[Federal Register Volume 87, Number 217 (Thursday, November 10, 2022)]
[Notices]
[Pages 67969-67972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-24509]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96241; File No. SR-FINRA-2022-030]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Extend Temporary Supplementary Material .17 
(Temporary Relief To Allow Remote Inspections for Calendar Years 2020 
and 2021, and Through December 31 of Calendar Year 2022) Under FINRA 
Rule 3110 (Supervision)

November 4, 2022.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 31, 2022, the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by FINRA. FINRA has designated the proposed rule change 
as constituting a ``non-controversial'' rule change under paragraph 
(f)(6) of Rule 19b-4 under the Act,\3\ which renders the proposal 
effective upon receipt of this filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to extend temporary Supplementary Material .17 
(Temporary Relief to Allow Remote Inspections for Calendar Years 2020 
and 2021, and Through December 31 of Calendar Year 2022) under FINRA 
Rule 3110 (Supervision) to include calendar year 2023 inspection 
obligations through the earlier of the effective date of the pilot 
program proposed in File No. SR-FINRA-2022-021, if approved, or 
December 31, 2023 within the scope of the supplementary material.\4\ 
The proposed extension of Rule 3110.17 would alleviate the ongoing 
operational challenges resulting from the COVID-19 pandemic that many 
member firms may continue to face in planning for and timely conducting 
the on-site inspection component of Rule 3110(c) (Internal Inspections) 
at locations requiring inspection in calendar year 2023.\5\
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    \4\ See infra note 15, and accompanying text for further 
discussion of the pilot program proposed in File No. SR-FINRA-2022-
021. The proposed rule change will automatically sunset on the 
earlier of the effective date of SR-FINRA-2022-021, if approved, or 
December 31, 2023. FINRA will submit a separate rule filing if it 
seeks to extend the duration of the temporary proposed rule beyond 
December 31, 2023.
    \5\ SEC staff and FINRA have stated in guidance that inspections 
must include a physical, on-site review component. See SEC National 
Examination Risk Alert, Volume I, Issue 2 (November 30, 2011) and 
Regulatory Notice 11-54 (November 2011) (joint SEC and FINRA 
guidance stating, a ``broker-dealer must conduct on-site inspections 
of each of its office locations; [OSJs] and non-OSJ branches that 
supervise non-branch locations at least annually, all non-
supervising branch offices at least every three years; and non-
branch offices periodically.'') (footnote defining an OSJ omitted). 
See also SEC Division of Market Regulation, Staff Legal Bulletin No. 
17: Remote Office Supervision (March 19, 2004) (stating, in part, 
that broker-dealers that conduct business through geographically 
dispersed offices have not adequately discharged their supervisory 
obligations where there are no on-site routine or ``for cause'' 
inspections of those offices).
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
3000. SUPERVISION AND RESPONSIBILITES RELATING TO ASSOCIATED PERSONS
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
    (a) through (f) No Change.
       Supplementary Material: --------------
    .01 through .16 No Change.
    .17 Temporary Relief to Allow Remote Inspections for Calendar Years 
2020, [and] 2021, 2022, and [Through December 31 of Calendar Year 
2022]2023.
    (a) Use of Remote Inspections. Each member obligated to conduct an 
inspection of an office of supervisory jurisdiction, branch office or 
non-branch location in the calendar years [2020, 2021 and 
2022]specified in this supplementary material pursuant to, as 
applicable, paragraphs (c)(1)(A), (B) and (C) under Rule 3110 may, 
subject to the requirements of this Rule 3110.17, satisfy such 
obligation by conducting the applicable inspection remotely, without an 
on-site visit to the office or location. In accordance with Rule 
3110.16, inspections for calendar year 2020 must be completed on or 
before March 31, 2021. [and] [i]Inspections for calendar year 2021 must 
be completed on or before December 31, 2021 and inspections for 
calendar year 2022 must be completed on or before December 31, 2022. 
With respect to a member's obligation to conduct an inspection of an 
office or location in calendar year [2022]2023, a member has the option 
to conduct those inspections remotely through the earlier of the 
effective date of the pilot program proposed in File No. SR-FINRA-2022-
021, if approved, or December 31, [2022]2023. Notwithstanding Rule 
3110.17, a member shall remain subject to the other requirements of 
Rule 3110(c).
    (b) Written Supervisory Procedures for Remote Inspections. 
Consistent with a member's obligation under Rule 3110(b)(1), a member 
that elects to conduct its inspections remotely for any of the calendar 
years specified in this supplementary material must amend or supplement 
its written supervisory procedures to provide for remote inspections 
that are reasonably designed to assist in detecting and preventing 
violations of and achieving compliance with applicable securities laws 
and regulations, and with applicable FINRA rules. Reasonably designed 
procedures for conducting remote inspections of offices or locations 
should include, among other things: (1) a description of the 
methodology, including

[[Page 67970]]

technologies permitted by the member, that may be used to conduct 
remote inspections; and (2) the use of other risk-based systems 
employed generally by the member firm to identify and prioritize for 
review those areas that pose the greatest risk of potential violations 
of applicable securities laws and regulations, and of applicable FINRA 
rules.
    (c) Effective Supervisory System. The requirement to conduct 
inspections of offices and locations is one part of the member's 
overall obligation to have an effective supervisory system and 
therefore, the member must continue with its ongoing review of the 
activities and functions occurring at all offices and locations, 
whether or not the member conducts inspections remotely. A member's use 
of a remote inspection of an office or location will be held to the 
same standards for review as set forth under Rule 3110.12. Where a 
member's remote inspection of an office or location identifies any 
indicators of irregularities or misconduct (i.e., ``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 
physical, on-site visit on an announced or unannounced basis when the 
member's operational difficulties associated with COVID-19 abate, 
nationally or locally as relevant, and the challenges a member is 
facing in light of the public health and safety concerns make such on-
site visits feasible using reasonable best efforts. The temporary 
relief provided by this Rule 3110.17 does not extend to a member's 
inspection requirements beyond the earlier of the effective date of the 
pilot program proposed in File No. SR-FINRA-2022-021, if approved, or 
December 31, [2022]2023, and such inspections must be conducted in 
compliance with Rule 3110(c).
    (d) Documentation Requirement. A member must maintain and preserve 
a centralized record for [each of calendar years 2020 and 2021] the 
calendar years specified in this supplementary material[, and for 
calendar year 2022 through December 31, 2022] that separately 
identifies: (1) all offices or locations that had inspections that were 
conducted remotely; and (2) any offices or locations for which the 
member determined to impose additional supervisory procedures or more 
frequent monitoring, as provided in Rule 3110.17(c). 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.
* * * * *

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

    In its filing with the Commission, FINRA 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. FINRA 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
    In response to the COVID-19 global health crisis and the 
corresponding need to restrict in-person activities, FINRA provided 
temporary relief to member firms from certain regulatory requirements, 
including those set forth under Rule 3110. To help alleviate the 
attendant logistical challenges member firms were encountering to 
satisfy the on-site inspection component of their Rule 3110(c) 
requirements, FINRA adopted Rule 3110.16 (Temporary Extension of Time 
to Complete Office Inspections) to extend the time by which member 
firms were required to complete their calendar year 2020 inspection 
obligations under Rule 3110(c) to March 31, 2021 with the expectation 
that the extension did not relieve firms from the on-site portion of 
the inspections of their offices and locations.\6\ However, health and 
safety concerns remained unabated and with many restrictive measures 
still in place as calendar year 2020 was ending, FINRA adopted Rule 
3110.17 to provide member firms the option, subject to specified 
requirements under the supplementary material, to complete remotely 
their calendar year inspection obligations without an on-site visit to 
the office or location.\7\ This relief has been extended and currently, 
Rule 3110.17 is set to automatically sunset on December 31, 2022.\8\
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    \6\ See Securities Exchange Act Release No. 89188 (June 30, 
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2020-019).
    \7\ See Securities Exchange Act Release No. 90454 (November 18, 
2020), 85 FR 75097 (November 24, 2020) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2020-040).
    \8\ See Securities Exchange Act Release No. 93002 (September 15, 
2021), 86 FR 52508 (September 21, 2021) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2021-023); and 
Securities Exchange Act Release No. 94018 (January 20, 2022), 87 FR 
4072 (January 26, 2022) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2022-001).
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    Even though it has been more than two years since the World Health 
Organization declared COVID-19 a pandemic,\9\ member firms' in-person 
staff requirements, which were first developed in response to COVID-19-
related health concerns, have remained in flux. This reflects, in part, 
ongoing staff health concerns; according to the CDC, the number of new 
deaths from COVID-19 in the United States in September 2022 ranged from 
approximately 2,900 to 3,200 deaths per week,\10\ and approximately 20 
percent of counties in the United States have a medium or high COVID-19 
Community Level based on the CDC's most recent calculations.\11\ While 
CDC guidance on managing the risks related to COVID-19 has become more 
streamlined,\12\ dissimilar vaccination rates through the U.S.\13\ and 
the uncertainty about whether there will be a significant increase in 
the number of COVID-19 cases in light of the presence of COVID-19 
variants, including Omicron and its lineages,\14\ continues to raise 
staff health concerns, particularly with regard to inspections of their 
home activities.
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    \9\ See Centers for Disease Control and Prevention (``CDC''), 
International Classification of Diseases, Tenth Revision, Clinical 
Modification, https://www.cdc.gov/nchs/data/icd/Announcement-New-ICD-code-for-coronavirus-3-18-2020.pdf. See also WHO Director-
General, Opening Remarks at the Media Briefing on COVID-19 (March 
11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
    \10\ See CDC, COVID Data Tracker--Trends in Number of COVID-19 
Cases and Deaths in the US Reported to CDC, by State/Territory, 
https://covid.cdc.gov/covid-data-tracker/#trends_weeklydeaths_select_00 (last visited October 27, 2022).
    \11\ See CDC, COVID Data Tracker--COVID-19 Integrated County 
View, https://covid.cdc.gov/covid-data-tracker/#county-view?list_select_state=all_states&data-type=CommunityLevels (last 
visited October 27, 2022).
    \12\ See generally CDC Press Release, CDC streamlines COVID-19 
guidance to help the public better protect themselves and understand 
their risk, https://www.cdc.gov/media/releases/2022/p0811-covid-guidance.html (August 11, 2022).
    \13\ A state-by-state comparison of vaccination rates is 
available at https://covid.cdc.gov/covid-data-tracker/#vaccinations_vacc-people-additionaldose-totalpop.
    \14\ Variants of concern include BA.5, BA.4.6, and BQ.1.1, among 
others. See CDC, COVID Data Tracker--Variant Proportions, https://covid.cdc.gov/covid-data-tracker/#variant-proportions (last visited 
October 27, 2022).
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    As year 2022 is in its fourth quarter, firms need to establish 
their inspection

[[Page 67971]]

schedules for calendar year 2023 and ensure there is adequate, 
experienced staff available to travel and conduct on-site inspections 
safely within the context of fluid work locations. This situation 
presents complexity for many firms in terms of planning and deploying 
resources. Even with increased availability of vaccines, FINRA 
understands that many firm personnel are still working at least part 
time from alternative work locations (e.g., private residences), while 
taking incremental steps to resume in-person activities in some fashion 
amid the current environment. With these considerations alone, FINRA 
believes there is a continued need for temporary relief beyond December 
31, 2022.
    FINRA has also filed with the Commission File No. SR-FINRA-2022-
021, a proposed rule change to adopt a voluntary, remote inspections 
pilot program that is currently pending Commission review. The review 
period may extend well into 2023.\15\ Given the potential length of 
that review period, and the pilot program's significant planning 
requirements and varying limitations applicable to specific firms and 
office locations, FINRA believes that firms that intend to participate 
in the pilot program, if approved, will need a significant number of 
months to prepare appropriately for the pilot program. Moreover, 
further FINRA guidance may be needed to guide implementation in various 
circumstances.\16\ Firms that are not eligible, or do not intend, to 
participate in the pilot program, if approved, will also need the time 
to make any operational adjustments to schedule and conduct the on-site 
component of their upcoming inspections once Rule 3110.17 expires on 
the effective date of the pilot program, which could come before 
December 31, 2023. For these reasons, and to avoid overlapping 
provisions, under the proposed rule change herein, temporary Rule 
3110.17 would expire on the earlier of the effective date of the pilot 
program proposed in File No. SR-FINRA-2022-021 or December 31, 
2023.\17\ If the Pilot Proposal is not approved, member firms should 
use the time provided in proposed Rule 3110.17 to prepare to fulfill 
their Rule 3110(c) obligations through on-site inspections of their 
offices and locations.\18\
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    \15\ On July 28, 2022, FINRA filed a proposed rule change to 
adopt proposed Supplementary Material .18 under Rule 3110 that would 
set forth the terms of a voluntary, three-year remote inspections 
pilot program to allow member firms to elect to fulfill their 
obligation under Rule 3110(c) by conducting inspections of some or 
all branch offices and locations remotely without an on-site visit 
to such office or location. See Securities Exchange Act Release No. 
95452 (August 9, 2022), 87 FR 50144 (August 15, 2022) (Notice of 
Filing of File No. SR-FINRA-2022-021) (``Pilot Proposal''). The 
Pilot Proposal is currently pending Commission review and under 
Section 19(b)(2) of the Exchange Act, the last day for the 
Commission to issue an order of approval or disapproval of File No. 
SR-FINRA-2022-021 is April 12, 2023. See 15 U.S.C. 78s(b)(2).
    \16\ As part of the implementation of the remote inspections 
pilot program, FINRA intends to publish a Regulatory Notice or other 
guidance about the operational aspects of the pilot program.
    \17\ Proposed Rule 3110.18 would expressly provide that if Rule 
3110.17 has not already expired by its own terms, it would 
automatically sunset on the effective date of the pilot program. See 
Pilot Proposal.
    \18\ See note 5, supra.
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    In sum, proposed Rule 3110.17 would avoid a potential lapse in the 
temporary relief while challenges from COVID-19 persist, provide firms 
regulatory continuity in meeting their inspection obligations during 
the remaining Commission review period of the Pilot Proposal, and allow 
firms time to adapt to the pilot program, if approved, and prepare for 
conducting on-site inspections, as applicable.
    FINRA is not proposing to amend the other conditions of the 
temporary rule. The current conditions of the supplementary material 
for firms that elect to conduct remote inspections would remain 
unchanged: such firms must amend or supplement their written 
supervisory procedures for remote inspections, use remote inspections 
as part of an effective supervisory system, and maintain the required 
documentation. FINRA continues to believe this temporary remote 
inspection option is a reasonable alternative to provide to firms to 
fulfill their Rule 3110(c) obligations under current conditions while 
the Commission considers the Pilot Proposal. This extension is designed 
to maintain the investor protection objectives of the inspection 
requirements under these circumstances. Firms should consider whether, 
under their particular operating conditions, reliance on remote 
inspections would be reasonable under the circumstances. For example, 
firms with offices that are open to the public or that are otherwise 
doing business as usual should consider whether some in-person 
inspections would be feasible and add value to the firms' supervisory 
program.
    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA is proposing to make the proposed rule change 
operative on January 1, 2023.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\19\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. In recognition of the ongoing impact of COVID-19 on 
performing the on-site inspection component of Rule 3110(c), the 
proposed rule change is intended to continue providing firms a 
temporary regulatory option to conduct inspections of offices and 
locations remotely during calendar year 2023. This temporary proposed 
supplementary material does not relieve firms from meeting the core 
regulatory obligation 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 FINRA rules that directly serve investor protection. 
With the ongoing staffing challenges resulting from the lingering 
COVID-19 pandemic, FINRA believes that the proposed rule change 
provides sensibly tailored relief, while continuing to serve and 
promote the protection of investors and the public interest. In 
addition, the extended time would give firms clarity around their Rule 
3110(c) inspection obligations pending the Commission's review of the 
Pilot Proposal.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The potential economic impacts 
of Rule 3110.17 as described in File No. SR-FINRA-2020-040 continue to 
have applicability to the proposed rule change herein. The proposed 
rule change would extend the temporary relief that provides firms with 
the option to fulfill their inspection obligations remotely. The 
proposed extension would include calendar year 2023 inspection 
obligations through the earlier of the effective date of the pilot 
program proposed in File No. SR-FINRA-2022-021, if approved, or 
December 31, 2023 within the scope of the supplementary material 
without making substantive changes to the other aspects of the 
provision. In addition, the proposed temporary extension would avoid a 
potential lapse in temporary relief while the Pilot Proposal is pending 
Commission action. Further, the

[[Page 67972]]

proposed extension would provide regulatory certainty while firms 
continue to manage health and safety concerns, work absences, and the 
transition to new workforce arrangements. FINRA believes that this 
limited extension in temporary relief, together with the requirements 
for using the temporary relief in Rule 3110.17, would not diminish 
investor protection.

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

    Written comments were neither solicited nor received.

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 Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6).
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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 to 
determine whether the proposed rule should be approved or disapproved.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-030 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-030. 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 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2022-030 
and should be submitted on or before December 1, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24509 Filed 11-9-22; 8:45 am]
BILLING CODE 8011-01-P


