Notice2024-23286
Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Supplementary Material .17 to IEX Rule 5.110 (Supervision), so That Any Location That Is the Private Residence of a Person Associated With a Member at Which Supervisory Activities Are Conducted, Which the Member Has Designated as a Residential Supervisory Location Pursuant to FINRA Rule 3110.19, Would Also Be Considered a Non-Branch Location Pursuant to IEX's Rules
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
October 9, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 196 (Wednesday, October 9, 2024)</title>
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[Federal Register Volume 89, Number 196 (Wednesday, October 9, 2024)]
[Notices]
[Pages 81971-81976]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-23286]
[[Page 81971]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101237; File No. SR-IEX-2024-19]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Supplementary Material .17 to IEX Rule 5.110 (Supervision), so That Any
Location That Is the Private Residence of a Person Associated With a
Member at Which Supervisory Activities Are Conducted, Which the Member
Has Designated as a Residential Supervisory Location Pursuant to FINRA
Rule 3110.19, Would Also Be Considered a Non-Branch Location Pursuant
to IEX's Rules
October 3, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on September 20, 2024, the Investors Exchange LLC (``IEX''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ the Exchange'') is filing with the
Commission a proposed rule change to adopt Supplementary Material .17
to IEX Rule 5.110 (Supervision), so that any location that is the
private residence of a person associated with a Member \6\ at which
supervisory activities are conducted, which the Member has designated
as a Residential Supervisory Location (``RSL'') pursuant to FINRA Rule
3110.19, would also be considered a non-branch location pursuant to
IEX's rules.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ See IEX Rule 1.160(y).
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The text of the proposed rule change is available at the Exchange's
website at <a href="http://www.iextrading.com">www.iextrading.com</a>, at the principal office of the Exchange,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
IEX proposes to adopt Supplementary Material .17 to IEX Rule 5.110,
which would allow a location that is the private residence of a person
associated with a Member where supervisory activities are conducted,
including those described in IEX Rule 5.110(f)(1)(D) through (G) or IEX
Rule 5.110(f)(2), that satisfies the conditions for designation as a
RSL set forth in FINRA Rule 3110.19 to also be considered a non-branch
location (i.e., an unregistered office) for those activities under IEX
rules. Without this proposed rule change, any private residence at
which a person associated with a member conducts supervisory activities
is subject to registration, an annual inspection and, in some cases,
additional licensing requirements.\7\ As described below, adding
Proposed Supplementary Material .17 to IEX Rule 5.110 would harmonize
IEX's internal inspections obligations for its Members \8\ with FINRA's
comparable obligations for its members, thereby avoiding confusion to
IEX Members with respect to the applicability of FINRA's new RSL
designation with respect to compliance with IEX Rule 5.110.\9\
Additionally, because Proposed Supplementary Material .17 to IEX Rule
5.110 incorporates by reference FINRA Rule 3110.19, this rule change
enables IEX Rule 5.110 to continue to be incorporated into the
agreement between IEX and FINRA to allocate regulatory responsibility
for common rules (the ``17d-2 Agreement'').\10\
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\7\ See IEX Rules 5.110(a)(4) and 5.110(c)(1)(A).
\8\ See IEX Rule 1.160(s).
\9\ IEX notes that all IEX Members are currently FINRA members,
or in the process of becoming FINRA members.
\10\ See Securities Exchange Act Release No. 93324 (October 14,
2021), 86 FR 58110 (October 20, 2021) (File No. 4-700). The 17d-2
Agreement includes a certification by IEX that states that the
requirements contained in certain Exchange rules are identical to,
or substantially similar to, certain FINRA rules that have been
identified as comparable.
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Background
Early in 2020, the COVID-19 pandemic prompted FINRA to provide
temporary relief to member firms from certain regulatory requirements
to address the public health crisis.\11\ FINRA subsequently adopted
temporary relief to allow remote inspections of an Office of
Supervisory Jurisdiction (``OSJ''), branch office, or non-branch
location for calendar years 2020 and 2021; \12\ FINRA extended the
temporary relief several times to include calendar years 2022, 2023,
and the first half of 2024.\13\ IEX, following FINRA, offered its
Members the same temporary relief to allow remote inspections of OSJs,
branch offices, and non-branch locations for calendar years 2021, 2022,
2023, and until June 30, 2024.\14\ FINRA replaced the temporary remote
inspections relief with the Remote Inspections Pilot Program \15\ that
impacts the internal inspections requirements of FINRA Rule 3110(c);
IEX subsequently amended its supervision rules such that any IEX Member
that participates in the FINRA pilot shall be deemed to satisfy the
[[Page 81972]]
equivalent internal inspection requirements in IEX Rule 5.110(c).\16\
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\11\ 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).
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) (SR-FINRA-2020-019).
\12\ See Securities Exchange Act Release No. 90454 (November 18,
2020), 85 FR 75097 (November 24, 2020) (SR-FINRA-2020-040).
\13\ See Securities Exchange Act Release No. 96241 (November 4,
2022), 87 FR 67969 (November 10, 2022) (SR-FINRA-2022-030);
Securities Exchange Act Release No. 93002 (September 15, 2021), 86
FR 52508 (September 21, 2021) (SR-FINRA-2021-023); Securities
Exchange Act Release No. 94018 (January 20, 2022), 87 FR 4072
(January 26, 2022) (SR-FINRA-2022-001); and Securities Exchange Act
Release No. 98560 (September 27, 2023), 88 FR 68258 (October 3,
2023) (SR-FINRA-2023-012).
\14\ See Securities Exchange Act Release No. 92222 (June 22,
2021), 86 FR 34069 (June 28, 2021) (SR-IEX-2021-09); Securities
Exchange Act Release No. 96460 (December 7, 2022), 87 FR 76222
(December 13, 2022) (SR-IEX-2022-12); Securities Exchange Act
Release No. 96606 (January 6, 2023), 88 FR 2140 (January 12, 2023)
(SR-IEX-2022-14); and Securities Exchange Act Release No. 99383
(January 17, 2024), 89 FR 4355 (January 23, 2024) (SR-IEX-2024-02).
\15\ See FINRA Rule 3110.18.
\16\ See Securities Exchange Act Release No. 101025 (September
16, 2024); see also Supplementary Material .16 to IEX Rule 5.110.
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In response to the pandemic, many private and government employers
closed their offices and their employees continued with their work from
alternative locations such as private residences. IEX, like 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. Moreover, the technology
advancements that facilitated the transition to working outside the
conventional office setting on a broad scale have not only effected a
profound change in lifestyle and workplace practices for member firms,
but provided SROs such as FINRA and IEX an opportunity to consider
aspects of their supervision rules that may benefit from
modernization.\17\ As such, IEX, like FINRA, believes measured changes
to its regulatory approach would allow firms to effectively and more
efficiently carry out their supervisory responsibilities to review the
activities of each office or location while preserving investor
protections.
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\17\ See Securities Exchange Act Release No. 97237 (March 31,
2023), 88 FR 20568 n. 8 (April 6, 2023) (SR-FINRA-2023-006) (``FINRA
RSL Proposal'') (describing FINRA's ``practice of periodically
reviewing its rules to ensure 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.'')
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Current IEX Requirements to Register and Inspect Offices
Currently, IEX Rule 5.110 (Supervision) requires a Member,
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
IEX rules.\18\ The rule sets forth the minimum requirements of a
Member's supervisory system that includes registering a location as an
OSJ or branch office that meets the definitions under IEX Rule 5.110(f)
and inspecting all offices and locations in accordance with IEX Rule
5.110(c). The rule categorizes offices or locations as an OSJ or
supervisory branch office, a non-supervisory branch office, or a non-
branch location.\19\ 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 IEX Rule
5.110, as described in more detail below.\20\
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\18\ See IEX Rule 5.110(a).
\19\ See IEX Rule 5.110(f).
\20\ See IEX Rule 5.110(a)(3) and Supplementary Material .01 to
IEX Rule 5.110.
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An OSJ is a type of branch office. IEX 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[.]'' \21\ 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
considered to be a supervisory branch office.\22\ 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.\23\
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\21\ See IEX Rule 5.110(f)(2).
\22\ See IEX Rule 5.110(f)(4).
\23\ See IEX Rule 5.110(c)(1)(A) & (B).
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Depending upon the functions occurring at a branch office, it may
be further classified as an OSJ, which IEX Rule 5.110(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 IEX Rule 5.110(b)(2); (6)
final approval of retail communications for use by Persons Associated
with the Member, pursuant to IEX Rule 3.280, except for an office that
solely conducts final approval of research reports; or (7)
responsibility for supervising the activities of persons associated
with the member at one or more other branch offices of the Member.\24\
An office designated as an OSJ must have an appropriately registered
principal on-site at the location, and must be inspected at least
annually.\25\
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\24\ See IEX Rule 5.110(f)(1)(A)-(G).
\25\ See IEX Rules 5.110(a)(4) and 5.110(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, IEX Rule 5.110(f)(2) sets forth seven
exclusions--often referred to as unregistered offices or non-branch
locations--of which two pertain to residential locations.\26\ One such
exclusion appears under IEX Rule 5.110(f)(2)(B) 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 IEX Rule 5.110; (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 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
[[Page 81973]]
by the Member (``primary residence exclusion'').\27\ The second
exclusion that pertains to a residential location appears under IEX
Rule 5.110(f)(2)(C) 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'').\28\ In general, the non-primary residence exclusion
typically refers to a vacation or second home.\29\ A non-branch
location must be inspected on a periodic schedule, presumed to be at
least every three years.\30\
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\26\ See generally IEX Rule 5.110(f)(2)(A) and IEX Rule
5.110(f)(2)(D)-(G) 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.
\27\ See IEX Rule 5.110(f)(2)(B)(i)-(ix). The primary residence
exclusion is also set forth in FINRA Rule 3110(f)(2)(A)(ii).
\28\ See IEX Rule 5.110(f)(2)(C). The non-primary residence
exclusion is also set forth in FINRA Rule 3110(f)(2)(A)(iii).
\29\ See NASD [FINRA] Notice to Members 06-12 (March 2006).
\30\ See IEX Rule 5.110(c)(1)(C) and Supplementary Material .13
to IEX Rule 5.110.
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Notwithstanding either of these two residential exclusions or the
other exclusions listed under Rule 5.110(f)(2)(A),\31\ 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.\32\ Consequently, such
residential supervisory offices are subject to registration, an annual
inspection and, in some cases, additional licensing requirements.\33\
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\31\ See generally IEX Rule 5.110(f)(2)(A) and IEX Rule
5.110(f)(2)(D)-(G).
\32\ See IEX Rule 5.110(f)(1)(D)-(G) and IEX Rule 5.110(f)(4).
\33\ See IEX Rules 5.110(a)(4) and 5.110(c)(1)(A).
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FINRA Residential Supervisory Location Rule
Effective June 1, 2024, FINRA implemented a rule change that
establishes a new Residential Supervisory Location (``RSL'')
designation for a private residence at which an associated person
engages in specified supervisory activities, subject to specified
investor protection safeguards and limitations.\34\ This new non-branch
location targets 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.
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\34\ See FINRA Regulatory Notice 24-02.
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As described in the FINRA RSL Proposal, the definition of an RSL is
based largely on several existing aspects of FINRA Rule 3110(f) (and
therefore on the functionally identical IEX Rule 5.110(f)). In
particular, the RSL definition incorporates the existing supervisory
functions appearing in the OSJ definition (FINRA Rule 3110(f)(1)) and
branch office definition (FINRA Rule 3110(f)(2)(A) with the existing
residential exclusions set forth in the branch office definition to
classify an RSL as a non-branch location. Under current IEX rules, a
private residence at which these supervisory functions occur must be
registered and designated as a branch office or OSJ under IEX Rule
5.110(a)(3), and inspected at least annually under IEX Rule
5.110(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 IEX Rule 5.110(c)(1)(C), presumed to be every
three years.\35\
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\35\ See IEX Rule 5.110(c)(1)(C) and Supplementary Material .13
to IEX Rule 5.110.
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FINRA Rule 3110.19 incorporates some existing safeguards and
limitations members must already satisfy to rely on the primary
residence exclusion.\36\ As described in the FINRA RSL Proposal, FINRA
intends for the terms underlying the RSL designation to be interpreted
consistently with their meaning in FINRA Rule 3110(f) and existing
related guidance.\37\ The requirements for designation of a location as
an RSL, which are set forth in FINRA Rule 3110.19, include the
following key elements:
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\36\ See FINRA Rule 3110(f)(2)(A)(ii)a., b., c., d., e., f., and
i.
\37\ See, e.g., NASD [FINRA] Notice to Members 06-12 (March
2006).
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<bullet> A location where supervisory activities are conducted
shall be considered for those activities a non-branch location provided
that: \38\
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\38\ See FINRA Rule 3110.19(a).
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[cir] only one associated person (or members of the same immediate
family) may conduct business at the location; \39\
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\39\ See FINRA Rule 3110.19(a)(1).
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[cir] the location is not held out to the public as an office; \40\
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\40\ See FINRA Rule 3110.19(a)(2).
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[cir] the associated person does not meet with customers or
prospective customers at the location; \41\
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\41\ See FINRA Rule 3110.19(a)(3).
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[cir] any sales activity that takes place at the location complies
with the conditions set forth under FINRA Rule 3110(f)(2)(A)(ii) (the
primary residence exclusion \42\) or FINRA Rule 3110(f)(2)(A)(iii) (the
non-primary residence exclusion \43\); \44\
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\42\ See IEX Rule 5.110(f)(2)(B)(i)-(ix).
\43\ See IEX Rule 5.110(f)(2)(C).
\44\ See FINRA Rule 3110.19(a)(4).
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[cir] neither customer funds nor securities are handled at that
location; \45\
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\45\ See FINRA Rule 3110.19(a)(5).
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[cir] 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; \46\
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\46\ See FINRA Rule 3110.19(a)(6).
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[cir] the associated person's correspondence and communications
with the public are subject to the firm's supervision in accordance
with FINRA's supervision rule; \47\
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\47\ See FINRA Rule 3110.19(a)(7).
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[cir] the associated person's electronic communications are made
through the member's electronic system; \48\
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\48\ See FINRA Rule 3110.19(a)(8).
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[cir] the member must have a recordkeeping system to make and keep
current, and preserve records required to be made and kept current, and
preserved under applicable securities laws and regulations, FINRA
rules, and the member's own written supervisory procedures under Rule
3110; such records are not physically or electronically maintained and
preserved at the office or location; and the member has prompt access
to such records; \49\ and
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\49\ See FINRA Rule 3110.19(a)(9).
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[cir] the member must determine that its surveillance and
technology tools are appropriate to supervise the types of risks
presented by each Residential Supervisory Location, and these tools may
include but are not limited to: firm-wide tools such as, electronic
recordkeeping system; electronic surveillance of email and
correspondence; electronic trade blotters; regular activity-based
sampling reviews; and tools for visual inspections; tools specific to
the RSL based on the activities of associated person assigned to the
location, products offered, restrictions on the activity of the RSL;
and system tools such as secure network connections and effective
cybersecurity protocols.\50\
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\50\ See FINRA Rule 3110.19(a)(10).
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<bullet> FINRA members shall not be eligible to designate an office
or location as an RSL if, among other things, the FINRA member is
designated as: (i) Restricted Firm under FINRA Rule 4111 or (ii) a
Taping Firm under FINRA Rule 3170. Additionally, firms with suspended
or new (effective less than 12 months) FINRA memberships or that
[[Page 81974]]
have been found within the past three years by the SEC or FINRA to have
violated FINRA Rule 3110(c) are ineligible to participate.\51\
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\51\ See FINRA Rule 3110.19(b).
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<bullet> An office or location shall not be eligible for
designation as an RSL if one or more associated persons at such office
or location: \52\
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\52\ See FINRA Rule 3110.19(c).
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[cir] is a designated supervisor who has less than one year of
direct supervisory experience with the member, or an affiliate or
subsidiary of the member that is registered as a broker-dealer or
investment adviser; \53\
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\53\ See FINRA Rule 3110.19(c)(1).
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[cir] is functioning as a principal for a limited period in
accordance with FINRA Rule 1210.04; \54\
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\54\ See FINRA Rule 3110.19(c)(2).
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[cir] is subject to a mandatory heightened supervisory plan under
the rules of the SEC, FINRA or state regulatory agency; \55\
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\55\ See FINRA Rule 3110.19(c)(3).
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[cir] 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 FINRA Rule
3110.19(c)(3) or otherwise as a condition to approval or permission for
such association; \56\
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\56\ See FINRA Rule 3110.19(c)(4).
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[cir] 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; \57\ or
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\57\ See FINRA Rule 3110.19(c)(5).
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[cir] has been notified in writing that such associated person is
now subject to, any Investigation or Proceeding, as such terms are
defined in the Explanation of Terms for the Form U4 (Uniform
Application for Securities Industry Registration or Transfer), by the
SEC, an SRO, including FINRA, or state securities commission (or agency
or office performing like functions) (each, a ``Regulator'') expressly
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, any state law pertaining to the regulation of securities
or any rule or regulation under any of such Acts or laws, or any of the
rules of the MSRB or other self-regulatory organization, including
FINRA; provided, however, such office or location may be designated or
redesignated as an RSL subject to the requirements of FINRA Rule
3110.19 upon the earlier of: (i) the member's receipt of written
notification from the applicable Regulator that such Investigation has
concluded without further action; or (ii) one year from the date of the
last communication from such Regulator relating to such
Investigation.\58\
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\58\ See FINRA Rule 3110.19(c)(6).
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<bullet> FINRA members that elect to designate an office or
location of the member as an RSL shall provide FINRA with a current
list of all locations designated as RSLs by the 15th day of the month
following each calendar quarter in the manner and format as FINRA may
prescribe.\59\
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\59\ See FINRA Rule 3110.19(d).
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<bullet> FINRA members must conduct a risk assessment prior to
designating an office or location as an RSL. Specifically, the FINRA
member must develop a reasonable risk-based approach to designating
such office or location as an RSL, and conduct and document a risk
assessment for the associated person assigned to that office or
location. The assessment must document the factors considered,
including among others, whether the associated person at such office or
location is now subject to: (1) customer complaints, taking into
account the volume and nature of the complaints; (2) heightened
supervision other than where such office or location is ineligible for
RSL designation under FINRA Rule 3110.19(c)(3); (3) any failure to
comply with the member's written supervisory procedures; (4) any
recordkeeping violation; and (5) any regulatory communications from a
Regulator, indicating that the associated person at such office or
location failed reasonably to supervise another person subject to their
supervision, including but not limited to, subpoenas, preliminary or
routine regulatory inquiries or requests for information, deficiency
letters, ``blue sheet'' requests or other trading questionnaires, or
examinations. The FINRA member must take into account any higher risk
activities that take place or a higher risk associated person that is
assigned to that office or location. Consistent with its obligation
under FINRA Rule 3110(a), the member's supervisory system must take
into consideration any indicators of irregularities or misconduct
(i.e., ``red flags'') when designating an office or location as an RSL.
Red flags should also be reviewed in determining whether it is
reasonable to maintain the RSL designation of such office or location
in accordance with the requirements of FINRA Rule 3110.19 and the
member should consider evidencing steps taken to address those red
flags where appropriate.\60\
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\60\ See FINRA Rule 3110.19(e).
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Proposal
IEX proposes to adopt Supplementary Material .17 to IEX Rule 5.110.
This proposed new supplementary material reads as follows:
Residential Supervisory Location. Notwithstanding any other
provisions of IEX Rule 5.110(f), a location that is the private
residence of a person associated with a Member where supervisory
activities are conducted, including those described in IEX Rule
5.110(f)(1)(D) through (G) or IEX Rule 5.110(f)(2)(B), which
satisfies the conditions for designation as a Residential
Supervisory Location set forth in FINRA Rule 3110.19 shall also be
considered a non-branch location for those activities pursuant to
IEX's Rules.\61\
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\61\ Proposed Supplementary Material .17 to IEX Rule 5.110.
As stated in proposed new Supplementary Material .17 to IEX Rule
5.110, any location that an IEX Member designates as an RSL pursuant to
FINRA Rule 3110.19 shall also be considered a non-branch location for
those activities pursuant to IEX's rules.
Pursuant to this proposed rule change, IEX Members will be required
to share information about designated RSLs with FINRA on a quarterly
basis. IEX is not proposing to add the entire FINRA Residential
Supervisory Location designation rule to its rules, because it would be
unnecessarily duplicative and burdensome for IEX Members to share the
same quarterly RSL designation information with IEX. Based upon
conversations with FINRA staff, IEX understands that adopting Proposed
Supplementary Material .17 to IEX Rule 5.110 would update IEX Rule
5.110 so that it remains substantially similar to FINRA Rule 3110, such
that they remain common rules subject to the 17d-2 Agreement. As a
result, regulatory responsibility for IEX Rule 5.110 would continue to
be allocated to FINRA.
IEX, like FINRA, believes that the current work environment merits
a reevaluation of the regulatory benefit of requiring firms to
designate a private residence, at which specified supervisory functions
occur, as an OSJ or branch office. IEX's proposal to incorporate by
reference FINRA's RSL designation is intended to reflect a pragmatic
balance between the hybrid workforce model and the parameters that
should ensure that all locations,
[[Page 81975]]
including residential locations, are appropriately supervised.
Separate and apart from the classification of the office or
location and the attendant inspection obligations, Members 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 IEX and FINRA rules.\62\ IEX, like 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 IEX and
FINRA rules.\63\
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\62\ See Supplementary Material .12 to IEX Rule 5.110.
\63\ See 15 U.S.C. 78o(b)(4)(E) and 15 U.S.C. 78o(b)(6)(A).
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IEX notes that although FINRA's RSL designation first became
available on June 1, 2024, the first action required by FINRA members
is the October 15, 2024 deadline for submitting the first list of
designated RSLs to FINRA.\64\ As described below, IEX is seeking waiver
of the 30-day operative delay for this rule change proposal, so that
IEX Members that designate any locations as RSLs by October 15, 2024
will know that the designation also applies to IEX's supervision rules.
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\64\ See FINRA Regulatory Notice 24-02.
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2. Statutory Basis
IEX believes that the proposed rule change is consistent with the
provisions of Section 6(b) \65\ of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act \66\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The Exchange's rule proposal is intended to harmonize
IEX's supervision rules, specifically with respect to designation of
certain non-branch offices as Residential Supervisory Locations, with
those of FINRA, on which they are based. As discussed in the Purpose
section, because Proposed Supplementary Material .17 to IEX Rule 5.110
incorporates by reference FINRA Rule 3110.19, this rule change enables
IEX Rule 5.110 to continue to be incorporated into the 17d-2 Agreement,
resulting in less burdensome and more efficient regulatory compliance.
Specifically, the proposed change will conform the Exchange's rules to
changes made to corresponding FINRA rules insofar as a Member's
compliance with FINRA Rule 3110.19 shall mean the Member is also in
compliance with Supplementary Material .17 to IEX Rule 5.110, thus
promoting the application of consistent regulatory standards with
respect to rules that FINRA enforces pursuant to the 17d-2 Agreement.
As such, the proposed rule change would foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national market system in accordance with
Section 6(b)(5) of the Act.\67\
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\65\ 15 U.S.C. 78f.
\66\ 15 U.S.C. 78f(b)(5).
\67\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is not
designed to address any competitive issue but rather to provide greater
harmonization among IEX and FINRA rules of similar purpose, resulting
in less burdensome and more efficient regulatory compliance for common
members and facilitating FINRA's performance of its regulatory
performance on the pending 17d-2 Agreement.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) \68\ of the Act and Rule 19b-4(f)(6) \69\
thereunder. Because the proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder. In addition, the Exchange provided the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing.\70\
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\68\ 15 U.S.C. 78s(b)(3)(A).
\69\ 17 CFR 240.19b-4(f)(6).
\70\ 17 CFR 240.19b-4(f)(6)(iii).
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A proposed rule change filed under Rule 19b-4(f)(6) \71\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\72\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay to permit the
Exchange to harmonize its rules with FINRA, as described herein, upon
effectiveness of the proposed rule filing.
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\71\ 17 CFR 240.19b-4(f)(6).
\72\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange stated that this proposed rule change is non-
controversial because it does not present any new or novel issues. In
particular, IEX is harmonizing its supervision rules with those of
FINRA, on which they are based and which have been previously approved
by the Commission. By conforming the Exchange's rules to FINRA's, the
proposed rule change would promote the application of consistent
regulatory standards with respect to rules that FINRA enforces pursuant
to the 17d-2 Agreement. As such, the Exchange believes that the
proposed rule change would foster cooperation and coordination with
persons engaged in facilitating transactions in securities and would
remove impediments to and perfect the mechanism of a free and open
market and a national market system in accordance with Exchange Act
Section 6(b)(5).
In addition, the Exchange stated that since FINRA first made its
Residential Supervisory Location designation available to its members
on June 1, 2024, waiving the 30-day operative delay would provide
assurances to IEX members who wish to designate certain private
residences as RSLs that they can plan the remainder of their 2024
inspection program under a harmonized rule set, particularly because
the first list of designated RSLs is not due to FINRA until October 15,
2024,\73\ while at the same time assuring that IEC members continue to
perform their supervisory obligations. Further, the Exchange stated
that waiver of the operative delay should avoid any
[[Page 81976]]
potential confusion that may otherwise occur on the part of IEX members
as to the applicable rules governing inspections of branch offices and
other locations. For these reasons, the Commission believes that waiver
of the 30-day operative delay for this proposed rule change is
consistent with the protection of investors and the public interest.
Accordingly, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change operative upon filing.\74\
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\73\ See FINRA Regulatory Notice 24-02.
\74\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \75\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\75\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#98eaedf4fdb5fbf7f5f5fdf6ecebd8ebfdfbb6fff7ee"><span class="__cf_email__" data-cfemail="e391968f86ce808c8e8e868d9790a3908680cd848c95">[email protected]</span></a>. Please include
file number SR-IEX-2024-19 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-IEX-2024-19. 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="https://www.sec.gov/rules/sro.shtml">https://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 Exchange. 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-IEX-2024-19 and should
be submitted on or before October 30, 2024.
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\76\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-23286 Filed 10-8-24; 8:45 am]
BILLING CODE 8011-01-P
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