Notice2024-12794
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend MSRB Rule G-27, on Supervision, To Allow Eligible Dealers To Fulfill Their Internal Inspection Obligation of Certain Offices and Locations Remotely for a Pilot Period, Subject to the Conditions Prescribed Under FINRA's Remote Inspections Pilot Program
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
June 12, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 114 (Wednesday, June 12, 2024)</title>
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[Federal Register Volume 89, Number 114 (Wednesday, June 12, 2024)]
[Notices]
[Pages 49950-49961]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-12794]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100291; File No. SR-MSRB-2024-05]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend MSRB Rule G-27, on Supervision, To Allow Eligible
Dealers To Fulfill Their Internal Inspection Obligation of Certain
Offices and Locations Remotely for a Pilot Period, Subject to the
Conditions Prescribed Under FINRA's Remote Inspections Pilot Program
June 6, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on May 30, 2024, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the MSRB. 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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[[Page 49951]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB filed with the Commission a proposed rule change
consisting of an amendment to MSRB Rule G-27, on supervision, to adopt
new Supplementary Material .05, on remote inspections pilot program, to
allow certain brokers, dealers, and municipal securities dealers
(``dealers'') that are members of a registered securities association
(``FINRA-member dealers'') \3\ to fulfill their internal inspection
(``office inspection'') obligation with respect to certain offices and
locations, as described herein, remotely for a specified period,
subject to the conditions of FINRA's Remote Inspections Pilot Program
(the ``FINRA Pilot Program'') as established by FINRA Rule 3110.18 (the
``proposed rule change''). Dealers that are not members of a registered
securities association (i.e., FINRA), including bank dealers,\4\ would
be ineligible from conducting office inspections remotely.
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\3\ The MSRB notes that the Financial Industry Regulatory
Authority (``FINRA'') is currently the only registered securities
association and will generally, as such, refer to FINRA specifically
in the filing when intending to clarify specific regulatory
obligations and/or applicable rule(s).
\4\ A bank dealer is defined under MSRB Rule D-8 as a municipal
securities dealer which is a bank or a separately identifiable
department or division of a bank. The MSRB will consider at a later
date whether or not to extend the ability to conduct office
inspections remotely to bank dealers after giving due consideration
to how to operationalize such an initiative.
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The MSRB has designated the proposed rule change as constituting a
``noncontroversial'' rule change under Section 19(b)(3)(A) \5\ of the
Exchange Act and Rule 19b-4(f)(6) \6\ thereunder, which renders the
proposal effective upon receipt of this filing by the Commission. The
MSRB proposes an operative date of July 1, 2024, for the proposed rule
change to conform with the effective date of the FINRA Pilot Program.
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\5\ 15 U.S.C. 78s(b)(3)(A).
\6\ 17 CFR 240.19b-4(f)(6).
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The text of the proposed rule change is available on the MSRB's
website at <a href="https://msrb.org/2024-SEC-Filings">https://msrb.org/2024-SEC-Filings</a>, at the MSRB's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change is meant to more closely conform the
MSRB's dealer supervisory rule to FINRA's recently approved supervisory
requirements to help ensure a coordinated regulatory approach in the
area of dealer supervision and to enable FINRA and the Commission to
more efficiently inspect those dealers that are subject to both self-
regulatory organizations, as well as to promote regulatory consistency
for dealers engaging in activities across asset classes. To that end,
the MSRB is proposing to adopt new Supplementary Material .05, on
remote inspections pilot program, to allow FINRA-member dealers that
engage in municipal securities activities to fulfill their office
inspection obligation remotely for a period of three years starting on
July 1, 2024 through June 30, 2027 (the ``Pilot Period''), if certain
conditions are met as prescribed under the proposed rule change in
conjunction with the FINRA Pilot Program under FINRA Rule 3110.18. The
specific compliance obligations are addressed below.
Background
MSRB Rule G-27(b), on supervisory system, requires dealers to
establish and maintain a system to supervise the municipal securities
activities of each registered representative, registered principal, and
other associated person that is reasonably designed to achieve
compliance with applicable securities laws and regulations, and with
applicable MSRB rules. As part of an overall supervisory system,
dealers must conduct inspections of each of their offices or locations:
offices of municipal supervisory jurisdiction (``OMSJs''),\7\
supervisory and non-supervisory municipal branch office,\8\ and non-
branch location \9\ in accordance with MSRB Rule G-27(d). Currently,
MSRB Rule G-27(d)(i)(A) requires dealers to inspect every OMSJ and any
supervisory municipal branch office at least annually. MSRB Rules G-
27(d)(i)(B) and G-27(d)(i)(C) require dealers to inspect every non-
supervisory municipal branch office at least every three years, and
every non-branch location on a regular periodic \10\ schedule. FINRA
and
[[Page 49952]]
the Commission's Office of Compliance Inspections and Examinations (now
the Division of Examinations) staff have previously issued joint
guidance stating that office inspections must be conducted on-site at
the office; \11\ however, the MSRB understands that the recent pandemic
propelled increased use and reliance on technology solutions by dealers
to surveil associated person's activities in a remote work environment.
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\7\ Pursuant to MSRB Rule G-27(g)(i), a municipal branch office
is classified as an OMSJ if any one of the following enumerated
activities occurs at the location with respect to municipal
securities: (i) order execution and/or market making; (ii)
structuring of public offerings or private placements; (iii)
maintaining custody of customers' funds and/or municipal securities;
(iv) final acceptance (approval) of new accounts on behalf of the
member; (v) review and endorsement of customer orders, pursuant to
subparagraph (c)(i)(G)(2); (vi) final approval of advertising for
use by persons associated with the dealer, pursuant to MSRB Rule G-
21(f); or (vii) responsibility for supervising the municipal
securities activities of persons associated with the dealer at one
or more other municipal branch offices of the dealer. An office that
is designated as an OMSJ must have a registered principal on-site,
pursuant to MSRB Rule G-27(b)(iv), and be inspected on an annual
basis, pursuant to MSRB Rule G-27(d)(i)(A).
\8\ Pursuant to MSRB Rule G-27(g)(ii)(A), a municipal branch
office is any location where one or more associated persons of a
dealer regularly conducts the business of effecting any transactions
in, or inducing or attempting to induce the purchase or sale of, any
municipal security, or is held out as such, with the exclusion of
such offices or locations identified in MSRB Rule G-27(g)(ii)(A)(1)-
(7). Pursuant to MSRB Rule G-27(g)(ii)(B), notwithstanding the
exclusions in MSRB Rule G-27(g)(ii)(A), any location that is
responsible for supervising the municipal securities activities of
persons associated with the dealer at one or more non-branch
locations of the dealer is considered to be a municipal branch
office (a/k/a supervisory municipal branch office). A non-
supervisory municipal branch office would generally be deemed an
office that is not charged with supervising the municipal securities
activities of persons associated with the dealer.
\9\ Pursuant to MSRB Rule G-27(g)(ii)(A), the following
locations are excluded from registration as a municipal branch
office, and are instead deemed non-branch locations: (i) a location
established solely for customer service and/or back office type
functions where no sales activities are conducted and that is not
held out to the public as a branch office; (ii) an associated
person's primary residence provided it is not held out to the public
as an office and certain other conditions are satisfied; (iii) a
location, other than a primary residence, that is used for municipal
securities activities for less than 30 business days in any one
calendar year and is not held out to the public as an office, and
which satisfies certain of the conditions set forth in the primary
residence exception; (iv) a location of convenience, where
associated persons occasionally and exclusively by appointment meet
with customers and is not held out to the public as an office; (v) a
location used primarily for non-securities activities and from which
the associated person(s) effects no more than 25 municipal
securities transactions in any one calendar year; (vi) the floor of
a registered national securities exchange; and (vii) a temporary
location established in response to the implementation of a business
continuity plan. Non-branch locations will include residential
supervisory locations as of June 1, 2024. See Exchange Act Release
No. 100131 (May 14, 2024), 89 FR 43961 (May 20, 2024) (File No. SR-
MSRB-2024-04).
\10\ While MSRB rules do not explicitly establish a specific
timeframe for such regular periodic inspections, FINRA Rule 3110.13
sets out a general presumption that a non-branch location will be
inspected at least every three years, even in the absence of any
indicators of irregularities or misconduct (i.e., ``red flags''), as
defined in proposed Supplementary Material .05(b)(1) of MSRB Rule G-
27, and if a FINRA-member dealer establishes a longer periodic
inspection schedule, such dealer must document in its written
supervisory and inspection procedures the factors used in
determining that a longer periodic inspection cycle is appropriate.
\11\ See FINRA Regulatory Notice 11-54, FINRA and the SEC Issue
Joint Guidance on Effective Policies and Procedures for Broker-
Dealer Branch Inspections, (November 30, 2011), available at <a href="https://www.finra.org/sites/default/files/NoticeDocument/p125204.pdf">https://www.finra.org/sites/default/files/NoticeDocument/p125204.pdf</a>. The
MSRB amended MSRB Rule G-27 in 2006 to align with a series of rule
changes by FINRA (f/k/a the National Association of Securities
Dealers) and the New York Stock Exchange, which were meant to
strengthen the supervisory control procedures of their member firms,
including more stringent office inspection rules. The MSRB has
favored regulatory consistency in order to avoid confusion between
MSRB Rule G-27 and FINRA Rule 3110 and, consistent with this
approach, the MSRB recognizes FINRA Regulatory Notice 11-54 and the
core principle of on-site inspections with respect to dealer
supervision. See Exchange Act Release No. 54930 (December 13, 2006),
71 FR 76400, 76403 (December 20, 2006) (File No. SR-MSRB-2006-10).
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To help mitigate operational challenges and business disruption for
dealers during the coronavirus disease (COVID-19) pandemic, including
challenges related to having a vast number of individuals working from
home and variations of telework arrangements, the MSRB has provided
ongoing regulatory relief by allowing dealers to conduct their office
inspections remotely, without an on-site visit to offices or locations,
subject to certain conditions. The MSRB previously filed proposed rule
changes for immediate effectiveness with the Commission in April
2020,\12\ December 2020,\13\ October 2021,\14\ March 2022,\15\ and
November 2022 \16\ with, by and large, the collective relief allowing
dealers to conduct office inspections for those respective calendar
years remotely without an onsite visit to such offices or
locations.\17\ The most recent relief, provided in May 2023, allowed
dealers to conduct office inspections due to be completed during the
calendar year 2023 remotely through December 31, 2023, and office
inspections due to be completed during the calendar year 2024 remotely
through June 30, 2024.\18\
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\12\ See Exchange Act Release No. 88694 (April 20, 2020), 85 FR
23088 (April 24, 2020) (File No. SR-MSRB-2020-01).
\13\ See Exchange Act Release No. 90621 (December 9, 2020), 85
FR 81254 (December 15, 2020) (File No. SR-MSRB-2020-09).
\14\ See Exchange Act Release No. 93435 (October 27, 2021), 86
FR 60522 (November 2, 2021) (File No. SR-MSRB-2021-06).
\15\ See Exchange Act Release No. 94383 (March 9, 2022), 87 FR
14596 (March 15, 2022) (File No. SR-MSRB-2022-01).
\16\ See Exchange Act Release No. 96346 (November 17, 2022), 87
FR 71719 (November 23, 2022) (File No. SR-MSRB-2022-08).
\17\ See Supplementary Material .01(a) of MSRB Rule G-27.
\18\ See Exchange Act Release No. 97423 (May 2, 2023), 88 FR
29774 (May 8, 2023) (File No. SR-MSRB-2023-04).
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Similarly, in June 2020, FINRA \19\ made its first of successive
filings with the Commission, noting that ongoing extenuating
circumstances warranted sensible and tailored accommodations for its
member firms to meet their inspection obligations under FINRA Rule
3110(c).\20\ FINRA went on to note that its proposed rule filing would
create further efficiencies for its member firms by aligning with the
MSRB's temporary extension of time for meeting the inspection
requirements of offices set forth under MSRB Rule G-27.\21\ In 2022,
recognizing how operations and business models within the financial
services industry have evolved during the public health crisis,
including that a large number of firms have implemented a hybrid work
environment in which particular business functions continue to be de-
centralized, FINRA began a rulemaking process \22\ that ultimately
resulted, on November 17, 2023, in the Commission approving a proposed
rule change to adopt the FINRA Pilot Program under Supplementary
Material .18 of FINRA Rule 3110.\23\ The FINRA Pilot Program consists
of a voluntary, three-year remote inspections pilot program to allow
eligible FINRA-member dealers to elect to fulfill their office
inspection obligations under FINRA Rule 3110 by conducting inspections
of eligible offices of supervisory jurisdictions, branch offices, and
non-branch locations remotely without an on-site visit to such
locations subject to certain conditions and criteria.\24\ The proposed
rule change is designed to promote regulatory consistency for dealers
that are both FINRA-member dealers and MSRB registrants.
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\19\ FINRA previously issued a request for comment in 2017 on a
proposal to allow firms to conduct remote office inspections. See
FINRA Regulatory Notice 17-38, Remote Branch Office Inspections,
(November 13, 2017), available at <a href="https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-38.pdf">https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-38.pdf</a>.
\20\ See Exchange Act Release No. 89188 (June 30, 2020), 85 FR
40713 (July 7, 2020) (File No. SR-FINRA-2020-019).
\21\ Id. at 40714.
\22\ See Exchange Act Release No. 95452 (August 9, 2022), 87 FR
50144, 50147 (August 15, 2022) (File No. SR-FINRA-2022-021). FINRA
later withdrew this proposal, available at <a href="https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-021-withdrawal.pdf">https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-021-withdrawal.pdf</a>.
\23\ See Exchange Act Release No. 98982 (November 17, 2023), 88
FR 82464 (November 24, 2023) (File No. SR-FINRA-2023-007). Pursuant
to FINRA Rule 3110.18(m), on the sunset of Rule 3110.17, if FINRA
Rule 3110.17 has not already expired by its own terms, FINRA Rule
3110.17 will automatically sunset on June 30, 2024.
\24\ Id.
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Description of Proposed Rule Change
Proposed Supplementary Material .05 of MSRB Rule G-27 would provide
eligible FINRA-member dealers \25\ with the flexibility to opt into the
FINRA Pilot Program, consisting of a voluntary, three-year remote
inspections pilot program to fulfill their office inspection
obligations under MSRB Rule G-27(d) by conducting inspections of
eligible OMSJs, municipal branch offices, and non-branch locations
remotely without an on-site visit to such locations, subject to certain
conditions and criteria. The requirements in connection with the
participation by FINRA-member dealers in the FINRA Pilot Program under
proposed Supplementary Material .05 would mirror in all material
respects the requirements with respect to FINRA-member dealers'
participation under FINRA rules in the FINRA Pilot Program. FINRA-
member dealers that engage in municipal securities activities and that
are therefore subject to MSRB Rule G-27 would be able to opt into the
FINRA Pilot Program with respect thereto. FINRA-member dealers opting
into the FINRA Pilot Program would do so pursuant to the provisions of
proposed Supplementary Material .05 of MSRB Rule G-27 and through the
mechanisms and processes established by FINRA in connection with the
FINRA Pilot Program.
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\25\ As previously noted, proposed Supplementary Material .05 of
MSRB Rule G-27 would be applicable only to dealers that are FINRA
members.
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The proposed rule change also re-orders and streamlines some of the
provisions of FINRA Rule 3110.18.
Scope (Proposed Supplementary Material .05(a) of MSRB Rule G-27)
Proposed Supplementary Material .05(a), on scope, of MSRB Rule G-27
would outline the scope of the proposed rule change establishing the
standards by which a FINRA-member dealer may participate in the FINRA
Pilot Program and mirrors the scope of the FINRA Pilot Program under
FINRA Rule 3110.18(a). Proposed Supplementary Material .05(a) would
permit FINRA-member dealers to avail themselves of the FINRA Pilot
Program for the required inspections of OMSJs, municipal branch
offices, and non-
[[Page 49953]]
branch locations, in accordance with MSRB Rule G-27(d). As such, under
proposed Supplementary Material .05(a), FINRA-member dealers would be
able to participate in the FINRA Pilot Program for a period of three
years, starting on July 1, 2024, and automatically sunsetting on June
30, 2027, if the proposed Supplementary Material .05 is not amended to
allow continued participation by FINRA-member dealers in the FINRA
Pilot Program.\26\ FINRA-member dealers would not be able to
participate in the FINRA Pilot Program after the prescribed provisions
under this proposed Supplementary Material sunset. The purpose of the
proposed rule change would be to allow FINRA-member dealers to
participate in the FINRA Pilot Program while also meeting their
compliance obligations under MSRB Rule G-27 in the same manner in which
they are able to participate in the FINRA Pilot Program with respect to
their parallel obligations under FINRA Rule 3110.18.
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\26\ The MSRB will engage with FINRA to understand the efficacy
of remote office inspections based on FINRA's review of data and
information provided to FINRA by FINRA-member dealers as required
under the FINRA Pilot Program.
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Risk Assessment (Proposed Supplementary Material .05(b) of MSRB Rule G-
27)
Proposed Supplementary Material .05(b), on risk assessment, of MSRB
Rule G-27 would outline the need for FINRA-member dealers to undertake
a risk assessment in order to participate in the FINRA Pilot Program
and mirrors the risk assessment provisions required with respect to the
FINRA Pilot Program under FINRA Rule 3110.18(b). Specifically, proposed
Supplementary Material .05(b)(1) would provide that a FINRA-member
dealer could elect to conduct the applicable inspection remotely,
without an on-site visit for an office or location, when such dealer
reasonably determines that the purposes of this Supplementary Material
can be accomplished by conducting such required inspection remotely.
The FINRA-member dealer would be required to develop a reasonable risk-
based approach to using remote inspections and conduct and document a
risk assessment for an office \27\ or location prior to conducting a
remote inspection. The risk assessment must document the factors
considered, including, among other things, the FINRA-member dealer's
size, organizational structure, scope of business activities, number
and location of the FINRA-member dealer's offices, the nature and
complexity of the products and services offered by the FINRA-member
dealer, the volume of business done, the number of associated persons
assigned to a location, the disciplinary history of municipal
securities representatives or associated persons, and any red flags,
and must take into account any higher-risk activities that take place
at, or higher-risk associated persons that are assigned to, that office
or location.\28\ Additionally, proposed Supplementary Material
.05(b)(1) would require a dealer to conduct an on-site inspection on
the required cycle for such offices or locations that are not eligible
for remote office inspections due to having not met the firm or
location level requirements under proposed Supplementary Material
.05(c) of MSRB Rule G-27. Notwithstanding proposed Supplementary
Material .05, a dealer shall remain subject to the other requirements
of MSRB Rule G-27(d), on internal inspections.
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\27\ While MSRB rules do not define ``office,'' in FINRA's 2005
rulemaking initiative to establish a uniform definition of branch
office, FINRA noted that the language of the uniform definition
substantially mirrored the Commission's definition of ``office'' in
its books and records rules under the Exchange Act. Exchange Act
Rule 17a-3(g)(i), defines the term as any location where one or more
associated persons regularly conducts the business of handling funds
or securities or effecting any transactions in, or inducing or
attempting to induce the purchase or sale of, any security (17 CFR
240.17a-3). See NASD Notice to Members 05-67 (October 6, 2005),
available at <a href="https://www.finra.org/sites/default/files/NoticeDocument/p015121.pdf">https://www.finra.org/sites/default/files/NoticeDocument/p015121.pdf</a>.
\28\ With one exception, these provisions of proposed
Supplementary Material .05(b)(1) mirror FINRA Rule 3110.18(b)(1)
with non-substantive terminology changes. However, FINRA Rule
3110.18(b)(1) refers to, without including within its text, a list
of factors set forth in FINRA Rule 3110.12 as factors to be
considered and documented with respect to the risk assessment
required under FINRA Rule 3110.18(b)(1). Because MSRB Rule G-27 does
not currently include a provision similar to FINRA Rule 3110.12, and
therefore cannot include such factors by reference in the same
manner as in FINRA Rule 3110.18(b)(1), proposed Supplementary
Material .05(b)(1) of MSRB Rule G-27 lists such factors within the
text thereof. Additionally, proposed Supplementary Material
.05(b)(1) of MSRB Rule G-27 states that dealers must conduct an on-
site inspection of that office or location on the applicable
schedule under section (d) of MSRB Rule G-27.
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Proposed Supplementary Material .05(b)(2), on other risk assessment
factors, of MSRB Rule G-27 would provide that, in addition to the
factors that FINRA-member dealers must consider as part of their risk
assessment for remotely inspecting an office or location under
Supplementary Material .05(b)(1), on review standards, FINRA-member
dealers must consider, among other things, the following factors also
contained in FINRA Rule 3110.18(b)(2), on other factors to consider for
risk assessment:
(i) the volume and nature of customer complaints; \29\
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\29\ Proposed Supplementary Material .05(b)(2)(A), mirroring
FINRA Rule 3110.18(b)(2)(A).
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(ii) the volume and nature of outside business activities,
particularly investment-related; \30\
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\30\ Proposed Supplementary Material .05(b)(2)(B), mirroring
FINRA Rule 3110.18(b)(2)(B).
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(iii) the volume and complexity of products offered; \31\
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\31\ Proposed Supplementary Material .05(b)(2)(C), mirroring
FINRA Rule 3110.18(b)(2)(C).
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(iv) the nature of the customer base, including vulnerable adult
investors; \32\
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\32\ Proposed Supplementary Material .05(b)(2)(D), mirroring
FINRA Rule 3110.18(b)(2)(D).
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(v) whether associated persons are subject to heightened
supervision; \33\
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\33\ Proposed Supplementary Material .05(b)(2)(E), mirroring
FINRA Rule 3110.18(b)(2)(E).
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(vi) failures by associated persons to comply with the FINRA-member
dealer's written supervisory procedures; \34\ and
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\34\ Proposed Supplementary Material .05(b)(2)(F), mirroring
FINRA Rule 3110.18(b)(2)(F) with a non-substantive terminology
change.
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(vii) any recordkeeping violations.\35\
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\35\ Proposed Supplementary Material .05(b)(2)(G), mirroring
FINRA Rule 3110.18(b)(2)(G).
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Proposed Supplementary Material .05(b)(2) would prescribe that
FINRA-member dealers should conduct on-site inspections or make more
frequent use of unannounced, on-site inspections for high-risk offices
or locations or when there are red flags, and supervisory systems must
take into consideration any red flags when determining whether to
conduct a remote inspection of an office or location.\36\
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\36\ These provisions of proposed Supplementary Material
.05(b)(2) mirror FINRA Rule 3110.18(b)(2), with elimination of
certain cross-references to FINRA rules.
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The existing on-site office inspection obligation \37\ under MSRB
Rule G-27(d) has been an industry benchmark, imposing high standards
regarding supervisory obligations. Therefore, in moving away from the
existing standard, the MSRB believes the provisions of the proposed
rule change should include a risk assessment conducted by FINRA-member
dealers under proposed Supplementary Material .05(b)(1), on review
standards, to mitigate residual risk not addressed by the ineligibility
criteria and the conditions contained in the FINRA Pilot Program. In
addition, proposed Supplementary Material .05(b)(2), on other risk
assessment factors, would provide additional guardrails to manage the
risk associated with firms conducting remote office inspections under
the FINRA Pilot Program.
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\37\ See supra note 11.
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[[Page 49954]]
Eligibility, Exclusions and Conditions--Firm Level Requirements
(Proposed Supplementary Material .05(c)(1) of MSRB Rule G-27)
FINRA Rule 3110.18(f)(1) outlines certain conditions that would
render a member firm ineligible to conduct remote inspections of any of
its offices or locations under the FINRA Pilot Program, if at any time
during the Pilot Period, the member firm: (i) is or becomes designated
as a restricted firm under FINRA Rule 4111; (ii) is or becomes
designated as a taping firm under FINRA Rule 3170; (iii) receives a
notice from FINRA, pursuant to FINRA Rule 9557, regarding capital
compliance related matters under Rules 4110, 4120 or 4130; (iv) is or
becomes suspended from FINRA membership; (v) has been a FINRA member
for less than 12 months; or (vi) is or has been found by the Commission
or FINRA to be in violation of office inspection obligations under
FINRA Rule 3110(c) within the past three years.\38\
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\38\ Notwithstanding the conditions outlined pursuant to FINRA
3110.18(f)(1), FINRA Rule 3110.18(k), on determination of
ineligibility, states that FINRA may make a determination in the
public interest and for the protection of investors that a member
firm is no longer eligible to participate in the FINRA Pilot Program
if such member firm fails to comply with the requirements of FINRA
Rule 3110.18. In such instances, FINRA will provide written notice
to the member firm of such determination that the member firm would
no longer be eligible to participate in the FINRA Pilot Program and
must conduct on-site inspections of required offices and locations
in accordance with FINRA Rule 3110(c).
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The MSRB believes that the aforementioned categories of
ineligibility are events or activities that are more likely to raise
investor protection concerns because they expressly account for FINRA-
member dealers that pose higher risks and, therefore, should result in
ineligibility for the FINRA Pilot Program. As such, proposed
Supplementary Material .05(c)(1)(A) of MSRB Rule G-27 would provide
that a FINRA-member dealer is ineligible to conduct remote inspections
of any of its offices or locations if the dealer is not a FINRA-member
dealer or if at any time during the Pilot Period such dealer becomes
ineligible under FINRA's prescribed ineligibility criteria to conduct
remote inspections under the FINRA Pilot Program, pursuant to FINRA
Rule 3110.18(f)(1). In addition, the MSRB believes the proposed
ineligibility criteria would appropriately limit the potential
population of FINRA Pilot Program participants to those FINRA-member
dealers that may be better positioned to conduct remote inspections.
Additionally, under proposed Supplementary Material .05(c)(1)(B)(i)
of MSRB Rule G-27, in support of a risk-based approach to using remote
office inspections as a firm-level condition, the FINRA-member dealer
would be required to have a recordkeeping system to make, maintain and
preserve required records under applicable securities laws and
regulations, including applicable MSRB rules, and the FINRA-member
dealer's written supervisory procedures under MSRB Rule G-27(c). These
records must not be maintained or preserved physically or
electronically at the office or location subject to remote inspection,
and the FINRA-member dealer must have prompt access to such
records.\39\ The MSRB notes that advancements in technology have
changed the way in which FINRA-member dealers and their associated
persons conduct business and communicate with clients, with such
activities of associated persons occurring, by and large, through
centralized electronic systems and maintained or preserved
electronically by the FINRA-member dealer rather than in paper form at
offices or locations.\40\ The MSRB understands that records may be
created at an office or location subject to remote inspections, but not
maintained at such office or location. Finally, as a further firm-level
condition, FINRA-member dealers would be required under proposed
Supplementary Material .05(c)(1)(B)(ii) of MSRB Rule G-27 to determine
that their surveillance and technology tools are appropriate to
supervise the types of risks presented by each remotely supervised
office or location and sets out examples of types of potential
surveillance and technology tools that FINRA-member dealers might
consider using. These provisions mirror the provisions of FINRA Rule
3110.18(f)(2), with appropriate cross-reference changes to the
applicable MSRB rule provision.
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\39\ Under Regulation S-P, on privacy of consumer financial
information, dealers are required to have policies and procedures
addressing the protection of customer information and records. See
17 CFR 248.30.
\40\ See Exchange Act Release No. 97398 (April 28, 2023), 88 FR
28620, 28622 and 28623 (May 4, 2023) (File No. SR-FINRA-2023-007)
(Notice of Filing).
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Eligibility, Exclusions and Conditions--Location Level Requirements
(Proposed Supplementary Material .05(c)(2) of MSRB Rule G-27)
FINRA Rule 3110.18(g) lists the criteria under the FINRA Pilot
Program that would render a particular office or location ineligible
for remote office inspection. Under FINRA Rule 3110.18(g)(1), offices
or locations would be ineligible for a remote office inspection if at
any time during the FINRA Pilot Period:
(i) one or more associated persons at such office or location is or
becomes subject to a mandatory heightened supervisory plan under the
rules of FINRA, the Commission, or a state regulatory agency;
(ii) one or more associated persons at such office or location is
or becomes 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 firm and is not
subject to a mandatory heightened supervision plan as a condition to
approval or permission for such association; \41\
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\41\ The language mirrors the text of FINRA Rule
3110.18(g)(1)(B) with the exception of the cross-reference to
paragraph (g)(1)(A) of FINRA Rule 3110.18.
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(iii) the firm is or becomes subject to FINRA Rule 1017(a)(7) as a
result of one or more associated persons at such office or location;
(iv) one or more associated persons at such office or 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 (Uniform Application for Securities Industry
Registration or Transfer) or similar form by a registered securities
association; \42\
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\42\ The language substantively mirrors the text of FINRA Rule
3110.18(g)(1)(D). The textual changes include the title of Form U-4
and the addition of the phrase ``or similar form by a registered
securities association.''
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(v) one or more associated persons at such office or location is or
becomes subject to a disciplinary action taken by the firm that is or
was reportable under FINRA Rule 4530(a)(2);
(vi) one or more associated persons at such office or location is
engaged in proprietary trading, including the incidental crossing of
customer orders, or the direct supervision of such activities; or
(vii) the office or location handles customer funds or securities.
The MSRB believes that the aforementioned categories of location-
level ineligibility are events or activities that are more likely to
raise investor protection concerns because they expressly account for
activities within offices or locations that pose higher risks and,
therefore, such offices or locations should be ineligible for the FINRA
Pilot Program. As such, proposed Supplementary Material .05(c)(2)(A),
on office or location requirements, of MSRB Rule G-27
[[Page 49955]]
would provide that a FINRA-member dealer is ineligible to conduct
remote inspection of an office or location if at any time during the
Pilot Period such office or location becomes ineligible for remote
inspection under the prescribed FINRA requirements relating to
location-level ineligibility for participation in the FINRA Pilot
Program under FINRA Rule 3110.18(g)(1).
In addition, as part of the requirement to develop a reasonably
designed risk-based approach to using remote inspections, and the
requirement to conduct and document a risk assessment, proposed
Supplementary Material .05(c)(2)(B), on office or location
requirements, of MSRB Rule G-27 would require that a specific office or
location of the FINRA-member dealer satisfy the following conditions to
be eligible for remote inspections under the FINRA Pilot Program:
(i) electronic communications (e.g., email) are made through the
FINRA-member dealer's electronic system; \43\
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\43\ Proposed Supplementary Material .05(c)(2)(B)(i), mirroring
FINRA Rule 3110.18(g)(2)(A) with a non-substantive terminology
change.
---------------------------------------------------------------------------
(ii) the associated person's correspondence and communications with
the public are subject to the FINRA-member dealer's supervision in
accordance with MSRB Rule G-27(e); \44\ and
---------------------------------------------------------------------------
\44\ Proposed Supplementary Material .05(c)(2)(B)(ii), mirroring
FINRA Rule 3110.18(g)(2)(B) with appropriate cross-reference change
to the applicable MSRB rule provision and a non-substantive
terminology change.
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(iii) no books or records of the FINRA-member dealer required to be
made, maintained, and preserved under applicable securities laws and
regulations, including applicable MSRB rules, and such FINRA-member
dealer's own written supervisory procedures under MSRB Rule G-27(c) are
physically or electronically maintained and preserved at such office or
location.\45\
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\45\ Proposed Supplementary Material .05(c)(2)(B)(iii),
mirroring FINRA Rule 3110.18(g)(2)(C) with appropriate cross-
reference changes to applicable MSRB rule provisions and a non-
substantive terminology change.
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A FINRA-member dealer's office inspection program is a necessary
part of its supervisory system and supports a culture of compliance
because it provides an additional level of oversight and safeguards
against risk; therefore, the conditions and eligibility exclusions at
the firm and location level are appropriate to ensure the efficacy of
remote inspections undertaken pursuant to the FINRA Pilot Program as
they will provide safeguards that will help ensure that firms maintain
effective supervision when conducting remote inspections. In addition,
the MSRB believes that keeping the firm and location-level eligibility
criteria consistent with FINRA-amended rules would avoid regulatory
inconsistencies in the application and use of remote office inspections
by FINRA-member dealers participating in the FINRA Pilot Program by
subjecting such dealers to the same supervisory framework.
Written Supervisory Procedures for Remote Inspections (Proposed
Supplementary Material .05(d) of MSRB Rule G-27)
Consistent with their obligations under FINRA Rule 3110(b), on
written procedures, FINRA Rule 3110.18(c), on written supervisory
procedures for remote inspections, requires member firms that elect to
participate in the FINRA Pilot Program to establish, maintain, and
enforce written supervisory procedures regarding remote inspections
that are reasonably designed to detect and prevent violations of and
achieve compliance with applicable securities laws and regulations, and
with applicable FINRA rules. Under proposed Supplementary Material
.05(d), on written supervisory procedures for remote inspections, of
MSRB Rule G-27, FINRA-member dealers electing to participate in the
FINRA Pilot Program would be required, consistent with their
obligations under MSRB Rule G-27(c), to establish, maintain, and
enforce written supervisory procedures regarding remote inspections
that are reasonably designed to detect and prevent violations of, and
achieve compliance with, applicable securities laws and regulations,
including applicable MSRB rules. These reasonably designed procedures,
at a minimum, must address:
(i) the methodology, including technology, that may be used to
conduct remote inspections; \46\
---------------------------------------------------------------------------
\46\ Proposed Supplementary Material .05(d)(1), mirroring FINRA
Rule 3110.18(c)(1).
---------------------------------------------------------------------------
(ii) the factors considered in the risk assessment made for each
applicable office or location pursuant to proposed Supplementary
Material .05(b); \47\ and
---------------------------------------------------------------------------
\47\ Proposed Supplementary Material .05(d)(2), mirroring FINRA
Rule 3110.18(c)(2).
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(iii) the use of other risk-based systems employed generally by the
FINRA-member dealer to identify and prioritize for review those areas
that pose the greatest risk of potential violations of applicable
securities laws and regulations, including applicable MSRB rules.\48\
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\48\ Proposed Supplementary Material .05(d)(3), mirroring FINRA
Rule 3110.18(c)(4) with a non-substantive terminology change. FINRA
Rule 3110.18(c)(3) is addressed in proposed Supplementary Material
.05(g) discussed below.
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Effective Supervisory System (Proposed Supplementary Material .05(e) of
MSRB Rule G-27)
FINRA Rule 3110.18(d), on effective supervisory system, provides
that a FINRA-member dealer's use of remote inspection of an office or
location will be held to the same standards for reasonable review as
set forth under FINRA Rule 3110.12. FINRA Rule 3110.18(d) also provides
where a firm's remote inspection of an office or location identifies
any red flags, the firm may need to impose additional supervisory
procedures for that office or location or may need to provide for more
frequent monitoring of that office or location, including potentially a
subsequent on-site visit on an announced or unannounced basis.
Proposed Supplementary Material .05(e), on effective supervisory
system, of MSRB Rule G-27 would mirror FINRA Rule 3110.18(d) by
reiterating that the requirement to conduct inspections of offices and
locations is one part of the FINRA-member dealer's overall obligation
to have an effective supervisory system. Therefore, a FINRA-member
dealer must maintain its ongoing review of the activities and functions
at all offices and locations regardless of whether such FINRA-member
dealer conducts inspections remotely, and that a FINRA-member dealer's
use of remote inspection of an office or location would be subject to
the same standards for review as for other offices or locations under
MSRB Rule G-27 in addition to the standard set forth under this
Supplementary Material.\49\ Additionally, proposed Supplementary
Material .05(e) would state that, where a FINRA-member dealer detects
red flags through a remote inspection, the FINRA-member dealer may need
to impose additional supervisory procedures or provide more frequent
monitoring for that office or location, which could include a
subsequent on-site visit on an announced or unannounced basis. The MSRB
believes that the supervisory
[[Page 49956]]
system requirements in the proposed rule change, consistent with the
FINRA Pilot Program, would assist in managing potential risks
associated with dealers conducting remote office inspections.
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\49\ FINRA Rule 3110.18(d), on effective supervisory system,
refers to the standards for office or location reviews under FINRA
Rule 3110.12, on reasonable standards of review, and states that
remote office inspections are subject to the same standards as other
inspections. Supplementary Material .05(e) of MSRB Rule G-27
explicitly incorporates within the text that the same standards for
review apply for on-site and remote inspections.
---------------------------------------------------------------------------
Documentation Requirement (Proposed Supplementary Material .05(f) of
MSRB Rule G-27)
FINRA Rule 3110.18(e) contains documentation requirements for
member firms participating in the FINRA Pilot Program. In particular,
FINRA Rule 3110.18(e) requires member firms to maintain and preserve a
centralized record for each Pilot Year, as defined under FINRA Rule
3110.18(l) (a ``Pilot Year''),\50\ that separately identifies all
offices or locations that were inspected remotely and any offices or
locations for which the member determined to impose additional
supervisory procedures or more frequent monitoring as a result of the
remote office inspection. In addition, FINRA Rule 3110.18(e) requires
the documentation of the results of a remote inspection for an office
or location to identify any additional supervisory procedures or more
frequent monitoring for that office or location that were imposed as a
result of the remote inspection, including whether an on-site
inspection was conducted at such office or location.
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\50\ The textual changes include the reference to FINRA Rule
3110.18(l). FINRA Rule 3110.18(l) defines Pilot Year as the
following: (1) Pilot Year 1 is the period beginning on July 1, 2024
and ending on December 31 of the same year; (2) Pilot Year 2 means
the calendar year period following Pilot Year 1, beginning on
January 1 and ending on December 31; (3) Pilot Year 3 means the
calendar year period following Pilot Year 2, beginning on January 1
and ending on December 31; and (4) if applicable, where Pilot Year 1
covers a period that is less than a full calendar year, then Pilot
Year 4 means the period following Pilot Year 3, beginning on January
1 and ending on June 30, 2027.
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Consistent with the FINRA provision, proposed Supplementary
Material .05(f), on documentation requirement, of MSRB Rule G-27 would
mirror such documentation requirements for FINRA-member dealers opting
to avail themselves of the FINRA Pilot Program. Specifically, proposed
Supplementary Material .05(f) would require such dealers to maintain
and preserve a centralized record for each of the Pilot Years, within
the meaning of the FINRA Pilot Program. In addition, proposed
Supplementary Material .05(f) would require FINRA-member dealers to
identify all offices or locations that were inspected remotely and any
offices or locations for which such dealer determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in proposed Supplementary Material .05(e), on effective
supervisory system, of MSRB Rule G-27. Moreover, a FINRA-member
dealer's documentation of the results of a remote inspection of an
office or location would need to identify any additional supervisory
procedures or more frequent monitoring of such office or location that
were imposed as a result of the remote inspection, including whether an
on-site inspection was conducted at such office or location. The MSRB
believes that these requirements would assist in tracking and
documenting the efficacy of the FINRA-member dealer's remote
inspections.
Data and Information Collection Requirement (Proposed Supplementary
Material .05(g) of MSRB Rule G-27)
FINRA Rule 3110.18(h) outlines requirements for member firms that
elect to participate in the FINRA Pilot Program to collect specific
data and information as part of the FINRA Pilot Program. Specifically,
FINRA Rule 3110.18(h) requires firms to collect specific data points
and to provide such data and information to FINRA on a quarterly basis,
in the manner and format determined by FINRA,\51\ including: (i) the
number of offices and locations with an inspection completed during
each calendar quarter; \52\ (ii) the number of those offices or
locations in each calendar quarter that were inspected remotely; \53\
(iii) the number of those offices or locations in each calendar quarter
that were the subject of an on-site inspection, as well as the number
of such inspections that were on-site because of a finding; \54\ (iv)
the number of offices and locations for which a remote office
inspection was conducted in the calendar quarter that identified a
finding, the number of findings, a list of the significant findings;
\55\ and (v) the number of locations for which an on-site inspection
was conducted in the calendar quarter that identified a finding, the
number of findings, and a list of the significant findings.\56\
Moreover, dealers are required to provide FINRA with their written
supervisory procedures for remote inspections that account for
escalating significant findings; new hires; supervising brokers with a
significant history of misconduct; and outside business activities and
``doing business as'' (or DBA) designations.\57\ In addition, FINRA
Rule 3110.18(h)(2) outlines requirements for member firms electing to
participate in the FINRA Pilot Program to provide certain data and
information for Pilot Year 1 if it is less than a full calendar year
\58\ and FINRA Rule 3110.18(h)(3) lists additional data and information
to be provided to FINRA for calendar year 2019 for member firms
electing to participate in the FINRA Pilot Program.
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\51\ FINRA Rule 3110.18(h)(1) notes that FINRA-member dealers
must provide separate counts for offices of supervisory jurisdiction
(``OSJs''), supervisory branch offices, non-supervisory branch
offices, and non-branch locations. FINRA office categories
correspond to the MSRB office categories contained in MSRB Rule G-
27.
\52\ See FINRA Rule 3110.18(h)(1)(A).
\53\ See FINRA Rule 3110.18(h)(1)(B).
\54\ See FINRA Rule 3110.18(h)(1)(C) and (D). Pursuant to FINRA
Rule 3110.18(h)(1), a finding means a discovery made during an
inspection that led to a remedial action or was listed on the
member's inspection report.
\55\ See FINRA Rule 3110.18(h)(1)(E).
\56\ See FINRA Rule 3110.18(h)(1)(F).
\57\ See FINRA Rule 3110.18(h)(1)(G).
\58\ FINRA Rule 3110.18(h)(2) also contains language that
addresses providing counts for OSJs, supervisory branch offices,
non-supervisory branch offices, and non-branch locations if Pilot
Year 1 covers a period less than a full calendar year.
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The MSRB believes that requiring certain data and information to be
collected and periodically provided to FINRA is critical to evaluating
the effectiveness of remote office inspections during the Pilot Period,
including to determine if the Pilot Program should be extended or made
permanent.\59\ Proposed Supplementary Material .05(g), on data and
information collection requirement, of MSRB Rule G-27 would require
FINRA-member dealers to comply with the requirements of FINRA with
respect to the collection and submission of specified data and
information, and in the manner and format required under the FINRA
Pilot Program. Furthermore, proposed Supplementary Material .05(g) of
MSRB Rule G-27, which substantially mirrors FINRA Rule 3110.18(h)(4)
would require FINRA-member dealers that elect to participate in the
FINRA Pilot Program to establish, maintain and enforce written policies
and procedures that are reasonably designed to comply with any
specified data and information collection, and transmission
requirements prescribed by FINRA.
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\59\ As previously mentioned, the MSRB will engage with FINRA to
understand the efficacy of remote office inspections based on
FINRA's review of data and information provided to FINRA by FINRA-
member dealers as required under the FINRA Pilot Program. More
specifically, the examination of the municipal securities activities
of FINRA-member dealers would aid the MSRB's understanding of the
efficacy of remote office inspections.
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[[Page 49957]]
Election To Participate in Remote Inspections Pilot Program (Proposed
Supplementary Material .05(h) of MSRB Rule G-27)
FINRA Rule 3110.18(i) specifies how a firm elects to participate
in, or subsequently withdraws from, the FINRA Pilot Program.
Specifically, FINRA Rule 3110.18(i) states that a firm must, at least
five calendar days before the beginning of a Pilot Year, provide FINRA
an ``opt-in notice'' in the manner and format determined by FINRA.\60\
Moreover, FINRA Rule 3110.18(i) specifies that a FINRA member that
elects to withdraw from subsequent Pilot Years (i.e., Pilot Year 2,
Pilot Year 3, and Pilot Year 4, if applicable) shall, at least five
calendar days before the end of the then current Pilot Year, provide
FINRA with an ``opt-out notice'' in the manner and format determined by
FINRA.\61\
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\60\ FINRA Rule 3110.18(i) also contains provisions for firms
wishing to opt-out of the FINRA Pilot Program.
\61\ FINRA may, in exceptional cases and where good cause is
shown, waive the applicable timeframes for the required opt-in or
opt-out notices.
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Proposed Supplementary Material .05(h), on election to participate,
of MSRB Rule G-27 would require FINRA-member dealers electing to
participate in the FINRA Pilot Program to make their election in the
manner and format as prescribed, in accordance with FINRA Rule
3110.18(i). In addition, proposed Supplementary Material .05(h) would
require FINRA-member dealers that elect to withdraw from the FINRA
Pilot Program for subsequent years to provide such notice to FINRA in
the manner and format as prescribed in accordance with FINRA Rule
3110.18(i). These requirements will ensure that FINRA-member dealers
can properly elect to participate in, or subsequently withdraw from,
the FINRA Pilot Program while satisfying requirements in accordance
with MSRB Rule G-27(d) on office inspections.
Failure to Satisfy Conditions (Proposed Supplementary Material .05(i)
of MSRB Rule G-27)
FINRA Rule 3110.18(j), on failure to satisfy conditions, addresses
situations in which a member firm fails to satisfy the requirements for
participating in the FINRA Pilot Program. Specifically, FINRA Rule
3110.18(j) states that member firms that fail to satisfy the conditions
set forth to avail themselves of the FINRA Pilot Program, including the
requirement to timely collect and submit the data and information to
FINRA as set forth under FINRA Rule 3110.18(h), shall be ineligible to
participate in the FINRA Pilot Program. Such member firms would be
required to conduct on-site inspections of each office and location on
the required cycle in accordance with FINRA Rule 3110(c) on internal
inspections.
Consistent with FINRA Rule 3110.18(j), proposed Supplementary
Material .05(i), on failure to satisfy conditions, of MSRB Rule G-27
would specify that any FINRA-member dealer that fails to satisfy the
conditions of proposed Supplementary Material .05 of MSRB Rule G-27 and
of FINRA Rule 3110.18, including the specified requirement to timely
collect and submit data, would no longer be eligible to participate in
the FINRA Pilot Program. Such FINRA-member dealers would need to
conduct on-site inspections of each office and location on the required
cycle in accordance with MSRB Rule G-27(d), on internal inspections.
While FINRA has adopted FINRA Rule 3110.18(k), on determination of
ineligibility, and FINRA Rule 3110.18(m), on the sunset of FINRA Rule
3110.17, the proposed rule change does not incorporate similar
provisions since FINRA solely makes the determination regarding FINRA-
member dealers' participation in the FINRA Pilot Program and the
sunsetting of the FINRA relief under FINRA Rule 3110.17, and therefore
those provisions would not be applicable. The MSRB specifically
references and explains these provisions in describing adopted FINRA
Rule 3110.18 within the filing. In addition, for purposes of the
proposed rule change, the terms defined in FINRA Rule 3110.18(l) are
used herein with the same meaning as set forth in FINRA Rule
3110.18(l).
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act,\62\ which provides that the
MSRB's rules shall be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in municipal securities and municipal
financial products, to remove impediments to and perfect the mechanism
of a free and open market in municipal securities and municipal
financial products, and, in general, to protect investors, municipal
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78 o-4(b)(2)(C).
---------------------------------------------------------------------------
In accordance with Section 15B(b)(2)(C) of the Exchange Act,\63\
the proposed rule change is designed to prevent fraudulent and
manipulative acts and practices because the proposed rule change would
allow FINRA-member dealers to participate in the FINRA Pilot Program in
a manner intended to provide a practical and balanced way for such
dealers to continue effectively meeting their core regulatory
obligations 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 MSRB rules, which directly serves investor protection.
The MSRB has noticed that there has been a shift towards adopting work
from home models due to carryover from the conditions associated with
the COVID-19 pandemic, and the criteria and conditions contained within
the proposed rule change are designed to accommodate this shift and
allow firms to supplement their existing inspection programs with the
option to conduct remote inspections at offices or locations where such
remote inspections satisfy the proposed conditions in the proposed rule
change, and are consistent with a reasonably designed supervisory
system, while also minimizing associated risks, as much as possible, to
investor protections. The risk assessment required by the proposed rule
change will further mitigate residual risk not addressed by the
ineligibility criteria and the affirmative conditions imposed to
participate in the FINRA Pilot Program. As such, the proposed rule
change is designed to minimize risks by limiting which offices or
locations can be inspected remotely while also setting conditions for
FINRA-member dealers wishing to partake in remote office inspections.
The robust nature of the criteria that must be satisfied and
circumstances that would make a location ineligible for remote office
inspections serve an important role in reducing the potential for fraud
and manipulative acts. For example, the terms of the proposed rule
change would include important safeguards, such as requiring risk
assessments, supplemental written supervisory procedures related to
remote inspections, and documentation for FINRA-member dealers wishing
to engage in remote office inspections, which furthers the prevention
of
[[Page 49958]]
manipulative acts and practices and protection of investors, municipal
entities, obligated persons and the public interest. FINRA-member
dealers are required to determine that their surveillance and
technology tools are appropriate to supervise remote office inspections
in furtherance of preventing fraudulent and manipulative acts and
practices.
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\63\ Id.
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By permitting FINRA-member dealers to avail themselves of remote
office inspections for the requisite period by use of the FINRA Pilot
Program, such dealers are receiving the same benefit, regardless of
asset class, of being able to deploy their resources in a manner that
maximizes efficiencies, which promotes just and equitable principles of
trade, through regulatory consistency for FINRA -member dealers and
MSRB registrants. The MSRB believes that the proposed rule change would
facilitate transactions in municipal securities and remove impediments
to a free and open market because, by ensuring a consistent regulatory
framework for which FINRA-member dealers can avail themselves of remote
office inspections, the proposed rule change would alleviate some of
the operational challenges such dealers would otherwise experience,
which will allow them to more effectively allocate resources to the
operations that facilitate transactions in municipal securities and
municipal financial products.
Finally, aligning the proposed rule change with adopted FINRA Rule
3110.18 and thereby making such requirements specifically applicable to
FINRA-member dealers' municipal securities activities fosters
cooperation between regulators, because it creates as close as possible
a uniform standard, with minimal distinction needed between the
treatment of municipal securities and other asset classes, enabling
FINRA and the Commission to more efficiently inspect dealers subject to
the rules of both self-regulatory organizations.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act \64\ requires that MSRB
rules be designed not to impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. The MSRB has considered the economic impact of the proposed rule
change and believes that the proposed rule change would not impose any
unnecessary or inappropriate burden on competition, as the proposed
rule change would align with the adoption of FINRA Rule 3110.18
allowing remote office inspections by FINRA members, for a requisite
period of time, by participating in the FINRA Pilot Program. In
addition, the proposed rule change would be applied equally to all
dealers that are FINRA-member dealers.\65\ Therefore, the MSRB believes
the proposed rule change would not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act.\66\
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\64\ Id.
\65\ As previously mentioned, the MSRB will consider amendments
to MSRB Rule G-27 at a later date on whether the proposed rule
change should be extended to other dealers under MSRB rules, such as
bank dealers.
\66\ 15 U.S.C. 78o-4(b)(2)(C).
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In determining whether these standards have been met, the MSRB was
guided by the MSRB's Policy on the Use of Economic Analysis in MSRB
Rulemaking.\67\ In accordance with this policy, the MSRB has evaluated
the potential impacts on competition of the proposed rule change. The
proposed rule change would amend MSRB Rule G-27 to provide a mechanism
for FINRA-member dealers to participate in the FINRA Pilot Program.\68\
The proposed rule change is intended to align MSRB Rule G-27 with the
adopted FINRA Rule 3110.18, which established the FINRA Pilot Program,
providing an option for FINRA-member dealers to fulfill their office
inspection obligations by conducting inspections of some or all branch
offices and locations remotely without an on-site visit to such offices
or locations. The MSRB also believes the proposed rule change would be
appropriate as some dealers' business model and work environment
continue to evolve with ongoing technological advancements, and the
shift to remote working may have accelerated since the COVID-19
pandemic.
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\67\ See Policy on the Use of Economic Analysis in MSRB
Rulemaking, available at <a href="https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking">https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking</a>. In evaluating whether there was any burden
on competition that is not necessary or appropriate in furtherance
of the purposes of the Exchange Act, the MSRB was guided by its
principles that required the MSRB to consider costs and benefits of
a rule change, its impact on efficiency, capital formation and
competition, and the main reasonable alternative regulatory
approaches. For those rule changes which the MSRB files for
immediate effectiveness under Section 19(b)(3)(A) of the Exchange
Act (15 U.S.C. 78s(b)(3)(A)), while not subject to the policy, the
MSRB usually focuses its examination exclusively on the burden of
competition on regulated entities, but may also include any
additional economic analysis that the MSRB believes may inform the
rulemaking process based on the facts and circumstances.
\68\ The proposed rule change would apply specifically to
dealers that are also FINRA-member dealers.
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Benefits
The MSRB believes that the proposed rule change would benefit
FINRA-member dealers by offering a remote office inspection option to
such eligible dealers, subject to certain conditions, while minimizing
the potential of harm to issuers and investors who benefit from the
current supervisory framework. Specifically, the MSRB believes that
FINRA-member dealers would have sufficient capability in carrying out
their office inspection duties remotely while minimizing the impact on
the quality of office inspections. The proposed rule change would
therefore lower costs for FINRA-member dealers that choose the remote
office inspection option by participating in the FINRA Pilot Program.
The MSRB has identified approximately 11,000 municipal branch offices,
which are inclusive of single-person municipal branch offices.\69\ For
all FINRA-member dealers, including but not limited to those with a
significant number of single-person municipal branch offices, the
benefits of participating in the FINRA Pilot Program include a
reduction in travel time and expenses as well as the productivity
gained from allowing FINRA-member dealers the flexibility of designing
their own compliance protocol for on-site inspections.\70\ Relatedly,
recent studies have shown that a reduction in travel time has been
beneficial to maintaining employees, increasing productivity, and
reducing costs.\71\
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\69\ Based on registration data provided by FINRA, as of May 20,
2024, the MSRB identified 11,139 municipal branch offices. These are
locations where one or more associated persons are qualified as a
municipal securities principal (Series 53), municipal fund
securities limited principal (Series 51) or municipal securities
representative (Series 52). The MSRB notes there is some double
counting of municipal branch offices due to registration data
provided by firms to FINRA listing a location twice as a municipal
branch office.
\70\ These benefits mirror those described in FINRA's Economic
Impact Analysis as part of the Amendments to FINRA Rule 3110.18. See
Exchange Act Release No. 97398 (April 28, 2023), 88 FR 28620, 28636-
28637 (May 4, 2023) (File No. SR-FINRA-2023-007).
\71\ See Aksoy, C., et al. (2023), ``Time Savings When Working
from Home,'' NBER Working Paper 30866, National Bureau of Economic
Research (NBER), Cambridge, MA, <a href="https://www.nber.org/papers/w30866">https://www.nber.org/papers/w30866</a>.
In their paper, the authors identify that workers save an average of
72 minutes a day working from home. Id. at 3. With the extra time at
home, the authors state that approximately 40% of that time goes to
additional work productivity. Id. at 3. See also Criscuolo, C., et
al. (2021), ``The role of telework for productivity during and post-
COVID-19: Results from an OECD survey among managers and workers,''
OECD Productivity Working Papers, No. 31, OECD Publishing, Paris,
<a href="https://doi.org/10.1787/7fe47de2-en">https://doi.org/10.1787/7fe47de2-en</a> (``The relationship between
firm-level labour productivity and the adoption rate of telework
(before and during the crisis) was found to be robustly positive and
significant.''). Id. at 16-17.
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[[Page 49959]]
In addition, even if FINRA-member dealers choose not to participate
in the FINRA Pilot Program, such dealers would still benefit from the
alignment of MSRB Rule G-27 with the recently adopted FINRA Rule
3110.18. With an estimated 98% of MSRB registrants subject to FINRA's
supervision rules, incongruity between MSRB Rule G-27 and adopted FINRA
Rule 3110.18 would create confusion, uncertainty and an unnecessary
burden for FINRA-member dealers and results in less operational
efficiencies for such dealers. By eliminating potential areas of
inconsistency between MSRB and FINRA rules, FINRA-member dealers would
have a lower compliance burden and improved efficiency. A more
efficient supervisory system for FINRA-member dealers may ultimately
also benefit issuers and investors whom the rules are designed to
protect, such as by ensuring dealers are able to focus time, attention,
and resources on matters related to effecting transactions in municipal
securities and advancing a fair and efficient market. The MSRB expects
the benefits to accumulate over time.
Costs
The MSRB expects that upfront costs would be minimal as it relates
to municipal securities activities because it is expected that FINRA-
member dealers will also be reviewing policies and procedures for other
financial products such as corporate bonds. The MSRB estimates that
FINRA-member dealers would need to make a one-time revision to their
policies and procedures in accordance with the proposed rule change,
including accounting for a risk assessment, eligibility criteria and
conditions, written supervisory procedures as well as an effective
supervisory system. To clarify, the upfront costs to update policies
and procedures and associated training are primarily applicable to
FINRA-member dealers that elect to conduct remote office inspections,
with such costs being proportionately higher for smaller rather than
larger dealers. However, the MSRB believes the total upfront costs
would still be manageable, with an estimated incremental amount
totaling approximately $5,990 for participation in the FINRA Pilot
Program for the three-year period, as shown in Table 1; therefore, the
cost should not impose an onerous burden on these FINRA-member dealers
that choose this option.\72\ The MSRB estimates that it would take an
inhouse attorney six hours to revise applicable policies and procedures
pertaining to the municipal securities activities of the FINRA-member
dealer. The MSRB also estimates that FINRA-member dealers may incur
fees associated with the engagement of outside counsel to assist with
any preparation and review of new policies and procedures; the
estimated time is three hours for such work. In addition, the MSRB
estimates that a compliance attorney will require two hours of training
on the new procedures.\73\ The MSRB believes the estimated one-time
upfront cost would be offset by the cumulative compliance cost savings
as a result of the consistency between MSRB Rule G-27 and FINRA Rule
3110 over time, as well as the cumulative cost savings, as described
above, from the utilization of remote office inspection if a FINRA-
member dealer chooses this option.\74\
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\72\ This cost includes six hours for an in-house attorney to
complete a revision of policies and procedures and three hours for
an outside counsel to review any revisions. We estimate an in-house
attorney's hourly rate as $540 ($540 x 6 hours = $3,240) for this
work and outside counsel's hourly rate of $570 ($570 x 3 hours =
$1,710). Lastly, we anticipate two hours for a compliance attorney
to conduct training with an hourly rate of $520 ($520 x 2 hours =
$1,040). In total, the MSRB estimates FINRA-member dealers will
incur upfront costs totaling approximately $5,990 ($3,240 + $1,710 +
$1,040 = $5,990) related to their participation in the FINRA Pilot
Program for the three-year period.
\73\ Id.
\74\ For those FINRA-member dealers that opt into the FINRA
Pilot Program, the change in process may impose additional costs on
acquiring information technology compliance software and hardware
upgrades to ensure adequate supervisory functions remotely. However,
FINRA-member dealers likely made these technology upgrades and
incurred cost in establishing supervisory controls appropriate to
support mandatory work-from-home orders and shift to hybrid work
arrangements during the COVID-19 pandemic. In addition, FINRA-member
dealers that would opt for remote office inspections likely would do
so for all securities rather than just for municipal securities; and
therefore, would also opt into the FINRA Pilot Program for those
asset classes as well. Therefore, the MSRB believes the incremental
costs for upgrading the information technology would be negligible.
\75\ The hourly rates data is gathered from the Commission's
filing on ``Amendments Regarding the Definition of ``Exchange'' and
``Alternative Trading Systems (ATSs) That Trade U.S. Treasury and
Agency Securities, National Market System (NMS) Stocks, and Other
Securities.'' See Exchange Act Release No. 94062 (January 26, 2022),
87 FR 15496, 15624 (March 18, 2022) (File No. S7-02-22). The
Commission's economic analysis utilizes the Securities Industry and
Financial Markets Association, Management & Professional Earnings in
the Securities Industry--2013 Report for the hourly rates of various
financial industry market professionals. To compensate for
inflation, the data reflects the 2024 hourly rate level after
adjusting for the annual cumulative wage inflation rate of 37%
between 2013 and 2023, and another 4% between 2023 and 2024. See The
Federal Reserve Bank of St. Louis Employment Cost Index: Wages and
Salaries Private Industry (available at <a href="https://fred.stlouisfed.org/series/ECIWAG">https://fred.stlouisfed.org/series/ECIWAG</a>). The number of hours for each task is based on the
MSRB's internal estimate.
Table 1--Estimate of Incremental Costs Based on 2024 Hourly Rates \75\
----------------------------------------------------------------------------------------------------------------
Number of
Cost components Hourly rate hours Cost per firm
----------------------------------------------------------------------------------------------------------------
Upfront Costs--Remote Supervision Pilot Program:
(a) In-House Attorney Revision of Policies and Procedures... $540 6.0 3,240
(b) Outside Counsel Review.................................. 570 3.0 1,710
(c) Training................................................ 520 2.0 1,040
-----------------------------------------------
Subtotal................................................ .............. .............. 5,990
Annual Ongoing Costs For Firms Choosing the Remote Supervision
Pilot Program:
(a) Risk and Eligibility Requirement Assessment............. 520 3.0 1,560
(b) Data Submission to FINRA................................ 520 1.0 520
(c) Continuing Education.................................... 520 2.0 1,040
-----------------------------------------------
Subtotal................................................ .............. .............. 3,120
----------------------------------------------------------------------------------------------------------------
The costs of annual ongoing compliance with the proposed rule
change would likely be incremental for FINRA-member dealers already
adopting the FINRA Pilot Program for other securities classes, as these
firms would already be complying, or in the process of complying, with
the language of FINRA Rule 3110.18. For those
[[Page 49960]]
FINRA-member dealers that engage in municipal securities activities and
that would choose to conduct remote office inspections by entering the
FINRA Pilot Program in connection with discharging their supervisory
activities under MSRB Rule G-27(d), the MSRB estimates about $3,120
annually per FINRA-member dealer for ongoing compliance costs.\76\
These compliance costs include the incremental annual cost for FINRA-
member dealers to conduct the required risk assessment, submit the
required data points to FINRA on a quarterly basis, provide continuing
education, and ensure that it is in compliance with the eligibility
requirements.\77\ Finally, the MSRB does not expect the proposed rule
change would impose any cost on municipal entities or investors because
FINRA-member dealers should realize cost savings resulting from greater
operational efficiencies, which would offset the ongoing compliance
costs related to complying with the FINRA Pilot Program.
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\76\ FINRA-member dealers of various sizes may incur different
amounts of ongoing costs. Therefore, the $3,120 annually per firm
represents an estimate for a mid-sized firm (``mid-sized'' is
defined by FINRA as a firm with 151-499 registered representatives).
\77\ The MSRB currently estimates annual ongoing cost of six
hours total for a risk and eligibility requirement assessment, data
submission to FINRA on a quarterly basis and continuing education
requirements. The MSRB estimates an hourly rate of $520 for a
compliance attorney to complete an annual risk and eligibility
requirement assessment in approximately three hours. Additionally,
the MSRB estimates one hour to complete the data submission to FINRA
by a compliance attorney. Finally, the MSRB estimates that any
drafting of annual continuing education requirements would take
approximately two hours for a compliance attorney to complete,
summing to a total of $3,120 annually per FINRA-member dealer for
ongoing compliance costs (i.e., 3 hours + 1 hour + 2 hours = 6
hours) x hourly rate of $520 = $3,120.
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Effect on Competition, Efficiency, and Capital Formation
The MSRB believes that the proposed rule change would neither
impose a burden on competition nor hinder capital formation, as the
proposed rule change is applicable to all eligible FINRA-member dealers
and is not expected to significantly affect the protection of investors
and issuers. While upfront costs would be relatively higher for
smaller-size rather than larger-size FINRA-member dealers, the MSRB
expects the total one-time upfront costs to be manageable for FINRA-
member dealers that elect to participate in the FINRA Pilot Program.
The MSRB believes it is appropriate, in an environment with increased
remote working personnel, to provide certain eligible FINRA-member
dealers with the option for remote office inspection subject to certain
conditions during the requisite time period by entering the FINRA Pilot
Program. Since bank dealers are not covered in the proposed rule change
for now, to the extent that some of those 18 bank dealers, as of 2023,
would have wanted to avail themselves of conducting office inspections
remotely, had the option been available to them, such bank dealers may
be disadvantaged in their competition with other dealers. The MSRB,
however, believes this disadvantage would be minimal because the MSRB
understands through its outreach and engagement with some bank dealers
that bank dealers generally have fewer OMSJs and municipal branch
offices or locations than other dealers, so the use of a remote
inspections pilot program may not be coveted for most bank dealers when
weighing the called for processes and documentation requirements. The
MSRB believes that the proposed rule change would improve the municipal
securities market's operational efficiency and promote regulatory
consistency. At present, the MSRB is unable to quantitatively evaluate
the magnitude of the efficiency gains or losses, but believes the
benefits accumulated over time would outweigh the upfront costs of
revising policies and procedures and the annual ongoing costs of
ensuring compliance.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were not directly solicited on the proposed rule
change.\78\
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\78\ Comments received in response to FINRA's recently adopted
FINRA Pilot Program under FINRA Rule 3110.18 can be found at <a href="https://www.sec.gov/comments/sr-finra-2023-007/srfinra2023007.htm">https://www.sec.gov/comments/sr-finra-2023-007/srfinra2023007.htm</a>.
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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 Exchange Act \79\ and
Rule 19b-4(f)(6) \80\ thereunder. 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 Exchange Act.
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\79\ 15 U.S.C. 78s(b)(3)(A).
\80\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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<ls-thn-eq> Send an email to <a href="/cdn-cgi/l/email-protection#7301061f165e101c1e1e161d0700330016105d141c05"><span class="__cf_email__" data-cfemail="d4a6a1b8b1f9b7bbb9b9b1baa0a794a7b1b7fab3bba2">[email protected]</span></a>. Please
include File Number SR-MSRB-2024-05 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.
All submissions should refer to File Number SR-MSRB-2024-05. 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 the filing also will be available for inspection
and copying at the principal office of the MSRB. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly.
We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-MSRB-2024-05 and should
be submitted on or before July 3, 2024.
[[Page 49961]]
For the Commission, pursuant to delegated authority.\81\
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\81\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-12794 Filed 6-11-24; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.