[Federal Register Volume 89, Number 236 (Monday, December 9, 2024)]
[Notices]
[Pages 97664-97673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28769]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101803; File No. SR-MIAX-2024-44]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Exchange Rule 1306 (Branch Offices) and
Exchange Rule 1308 (Supervision of Accounts) To Harmonize With FINRA
Rules
December 3, 2024.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 25, 2024, Miami International
Securities Exchange, LLC (``MIAX'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') a proposed rule
change as described in Items I and II below, which Items have been
prepared by the Exchange. 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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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to: (i) amend Rule 1306 (Branch Offices) to
adopt the definition used by Financial Industry Regulatory Authority,
Inc. (``FINRA'') of Office of Supervisory Jurisdiction (``OSJ''); (ii)
amend Rule 1308 (Supervision of Accounts) to adopt FINRA's inspection
requirement for non-branch location; (iii) harmonize Rule 1308
(Supervision of Accounts) with certain changes by FINRA to FINRA Rule
3110 to permit eligible Members \3\ to participate in FINRA's remote
inspections program (``FINRA Pilot Program''); \4\ and (iv) adopt
FINRA's Residential Supervisory Location (``RSL'') classification.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ See Securities Exchange Act Release No. 97398 (April 28,
2023), 88 FR 28620 (May 4, 2023) (``Remote Inspections Pilot Program
Proposal''); Securities Exchange Act Release No. 98982 (November 17,
2023), 88 FR 82464 (November 24, 2023) (``Remote Inspections Pilot
Program Approval Order'') (SR-FINRA-2023-007).
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The text of the proposed rule change is available on the Exchange's
website at https://www.miaxglobal.com/markets/us-options/miax-options/rule-filings, at MIAX'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 Exchange 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 Exchange 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 Exchange proposes to (i) amend Rule 1306 to adopt FINRA's
definition of OSJ; (ii) amend Rule 1308 to adopt FINRA's inspection
requirement for non-branch location; (iii) harmonize Rule 1308 with
certain changes by FINRA to FINRA Rule 3110 to permit eligible Members
to participate in FINRA's Remote Inspections Pilot Program; and (iv)
adopt FINRA's RSL classification. The proposed changes would harmonize
the Exchange's office and other location inspection rules with those of
FINRA and thus promote uniform inspection standards across the
securities industry resulting in less burdensome and more efficient
regulatory compliance for common members.\5\ Additionally, the proposed
changes would allow Members who participate in FINRA's Remote
Inspections Pilot Program to also satisfy the equivalent internal
inspections requirements set out in Rule 1308. The
[[Page 97665]]
Exchange notes that Exchange Rules 1306 and 1308 as proposed to be
amended by this filing, are incorporated by reference into the
rulebooks of the Exchange's affiliate MIAX PEARL, LLC (``MIAX Pearl''),
MIAX Emerald, LLC (``MIAX Emerald''), and MIAX Sapphire, LLC (``MIAX
Sapphire''). As such, the amendment to Exchange Rules 1306 and 1308
proposed herein will also apply to MIAX Pearl, MIAX Emerald, and MIAX
Sapphire members.
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\5\ Currently, all Exchange Members are also FINRA members.
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Proposal To Adopt FINRA's Definition of OSJ
The Exchange proposes to adopt paragraph (j) of Rule 1306 to adopt
FINRA's definition of OSJ. Currently, Exchange Rule 1306(a) only
requires Members to file with the Exchange and keep current a list of
each of its branch offices showing the location of each such office and
the name of the manager of each such office. FINRA Rule 3110.01
provides that a member's main office location is required to be
registered and designated as a branch office or OSJ if it meets the
definitions of a ``branch office'' or ``office of supervisory
jurisdiction'' as set forth in FINRA Rule 3110(f). The purpose of the
proposed change is to harmonize Exchange Rule 1306 with FINRA Rule
3110.01 to provide that both branch offices and OSJs will be subject to
the office registration requirements set forth in Exchange Rule
1306(a). The proposed Exchange Rule 1306(j) is substantively identical
to FINRA Rule 3110(f)(1). The proposed definition of OSJ defined in
Rule 1306(j) will read as follows:
``Office of Supervisory Jurisdiction'' means any office of a
member at which any one or more of the following functions take
place: (1) order execution or market making; (2) structuring of
public offerings or private placements; (3) maintaining custody of
customers' funds or securities; (4) final acceptance (approval) of
new accounts on behalf of the Member; (5) review and endorsement of
customer orders; (6) final approval of retail communications for use
by persons associated with the Member, pursuant to FINRA Rule
2210(b)(1), except for an office that solely conducts final approval
of research reports; or (7) responsibility for supervising the
activities of persons associated with the Member at one or more
other branch offices of the Member.
The Exchange proposes to add ``offices of supervisory
jurisdictions'' to Exchange Rule 1306(a) as follows:
Every Member approved to do options business with the public
under this Chapter shall file with the Exchange and keep current a
list of each of its branch offices and offices of supervisory
jurisdictions showing the location of each such office and the name
of the manager of each such office.
Additionally, the Exchange proposes to add ``OSJ'' to Exchange Rule
1308(d)(1) and its subparagraph (i) to provide that both branch offices
and OSJs that supervise one or more non-branch locations must be
inspected no less than once each calendar year. In the event that it
has been demonstrated to the satisfaction of the Exchange that because
of proximity, special reporting or supervisory practice, other
arrangements may satisfy this Rule's requirements for a particular
branch office or OSJ, the Member does not have inspect such office no
less than once every calendar year. The proposed Rule 1308(d)(1) is
substantively identical to FINRA Rule 3110(c)(1)(A). The purpose of the
proposed change is to harmonize Exchange Rule 1308(d) with FINRA Rule
3110(c), resulting in less burdensome and more efficient regulatory
compliance for common members. The proposed rule change would enable
Exchange Rule 1308 to continue to be incorporated into the agreement
between the Exchange and FINRA to allocate regulatory responsibility
for common rules (the ``17d-2 Agreement''), thereby facilitating
FINRA's performance of its regulatory performance on the 17d-2
Agreement.\6\
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\6\ See Securities Exchange Act Release No. 68363 (December 5,
2012), 77 FR 73711 (December 11, 2012) (File No. S7-966). The 17d-2
Agreement includes a certification by the Exchange that states that
the requirements contained in certain Exchange rules are identical
to, or substantially similar to, certain FINRA rules that have been
identified as comparable.
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Proposal To Adopt FINRA's Inspection Requirement for Non-Branch
Location
Next, the Exchange propose to amend Rule 1308(d)(3) to adopt
FINRA's inspection requirement for non-branch location. Exchange Rule
1308 sets forth the main requirements for inspections. An inspection of
an office or location must occur on a designated frequency. The
periodicity of the required inspection varies depending on the
classification of the location or the nature of the activities that
take place. Currently, Exchange Rule 1308(d) provides that each branch
office that supervises one or more non-branch locations must be
inspected no less often than once each calendar year; \7\ and every
branch office, without exception, must be inspected at least once every
three calendar-years.\8\ The Exchange proposes to amend Rule 1308(d)(3)
to provide that each non-branch office should be inspected on a regular
periodic schedule. The Member shall consider the nature and complexity
of the securities activities for which the location is responsible and
the nature and extent of contact with customers when establishing the
schedule. In addition, the Member should have written supervisory and
inspection procedures to set forth the schedule and an explanation
regarding how the Member determined the frequency of the examination.
FINRA Rule 3110(c) requires Members to inspect every branch office that
supervises one or more non-branch locations at least annually, every
branch office that does not supervise one or more non-branch locations
at least every three years, and every non-branch location on a regular
periodic schedule. The proposed Exchange Rule 1308(d)(3) is
substantively identical to FINRA Rule 3110(c)(1)(C). The purpose of the
proposed change is to harmonize Exchange Rule 1308(d) with FINRA Rule
3110(c), resulting in less burdensome and more efficient regulatory
compliance for common members and facilitating FINRA's performance of
its regulatory performance on the 17d-2 Agreement.\9\ The proposed
Exchange Rule 1308(d)(3) will read as follows:
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\7\ See Exchange Rule 1308(d)(1).
\8\ See Exchange Rule 1308(d)(2).
\9\ See supra note 6.
Each Member shall inspect on a regular periodic schedule every
non-branch location. In establishing such schedule, the Member shall
consider the nature and complexity of the securities activities for
which the location is responsible and the nature and extent of
contact with customers. The Member's written supervisory and
inspection procedures shall set forth the schedule and an
explanation regarding how the Member determined the frequency of the
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examination.
The Exchange proposes to amend the hierarchical headings in
Exchange Rule 1308 so that subparagraphs (d)(3)-(5) will be renumbered
as (d)(4)-(6). In addition, the Exchange proposes to amend proposed
renumbered subparagraph (d)(6) of Rule 1308 to replace certain internal
cross references to other paragraphs of Rule 1308 in light of the
hierarchical heading changes described above. In particular, the
Exchange propose to amend the cross references contained in proposed
renumbered subparagraph (d)(6) of Rule 1308 that are to subparagraphs
(d)(4) and (d)(5), to now to be subparagraphs (d)(5) and (d)(6),
respectively. The Exchange proposes to add the reference to
subparagraph (d)(3) in the sentence describing Member complying with
the requirements of the New York Stock Exchange or FINRA in proposed
renumbered Rule 1308(d)(4). With the proposed changes, proposed
[[Page 97666]]
renumbered Rule 1308(d)(4) will provide that a Member that complies
with requirements of the New York Stock Exchange or FINRA that are
substantially similar to the requirements in paragraphs (d)(1), (d)(2),
and (d)(3) of Rule 1308 as well as other related requirements in
paragraphs (e) and (f) of Rule 1308 will be deemed to have met
inspection requirements set forth in Rule 1308.
Proposal To Adopt FINRA Remote Inspections Pilot Program
The Exchange proposes to adopt subparagraph (d)(7) of Rule 1308,
which would provide that any Member that participates in the FINRA
Remote Inspections Pilot Program,\10\ thereby satisfying the internal
inspections requirements in FINRA Rule 3110(c), would also satisfy the
equivalent annual branch office inspections requirements in Exchange
Rule 1308(d). This proposed rule change would supplant Rule 1308(d)(5)
(to be renumbered as Rule 1308(d)(6)), which allowed Members to fulfill
any calendar year 2024 internal inspection obligations set forth in
Rule 1308(d)(5) (to be renumbered as Rule 1308(d)(6)) by conducting
remote inspections of the applicable branch offices \11\ or non-branch
locations.\12\ This temporary relief, which was analogous to relief
that FINRA provided for, automatically sunset on June 30, 2024.\13\ As
described below, adding proposed subparagraph (d)(7) of Rule 1308 would
harmonize the Exchange's annual branch office inspections obligations
for its Members with FINRA's comparable obligations for its members,
thereby avoiding confusion to Members with respect to the applicability
of participation in the FINRA Remote Inspections Pilot Program and
compliance with Exchange Rule 1308. Additionally, because the proposed
subparagraph (d)(7) of Rule 1308 would incorporate by reference FINRA
Rule 3110.18, this rule change would enable Exchange Rule 1308 to
continue to be incorporated into the 17d-2 Agreement.\14\
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\10\ See FINRA Rule 3110.18.
\11\ See Exchange Rule 1306(c).
\12\ See Exchange Rule 1308(d)(5) (to be renumbered as Rule
1308(d)(6)) (Temporary Relief to Allow Remote Inspections for
Calendar Years 2021, 2022, 2023, and Through the Earlier of the
Effective Date of the Remote Inspections Pilot Program or June 30,
2024).
\13\ See Id. The equivalent temporary relief offered by FINRA
also sunset on June 30, 2024. See FINRA Rule 3110.17
\14\ See supra note 6.
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Standards for Supervision of Remote Offices
The responsibility of firms to supervise their associated persons
is a critical component of broker-dealer regulation.\15\ Members must
supervise all of their associated persons, regardless of their
location, compensation or employment arrangement, or registration
status. Exchange Rule 1308(d), which is substantially identical to
FINRA Rule 3110(c), requires any Member, regardless of size or type, to
have a supervisory system for the activities of its associated persons
that is reasonably designed to achieve compliance with the applicable
securities laws and regulations and Exchange rules, and that sets forth
the minimum requirements for such supervisory system.\16\ The internal
inspection obligation under Exchange Rule 1308(d) and FINRA Rule
3110(c) is one component of such system.
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\15\ See generally SEC Division of Market Regulation, Staff
Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004)
(``SLB 17'') (SEC guidance on remote office supervision), available
at https://www.sec.gov/interps/legal/mrslb17.htm; and Regulatory
Notice 11-54 (November 2011) (``Notice 11-54'') (joint SEC and FINRA
guidance on effective policies and procedures for broker-dealer
branch inspections).
\16\ See Exchange Rule 1308(d).
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Exchange Rule 1308(d), as amended herein, sets forth three main
requirements for inspections. First, an inspection of an office or
location must occur on a designated frequency. The periodicity of the
required inspection varies depending on the classification of the
location or the nature of the activities that take place: each branch
office that supervises one or more non-branch locations must be
inspected no less often than once each calendar year; \17\ and every
branch office, without exception, must be inspected at least once every
three calendar-years.\18\ Second, written reports reflecting the
results of such inspections are to be maintained with the Member for
the longer of three years or until the next branch office
inspection.\19\ Third, to prevent compromising the effectiveness of
inspections due to conflicts of interest, the rule requires a Member to
ensure that the person conducting the inspection is independent of the
direct supervision and control of the branch office in question (i.e.,
not the branch office manager, or any person who directly or indirectly
reports to such manager, or any person to whom such manager directly
reports).\20\
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\17\ See Exchange Rule 1308(d)(1).
\18\ See Exchange Rule 1308(d)(2).
\19\ Id.
\20\ Id.
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Further, Rule 1306(i) sets out factors that should be considered
when developing risk-based sampling techniques to determine the
appropriateness of on-site for cause reviews of selected residences and
other remote locations shall include, but not be limited to, the
following: (1) the firm's size; (2) the firm's organizational
structure; (3) the scope of business activities; (4) the number and
location of offices; (5) the number of associated persons assigned to a
location; (6) the nature and complexity of products and services
offered; (7) the volume of business done; (8) whether the location has
a Series 9/10-qualified person on-site; (9) the disciplinary history of
the registered persons or associated persons, including a review of
such person's customer complaints and Forms U4 and U5; and (10) the
nature and extent of a registered person's or associated person's
outside business activities, whether or not related to the securities
business. Rule 1306(h) further states that the written supervisory
procedures pertaining to supervision of sales activities conducted at
the associated person's primary residence and other remote locations
must be designed to assure compliance with applicable securities laws
and regulations and with Exchange Rules.
Notably, all of the above requirements about supervision and
inspections of branch offices reflected a business environment in which
Members conducted in-person inspections of all of their offices.\21\
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\21\ See SLB 17 and Notice 11-54, supra note 15.
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FINRA's Recent Attempts To Change the In-Person Inspection Requirements
of Offices of Supervisory Jurisdiction, Branch Offices, and Non-Branch
Locations
In the Remote Inspections Pilot Program Proposal, FINRA described
its efforts during the past several years to offer its members the
option of remotely conducting internal inspections of their OSJs,
branch offices, and non-branch locations.\22\ As stated therein, FINRA
believed that as more recordkeeping moved from paper to electronic
records, and as more meetings were conducted virtually using platforms
such as Zoom and WebEx, the burden on FINRA members of conducting in-
person inspections for all their remote office locations became harder
to justify.\23\
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\22\ See Remote Inspections Pilot Program Proposal, supra note
4.
\23\ See Id.
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Thus, when the COVID-19 pandemic required many securities industry
professionals to work from home,
[[Page 97667]]
FINRA implemented several forms of regulatory relief to its members,
including introducing FINRA Rule 3110.17, which the Exchange also
introduced as subparagraph (d)(5) of Exchange Rule 1308 (to be
renumbered as Rule 1308(d)(6)), to permit remote internal inspections
of their branch offices.
The pandemic accelerated the industry's adoption of a broad remote
work environment and the Exchange recognizes that the pandemic has
profoundly changed attitudes on where work can occur. As a result of
this change many firms have adopted, in varying scale, hybrid work
models involving personnel who are working at least part time from
alternative work locations (e.g., private residences). As part of an
effort to modernize its rules to reflect evolving technologies and
business models, in April 2023, FINRA filed the Remote Inspections
Pilot Program Proposal with the Securities and Exchange Commission
(``SEC'') to establish a voluntary, three-year remote inspections pilot
program that would allow eligible firms to conduct inspections of all
or some offices or locations, remotely, subject to the specified terms
therein.\24\ The SEC approved the FINRA Remote Inspection Pilot Program
Proposal in November 2023,\25\ and FINRA commenced the pilot program on
July 1, 2024.\26\
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\24\ See Id.
\25\ See Remote Inspections Pilot Program Approval Order, supra
note 4.
\26\ See FINRA Regulatory Notice 24-02.
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FINRA's Remote Inspections Pilot Program
FINRA's Remote Inspection Pilot Program builds on the terms of the
temporary relief in FINRA Rule 3110.17, while requiring members to
provide even more information about their remote inspections to allow
FINRA to assess the overall impact and effectiveness of remote
inspections.\27\ The pilot program is designed to provide broader
systemized information to supplement the information obtained through
the FINRA examination process in an environment where offices and
locations were closed. The information firms would be required to
produce as a pilot program participant will help FINRA more accurately
assess the overall impact and effectiveness of remote inspections.\28\
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\27\ See Remote Inspections Pilot Program Proposal, supra note
4.
\28\ See Id.
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FINRA's Remote Inspection Pilot Program includes, among other
things, the following requirements for participating firms:
Risk Assessment. Prior to electing a remote inspection for
an office or location, participating firms must develop a reasonable
risk-based approach to using remote inspections and conduct and
document a risk assessment for that office or location.\29\
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\29\ See FINRA Rule 3110.18(b).
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Written Supervisory Procedures for Remote Inspections.
Participating firms must establish, maintain, and enforce written
procedures that are reasonably designed for conducting remote
inspections and reasonably designed to achieve compliance with
applicable securities laws and regulations.\30\
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\30\ See FINRA Rule 3110.18(c).
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Effective Supervisory System. Participating firms must
have an effective supervisory system for remote inspections that will
be held to the same standards of review (set forth under FINRA Rule
3110.12). Where a member's remote inspection of an office or location
identifies any ``red flags,'' the member 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.\31\
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\31\ See FINRA Rule 3110.18(d).
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Documentation Requirement. Participating firms must
maintain and preserve a centralized record for each of the Pilot Years
specified in the pilot program that separately identifies: (1) all
offices or locations that were inspected remotely; and (2) any offices
or locations for which the member determined to impose additional
supervisory procedures or more frequent monitoring, as provided in
FINRA Rule 3110.18(d). A member's documentation of the results of a
remote inspection for an office or location must 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.\32\
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\32\ See FINRA Rule 3110.18(e).
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Firm Level Requirements. Participating firms must meet
certain firm- level eligibility requirements to participate in the
program set forth in FINRA Rule 3110.18(f)(1). For example, a firm
cannot participate if it is designated as: (i) Restricted Firm under
FINRA Rule 4111 or (ii) a Taping Firm under FINRA Rule 3170.
Additionally, firms with suspended or new (effective less than 12
months) FINRA memberships or that have been found by the SEC or FINRA
to have violated FINRA Rule 3110(c) are ineligible to participate.
Participating firms must also comply with firm- level conditions to
participate in the program. For example, a firm must have a
recordkeeping system that keeps records current and promptly
accessible, and that does not maintain physical or electronic records
at the location subject to remote inspection. Additionally,
participating firms must have firm-wide tools such as electronic
recordkeeping systems, system security tools such as secure network
connections and effective cybersecurity protocols, and tools
specifically applied to each office or location based on the activities
of associated persons, products offered, or any restrictions on the
activity of the office or location.\33\
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\33\ See FINRA Rule 3110.18(f).
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Location Level Requirements. Participating firms must
exclude from participating in the program any locations that do not
meet the location level eligibility criteria set forth in FINRA Rule
3110.18(g)(1) (e.g., the location includes: (i) persons subject to a
disciplinary action, a statutory disqualification, or a mandated
heightened supervisory plan; (ii) persons engaged in proprietary
trading; or (iii) the handling of customer funds or securities).
Additionally, eligible locations must use the firm's electronic
communication system and may not maintain any original copies of books
or records at the location.\34\
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\34\ See FINRA Rule 3110.18(g).
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Data and Information Collection Requirement. Participating
firms must collect and on a quarterly basis produce to FINRA data
consisting of separate counts for OSJs, supervisory branch offices,
non-supervisory branch offices, and non-branch locations. This data
must include information about the number of remote inspections
conducted and any significant findings. Firms shall establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the data collection and transmission
requirements.\35\
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\35\ See FINRA Rule 3110.18(h).
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Election to Participate in Remote Inspections Pilot
Program. Participating firms must opt-in to the pilot program in a
manner specified by FINRA.\36\
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\36\ See FINRA Rule 3110.18(i).
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Failure to Satisfy Conditions and Determination of
Ineligibility. Participating firms that fail to satisfy terms of the
Remote Inspections Pilot Program will be ineligible to participate in
the pilot program and return to
[[Page 97668]]
conducting only on-site inspections.\37\ FINRA may also make a
determination to revoke a member's eligibility to participate if FINRA
finds it to be in the public interest.\38\
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\37\ See FINRA Rule 3110.18(j).
\38\ See FINRA Rule 3110.18(k).
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Definitions of Pilot Year periods. Includes clarifications
that Pilot Year 1 is the second half of 2024, and Pilot Year 4 is the
first half of 2027.\39\
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\39\ See FINRA Rule 3110.18(l).
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Proposal
The Exchange now proposes to adopt subparagraph (d)(7) of Exchange
Rule 1308. This proposed new paragraph reads as follows:
Members that are obligated to conduct an inspection of an office
of supervisory jurisdiction, branch office or non-branch location
pursuant to, as applicable, Rule 1308(d)(1), (2), and (3) may
satisfy such obligation by participating in the FINRA Remote
Inspections Pilot Program, as set forth in FINRA Rule 3110.18. The
FINRA Remote Inspections Pilot Program shall cover required
inspections of such offices or locations for a period of three years
starting on [effective date] (``pilot period''), and such pilot
period shall expire on July 1, 2027. If the pilot period is not
extended, this subparagraph will automatically sunset on July 1,
2027. Members will not be able to participate in the FINRA Remote
Inspections Pilot Program after such date.\40\
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\40\ Proposed Exchange Rule 1308(d)(6).
As stated in proposed new Exchange Rule 1308(d)(7), any Member that
participates in the FINRA Remote Inspections Pilot Program, thereby
satisfying the annual branch office inspections requirements in FINRA
Rule 3110(c), will satisfy the equivalent annual branch office
inspections requirements in Exchange Rule 1308(d).
The Exchange is not proposing to add the entire FINRA Remote
Inspections Pilot Program to its rules, because it would be
unnecessarily duplicative and burdensome for Members to submit the data
and information required as part of the Remote Inspections Pilot
Program to both the Exchange and FINRA.\41\ The Exchange understands
that adopting proposed paragraph (d)(7) of Exchange Rule 1308 would
update Rule 1308 so that it remains substantially similar to FINRA Rule
3110, such that they remain common rules subject to the 17d-2
Agreement.\42\ As a result, regulatory responsibility for Exchange Rule
1308(d) would continue to be allocated to FINRA.
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\41\ Pursuant to this proposed rule change, Members will be
required to collect and on a quarterly basis produce to FINRA data
regarding its participation in the Remote Inspections Pilot Program.
See FINRA Rule 3110.18(h). But Members will not be required to
produce that information directly to the Exchange.
\42\ See supra note 6.
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As noted above, all Members were temporarily eligible to conduct
remote office inspections until June 30, 2024. This proposed rule
change would allow those Members who have enrolled in FINRA's Remote
Inspections Pilot Program to continue to use remote inspections as part
of an effective supervisory system.\43\ The Exchange believes this
Remote Inspections Pilot Program is a reasonable alternative for firms
to fulfill their Rule 1308(d) obligations while permitting FINRA to
collect data as the regulatory authority in this area under the 17d-2
Agreement to assess the efficacy and long-term viability of a permanent
remote office inspections program. The Exchange emphasizes that the
inspection requirement is one aspect of a firm's overall supervisory
system, and that the inspection, whether done in accordance with the
FINRA Remote Inspections Pilot Program, or on-site, would be held to
the existing standards of review under Exchange Rule 1308(d).\44\
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\43\ The Exchange notes that any inspections conducted by its
Members in the brief period between July 1, 2024 and the effective
date of this filing will not satisfy Exchange Rule 1308(d), but
believes this will not be an issue for its Members because the
remote inspections process outlined in the pilot program is an
ongoing process that cannot be completed in the few days between the
start of the FINRA's pilot program and the effectiveness of this
rule filing.
\44\ Those standards provide, in part that based on the factors
set forth under Exchange Rule 1308(d)(6)(ii), Members ``may need to
provide for more frequent monitoring or oversight of that office or
location.''
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Adopt FINRA's RSL Classification
The Exchange proposes to adopt paragraph (d)(8) of Rule 1308, which
would allow a location that is the private residence of a person
associated with a Member where supervisory activities are conducted,
including those described in proposed Rule 1306(j)(4) through (7) or
Rule 1306(c)(2), that satisfies the conditions for designation as RSL
set forth in FINRA Rule 3110.19 to also be considered a non-branch
location (i.e., an unregistered office) for those activities under the
Exchange rules. Without this proposed rule change, any private
residence at which a person associated with a member conducts
supervisory activities is subject to registration, an annual inspection
and, in some cases, additional licensing requirements.\45\ As described
below, adding proposed paragraph (d)(8) of Rule 1308 would harmonize
the Exchange's internal inspections obligations for its Members with
FINRA's comparable obligations for its members, thereby avoiding
confusion to Members with respect to the applicability of FINRA's new
RSL designation with respect to compliance with Rule 1308(d).\46\
Additionally, because proposed paragraph (d)(8) of Rule 1308 would
incorporate by reference FINRA Rule 3110.19, this rule change would
enable Exchange Rule 1308 to continue to be incorporated into the 17d-2
agreement.\47\
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\45\ See Exchange Rules 1306(d) and 1308(d)(1).
\46\ The Exchange notes that all Members are currently FINRA
members.
\47\ See supra note 6.
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Background
Early in 2020, the COVID-19 pandemic prompted FINRA to provide
temporary relief to member firms from certain regulatory requirements
to address the public health crisis.\48\ As mentioned above, FINRA
subsequently adopted temporary relief to allow remote inspections of an
OSJ, branch office, or non-branch location for calendar years 2020 and
2021; \49\ FINRA extended the temporary relief several times to include
calendar years 2022, 2023, and the first half of 2024.\50\ The
Exchange, following FINRA, offered its Members the same temporary
relief to allow remote inspections of OSJs, branch offices, and non-
branch locations for calendar years 2021, 2022, 2023, and until June
30, 2024.\51\ FINRA
[[Page 97669]]
replaced the temporary remote inspections relief with the Remote
Inspections Pilot Program \52\ that impacts the internal inspections
requirements of FINRA Rule 3110(c); the Exchange proposes to amend its
supervision rules such that any Member that participates in the FINRA
pilot shall be deemed to satisfy the equivalent internal inspection
requirements in Exchange Rule 1308(d) as above.
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\48\ Among the temporary regulatory relief provided, FINRA
adopted relief pertaining to branch office registration requirements
through Form BR (Uniform Branch Office Registration Form) and FINRA
Rule 3110(c) inspection requirements. Specifically, FINRA
temporarily suspended the requirement for member firms to submit
branch office applications on Form BR for any newly opened temporary
office locations or space-sharing arrangements established as a
result of the pandemic. See Regulatory Notice 20-08 (March 2020).
With respect to inspection obligations, FINRA adopted temporary Rule
3110.16 that provided additional time for member firms to complete
their calendar year 2020 inspection obligations. See Securities
Exchange Act Release No. 89188 (June 30, 2020), 85 FR 40713 (July 7,
2020) (SR-FINRA-2020-019).
\49\ See Securities Exchange Act Release No. 90454 (November 18,
2020), 85 FR 75097 (November 24, 2020) (SR-FINRA-2020-040).
\50\ See Securities Exchange Act Release No. 96241 (November 4,
2022), 87 FR 67969 (November 10, 2022) (SR-FINRA-2022-030);
Securities Exchange Act Release No. 93002 (September 15, 2021), 86
FR 52508 (September 21, 2021) (SR-FINRA-2021-023); Securities
Exchange Act Release No. 94018 (January 20, 2022), 87 FR 4072
(January 26, 2022) (SR-FINRA-2022-001); and Securities Exchange Act
Release No. 98560 (September 27, 2023), 88 FR 68258 (October 3,
2023) (SR-FINRA-2023-012).
\51\ See Securities Exchange Act Release Nos. 90937 (January 15,
2021), 86 FR 6944 (January 25, 2021) (SR-MIAX-2021-01) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Exchange Rule 1308, Supervision of Accounts, To Adopt
Temporary Rules To Extend the Time by Which Members Must Complete
Their Branch Office Inspections for the Calendar Year 2020 and To
Provide Temporary Remote Inspection Relief for Their Office
Inspections for Calendar Years 2020 and 2021); 94251 (February 15,
2022), 87 FR 9764 (February 22, 2022) (SR-MIAX-2022-09) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change by
Miami International Securities Exchange, LLC To Amend Exchange Rule
1308, Supervision of Accounts); 96867 (February 9, 2023), 88 FR 9919
(February 15, 2023) (SR-MIAX-2023-04) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 1308, Supervision of Accounts); and 99548 (February 15, 2024),
89 FR 13386 (February 22, 2024) (SR-MIAX-2024-10) (Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend
Exchange Rule1308 To Extend the Temporary Remote Inspection Relief
for Members Through June 30, 2024).
\52\ See FINRA Rule 3110.18.
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In response to the pandemic, many private and government employers
closed their offices and their employees continued with their work from
alternative locations such as private residences. The Exchange, like
FINRA, believes this model will endure, irrespective of the state of
the pandemic. The pandemic accelerated reliance on technological
advances in surveillance and monitoring capabilities and prompted
significant changes in lifestyles and work habits, including the
growing expectation for workplace flexibility. Moreover, the technology
advancements that facilitated the transition to working outside the
conventional office setting on a broad scale have not only effected a
profound change in lifestyle and workplace practices for member firms,
but provided SROs such as FINRA and the Exchange an opportunity to
consider aspects of their supervision rules that may benefit from
modernization.\53\ As such, the Exchange, like FINRA, believes measured
changes to its regulatory approach would allow firms to effectively and
more efficiently carry out their supervisory responsibilities to review
the activities of each office or location while preserving investor
protections.
---------------------------------------------------------------------------
\53\ See Securities Exchange Act Release No. 97237 (March 31,
2023), 88 FR 20568 n. 8 (April 6, 2023) (SR-FINRA-2023-006) (``FINRA
RSL Proposal'') (describing FINRA's ``practice of periodically
reviewing its rules to ensure they continue to promote their
intended investor protection objectives in a manner that is
effective and efficient, without imposing undue burdens,
particularly in light of technological, industry and market
changes.'')
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Requirements To Register and Inspect Offices
Exchange Rule 1308 requires a Member, regardless of size or type,
to have a supervisory system for the activities of its associated
persons. Proposed Exchange Rule 1306(a) would set forth the minimum
requirements of a Member's supervisory system that includes registering
a location as an OSJ or branch office that meets the definitions under
paragraph (c) and proposed paragraph (j) of Exchange Rule 1306.
Proposed Exchange Rule 1308(d) would require Members to inspect all
offices and locations. The proposed rule would categorize offices or
locations as an OSJ or supervisory branch office, a non-supervisory
branch office, or a non-branch location.\54\ The requirements to
register, inspect and have a principal on-site vary based on the
categorization. Specifically, proposed Rule 1306(a) would require the
registration as an OSJ or branch office of each location, that meets
their respective definition under paragraph (c) and proposed paragraph
(j) of Exchange Rule 1306, as described in more detail below.\55\
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\54\ See proposed Exchange Rules 1308(d)(1), (2), and proposed
paragraph (3).
\55\ See Exchange Rule 1306(a).
---------------------------------------------------------------------------
An OSJ is a type of branch office. The Exchange defines a ``branch
office'' as ``any location where one or more associated persons of a
Member regularly conduct the business of effecting any transactions in,
or inducing or attempting to induce the purchase or sale of any
security, or is held out as such[.]'' \56\ In addition, any location
that is responsible for supervising the activities of persons
associated with a Member at one or more non-branch locations of such
Member is considered to be a branch office.\57\ A location registered
as a branch office must file with the Exchange and keep current a list
of each of its branch offices showing the location of each such office
and the name of the manager of each such office,\58\ and is subject to
an inspection at least every three years, unless it is a supervisory
branch office in which case it is subject to at least an annual
inspection.\59\
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\56\ See Exchange Rule 1306(c).
\57\ See Exchange Rule 1306(d).
\58\ See Exchange Rule 1306(a).
\59\ See proposed Exchange Rules 1308(d)(1) and (2).
---------------------------------------------------------------------------
Depending upon the functions occurring at a branch office, it may
be further classified as an OSJ. As described above, proposed paragraph
(j) of Rule 1306 would define as any office of a member at which any
one or more of the following functions take place: (1) order execution
or market making; (2) structuring of public offerings or private
placements; (3) maintaining custody of customers' funds or securities;
(4) final acceptance (approval) of new accounts on behalf of the
Member; (5) review and endorsement of customer orders; (6) final
approval of retail communications for use by persons associated with
the Member, pursuant to FINRA Rule 2210(b)(1), except for an office
that solely conducts final approval of research reports; or (7)
responsibility for supervising the activities of persons associated
with the Member at one or more other branch offices of the Member.\60\
Under the proposed rule change, each OSJ would need to be inspected at
least annually.\61\
---------------------------------------------------------------------------
\60\ See proposed Exchange Rules 1306 (j)(1)-(7).
\61\ See proposed Exchange Rule 1308(d)(1).
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However, subject to specified conditions, an office or location may
be deemed a ``non-branch location,'' and excluded from registration as
a branch office. Currently, Exchange Rule 1306(c) sets forth seven
exclusions--often referred to as unregistered offices or non-branch
locations--of which two pertain to residential locations.\62\ One such
exclusion appears under Exchange Rule 1306(c)(2) and exempts from
registration as a branch office an associated person's primary
residence subject to the following express conditions: (1) only one
associated person, or multiple associated persons who reside at that
location and are members of the same immediate family, conduct business
at the location; (2) the location is not held out to the public as an
office and the associated person does not meet with customers at the
location; (3) neither customer funds nor securities are handled at that
location; (4) the associated person is assigned to a
[[Page 97670]]
designated branch office, and such designated branch office is
reflected on all business cards, stationery, retail communications and
other communications to the public by such associated person; (5) the
associated person's correspondence and communications with the public
are subject to all supervisory provisions of the Exchange's Rules; (6)
electronic communications (e.g., email) are made through the Member's
electronic system; (7) all orders are entered through the designated
branch office or an electronic system established by the Member that is
reviewable at the branch office; (8) written supervisory procedures
pertaining to supervision of sales activities conducted at the
residence are maintained by the Member; and (9) a list of the residence
locations is maintained by the Member (``primary residence
exclusion'').\63\ The second exclusion that pertains to a residential
location appears under Rule 1306(c)(3) is any location, other than a
primary residence, that is used for securities business for less than
30 business days in any one calendar year, provided that the Member
complies with the provisions of (ii) through (viii) of Exchange Rule
1306(c) (2) (``non-primary residence exclusion'').\64\ In general, the
non-primary residence exclusion typically refers to a vacation or
second home.\65\ Under the proposed rule change, a non-branch location
would need to be inspected on a periodic schedule, presumed to be at
least every three years.\66\
---------------------------------------------------------------------------
\62\ See generally Rule 1306(c)(1) and Rule 1306(c)(4) (7)
which, in addition to the primary residence and the non-primary
residence exclusions that are further described, excludes the
following from the definition of ``branch office'': (1) any location
that is established solely for customer service or back office type
functions where no sales activities are conducted and that is not
held out to the public as a branch office; (2) any office of
convenience, where associated persons occasionally and exclusively
by appointment meet with customers, which is not held out to the
public as an office; (3) any location that is used primarily to
engage in non-securities activities and from which the associated
person(s) effects no more than 25 securities transactions in any one
calendar year; provided that any retail communication identifying
such location also sets forth the address and telephone number of
the location from which the associated person(s) conducting business
at the non-branch locations are directly supervised; (4) the Floor
of a registered national securities exchange where a member conducts
a direct access business with public customers; or (5) a temporary
location established in response to the implementation of a business
continuity plan.
\63\ See Exchange Rule 1306(c)(2)(i)-(ix). The primary residence
exclusion is also set forth in FINRA Rule 3110(f)(2)(A)(ii).
\64\ See Exchange Rule 1306(c)(3).
\65\ See NASD [FINRA] Notice to Members 06-12 (March 2006).
\66\ See proposed Exchange Rule 1308(d)(3).
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Notwithstanding either of these two residential exclusions or the
other exclusions listed under Exchange Rule 1306(c)(1),\67\ a primary
or non-primary residence location that is responsible for either the
supervisory activities set forth in the OSJ definition or for
supervising the activities of persons associated with the Member at one
or more non-branch locations of the Member is considered an OSJ or
(supervisory) branch office, respectively.\68\ Consequently, such
residential supervisory offices would be subject to registration, an
annual inspection and, in some cases, additional licensing
requirements.\69\
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\67\ See generally Exchange Rule 1306(c)(1) and Exchange Rules
1306(c)(4)-(7).
\68\ See proposed Exchange Rules 1306(j)(4)-(7).
\69\ See proposed Exchange Rule 1308(d)(1) and Exchange Rule
1306(d).
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FINRA Residential Supervisory Location Rule
Effective June 1, 2024, FINRA implemented a rule change that
establishes a new RSL designation for a private residence at which an
associated person engages in specified supervisory activities, subject
to specified investor protection safeguards and limitations.\70\ This
new non-branch location designation targets the subset of residential
locations that have many of the attributes contained in the primary
residence exclusion, but must be registered as an OSJ or branch office
because of the supervisory functions taking place there.
---------------------------------------------------------------------------
\70\ See FINRA Regulatory Notice 24-02.
---------------------------------------------------------------------------
As described in the FINRA RSL Proposal,\71\ the definition of an
RSL is based largely on several existing aspects of FINRA Rule 3110(f)
(and therefore on the functionally identical to Exchange Rule 1306). In
particular, the RSL definition incorporates the existing supervisory
functions appearing in the OSJ definition (FINRA Rule 3110(f)(1)) and
branch office definition (FINRA Rule 3110(f)(2)(A)) with the existing
residential exclusions set forth in the branch office definition to
classify an RSL as a non-branch location. Under current Exchange rules,
a private residence at which these supervisory functions occur must be
registered as a branch office under Exchange Rule 1306(d), and
inspected at least annually under proposed Exchange Rule 1308(d)(1). By
treating such location as a non-branch location, the private residence
would become subject to inspections on a regular periodic schedule
under proposed Exchange Rule 1308(d)(3).\72\
---------------------------------------------------------------------------
\71\ See Securities Exchange Act Release No. 97237 (March 31,
2023), 88 FR 20568 n. 8 (April 6, 2023) (SR-FINRA-2023-006) (``FINRA
RSL Proposal'').
\72\ See proposed Exchange Rule 1308(d)(3).
---------------------------------------------------------------------------
FINRA Rule 3110.19 incorporates some existing safeguards and
limitations members must already satisfy to rely on the primary
residence exclusion.\73\ As described in the FINRA RSL Proposal, FINRA
intends for the terms underlying the RSL designation to be interpreted
consistently with their meaning in FINRA Rule 3110(f) and existing
related guidance.\74\ The requirements for designation of a location as
an RSL, which are set forth in FINRA Rule 3110.19, include the
following key elements:
---------------------------------------------------------------------------
\73\ See FINRA Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f., and
i.
\74\ See, e.g., NASD [FINRA] Notice to Members 06-12 (March
2006).
---------------------------------------------------------------------------
A location where supervisory activities are conducted
shall be considered for those activities a non-branch location provided
that: \75\
---------------------------------------------------------------------------
\75\ See FINRA Rule 3110.19(a).
---------------------------------------------------------------------------
[cir] only one associated person (or members of the same immediate
family) may conduct business at the location; \76\
---------------------------------------------------------------------------
\76\ See FINRA Rule 3110.19(a)(1).
---------------------------------------------------------------------------
[cir] the location is not held out to the public as an office: \77\
---------------------------------------------------------------------------
\77\ See FINRA Rule 3110.19(a)(2).
---------------------------------------------------------------------------
[cir] the associated person does not meet with customers or
prospective customers at the location; \78\
---------------------------------------------------------------------------
\78\ See FINRA Rule 3110.19(a)(3).
---------------------------------------------------------------------------
[cir] any sales activity that takes place at the location complies
with the conditions set forth under FINRA Rule 3110(f)(2)(A)(ii) (the
primary residence exclusion \79\) or FINRA Rule 3110(f)(2)(A)(iii) (the
non-primary residence exclusion; \80\) \81\
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\79\ See Exchange Rule 1306(c)(2)(i)-(ix).
\80\ See Exchange Rule 1306(c)(3).
\81\ See FINRA Rule 3110.19(a)(4).
---------------------------------------------------------------------------
[cir] neither customer funds nor securities are handled at that
location; \82\
---------------------------------------------------------------------------
\82\ See FINRA Rule 3110.19(a)(5).
---------------------------------------------------------------------------
[cir] the associated person is assigned to a designated branch
office, and such designated branch office is reflected on all business
cards, stationery, retail communications and other communications to
the public by such associated person; \83\
---------------------------------------------------------------------------
\83\ See FINRA Rule 3110.19(a)(6).
---------------------------------------------------------------------------
[cir] the associated person's correspondence and communications
with the public are subject to the firm's supervision in accordance
with FINRA's supervision rule; \84\
---------------------------------------------------------------------------
\84\ See FINRA Rule 3110.19(a)(7).
---------------------------------------------------------------------------
[cir] the associated person's electronic communications are made
through the member's electronic system; \85\
---------------------------------------------------------------------------
\85\ See FINRA Rule 3110.19(a)(8).
---------------------------------------------------------------------------
[cir] the member must have a recordkeeping system to make and keep
current, and preserve records required to be made and kept current, and
preserved under applicable securities laws and regulations, FINRA
rules, and the member's own written supervisory procedures under Rule
3110; such records are not physically or electronically maintained and
preserved at the office or location; and the member has prompt access
to such records; \86\ and
---------------------------------------------------------------------------
\86\ See FINRA Rule 3110.19(a)(9).
---------------------------------------------------------------------------
[cir] the member must determine that its surveillance and
technology tools are appropriate to supervise the types of risks
presented by each Residential Supervisory Location, and these tools may
include but are not limited to: firm-wide tools such as, electronic
recordkeeping system; electronic surveillance of email and
correspondence; electronic trade
[[Page 97671]]
blotters; regular activity-based sampling reviews; and tools for visual
inspections; tools specific to the RSL based on the activities of
associated person assigned to the location, products offered,
restrictions on the activity of the RSL; and system tools such as
secure network connections and effective cybersecurity protocols.\87\
---------------------------------------------------------------------------
\87\ See FINRA Rule 3110.19(a)(10).
---------------------------------------------------------------------------
FINRA members shall not be eligible to designate an office
or location as an RSL if, among other things, the FINRA member is
designated as: (i) Restricted Firm under FINRA Rule 4111 or (ii) a
Taping Firm under FINRA Rule 3170. Additionally, firms with suspended
or new (effective less than 12 months) FINRA memberships or that have
been found within the past three years by the SEC or FINRA to have
violated FINRA Rule 3110(c) are ineligible to participate.\88\
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\88\ See FINRA Rule 3110.19(b).
---------------------------------------------------------------------------
An office or location shall not be eligible for
designation as an RSL if one or more associated persons at such office
or location: \89\
---------------------------------------------------------------------------
\89\ See FINRA Rule 3110.19(c).
---------------------------------------------------------------------------
[cir] is a designated supervisor who has less than one year of
direct supervisory experience with the member, or an affiliate or
subsidiary of the member that is registered as a broker-dealer or
investment adviser; \90\
---------------------------------------------------------------------------
\90\ See FINRA Rule 3110.19(c)(1).
---------------------------------------------------------------------------
[cir] is functioning as a principal for a limited period in
accordance with FINRA Rule 1210.04; \91\
---------------------------------------------------------------------------
\91\ See FINRA Rule 3110.19(c)(2).
---------------------------------------------------------------------------
[cir] is subject to a mandatory heightened supervisory plan under
the rules of the SEC, FINRA or state regulatory agency; \92\
---------------------------------------------------------------------------
\92\ See FINRA Rule 3110.19(c)(3).
---------------------------------------------------------------------------
[cir] is statutorily disqualified, unless such disqualified person
has been approved (or is otherwise permitted pursuant to FINRA rules
and the federal securities laws) to associate with a member and is not
subject to a mandatory heightened supervisory plan under FINRA Rule
3110.19(c)(3) or otherwise as a condition to approval or permission for
such association; \93\
---------------------------------------------------------------------------
\93\ See FINRA Rule 3110.19(c)(4).
---------------------------------------------------------------------------
[cir] 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; \94\ or
---------------------------------------------------------------------------
\94\ See FINRA Rule 3110.19(c)(5).
---------------------------------------------------------------------------
[cir] has been notified in writing that such associated person is
now subject to, any Investigation or Proceeding, as such terms are
defined in the Explanation of Terms for the Form U4 (Uniform
Application for Securities Industry Registration or Transfer), by the
SEC, an SRO, including FINRA, or state securities commission (or agency
or office performing like functions) (each, a ``Regulator'') expressly
alleging they have failed reasonably to supervise another person
subject to their supervision, with a view to preventing the violation
of any provision of the Securities Act, the Exchange Act, the
Investment Advisers Act, the Investment Company Act, the Commodity
Exchange Act, any state law pertaining to the regulation of securities
or any rule or regulation under any of such Acts or laws, or any of the
rules of the MSRB or other self-regulatory organization, including
FINRA; provided, however, such office or location may be designated or
redesignated as an RSL subject to the requirements of FINRA Rule
3110.19 upon the earlier of: (i) the member's receipt of written
notification from the applicable Regulator that such Investigation has
concluded without further action; or (ii) one year from the date of the
last communication from such Regulator relating to such
Investigation.\95\
---------------------------------------------------------------------------
\95\ See FINRA Rule 3110.19(c)(6).
---------------------------------------------------------------------------
FINRA members that elect to designate an office or
location of the member as an RSL shall provide FINRA with a current
list of all locations designated as RSLs by the 15th day of the month
following each calendar quarter in the manner and format as FINRA may
prescribe.\96\
---------------------------------------------------------------------------
\96\ See FINRA Rule 3110.19(d).
---------------------------------------------------------------------------
FINRA members must conduct a risk assessment prior to
designating an office or location as an RSL. Specifically, the FINRA
member must develop a reasonable risk-based approach to designating
such office or location as an RSL, and conduct and document a risk
assessment for the associated person assigned to that office or
location. The assessment must document the factors considered,
including among others, whether the associated person at such office or
location is now subject to: (1) customer complaints, taking into
account the volume and nature of the complaints; (2) heightened
supervision other than where such office or location is ineligible for
RSL designation under FINRA Rule 3110.19(c)(3); (3) any failure to
comply with the member's written supervisory procedures; (4) any
recordkeeping violation; and (5) any regulatory communications from a
Regulator, indicating that the associated person at such office or
location failed reasonably to supervise another person subject to their
supervision, including but not limited to, subpoenas, preliminary or
routine regulatory inquiries or requests for information, deficiency
letters, ``blue sheet'' requests or other trading questionnaires, or
examinations. The FINRA member must take into account any higher risk
activities that take place or a higher risk associated person that is
assigned to that office or location. Consistent with its obligation
under FINRA Rule 3110(a), the member's supervisory system must take
into consideration any indicators of irregularities or misconduct
(i.e., ``red flags'') when designating an office or location as an RSL.
Red flags should also be reviewed in determining whether it is
reasonable to maintain the RSL designation of such office or location
in accordance with the requirements of FINRA Rule 3110.19 and the
member should consider evidencing steps taken to address those red
flags where appropriate.\97\
---------------------------------------------------------------------------
\97\ See FINRA Rule 3110.19(e).
---------------------------------------------------------------------------
Proposal
The Exchange proposes to adopt subparagraph (d)(8) of Exchange Rule
1308. This proposed new paragraph reads as follows:
Residential Supervisory Location. A location that is the private
residence of a person associated with a Member where supervisory
activities are conducted, including those described in Rule
1306(j)(4) through (7) or Rule 1306(c)(2), which satisfies the
conditions for designation as a Residential Supervisory Location set
forth in FINRA Rule 3110.19 shall also be considered a non-branch
location for those activities pursuant to the Exchange Rules.\98\
---------------------------------------------------------------------------
\98\ See proposed paragraph (d)(8) of Rule 1308.
As stated in proposed new paragraph (d)(8) of Rule 1308, any
location that a Member designates as an RSL pursuant to FINRA Rule
3110.19 shall also be considered a non-branch location for those
activities pursuant to Exchange rules.
Pursuant to this proposed rule change, Members will be required to
share information about designated RSLs with FINRA on a quarterly
basis. The Exchange is not proposing to add the entire FINRA
Residential Supervisory Location designation rule to its rules, because
it would be unnecessarily duplicative and burdensome for Members to
share the same quarterly RSL designation information with the Exchange.
The Exchange understands that adopting paragraph (d)(8) of Rule 1308
would update Exchange Rule 1308 so that it remains substantially
similar to FINRA Rule 3110, such that they remain common rules subject
to the 17d-2
[[Page 97672]]
Agreement. As a result, regulatory responsibility for Exchange Rule
1308 would continue to be allocated to FINRA.
The Exchange, like FINRA, believes that the current work
environment merits a reevaluation of the regulatory benefit of
requiring firms to designate a private residence, at which specified
supervisory functions occur, as an OSJ or branch office. The Exchange's
proposal to incorporate by reference FINRA's RSL designation is
intended to reflect a pragmatic balance between the hybrid workforce
model and the parameters that should ensure that all locations,
including residential locations, are appropriately supervised.
Separate and apart from the classification of the office or
location and the attendant inspection obligations, Members will
continue to have an ongoing obligation to supervise the activities of
each associated person in a manner reasonably designed to achieve
compliance with applicable securities laws and regulations, and with
applicable the Exchange and FINRA rules.\99\ The Exchange, like FINRA,
emphasizes that Members have a statutory duty to supervise their
associated persons, regardless of their location, compensation or
employment arrangement, or registration status, in accordance with the
Exchange and FINRA rules.\100\
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\99\ See FINRA Rule 3110.12.
\100\ See 15 U.S.C. 78o(b)(4)(E) and 15 U.S.C. 78o(b)(6)(A).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \101\ of the Act in general, and
furthers the objectives of Section 6(b)(5) of the Act \102\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. The Exchange's
rule proposal is intended to harmonize the Exchange's supervision
rules, specifically with respect to the definition of OSJ, the
requirements for inspections of Members' all offices and locations, and
designation of certain non-branch offices as RSL, with those of FINRA,
on which they are based. As discussed in the Purpose section, because
proposed Exchange Rules 1308(d)(7) and (8) would incorporate by
reference FINRA Rule 3110.18 and 3110.19, the proposed rule changes
would enable Exchange Rule 1308 to continue to be incorporated into the
17d-2 Agreement, resulting in less burdensome and more efficient
regulatory compliance. Specifically, the proposed change will conform
the Exchange's rules to changes made to corresponding FINRA rules
insofar as a Member's compliance with FINRA Rule 3110.18 and 3110.19
shall mean the Member would be also in compliance with Exchange Rule
1308, thus promoting the application of consistent regulatory standards
with respect to rules that FINRA enforces. Adopting the definition of
OSJ is to harmonize Exchange Rule 1306 with FINRA Rule 3110.01 to
provide that both branch offices and OSJs will be subject to the office
registration requirements set forth in Exchange Rule 1306(a). Adopting
FINRA's inspection requirement for non-branch locations is to harmonize
Exchange Rule 1308(d) with FINRA Rule 3110(c) so that a Member's
compliance with FINRA Rule 3110(c) shall mean the Member would be also
in compliance with Exchange Rule 1308(d). As such, the proposed rule
changes would foster cooperation and coordination with persons engaged
in facilitating transactions in securities and would remove impediments
to and perfect the mechanism of a free and open market and a national
market system in accordance with Section 6(b)(5) of the Act.\103\
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\101\ 15 U.S.C. 78f(b).
\102\ 15 U.S.C. 78f(b)(5).
\103\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
rule changes are not designed to address any competitive issue but
rather to provide greater harmonization among the Exchange and FINRA
rules of similar purpose, resulting in less burdensome and more
efficient regulatory compliance for common members and facilitating
FINRA's performance of its regulatory performance.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \104\ and Rule 19b-4(f)(6) \105\ thereunder.
Because the proposed rule change does not (i) significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder. In addition, the Exchange provided the
Commission with written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the date of filing.\106\
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\104\ 15 U.S.C. 78s(b)(3)(A).
\105\ 17 CFR 240.19b-4(f)(6).
\106\ 17 CFR 240.19b-4(f)(6)(iii).
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A proposed rule change filed under Rule 19b-4(f)(6) \107\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\108\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing.
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\107\ 17 CFR 240.19b-4(f)(6).
\108\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange stated that this proposed rule change is non-
controversial because it does not present any new or novel issues. In
particular, MIAX is harmonizing the Exchange's supervision rules with
those of FINRA, on which they are based and which have been previously
approved by the Commission. By conforming the Exchange's rules to
FINRA's, the proposed rule change would promote the application of
consistent regulatory standards with respect to rules that FINRA
enforces pursuant to the 17d-2 Agreement. As such, the Exchange
believes that the proposed rule change would foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national market
[[Page 97673]]
system in accordance with Exchange Act Section 6(b)(5).
Further, the Exchange stated that waiver of the operative delay
would be consistent with the protection of investors and the public
interest because such waiver would allow the Exchange to immediately
harmonize its supervision rule with the FINRA rule on which it is based
without delay, thereby eliminating the possibility of a significant
regulatory gap between the FINRA and Exchange rules, providing more
uniform inspection standards across the securities industry, and
helping to avoid confusion for Exchange Members that are also FINRA
members. For these reasons, the Commission believes that waiver of the
30-day operative delay for this proposed rule change is consistent with
the protection of investors and the public interest. Accordingly, the
Commission hereby waives the 30-day operative delay and designates the
proposed rule change operative upon filing.\109\
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\109\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \110\ of the Act to determine whether the proposed
rule should be approved or disapproved.
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\110\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MIAX-2024-44 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-MIAX-2024-44. 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 the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-MIAX-2024-44 and should
be submitted on or before December 30, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\111\
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\111\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28769 Filed 12-6-24; 8:45 am]
BILLING CODE 8011-01-P