Notice2021-13652
Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide Temporary Remote Inspection Relief to IEX Members for Calendar Year 2021
Primary source
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Published
June 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 121 (Monday, June 28, 2021)</title>
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[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34069-34074]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13652]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34 -92222; File No. SR-IEX-2021-09]
Self-Regulatory Organizations: Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Provide
Temporary Remote Inspection Relief to IEX Members for Calendar Year
2021
June 22, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on June 11, 2021, the Investors Exchange LLC (``IEX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The
[[Page 34070]]
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\ 15 U.S.C. 78a.
\3\ 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
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ IEX is filing with the Commission a
proposed rule change to amend IEX Rule 5.110 (Supervision) to provide
temporary remote inspection relief to IEX Members for calendar year
2021.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website at <a href="http://www.iextrading.com">www.iextrading.com</a>, at the principal office of the Exchange,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 statement may be examined at
the places specified in Item IV below. The self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
In light of the operational challenges that IEX Members \6\ are
facing due to the outbreak of the coronavirus disease (COVID-19), the
Exchange proposes to amend IEX Rule 5.110 (Supervision) to adopt
Supplementary Material .15 (Temporary Relief to Allow Remote
Inspections for Calendar Year 2021) to provide member firms the option,
subject to specified requirements under the proposed supplementary
material, to complete remotely their calendar year 2021 inspection
obligations under IEX Rule 5.110(c) (Internal Inspections), without an
on-site visit to the office or location.\7\ The proposed rule change
would harmonize IEX Rule 5.110 with FINRA Rule 3110.17, which provides
FINRA member firms with the option, subject to specified requirements
under the supplementary material, to complete remotely their calendar
year 2021 inspection obligations without an on-site visit to the office
or location.\8\ The proposed rule change is necessitated by the
compelling health and safety concerns and the operational challenges
that Members are facing due to the sustained COVID-19 pandemic.\9\
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\6\ See IEX Rule 1.160(s).
\7\ SEC and Financial Industry Regulatory Authority, Inc.
(``FINRA'') staff 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
FINRA 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; Office of Supervisory Jurisdictions
(`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).
\8\ See Securities Exchange Act Release No. 90454 (November 18,
2020), 85 FR 75097 (November 24, 2020) (SR-FINRA-2020-040). FINRA's
rule change also permitted FINRA members to complete their 2020
remote inspections remotely, but IEX is only seeking to permit
temporary remote inspections for calendar year 2021 because the
applicable deadlines to complete the 2020 inspections have elapsed.
\9\ The proposed rule change will automatically sunset on
December 31, 2021. If IEX seeks to extend the duration of the
temporary proposed rule beyond December 31, 2021, IEX will submit a
separate rule filing to further renew the temporary relief.
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IEX Rule 5.110(c), Internal Inspections, requires, inter alia, that
``(1) [e]ach Member shall conduct a review, at least annually (on a
calendar year basis), of the businesses in which it engages . . . .''
Subparagraph (1)(A) of the rule requires, in relevant part, that
``[e]ach Member shall inspect annually (on a calendar year basis) every
[Office of Supervisory Jurisdiction or ``OSJ''] \10\ and any branch
office \11\ that supervises one or more non-branch locations.''
Subparagraph (1)(B) of the rule requires, in relevant part, that
``[e]ach Member shall inspect at least every three years every branch
office that does not supervise one or more non-branch locations . . .
.'' Subparagraph (1)(B) further provides the criteria that a Member
must consider when establishing the frequency of inspections for such
branch locations.
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\10\ See IEX Rule 5.110(f)(1).
\11\ See IEX Rule 5.110(f)(2).
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On March 13, 2020 the United States declared a national emergency
in response to the pandemic.\12\ Around this time, many states issued
stay-at-home orders and imposed restrictions on businesses, social
activities, and travel to slow the spread of COVID-19 and reduce the
burden on the U.S. health care system in accordance with the
recommendations of public health experts.\13\ In response, like many
employers across U.S., Members closed their offices to the public,
transitioned their employees to telework arrangements to comply with
stay-at-home orders, and implemented other restrictive measures in an
effort to slow the spread of COVID-19 such as curtailing or eliminating
non-essential business travel, and significantly limiting or canceling
in-person activities.\14\
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\12\ See Centers for Disease Control and Prevention (``CDC''),
International Classification of Diseases, Tenth Revision, Clinical
Modification, <a href="https://www.cdc.gov/nchs/data/icd/Announcement-New-ICD-code-for-coronavirus-3-18-2020.pdf">https://www.cdc.gov/nchs/data/icd/Announcement-New-ICD-code-for-coronavirus-3-18-2020.pdf</a>. See also WHO Director-
General, Opening Remarks at the Media Briefing on COVID-19 (March
11, 2020), <a href="https://www.who.int/director-general/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020">https://www.who.int/director-general/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020</a>.
\13\ See S.J. Lange et al., Potential Indirect Effects of the
COVID-19 Pandemic on Use of Emergency Departments for Acute Life-
Threatening Conditions--United States, January-May 2020, Morbidity
and Mortality Weekly Report (June 26, 2020), <a href="https://www.cdc.gov/mmwr/volumes/69/wr/mm6925e2.htm">https://www.cdc.gov/mmwr/volumes/69/wr/mm6925e2.htm</a>.
\14\ See generally FINRA Regulatory Notice 20-16 (May 2020)
(describing practices implemented by FINRA member firms to
transition to, and supervise in, a remote work environment during
the COVID-19 pandemic).
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These pandemic-related operational changes have made it
impracticable for Members to conduct on-site inspections of OSJs,
branch offices, and non-branch locations because this compliance
function requires employees of the Member to travel to geographically
dispersed locations. Such travel not only has been restricted at times
by government orders, but also puts the health and safety of employees
at great risk of contracting and spreading COVID-19.\15\ By mid-year
2020, with many restrictive measures still in place, and in some
instances additional quarantine requirements imposed on interstate
travel, on-site inspections of offices or locations scheduled for
calendar year 2020 continued to remain in abeyance.\16\
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\15\ See CDC, Travel During the COVID-19 Pandemic (stating in
part, ``Travel increases your chance of getting and spreading COVID-
19. . . . Delay travel and stay home to protect yourself and others
from COVID-19.''), <a href="https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html">https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html</a> (updated February 16, 2021).
\16\ See, e.g., Government of the District of Columbia, Phase
Two (June 22, 2020) (announcing certain businesses to reopen and
activities to resume under specified conditions and stating that
anyone coming into Washington, DC from states specified as high-risk
is required to self-quarantine for 14 days), <a href="https://coronavirus.dc.gov/phasetwo">https://coronavirus.dc.gov/phasetwo</a> (last visited March 2, 2021); New York
Department of Health, Interim Guidance for Quarantine Restrictions
on Travelers Arriving in New York State Following Out of State
Travel (November 3, 2020), available at <a href="https://coronavirus.health.ny.gov/system/files/documents/2020/11/interm_guidance_travel_advisory.pdf">https://coronavirus.health.ny.gov/system/files/documents/2020/11/interm_guidance_travel_advisory.pdf</a> (last visited March 2, 2021);
and Chicago Department of Public Health, Emergency Travel Order
(issued July 2, 2020 and last updated February 23, 2021, requiring
travelers from states and territories meeting certain daily test
metrics to test negative for COVID-19 pre-arrival and quarantine for
10 days), <a href="https://www.chicago.gov/city/en/sites/covid-19/home/emergency-travel-order.html">https://www.chicago.gov/city/en/sites/covid-19/home/emergency-travel-order.html</a>.
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[[Page 34071]]
In recognition of the logistical challenges firms were facing at
that time to satisfy their on-site inspection obligations, FINRA
adopted Rule 3110.16 (Temporary Extension of Time to Complete Office
Inspections), extending the time by which firms must complete their
calendar year 2020 inspection obligations under FINRA Rule 3110(c) to
March 31, 2021, but emphasizing that the extension of time did not
relieve firms from conducting the on-site portion of the inspections of
their OSJs, branch offices, and non-branch locations.\17\ As noted
above, FINRA thereafter adopted Rule 3110.17 to allow for FINRA member
firms to conduct calendar year 2020 inspections and calendar year 2021
inspections remotely, without an on-site visit to the office or
location.\18\
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\17\ See Securities Exchange Act Release No. 89188 (June 30,
2020), 85 FR 40713 (July 7, 2020) (SR-FINRA-2020-19). In this rule
filing, FINRA stated, among other things, that FINRA would consider
whether additional relief may be warranted to address any backlog of
2020 inspections that may continue to exist in light of ongoing
public health and safety concerns).
\18\ See supra note 8.
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The acute health and safety concerns related to COVID-19 persist,
with the number of confirmed cases of COVID-19 in the U.S. continuing
to increase since March 13, 2020.\19\ While Members have continued to
supervise OSJs, branch offices, and non-branch locations by, among
other things, implementing remote supervisory practices through novel
uses of technology as well as existing methods of supervision (e.g.,
supervisory checklists, surveillance tools, incident trackers, email
review, and trade exception reports),\20\ Members are still
experiencing logistical challenges related to conducting the on-site
portion of their inspections due to continuing business and
governmental restrictions and public health concerns.
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\19\ See Johns Hopkins, Coronavirus Resource Center, COVID-19
Dashboard by the Center for Systems Science and Engineering at Johns
Hopkins University, <a href="https://coronavirus.jhu.edu/map.html">https://coronavirus.jhu.edu/map.html</a> (last
visited March 2, 2021).
\20\ See FINRA Regulatory Notice 20-16.
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Based on feedback described in FINRA's Regulatory Notice 20-16, in
comment letters submitted in response to FINRA's proposed rule changes,
and discussions with industry representatives, FINRA understood that
beginning in or about March 2020, many firms had suspended the on-site
component of their inspections scheduled for calendar year 2020. With
no certainty as to when pandemic-related health concerns and
restrictions will subside, firms will have a considerable backlog of
2020 inspections. Moreover, planning on-site inspections for calendar
year 2021 for OSJs, branch offices, and non-branch locations in the
current environment may be impacted as well. In light of pandemic-
related developments, IEX believes further sensible and tailored
temporary relief is warranted for Members to meet their inspection
obligations under IEX Rule 5.110(c) for calendar year 2021.
Proposed Supplementary Material .15 to IEX Rule 5.110
In order to proactively address these concerns and to align its
Supervision rule with corresponding FINRA rules covered by its
regulatory services agreement with FINRA, IEX is proposing to adopt
Supplementary Material .15. As proposed, Supplementary Material .15
would provide Members, subject to specified requirements therein, the
option to conduct remotely the inspections of their OSJs, branch
offices, and non-branch locations for any inspections to be conducted
in calendar year 2021, without the requirement to conduct an on-site
visit to such office or location. As described further below, the
proposed rule change would set forth the dates by which inspections for
calendar year 2021 are due, the requirement to amend or supplement
written supervisory procedures for remote inspections, the use of
remote inspections as part of an effective supervisory system, and
documentation requirements. The Exchange believes this temporary remote
inspection option is a reasonable alternative to provide to Members to
fulfill their IEX Rule 5.110(c) obligations during these pressing
times, and is designed to achieve the investor protection objectives of
the inspection requirements under these unique circumstances.
The responsibility of Members to supervise their associated persons
is a critical component of broker-dealer regulation. IEX Rule 5.110(a)
requires that ``[e]ach Member . . . 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 IEX Rules . . . .'' The proposed
Supplementary Material is not intended to alter this core
responsibility. The advent of technology and automation in the
financial industry has significantly changed the way in which Members
and their associated persons conduct their business, communicate, and
meet their regulatory obligations. IEX recognizes that Members
generally use an array of technological tools to facilitate their
supervisory practices (e.g., surveillance systems; electronic tracking
programs or applications; and electronic communications, including
video conferencing tools), which many firms have leveraged to create
and implement remote inspection plans, on a temporary basis, in
response to pandemic-related operational challenges.\21\
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\21\ See FINRA Regulatory Notice 20-16. See generally FINRA
White Paper, ``Technology Based Innovations for Regulatory
Compliance (``RegTech'') in the Securities Industry'' (September
2018) (reporting, among other things, that as financial services
firms seek to keep pace with regulatory compliance requirements,
they are turning to new and innovative regulatory tools to assist
them in meeting their obligations in an effective and efficient
manner), <a href="https://www.finra.org/sites/default/files/2018_RegTech_Report.pdf">https://www.finra.org/sites/default/files/2018_RegTech_Report.pdf</a>.
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IEX believes that proposed Supplementary Material .15 to IEX Rule
5.110 would provide a sensibly tailored regulatory alternative for
Members to fulfill their obligations under IEX Rule 5.110(c) that would
not materially diminish, and is reasonably designed to achieve, the
investor protection objectives of the inspection requirements under
these unique circumstances. IEX further notes that the proposed relief
would be limited in duration to align with the extended date set forth
under FINRA Rule 3110.16 of December 31, 2021 for calendar year 2021
inspections.\22\
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\22\ See supra note 8.
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A. Deadlines To Complete Calendar Year 2021 Inspections
Currently, IEX Rule 5.110(c)(1) provides that an inspection of an
office or location must occur on a designated frequency, and the
periodicity of the required inspection varies depending on the
classification of the location or the nature of the activities that
take place. OSJs and supervisory branch offices must be inspected at
least annually (on a calendar-year basis); non-supervisory branch
offices, at least every three years; and non-branch locations, on a
periodic schedule at least once every three years.
Proposed Supplementary Material .15(a) would provide that a Member
that is obligated to complete a 2021 inspection of an OSJ, branch
office or non-branch location, pursuant to the applicable periodicity
set forth under
[[Page 34072]]
IEX Rule 5.110(c)(1), may satisfy such obligation by conducting the
applicable inspection remotely, without an on-site visit to the office
or location subject to the other requirements set forth under the
proposed supplementary material. In addition, the proposed
Supplementary Material would expressly provide that inspections for
calendar year 2021 must be completed on or before December 31, 2021.
IEX believes that providing firms with the option to satisfy the
inspection component of IEX Rule 5.110(c) remotely would enable firms
to finish their calendar year 2021 inspections on or before December
31, 2021, particularly given the uncertainty surrounding planning
inspections at this time. Further, proposed Supplementary Material
.15(a) would affirm that a Member would remain subject to the other
requirements of IEX Rule 5.110(c).\23\
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\23\ In addition to requiring firms to conduct inspections of
their offices and locations on a designated frequency, IEX Rule
5.110(c) generally requires a member to retain a written record of
the date upon which each review and inspection occurred, reduce a
location's inspection to a written report and keep each inspection
report on file either for a minimum of three years or, if the
location's inspection schedule is longer than three years, until the
next inspection report has been written. If applicable to the
location being inspected, the inspection report must include,
without limitation, the testing and verification of the member's
policies and procedures, including supervisory policies and
procedures, in specified areas. See IEX Rule 5.110(c)(2). In
addition, to prevent compromising the effectiveness of inspections
due to conflicts of interest, IEX Rule 5.110(c)(3)(B) requires a
Member to ensure that the person conducting the inspection is not an
associated person assigned to the location or is not directly or
indirectly supervised by, or otherwise reporting to, an associated
person assigned to that location.
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B. Written Supervisory Procedures for Remote Inspections
IEX Rule 5.110(a) requires that Members establish and maintain a
supervisory system that is tailored specifically to the member firm's
business and addresses the activities of all its associated persons.
The Rule requires that a Member's supervisory system shall include a
number of elements, including ``[t]he establishment and maintenance of
written procedures required by this IEX Rule 5.110 . . . .'' Under IEX
Rule 5.110(b) (Written Procedures) a Member must establish, maintain,
and enforce written procedures to supervise the types of business in
which it engages and the activities of its associated persons that are
reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable IEX rules.
To underscore the importance of this existing requirement in the
context of remote inspections, proposed Supplementary Material .15(b)
would expressly provide that consistent with a Member's obligation
under Rule 5.110(b)(1), a Member that elects to conduct its calendar
year 2021 inspections remotely 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 IEX rules. As proposed by the
Exchange, reasonably designed procedures for conducting remote
inspection of offices or locations should include, among other things,
a description of the methodology, including technologies permitted by
the member, that may be used to conduct remote inspections. In
addition, such procedures should include the use of other risk-based
systems employed generally by the Member 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 IEX
rules.\24\
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\24\ Offices or locations that may present a higher risk profile
would include, for example, those that have associated persons
engaging in activities that involve handling customer funds or
securities, maintaining books and records as described under
applicable federal securities laws and IEX rules, order execution or
other activities that may be more susceptible to higher risks of
operational or sales practice wrongdoing, or have associated persons
assigned to an office or location who may be subject to additional
or heightened supervisory procedures.
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C. An Effective Supervisory System
Internal inspections are a critical component of a Member's
fundamental obligation under IEX Rule 5.110 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 IEX rules. Proposed
Supplementary Material .15(c) would expressly affirm this principle
that: (i) The requirement to conduct inspections of offices and
locations is one part of the Member's overall ongoing obligation to
have an effective supervisory system; and (ii) a Member must continue
with its reviews of the activities and functions occurring at all
offices and locations, whether or not such offices or locations are due
for an inspection under IEX Rule 5.110(c) in a given year or the
Member's election to conduct such inspections remotely. In addition,
under the proposed Supplementary Material, a Member's remote inspection
of an office or location, like the traditional on-site inspection,
would be held to the same standards for review as set forth under IEX
Rule 5.110, Supplementary Material .12 (Standards for Reasonable
Review).\25\ Further, in accordance with this obligation, proposed
Supplementary Material .15(c) would provide that where a Member's
remote inspection of an office or location identifies any indicators of
irregularities or misconduct (i.e., ``red flags''),\26\ the Member may
need to impose additional supervisory procedures for that office or
location, or may need to provide for more frequent monitoring or
oversight of that office or location, or both, including potentially a
subsequent physical, on-site visit on an announced
[[Page 34073]]
or unannounced basis when the Member's operational difficulties
associated with COVID-19 meetings abate, nationally or locally as
relevant, and the challenges the Member is facing in light of the
public health and safety concerns make such physical, on-site visits
feasible, using reasonable best efforts. Finally, to underscore the
limited duration of proposed supplementary material expressly states
that the temporary relief would not extend to a Member's inspection
requirements beyond calendar year 2021 and that such inspections must
be conducted in compliance with IEX Rule 5.110(c).
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\25\ IEX Rule 5.110, Supplementary Material .12 provides: ``In
fulfilling its obligations under IEX Rule 5.110(c), each Member must
conduct a review, at least annually, of the businesses in which it
engages. The review must be reasonably designed to assist in
detecting and preventing violations of and achieving compliance with
applicable securities laws and regulations and with IEX rules. Each
Member shall establish and maintain supervisory procedures that must
take into consideration, among other things, the firm's size,
organizational structure, scope of business activities, number and
location of the firm's offices, the nature and complexity of the
products and services offered by the firm, the volume of business
done, the number of associated persons assigned to a location, the
disciplinary history of registered representatives or associated
persons, and any indicators of irregularities or misconduct (i.e.,
`red flags'), etc. The procedures established and reviews conducted
must provide that the quality of supervision at remote locations is
sufficient to ensure compliance with applicable securities laws and
regulations and with IEX rules. A Member must be especially diligent
in establishing procedures and conducting reasonable reviews with
respect to a non-branch location where a registered representative
engages in securities activities. Based on the factors outlined
above, Members may need to impose reasonably designed supervisory
procedures for certain locations or may need to provide for more
frequent reviews of certain locations.''
\26\ Red flags that suggest the increased risk or occurrence of
violations may include, among other events: Customer complaints; an
unexplained increase or change in the types of investments or
trading concentration that a representative is recommending or
trading; an unexpected improvement in a representative's production,
lifestyle, or wealth; questionable or frequent transfers of cash or
securities between customer or third party accounts, or to or from
the representative; a representative that serves as a power of
attorney, trustee or in a similar capacity for a customer or has
discretionary control over a customer's account(s); representative
with disciplinary records; customer investments in one or a few
securities or class of securities that is inconsistent with firm
policies related to such investments; churning; trading that is
inconsistent with customer objectives; numerous trade corrections,
extensions, liquidations; or significant switching activity of
mutual funds or variable products held for short time periods. See
generally SEC Division of Market Regulation, Staff Legal Bulletin
No. 17: Remote Office Supervision (March 19, 2004); see also FINRA
Regulatory Notices 98-38 and 99-45.
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D. Documentation Requirement
In general, IEX Rule 5.110(c)(2) describes the documentation
requirements associated with conducting internal inspections. The rule
requires a member to reduce the inspection and review conducted under
IEX Rule 5.110(c)(1) to a written report and specifies how long the
member must keep the report on file.\27\ If applicable to the location
being inspected, IEX Rule 5.110(c)(2)(A) specifies that the inspection
report must include, without limitation, the testing and verification
of the member's policies and procedures, including supervisory policies
and procedures for: (i) Safeguarding of customer funds and securities;
(ii) maintaining books and records; (iii) supervision of supervisory
personnel; (iv) transmittals of funds from customers to third party
accounts, from customer accounts to outside entities, from customer
accounts to locations other than a customer's primary residence, and
between customers and registered representatives, including the hand
delivery of checks; and (v) changes of customer account information,
including address and investment objectives changes, and validation of
such changes. In addition to the requirements under IEX Rule
5.110(c)(2), proposed Supplementary Material .15(d) would require
supplemental documentation by a Member that avails itself of the remote
inspection option. The Member must maintain and preserve a centralized
record for calendar year 2021 that separately identifies: (1) All
offices or locations that had inspections that were conducted remotely;
and (2) any offices or locations that the Member determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in Supplementary Material .15(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. IEX believes that this documentation requirement
would help readily distinguish the offices and locations that underwent
remote inspections and their attendant supervisory procedures, and
their more frequent monitoring, as applicable. IEX notes that even in
the current environment, Members have an ongoing obligation to
establish and maintain a system to supervise the activities of their
associated persons that is reasonably designed to achieve compliance
with applicable securities laws and regulations, and with applicable
IEX rules. IEX emphasizes that its proposed rule change is not intended
to lessen the core obligations prescribed under IEX Rule 5.110. IEX
believes that proposed Supplementary Material .15, which would permit
firms to remotely inspect, subject to specified requirements described
above, their offices and locations for any calendar year 2021
inspections, instead of an on-site visit to the office or location
would provide Members a way to comply with IEX Rule 5.110(c) that would
not materially diminish, and is reasonably designed to achieve, the
investor protection objectives of the inspection requirements under
these unique circumstances. IEX notes that potential risks that may
arise from providing Members the option to conduct their inspections
remotely are mitigated by Members' use of technology to meet their
supervisory obligations on an ongoing basis, the unique circumstances
under which they are operating, and the temporary nature of proposed
rule change, which would remain in place through December 31, 2021.\28\
IEX will continue to monitor the situation and engage with Members,
other financial regulators, and governmental authorities to determine
whether further regulatory relief or guidance related to IEX Rule
5.110(c) may be appropriate.
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\27\ In addition to requiring Members to conduct inspections of
their offices and locations on a designated frequency, IEX Rule
5.110(c) generally requires a Member to retain a written record of
the date upon which each review and inspection occurred, reduce a
location's inspection to a written report and keep each inspection
report on file either for a minimum of three years or, if the
location's inspection schedule is longer than three years, until the
next inspection report has been written. If applicable to the
location being inspected, the inspection report must include,
without limitation, the testing and verification of the member's
policies and procedures, including supervisory policies and
procedures, in specified areas. See IEX Rule 5.110(c)(2). In
addition, 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 not an associated
person assigned to the location or is not directly or indirectly
supervised by, or otherwise reporting to, an associated person
assigned to that location. See IEX Rule 5.110(c)(3).
\28\ See supra note 9.
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In addition, during the time that proposed Supplementary Material
.15 remains in effect, IEX will closely monitor the effectiveness of
remote inspections and their impacts--positive or negative--on Members'
overall supervisory systems to assess whether to propose to make
permanent a remote inspection option for some or all locations that
would not materially diminish, and is reasonably designed to achieve,
the investor protection objectives underpinning the requirement to
inspect branch offices or locations in accordance with IEX Rule
5.110(c).
IEX has filed the proposed rule change for immediate effectiveness
and has requested that the SEC waive the requirement that the proposed
rule change not become operative for 30 days after the date of the
filing, so IEX can implement the proposed rule change immediately.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with the
provisions of Section 6(b) \29\ of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act \30\ 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
IEX's supervision rules, specifically with respect to the requirements
for inspections of Members' branch offices and other locations, with
those of FINRA, on which they are based. Consequently, the proposed
change will conform the Exchange's rules to changes made to
corresponding FINRA rules, thus promoting application of consistent
regulatory standards with respect to rules that FINRA enforces pursuant
to its regulatory services agreement with the Exchange.
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\29\ 15 U.S.C. 78f.
\30\ 15 U.S.C. 78f(b)(5).
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In recognition of the impact of COVID-19 on performing on-site
inspections, the proposed rule change is intended to provide firms a
temporary regulatory option to conduct inspections of offices and
locations remotely for
[[Page 34074]]
calendar year 2021 inspections. This 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
IEX rules that directly serve investor protection. In a time when faced
with unique challenges resulting from the COVID-19 pandemic, IEX
believes that the proposed rule change provides sensibly tailored
relief that will afford firms the ability to observe the
recommendations of public health officials to provide for the health
and safety of their personnel, while continuing to serve and promote
the protection of investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX 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 proposed rule change is not
designed to address any competitive issue but to align the Exchange's
rules with those of FINRA, which will assist FINRA in its oversight
work done pursuant to a regulatory services agreement with IEX. The
proposed rule change will also provide for consistent application of
the Exchange's supervision rules with those of FINRA, on which they are
based. Consequently, the Exchange does not believe that the proposed
change implicates competition at all.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) \31\ of the Act and Rule 19b-4(f)(6) \32\
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, it has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.
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\31\ 15 U.S.C. 78s(b)(3)(A).
\32\ 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 under
Section 19(b)(2)(B) \33\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\33\ 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1f6d6a737a327c7072727a716b6c5f6c7a7c31787069"><span class="__cf_email__" data-cfemail="1361667f763e707c7e7e767d6760536076703d747c65">[email protected]</span></a>. Please include
File Number SR-IEX-2021-09 on the subject line.
Paper Comments
<bullet> 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-IEX-2021-09. This file
number should be included in 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 Section, 100 F Street NE, Washington,
DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing will also be available for inspection
and copying at the IEX's principal office and on its internet website
at <a href="http://www.iextrading.com">www.iextrading.com</a>. 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-IEX-2021-09
and should be submitted on or before July 19, 2021.
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\34\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13652 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P
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