Notice2024-26406
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 2300 (Supervision)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 14, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 220 (Thursday, November 14, 2024)</title>
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[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90089-90098]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26406]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101533; File No. SR-PEARL-2024-51]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 2300 (Supervision)
November 7, 2024.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 1, 2024, MIAX PEARL, LLC (``MIAX
Pearl'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 2300 (Supervision)
with certain changes by the Financial Industry Regulatory Authority,
Inc. (``FINRA'') to FINRA Rule 3110 to permit eligible Members \3\ to
participate in FINRA's remote inspections program (``FINRA Pilot
Program'') and to adopt FINRA's Residential Supervisory Location
(``RSL'') classification.
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\3\ The term ``Member'' herein refers to ``Equity Member.'' The
term ``Equity Member'' is a Member authorized by the Exchange to
transact business on MIAX Pearl Equities. See Exchange Rule 1901.
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The text of the proposed rule change is available on the Exchange's
website at <a href="https://www.miaxglobal.com/markets/us-equities/pearl-equities/rule-filings">https://www.miaxglobal.com/markets/us-equities/pearl-equities/rule-filings</a>, at MIAX Pearl'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 Exchange 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 Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 90090]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to harmonize Exchange Rule 2300 (Supervision)
with certain changes by FINRA to FINRA Rule 3110 to permit eligible
Members to participate in the FINRA Pilot Program and to adopt FINRA's
RSL classification. The proposed rule change would harmonize the
Exchange's office and other location inspection rules with those of
FINRA and thus promote uniform inspection standards across the
securities industry. Additionally, because proposed Interpretations and
Policies .18 and .19 of Rule 2300 would be substantially similar to
FINRA Rule 3110.18 and FINRA Rule 3110.19, respectively, this rule
change enables Rule 2300 to continue to be incorporated into the
agreement between the Exchange and FINRA to allocate regulatory
responsibility for common rules (the ``17d-2 Agreement'').\4\
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\4\ See Securities Exchange Act Release No. 79929 (February 2,
2017), 82 FR 9757 (February 8, 2017).The 17d-2 Agreement includes a
certification by the Exchange 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 and Proposed Rule Change
Exchange Rule 2300 is based on FINRA Rule 3110 \5\ and requires
Members 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 Exchange rules, and sets forth the minimum requirements for
such supervisory system.\6\ Under Exchange Rule 2300, final
responsibility for proper supervision rests with the Member.
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\5\ See Securities Exchange Act Release No. 91303 (March 11,
2021), 86 FR 14659 (March 17, 2021) (SR-PEARL-2021-04).
\6\ See Exchange Rule 2300(a).
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As part of an overall supervisory system, Members must conduct
inspections of each of their offices or locations on a designated
frequency depending on the classification of the location or the nature
of the activities that take place: an office of supervisory
jurisdiction (``OSJ'') and supervisory branch offices must be inspected
at least annually; \7\ non-supervisory branch offices, at least every
three years; \8\ and non-branch locations on a periodic schedule,
presumed to be at least every three years.\9\ Moreover, Members must
retain a written record of the date upon which each review and
inspection occurred, reduce a location's inspection to a written report
and keep each inspection report on file either for a minimum of three
years or, if the location's inspection schedule is longer than three
years, until the next inspection report has been written.\10\ If
applicable to the location being inspected, the inspection report must
include the testing and verification of the Member's policies and
procedures, including supervisory policies and procedures, in specified
areas.\11\ Finally, the rule requires a member to ensure that the
person conducting the inspection is not an associated person assigned
to the location or is not directly or indirectly supervised by, or
otherwise reporting to, an associated person assigned to the
location.\12\ The factors governing what constitutes a reasonable
review are set out in Interpretations and Policies .12 of Exchange Rule
2300 (Standards for Reasonable Review).
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\7\ See Exchange Rule 2300(c)(1)(A).
\8\ See Exchange Rule 2300(c)(1)(B).
\9\ See Exchange Rule 2300(c)(1)(C) and Interpretations and
Policies .13 of Exchange Rule 2300 (General Presumption of Three-
Year Limit for Periodic Inspection Schedules).
\10\ See Exchange Rule 2300(c)(2).
\11\ See Exchange Rule 2300(c)(2)(A).
\12\ See Exchange Rule 2300(c)(3)(B).
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In 2023, recognizing how operations and business models within the
financial services industry have evolved with changes in technology
that were accelerated by the COVID-19 pandemic, including in particular
the implementation by a large number of firms of a hybrid work
environment during the public health crisis, FINRA adopted two
amendments to FINRA Rule 3110. First, FINRA established a voluntary,
three-year remote inspections pilot program to allow eligible members
to fulfill their FINRA Rule 3110(c)(1) inspection obligation of
qualified branch offices, including OSJs and non-branch locations
remotely, without an on-site visit to such offices or locations subject
to certain conditions and criteria.\13\ The FINRA Pilot Program is set
forth in Supplementary Material .18 of FINRA Rule 3110. Second, FINRA
adopted new Supplementary Material .19 to FINRA Rule 3110 that treats
an associated person's private residence where specified supervisory
activities are conducted, subject to certain safeguards and
limitations, as a non-branch location (i.e., unregistered office). As a
non-branch location under FINRA Rule 3110(c), the RSL would be subject
to inspections on a regular periodic schedule instead of the annual
inspection currently required for every OSJ and supervisory branch
offices.\14\
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\13\ See Securities Exchange Act Release No. 98982 (November 17,
2023), 88 FR 82464 (November 24, 2023) (File No. SR-FINRA-2023-007)
(Order Approving a Proposed Rule Change To Adopt Supplementary
Material .18 (Remote Inspections Pilot Program) Under FINRA Rule
3110 (Supervision)). Pursuant to FINRA Rule 3110.18(m), on the
sunset of Rule 3110.18, if FINRA Rule 3110.18 has not already
expired by its own terms, FINRA Rule 3110.18 will automatically
sunset on June 30, 2024.
\14\ See Securities Exchange Act Release No. 98980 (November 17,
2023), 88 FR 82447 (November 24, 2023) (File No. SR-FINRA-2023-006)
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1
and 2, To Adopt Supplementary Material .19 (Residential Supervisory
Location) Under FINRA Rule 3110 (Supervision)).
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The Exchange proposes to incorporate each of these amendments into
Exchange Rule 2300, as follows.
Interpretations and Policies .18 of Exchange Rule 2300 \15\
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\15\ The Exchange would add new Interpretations and Policies
.15, .16, and .17 marked ``Reserved'' in order to maintain
consistency with FINRA.
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The Exchange proposes, consistent with current FINRA Rule 3110,
Supplementary Material .18, to adopt new Interpretations and Policies
.18 of Exchange Rule 2300 in order to provide eligible Members that are
also FINRA members \16\ 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
Exchange Rule 2300(c) by conducting inspections of eligible OSJs,
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 in the FINRA
Pilot Program under proposed Interpretations and Policies .18 of
Exchange Rule 2300 would mirror in all material respects the
requirements with respect to a FINRA member's participation under FINRA
rules in the FINRA Pilot Program. Members opting into the FINRA Pilot
Program would do so pursuant to the provisions of proposed
Interpretations and Policies .18 of Exchange Rule 2300 and through the
mechanisms and processes established by FINRA in connection with the
FINRA Pilot Program. The proposed rule change also re-orders and
streamlines some of the provisions of FINRA Rule 3110.18, as described
below.
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\16\ Currently, all Exchange Members with one exception are also
FINRA members.
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[[Page 90091]]
Proposed Interpretations and Policies .18(a) of Exchange Rule 2300
(Scope)
Proposed Interpretations and Policies .18(a) of Exchange Rule 2300
would establish the standards by which a Member that is also a FINRA
member may participate in the FINRA Pilot Program.
Proposed Interpretations and Policies .18(a) of Exchange Rule 2300
would permit Members to avail themselves of the FINRA Pilot Program for
the required inspection of OSJs, branch offices and non-branch
locations pursuant to, as applicable, paragraphs (c)(1)(A), (B) and (C)
of Rule 2300 for a period starting on the effective date of the
proposed rule filing and expiring on June 30, 2027. If FINRA extends
the pilot program and the proposed Interpretations and Policies .18 is
not amended to allow continued participation by Members in the FINRA
Pilot Program, Members would not be able to participate in the FINRA
Pilot Program after the prescribed provisions under the proposed
Interpretations and Policies .18 sunset.
With the exception of conforming and technical changes,\17\
proposed Interpretations and Policies .18(a) of Exchange Rule 2300 is
substantially the same as FINRA Rule 3110.18(a).
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\17\ Where the Exchange states herein that only conforming and
technical changes have been made, the Exchange is referring to
instances in which it changed FINRA's ``member'' to the Exchange's
equivalent ``Member;'' changed cross-references to FINRA rules to
cross-references to Exchange rules unless there was no equivalent
Exchange rule; and made other non-substantive technical or
grammatical changes.
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Proposed Interpretations and Policies .18(b) of Exchange Rule 2300
(Risk Assessment)
Proposed Interpretations and Policies .18(b) of Exchange Rule 2300
governing risk assessment would outline the need for Members to
undertake a risk assessment in order to participate in the FINRA Pilot
Program.
Proposed Interpretations and Policies .18(b) of Exchange Rule 2300
would set forth the applicable standard for review and would provide
that a Member could elect to conduct the applicable inspection
remotely, without an on-site visit for an office or location, when such
Member reasonably determines that the purposes of the Interpretations
and Policies .18 can be accomplished by conducting such required
inspection remotely. The Member would be required to develop a
reasonable risk-based approach to using remote inspections and conduct
and document a risk assessment for an office or location prior to
conducting a remote inspection. The risk assessment must document the
factors considered, including, among other things, the factors set
forth in current Rule Interpretations and Policies .12 of Exchange Rule
2300 such as a firm's size, organizational structure, scope of business
activities, number and location of the firm's offices, the nature and
complexity of the products and services offered by the firm, the volume
of business done, the number of associated persons assigned to a
location, the disciplinary history of registered representatives or
associated persons, and any indicators of irregularities or misconduct
(i.e., ``red flags''), 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. Additionally, proposed
Interpretations and Policies .18(b)(1) of Exchange Rule 2300 would
require a Member to conduct an on-site inspection on the required cycle
for such offices or locations that are ineligible for remote office
inspections because of not having met the firm or location level
requirements under proposed Interpretations and Policies .18(f) or (g),
respectively. Notwithstanding proposed Interpretations and Policies .18
of Exchange 2300, a Member would remain subject to the other
requirements of Rule 2300(c).
Proposed Interpretations and Policies .18(b)(2) would address other
risk assessment factors and would provide that when conducting the risk
assessment of each office or location in accordance with proposed
paragraph (b)(1) of Interpretations and Policies .18, a Member must
consider, among other things, the following factors with respect to an
office or location in making its risk assessment for remotely
inspecting an office or location:
<bullet> the volume and nature of customer complaints; \18\
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\18\ See proposed Interpretations and Policies .18(b)(2)(A),
mirroring FINRA Rule 3110.18(b)(2)(A).
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<bullet> the volume and nature of outside business activities,
particularly investment-related; \19\
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\19\ See proposed Interpretations and Policies .18(b)(2)(B),
mirroring FINRA Rule 3110.18(b)(2)(B).
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<bullet> the volume and complexity of products offered; \20\
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\20\ See proposed Interpretations and Policies .18(b)(2)(C),
mirroring FINRA Rule 3110.18(b)(2)(C).
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<bullet> the nature of the customer base, including vulnerable
adult investors; \21\
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\21\ See proposed Interpretations and Policies .18(b)(2)(D),
mirroring FINRA Rule 3110.18(b)(2)(D).
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<bullet> whether associated persons are subject to heightened
supervision; \22\
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\22\ See proposed Interpretations and Policies .18(b)(2)(E),
mirroring FINRA Rule 3110.18(b)(2)(E).
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<bullet> failures by associated persons to comply with the Member's
written supervisory procedures; \23\ and
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\23\ See proposed Interpretations and Policies .18(b)(2)(F),
mirroring FINRA Rule 3110.18(b)(2)(F).
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<bullet> any recordkeeping violations.\24\
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\24\ See proposed Interpretations and Policies .18(b)(2)(G),
mirroring FINRA Rule 3110.18(b)(2)(G).
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Further, proposed Interpretations and Polices .18(b)(2) would
prescribe that Members 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, consistent with
Exchange Rule 2300(a).
With the exception of conforming and technical changes, proposed
Interpretations and Policies .18(b) is substantially the same as FINRA
Rule 3110.18(b).
Proposed Interpretations and Policies .18(c) of Exchange Rule 2300
(Written Supervisory Procedures for Remote Inspections)
Proposed Interpretations and Policies .18(c) would provide that,
consistent with a Member's obligation under Exchange Rule 2300(b), a
Member that elects to participate in the FINRA Pilot Program must
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 and Exchange rules.
As proposed, reasonably designed procedures for conducting remote
inspections of offices or locations must address, among other things:
<bullet> the methodology, including technology, that may be used to
conduct remote inspections; \25\
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\25\ See proposed Interpretations and Policies .18(c)(1),
mirroring FINRA Rule 3110.18(c)(1).
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<bullet> the factors considered in the risk assessment made for
each applicable office or location pursuant to paragraph (b) of these
Interpretations and Policies .18; \26\
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\26\ See proposed Interpretations and Policies .18(c)(2),
mirroring FINRA Rule 3110.18(c)(2).
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<bullet> the procedures specified in paragraph (h)(1)(G) and (h)(4)
of FINRA Rule 3310.18; \27\ and
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\27\ See proposed Interpretations and Policies .18(c)(3),
mirroring FINRA Rule 3110.18(c)(3).
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<bullet> the use of other risk-based systems employed generally by
the Member to identify and prioritize for review those areas that pose
the greatest risk of potential violations of applicable
[[Page 90092]]
securities laws and regulations, and of applicable FINRA and Exchange
rules.\28\
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\28\ See proposed Interpretations and Policies .18(c)(4),
mirroring FINRA Rule 3110.18(c)(4).
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With the exception of conforming and technical changes and the
addition of a reference to Exchange rules in proposed Interpretations
and Policies .18(c)(4), proposed Interpretations and Policies .18(c) of
Exchange Rule 2300 is substantially the same as FINRA Rule 3110.18(c).
Proposed Interpretations and Polices .18(d) of Exchange Rule 2300
(Effective Supervisory System)
Proposed Interpretations and Policies .18(d) would provide that the
requirement to conduct inspections of offices and locations is one part
of the Member's overall obligation to have an effective supervisory
system and therefore the Member must maintain its ongoing review of the
activities and functions occurring at all offices and locations,
whether or not the Member conducts inspections remotely.
Further, a Member's use of a remote inspection of an office or
location will be held to the same standards for review as set forth
under Interpretations and Policies .12 of Exchange Rule 2300. Where a
Member's remote inspection of an office or location identifies any
``red flags,'' the Member may need to impose additional supervisory
procedures for that office or location or may need to provide for more
frequent monitoring of that office or location, including potentially a
subsequent on-site visit on an announced or unannounced basis.
With the exception of conforming and technical changes, proposed
Interpretations and Policies .18(d) is substantially the same as FINRA
Rule 3110.18(d).
Proposed Interpretations and Policies .18(e) of Exchange Rule 2300
(Documentation Requirement)
Proposed Interpretations and Policies .18(e) would set forth
documentation requirements for a Member's participating in the FINRA
Pilot Program. In particular, Interpretations and Policies .18(e) would
require Members to maintain and preserve a centralized record for each
of the Pilot Years specified in this FINRA Pilot Program that
separately identifies all offices or locations that were inspected
remotely.\29\ In addition, proposed Interpretations and Policies .18(e)
would require documentation of the results of a remote inspection for
any offices or locations for which the Member determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in proposed Interpretations and Policies .18(d). Further, a
Member's documentation of the results of a remote inspection for an
office or location must identify any additional supervisory procedures
or more frequent monitoring for that office or location that were
imposed as a result of the remote inspection, including whether an on-
site inspection was conducted at such office or location.\30\
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\29\ See proposed Interpretations and Policies .18(e)(1),
mirroring FINRA Rule 3110.18(e)(1).
\30\ See proposed Interpretations and Policies .18(e)(2),
mirroring FINRA Rule 3110.18(e)(2).
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With the exception of conforming and technical changes, proposed
Interpretations and Policies .18(e) is substantially the same as FINRA
Rule 3110.18(e).
Proposed Interpretations and Policies .18(f) of Exchange Rule 2300
(Firm Level Requirements)
Proposed Interpretations and Policies .18(f)(1) would set forth
certain firm level ineligibility conditions for further participation
in the FINRA Pilot Program. As proposed, a Member would be 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 that
Member:
<bullet> is or becomes designated as a Restricted Firm under FINRA
Rule 4111; \31\
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\31\ See proposed Interpretations and Policies .18(f)(1)(A),
mirroring FINRA Rule 3110.18(f)(1)(A). The Exchange has not adopted
FINRA Rule 4111.
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<bullet> is or become designated a taping firm under FINRA Rule
3170; \32\
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\32\ See proposed Interpretations and Policies .18(f)(1)(B),
mirroring FINRA Rule 3110.18(f)(1)(B). The Exchange has not adopted
FINRA Rule 3170.
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<bullet> receives a notice pursuant to FINRA Rule 9557 regarding
capital compliance related matters under FINRA Rules 4110 (Capital
Compliance), FINRA 4120 (Regulatory Notification and Business
Curtailment) or FINRA Rule 4130 (Regulation of Activities of Section
15C Members Experiencing Financial and/or Operational Difficulties);
\33\
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\33\ See proposed Interpretations and Policies .18(f)(1)(C),
mirroring FINRA Rule 3110.18(f)(1)(C). The Exchange has not adopted
FINRA Rule 9557, 4110, 4120, or 4130.
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<bullet> is or becomes suspended from Exchange or FINRA membership;
\34\
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\34\ See proposed Interpretations and Policies .18(f)(1)(D),
mirroring FINRA Rule 3110.18(f)(1)(D).
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<bullet> based on the date in the Central Registration Depository
(CRD), had its FINRA membership become effective within the prior 12
months; \35\ or
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\35\ See proposed Interpretations and Policies .18(f)(1)(E),
mirroring FINRA Rule 3110.18(f)(1)(E).
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<bullet> is or has been found by the Securities and Exchange
Commission (``the Commission''), FINRA or the Exchange to be in
violation of office inspection obligations under FINRA or Exchange Rule
2300(c) within the past three years.\36\
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\36\ See proposed Interpretations and Policies .18(f)(1)(F),
mirroring FINRA Rule 3110.18(f)(1)(F).
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Proposed Interpretations and Polices .18(f)(2) would set forth the
firm-level conditions a Member must satisfy as part of the requirements
in Interpretations and Policies .18(b) to develop a reasonably designed
risk-based approach to using remote inspections and to conduct and
document a risk assessment for each office or location. Specifically,
Members must have a recordkeeping system:
<bullet> to make and keep current, and preserve records required to
be made and kept current, and preserved under applicable securities
laws and regulations, Exchange rules, and the Member's own written
supervisory procedures under Exchange Rule 2300; \37\
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\37\ See proposed Interpretations and Policies .18(f)(2)(A)(i),
mirroring FINRA Rule 3110.18(f)(2)(A)(i).
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<bullet> such records are not physically or electronically
maintained and preserved at the office or location subject to the
remote inspection; \38\ and
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\38\ See proposed Interpretations and Policies .18(f)(2)(A)(ii),
mirroring FINRA Rule 3110.18(f)(2)(A)(ii).
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<bullet> the Member has prompt access to such records.\39\
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\39\ See proposed Interpretations and Policies
.18(f)(2)(A)(iii), mirroring FINRA Rule 3110.18(f)(2)(A)(iii).
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In addition, Members must determine that the surveillance and
technology tools are appropriate to supervise the types of risks
presented by each such remotely supervised office or location. As
proposed, these tools may include but are not limited to:
<bullet> firm-wide tools such as electronic recordkeeping systems;
electronic surveillance of email and correspondence; electronic trade
blotters; regular activity-based sampling reviews; and tools for visual
inspections; \40\
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\40\ See proposed Interpretations and Policies .18(f)(2)(B)(i),
mirroring FINRA Rule 3110.18(f)(2)(B)(i).
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<bullet> tools specifically applied to such office or location
based on the activities of associated persons, products offered,
restrictions on the activity of the office or location (including
holding out to customers and handling of customer funds or securities);
\41\ and
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\41\ See proposed Interpretations and Policies .18(f)(2)(B)(ii),
mirroring FINRA Rule 3110.18(f)(2)(B)(ii).
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[[Page 90093]]
<bullet> system security tools such as secure network connections
and effective cybersecurity protocols.\42\
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\42\ See proposed Interpretations and Policies
.18(f)(2)(B)(iii), mirroring FINRA Rule 3110.18(f)(2)(B)(iii).
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With the exception of conforming and technical changes and the
addition of a reference to Exchange rules in proposed Interpretations
and Policies .18(f)(2)(A)(i), proposed Interpretations and Policies
.18(f)(1) and (2) are substantially the same as FINRA Rule
3110.18(f)(1) and (2).
Proposed Interpretations and Policies .18(g) of Exchange Rule 2300
(Location Level Requirements)
Proposed Interpretations and Policies .18(g) would set forth the
criteria under the FINRA Pilot Program that would render a particular
office or location ineligible for remote office inspection. As
proposed, Interpretations and Policies .18(g)(1), offices or locations
would be ineligible for a remote office inspection if at any time
during the FINRA Pilot Period:
<bullet> one or more associated persons at such office or location
is or becomes subject to a mandatory heightened supervisory plan under
the rules of the SEC, FINRA, the Exchange or a state regulatory agency;
\43\
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\43\ See proposed Interpretations and Policies .18(g)(1)(A),
mirroring FINRA Rule 3110.18(g)(1)(A).
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<bullet> 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 or
Exchange rules and the federal securities laws) to associate with a
Member and is not subject to a mandatory heightened supervisory plan
under paragraph (g)(1)(A) of Interpretations and Policies .18 or
otherwise as a condition to approval or permission for such
association; \44\
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\44\ See proposed Interpretations and Policies .18(g)(1)(B),
mirroring FINRA Rule 3110.18(g)(1)(B).
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<bullet> 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;
\45\
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\45\ See proposed Interpretations and Policies .18(g)(1)(C),
mirroring FINRA Rule 3110.18(g)(1)(C).
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<bullet> 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; \46\
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\46\ See proposed Interpretations and Policies .18(g)(1)(D),
mirroring FINRA Rule 3110.18(g)(1)(D).
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<bullet> one or more associated persons at such office or location
is or becomes subject to a disciplinary action taken by the Member that
is or was reportable under FINRA Rule 4530(a)(2); \47\
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\47\ See proposed Interpretations and Policies .18(g)(1)(E),
mirroring FINRA Rule 3110.18(g)(1)(E). The Exchange has not adopted
FINRA Rule 4530.
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<bullet> 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; \48\ or
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\48\ See proposed Interpretations and Policies .18(g)(1)(F),
mirroring FINRA Rule 3110.18(g)(1)(F).
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<bullet> the office or location handles customer funds or
securities.\49\
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\49\ See proposed Interpretations and Policies .18(g)(1)(G),
mirroring FINRA Rule 3110.18(g)(1)(G).
---------------------------------------------------------------------------
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
Interpretations and Policies .18(g)(2) would require that a specific
office or location satisfy the following conditions to be eligible for
remote inspections under the Pilot Program:
<bullet> electronic communications (e.g., email) are made through
the Member's electronic system; \50\
---------------------------------------------------------------------------
\50\ See proposed Interpretations and Policies .18(g)(2)(A),
mirroring FINRA Rule 3110.18(g)(2)(A).
---------------------------------------------------------------------------
<bullet> the associated person's correspondence and communications
with the public are subject to the firm's supervision in accordance
with Exchange Rule 2300; \51\ and
---------------------------------------------------------------------------
\51\ See proposed Interpretations and Policies .18(g)(2)(B),
mirroring FINRA Rule 3110.18(g)(2)(B).
---------------------------------------------------------------------------
<bullet> no books or records of the Member required to be made and
kept current, and preserved under applicable securities laws and
regulations, FINRA and Exchange rules and the Member's own written
supervisory procedures under Exchange Rule 2300 are physically or
electronically maintained and preserved at such office or location.\52\
---------------------------------------------------------------------------
\52\ See proposed Interpretations and Policies .18(g)(2)(C),
mirroring FINRA Rule 3110.18(g)(2)(C).
---------------------------------------------------------------------------
With the exception of conforming and technical changes and the
inclusion of references to Exchange rules in proposed Interpretations
and Policies .18(g)(2)(B) and (C), proposed Interpretations and
Policies .18(g)(1) and (2) are substantially the same as FINRA Rule
3110.18(g)(1) and (2).
Proposed Interpretations and Policies .18(h) of Exchange Rule 2300
(Data and Information Collection Requirement)
FINRA Rule 3110.18(h) outlines requirements for FINRA members that
elect to participate in the 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, including:
<bullet> the number of offices and locations with an inspection
completed during each calendar quarter; \53\
---------------------------------------------------------------------------
\53\ See FINRA Rule 3110.18(h)(1)(A).
---------------------------------------------------------------------------
<bullet> the number of those offices or locations in each calendar
quarter that were inspected remotely; \54\
---------------------------------------------------------------------------
\54\ See FINRA Rule 3110.18(h)(1)(B).
---------------------------------------------------------------------------
<bullet> 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; \55\
---------------------------------------------------------------------------
\55\ 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.
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<bullet> 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;
\56\ and
---------------------------------------------------------------------------
\56\ See FINRA Rule 3110.18(h)(1)(E).
---------------------------------------------------------------------------
<bullet> 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.\57\
---------------------------------------------------------------------------
\57\ See FINRA Rule 3110.18(h)(1)(F).
---------------------------------------------------------------------------
Moreover, FINRA members 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.\58\ In addition, FINRA
Rule 3110.18(h)(2) outlines requirements for FINRA member firms
electing to participate in the Pilot Program to provide certain data
and information for Pilot Year 1 if it is less than a full calendar
year 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.
---------------------------------------------------------------------------
\58\ See FINRA Rule 3110.18(h)(1)(G).
---------------------------------------------------------------------------
Proposed Interpretations and Policies .18(h) on data and
information collection requirement would require Members to comply with
the FINRA requirements with respect to the collection and submission of
specified data and information, and in the manner and format required
under the Pilot Program. In addition, proposed Interpretations and
Policies .18(h) which substantially mirrors FINRA Rule
[[Page 90094]]
3110.18(h)(4) would require Members that elect to participate in the
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.
Proposed Interpretations and Policies .18(i) of Exchange Rule 2300
(Election To Participate in Pilot Program)
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.\59\
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.
---------------------------------------------------------------------------
\59\ FINRA Rule 3110.18(i) contains provisions for firms wishing
to opt-in of the FINRA Pilot Program.
---------------------------------------------------------------------------
Proposed Interpretations and Policies .18(i) would govern elections
to participate in the Pilot Program and would require Members electing
to participate in the Pilot Program to make their election in the
manner and format as prescribed, in accordance with FINRA Rule
3110.18(i). In addition, the proposed rule would require Members that
elect to withdraw from the Pilot Program for subsequent years to
provide such notice in the manner and format as prescribed in
accordance with FINRA Rule 3110.18(i). These requirements will ensure
that Members can properly elect to participate in, or subsequently
withdraw from, the Pilot Program.
Proposed Interpretations and Policies .18(j) of Exchange Rule 2300
(Failure To Satisfy Conditions)
FINRA Rule 3110.18(j) governs failure to satisfy conditions and
addresses situations in which a member fails to satisfy the
requirements for participating in the FINRA Pilot Program.
Specifically, FINRA Rule 3110.18(j) provides that FINRA members 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 FINRA members 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 Interpretations and
Policies .18(j) on failure to satisfy conditions would specify that any
Member that fails to satisfy the conditions of proposed Interpretations
and Policies .18 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 Members would
need to conduct on-site inspections of each office and location on the
required cycle in accordance with Exchange Rule 2300(c).
Proposed Interpretations and Policies .18(k) (Determination of
Ineligibility)
FINRA Rule 3110.18(k) governs determinations of ineligibility and
provides that FINRA may make a determination in the public interest and
for the protection of investors that a FINRA member is no longer
eligible to participate in the FINRA Pilot Program if the FINRA member
fails to comply with the requirements of FINRA Rule 3110.18. In such
instances, FINRA will provide written notice to the FINRA member of
such determination and the member 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).
Consistent with FINRA Rule 3110.18(k), proposed Interpretations and
Policies .18(k) would govern ineligibility determinations and provide
that FINRA or the Exchange may make a determination in the public
interest and for the protection of investors that a Member is no longer
eligible to participate in the FINRA Pilot Program if the Member fails
to comply with the requirements of FINRA or Interpretations and
Policies .18 of Exchange Rule 2300. The proposed rule would further
provide that, in such instances, FINRA or the Exchange will provide
written notice to the Member of such determination and the Member 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 or Exchange Rule 2300(c). With the exception of
conforming and technical changes, proposed Interpretations and Policies
.18(k) is substantially the same as FINRA Rule 3110.18(k).
Proposed Interpretations and Policies .18(l) of Exchange Rule 2300
(Definitions)
The Exchange proposes to adopt FINRA Rule 3110.18(l) setting forth
definitions applicable to Interpretations and Policies .18 verbatim. As
proposed, Interpretations and Policies .18(l) would provide that for
purposes of Interpretations and Policies .18, the term ``Pilot Year''
shall mean the following:
<bullet> Pilot Year 1 is the period beginning on July 1, 2024 and
ending on December 31 of the same year;
<bullet> Pilot Year 2 means the calendar year period following
Pilot Year 1, beginning on January 1 and ending on December 31;
<bullet> Pilot Year 3 means the calendar year period following
Pilot Year 2, beginning on January 1 and ending on December 31; and
<bullet> 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.
Finally, FINRA also adopted FINRA Rule 3110.18(m) describing the
sunset of FINRA Rule 3110.17, which the Exchange has not adopted. The
Exchange accordingly does not propose to incorporate a provision
similar to FINRA Rule 3110.18(m).
Interpretations and Policies .19 of Exchange Rule 2300
Interpretations and Policies .19(a) of Exchange Rule 2300 (Conditions
for Designation as a Residential Supervisory Location (RSL)
FINRA Rule 3110.19(a) lists the conditions for FINRA members to
designate an office or location as an RSL. Proposed Interpretations and
Policies .19(a) would set forth the conditions for designation as an
RSL that would mirror the conditions set forth in FINRA Rule 3110.19(a)
for Members to designate a location that is the associated person's
private residence where specified supervisory activities are conducted
as an RSL.
As proposed, Interpretations and Policies .19 would provide that,
notwithstanding any other provisions of Exchange Rule 2300(f) and
subject to paragraphs (b) through (d) of the proposed Interpretations
and Policies .19, a location that is the associated person's private
residence where supervisory activities are conducted, including those
described in Exchange
[[Page 90095]]
Rule 2300(f)(1)(D) through (G) or in Exchange Rule 2300(f)(4), shall be
considered for those activities a non-branch location, provided that:
<bullet> 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; \60\
---------------------------------------------------------------------------
\60\ See proposed Interpretations and Policies .19(a)(1),
mirroring FINRA Rule 3110.19(a)(1).
---------------------------------------------------------------------------
<bullet> the location is not held out to the public as an office;
\61\
---------------------------------------------------------------------------
\61\ See proposed Interpretations and Policies .19(a)(2),
mirroring FINRA Rule 3110.19(a)(2).
---------------------------------------------------------------------------
<bullet> the associated person does not meet with customers or
prospective customers at the location; \62\
---------------------------------------------------------------------------
\62\ See proposed Interpretations and Policies .19(a)(3),
mirroring FINRA Rule 3110.19(a)(3).
---------------------------------------------------------------------------
<bullet> any sales activity that takes place at the location
complies with the conditions set forth under Exchange Rule
2300(f)(2)(B) or (C); \63\
---------------------------------------------------------------------------
\63\ See proposed Interpretations and Policies .19(a)(4),
mirroring FINRA Rule 3110.19(a)(4).
---------------------------------------------------------------------------
<bullet> neither customer funds nor securities are handled at that
location; \64\
---------------------------------------------------------------------------
\64\ See proposed Interpretations and Policies .19(a)(5),
mirroring FINRA Rule 3110.19(a)(5).
---------------------------------------------------------------------------
<bullet> 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; \65\
---------------------------------------------------------------------------
\65\ See proposed Interpretations and Policies .19(a)(6),
mirroring FINRA Rule 3110.19(a)(6).
---------------------------------------------------------------------------
<bullet> the associated persons correspondence and communications
with the public are subject to the firm's supervision in accordance
with this Rule; \66\
---------------------------------------------------------------------------
\66\ See proposed Interpretations and Policies .19(a)(7),
mirroring FINRA Rule 3110.19(a)(7).
---------------------------------------------------------------------------
<bullet> the associated persons electronic communications (e.g.,
email) are made through the Member's electronic system; \67\
---------------------------------------------------------------------------
\67\ See proposed Interpretations and Policies .19(a)(8),
mirroring FINRA Rule 3110.19(a)(8).
---------------------------------------------------------------------------
<bullet> 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, Exchange rules, and the Member's own written supervisory
procedures under Exchange Rule 2300; (B) such records are not
physically or electronically maintained and preserved at the office or
location; and (C) the Member has prompt access to such records; \68\
and
---------------------------------------------------------------------------
\68\ See proposed Interpretations and Policies .19(a)(9),
mirroring FINRA Rule 3110.19(a)(9).
---------------------------------------------------------------------------
<bullet> 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: (A) 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; (B) 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 (C) system tools such as secure network connections and effective
cybersecurity protocols.\69\
---------------------------------------------------------------------------
\69\ See proposed Interpretations and Policies .19(a)(10),
mirroring FINRA Rule 3110.19(a)(10).
---------------------------------------------------------------------------
With the exception of conforming and technical changes, proposed
Interpretations and Policies .19(a) is substantially the same as FINRA
Rule 3110.19(a).
Interpretations and Policies .19(b) of Exchange Rule 2300 (Member
Ineligibility Criteria)
FINRA Rule 3110.19(b) outlines the conditions that would render its
members ineligible from designating an office as an RSL. As proposed,
Interpretations and Policies .19(b) would mirror these criteria and
provide that a Member is ineligible from designating an office or
location as an RSL if the Member:
<bullet> is currently designated as a restricted firm under FINRA
Rule 4111; \70\
---------------------------------------------------------------------------
\70\ See proposed Interpretations and Policies .19(b)(1),
mirroring FINRA Rule 3110.19(b)(1). The Exchange has not adopted
FINRA Rule 4111.
---------------------------------------------------------------------------
<bullet> is currently designated as a taping firm under FINRA Rule
3170; \71\
---------------------------------------------------------------------------
\71\ See proposed Interpretations and Policies .19(b)(2),
mirroring FINRA Rule 3110.19(b)(2). The Exchange has not adopted
FINRA Rule 3170.
---------------------------------------------------------------------------
<bullet> is currently undergoing, or is required to undergo, a
review under FINRA Rule 1017(a)(7) as a result of one or more
associated persons at such location; \72\
---------------------------------------------------------------------------
\72\ See proposed Interpretations and Policies .19(b)(3),
mirroring FINRA Rule 3110.19(b)(3).
---------------------------------------------------------------------------
<bullet> receives a notice pursuant to FINRA Rule 9557, regarding
capital compliance related matters under FINRA Rules 4110, 4120 and
4130, unless the Exchange has otherwise permitted such activities in
writing pursuant to such rule; \73\
---------------------------------------------------------------------------
\73\ See proposed Interpretations and Policies .19(b)(4),
mirroring FINRA Rule 3110.19(b)(4). The Exchange has not adopted
FINRA Rule 9557, 4110, 4120, or 4130.
---------------------------------------------------------------------------
<bullet> is or becomes suspended by the Exchange or FINRA; \74\
---------------------------------------------------------------------------
\74\ See proposed Interpretations and Policies .19(b)(5),
mirroring FINRA Rule 3110.19(b)(5).
---------------------------------------------------------------------------
<bullet> based on the date in the Central Registration Depository
(CRD), had its FINRA membership become effective within the prior 12
months; \75\ or
---------------------------------------------------------------------------
\75\ See proposed Interpretations and Policies .19(b)(6),
mirroring FINRA Rule 3110.19(b)(6).
---------------------------------------------------------------------------
<bullet> is or has been found to be in violation of office
inspection obligations under Exchange Rule 2300(c) or FINRA Rule
3110(c) within the past three years.\76\
---------------------------------------------------------------------------
\76\ See proposed Interpretations and Policies .19(b)(7),
mirroring FINRA Rule 3110.19(b)(7).
---------------------------------------------------------------------------
With the exception of conforming and technical changes, proposed
Interpretations and Policies .19(b) is substantially the same as FINRA
Rule 3110.19(b).
Interpretations and Policies .19(c) of Exchange Rule 2300 (Location
Ineligibility Criteria)
FINRA Rule 3110.19(c) sets forth the criteria that would render a
particular office or location that is an associated person's private
residence where specified supervisory activities are conducted
ineligible for an RSL designation. Proposed Interpretations and
Policies .19(c) would mirror these criteria. As proposed,
Interpretations and Policies .19(c) would make an office ineligible for
the RSL designation if one or more associated persons at such office or
location:
<bullet> 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; \77\
---------------------------------------------------------------------------
\77\ See proposed Interpretations and Policies .19(c)(1),
mirroring FINRA Rule 3110.19(c)(1).
---------------------------------------------------------------------------
<bullet> is functioning as a principal for a limited period in
accordance with Interpretations and Policies .04 of Exchange Rule 3100;
\78\
---------------------------------------------------------------------------
\78\ See proposed Interpretations and Policies .19(c)(2),
mirroring FINRA Rule 3110.19(c)(2).
---------------------------------------------------------------------------
<bullet> is subject to a mandatory heightened supervisory plan
under the rules of the SEC, FINRA, the Exchange or state regulatory
agency; \79\
---------------------------------------------------------------------------
\79\ See proposed Interpretations and Policies .19(c)(3),
mirroring FINRA Rule 3110.19(c)(3).
---------------------------------------------------------------------------
<bullet> is statutorily disqualified, unless such disqualified
person has been approved (or is otherwise permitted pursuant to FINRA
or Exchange rules and the federal securities laws) to associate with a
Member and is not subject to a mandatory heightened supervisory plan
under paragraph (c)(3) of Interpretations and Policies .19 or otherwise
as a condition to approval or permission for such association; \80\
---------------------------------------------------------------------------
\80\ See proposed Interpretations and Policies .19(c)(4),
mirroring FINRA Rule 3110.19(c)(4).
---------------------------------------------------------------------------
<bullet> has an event in the prior three years that required a
``yes'' response to any item in Questions 14A(1)(a) and 2(a),
[[Page 90096]]
14B(1)(a) and 2(a), 14C, 14D and 14E on Form U4; \81\ or
---------------------------------------------------------------------------
\81\ See proposed Interpretations and Policies .19(c)(5),
mirroring FINRA Rule 3110.19(c)(5).
---------------------------------------------------------------------------
<bullet> 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, a self-regulatory organization, including the Exchange, 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
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 Exchange or other self- regulatory
organization, including the Exchange; provided, however, such office or
location may be designated or redesignated as an RSL subject to the
requirements of Interpretations and Policies .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.\82\
---------------------------------------------------------------------------
\82\ See proposed Interpretations and Policies .19(c)(6),
mirroring FINRA Rule 3110.19(c)(6).
---------------------------------------------------------------------------
With the exception of conforming and technical changes, proposed
Interpretations and Policies .19(c) is substantially the same as FINRA
Rule 3110.19(c).
Interpretations and Policies .19(d) of Exchange Rule 2300 (Obligation
to Provide List of RSLs)
Proposed Interpretations and Policies .19(d) setting forth the
obligations to provide RSL list would fully mirror the provisions of
FINRA Rule 3110.19(d) and would require Members electing to designate
any office or location of that Member as an RSL to provide a current
list of all offices or locations designated as RSLs by the 15th day of
the month following each calendar quarter to FINRA in the manner and
format as FINRA may prescribe.
With the exception of conforming and technical changes, proposed
Interpretations and Policies .19(d) is substantially the same as FINRA
Rule 3110.19(d).
Interpretations and Policies .19(e) of Exchange Rule 2300 (Risk
Assessment)
FINRA Rule 3110.19(e) requires its members, prior to designating an
office or location as an RSL, to 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. Proposed Interpretations and Policies .19(e)
would mirror the provisions of FINRA Rule 3110.19(e). Specifically, a
Member would be required, prior to designating an office or location as
an RSL, to 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(s) assigned to that office or location. In
line with FINRA Rule 3110.19(e), the proposed rule would list certain
factors, among others, that Members must consider in the risk
assessment that include whether each associated person at such office
or location is subject to:
<bullet> customer complaints, taking into account the volume and
nature of the complaints; \83\
---------------------------------------------------------------------------
\83\ See proposed Interpretations and Policies .19(e)(1),
mirroring FINRA Rule 3110.19(e)(1).
---------------------------------------------------------------------------
<bullet> heightened supervision other than where such office or
location is ineligible for RSL designation under paragraph (c)(3) of
Interpretations and Policies .19; \84\
---------------------------------------------------------------------------
\84\ See proposed Interpretations and Policies .19(e)(2),
mirroring FINRA Rule 3110.19(e)(2).
---------------------------------------------------------------------------
<bullet> any failure to comply with the Member's written
supervisory procedures; \85\
---------------------------------------------------------------------------
\85\ See proposed Interpretations and Policies .19(e)(3),
mirroring FINRA Rule 3110.19(e)(3).
---------------------------------------------------------------------------
<bullet> any recordkeeping violation; \86\ and
---------------------------------------------------------------------------
\86\ See proposed Interpretations and Policies .19(e)(4),
mirroring FINRA Rule 3110.19(e)(4).
---------------------------------------------------------------------------
<bullet> 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 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 Exchange Rule 2300(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 Interpretations and Policies .19 and the Member should
consider evidencing steps taken to address those red flags where
appropriate.\87\
---------------------------------------------------------------------------
\87\ See proposed Interpretations and Policies .19(e)(5),
mirroring FINRA Rule 3110.19(e)(5).
---------------------------------------------------------------------------
With the exception of conforming and technical changes, proposed
Interpretations and Policies .19(e) is substantially the same as FINRA
Rule 3110.19(e).
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\88\ in general, and furthers the objectives of Section
6(b)(5),\89\ in particular, because it is 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 facilitating transactions in securities, 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.
---------------------------------------------------------------------------
\88\ 15 U.S.C. 78f(b).
\89\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change furthers the
objectives of the Act by permitting Members that are FINRA members to
participate in the FINRA Pilot Program and for all Members to utilize
the RSL designation in order to continue to meet the core regulatory
obligation to establish and maintain a supervisory system reasonably
designed to achieve compliance with applicable securities laws and
regulations and applicable Exchange rules that directly serve investor
protection. The Exchange believes that the proposed changes, taken
together, reasonably account for evolving work models while maintaining
effective supervision. The Exchange believes that the proposed
safeguards and controls built into both the remote inspection program
and the RSL designation will, as FINRA noted,\90\
[[Page 90097]]
provide Members with greater flexibility to adapt to changing work
conditions without compromising investor protection. The robust nature
of the criteria that must be satisfied and circumstances that would
make a location ineligible for remote office inspections, as well as
requirements for supplemental written supervisory procedures related to
remote inspections, documentation requirements, and obligations to
share data with FINRA to allow for assessment of the pilot program,
serve an important role in reducing the potential for fraud and
manipulative acts. Similarly, important safeguards such as requiring
risk assessments in connection with the RSL designation in addition to
delineating specific criteria for locations that would be ineligible
for designation as an RSL furthers the prevention of manipulative acts
and practices and the protection of investors and the public interest.
---------------------------------------------------------------------------
\90\ See Securities Exchange Act Release No. 97398 (November 17,
2023), 88 FR 28620, 28635 (May 4, 2023) (SR-FINRA-2023-007) (Notice
of Filing of a Proposed Rule Change To Adopt Supplementary Material
.18 (Remote Inspections Pilot Program) Under FINRA Rule 3110
(Supervision)); Securities Exchange Act Release No. 97237 (March 31,
2023), 88 FR 20568 (April 6, 2023) (SR-FINRA-2023-006) (Notice of
Filing of a Proposed Rule Change To Adopt Supplementary Material .19
(Residential Supervisory Location) Under FINRA Rule 3110
(Supervision)).
---------------------------------------------------------------------------
As discussed in the Purpose section, because proposed
Interpretations and Policies .18 and Interpretations of Exchange Rule
2300 and Policies .19 of Exchange Rule 2300 are substantially similar
to FINRA Rule 3110.18 and FINRA Rule 3110.19, respectively, this rule
change enables Exchange Rule 2300 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 Rules 3110.18 and 3110.19
shall mean the Member is also in compliance with proposed
Interpretations and Policies .18 and Interpretations of Exchange Rule
2300 and Policies .19 of Exchange Rule 2300, thus promoting the
application of consistent regulatory standards with respect to rules
that FINRA enforces pursuant to the 17d-2 Agreement. As previously
noted, except for conforming and technical changes, the proposed text
of proposed Interpretations and Policies .18 and.19 of Exchange Rule
2300 is substantially the same as the text of FINRA Supplementary
Material .18 and .19, respectively, to FINRA Rule 3110. As such, the
proposed rule change would facilitate rule harmonization among self-
regulatory organizations with respect to inspection of Members and a
consistent and uniform regulatory framework for which Members can avail
themselves of the RSL designation, thereby fostering cooperation and
coordination with persons engaged in facilitating transactions in
securities and will remove impediments to and perfect the mechanism of
a free and open market and a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
not intended to address competitive issues but rather is intended
solely to reduce potential compliance burdens on Members by aligning
Exchange Rule 2300 with FINRA Rule 3110, resulting in less burdensome
and more efficient regulatory compliance for common members and
facilitating FINRA's performance under the 17d-2 Agreement.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \91\ and Rule 19b-4(f)(6) \92\
thereunder.
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\91\ 15 U.S.C. 78s(b)(3)(A).
\92\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \93\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\94\ 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 so that the proposal
may become operative immediately upon filing.
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\93\ 17 CFR 240.19b-4(f)(6).
\94\ 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, MIAX Pearl 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). Further, the Exchange stated that waiver
of the operative delay should reduce any potential confusion that may
otherwise occur on the part of joint members of the Exchange and FINRA
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.\95\
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\95\ 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) \96\ of the Act to determine whether the proposed
rule should be approved or disapproved.
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\96\ 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:
[[Page 90098]]
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#d5a7a0b9b0f8b6bab8b8b0bba1a695a6b0b6fbb2baa3"><span class="__cf_email__" data-cfemail="cab8bfa6afe7a9a5a7a7afa4beb98ab9afa9e4ada5bc">[email protected]</span></a>. Please include
file number SR-PEARL-2024-51 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-PEARL-2024-51. 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
a.m. and 3 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-PEARL-2024-51 and should be
submitted on or before December 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\97\
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\97\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26406 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on November 14, 2024.
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