024. The Commission received comment letters in 
response to the Notice.\5\ On February 21, 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 April 19, 2024.\6\
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    \4\ Notice at 3968-3979.
    \5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2024-001/srfinra2024001.htm.
    \6\ See letter from Ilana Reid, Associate General Counsel, 
FINRA, to Daniel Fisher, Branch Chief, Division of Trading and 
Markets, Commission, dated February 21, 2023 [sic], https://www.finra.org/sites/default/files/2024-02/SR-FINRA-2024-001-Extension1.pdf.
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    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \7\ to institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

A. Background

    FINRA Rule 3240 generally prohibits, with exceptions, registered 
persons from borrowing money from, or lending money to, their 
customers. The rule has five tailored exceptions,\8\ available only 
when the registered person's member firm has written procedures 
allowing the borrowing and lending of money between such registered 
persons and customers of the member,\9\ the borrowing or lending 
arrangements meet the conditions applicable to the relevant exception 
and, when required, the registered person notifies the member of a 
borrowing or lending arrangement, prior to entering into such 
arrangement, and obtains the member's pre-approval in writing.\10\ 
FINRA stated that the exceptions are for limited situations where the 
likelihood that the registered person and customer entered into the 
borrowing or lending arrangement by virtue of the broker-customer 
relationship is reduced, and the potential risks are outweighed by the 
potential benefits of allowing registered persons to enter into 
arrangements with such customers.\11\
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    \8\ See Rule 3240(a)(2)(A) (the ``immediate family exception''); 
Rule 3240(a)(2)(B) (the ``financial institution exception''); Rule 
3240(a)(2)(C) (the ``registered persons exception''); Rule 
3240(a)(2)(D) (the ``personal relationship exception''); Rule 
3240(a)(2)(E) (the ``business relationship exception'').
    \9\ See Rule 3240(a)(1).
    \10\ See Rules 3240(a)(3) and 3240(b).
    \11\ See Notice at 3969.
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B. Proposed Rule Change

1. The General Prohibition on Borrowing From or Lending to Customers
    The proposed rule change would amend the title of FINRA Rule 3240 
from ``Borrowing From or Lending to Customers'' to ``Prohibition on 
Borrowing From or Lending to Customers,'' and change the title of Rule

[[Page 31243]]

3240(a) from ``Permissible Lending Arrangements; Conditions'' to 
``General Prohibition; Permissible Borrowing or Lending Arrangements; 
Conditions.'' \12\
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    \12\ Proposed Rule 3240 and Proposed Rule 3240(a).
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    The proposed rule change would also make the following substantive 
changes to the general prohibition.
a. Pre-Existing Relationships
    The proposed rule change would amend Rule 3240(a) to clarify that 
the rule's general requirements concerning borrowing and lending 
arrangements--including the general prohibition--apply to arrangements 
that pre-exist a new broker-customer relationship.\13\ Specifically, 
the proposed rule change would amend the introductory clause in Rule 
3240(a) to prohibit registered persons from initiating a broker-
customer relationship with a person with whom the registered person has 
an existing borrowing or lending arrangement.\14\
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    \13\ See Notice at 3969.
    \14\ Proposed Rule 3240(a).
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b. Definition of Customer
    The proposed rule change would extend the rule's limitations to 
borrowing or lending arrangements entered into within six months after 
a broker-customer relationship terminates.\15\ Specifically, the 
proposed rule change would add new FINRA Rule 3240.02 (Customer) to 
define ``customer,'' for purposes of Rule 3240, as including any 
customer who has, or in the previous six months had, a securities 
account assigned to the registered person at any member.\16\
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    \15\ See Notice at 3969.
    \16\ Proposed Rule 3240.02.
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c. Borrowing and Lending Arrangements With Related Parties
    The proposed rule change would extend the rule's requirements to 
borrowing or lending arrangements that involve similar conflicts as 
ones presented by arrangements directly between registered persons and 
their customers.\17\ Specifically, the proposed rule change would add 
new FINRA Rule 3240.05 (Arrangements with Persons Related to Either the 
Registered Person or the Customer) to provide that ``[a] registered 
person instructing or asking a customer to enter into a borrowing or 
lending arrangement with a person related to the registered person 
(e.g., the registered person's immediate family member or outside 
business) or to have a person related to the customer (e.g., the 
customer's immediate family member or business) enter into a borrowing 
or lending arrangement with the registered person would present similar 
conflict of interest concerns as borrowing or lending arrangements 
between the registered person and the customer and would not be 
consistent with this Rule [3240] unless the conditions set forth in 
[Rule 3240(a)(1), (2), and (3)] are satisfied.'' \18\
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    \17\ See Notice at 3969.
    \18\ Proposed Rule 3240.05.
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d. Owner-Financing Arrangements
    The proposed rule change would add Rule 3240.03 (Owner-Financing 
Arrangements) to state that, for purposes of Rule 3240, ``borrowing or 
lending arrangements include owner-financing arrangements.'' \19\ For 
example, Rule 3240 would apply to situations where a registered person 
purchases real estate from his customer, the customer agrees to finance 
the purchase, and the registered person provides a promissory note for 
the entire purchase price or arranges to pay in installments.\20\
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    \19\ Proposed Rule 3240.03.
    \20\ See Notice at 3969.
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2. The ``Immediate Family'' Definition
    Currently, one exception to Rule 3240's general prohibition is for 
borrowing or lending arrangements with a customer who is a member of 
the registered person's immediate family.\21\ Rule 3240(c) defines 
``immediate family'' to mean ``parents, grandparents, mother-in-law or 
father-in-law, husband or wife, brother or sister, brother-in-law or 
sister-in-law, son-in-law or daughter-in-law, children, grandchildren, 
cousin, aunt or uncle, or niece or nephew, and any other person whom 
the registered person supports, directly or indirectly, to a material 
extent.'' \22\
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    \21\ See Rule 3240(a)(2)(A).
    \22\ Rule 3240(c).
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    The proposed rule change would modernize the ``immediate family'' 
definition.\23\ Specifically, the proposed rule change would amend Rule 
3240(c) to replace ``husband or wife'' with ``spouse or domestic 
partner'' and amend the definition so that it ``includes step and 
adoptive relationships.'' \24\ In addition, the proposed rule change 
would amend the ``any other person'' clause to limit it to ``any other 
person who resides in the same household as the registered person and 
the registered person financially supports, directly or indirectly, to 
a material extent.'' \25\
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    \23\ See Notice at 3970.
    \24\ Proposed Rule 3240(c).
    \25\ Id.
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3. The Personal Relationship and Business Relationship Exceptions
    Currently, Rule 3240 provides an exception to the rule's general 
prohibition for arrangements based on a ``personal relationship with 
the customer, such that the loan would not have been solicited, 
offered, or given had the customer and the registered person not 
maintained a relationship outside of the broker-customer relationship'' 
(the ``personal relationship exception'').\26\ The proposed rule change 
would narrow the personal relationship exception to arrangements that 
are based on a ``bona fide, close personal relationship between the 
registered person and the customer maintained outside of, and formed 
prior to, the broker-customer relationship.'' \27\ Similarly, current 
Rule 3240 provides an exception to the rule's general prohibition for 
arrangements based on a ``business relationship outside of the broker-
customer relationship'' (the ``business relationship exception'').\28\ 
The proposed rule change would also narrow the business relationship 
exception to arrangements that are based on a ``bona fide business 
relationship outside of the broker-customer relationship.'' \29\
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    \26\ Rule 3240(a)(2)(D).
    \27\ Proposed Rule 3240(a)(2)(D).
    \28\ Rule 3240(a)(2)(E).
    \29\ Proposed Rule 3240(a)(2)(E).
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    In addition to narrowing the personal relationship and business 
relationship exceptions, the proposed rule change would add new Rule 
3240.04 (Close Personal Relationships; Business Relationships), which 
would provide factors for evaluating whether a borrowing or lending 
arrangement is based on a close personal relationship or a business 
relationship. The proposed factors would include, but would not be 
limited to, ``when the relationship began, its duration and nature, and 
any facts suggesting that the relationship is not bona fide or was 
formed with the purpose of circumventing the purpose of Rule 3240.'' 
\30\ Proposed Rule 3240.04 would also provide examples of ``close 
personal relationships,'' including, ``a childhood or long-term friend 
or a godparent.'' \31\ Additionally, proposed Rule 3240.04 would 
provide examples of a ``business relationship,'' including ``a loan 
from a registered person to a small outside business that the 
registered person co-owned for years for the sole purpose of providing 
the

[[Page 31244]]

business with additional operating capital.'' \32\
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    \30\ Proposed Rule 3240.04.
    \31\ Id.
    \32\ Id.
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4. Notification and Approval Requirements
    Currently, Rule 3240(b) contains notification and approval 
requirements for borrowing or lending arrangements within the five 
exceptions, which vary depending on which exception applies.\33\ The 
proposed rule change would make the following changes to the 
notification and approval requirements.
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    \33\ See Notice at 3970.
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a. Notification and Approval Requirements With Respect to the Personal 
Relationship, Business Relationship, and Registered Persons Exceptions
    Current Rule 3240(b)(1)(A) provides that a registered person shall 
notify the member of borrowing or lending arrangements made under the 
personal relationship exception,\34\ business relationship 
exception,\35\ or the registered persons exception \36\ prior to 
entering into such arrangements, and that the member shall pre-approve 
in writing such arrangements.\37\ The proposed rule change would amend 
Rule 3240(b)(1)(A) to clarify that, although registered persons are 
required to obtain the member's prior approval of arrangements within 
the close personal relationship, business relationship, or registered 
persons exceptions, the member is not required to approve such 
arrangements.\38\ Specifically, the proposed rule change would delete 
the ``shall pre-approve'' language and instead require the registered 
person to provide the member with notice of the arrangements or 
modifications ``prior to entering into such arrangements'' or ``prior 
to the modification of such arrangements'' and ``obtain the member's 
approval.'' \39\
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    \34\ Rule 3240(a)(2)(D).
    \35\ Rule 3240(a)(2)(E).
    \36\ Rule 3240(a)(2)(C).
    \37\ Rule 3240(b)(1)(A).
    \38\ See Notice at 3970.
    \39\ See proposed Rule 3240(b)(1)(A).
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    Further, the proposed rule change would amend Rule 3240(b)(1) to 
clarify that it also would apply to pre-existing arrangements. 
Specifically, proposed Rule 3240(b)(1)(B) would require registered 
persons, prior to the initiation of a broker-customer relationship at 
the member with a person with whom the registered person has an 
existing borrowing or lending arrangement, to notify the member in 
writing of existing arrangements within the registered persons, 
personal relationship and business relationship exceptions and obtain 
the member's approval in writing of the broker-customer 
relationship.\40\
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    \40\ See proposed Rule 3240(b)(1)(B).
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b. Notification and Approval Requirements With Respect to the Immediate 
Family Member
    Current Rule 3240(b)(2) provides, in pertinent part, that a 
member's written procedures may indicate that registered persons are 
not required to notify the member or receive member approval of 
arrangements within the immediate family exception.\41\ The proposed 
rule change would amend Rule 3240(b)(2) to clarify that the same 
approach would apply to arrangements that pre-exist the broker-customer 
relationship.\42\ Specifically, the proposed rule change would amend 
Rule 3240(b)(2) to provide that the member's procedures may indicate 
that registered persons are not required to notify the member or 
receive member approval of such arrangements either prior to or 
subsequent to initiating a broker-customer relationship.\43\ FINRA 
stated, however, that proposed Rule 3240(b)(2) implies that members may 
choose to require such notice and approval of those arrangements.\44\
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    \41\ Rule 3240(b)(2).
    \42\ See Notice at 3971.
    \43\ See proposed Rule 3240(b)(2).
    \44\ See Notice at note 21.
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c. Notification and Approval Requirements With Respect to the Financial 
Institution Exception
    Current Rule 3240(b)(3) provides, in pertinent part, that a 
member's written procedures may indicate that registered persons are 
not required to notify the member or receive member approval of 
arrangements within the financial institution exception,\45\ provided 
that ``the loan has been made on commercial terms that the customer 
generally makes available to members of the general public similarly 
situated as to need, purpose and creditworthiness.'' \46\ The proposed 
rule change would amend Rule 3240(b)(3) to clarify that it also would 
apply to arrangements that pre-exist the broker-customer 
relationship.\47\ Specifically, the proposed rule change would amend 
Rule 3240(b)(3) to provide that the member's procedures may also 
indicate that registered persons are not required to notify the member 
or receive member approval of such arrangements either prior to or 
subsequent to initiating a broker-customer relationship.\48\
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    \45\ The ``financial institution exception'' states that no 
person associated with a member in any registered capacity may 
borrow money from or lend money to any customer of such person, 
unless the customer (i) is a financial institution regularly engaged 
in the business of providing credit, financing, or loans, or other 
entity or person that regularly arranges or extends credit in the 
ordinary course of business and (ii) is acting in the course of such 
business. See Rule 3240(a)(2)(B).
    \46\ Rule 3240(b)(3).
    \47\ See Notice at 3971.
    \48\ See proposed Rule 3240(b)(3).
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d. Notifications in Writing
    Currently, Rule 3240 does not specify that notice must be given in 
writing, and the record-retention provision in Rule 3240.01 requires 
members only to preserve written approvals.\49\ The proposed rule 
change would require that all notices required under Rule 3240 be in 
writing and retained by the member.\50\ Specifically, the proposed rule 
change would require registered persons to give written notice and 
require members to preserve records of such written notice for at least 
three years.\51\ The proposed rule change would also amend Rule 3240.01 
to provide that the record-retention requirements would be for purposes 
of complying with proposed Rule 3240(b) regarding notification and 
approval requirements for borrowing or lending arrangements within the 
five exceptions, if any apply, not just borrowing or lending 
arrangements within the exceptions referenced in current Rule 
3240(b)(1).\52\
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    \49\ See Notice at 3971.
    \50\ Id.
    \51\ See proposed Rules 3240(b)(1)(A) and (b)(1)(B) and proposed 
Rule 3240.01.
    \52\ See proposed Rule 3240.01.
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e. Reasonable Assessment by Member of the Risks Created by the 
Borrowing or Lending Arrangement
    The proposed rule change also would add new Rule 3240.06 
(Obligations of Member Receiving Notice). Proposed Rule 3240.06 would 
provide that upon receiving written notice under Rule 3240, the member 
``shall perform a reasonable assessment of the risks created by the 
borrowing or lending arrangement with a customer, modification to the 
borrowing or lending arrangement with a customer, or existing borrowing 
or lending arrangement with a person who seeks to be a customer of the 
registered person.'' \53\ It would further provide that the member 
``shall also make a reasonable determination of whether to approve the 
borrowing or lending arrangement, modification to the borrowing or 
lending arrangement, or, where there is an existing borrowing or 
lending arrangement with a person who seeks to be a customer of the 
registered person, the broker-customer

[[Page 31245]]

relationship.'' \54\ FINRA stated that it expects that a member's 
``reasonable assessment'' would take into consideration several 
factors, such as:
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    \53\ Proposed Rule 3240.06.
    \54\ Id.
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    (1) any potential conflicts of interest in the registered person 
being in a borrowing or lending arrangement with a customer;
    (2) the length and type of relationship between the customer and 
registered person;
    (3) the material terms of the borrowing or lending arrangement;
    (4) the customer's or the registered person's ability to repay the 
loan;
    (5) the customer's age;
    (6) whether the registered person has been a party to other 
borrowing or lending arrangements with customers;
    (7) whether, based on the facts and circumstances observed in the 
member's business relationship with the customer, the customer has a 
mental or physical impairment that renders the customer unable to 
protect his or her own interests;
    (8) any disciplinary history or indicia of improper activity or 
conduct with respect to the customer or the customer's account (e.g., 
excessive trading); and
    (9) any indicia of customer vulnerability or undue influence of the 
registered person over the customer.\55\
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    \55\ See Notice at 3971.
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    FINRA also stated that it would expect a member to try to discuss 
the arrangement with the customer, as part of the member's reasonable 
assessment of the risks.\56\
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    \56\ See id. at 3972.
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III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2024-001 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 should be approved or disapproved.\57\ Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to the proposed rule change.
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    \57\ 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.\58\ The Commission is instituting proceedings to allow 
for additional analysis and input concerning whether the proposed rule 
change is consistent with the Exchange Act and the rules thereunder.
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    \58\ 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. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change 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.\59\
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    \59\ 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 should be approved 
or disapproved by May 15, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
May 29, 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-2024-001 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-2024-001. 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 
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-2024-001 and should be submitted 
on or before May 15, 2024. If comments are received, any rebuttal 
comments should be submitted on or before May 29, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
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    \60\ 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. 2024-08681 Filed 4-23-24; 8:45 am]
BILLING CODE 8011-01-P