[Federal Register Volume 89, Number 114 (Wednesday, June 12, 2024)]
[Notices]
[Pages 49950-49961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12794]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100291; File No. SR-MSRB-2024-05]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend MSRB Rule G-27, on Supervision, To Allow Eligible 
Dealers To Fulfill Their Internal Inspection Obligation of Certain 
Offices and Locations Remotely for a Pilot Period, Subject to the 
Conditions Prescribed Under FINRA's Remote Inspections Pilot Program

June 6, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 30, 2024, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the MSRB. 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\ 17 CFR 240.19b-4.

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[[Page 49951]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change 
consisting of an amendment to MSRB Rule G-27, on supervision, to adopt 
new Supplementary Material .05, on remote inspections pilot program, to 
allow certain brokers, dealers, and municipal securities dealers 
(``dealers'') that are members of a registered securities association 
(``FINRA-member dealers'') \3\ to fulfill their internal inspection 
(``office inspection'') obligation with respect to certain offices and 
locations, as described herein, remotely for a specified period, 
subject to the conditions of FINRA's Remote Inspections Pilot Program 
(the ``FINRA Pilot Program'') as established by FINRA Rule 3110.18 (the 
``proposed rule change''). Dealers that are not members of a registered 
securities association (i.e., FINRA), including bank dealers,\4\ would 
be ineligible from conducting office inspections remotely.
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    \3\ The MSRB notes that the Financial Industry Regulatory 
Authority (``FINRA'') is currently the only registered securities 
association and will generally, as such, refer to FINRA specifically 
in the filing when intending to clarify specific regulatory 
obligations and/or applicable rule(s).
    \4\ A bank dealer is defined under MSRB Rule D-8 as a municipal 
securities dealer which is a bank or a separately identifiable 
department or division of a bank. The MSRB will consider at a later 
date whether or not to extend the ability to conduct office 
inspections remotely to bank dealers after giving due consideration 
to how to operationalize such an initiative.
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    The MSRB has designated the proposed rule change as constituting a 
``noncontroversial'' rule change under Section 19(b)(3)(A) \5\ of the 
Exchange Act and Rule 19b-4(f)(6) \6\ thereunder, which renders the 
proposal effective upon receipt of this filing by the Commission. The 
MSRB proposes an operative date of July 1, 2024, for the proposed rule 
change to conform with the effective date of the FINRA Pilot Program.
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    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
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    The text of the proposed rule change is available on the MSRB's 
website at https://msrb.org/2024-SEC-Filings, at the MSRB's principal 
office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB 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 MSRB 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change is meant to more closely conform the 
MSRB's dealer supervisory rule to FINRA's recently approved supervisory 
requirements to help ensure a coordinated regulatory approach in the 
area of dealer supervision and to enable FINRA and the Commission to 
more efficiently inspect those dealers that are subject to both self-
regulatory organizations, as well as to promote regulatory consistency 
for dealers engaging in activities across asset classes. To that end, 
the MSRB is proposing to adopt new Supplementary Material .05, on 
remote inspections pilot program, to allow FINRA-member dealers that 
engage in municipal securities activities to fulfill their office 
inspection obligation remotely for a period of three years starting on 
July 1, 2024 through June 30, 2027 (the ``Pilot Period''), if certain 
conditions are met as prescribed under the proposed rule change in 
conjunction with the FINRA Pilot Program under FINRA Rule 3110.18. The 
specific compliance obligations are addressed below.
Background
    MSRB Rule G-27(b), on supervisory system, requires dealers to 
establish and maintain a system to supervise the municipal securities 
activities of each registered representative, registered principal, and 
other associated person that is reasonably designed to achieve 
compliance with applicable securities laws and regulations, and with 
applicable MSRB rules. As part of an overall supervisory system, 
dealers must conduct inspections of each of their offices or locations: 
offices of municipal supervisory jurisdiction (``OMSJs''),\7\ 
supervisory and non-supervisory municipal branch office,\8\ and non-
branch location \9\ in accordance with MSRB Rule G-27(d). Currently, 
MSRB Rule G-27(d)(i)(A) requires dealers to inspect every OMSJ and any 
supervisory municipal branch office at least annually. MSRB Rules G-
27(d)(i)(B) and G-27(d)(i)(C) require dealers to inspect every non-
supervisory municipal branch office at least every three years, and 
every non-branch location on a regular periodic \10\ schedule. FINRA 
and

[[Page 49952]]

the Commission's Office of Compliance Inspections and Examinations (now 
the Division of Examinations) staff have previously issued joint 
guidance stating that office inspections must be conducted on-site at 
the office; \11\ however, the MSRB understands that the recent pandemic 
propelled increased use and reliance on technology solutions by dealers 
to surveil associated person's activities in a remote work environment.
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    \7\ Pursuant to MSRB Rule G-27(g)(i), a municipal branch office 
is classified as an OMSJ if any one of the following enumerated 
activities occurs at the location with respect to municipal 
securities: (i) order execution and/or market making; (ii) 
structuring of public offerings or private placements; (iii) 
maintaining custody of customers' funds and/or municipal securities; 
(iv) final acceptance (approval) of new accounts on behalf of the 
member; (v) review and endorsement of customer orders, pursuant to 
subparagraph (c)(i)(G)(2); (vi) final approval of advertising for 
use by persons associated with the dealer, pursuant to MSRB Rule G-
21(f); or (vii) responsibility for supervising the municipal 
securities activities of persons associated with the dealer at one 
or more other municipal branch offices of the dealer. An office that 
is designated as an OMSJ must have a registered principal on-site, 
pursuant to MSRB Rule G-27(b)(iv), and be inspected on an annual 
basis, pursuant to MSRB Rule G-27(d)(i)(A).
    \8\ Pursuant to MSRB Rule G-27(g)(ii)(A), a municipal branch 
office is any location where one or more associated persons of a 
dealer regularly conducts the business of effecting any transactions 
in, or inducing or attempting to induce the purchase or sale of, any 
municipal security, or is held out as such, with the exclusion of 
such offices or locations identified in MSRB Rule G-27(g)(ii)(A)(1)-
(7). Pursuant to MSRB Rule G-27(g)(ii)(B), notwithstanding the 
exclusions in MSRB Rule G-27(g)(ii)(A), any location that is 
responsible for supervising the municipal securities activities of 
persons associated with the dealer at one or more non-branch 
locations of the dealer is considered to be a municipal branch 
office (a/k/a supervisory municipal branch office). A non-
supervisory municipal branch office would generally be deemed an 
office that is not charged with supervising the municipal securities 
activities of persons associated with the dealer.
    \9\ Pursuant to MSRB Rule G-27(g)(ii)(A), the following 
locations are excluded from registration as a municipal branch 
office, and are instead deemed non-branch locations: (i) a location 
established solely for customer service and/or back office type 
functions where no sales activities are conducted and that is not 
held out to the public as a branch office; (ii) an associated 
person's primary residence provided it is not held out to the public 
as an office and certain other conditions are satisfied; (iii) a 
location, other than a primary residence, that is used for municipal 
securities activities for less than 30 business days in any one 
calendar year and is not held out to the public as an office, and 
which satisfies certain of the conditions set forth in the primary 
residence exception; (iv) a location of convenience, where 
associated persons occasionally and exclusively by appointment meet 
with customers and is not held out to the public as an office; (v) a 
location used primarily for non-securities activities and from which 
the associated person(s) effects no more than 25 municipal 
securities transactions in any one calendar year; (vi) the floor of 
a registered national securities exchange; and (vii) a temporary 
location established in response to the implementation of a business 
continuity plan. Non-branch locations will include residential 
supervisory locations as of June 1, 2024. See Exchange Act Release 
No. 100131 (May 14, 2024), 89 FR 43961 (May 20, 2024) (File No. SR-
MSRB-2024-04).
    \10\ While MSRB rules do not explicitly establish a specific 
timeframe for such regular periodic inspections, FINRA Rule 3110.13 
sets out a general presumption that a non-branch location will be 
inspected at least every three years, even in the absence of any 
indicators of irregularities or misconduct (i.e., ``red flags''), as 
defined in proposed Supplementary Material .05(b)(1) of MSRB Rule G-
27, and if a FINRA-member dealer establishes a longer periodic 
inspection schedule, such dealer must document in its written 
supervisory and inspection procedures the factors used in 
determining that a longer periodic inspection cycle is appropriate.
    \11\ See FINRA Regulatory Notice 11-54, FINRA and the SEC Issue 
Joint Guidance on Effective Policies and Procedures for Broker-
Dealer Branch Inspections, (November 30, 2011), available at https://www.finra.org/sites/default/files/NoticeDocument/p125204.pdf. The 
MSRB amended MSRB Rule G-27 in 2006 to align with a series of rule 
changes by FINRA (f/k/a the National Association of Securities 
Dealers) and the New York Stock Exchange, which were meant to 
strengthen the supervisory control procedures of their member firms, 
including more stringent office inspection rules. The MSRB has 
favored regulatory consistency in order to avoid confusion between 
MSRB Rule G-27 and FINRA Rule 3110 and, consistent with this 
approach, the MSRB recognizes FINRA Regulatory Notice 11-54 and the 
core principle of on-site inspections with respect to dealer 
supervision. See Exchange Act Release No. 54930 (December 13, 2006), 
71 FR 76400, 76403 (December 20, 2006) (File No. SR-MSRB-2006-10).
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    To help mitigate operational challenges and business disruption for 
dealers during the coronavirus disease (COVID-19) pandemic, including 
challenges related to having a vast number of individuals working from 
home and variations of telework arrangements, the MSRB has provided 
ongoing regulatory relief by allowing dealers to conduct their office 
inspections remotely, without an on-site visit to offices or locations, 
subject to certain conditions. The MSRB previously filed proposed rule 
changes for immediate effectiveness with the Commission in April 
2020,\12\ December 2020,\13\ October 2021,\14\ March 2022,\15\ and 
November 2022 \16\ with, by and large, the collective relief allowing 
dealers to conduct office inspections for those respective calendar 
years remotely without an onsite visit to such offices or 
locations.\17\ The most recent relief, provided in May 2023, allowed 
dealers to conduct office inspections due to be completed during the 
calendar year 2023 remotely through December 31, 2023, and office 
inspections due to be completed during the calendar year 2024 remotely 
through June 30, 2024.\18\
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    \12\ See Exchange Act Release No. 88694 (April 20, 2020), 85 FR 
23088 (April 24, 2020) (File No. SR-MSRB-2020-01).
    \13\ See Exchange Act Release No. 90621 (December 9, 2020), 85 
FR 81254 (December 15, 2020) (File No. SR-MSRB-2020-09).
    \14\ See Exchange Act Release No. 93435 (October 27, 2021), 86 
FR 60522 (November 2, 2021) (File No. SR-MSRB-2021-06).
    \15\ See Exchange Act Release No. 94383 (March 9, 2022), 87 FR 
14596 (March 15, 2022) (File No. SR-MSRB-2022-01).
    \16\ See Exchange Act Release No. 96346 (November 17, 2022), 87 
FR 71719 (November 23, 2022) (File No. SR-MSRB-2022-08).
    \17\ See Supplementary Material .01(a) of MSRB Rule G-27.
    \18\ See Exchange Act Release No. 97423 (May 2, 2023), 88 FR 
29774 (May 8, 2023) (File No. SR-MSRB-2023-04).
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    Similarly, in June 2020, FINRA \19\ made its first of successive 
filings with the Commission, noting that ongoing extenuating 
circumstances warranted sensible and tailored accommodations for its 
member firms to meet their inspection obligations under FINRA Rule 
3110(c).\20\ FINRA went on to note that its proposed rule filing would 
create further efficiencies for its member firms by aligning with the 
MSRB's temporary extension of time for meeting the inspection 
requirements of offices set forth under MSRB Rule G-27.\21\ In 2022, 
recognizing how operations and business models within the financial 
services industry have evolved during the public health crisis, 
including that a large number of firms have implemented a hybrid work 
environment in which particular business functions continue to be de-
centralized, FINRA began a rulemaking process \22\ that ultimately 
resulted, on November 17, 2023, in the Commission approving a proposed 
rule change to adopt the FINRA Pilot Program under Supplementary 
Material .18 of FINRA Rule 3110.\23\ The FINRA Pilot Program consists 
of a voluntary, three-year remote inspections pilot program to allow 
eligible FINRA-member dealers to elect to fulfill their office 
inspection obligations under FINRA Rule 3110 by conducting inspections 
of eligible offices of supervisory jurisdictions, branch offices, and 
non-branch locations remotely without an on-site visit to such 
locations subject to certain conditions and criteria.\24\ The proposed 
rule change is designed to promote regulatory consistency for dealers 
that are both FINRA-member dealers and MSRB registrants.
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    \19\ FINRA previously issued a request for comment in 2017 on a 
proposal to allow firms to conduct remote office inspections. See 
FINRA Regulatory Notice 17-38, Remote Branch Office Inspections, 
(November 13, 2017), available at https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-38.pdf.
    \20\ See Exchange Act Release No. 89188 (June 30, 2020), 85 FR 
40713 (July 7, 2020) (File No. SR-FINRA-2020-019).
    \21\ Id. at 40714.
    \22\ See Exchange Act Release No. 95452 (August 9, 2022), 87 FR 
50144, 50147 (August 15, 2022) (File No. SR-FINRA-2022-021). FINRA 
later withdrew this proposal, available at https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-021-withdrawal.pdf.
    \23\ See Exchange Act Release No. 98982 (November 17, 2023), 88 
FR 82464 (November 24, 2023) (File No. SR-FINRA-2023-007). Pursuant 
to FINRA Rule 3110.18(m), on the sunset of Rule 3110.17, if FINRA 
Rule 3110.17 has not already expired by its own terms, FINRA Rule 
3110.17 will automatically sunset on June 30, 2024.
    \24\ Id.
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Description of Proposed Rule Change
    Proposed Supplementary Material .05 of MSRB Rule G-27 would provide 
eligible FINRA-member dealers \25\ with the flexibility to opt into the 
FINRA Pilot Program, consisting of a voluntary, three-year remote 
inspections pilot program to fulfill their office inspection 
obligations under MSRB Rule G-27(d) by conducting inspections of 
eligible OMSJs, municipal branch offices, and non-branch locations 
remotely without an on-site visit to such locations, subject to certain 
conditions and criteria. The requirements in connection with the 
participation by FINRA-member dealers in the FINRA Pilot Program under 
proposed Supplementary Material .05 would mirror in all material 
respects the requirements with respect to FINRA-member dealers' 
participation under FINRA rules in the FINRA Pilot Program. FINRA-
member dealers that engage in municipal securities activities and that 
are therefore subject to MSRB Rule G-27 would be able to opt into the 
FINRA Pilot Program with respect thereto. FINRA-member dealers opting 
into the FINRA Pilot Program would do so pursuant to the provisions of 
proposed Supplementary Material .05 of MSRB Rule G-27 and through the 
mechanisms and processes established by FINRA in connection with the 
FINRA Pilot Program.
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    \25\ As previously noted, proposed Supplementary Material .05 of 
MSRB Rule G-27 would be applicable only to dealers that are FINRA 
members.
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    The proposed rule change also re-orders and streamlines some of the 
provisions of FINRA Rule 3110.18.
Scope (Proposed Supplementary Material .05(a) of MSRB Rule G-27)
    Proposed Supplementary Material .05(a), on scope, of MSRB Rule G-27 
would outline the scope of the proposed rule change establishing the 
standards by which a FINRA-member dealer may participate in the FINRA 
Pilot Program and mirrors the scope of the FINRA Pilot Program under 
FINRA Rule 3110.18(a). Proposed Supplementary Material .05(a) would 
permit FINRA-member dealers to avail themselves of the FINRA Pilot 
Program for the required inspections of OMSJs, municipal branch 
offices, and non-

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branch locations, in accordance with MSRB Rule G-27(d). As such, under 
proposed Supplementary Material .05(a), FINRA-member dealers would be 
able to participate in the FINRA Pilot Program for a period of three 
years, starting on July 1, 2024, and automatically sunsetting on June 
30, 2027, if the proposed Supplementary Material .05 is not amended to 
allow continued participation by FINRA-member dealers in the FINRA 
Pilot Program.\26\ FINRA-member dealers would not be able to 
participate in the FINRA Pilot Program after the prescribed provisions 
under this proposed Supplementary Material sunset. The purpose of the 
proposed rule change would be to allow FINRA-member dealers to 
participate in the FINRA Pilot Program while also meeting their 
compliance obligations under MSRB Rule G-27 in the same manner in which 
they are able to participate in the FINRA Pilot Program with respect to 
their parallel obligations under FINRA Rule 3110.18.
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    \26\ The MSRB will engage with FINRA to understand the efficacy 
of remote office inspections based on FINRA's review of data and 
information provided to FINRA by FINRA-member dealers as required 
under the FINRA Pilot Program.
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Risk Assessment (Proposed Supplementary Material .05(b) of MSRB Rule G-
27)
    Proposed Supplementary Material .05(b), on risk assessment, of MSRB 
Rule G-27 would outline the need for FINRA-member dealers to undertake 
a risk assessment in order to participate in the FINRA Pilot Program 
and mirrors the risk assessment provisions required with respect to the 
FINRA Pilot Program under FINRA Rule 3110.18(b). Specifically, proposed 
Supplementary Material .05(b)(1) would provide that a FINRA-member 
dealer could elect to conduct the applicable inspection remotely, 
without an on-site visit for an office or location, when such dealer 
reasonably determines that the purposes of this Supplementary Material 
can be accomplished by conducting such required inspection remotely. 
The FINRA-member dealer would be required to develop a reasonable risk-
based approach to using remote inspections and conduct and document a 
risk assessment for an office \27\ or location prior to conducting a 
remote inspection. The risk assessment must document the factors 
considered, including, among other things, the FINRA-member dealer's 
size, organizational structure, scope of business activities, number 
and location of the FINRA-member dealer's offices, the nature and 
complexity of the products and services offered by the FINRA-member 
dealer, the volume of business done, the number of associated persons 
assigned to a location, the disciplinary history of municipal 
securities representatives or associated persons, and any red flags, 
and must take into account any higher-risk activities that take place 
at, or higher-risk associated persons that are assigned to, that office 
or location.\28\ Additionally, proposed Supplementary Material 
.05(b)(1) would require a dealer to conduct an on-site inspection on 
the required cycle for such offices or locations that are not eligible 
for remote office inspections due to having not met the firm or 
location level requirements under proposed Supplementary Material 
.05(c) of MSRB Rule G-27. Notwithstanding proposed Supplementary 
Material .05, a dealer shall remain subject to the other requirements 
of MSRB Rule G-27(d), on internal inspections.
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    \27\ While MSRB rules do not define ``office,'' in FINRA's 2005 
rulemaking initiative to establish a uniform definition of branch 
office, FINRA noted that the language of the uniform definition 
substantially mirrored the Commission's definition of ``office'' in 
its books and records rules under the Exchange Act. Exchange Act 
Rule 17a-3(g)(i), defines the term as any location where one or more 
associated persons regularly conducts the business of handling funds 
or securities or effecting any transactions in, or inducing or 
attempting to induce the purchase or sale of, any security (17 CFR 
240.17a-3). See NASD Notice to Members 05-67 (October 6, 2005), 
available at https://www.finra.org/sites/default/files/NoticeDocument/p015121.pdf.
    \28\ With one exception, these provisions of proposed 
Supplementary Material .05(b)(1) mirror FINRA Rule 3110.18(b)(1) 
with non-substantive terminology changes. However, FINRA Rule 
3110.18(b)(1) refers to, without including within its text, a list 
of factors set forth in FINRA Rule 3110.12 as factors to be 
considered and documented with respect to the risk assessment 
required under FINRA Rule 3110.18(b)(1). Because MSRB Rule G-27 does 
not currently include a provision similar to FINRA Rule 3110.12, and 
therefore cannot include such factors by reference in the same 
manner as in FINRA Rule 3110.18(b)(1), proposed Supplementary 
Material .05(b)(1) of MSRB Rule G-27 lists such factors within the 
text thereof. Additionally, proposed Supplementary Material 
.05(b)(1) of MSRB Rule G-27 states that dealers must conduct an on-
site inspection of that office or location on the applicable 
schedule under section (d) of MSRB Rule G-27.
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    Proposed Supplementary Material .05(b)(2), on other risk assessment 
factors, of MSRB Rule G-27 would provide that, in addition to the 
factors that FINRA-member dealers must consider as part of their risk 
assessment for remotely inspecting an office or location under 
Supplementary Material .05(b)(1), on review standards, FINRA-member 
dealers must consider, among other things, the following factors also 
contained in FINRA Rule 3110.18(b)(2), on other factors to consider for 
risk assessment:
    (i) the volume and nature of customer complaints; \29\
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    \29\ Proposed Supplementary Material .05(b)(2)(A), mirroring 
FINRA Rule 3110.18(b)(2)(A).
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    (ii) the volume and nature of outside business activities, 
particularly investment-related; \30\
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    \30\ Proposed Supplementary Material .05(b)(2)(B), mirroring 
FINRA Rule 3110.18(b)(2)(B).
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    (iii) the volume and complexity of products offered; \31\
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    \31\ Proposed Supplementary Material .05(b)(2)(C), mirroring 
FINRA Rule 3110.18(b)(2)(C).
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    (iv) the nature of the customer base, including vulnerable adult 
investors; \32\
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    \32\ Proposed Supplementary Material .05(b)(2)(D), mirroring 
FINRA Rule 3110.18(b)(2)(D).
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    (v) whether associated persons are subject to heightened 
supervision; \33\
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    \33\ Proposed Supplementary Material .05(b)(2)(E), mirroring 
FINRA Rule 3110.18(b)(2)(E).
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    (vi) failures by associated persons to comply with the FINRA-member 
dealer's written supervisory procedures; \34\ and
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    \34\ Proposed Supplementary Material .05(b)(2)(F), mirroring 
FINRA Rule 3110.18(b)(2)(F) with a non-substantive terminology 
change.
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    (vii) any recordkeeping violations.\35\
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    \35\ Proposed Supplementary Material .05(b)(2)(G), mirroring 
FINRA Rule 3110.18(b)(2)(G).
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    Proposed Supplementary Material .05(b)(2) would prescribe that 
FINRA-member dealers should conduct on-site inspections or make more 
frequent use of unannounced, on-site inspections for high-risk offices 
or locations or when there are red flags, and supervisory systems must 
take into consideration any red flags when determining whether to 
conduct a remote inspection of an office or location.\36\
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    \36\ These provisions of proposed Supplementary Material 
.05(b)(2) mirror FINRA Rule 3110.18(b)(2), with elimination of 
certain cross-references to FINRA rules.
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    The existing on-site office inspection obligation \37\ under MSRB 
Rule G-27(d) has been an industry benchmark, imposing high standards 
regarding supervisory obligations. Therefore, in moving away from the 
existing standard, the MSRB believes the provisions of the proposed 
rule change should include a risk assessment conducted by FINRA-member 
dealers under proposed Supplementary Material .05(b)(1), on review 
standards, to mitigate residual risk not addressed by the ineligibility 
criteria and the conditions contained in the FINRA Pilot Program. In 
addition, proposed Supplementary Material .05(b)(2), on other risk 
assessment factors, would provide additional guardrails to manage the 
risk associated with firms conducting remote office inspections under 
the FINRA Pilot Program.
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    \37\ See supra note 11.

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[[Page 49954]]

Eligibility, Exclusions and Conditions--Firm Level Requirements 
(Proposed Supplementary Material .05(c)(1) of MSRB Rule G-27)
    FINRA Rule 3110.18(f)(1) outlines certain conditions that would 
render a member firm ineligible to conduct remote inspections of any of 
its offices or locations under the FINRA Pilot Program, if at any time 
during the Pilot Period, the member firm: (i) is or becomes designated 
as a restricted firm under FINRA Rule 4111; (ii) is or becomes 
designated as a taping firm under FINRA Rule 3170; (iii) receives a 
notice from FINRA, pursuant to FINRA Rule 9557, regarding capital 
compliance related matters under Rules 4110, 4120 or 4130; (iv) is or 
becomes suspended from FINRA membership; (v) has been a FINRA member 
for less than 12 months; or (vi) is or has been found by the Commission 
or FINRA to be in violation of office inspection obligations under 
FINRA Rule 3110(c) within the past three years.\38\
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    \38\ Notwithstanding the conditions outlined pursuant to FINRA 
3110.18(f)(1), FINRA Rule 3110.18(k), on determination of 
ineligibility, states that FINRA may make a determination in the 
public interest and for the protection of investors that a member 
firm is no longer eligible to participate in the FINRA Pilot Program 
if such member firm fails to comply with the requirements of FINRA 
Rule 3110.18. In such instances, FINRA will provide written notice 
to the member firm of such determination that the member firm would 
no longer be eligible to participate in the FINRA Pilot Program and 
must conduct on-site inspections of required offices and locations 
in accordance with FINRA Rule 3110(c).
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    The MSRB believes that the aforementioned categories of 
ineligibility are events or activities that are more likely to raise 
investor protection concerns because they expressly account for FINRA-
member dealers that pose higher risks and, therefore, should result in 
ineligibility for the FINRA Pilot Program. As such, proposed 
Supplementary Material .05(c)(1)(A) of MSRB Rule G-27 would provide 
that a FINRA-member dealer is ineligible to conduct remote inspections 
of any of its offices or locations if the dealer is not a FINRA-member 
dealer or if at any time during the Pilot Period such dealer becomes 
ineligible under FINRA's prescribed ineligibility criteria to conduct 
remote inspections under the FINRA Pilot Program, pursuant to FINRA 
Rule 3110.18(f)(1). In addition, the MSRB believes the proposed 
ineligibility criteria would appropriately limit the potential 
population of FINRA Pilot Program participants to those FINRA-member 
dealers that may be better positioned to conduct remote inspections.
    Additionally, under proposed Supplementary Material .05(c)(1)(B)(i) 
of MSRB Rule G-27, in support of a risk-based approach to using remote 
office inspections as a firm-level condition, the FINRA-member dealer 
would be required to have a recordkeeping system to make, maintain and 
preserve required records under applicable securities laws and 
regulations, including applicable MSRB rules, and the FINRA-member 
dealer's written supervisory procedures under MSRB Rule G-27(c). These 
records must not be maintained or preserved physically or 
electronically at the office or location subject to remote inspection, 
and the FINRA-member dealer must have prompt access to such 
records.\39\ The MSRB notes that advancements in technology have 
changed the way in which FINRA-member dealers and their associated 
persons conduct business and communicate with clients, with such 
activities of associated persons occurring, by and large, through 
centralized electronic systems and maintained or preserved 
electronically by the FINRA-member dealer rather than in paper form at 
offices or locations.\40\ The MSRB understands that records may be 
created at an office or location subject to remote inspections, but not 
maintained at such office or location. Finally, as a further firm-level 
condition, FINRA-member dealers would be required under proposed 
Supplementary Material .05(c)(1)(B)(ii) of MSRB Rule G-27 to determine 
that their surveillance and technology tools are appropriate to 
supervise the types of risks presented by each remotely supervised 
office or location and sets out examples of types of potential 
surveillance and technology tools that FINRA-member dealers might 
consider using. These provisions mirror the provisions of FINRA Rule 
3110.18(f)(2), with appropriate cross-reference changes to the 
applicable MSRB rule provision.
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    \39\ Under Regulation S-P, on privacy of consumer financial 
information, dealers are required to have policies and procedures 
addressing the protection of customer information and records. See 
17 CFR 248.30.
    \40\ See Exchange Act Release No. 97398 (April 28, 2023), 88 FR 
28620, 28622 and 28623 (May 4, 2023) (File No. SR-FINRA-2023-007) 
(Notice of Filing).
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Eligibility, Exclusions and Conditions--Location Level Requirements 
(Proposed Supplementary Material .05(c)(2) of MSRB Rule G-27)
    FINRA Rule 3110.18(g) lists the criteria under the FINRA Pilot 
Program that would render a particular office or location ineligible 
for remote office inspection. Under FINRA Rule 3110.18(g)(1), offices 
or locations would be ineligible for a remote office inspection if at 
any time during the FINRA Pilot Period:
    (i) one or more associated persons at such office or location is or 
becomes subject to a mandatory heightened supervisory plan under the 
rules of FINRA, the Commission, or a state regulatory agency;
    (ii) one or more associated persons at such office or location is 
or becomes statutorily disqualified, unless such disqualified person 
has been approved (or is otherwise permitted pursuant to FINRA rules 
and the federal securities laws) to associate with a firm and is not 
subject to a mandatory heightened supervision plan as a condition to 
approval or permission for such association; \41\
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    \41\ The language mirrors the text of FINRA Rule 
3110.18(g)(1)(B) with the exception of the cross-reference to 
paragraph (g)(1)(A) of FINRA Rule 3110.18.
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    (iii) the firm is or becomes subject to FINRA Rule 1017(a)(7) as a 
result of one or more associated persons at such office or location;
    (iv) one or more associated persons at such office or location has 
an event in the prior three years that required a ``yes'' response to 
any item in Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D 
and 14E on Form U4 (Uniform Application for Securities Industry 
Registration or Transfer) or similar form by a registered securities 
association; \42\
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    \42\ The language substantively mirrors the text of FINRA Rule 
3110.18(g)(1)(D). The textual changes include the title of Form U-4 
and the addition of the phrase ``or similar form by a registered 
securities association.''
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    (v) one or more associated persons at such office or location is or 
becomes subject to a disciplinary action taken by the firm that is or 
was reportable under FINRA Rule 4530(a)(2);
    (vi) one or more associated persons at such office or location is 
engaged in proprietary trading, including the incidental crossing of 
customer orders, or the direct supervision of such activities; or
    (vii) the office or location handles customer funds or securities.
    The MSRB believes that the aforementioned categories of location-
level ineligibility are events or activities that are more likely to 
raise investor protection concerns because they expressly account for 
activities within offices or locations that pose higher risks and, 
therefore, such offices or locations should be ineligible for the FINRA 
Pilot Program. As such, proposed Supplementary Material .05(c)(2)(A), 
on office or location requirements, of MSRB Rule G-27

[[Page 49955]]

would provide that a FINRA-member dealer is ineligible to conduct 
remote inspection of an office or location if at any time during the 
Pilot Period such office or location becomes ineligible for remote 
inspection under the prescribed FINRA requirements relating to 
location-level ineligibility for participation in the FINRA Pilot 
Program under FINRA Rule 3110.18(g)(1).
    In addition, as part of the requirement to develop a reasonably 
designed risk-based approach to using remote inspections, and the 
requirement to conduct and document a risk assessment, proposed 
Supplementary Material .05(c)(2)(B), on office or location 
requirements, of MSRB Rule G-27 would require that a specific office or 
location of the FINRA-member dealer satisfy the following conditions to 
be eligible for remote inspections under the FINRA Pilot Program:
    (i) electronic communications (e.g., email) are made through the 
FINRA-member dealer's electronic system; \43\
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    \43\ Proposed Supplementary Material .05(c)(2)(B)(i), mirroring 
FINRA Rule 3110.18(g)(2)(A) with a non-substantive terminology 
change.
---------------------------------------------------------------------------

    (ii) the associated person's correspondence and communications with 
the public are subject to the FINRA-member dealer's supervision in 
accordance with MSRB Rule G-27(e); \44\ and
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    \44\ Proposed Supplementary Material .05(c)(2)(B)(ii), mirroring 
FINRA Rule 3110.18(g)(2)(B) with appropriate cross-reference change 
to the applicable MSRB rule provision and a non-substantive 
terminology change.
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    (iii) no books or records of the FINRA-member dealer required to be 
made, maintained, and preserved under applicable securities laws and 
regulations, including applicable MSRB rules, and such FINRA-member 
dealer's own written supervisory procedures under MSRB Rule G-27(c) are 
physically or electronically maintained and preserved at such office or 
location.\45\
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    \45\ Proposed Supplementary Material .05(c)(2)(B)(iii), 
mirroring FINRA Rule 3110.18(g)(2)(C) with appropriate cross-
reference changes to applicable MSRB rule provisions and a non-
substantive terminology change.
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    A FINRA-member dealer's office inspection program is a necessary 
part of its supervisory system and supports a culture of compliance 
because it provides an additional level of oversight and safeguards 
against risk; therefore, the conditions and eligibility exclusions at 
the firm and location level are appropriate to ensure the efficacy of 
remote inspections undertaken pursuant to the FINRA Pilot Program as 
they will provide safeguards that will help ensure that firms maintain 
effective supervision when conducting remote inspections. In addition, 
the MSRB believes that keeping the firm and location-level eligibility 
criteria consistent with FINRA-amended rules would avoid regulatory 
inconsistencies in the application and use of remote office inspections 
by FINRA-member dealers participating in the FINRA Pilot Program by 
subjecting such dealers to the same supervisory framework.
Written Supervisory Procedures for Remote Inspections (Proposed 
Supplementary Material .05(d) of MSRB Rule G-27)
    Consistent with their obligations under FINRA Rule 3110(b), on 
written procedures, FINRA Rule 3110.18(c), on written supervisory 
procedures for remote inspections, requires member firms that elect to 
participate in the FINRA Pilot Program to establish, maintain, and 
enforce written supervisory procedures regarding remote inspections 
that are reasonably designed to detect and prevent violations of and 
achieve compliance with applicable securities laws and regulations, and 
with applicable FINRA rules. Under proposed Supplementary Material 
.05(d), on written supervisory procedures for remote inspections, of 
MSRB Rule G-27, FINRA-member dealers electing to participate in the 
FINRA Pilot Program would be required, consistent with their 
obligations under MSRB Rule G-27(c), to establish, maintain, and 
enforce written supervisory procedures regarding remote inspections 
that are reasonably designed to detect and prevent violations of, and 
achieve compliance with, applicable securities laws and regulations, 
including applicable MSRB rules. These reasonably designed procedures, 
at a minimum, must address:
    (i) the methodology, including technology, that may be used to 
conduct remote inspections; \46\
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    \46\ Proposed Supplementary Material .05(d)(1), mirroring FINRA 
Rule 3110.18(c)(1).
---------------------------------------------------------------------------

    (ii) the factors considered in the risk assessment made for each 
applicable office or location pursuant to proposed Supplementary 
Material .05(b); \47\ and
---------------------------------------------------------------------------

    \47\ Proposed Supplementary Material .05(d)(2), mirroring FINRA 
Rule 3110.18(c)(2).
---------------------------------------------------------------------------

    (iii) the use of other risk-based systems employed generally by the 
FINRA-member dealer to identify and prioritize for review those areas 
that pose the greatest risk of potential violations of applicable 
securities laws and regulations, including applicable MSRB rules.\48\
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    \48\ Proposed Supplementary Material .05(d)(3), mirroring FINRA 
Rule 3110.18(c)(4) with a non-substantive terminology change. FINRA 
Rule 3110.18(c)(3) is addressed in proposed Supplementary Material 
.05(g) discussed below.
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Effective Supervisory System (Proposed Supplementary Material .05(e) of 
MSRB Rule G-27)
    FINRA Rule 3110.18(d), on effective supervisory system, provides 
that a FINRA-member dealer's use of remote inspection of an office or 
location will be held to the same standards for reasonable review as 
set forth under FINRA Rule 3110.12. FINRA Rule 3110.18(d) also provides 
where a firm's remote inspection of an office or location identifies 
any red flags, the firm may need to impose additional supervisory 
procedures for that office or location or may need to provide for more 
frequent monitoring of that office or location, including potentially a 
subsequent on-site visit on an announced or unannounced basis.
    Proposed Supplementary Material .05(e), on effective supervisory 
system, of MSRB Rule G-27 would mirror FINRA Rule 3110.18(d) by 
reiterating that the requirement to conduct inspections of offices and 
locations is one part of the FINRA-member dealer's overall obligation 
to have an effective supervisory system. Therefore, a FINRA-member 
dealer must maintain its ongoing review of the activities and functions 
at all offices and locations regardless of whether such FINRA-member 
dealer conducts inspections remotely, and that a FINRA-member dealer's 
use of remote inspection of an office or location would be subject to 
the same standards for review as for other offices or locations under 
MSRB Rule G-27 in addition to the standard set forth under this 
Supplementary Material.\49\ Additionally, proposed Supplementary 
Material .05(e) would state that, where a FINRA-member dealer detects 
red flags through a remote inspection, the FINRA-member dealer may need 
to impose additional supervisory procedures or provide more frequent 
monitoring for that office or location, which could include a 
subsequent on-site visit on an announced or unannounced basis. The MSRB 
believes that the supervisory

[[Page 49956]]

system requirements in the proposed rule change, consistent with the 
FINRA Pilot Program, would assist in managing potential risks 
associated with dealers conducting remote office inspections.
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    \49\ FINRA Rule 3110.18(d), on effective supervisory system, 
refers to the standards for office or location reviews under FINRA 
Rule 3110.12, on reasonable standards of review, and states that 
remote office inspections are subject to the same standards as other 
inspections. Supplementary Material .05(e) of MSRB Rule G-27 
explicitly incorporates within the text that the same standards for 
review apply for on-site and remote inspections.
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Documentation Requirement (Proposed Supplementary Material .05(f) of 
MSRB Rule G-27)
    FINRA Rule 3110.18(e) contains documentation requirements for 
member firms participating in the FINRA Pilot Program. In particular, 
FINRA Rule 3110.18(e) requires member firms to maintain and preserve a 
centralized record for each Pilot Year, as defined under FINRA Rule 
3110.18(l) (a ``Pilot Year''),\50\ that separately identifies all 
offices or locations that were inspected remotely and any offices or 
locations for which the member determined to impose additional 
supervisory procedures or more frequent monitoring as a result of the 
remote office inspection. In addition, FINRA Rule 3110.18(e) requires 
the documentation of the results of a remote inspection for an office 
or location to identify any additional supervisory procedures or more 
frequent monitoring for that office or location that were imposed as a 
result of the remote inspection, including whether an on-site 
inspection was conducted at such office or location.
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    \50\ The textual changes include the reference to FINRA Rule 
3110.18(l). FINRA Rule 3110.18(l) defines Pilot Year as the 
following: (1) Pilot Year 1 is the period beginning on July 1, 2024 
and ending on December 31 of the same year; (2) Pilot Year 2 means 
the calendar year period following Pilot Year 1, beginning on 
January 1 and ending on December 31; (3) Pilot Year 3 means the 
calendar year period following Pilot Year 2, beginning on January 1 
and ending on December 31; and (4) if applicable, where Pilot Year 1 
covers a period that is less than a full calendar year, then Pilot 
Year 4 means the period following Pilot Year 3, beginning on January 
1 and ending on June 30, 2027.
---------------------------------------------------------------------------

    Consistent with the FINRA provision, proposed Supplementary 
Material .05(f), on documentation requirement, of MSRB Rule G-27 would 
mirror such documentation requirements for FINRA-member dealers opting 
to avail themselves of the FINRA Pilot Program. Specifically, proposed 
Supplementary Material .05(f) would require such dealers to maintain 
and preserve a centralized record for each of the Pilot Years, within 
the meaning of the FINRA Pilot Program. In addition, proposed 
Supplementary Material .05(f) would require FINRA-member dealers to 
identify all offices or locations that were inspected remotely and any 
offices or locations for which such dealer determined to impose 
additional supervisory procedures or more frequent monitoring, as 
provided in proposed Supplementary Material .05(e), on effective 
supervisory system, of MSRB Rule G-27. Moreover, a FINRA-member 
dealer's documentation of the results of a remote inspection of an 
office or location would need to identify any additional supervisory 
procedures or more frequent monitoring of such office or location that 
were imposed as a result of the remote inspection, including whether an 
on-site inspection was conducted at such office or location. The MSRB 
believes that these requirements would assist in tracking and 
documenting the efficacy of the FINRA-member dealer's remote 
inspections.
Data and Information Collection Requirement (Proposed Supplementary 
Material .05(g) of MSRB Rule G-27)
    FINRA Rule 3110.18(h) outlines requirements for member firms that 
elect to participate in the FINRA Pilot Program to collect specific 
data and information as part of the FINRA Pilot Program. Specifically, 
FINRA Rule 3110.18(h) requires firms to collect specific data points 
and to provide such data and information to FINRA on a quarterly basis, 
in the manner and format determined by FINRA,\51\ including: (i) the 
number of offices and locations with an inspection completed during 
each calendar quarter; \52\ (ii) the number of those offices or 
locations in each calendar quarter that were inspected remotely; \53\ 
(iii) the number of those offices or locations in each calendar quarter 
that were the subject of an on-site inspection, as well as the number 
of such inspections that were on-site because of a finding; \54\ (iv) 
the number of offices and locations for which a remote office 
inspection was conducted in the calendar quarter that identified a 
finding, the number of findings, a list of the significant findings; 
\55\ and (v) the number of locations for which an on-site inspection 
was conducted in the calendar quarter that identified a finding, the 
number of findings, and a list of the significant findings.\56\ 
Moreover, dealers are required to provide FINRA with their written 
supervisory procedures for remote inspections that account for 
escalating significant findings; new hires; supervising brokers with a 
significant history of misconduct; and outside business activities and 
``doing business as'' (or DBA) designations.\57\ In addition, FINRA 
Rule 3110.18(h)(2) outlines requirements for member firms electing to 
participate in the FINRA Pilot Program to provide certain data and 
information for Pilot Year 1 if it is less than a full calendar year 
\58\ and FINRA Rule 3110.18(h)(3) lists additional data and information 
to be provided to FINRA for calendar year 2019 for member firms 
electing to participate in the FINRA Pilot Program.
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    \51\ FINRA Rule 3110.18(h)(1) notes that FINRA-member dealers 
must provide separate counts for offices of supervisory jurisdiction 
(``OSJs''), supervisory branch offices, non-supervisory branch 
offices, and non-branch locations. FINRA office categories 
correspond to the MSRB office categories contained in MSRB Rule G-
27.
    \52\ See FINRA Rule 3110.18(h)(1)(A).
    \53\ See FINRA Rule 3110.18(h)(1)(B).
    \54\ See FINRA Rule 3110.18(h)(1)(C) and (D). Pursuant to FINRA 
Rule 3110.18(h)(1), a finding means a discovery made during an 
inspection that led to a remedial action or was listed on the 
member's inspection report.
    \55\ See FINRA Rule 3110.18(h)(1)(E).
    \56\ See FINRA Rule 3110.18(h)(1)(F).
    \57\ See FINRA Rule 3110.18(h)(1)(G).
    \58\ FINRA Rule 3110.18(h)(2) also contains language that 
addresses providing counts for OSJs, supervisory branch offices, 
non-supervisory branch offices, and non-branch locations if Pilot 
Year 1 covers a period less than a full calendar year.
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    The MSRB believes that requiring certain data and information to be 
collected and periodically provided to FINRA is critical to evaluating 
the effectiveness of remote office inspections during the Pilot Period, 
including to determine if the Pilot Program should be extended or made 
permanent.\59\ Proposed Supplementary Material .05(g), on data and 
information collection requirement, of MSRB Rule G-27 would require 
FINRA-member dealers to comply with the requirements of FINRA with 
respect to the collection and submission of specified data and 
information, and in the manner and format required under the FINRA 
Pilot Program. Furthermore, proposed Supplementary Material .05(g) of 
MSRB Rule G-27, which substantially mirrors FINRA Rule 3110.18(h)(4) 
would require FINRA-member dealers that elect to participate in the 
FINRA Pilot Program to establish, maintain and enforce written policies 
and procedures that are reasonably designed to comply with any 
specified data and information collection, and transmission 
requirements prescribed by FINRA.
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    \59\ As previously mentioned, the MSRB will engage with FINRA to 
understand the efficacy of remote office inspections based on 
FINRA's review of data and information provided to FINRA by FINRA-
member dealers as required under the FINRA Pilot Program. More 
specifically, the examination of the municipal securities activities 
of FINRA-member dealers would aid the MSRB's understanding of the 
efficacy of remote office inspections.

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[[Page 49957]]

Election To Participate in Remote Inspections Pilot Program (Proposed 
Supplementary Material .05(h) of MSRB Rule G-27)
    FINRA Rule 3110.18(i) specifies how a firm elects to participate 
in, or subsequently withdraws from, the FINRA Pilot Program. 
Specifically, FINRA Rule 3110.18(i) states that a firm must, at least 
five calendar days before the beginning of a Pilot Year, provide FINRA 
an ``opt-in notice'' in the manner and format determined by FINRA.\60\ 
Moreover, FINRA Rule 3110.18(i) specifies that a FINRA member that 
elects to withdraw from subsequent Pilot Years (i.e., Pilot Year 2, 
Pilot Year 3, and Pilot Year 4, if applicable) shall, at least five 
calendar days before the end of the then current Pilot Year, provide 
FINRA with an ``opt-out notice'' in the manner and format determined by 
FINRA.\61\
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    \60\ FINRA Rule 3110.18(i) also contains provisions for firms 
wishing to opt-out of the FINRA Pilot Program.
    \61\ FINRA may, in exceptional cases and where good cause is 
shown, waive the applicable timeframes for the required opt-in or 
opt-out notices.
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    Proposed Supplementary Material .05(h), on election to participate, 
of MSRB Rule G-27 would require FINRA-member dealers electing to 
participate in the FINRA Pilot Program to make their election in the 
manner and format as prescribed, in accordance with FINRA Rule 
3110.18(i). In addition, proposed Supplementary Material .05(h) would 
require FINRA-member dealers that elect to withdraw from the FINRA 
Pilot Program for subsequent years to provide such notice to FINRA in 
the manner and format as prescribed in accordance with FINRA Rule 
3110.18(i). These requirements will ensure that FINRA-member dealers 
can properly elect to participate in, or subsequently withdraw from, 
the FINRA Pilot Program while satisfying requirements in accordance 
with MSRB Rule G-27(d) on office inspections.
Failure to Satisfy Conditions (Proposed Supplementary Material .05(i) 
of MSRB Rule G-27)
    FINRA Rule 3110.18(j), on failure to satisfy conditions, addresses 
situations in which a member firm fails to satisfy the requirements for 
participating in the FINRA Pilot Program. Specifically, FINRA Rule 
3110.18(j) states that member firms that fail to satisfy the conditions 
set forth to avail themselves of the FINRA Pilot Program, including the 
requirement to timely collect and submit the data and information to 
FINRA as set forth under FINRA Rule 3110.18(h), shall be ineligible to 
participate in the FINRA Pilot Program. Such member firms would be 
required to conduct on-site inspections of each office and location on 
the required cycle in accordance with FINRA Rule 3110(c) on internal 
inspections.
    Consistent with FINRA Rule 3110.18(j), proposed Supplementary 
Material .05(i), on failure to satisfy conditions, of MSRB Rule G-27 
would specify that any FINRA-member dealer that fails to satisfy the 
conditions of proposed Supplementary Material .05 of MSRB Rule G-27 and 
of FINRA Rule 3110.18, including the specified requirement to timely 
collect and submit data, would no longer be eligible to participate in 
the FINRA Pilot Program. Such FINRA-member dealers would need to 
conduct on-site inspections of each office and location on the required 
cycle in accordance with MSRB Rule G-27(d), on internal inspections.
    While FINRA has adopted FINRA Rule 3110.18(k), on determination of 
ineligibility, and FINRA Rule 3110.18(m), on the sunset of FINRA Rule 
3110.17, the proposed rule change does not incorporate similar 
provisions since FINRA solely makes the determination regarding FINRA-
member dealers' participation in the FINRA Pilot Program and the 
sunsetting of the FINRA relief under FINRA Rule 3110.17, and therefore 
those provisions would not be applicable. The MSRB specifically 
references and explains these provisions in describing adopted FINRA 
Rule 3110.18 within the filing. In addition, for purposes of the 
proposed rule change, the terms defined in FINRA Rule 3110.18(l) are 
used herein with the same meaning as set forth in FINRA Rule 
3110.18(l).
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Exchange Act,\62\ which provides that the 
MSRB's rules shall be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in municipal securities and municipal 
financial products, to remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products, and, in general, to protect investors, municipal 
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78 o-4(b)(2)(C).
---------------------------------------------------------------------------

    In accordance with Section 15B(b)(2)(C) of the Exchange Act,\63\ 
the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices because the proposed rule change would 
allow FINRA-member dealers to participate in the FINRA Pilot Program in 
a manner intended to provide a practical and balanced way for such 
dealers to continue effectively meeting their core regulatory 
obligations to establish and maintain a system to supervise the 
activities of each associated person that is reasonably designed to 
achieve compliance with applicable securities laws and regulations and 
with applicable MSRB rules, which directly serves investor protection. 
The MSRB has noticed that there has been a shift towards adopting work 
from home models due to carryover from the conditions associated with 
the COVID-19 pandemic, and the criteria and conditions contained within 
the proposed rule change are designed to accommodate this shift and 
allow firms to supplement their existing inspection programs with the 
option to conduct remote inspections at offices or locations where such 
remote inspections satisfy the proposed conditions in the proposed rule 
change, and are consistent with a reasonably designed supervisory 
system, while also minimizing associated risks, as much as possible, to 
investor protections. The risk assessment required by the proposed rule 
change will further mitigate residual risk not addressed by the 
ineligibility criteria and the affirmative conditions imposed to 
participate in the FINRA Pilot Program. As such, the proposed rule 
change is designed to minimize risks by limiting which offices or 
locations can be inspected remotely while also setting conditions for 
FINRA-member dealers wishing to partake in remote office inspections. 
The robust nature of the criteria that must be satisfied and 
circumstances that would make a location ineligible for remote office 
inspections serve an important role in reducing the potential for fraud 
and manipulative acts. For example, the terms of the proposed rule 
change would include important safeguards, such as requiring risk 
assessments, supplemental written supervisory procedures related to 
remote inspections, and documentation for FINRA-member dealers wishing 
to engage in remote office inspections, which furthers the prevention 
of

[[Page 49958]]

manipulative acts and practices and protection of investors, municipal 
entities, obligated persons and the public interest. FINRA-member 
dealers are required to determine that their surveillance and 
technology tools are appropriate to supervise remote office inspections 
in furtherance of preventing fraudulent and manipulative acts and 
practices.
---------------------------------------------------------------------------

    \63\ Id.
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    By permitting FINRA-member dealers to avail themselves of remote 
office inspections for the requisite period by use of the FINRA Pilot 
Program, such dealers are receiving the same benefit, regardless of 
asset class, of being able to deploy their resources in a manner that 
maximizes efficiencies, which promotes just and equitable principles of 
trade, through regulatory consistency for FINRA -member dealers and 
MSRB registrants. The MSRB believes that the proposed rule change would 
facilitate transactions in municipal securities and remove impediments 
to a free and open market because, by ensuring a consistent regulatory 
framework for which FINRA-member dealers can avail themselves of remote 
office inspections, the proposed rule change would alleviate some of 
the operational challenges such dealers would otherwise experience, 
which will allow them to more effectively allocate resources to the 
operations that facilitate transactions in municipal securities and 
municipal financial products.
    Finally, aligning the proposed rule change with adopted FINRA Rule 
3110.18 and thereby making such requirements specifically applicable to 
FINRA-member dealers' municipal securities activities fosters 
cooperation between regulators, because it creates as close as possible 
a uniform standard, with minimal distinction needed between the 
treatment of municipal securities and other asset classes, enabling 
FINRA and the Commission to more efficiently inspect dealers subject to 
the rules of both self-regulatory organizations.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) of the Exchange Act \64\ requires that MSRB 
rules be designed not to impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. The MSRB has considered the economic impact of the proposed rule 
change and believes that the proposed rule change would not impose any 
unnecessary or inappropriate burden on competition, as the proposed 
rule change would align with the adoption of FINRA Rule 3110.18 
allowing remote office inspections by FINRA members, for a requisite 
period of time, by participating in the FINRA Pilot Program. In 
addition, the proposed rule change would be applied equally to all 
dealers that are FINRA-member dealers.\65\ Therefore, the MSRB believes 
the proposed rule change would not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.\66\
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    \64\ Id.
    \65\ As previously mentioned, the MSRB will consider amendments 
to MSRB Rule G-27 at a later date on whether the proposed rule 
change should be extended to other dealers under MSRB rules, such as 
bank dealers.
    \66\ 15 U.S.C. 78o-4(b)(2)(C).
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    In determining whether these standards have been met, the MSRB was 
guided by the MSRB's Policy on the Use of Economic Analysis in MSRB 
Rulemaking.\67\ In accordance with this policy, the MSRB has evaluated 
the potential impacts on competition of the proposed rule change. The 
proposed rule change would amend MSRB Rule G-27 to provide a mechanism 
for FINRA-member dealers to participate in the FINRA Pilot Program.\68\ 
The proposed rule change is intended to align MSRB Rule G-27 with the 
adopted FINRA Rule 3110.18, which established the FINRA Pilot Program, 
providing an option for FINRA-member dealers to fulfill their office 
inspection obligations by conducting inspections of some or all branch 
offices and locations remotely without an on-site visit to such offices 
or locations. The MSRB also believes the proposed rule change would be 
appropriate as some dealers' business model and work environment 
continue to evolve with ongoing technological advancements, and the 
shift to remote working may have accelerated since the COVID-19 
pandemic.
---------------------------------------------------------------------------

    \67\ See Policy on the Use of Economic Analysis in MSRB 
Rulemaking, available at https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking. In evaluating whether there was any burden 
on competition that is not necessary or appropriate in furtherance 
of the purposes of the Exchange Act, the MSRB was guided by its 
principles that required the MSRB to consider costs and benefits of 
a rule change, its impact on efficiency, capital formation and 
competition, and the main reasonable alternative regulatory 
approaches. For those rule changes which the MSRB files for 
immediate effectiveness under Section 19(b)(3)(A) of the Exchange 
Act (15 U.S.C. 78s(b)(3)(A)), while not subject to the policy, the 
MSRB usually focuses its examination exclusively on the burden of 
competition on regulated entities, but may also include any 
additional economic analysis that the MSRB believes may inform the 
rulemaking process based on the facts and circumstances.
    \68\ The proposed rule change would apply specifically to 
dealers that are also FINRA-member dealers.
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Benefits
    The MSRB believes that the proposed rule change would benefit 
FINRA-member dealers by offering a remote office inspection option to 
such eligible dealers, subject to certain conditions, while minimizing 
the potential of harm to issuers and investors who benefit from the 
current supervisory framework. Specifically, the MSRB believes that 
FINRA-member dealers would have sufficient capability in carrying out 
their office inspection duties remotely while minimizing the impact on 
the quality of office inspections. The proposed rule change would 
therefore lower costs for FINRA-member dealers that choose the remote 
office inspection option by participating in the FINRA Pilot Program. 
The MSRB has identified approximately 11,000 municipal branch offices, 
which are inclusive of single-person municipal branch offices.\69\ For 
all FINRA-member dealers, including but not limited to those with a 
significant number of single-person municipal branch offices, the 
benefits of participating in the FINRA Pilot Program include a 
reduction in travel time and expenses as well as the productivity 
gained from allowing FINRA-member dealers the flexibility of designing 
their own compliance protocol for on-site inspections.\70\ Relatedly, 
recent studies have shown that a reduction in travel time has been 
beneficial to maintaining employees, increasing productivity, and 
reducing costs.\71\
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    \69\ Based on registration data provided by FINRA, as of May 20, 
2024, the MSRB identified 11,139 municipal branch offices. These are 
locations where one or more associated persons are qualified as a 
municipal securities principal (Series 53), municipal fund 
securities limited principal (Series 51) or municipal securities 
representative (Series 52). The MSRB notes there is some double 
counting of municipal branch offices due to registration data 
provided by firms to FINRA listing a location twice as a municipal 
branch office.
    \70\ These benefits mirror those described in FINRA's Economic 
Impact Analysis as part of the Amendments to FINRA Rule 3110.18. See 
Exchange Act Release No. 97398 (April 28, 2023), 88 FR 28620, 28636-
28637 (May 4, 2023) (File No. SR-FINRA-2023-007).
    \71\ See Aksoy, C., et al. (2023), ``Time Savings When Working 
from Home,'' NBER Working Paper 30866, National Bureau of Economic 
Research (NBER), Cambridge, MA, https://www.nber.org/papers/w30866. 
In their paper, the authors identify that workers save an average of 
72 minutes a day working from home. Id. at 3. With the extra time at 
home, the authors state that approximately 40% of that time goes to 
additional work productivity. Id. at 3. See also Criscuolo, C., et 
al. (2021), ``The role of telework for productivity during and post-
COVID-19: Results from an OECD survey among managers and workers,'' 
OECD Productivity Working Papers, No. 31, OECD Publishing, Paris, 
https://doi.org/10.1787/7fe47de2-en (``The relationship between 
firm-level labour productivity and the adoption rate of telework 
(before and during the crisis) was found to be robustly positive and 
significant.''). Id. at 16-17.

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[[Page 49959]]

    In addition, even if FINRA-member dealers choose not to participate 
in the FINRA Pilot Program, such dealers would still benefit from the 
alignment of MSRB Rule G-27 with the recently adopted FINRA Rule 
3110.18. With an estimated 98% of MSRB registrants subject to FINRA's 
supervision rules, incongruity between MSRB Rule G-27 and adopted FINRA 
Rule 3110.18 would create confusion, uncertainty and an unnecessary 
burden for FINRA-member dealers and results in less operational 
efficiencies for such dealers. By eliminating potential areas of 
inconsistency between MSRB and FINRA rules, FINRA-member dealers would 
have a lower compliance burden and improved efficiency. A more 
efficient supervisory system for FINRA-member dealers may ultimately 
also benefit issuers and investors whom the rules are designed to 
protect, such as by ensuring dealers are able to focus time, attention, 
and resources on matters related to effecting transactions in municipal 
securities and advancing a fair and efficient market. The MSRB expects 
the benefits to accumulate over time.
Costs
    The MSRB expects that upfront costs would be minimal as it relates 
to municipal securities activities because it is expected that FINRA-
member dealers will also be reviewing policies and procedures for other 
financial products such as corporate bonds. The MSRB estimates that 
FINRA-member dealers would need to make a one-time revision to their 
policies and procedures in accordance with the proposed rule change, 
including accounting for a risk assessment, eligibility criteria and 
conditions, written supervisory procedures as well as an effective 
supervisory system. To clarify, the upfront costs to update policies 
and procedures and associated training are primarily applicable to 
FINRA-member dealers that elect to conduct remote office inspections, 
with such costs being proportionately higher for smaller rather than 
larger dealers. However, the MSRB believes the total upfront costs 
would still be manageable, with an estimated incremental amount 
totaling approximately $5,990 for participation in the FINRA Pilot 
Program for the three-year period, as shown in Table 1; therefore, the 
cost should not impose an onerous burden on these FINRA-member dealers 
that choose this option.\72\ The MSRB estimates that it would take an 
inhouse attorney six hours to revise applicable policies and procedures 
pertaining to the municipal securities activities of the FINRA-member 
dealer. The MSRB also estimates that FINRA-member dealers may incur 
fees associated with the engagement of outside counsel to assist with 
any preparation and review of new policies and procedures; the 
estimated time is three hours for such work. In addition, the MSRB 
estimates that a compliance attorney will require two hours of training 
on the new procedures.\73\ The MSRB believes the estimated one-time 
upfront cost would be offset by the cumulative compliance cost savings 
as a result of the consistency between MSRB Rule G-27 and FINRA Rule 
3110 over time, as well as the cumulative cost savings, as described 
above, from the utilization of remote office inspection if a FINRA-
member dealer chooses this option.\74\
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    \72\ This cost includes six hours for an in-house attorney to 
complete a revision of policies and procedures and three hours for 
an outside counsel to review any revisions. We estimate an in-house 
attorney's hourly rate as $540 ($540 x 6 hours = $3,240) for this 
work and outside counsel's hourly rate of $570 ($570 x 3 hours = 
$1,710). Lastly, we anticipate two hours for a compliance attorney 
to conduct training with an hourly rate of $520 ($520 x 2 hours = 
$1,040). In total, the MSRB estimates FINRA-member dealers will 
incur upfront costs totaling approximately $5,990 ($3,240 + $1,710 + 
$1,040 = $5,990) related to their participation in the FINRA Pilot 
Program for the three-year period.
    \73\ Id.
    \74\ For those FINRA-member dealers that opt into the FINRA 
Pilot Program, the change in process may impose additional costs on 
acquiring information technology compliance software and hardware 
upgrades to ensure adequate supervisory functions remotely. However, 
FINRA-member dealers likely made these technology upgrades and 
incurred cost in establishing supervisory controls appropriate to 
support mandatory work-from-home orders and shift to hybrid work 
arrangements during the COVID-19 pandemic. In addition, FINRA-member 
dealers that would opt for remote office inspections likely would do 
so for all securities rather than just for municipal securities; and 
therefore, would also opt into the FINRA Pilot Program for those 
asset classes as well. Therefore, the MSRB believes the incremental 
costs for upgrading the information technology would be negligible.
    \75\ The hourly rates data is gathered from the Commission's 
filing on ``Amendments Regarding the Definition of ``Exchange'' and 
``Alternative Trading Systems (ATSs) That Trade U.S. Treasury and 
Agency Securities, National Market System (NMS) Stocks, and Other 
Securities.'' See Exchange Act Release No. 94062 (January 26, 2022), 
87 FR 15496, 15624 (March 18, 2022) (File No. S7-02-22). The 
Commission's economic analysis utilizes the Securities Industry and 
Financial Markets Association, Management & Professional Earnings in 
the Securities Industry--2013 Report for the hourly rates of various 
financial industry market professionals. To compensate for 
inflation, the data reflects the 2024 hourly rate level after 
adjusting for the annual cumulative wage inflation rate of 37% 
between 2013 and 2023, and another 4% between 2023 and 2024. See The 
Federal Reserve Bank of St. Louis Employment Cost Index: Wages and 
Salaries Private Industry (available at https://fred.stlouisfed.org/series/ECIWAG). The number of hours for each task is based on the 
MSRB's internal estimate.

                     Table 1--Estimate of Incremental Costs Based on 2024 Hourly Rates \75\
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                         Cost components                            Hourly rate        hours       Cost per firm
----------------------------------------------------------------------------------------------------------------
Upfront Costs--Remote Supervision Pilot Program:
    (a) In-House Attorney Revision of Policies and Procedures...            $540             6.0           3,240
    (b) Outside Counsel Review..................................             570             3.0           1,710
    (c) Training................................................             520             2.0           1,040
                                                                 -----------------------------------------------
        Subtotal................................................  ..............  ..............           5,990
Annual Ongoing Costs For Firms Choosing the Remote Supervision
 Pilot Program:
    (a) Risk and Eligibility Requirement Assessment.............             520             3.0           1,560
    (b) Data Submission to FINRA................................             520             1.0             520
    (c) Continuing Education....................................             520             2.0           1,040
                                                                 -----------------------------------------------
        Subtotal................................................  ..............  ..............           3,120
----------------------------------------------------------------------------------------------------------------

    The costs of annual ongoing compliance with the proposed rule 
change would likely be incremental for FINRA-member dealers already 
adopting the FINRA Pilot Program for other securities classes, as these 
firms would already be complying, or in the process of complying, with 
the language of FINRA Rule 3110.18. For those

[[Page 49960]]

FINRA-member dealers that engage in municipal securities activities and 
that would choose to conduct remote office inspections by entering the 
FINRA Pilot Program in connection with discharging their supervisory 
activities under MSRB Rule G-27(d), the MSRB estimates about $3,120 
annually per FINRA-member dealer for ongoing compliance costs.\76\ 
These compliance costs include the incremental annual cost for FINRA-
member dealers to conduct the required risk assessment, submit the 
required data points to FINRA on a quarterly basis, provide continuing 
education, and ensure that it is in compliance with the eligibility 
requirements.\77\ Finally, the MSRB does not expect the proposed rule 
change would impose any cost on municipal entities or investors because 
FINRA-member dealers should realize cost savings resulting from greater 
operational efficiencies, which would offset the ongoing compliance 
costs related to complying with the FINRA Pilot Program.
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    \76\ FINRA-member dealers of various sizes may incur different 
amounts of ongoing costs. Therefore, the $3,120 annually per firm 
represents an estimate for a mid-sized firm (``mid-sized'' is 
defined by FINRA as a firm with 151-499 registered representatives).
    \77\ The MSRB currently estimates annual ongoing cost of six 
hours total for a risk and eligibility requirement assessment, data 
submission to FINRA on a quarterly basis and continuing education 
requirements. The MSRB estimates an hourly rate of $520 for a 
compliance attorney to complete an annual risk and eligibility 
requirement assessment in approximately three hours. Additionally, 
the MSRB estimates one hour to complete the data submission to FINRA 
by a compliance attorney. Finally, the MSRB estimates that any 
drafting of annual continuing education requirements would take 
approximately two hours for a compliance attorney to complete, 
summing to a total of $3,120 annually per FINRA-member dealer for 
ongoing compliance costs (i.e., 3 hours + 1 hour + 2 hours = 6 
hours) x hourly rate of $520 = $3,120.
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Effect on Competition, Efficiency, and Capital Formation
    The MSRB believes that the proposed rule change would neither 
impose a burden on competition nor hinder capital formation, as the 
proposed rule change is applicable to all eligible FINRA-member dealers 
and is not expected to significantly affect the protection of investors 
and issuers. While upfront costs would be relatively higher for 
smaller-size rather than larger-size FINRA-member dealers, the MSRB 
expects the total one-time upfront costs to be manageable for FINRA-
member dealers that elect to participate in the FINRA Pilot Program. 
The MSRB believes it is appropriate, in an environment with increased 
remote working personnel, to provide certain eligible FINRA-member 
dealers with the option for remote office inspection subject to certain 
conditions during the requisite time period by entering the FINRA Pilot 
Program. Since bank dealers are not covered in the proposed rule change 
for now, to the extent that some of those 18 bank dealers, as of 2023, 
would have wanted to avail themselves of conducting office inspections 
remotely, had the option been available to them, such bank dealers may 
be disadvantaged in their competition with other dealers. The MSRB, 
however, believes this disadvantage would be minimal because the MSRB 
understands through its outreach and engagement with some bank dealers 
that bank dealers generally have fewer OMSJs and municipal branch 
offices or locations than other dealers, so the use of a remote 
inspections pilot program may not be coveted for most bank dealers when 
weighing the called for processes and documentation requirements. The 
MSRB believes that the proposed rule change would improve the municipal 
securities market's operational efficiency and promote regulatory 
consistency. At present, the MSRB is unable to quantitatively evaluate 
the magnitude of the efficiency gains or losses, but believes the 
benefits accumulated over time would outweigh the upfront costs of 
revising policies and procedures and the annual ongoing costs of 
ensuring compliance.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were not directly solicited on the proposed rule 
change.\78\
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    \78\ Comments received in response to FINRA's recently adopted 
FINRA Pilot Program under FINRA Rule 3110.18 can be found at https://www.sec.gov/comments/sr-finra-2023-007/srfinra2023007.htm.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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 Exchange Act \79\ and 
Rule 19b-4(f)(6) \80\ thereunder. 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 Exchange Act.
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    \79\ 15 U.S.C. 78s(b)(3)(A).
    \80\ 17 CFR 240.19b-4(f)(6).
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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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please 
include File Number SR-MSRB-2024-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2024-05. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the MSRB. 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-MSRB-2024-05 and should 
be submitted on or before July 3, 2024.


[[Page 49961]]


    For the Commission, pursuant to delegated authority.\81\
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    \81\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-12794 Filed 6-11-24; 8:45 am]
BILLING CODE 8011-01-P