Notice2022-01467
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Effectiveness of Temporary Supplementary Material .17 (Temporary Relief To Allow Remote Inspections for Calendar Years 2020 and 2021, and Through June 30 of Calendar Year 2022) Under FINRA Rule 3110 (Supervision)
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Published
January 26, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 17 (Wednesday, January 26, 2022)</title>
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[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Notices]
[Pages 4072-4075]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01467]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94018; File No. SR-FINRA-2022-001]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Extend the Effectiveness of Temporary
Supplementary Material .17 (Temporary Relief To Allow Remote
Inspections for Calendar Years 2020 and 2021, and Through June 30 of
Calendar Year 2022) Under FINRA Rule 3110 (Supervision)
January 20, 2022.
Pursuant to 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 January 10, 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 June 30 of Calendar Year 2022) under FINRA Rule
3110 (Supervision) to include calendar year 2022 inspection obligations
through December 31, 2022 within the scope of the supplementary
material.\4\ The proposed additional six-month extension of Rule
3110.17 is necessary to address the operational challenges resulting
from the COVID-19 pandemic that many member firms continue to face in
planning for and timely conducting, during the second half of calendar
year 2022, the on-site
[[Page 4073]]
inspection component of Rule 3110(c) (Internal Inspections) at
locations requiring inspection in calendar year 2022.\5\
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\4\ The proposed rule text changes to Rule 3110.17 are applied
to the version that becomes operative on January 1, 2022 and
automatically sunsets on June 30, 2022.
\5\ The proposed rule change will automatically sunset on
December 31, 2022. FINRA will submit a separate rule filing if it
seeks to extend the duration of the temporary proposed rule beyond
December 31, 2022.
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Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
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, and Through [June 30]December 31 of Calendar Year
2022.
(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 calendar years 2020, 2021 and 2022
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 inspections for
calendar year 2021 must be completed on or before December 31, 2021.
With respect to a member's obligation to conduct an inspection of an
office or location in calendar year 2022, a member has the option to
conduct those inspections remotely [only] through [June 30]December
31, 2022. 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 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 [June
30]December 31, 2022 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, and for calendar year 2022 through [June 30]December 31, 2022
[only] 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 the midst of the global COVID-19 pandemic where the United
States recorded its first case of COVID-19 in early 2020,\6\ and the
attendant logistical challenges member firms were encountering to
satisfy the on-site inspection component of their Rule 3110(c)
requirements, FINRA adopted Rule 3110.17 to provide a tailored
regulatory alternative for member firms to have the option, subject to
specified conditions, to complete their inspection obligations
remotely.\7\ While there were some signs that the pandemic was receding
for a subsequent period of time, much uncertainty still remained. The
emergence of the Delta variant, dissimilar vaccination rates throughout
the U.S., and the significant uptick in transmissions in many locations
during the summer of 2021 indicated that COVID-19 remained an active
and real public health concern.\8\ Against this setting, FINRA
understood the complexity firms were facing in assessing when and how
to effectively and safely recall their employees back into offices
alongside fashioning permanent telework arrangements or a hybrid
workforce model in which some employees may work on-site in a
commercial office space and other employees may work off-site in an
alternative location (e.g., personal residence).\9\ Accordingly, in
September
[[Page 4074]]
2021, FINRA extended Rule 3110.17 through June 30, 2022 to give firms
clarity on their inspection requirements at least for the first half of
2022 and to account for the time needed for many firms to carefully
assess when and how to have their employees safely return to their
offices in light of vaccination coverage in the U.S. and transmission
levels of the virus, including any emergent variants throughout the
country.\10\
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\6\ See generally Centers for Disease Control and Prevention
(``CDC''), CDC Museum COVID-19 Timeline, <a href="https://www.cdc.gov/museum/timeline/covid19.html">https://www.cdc.gov/museum/timeline/covid19.html</a> (last visited January 10, 2022).
\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) (citing SEC
National Examination Risk Alert, Volume I, Issue 2 (November 30,
2011) and Regulatory Notice 11-54 (November 2011) for the
expectation that firms must conduct their inspections on-site).
\8\ See Securities Exchange Act Release No. 93002 (September 15,
2021), 86 FR 52508, 52509 nn.7 & 8 (September 21, 2021) (Notice of
Filing and Immediate Effectiveness of File No. SR-FINRA-2021-023)
(``Extension No. 1'') (becoming operative on January 1, 2022).
\9\ Since March 2020, FINRA staff, with limited exceptions, have
continued to work remotely to protect their health and safety. As
indicated in its previous filings concerning other pandemic-related
temporary relief from specified FINRA rules and requirements, FINRA
has established a COVID-19 task force to develop a data-driven,
staged plan for FINRA staff to safely return to working in FINRA
office locations and resume other in-person activities. See
Securities Exchange Act Release No. 93758 (December 13, 2021), 86 FR
71695, 71696 (December 17, 2021) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2021-031). Similarly, the SEC has
remained in a telework posture since March 2020 and has recently
indicated that in 2022, it ``will continue to monitor the scientific
data about COVID-19 and national, state, and local guidance to
determine the appropriate operating posture for the agency's
workforce.'' See the SEC's Fiscal Year 2021 Agency Financial Report,
<a href="https://www.sec.gov/files/sec-2021-agency-financial-report.pdf">https://www.sec.gov/files/sec-2021-agency-financial-report.pdf</a>.
\10\ See Extension No. 1, supra note 8.
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The emergence of the new Omicron variant in November 2021 and its
rapid spread in the U.S. since December 1, 2021, the date on which the
first confirmed case of Omicron in the U.S. was identified,\11\
indicate that the active and real public health concerns about COVID-19
are unabated.\12\
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\11\ See CDC, Omicron Variant: What You Need to Know, <a href="https://www.cdc.gov/coronavirus/2019-ncov/variants/omicron-variant.html">https://www.cdc.gov/coronavirus/2019-ncov/variants/omicron-variant.html</a>
(updated December 20, 2021).
\12\ In November 2021, the U.S. Office of Personnel Management
(``OPM''), which serves as the chief human resources agency and
personnel policy manager for the Federal Government, released an
updated guide to telework and remote work, noting, among other
things, that ``[t]he COVID-19 pandemic forced even more adoption of
telework and sparked a nationwide focus on telework as an important
tool for safely and efficiently delivering mission-critical services
in the public and private sectors during both short- and long-term
emergencies . . . . As we look to the future, OPM is encouraging
agencies to strategically leverage workplace flexibilities such as
telework, remote work, and alternative/flexible work schedules as
tools to help attract, recruit, and retain the best possible
workforce.'' See OPM, 2021 Guide to Telework and Remote Work in the
Federal Government: Leveraging Telework and Remote Work in the
Federal Government to Better Meet Our Human Capital Needs and
Improve Mission Delivery (November 2021), <a href="https://www.telework.gov/guidance-legislation/telework-guidance/telework-guide/guide-to-telework-in-the-federal-government.pdf">https://www.telework.gov/guidance-legislation/telework-guidance/telework-guide/guide-to-telework-in-the-federal-government.pdf</a>. Further, on December 2,
2021, President Biden announced new actions to protect Americans
against the Delta and Omicron variants. See <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/02/fact-sheet-president-biden-announces-new-actions-to-protect-americans-against-the-delta-and-omicron-variants-as-we-battle-covid-19-this-winter/">https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/02/fact-sheet-president-biden-announces-new-actions-to-protect-americans-against-the-delta-and-omicron-variants-as-we-battle-covid-19-this-winter/</a>. See also Lena H. Sun, Joel Achenbach, Laurie
McGinley & Tyler Pager, Omicron spreading rapidly in U.S. and could
bring punishing wave as soon as January, CDC warns, Washington Post
(December 14, 2021), <a href="https://www.washingtonpost.com/health/2021/12/14/omicron-us-spread/">https://www.washingtonpost.com/health/2021/12/14/omicron-us-spread/</a>.
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Due to the continued logistical challenges of going on-site to
branch offices or locations while these public health and safety
concerns related to COVID-19 persist, and the continued risk from the
Delta and new Omicron variants, the need for firms to establish
inspection schedules for the second half of 2022 and ensure there is
adequate, experienced staff available to travel and conduct on-site
inspections within the context of fluid work locations continues to
present a unique 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 from
alternative work locations, and have not resumed traveling or are
reluctant to do so at pre-pandemic levels amid persistent significant
health and safety concerns. As a result of the new Omicron variant,
many employers have further delayed or modified their return to office
plans.\13\ For unvaccinated persons in particular, health and safety
risks in connection with returning to the office with other personnel
still remain worrisome and travel still poses a risk of contracting and
spreading COVID-19.\14\ FINRA believes extending Rule 3110.17 through
December 31, 2022 represents a prudent accommodation.\15\ The proposed
additional six-month extension would provide further clarity to firms
on regulatory requirements and account for the time needed for many
firms to carefully assess when and how to have their employees safely
return to their offices in light of vaccination coverage in the U.S.
and transmission levels of the virus, including any emergent variants
throughout the country.
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\13\ See Jennifer Surane & Angelica Peebles, `I Was Wrong':
Omicron Wrecks CEOs' Plans for Office Return (describing how the
``new wave of Covid uncertainty is upending business plans from Wall
Street to Silicon Valley.''), Bloomberg (December 16, 2021), <a href="https://www.bloomberg.com/news/articles/2021-12-16/-i-was-wrong-omicron-wrecks-ceos-plans-for-u-s-office-return">https://www.bloomberg.com/news/articles/2021-12-16/-i-was-wrong-omicron-wrecks-ceos-plans-for-u-s-office-return</a>; see also Nne D'Innocenzio,
Omicron Cases Have Companies Rethinking Return to Work Plans
(noting, in part, ``how difficult it is for companies to set firm
plans for their employees' mandatory return as worries about a spike
in new cases or new variants keep shifting deadlines. This fall, the
delta variant spurred many big companies to postpone a mandatory
return to early next year.''), Time (December 10, 2021), <a href="https://time.com/6127429/omicron-companies-rethinking-return-to-work/">https://time.com/6127429/omicron-companies-rethinking-return-to-work/</a>.
\14\ See generally CDC, Workplaces and Businesses, <a href="https://www.cdc.gov/coronavirus/2019-ncov/community/workplaces-businesses/index.html">https://www.cdc.gov/coronavirus/2019-ncov/community/workplaces-businesses/index.html</a> (updated October 18, 2021); CDC, Domestic Travel During
COVID-19 (stating, among other things, ``You might have been exposed
to COVID-19 on your travels. You might feel well and not have any
symptoms, but you can still be infected and spread the virus to
others. People who are not fully vaccinated are more likely to get
COVID-19 and spread it to others.''), <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
January 4, 2022).
\15\ See supra note 5.
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By further extending Rule 3110.17 to cover the second half of
calendar year 2022 inspection obligations through December 31, 2022,
FINRA is not proposing to amend the other conditions of the temporary
rule. The proposed amendments to Rule 3110.17 would provide that for
calendar year 2022, a member has the option to conduct those
inspections remotely through December 31, 2022. 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. The additional period of time would also
enable FINRA to further monitor the effectiveness of remote inspections
and their impacts--positive or negative--on firms' overall supervisory
systems in the evolving workplace.
FINRA continues to believe this temporary remote inspection option
is a reasonable alternative to provide to firms to fulfill their Rule
3110(c) obligations during the ongoing pandemic, and is designed to
achieve the investor protection objectives of the inspection
requirements under these unique 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 form of
in-person inspections would be feasible and appropriately contribute to
a supervisory system that is reasonably designed to achieve compliance
with applicable securities laws and regulations, and with applicable
FINRA rules.
FINRA has filed the proposed rule change for immediate
effectiveness. FINRA is proposing to make the proposed rule change
operative on July 1, 2022.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\16\ 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, and
the emergence of the Delta variant and, more recently, the new Omicron
variant, on performing the on-site inspection
[[Page 4075]]
component of Rule 3110(c), the proposed rule change is intended to
provide firms a temporary regulatory option to conduct inspections of
offices and locations remotely during the second half of calendar year
2022. 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. In a time when faced with ongoing
challenges resulting from the COVID-19 pandemic and the emergence of
new variants, FINRA believes that the proposed rule change provides
sensibly tailored relief that will afford firms the ability to assess
when and how to implement their work re-entry plans as measured against
the health and safety of their personnel, while continuing to serve and
promote the protection of investors and the public interest.
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\16\ 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 to include calendar year
2022 inspection obligations through December 31, 2022 within the scope
of the supplementary material without making substantive changes to the
other aspects of the provision. FINRA believes that the proposed
temporary extension would afford firms the time needed to determine
when and how to effectively and safely implement their work re-entry
plans, which must take into account multiple factors, including local
health and safety conditions, without diminishing 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 \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 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
<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#d5a7a0b9b0f8b6bab8b8b0bba1a695a6b0b6fbb2baa3"><span class="__cf_email__" data-cfemail="0e7c7b626b236d6163636b607a7d4e7d6b6d20696178">[email protected]</span></a>. Please include
File Number SR-FINRA-2022-001 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-FINRA-2022-001. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<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 Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of 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-2022-001 and should be submitted
on or before February 16, 2022.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01467 Filed 1-25-22; 8:45 am]
BILLING CODE 8011-01-P
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