Notice2022-16487
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Supplementary Material .19 (Residential Supervisory Location) Under FINRA Rule 3110 (Supervision)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 2, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 147 (Tuesday, August 2, 2022)</title>
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[Federal Register Volume 87, Number 147 (Tuesday, August 2, 2022)]
[Notices]
[Pages 47248-47259]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-16487]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95379; File No. SR-FINRA-2022-019]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt
Supplementary Material .19 (Residential Supervisory Location) Under
FINRA Rule 3110 (Supervision)
July 27, 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 July15, 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. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt new Supplementary Material .19
(Residential Supervisory Location) under FINRA Rule 3110 (Supervision)
that would align FINRA's definition of an office of supervisory
jurisdiction (``OSJ'') and the classification of a location that
supervises activities at non-branch locations with the existing
residential exclusions set forth in the branch office definition to
treat a private residence at which an associated person engages in
specified supervisory activities as a non-branch location, subject to
safeguards and limitations. In accordance with Rule 3110(c), as a non-
branch location, a Residential Supervisory Location would become
subject to inspections on a regular periodic schedule, which is
presumed to be at least every three years,\3\ rather than an annual
inspection requirement required of OSJs and other supervisory branch
offices.\4\
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\3\ See FINRA Rules 3110(c)(1)(C) and 3110.13.
\4\ SEC staff and FINRA have interpreted FINRA rules to require
member firms to conduct on-site inspections of branch offices and
unregistered offices (i.e., non-branch locations) in accordance with
the periodic schedule described under Rule 3110(c)(1). See SEC
National Examination Risk Alert, Volume I, Issue 2 (November 30,
2011), <a href="https://www.sec.gov/about/offices/ocie/riskalert-bdbranchinspections.pdf">https://www.sec.gov/about/offices/ocie/riskalert-bdbranchinspections.pdf</a>, 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)
(``SLB 17'') (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),
<a href="https://www.sec.gov/interps/legal/mrslb17.htm">https://www.sec.gov/interps/legal/mrslb17.htm</a>.
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Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are bracketed.
* * * * *
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
(a) through (f) No Change.
<bullet> <bullet> <bullet> Supplementary
Material: --------------
.01 through .17 No Change.
.18 Reserved.
.19 Residential Supervisory Location
(a) Residential Supervisory Location. Notwithstanding any other
provisions of Rule 3110(f), and subject to paragraph (b) of this
Supplementary Material, a location that is the associated person's
private residence where supervisory activities are conducted, including
those described in Rule 3110(f)(1)(D) through (G) or in Rule
3110(f)(2)(B), shall be considered for those activities a non-branch
location, provided that:
(1) only one associated person, or multiple associated persons who
reside at that location and are members of the same immediate family,
conduct business at the location;
(2) the location is not held out to the public as an office;
(3) the associated person does not meet with customers or
prospective customers at the location;
(4) any sales activity that takes place at the location complies
with the conditions set forth under Rule 3110(f)(2)(A)(ii) or (iii);
(5) neither customer funds nor securities are handled at that
location;
(6) the associated person is assigned to a designated branch
office, and such designated branch office is reflected on all business
cards, stationery, retail communications and other communications to
the public by such associated person;
(7) the associated person's correspondence and communications with
the public are subject to the firm's supervision in accordance with
this Rule;
(8) all electronic communications by the associated person at that
location are made through the member's electronic system;
(9) a list of the residence locations is maintained by the member;
and
(10) all books or records required to be made and preserved by the
member under the federal securities laws or FINRA rules are maintained
by the member other than at the location.
(b) Ineligible Locations
A location shall not be eligible for designation as a non-branch
location in accordance with Rule 3110.19 if:
(1) the member is designated as a Restricted Firm under Rule 4111;
(2) the member is designated as a Taping Firm under Rule 3170;
(3) the member is currently undergoing, or is required to undergo,
a review under Rule 1017(a)(7) as a result of one or more associated
persons at such location;
(4) one or more associated persons at such location is a designated
supervisor
[[Page 47249]]
who has less than one year of direct supervisory experience with the
member;
(5) one or more associated persons at such location is functioning
as a principal for a limited period in accordance with Rule 1210.04;
(6) one or more associated persons at such location is subject to a
mandatory heightened supervisory plan under the rules of the SEC, FINRA
or state regulatory agency;
(7) one or more associated persons at such location is statutorily
disqualified, unless such disqualified person has been approved (or is
otherwise permitted pursuant to FINRA rules and the federal securities
laws) to associate with a member and is not subject to a mandatory
heightened supervisory plan under paragraph (b)(6) of this
Supplementary Material or otherwise as a condition to approval or
permission for such association;
(8) one or more associated persons at such location has an event in
the prior three years that required a ``yes'' response to any item in
Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on
Form U4; or
(9) one or more associated persons at such location is currently
subject to, or has been notified in writing that it will be subject to,
any investigation, proceeding, complaint or other action by the member,
the SEC, a self-regulatory organization, including FINRA, or state
securities commission (or agency or office performing like functions)
alleging they have failed reasonably to supervise another person
subject to their supervision, with a view to preventing the violation
of any provision of the Securities Act, the Exchange Act, the
Investment Advisers Act, the Investment Company Act, the Commodity
Exchange Act, or any rule or regulation under any of such Acts, or any
of the rules of the MSRB.
* * * * *
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
Background
Early in 2020, the COVID-19 pandemic prompted FINRA and other
regulators to provide temporary relief to member firms from certain
regulatory requirements to address the public health crisis.\5\ In
response to the pandemic, many private and government employers closed
their offices and allowed their employees to work from alternative
worksites (e.g., an employee's residence). As jurisdictions scale back
pandemic-related restrictions,\6\ many member firms are moving towards
a blended workforce model, whereby employees work both on-site in a
conventional office setting and remotely in an alternative location
such as a private residence. Based on feedback from member firms, FINRA
believes this model will endure, irrespective of the state of the
pandemic. The pandemic accelerated reliance on technological advances
in surveillance and monitoring capabilities and prompted significant
changes in lifestyles and work habits, including the growing
expectation for workplace flexibility. These dynamics have persuaded
FINRA to review aspects of Rule 3110 that may benefit from
modernization.\7\ The changes brought forth by the pandemic merit a
reevaluation of the regulatory benefit of requiring firms to designate
a private residence where lower risk activities are conducted as an OSJ
or branch office. In recognition of the significant technology and
industry changes that are impacting workplace arrangements, FINRA is
proposing to adopt new Supplementary Material .19 under Rule 3110 to
establish a Residential Supervisory Location that would be treated as a
non-branch location (i.e., an unregistered office), subject to
specified investor protection safeguards and limitations. The most
significant regulatory effect of the proposed rule change would be
that, as a non-branch location, a Residential Supervisory Location
would become subject to inspections on a regular periodic schedule,
which is presumed to be at least every three years, rather than an
annual inspection requirement required of OSJs and other supervisory
branch offices.\8\
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\5\ Among the temporary regulatory relief provided, FINRA
adopted relief pertaining to branch office registration requirements
through Form BR (Uniform Branch Office Registration Form) and FINRA
Rule 3110(c) inspection requirements. Specifically, FINRA
temporarily suspended the requirement for member firms to submit
branch office applications on Form BR for any newly opened temporary
office locations or space-sharing arrangements established as a
result of the pandemic. See Regulatory Notice 20-08 (March 2020)
(``Notice 20-08''). With respect to inspection obligations, FINRA
adopted temporary Rule 3110.16 that provided additional time for
member firms to complete their calendar year 2020 inspection
obligations. See Securities Exchange Act Release No. 89188 (June 30,
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-019). In response to the
ongoing public health crisis, FINRA subsequently adopted temporary
FINRA Rule 3110.17, providing member firms the option to conduct
inspections of their branch offices and non-branch locations
remotely, subject to specified terms therein. 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). FINRA Rule 3110.17 expires on December
31, 2022. See 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).
\6\ See, e.g., Government of the District of Columbia, Mayor's
Order 2022-029 (February 14, 2022) (announcing the end of the indoor
mask mandate at certain venues effective March 1, 2022; and the end
of the requirement for certain private venues to check vaccination
status effective February 14, 2022); State of New York, ``Winter
Toolkit for New Phase of COVID Response: Keep New York Safe, Open
and Moving Forward'' (Governor Kathy Hochul lifting the statewide
indoor business mask-or-vaccine requirement starting on February 10,
2022, and remaining optional for businesses, local governments and
counties to enforce) (February 9, 2022), <a href="https://www.governor.ny.gov/news/governor-hochul-announces-winter-toolkit-new-phase-covid-response-keep-new-york-safe-open-and">https://www.governor.ny.gov/news/governor-hochul-announces-winter-toolkit-new-phase-covid-response-keep-new-york-safe-open-and</a>; and State of
California, Office of Governor Gavin Newsom, ``Governors Newsom,
Brown and Inslee Announce Updated Health Guidance,'' (announcing
that on March 11, 2022, California, Oregon and Washington to adopt
new indoor mask policies and move from mask requirements to mask
recommendations in schools) (February 28, 2022).
\7\ In general, FINRA has had a longstanding practice of
periodically reviewing its rules to ensure that they continue to
promote their intended investor protection objectives in a manner
that is effective and efficient, without imposing undue burdens,
particularly in light of technological, industry and market changes.
See generally Special Notices to Members 01-35 (May 2001) (``Notice
01-35'') (requesting comment on steps that can be taken to
streamline FINRA rules) and 02-10 (January 2002) (``Notice 02-10'')
(requesting information on steps that can be taken to streamline
FINRA rules). See also Regulatory Notice 14-14 (April 2014)
(requesting comment on the effectiveness and efficiency of FINRA's
communications with the public rules) and Regulatory Notice 14-15
(April 2014) (requesting comment on the effectiveness and efficiency
of FINRA's gifts, gratuities and non-cash compensation rules), both
launching FINRA's Retrospective Rule Review Program.
\8\ See note 3, supra.
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Evolution of OSJ and Branch Office Definitions
FINRA has periodically assessed the manner in which firms may
effectively and efficiently carry out their supervisory
responsibilities considering evolving business models and practices,
advances in technology, and regulatory
[[Page 47250]]
benefits. As detailed below, since the late 1980s, the OSJ and branch
office definitions have undergone several revisions to address
regulatory need and efficiency (e.g., rule alignment with other
regulators, access to more robust information), evolving with
technological and industry changes while also remaining focused on
promoting investor protection.
Under FINRA's (then NASD's) Rules of Fair Practice,\9\ an OSJ was
defined as ``any office designated as directly responsible for the
review of the activities of registered representatives or associated
persons in such office and/or any other offices of the member[,]'' and
a branch office was one that was ``owned or controlled by a member, and
which is engaged in the investment banking or securities business.''
\10\ Further, a place of business of a member firm's associated person
was considered a branch office if the member: ``(1) directly or
indirectly contributes a substantial portion of the operating expenses
of any place used by a person associated with a member who is engaged
in the investment banking or securities business, whether it be
commercial office space or a residence. Operating expenses, for
purposes of this standard, shall include items normally associated with
the cost of operating the business such as rent and taxes.'' \11\ In
addition, such location was a branch office if the member ``authorizes
a listing in any publication or any other media, including a
professional dealer's digest or a telephone directory, which listing
designates a place as an office or if the member designates a place as
an office or if the member designates any such place with an
organization as an office.'' \12\ The term ``branch office'' was
established ``merely to designate and identify for registration
purposes the various offices of a member other than the main office and
as such [were] required to be registered and as to which a registration
fee should be paid.'' \13\
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\9\ FINRA (then NASD) adopted Rules of Fair Practice when it was
founded in 1939 under provisions of the 1938 Maloney Act amendments
to the Exchange Act.
\10\ See Notice to Members 87-41 (June 1987) (``Notice 87-41'')
(setting forth the proposed rule text changes to Article III,
Section 27 of the NASD Rules of Fair Practice for the OSJ definition
and Article I, Section (c) of the NASD By-Laws for the branch office
definition, among other provisions).
\11\ See Notice 87-41.
\12\ See Notice 87-41.
\13\ See Notice 87-41.
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Over the years, these terms have undergone several modifications,
driven by changes in regulatory need and business models. In
particular, the subsequent amendments focused on providing regulators
robust information when conducting examinations that readily identified
the appropriate individuals and records at a firm. In response to such
changes, the OSJ and branch office definitions were refined and
exemptions from branch office registration were added.
In 1988, as part of several supervisory enhancements, the OSJ and
branch office definitions were significantly amended in response to
general concerns about member firms' associated persons engaging in the
offer and sale of securities to the public without adequate ongoing
supervision and regular examination by member firms.\14\ The amendments
substantially expanded the specificity of FINRA Rule 3110 (formerly,
Article III, Section 27 of the NASD Rules of Fair Practice) with
respect to a member's supervisory obligations and the new standards
focused on ``the creation of a supervisory `chain of command,' in which
qualified supervisory personnel are appointed to carry out the firm's
supervisory obligations[.]'' \15\ The newly amended OSJ definition
focused on an office at which ``the approval [of specified functions]
that constitutes formal action by the member takes place.'' \16\ The
amendments also added more prescriptive requirements with respect to
OSJs such as requiring a firm to designate as an OSJ an office that
meets the OSJ definition and any other location for which such
designation would be appropriate; designate one or more registered
principals in each OSJ; maintain written supervisory procedures
describing the supervisory system implemented and listing the titles,
registration status, and locations of the required supervisory
personnel and the specific responsibilities associated with each; and
keep and maintain the firm's supervisory procedures, or the relevant
parts thereof, at each OSJ and at each other location where supervisory
activities are conducted on behalf of the firm.\17\
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\14\ See Securities Exchange Act Release No. 26177 (October 13,
1988), 53 FR 41008 (October 19, 1988) (Order Approving File No. SR-
NASD-88-31). See also Notice to Members 88-84 (November 1988)
(``Notice 88-84'') (announcing SEC approval of File No. SR-NASD-88-
31).
\15\ See Notice to Members 88-11 (February 1988) (``Notice 88-
11'') (requesting comments on proposed amendments to Article III,
Section 27 of the NASD Rules of Fair Practice regarding supervision
and the OSJ and branch office definitions).
\16\ See Notice 88-11. Largely similar to current Rule
3110(f)(1)(A) through (G), the specified functions were: ``(1) Order
execution and/or market making; (2) Structuring of public offerings
or private placements; (3) Maintaining custody of customers' funds
and/or securities; (4) Final acceptance (approval) of new accounts
on behalf of the member, (5) Review and endorsement of customer
orders pursuant to the provisions of proposed Article III, Section
27(d); (6) Final approval of advertising or sales literature for use
by persons associated with the member, pursuant to Article III,
Section 35(b)(l) of the Rules of Fair Practice; or (7)
Responsibility for supervising the activities of persons associated
with the member at one or more other offices of the member.'' See
Notice 88-84.
\17\ See Notice 88-84. See generally Rule 3110(a) and (b).
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With respect to the branch office definition, the amendments also
refined it from any location ``owned or controlled by a member, and
which [was] engaged in the investment banking or securities business''
\18\ to ``any business location held out to the public or customers by
any means as a location at which the investment banking or securities
business is conducted on behalf of the member, excluding any location
identified solely in a telephone directory line listing or on a
business card or letterhead, which listing, card, or letterhead also
sets forth the address and telephone number of the office of the member
responsible for supervising the activities of the identified
location.'' \19\
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\18\ See Notice 87-41.
\19\ See Notice 88-84.
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These definitional amendments were intended to address concerns
about the absence of on-site supervision by registered principals at a
firm's business location.\20\ The amendments required a ``minimum
supervisory structure that facilitate[d] closer supervision by
principals with clear responsibilities.'' \21\ In addition, the
revisions required OSJ designation for ``any office at which the
approval that constitutes formal action by the member takes place.''
\22\ Further, FINRA noted that the enhancements to the supervisory
practices and definitions reflected its ``continuing commitment to
facilitate more effective supervision by members while accommodating
their diverse modes of operation.'' \23\ FINRA believes the
definitional amendments brought focus to where final approval of
certain functions was occurring so both the firm and regulators would
be able to readily identify the principal who was designated to review
a specific function and also where original books and records related
to such supervision would be kept. At that time, books and records
(e.g., account documents, communications, order tickets, trade
blotters) were generally made and preserved in hard copy paper format,
[[Page 47251]]
not electronically, and stored in files at such offices.
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\20\ See Notice 87-41.
\21\ See Notice 87-41.
\22\ See Notice 88-11.
\23\ See Notice 88-11.
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In 1992, FINRA further amended the branch office definition to
allow additional locations that were not being held out to the public
to be exempt from branch office registration.\24\ FINRA noted that the
exclusions were intended as a reasonable accommodation to member firms
with widely dispersed sales personnel selling limited product lines
such as variable contracts and mutual funds.\25\ In the approval order,
the Commission recognized that the amended definition would eliminate
the requirement to register as a branch office unless the securities
activity at the office required ``continuous and direct supervision of
a principal, or the location is being held out to the public as a place
where a full range of securities activity is being conducted. Having
considered the proposal, the Commission believe[d] the rule change will
assist [FINRA] members in meeting their obligation to supervise off-
site registered representatives under applicable securities laws,
regulations and [FINRA] rules.'' \26\
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\24\ In general, these amendments codified interpretations
pertaining to the branch office definitions and their exclusions by
clarifying that the address and telephone number of the appropriate
OSJ or branch office must be provided in advertisements and sales
literature, not the address of a non-branch location. See Securities
Exchange Act Release No. 30509 (March 24, 1992), 57 FR 10936 (March
31, 1992) (Order Approving File No. SR-NASD-91-42).
\25\ See Notice to Members 92-18 (April 1992) (announcing SEC
approval of File No. SR-NASD-91-42).
\26\ See Securities Exchange Act Release No. 30509 (March 24,
1992), 57 FR 10936, 10937 (March 31, 1992) (Order Approving File No.
SR-NASD-91-42).
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In 2001, FINRA launched an initiative to modernize its rules.\27\
Based on input from member firms, FINRA identified the branch office
definition as a rule that could benefit from modernization in light of
the SEC's amendment to the term ``office'' in the SEC's Books and
Records Rules,\28\ the branch office definition used by the New York
Stock Exchange (``NYSE'') and state regulators, new business practices
that were developing based on technological innovations, and the
potential to create a uniform branch office registration system.\29\
FINRA expressly noted that a factor to be considered in modernizing
rules included instances ``where the regulatory burden of a rule
significantly outweigh[ed] the benefit, or the rule no longer work[ed]
efficiently given new technologies.'' \30\
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\27\ See Notice 01-35.
\28\ 17 CFR 240.17a-3 and 240.17a-4. See generally Notice to
Members 01-80 (December 2001) (describing amendments to the SEC
Books and Records Rules).
\29\ See Notice 02-10.
\30\ See Notice 01-35.
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Until 2005, member firms were required to complete Schedule E to
the Form BD (``Schedule E'') to register or report branch offices to
the SEC, FINRA, and the state in which they conducted a securities
business that required branch office registration. While Schedule E
captured certain data with respect to branch offices, it did not
adequately fulfill the evolving needs of regulators. For example,
Schedule E did not link an individual registered representative with a
particular branch office, which made it more difficult for regulators
to track the appropriate individuals for examinations.
As technology advanced and business models changed, FINRA continued
its commitment to modernizing the rule while preserving investor
protections. By 2005, this initiative led to the establishment of a
national standard, a uniform definition of a branch office, that was
the product of a coordinated effort among regulators to reduce
inconsistencies in the definitions used by the SEC, FINRA, the NYSE,
the North American Securities Administrators Association, and state
securities regulators to identify locations where broker-dealers
conduct securities or investment banking business.\31\ Moreover, the
adoption of a uniform definition facilitated the development of a
centralized branch office registration system through the Central
Registration Depository and the creation of a uniform form to register
or report branch offices electronically with multiple regulators.\32\
With the launch of this new technology, firms and regulators could
efficiently identify each branch location, which would be assigned a
unique branch office number by the system, the individuals assigned to
such location, and the designated supervisor(s) for such location. This
new centralized branch office registration system allowed firms and
regulators to efficiently locate offices and individuals, and moreover
closed gaps in information, created significant efficiencies and
lessened the burden on firms and regulators.
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\31\ See Securities Exchange Act Release No. 52403 (September 9,
2005), 70 FR 54782 (September 16, 2005) (Order Approving File No.
SR-NASD-2003-104).
\32\ See Form BR.
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By the 1990s, technology had progressed with the advent of faster
internet, wifi, the emergence of web-based platforms, and more portable
computers to enhance workplace connectivity that allowed for expanded
remote work options. In recognition of the evolving and growing trend
in the financial industry and workforce generally to work from home,
the uniform branch office definition adopted numerous exclusions,
including the current primary residence exclusion. The limitations on
use of a primary residence closely tracks the limitations on the use of
a private residence in the SEC's Books and Records Rules,\33\ which
provide that a broker-dealer is not required to maintain records at an
office that is a private residence if only one associated person (or
multiple associated persons if members of the same family) regularly
conducts business at the office, the office is not held out to the
public as an office, and neither customer funds nor securities are
handled at the office. At the same time, FINRA adopted IM-3010-1
(Standards for Reasonable Review) (now Rule 3110.12 (Standards for
Reasonable Review)), as a further safeguard. It clarified the high
standards firms must observe regarding supervisory obligations and
emphasized the requirement that members already had to establish
reasonable supervisory procedures and conduct reviews of locations
taking into consideration, among other things: the firm's size,
organizational structure, scope of business activities, number and
location of offices, the nature and complexity of products and services
offered, the volume of business done, the number of associated persons
assigned to a location, whether a location has a principal on-site,
whether the office is a non-branch location, and the disciplinary
history of the registered person.
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\33\ See note 28, supra.
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During the almost two decades since the adoption of the uniform
branch office definition and its related exclusions, regulators have
utilized advancements in technology to support their examinations and
otherwise further investor protections, and firms have embraced and
adopted numerous technologies to enhance their regulatory and
compliance programs. The rapid explosion of new technologies in the
last 20 years, and the widespread use such of technology (e.g.,
computers, email, mobile phones, electronic communication systems with
audio and visual capabilities, cloud storage of books and records), and
the ability to use risk-based surveillance and compliance tools and
systems, have fundamentally altered the landscape of how the broker-
dealer business is conducted.
These earlier amendments evidence the need to keep the regulatory
[[Page 47252]]
framework current. FINRA believes that with evolving changes in
business models and the significant advance of technological tools that
are now readily available, some functions can be exempt from
registration, subject to specified conditions, without compromising a
reasonably designed supervisory system. Moreover, FINRA believes the
proposed rule change to classify some private residences as non-branch
locations, subject to specified controls, will not result in a loss of
the important regulatory information that the rules were designed, in
part, to provide regarding the locations or associated persons. That
information will continue to be collected through our regulatory
requirements and systems such as the branch office registration system
and Form BR (Uniform Branch Office Registration Form) and other uniform
registration forms.\34\
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\34\ For example, under Form U4 (Uniform Application for
Securities Industry Registration or Transfer), if an individual's
``Office of Employment Address'' is an unregistered location, the
firm must report the address of such location as the individual's
``located at'' address and must report the branch office that
supervises that non-registered location as the ``supervised from''
location. See Form U4, Section 1 (General Information). Similar to
Form BR, Form U4 solicits information about an individual's other
business activities. See Form U4, Section 13 (Other Business) and
Form BR, Section 3 (Other Business Activities/Names/Websites). Form
BD (Uniform Application for Broker-Dealer Registration) captures the
types of business in which a firm is engaged. See Form BD, Item 12;
see also Form BR, Section 2 (Registration/Notice Filing/Type of
Office/Activities), Item D.
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FINRA Rule 3110 and Current Requirements To Register and Inspect
Offices
Rule 3110 requires a member firm, regardless of size or type, to
have a supervisory system for the activities of its associated persons
that is reasonably designed to achieve compliance with applicable
securities laws and regulations, and FINRA rules. The rule sets forth
the minimum requirements of a member firm's supervisory system that
includes registering a location as an OSJ or branch office that meets
the definitions under Rule 3110(f) and inspecting all offices and
locations in accordance with Rule 3110(c). The rule categorizes offices
or locations as an OSJ or supervisory branch office, a non-supervisory
branch office, or a non-branch location.\35\ The requirements to
register, inspect and have a principal on-site vary based on the
categorization. Specifically, the rule requires the registration and
designation as an OSJ or branch office of each location, including the
main office, that meets their respective definition under paragraphs
(f)(1) and (f)(2) of Rule 3110, as described in more detail below.\36\
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\35\ See FINRA Rule 3110(c).
\36\ See FINRA Rules 3110(a)(3) and 3110.01. Currently, firms
are required to register each branch office and indicate, among
other things, whether it is an OSJ, by filing Form BR. See Section 2
of Form BR, requiring the applicant to indicate whether an office is
a ``FINRA OSJ'' or ``non-OSJ branch,'' <a href="https://www.finra.org/sites/default/files/web-crd-form-br-filing.pdf">https://www.finra.org/sites/default/files/web-crd-form-br-filing.pdf</a>.
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OSJs are a subset of branch offices. Rule 3110(f)(2) defines a
``branch office'' as ``any location where one or more associated
persons of a member firm regularly conducts the business of effecting
any transactions in, or inducing or attempting to induce the purchase
or sale of, any security, or is held out as such[.]'' \37\ In addition,
any location that is responsible for supervising the activities of
persons associated with the member at one or more non-branch locations
of the member is a branch office (i.e., a supervisory branch
office).\38\ A location registered as a branch office must have one or
more appropriately registered representatives or principals in each
office, and is subject to an inspection at least every three years,
unless it is a supervisory branch office in which case it is subject to
at least an annual inspection.\39\
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\37\ See FINRA Rule 3110(f)(2)(A).
\38\ See FINRA Rule 3110(f)(2)(B).
\39\ See FINRA Rule 3110(a)(4), and FINRA Rule 3110(c)(1)(A) and
(B).
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Depending upon the functions occurring at a branch office, it may
be further classified as an OSJ, which Rule 3110(f)(1) defines as a
member's business location at which any one or more of the following
functions take place: (1) order execution or market making; (2)
structuring of public offerings or private placements; (3) maintaining
custody of customers' funds or securities; (4) final acceptance
(approval) of new accounts on behalf of the member; (5) review and
endorsement of customer orders, pursuant to Rule 3110(b)(2); \40\ (6)
final approval of retail communications for use by persons associated
with the member, pursuant to Rule 2210(b)(1), except for an office that
solely conducts final approval of research reports; \41\ or (7)
responsibility for supervising the activities of persons associated
with the member at one or more other branch offices of the member. An
office designated as an OSJ must have an appropriately registered
principal on-site at the location, and must be inspected at least
annually.\42\
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\40\ FINRA Rule 3110(b)(2) pertains to the review of a member's
investment banking and securities business and provides that ``[t]he
supervisory procedures required by [Rule 3110(b) (Written
Procedures)] shall include procedures for the review by a registered
principal, evidenced in writing, of all transactions relating to the
investment banking or securities business of the member.''
\41\ In general, with some exceptions, paragraph (b)(1) of Rule
2210 (Communications with the Public) requires that an appropriately
qualified registered principal approve each retail communication
prior to use or filing with FINRA.
\42\ See FINRA Rules 3110(a)(4) and 3110(c)(1)(A).
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However, subject to specified conditions, an office or location may
be deemed a ``non-branch location,'' and excluded from registration as
a branch office. Currently, Rule 3110(f)(2)(A) sets forth seven
exclusions--often referred to as unregistered offices or non-branch
locations--of which two pertain to residential locations.\43\ One such
exclusion appears under Rule 3110(f)(2)(A)(ii) and exempts from
registration as a branch office an associated person's primary
residence subject to the following express conditions: (1) only one
associated person, or multiple associated persons who reside at that
location and are members of the same immediate family, conduct business
at the location; (2) the location is not held out to the public as an
office and the associated person does not meet with customers at the
location; (3) neither customer funds nor securities are handled at that
location; (4) the associated person is assigned to a designated branch
office, and such designated branch office is reflected on all business
cards, stationery, retail communications and other communications to
the public by such associated person; (5) the associated person's
correspondence and communications with the public are subject to the
firm's supervision in accordance with the Rule; (6) electronic
communications (e.g., email) are made through the member's electronic
system; (7) all orders are entered through the designated branch office
or an electronic
[[Page 47253]]
system established by the member that is reviewable at the branch
office; (8) written supervisory procedures pertaining to supervision of
sales activities conducted at the residence are maintained by the
member; and (9) a list of the residence locations is maintained by the
member (``primary residence exclusion'').\44\ The second exclusion that
pertains to a residential location appears under Rule
3110(f)(2)(A)(iii) and is any location, other than a primary residence,
that is used for securities business for less than 30 business days in
any one calendar year, provided that the member complies with the
conditions described in (1) through (8) above (``non-primary residence
exclusion''). In general, the non-primary residence exclusion typically
refers to a vacation or second home.\45\ A non-branch location must be
inspected on a periodic schedule, presumed to be at least every three
years.\46\
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\43\ See generally FINRA Rule 3110(f)(2)(A) which, in addition
to the primary residence and the non-primary residence exclusions
that are further described, excludes the following from the
definition of ``branch office'': (1) any location that is
established solely for customer service or back office type
functions where no sales activities are conducted and that is not
held out to the public as a branch office; (2) any office of
convenience, where associated persons occasionally and exclusively
by appointment meet with customers, which is not held out to the
public as an office; (3) any location that is used primarily to
engage in non-securities activities and from which the associated
person(s) effects no more than 25 securities transactions in any one
calendar year; provided that any retail communication identifying
such location also sets forth the address and telephone number of
the location from which the associated person(s) conducting business
at the non-branch locations are directly supervised; (4) the Floor
of a registered national securities exchange where a member conducts
a direct access business with public customers; or (5) a temporary
location established in response to the implementation of a business
continuity plan.
\44\ See FINRA Rule 3110(f)(2)(ii)a. through i.
\45\ See Notice to Members 06-12 (March 2006) (``Notice 06-
12'').
\46\ See note 3, supra.
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Notwithstanding either of these two residential exclusions or the
other exclusions listed under Rule 3110(f)(2)(A),\47\ a primary or non-
primary residence location that is responsible for either the
supervisory activities set forth in the OSJ definition or for
supervising the activities of persons associated with the member at one
or more non-branch locations of the member is considered an OSJ or
(supervisory) branch office, respectively.\48\ Consequently, such
residential supervisory offices are subject to registration, an annual
inspection and, in some cases, additional licensing requirements.\49\
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\47\ See note 43, supra.
\48\ See FINRA Rule 3110(f)(1)(D) through (G) and FINRA Rule
3110(f)(2)(B).
\49\ See note 42, supra.
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As noted above, the branch office definition and its exclusions,
including the conditions for the primary residence and non-primary
residence exclusions, is a uniform definition FINRA developed in
coordination with the NYSE and other self-regulatory organizations
(``SROs''), and state securities regulators, and it has been in place
since 2005 (collectively, the ``uniform branch office
definition'').\50\ The codification of the seven exclusions from
registration in the uniform branch office definition recognized both
practical situations and advances in technology used to conduct and
monitor business, the evolving nature of business models, and changing
lifestyle and work practices while also preserving investor protection
through specified safeguards and limitations such as those appearing in
the primary residence exclusion.\51\ In the approval order for the
uniform branch office definition, the Commission noted that the
limitations for the primary residence exclusion ``closely track the
limitations on the use of a private residence in the Books and Records
Rules.'' \52\ The Commission also stated that the seven exclusions
``recognize current business, lifestyle, and surveillance practices and
provide associated persons with additional flexibility. For instance,
because associated persons may have to work from home due to illness,
or to provide childcare or eldercare for certain family members, the
Commission believes it is appropriate to except primary residences from
the definition of branch office while providing certain safeguards and
limitations to protect investors.'' \53\ Further, the Commission stated
that ``[g]iven the continued advances in technology used to conduct and
monitor businesses and changes in the structure of broker-dealers and
in the lifestyles and work habits of the workforce, the Commission
believes it is reasonable and appropriate for [FINRA] to reexamine how
it determines whether business locations need to be registered as
branch offices of broker-dealer members.'' \54\ Finally, the Commission
expressed the view that the uniform branch office definition ``strikes
the right balance between providing flexibility to broker-dealer firms
to accommodate the needs of their associated persons, while at the same
time setting forth parameters that should ensure that all locations,
including home offices, are appropriately supervised.'' \55\ FINRA
believes that the Commission's statements about advances in technology
and evolving workplace conventions, and the safeguards and limitations
of the primary residence exclusion are apt for this proposed rule
change as well.
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\50\ See note 31, supra.
\51\ See generally Notice to Members 05-67 (October 2005).
\52\ See 70 FR 54782, 54783 (citation omitted).
\53\ See 70 FR 54782, 54787. See also Securities Exchange Act
Release No. 52402 (September 9, 2005), 70 FR 54788, 54795 (September
16, 2005) (Order Approving File No. SR-NYSE-2002-34) (stating, ``the
Commission believes that the seven proposed exceptions to
registering as a branch office constitute a reasonable approach to
recognize current business, lifestyle, and surveillance practices
and provide associated persons with flexibility with respect to
where they perform their jobs. For instance, because associated
persons may have to work from home due to illness, or to provide
childcare or eldercare for certain family members, the Commission
believes it is appropriate to except primary residences from the
definition of branch office.'').
\54\ See 70 FR 54782, 54787.
\55\ See note 53, supra.
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Impact of New Workplace Models
As noted above, many employers closed their offices and moved to a
broad remote work environment to contend with the public health crisis.
In response, FINRA requested comment regarding pandemic-related issues
and questions, including the comment process in connection with the
temporary amendments to Rule 3110,\56\ and discussions with FINRA's
advisory committees and other industry representatives. Firms responded
that they relied extensively on technology to support their effective
transition to the remote work environment and enhance the supervision
of geographically dispersed associated persons, many of whom have been
working from home since early 2020 and may continue to do so in some
manner in the current environment.\57\ These technological tools
facilitating their supervisory practices include surveillance systems,
electronic tracking programs or applications, and electronic
communications, including video conferencing tools.\58\ In addition,
some firms have further noted that the flexibility remote work offers
has made a positive impact in attracting more diverse talent, and
retaining existing talent.\59\
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\56\ See, e.g., Submitted Comments to 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), <a href="https://www.sec.gov/comments/sr-finra-2022-001/srfinra2022001.htm">https://www.sec.gov/comments/sr-finra-2022-001/srfinra2022001.htm</a>; and 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), <a href="https://www.sec.gov/comments/sr-finra-2020-019/srfinra2020019.htm">https://www.sec.gov/comments/sr-finra-2020-019/srfinra2020019.htm</a>.
\57\ See generally Regulatory Notice 21-44 (December 2021).
\58\ See generally Regulatory Notice 20-16 (May 2020); see also
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>.
\59\ See generally Submitted Comments to Regulatory Notice 20-42
(December 2020), <a href="https://www.finra.org/rules-guidance/notices/20-42#comments">https://www.finra.org/rules-guidance/notices/20-42#comments</a>.
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As pandemic-related restrictions are easing,\60\ many member firms
are moving towards a blended workforce model for their employees,
consisting of working on-site in a conventional office
[[Page 47254]]
setting and working remotely in an alternative location such as a
private residence. Similar to the changed environment underlying the
Commission's approval order of the uniform branch office definition
that codified the existing seven exclusions, FINRA believes that the
structural and lifestyle changes for member firms and their workforce
catalyzed by the pandemic--along with advances in technology--merit
reevaluation of some aspects of the branch office registration and
inspection requirements. Specifically, FINRA believes the regulatory
benefit of requiring firms to designate a private residence as an OSJ
or branch office should now be reconsidered where the risk profile of
these offices can be effectively controlled through practically based
safeguards and limitations. FINRA is therefore proposing to adopt new
Supplementary Material .19 under Rule 3110 to establish a Residential
Supervisory Location as a non-branch location, subject to specified
safeguards and limitations. This proposed new non-branch location would
target the subset of residential locations that have many of the
attributes contained in the primary residence exclusion, but must be
registered as an OSJ or branch office because of the supervisory
functions taking place there.
---------------------------------------------------------------------------
\60\ See note 6, supra.
---------------------------------------------------------------------------
Proposed Residential Supervisory Location as a Non-Branch Location
The proposed definition of a Residential Supervisory Location would
be based largely on several existing aspects of Rule 3110(f). In
particular, FINRA is proposing to incorporate the existing supervisory
functions appearing in the OSJ definition (Rule 3110(f)(1)) and branch
office definition (Rule 3110(f)(2)(B)) with the existing residential
exclusions set forth in the branch office definition to classify a
Residential Supervisory Location as a non-branch location. Currently, a
private residence at which these supervisory functions occur must be
registered and designated as a branch office or OSJ under Rule
3110(a)(3), and inspected at least annually under Rule 3110(c)(1)(A).
By treating such location as a non-branch location, the private
residence would become subject to inspections on a regular periodic
schedule under Rule 3110(c)(1)(C), presumed to be every three
years.\61\
---------------------------------------------------------------------------
\61\ See note 3, supra.
---------------------------------------------------------------------------
Proposed Rule 3110.19 would incorporate some existing safeguards
and limitations firms must already satisfy to rely on the primary
residence exclusion \62\ as FINRA believes that several of these
conditions are also appropriate for the proposed Residential
Supervisory Location. FINRA intends for the terms underlying the
proposed Residential Supervisory Location to be interpreted
consistently with their meaning in Rule 3110(f) and existing related
guidance.\63\ In addition, FINRA is proposing to further augment the
safeguards and limitations to describe the locations that would be
ineligible to rely on proposed Rule 3110.19.
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\62\ See Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f, and i.
\63\ See, e.g., Notice 06-12.
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A. Safeguards and Conditions To Rely on the Residential Supervisory
Location Exclusion (Proposed Rule 3110.19(a))
As described above, FINRA is proposing to adopt Rule 3110.19 to
establish a Residential Supervisory Location as a new non-branch
location, but subject to specified conditions, most of which are
derived from those currently required for the primary residence and
non-primary residence exclusions. FINRA is proposing to add one new
condition to a Residential Supervisory Location: a restriction from
maintaining original books and records at such location.
Under proposed Rule 3110.19(a), any such location would be
considered a non-branch location (and thus excluded from branch office
registration), provided that: (1) only one associated person, or
multiple associated persons who reside at that location and are members
of the same immediate family, conduct business at the location
(proposed Rule 3110.19(a)(1)); \64\ (2) the location is not held out to
the public as an office (proposed Rule 3110.19(a)(2)); \65\ (3) the
associated person does not meet with customers or prospective customers
at the location (proposed Rule 3110.19(a)(3)); \66\ (4) no sales
activity takes place at the location other than as permitted and
subject to the conditions set forth under Rule 3110(f)(2)(A)(ii) or
(iii) (proposed Rule 3110.19(a)(4)); \67\ (5) neither customer funds
nor securities are handled at that location (proposed Rule
3110.19(a)(5)); \68\ (6) the associated person is assigned to a
designated branch office, and such designated branch office is
reflected on all business cards, stationery, retail communications and
other communications to the public by such associated person (proposed
Rule 3110.19(a)(6)); \69\ (7) the associated person's correspondence
and communications with the public are subject to the firm's
supervision in accordance with Rule 3110 (proposed Rule 3110.19(a)(7));
\70\ (8) all electronic communications by the associated person at that
location are made through the member's electronic system (proposed Rule
3110.19(a)(8)); \71\ (9) a list of the residence locations is
maintained by the member (proposed Rule 3110.19(a)(9)); \72\ and (10)
all books or records required to be made and preserved by the member
under the federal securities laws or FINRA rules are maintained by the
member other than at the location (proposed Rule 3110.19(a)(10)).
---------------------------------------------------------------------------
\64\ See Rule 3110(f)(2)(A)(ii)a. (``Only one associated person,
or multiple associated persons who reside at that location and are
members of the same immediate family, conduct business at the
location[.]'').
\65\ See Rule 3110(f)(2)(A)(ii)b. (``The location is not held
out to the public as an office and the associated persons does not
meet with customers at the location[.]'').
\66\ See note 65, supra.
\67\ An associated person's private residence, other than a
primary residence, remains subject to the less than 30-business-day
in any calendar year limitation on use for securities business.
\68\ See Rule 3110(f)(2)(A)(ii)c. (``Neither customer funds nor
securities are handled at the location[.]'').
\69\ See Rule 3110(f)(2)(A)(ii)d. (``The associated person is
assigned to a designated branch office, and such designated branch
office is reflected on all business cards, stationery, retail
communications and other communications to the public by such
associated person[.]'').
\70\ See Rule 3110(f)(2)(A)(ii)e. (``The associated person's
correspondence and communications with the public are subject to the
firm's supervision in accordance with this Rule[.]'').
\71\ See Rule 3110(f)(2)(A)(ii)f. (``Electronic communications
(e.g., email) are made through the member's electronic system[.]'').
\72\ See Rule 3110(f)(2)(A)(ii)i. (``A list of the residence
locations is maintained by the member[.]'').
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FINRA notes that the proposed conditions are substantially similar
to those applied to the current primary and non-primary residence
exclusions, and are supplemented by a proposed additional condition
that would preclude a firm from maintaining any books or records
required to be made and preserved by the member under the federal
securities laws or FINRA rules at the Residential Supervisory Location.
FINRA believes that this proposed new limitation would strengthen a
firm's ability to monitor the supervisory activities occurring at a
Residential Supervisory Location and act to lower the overall risks
associated with such location because the books and records required to
be made and preserved by the member under the federal securities laws
or FINRA rules cannot be maintained on-site. Moreover, FINRA notes that
sales activities would be permissible at a Residential Supervisory
Location to the same extent sales activities are permitted currently
under such exclusions. As previously noted,
[[Page 47255]]
the conditions for the current primary and non-primary residence
exclusions, which align with the SEC's Books and Records Rules, were
developed in coordination with other SROs and state securities
regulators and such exclusions have been in place since 2005.\73\ As
such, firms have developed experience with monitoring and supervising
these conditions, and FINRA believes member firms will be able to rely
on such experience to reasonably supervise similar conditions for
proposed Residential Supervisory Locations. As with any non-branch
location, a Residential Supervisory Location would be subject to an
inspection on a periodic schedule, presumed to be at least every three
years.\74\
---------------------------------------------------------------------------
\73\ 17 CFR 240.17a-4(l); see also note 31, supra.
\74\ See note 3, supra.
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B. Ineligible Locations (Proposed Rule 3110.19(b))
FINRA is further proposing several location categories that are
ineligible for designation as a Residential Supervisory Location. The
nine proposed categories of ineligibility are events or activities of a
member firm or its associated persons that FINRA believes are more
likely to raise investor protection concerns based on FINRA rules, an
associated person's level of supervisory experience with the member
firm or qualifications, or an associated person's record of specified
regulatory or disciplinary events.
1. Member Firm Ineligibility
Under proposed Rule 3110.19(b), a location would be ineligible for
designation as a Residential Supervisory Location, non-branch location,
in accordance with Rule 3110.19 if: (i) the member is designated as a
``Restricted Firm'' under Rule 4111 (Restricted Firm Obligations) \75\
(proposed Rule 3110.19(b)(1)); (ii) the member is designated as a
``Taping Firm'' under Rule 3170 (Tape Recording of Registered Persons
by Certain Firms) \76\ (proposed Rule 3110.19(b)(2)); or (iii) the
member is currently undergoing, or is required to undergo, a review
under Rule 1017(a)(7) as a result of one or more associated persons at
such location \77\ (proposed Rule 3110.19(b)(3)). These rules expressly
account for firms that pose higher risks, and for that reason, would be
ineligible to rely on proposed Rule 3110.19(a).
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\75\ In general, Rule 4111 requires member firms that are
identified as ``Restricted Firms'' to deposit cash or qualified
securities in a segregated, restricted account; adhere to specified
conditions or restrictions; or comply with a combination of such
obligations. See generally Regulatory Notice 21-34 (September 2021)
(announcing FINRA's adoption of rules to address firms with a
significant history of misconduct).
\76\ In general, Rule 3170 requires a member firm to establish,
enforce and maintain special written procedures supervising the
telemarketing activities of all of its registered persons, including
the tape recording of conversations, if the firm has hired more than
a specified percentage of registered persons from firms that meet
FINRA Rule 3170's definition of ``disciplined firm.'' See generally
Regulatory Notice 14-10 (March 2014) (announcing FINRA's adoption of
consolidated rules governing supervision).
\77\ Rule 1017(a)(7) requires a member firm to file an
application for continuing membership when a natural person seeking
to become an owner, control person, principal or registered person
of the member firm has, in the prior five years, one or more defined
``final criminal matters'' or two or more ``specified risk events''
unless the member firm has submitted a written request to FINRA
seeking a materiality consultation for the contemplated activity.
Rule 1017(a)(7) applies whether the person is seeking to become an
owner, control person, principal or registered person at the
person's current member firm or at a new member firm. See generally
Regulatory Notice 21-09 (March 2021) (announcing FINRA's adoption of
rules to address brokers with a significant history of misconduct).
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2. Associated Person Ineligibility
In addition, under proposed Rule 3110.19(b), a location would be
ineligible for designation as a Residential Supervisory Location, a
non-branch location, in accordance with proposed Rule 3110.19 where:
(i) one or more associated persons at such location is a designated
supervisor who has less than one year of direct supervisory experience
with the member (proposed Rule 3110.19(b)(4)); (ii) one or more
associated persons at such location is functioning as a principal for a
limited period in accordance with Rule 1210.04 \78\ (proposed Rule
3110.19(b)(5)); (iii) one or more associated persons at such location
is subject to a mandatory heightened supervisory plan under the rules
of the SEC, FINRA or state regulatory agency (proposed Rule
3110.19(b)(6)); (iv) one or more associated persons at such location is
statutorily disqualified, unless such disqualified person has been
approved (or is otherwise permitted pursuant to FINRA rules and the
federal securities laws) to associate with a member and is not subject
to a mandatory heightened supervisory plan under paragraph (b)(6) of
this Supplementary Material or otherwise as a condition to approval or
permission for such association (proposed Rule 3110.19(b)(7)); (v) one
or more associated persons at such location has an event in the prior
three years that required a ``yes'' response to any item in Questions
14A(1)(a) and 2(a), 14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4
\79\ (proposed Rule 3110.19(b)(8)); or (vi) one or more associated
persons at a location is currently subject to, or has been notified in
writing that it will be subject to, any investigation, proceeding,
complaint or other action by the member, the SEC, an SRO, including
FINRA, or state securities commission (or agency or office performing
like functions) alleging they have failed reasonably to supervise
another person subject to their supervision, with a view to preventing
the violation of any provision of the Securities Act, the Exchange Act,
the Investment Advisers Act, the Investment Company Act, the Commodity
Exchange Act, or any rule or regulation under any of such Acts, or any
of the rules of the Municipal Securities Rulemaking Board (proposed
Rule 3110.19(b)(9)).
---------------------------------------------------------------------------
\78\ In general, Rule 1210.04 (Requirements for Registered
Persons Functioning as Principals for a Limited Period) imposes an
experience requirement (18 months of experience within the preceding
five-year period) on those registered representatives who are
designated by their firms to function in a principal capacity for a
fixed 120-day period before having passed an appropriate principal
qualification examination. See generally Regulatory Notice 17-30
(October 2017) (announcing FINRA's adoption of consolidated rules
governing qualification and registration).
\79\ Form U4's Questions 14A(1)(a) and 2(a), 14B(1)(a) and 2(a)
elicit reporting of criminal convictions, and Questions 14C, 14D,
and 14E pertain to regulatory action disclosures.
---------------------------------------------------------------------------
FINRA believes that an associated person designated at such
location should have more than one year of supervisory experience with
the member and have passed the appropriate principal level
qualification examination before the associated person's private
residence can be treated as a non-branch location under proposed Rule
3110.19(a). In addition, FINRA believes that the imposition of a
mandatory heightened supervisory plan and the specified disclosures on
Form U4 pertaining to criminal convictions and final regulatory action
are indicia of increased risk to investors at some firms and locations
such that they should not be treated as a non-branch location under the
proposed supplementary material.
A private residence meeting the description of any one of the
categories in proposed Rule 3110.19(b) would be ineligible for
designation as a Residential Supervisory Location, even with the
safeguards and limitations listed in proposed Rule 3110.19(a). A member
firm would be required to designate such private residence as an OSJ or
branch office, as applicable, unless the location meets a branch office
exclusion under Rule 3110(f)(2). FINRA believes the proposed list of
ineligibility categories is appropriately derived from existing rule-
based criteria that already
[[Page 47256]]
have a process to identify firms that may pose greater concern (e.g.,
Rules 4111 and 3170) or to identify associated persons that may pose
greater concerns as supervisors due to the nature of disclosures of
regulatory or disciplinary events on the uniform registration forms or
where the firm has not yet had the opportunity to gauge such person's
effectiveness as a supervisor due to their limited supervisory
experience with the member firm. FINRA believes that these objective
categorical restrictions strike the correct balance and are sensible
and consistent with a reasonably designed supervisory system while
still promoting investor protections.
FINRA acknowledges the shift towards a permanent blended or hybrid
workforce model and therefore believes under the current environment,
private residences responsible for the supervisory activities and
subject to the conditions described above should not require
registration as branch offices. The proposed Residential Supervisory
Location is intended to reflect a pragmatic balance between the hybrid
workforce model and the parameters that should ensure that all
locations, including residential locations, are appropriately
supervised. Separate and apart from the classification of the office or
location and the attendant inspection obligations, firms will continue
to have an ongoing obligation to supervise the activities of each
associated person in a manner reasonably designed to achieve compliance
with applicable securities laws and regulations, and with applicable
FINRA rules. FINRA emphasizes that member firms have a statutory duty
to supervise their associated persons, regardless of their location,
compensation or employment arrangement, or registration status, in
accordance with the FINRA By-Laws and rules.\80\
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\80\ See Exchange Act Section 15(b)(4)(E), 15 U.S.C.
78o(b)(4)(E), and Exchange Act Section 15(b)(6)(A), 15 U.S.C.
78o(b)(6)(A).
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If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice. The effective date will be no later than 90 days following the
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\81\ 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 advances in compliance
technology and evolving lifestyle and work practices, FINRA believes
that the proposed rule change will reasonably account for evolving work
models by excluding from branch office registration a Residential
Supervisory Location at which lower risk activities occur, while
retaining important investor protections with a set of safeguards and
limitations derived largely from the primary residence exclusion. The
proposed new non-branch location is intended to provide a practical and
balanced way for firms to continue to effectively meet 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.
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\81\ 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.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the regulatory need for the proposed rule change, its
potential economic impacts, including anticipated costs, benefits, and
distributional and competitive effects, relative to the current
baseline, and the alternatives FINRA considered in assessing how best
to meet FINRA's regulatory objectives.
1. Regulatory Need
As discussed above, in the wake of the pandemic, many member firms
are developing hybrid workforce models for their employees. In these
new ways of working, some employees may work permanently in an
alternative location such as a private residence, other employees may
spend some time in alternative locations and some time on-site in a
conventional office setting, and some may work on-site full time.\82\
Absent the proposed rule change, when the temporary relief from the
requirement to submit branch office applications on Form BR for new
office locations ends, many member firms would need to either curtail
activities at residential locations or register large numbers of
residential locations as OSJs or supervisory branch offices. Either
type of adjustment would create potentially significant costs. The
proposed rule change would reduce, but not eliminate, the need for such
adjustments since the activities conducted at some new residential
locations would likely not meet the requirements of the proposed rule
change.
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\82\ According to the Survey of Working Arrangements and
Attitudes (SWAA), post-COVID, many employers are planning to allow
employees to work from home between two and three days per week. See
Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, SWAA April
2022 Updates (April 11, 2022), <a href="https://wfhresearch.com/wp-content/uploads/2022/04/WFHResearch_updates-April-2022.pdf">https://wfhresearch.com/wp-content/uploads/2022/04/WFHResearch_updates-April-2022.pdf</a>. The number of
expected work-from-home days post-pandemic has been increasing
steadily since the January 2021 survey. The SWAA is monthly survey
with respondents that are working-age persons in the United States
that had earnings of at least $20,000 in 2019. Further details about
this survey can be found at <a href="https://wfhresearch.com">https://wfhresearch.com</a>.
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[[Page 47257]]
2. Economic Baseline
The economic baseline includes both current and foreseeable
workforce arrangements and business practices, including those that
were first developed during the pandemic and have been modified since
in light of reduced health and safety concerns. In particular, the
economic baseline includes the innovations, and investments in
communication and surveillance technology, that have supported and
continue to support supervision in the remote work environment.\83\
These innovations and investments have depended in part on the
temporary suspension of the requirement to submit branch office
applications on Form BR for new office locations, provided in Notice
20-08. However, in order to provide a full accounting of the likely
effects of the proposed rule change, the analysis considers the impact
of the proposed rule change under the assumption that, going forward,
the temporary suspension of the above requirement is no longer in
effect. The current supervisory requirements of Rule 3110 will then
apply, including the provisions of Rule 3110 that categorize an OSJ,
branch office and non-branch location and that establish the
supervisory and registration requirements of each office or location.
As discussed above, a location registered as a branch office must have
one or more appropriately registered representatives or principals in
each office, and is subject to an inspection at least every three
years, unless it is a supervisory branch office in which case it is
subject to at least an annual inspection.
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\83\ The pandemic propelled increased reliance on technology
solutions in the remote work environment. A McKinsey survey in late
2020 found that, overall, firms had accelerated their adoption of
technology, with large accelerations in the implementation of
changes to increase remote working and collaboration, as well the
use of advanced technologies in operations. See McKinsey & Company,
How COVID-19 has pushed companies over the technology tipping
point--and transformed business forever, October 5, 2020, <a href="https://mck.co/3nlK8b2">https://mck.co/3nlK8b2</a>.
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As of April 30, 2022, FINRA's membership included 3,365 firms \84\
with 151,463 registered branch offices. Of these branch offices, 18,290
(12%) are OSJs, with 1,910 of them identified as private
residences.\85\ There are 21,647 principal level registered persons
serving as OSJ supervisors, with 1,775 (8%) working at OSJs identified
as private residences.\86\ Data on the number of residential locations
at which supervisors are currently working full or part time may be
incomplete, due to the temporary suspension of the Form BR requirement
for new offices included in Notice 20-08. However, large member firms
(500 or more registered persons) account for about 69% of OSJs. By type
of business, diversified and retail firms account for 81% of OSJs. To
the extent that these member firms account for most supervisory staff,
they are potentially currently making broad use of hybrid workforce
arrangements involving residential locations.
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\84\ This count excludes firms with membership pending approval,
and withdrawn or terminated from membership.
\85\ The number of branch offices and OSJs is derived from Form
BR, a uniform form that a member firm uses to register with FINRA
and as required by the relevant state jurisdictions or other SROs,
the firm's location as a branch office. Form BR's Section 1 (General
Information) provides a place for a firm to indicate whether the
branch office is a private residence by checking a ``Private
Residence Checkbox.'' The number of OSJs is derived from Form BR's
Section 2 (Registration/Notice Filing/Type of Office/Activities),
which requires a firm to indicate whether the branch office is an
OSJ. Some OSJs have more than one supervisor, and some principals
serve as supervisors for more than one OSJ. FINRA's records from
Form U4 show that, altogether, there are about 138,035 registered
persons with principal registration categories (including those in
OSJ supervisory roles).
\86\ In addition, FINRA member firms with a single branch
account for 1,744 of these OSJs and 1,967 of the supervisors. Forty-
three FINRA member firms do not have any branches registered; these
firms are all small member firms and not counted among the 3,365
firms.
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3. Economic Impacts
Absent the proposed rule change, if the temporary relief on
registering new branches with Form BR, provided during the pandemic,
ends, many member firms would likely need to either curtail activities
at residential locations or register large numbers of residential
locations as OSJs or supervisory branch offices. This potential
increase in office count would impact inspection obligations and in
some cases, licensing requirements associated with individual
locations. These additional requirements would hold even for office
locations that bear lower risk characteristics and from which lower
risk supervisory functions are conducted. The economic impacts of these
changes would be mitigated by the proposed rule change.
Changes in the number of different types of offices and locations
since the start of the pandemic, along with current data, can provide a
rough indication of the potential impact of the proposed rule change on
firms. As Table 1 below shows, the number of offices and locations has
fallen except for non-branch locations. Residential non-branch
locations have increased by 12,921 (53%). Some of these new residential
non-branch locations would have needed to register as OSJs if not for
the temporary suspension of the Form BR requirement and will need to
register as OSJs unless the proposed rule change is adopted. Further,
some of the 1,910 private residences that are currently registered as
OSJs, described above, might be able to become Residential Supervisory
Locations if the proposed rule change is adopted. The numbers suggest
that the number of offices and locations that may benefit from the
proposed rule change is in the thousands. While Form U4 and Form BR can
be used to count numbers of work locations and identify high-level
activities at registered branch offices, the number of residential
locations that would meet the conditions of proposed Rule 3110.19(a)
alone would depend on specific information about the activities at
residential locations that these forms do not provide.\87\
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\87\ Non-branch locations do not have to be registered with
FINRA. The estimates for non-branch locations are obtained by
reviewing Form U4. There may be some double counting of non-branch
locations if members record the address differently on more than one
Form U4 (e.g., use ``St.'' on one and ``Street'' on another).
Table 1--Numbers of Offices and Locations, Pre-Pandemic and Current
------------------------------------------------------------------------
December 31, 2019 April 30, 2022
------------------------------------------------------------------------
Registered branch locations....... 152,682 151,463
OSJs.......................... 19,123 18,290
Non-OSJs...................... 134,559 133,173
Non-branch locations.............. 56,317 66,054
Residential non-branch 24,369 37,290
locations....................
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[[Page 47258]]
Anticipated Benefits
The proposed rule change would allow some of the work arrangements
adopted during the pandemic to continue with only small additional
compliance costs. Specifically, as long as the location is a private
residence and is not otherwise ineligible under the rule, associated
persons could continue to conduct work that meets the requirements of
the proposed rule change. Not all new residential locations would
qualify as Residential Supervisory Locations, so some would need to
register as some type of branch location--and face higher compliance
costs--or otherwise meet a branch office exclusion under Rule
3110(f)(2) or stop operating as a work location.
The proposed rule change, also creates an opportunity for continued
innovation in workforce arrangements. The proposed rule change may lead
to centralizing tasks in specific OSJs and restructuring of job
functions to enable the use of a Residential Supervisory Location on a
full or part time basis, and possibly an increase in the number of
supervisors. Some current OSJs might qualify as Residential Supervisory
Locations with no further adjustments, allowing members to reduce
expenses on compliance. Firms would make use of these opportunities if
they are beneficial to their operations, and not otherwise.
The proposed rule change would also support the competitiveness of
the broker-dealer industry for educated individuals who seek
professional positions.\88\ The expectation of workplace flexibility
and remote work by such individuals may lead them away from the broker-
dealer industry if other segments of financial services or professional
occupations offer more flexible workforce arrangements.
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\88\ See note 82, supra. See also Jose Maria Barrero, Nicholas
Bloom & Steven J. Davis, Why Working from Home Will Stick (NBER
Working Paper 28731, April 2021), <a href="https://wfhresearch.com/wp-content/uploads/2021/04/w28731-3-May-2021.pdf">https://wfhresearch.com/wp-content/uploads/2021/04/w28731-3-May-2021.pdf</a>, who point to a
lasting effect of the pandemic on work arrangements, in particular
for those with higher education and earnings; and Alexander Bick,
Adam Blandin & Karel Mertens, Work from Home Before and After the
COVID-19 Outbreak, (Working Paper, February 2022), <a href="https://karelmertenscom.files.wordpress.com/2022/02/wfh_feb17_2022_paper.pdf">https://karelmertenscom.files.wordpress.com/2022/02/wfh_feb17_2022_paper.pdf</a>
who find consistent results, with a higher adoption rate of work
from home jobs in Finance and Insurance, relative to other
industries, reflected in Figure 10.
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As noted above, the pandemic caused firms throughout the financial
services sector to accelerate the adoption of technological
solutions.\89\ Technology has been used not only to make remote work
possible but also to conduct a range of compliance and regulatory risk
management activities. By facilitating hybrid work arrangements, the
proposed rule change would support continued adoption and innovation in
technological solutions and reductions in the cost of these solutions.
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\89\ See note 83, supra.
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Finally, the proposed rule change would relieve member firms from
paying FINRA branch office registration fees for locations that would
be branch offices under the baseline but qualify as Residential
Supervisory Locations. Member firms may also find that some existing
branch locations become unnecessary given the proposed rule change and
could reduce expenses attendant to those locations, including such
fees. However, member firms would still need to pay branch office
registration fees generally for new residential locations that meet the
definition of a ``branch office,'' and are not covered by the proposed
Residential Supervisory Location designation or do not meet a branch
office exclusion under Rule 3110(f)(2).
Anticipated Costs
The proposed rule change provides firms with a new designation for
work locations without removing any designations that are available
under the baseline. Firms will therefore use the new Residential
Supervisory Location designation only if doing so is beneficial to
their operations relative to using one of the existing designations.
The cost of complying with the requirements of the new designation for
work locations is obviously a factor in this decision. Firms may incur
a number of new one-time costs, such as adjusting staffing and
activities at existing locations, to initially meet the requirements of
proposed Rule 3110.19. Firms may also need to develop new written
supervisory procedures and new trainings for staff at Residential
Supervisory Locations, and deploy these trainings, so staff are aware
of the compliance requirements. Firms may incur new ongoing costs to
monitor for compliance and for adjusting staffing and designations if a
Residential Supervisory Location becomes ineligible for this
designation because an associated person incurs events or actions
described in proposed Rule 3110.19(b).
Classifying residential locations that would otherwise need to
register as OSJs or branch offices as Residential Supervisory Locations
will remove certain compliance requirements. Depending on the type of
branch, the reduction in compliance requirements may include no longer
having to have one or more appropriately registered representatives or
principals in each office or to conduct inspections annually or every
three years. These reductions in compliance requirements may create
risks to member firms and investors.
To mitigate these risks, the proposal excludes locations on the
basis of inexperience or prior harmful conduct by individuals working
at those locations, and limits the activities that can be performed at
those locations. The designation of certain locations as ineligible
provides minimum standards for staff that are eligible to work in such
locations. FINRA expects that most firms would go beyond these minimum
standards in selecting staff who would perform supervisory and other
sensitive work at Residential Supervisory Locations, and in monitoring
their conduct.
4. Alternatives Considered
FINRA is proposing to provide certain regulatory accommodations for
the innovations in business organization and operations that occurred
during the pandemic by modeling the Residential Supervisory Locations
after the existing primary residence and non-primary residence
exclusions, which have been in effect since 2005. FINRA considered
adopting a proposed rule with just those exclusions and without the
designation of certain locations as ineligible. More locations would
qualify as Residential Supervisory Locations without the additional
requirements. FINRA expects, however, that the proposed rule change
provides a better balance of the potential benefits and the risks that
could impose costs on members and investors.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
[[Page 47259]]
(B) institute proceedings to determine whether the proposed rule
change should be 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#bccec9d0d991dfd3d1d1d9d2c8cffccfd9df92dbd3ca"><span class="__cf_email__" data-cfemail="582a2d343d753b3735353d362c2b182b3d3b763f372e">[email protected]</span></a>. Please include
File Number SR-FINRA-2022-019 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-2022-019. 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 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-2022-019 and
should be submitted on or before August 23, 2022.
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\90\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-16487 Filed 8-1-22; 8:45 am]
BILLING CODE 8011-01-P
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