Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Supplementary Material .16 to IEX Rule 5.110 (Supervision), So That IEX Members Who Participate in the Recently Approved FINRA Pilot Program on Remote Inspections Will Also Satisfy the Internal Inspection Requirements Found in IEX's Rules

September 16, 2024.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) and Rule 19b-4 thereunder, notice is hereby given that, on September 4, 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.

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, and Rule 19b-4 thereunder, the Exchange is filing with the Commission a proposed rule change to adopt Supplementary Material .16 to IEX Rule 5.110 (Supervision), so that IEX Members who participate in the recently-approved FINRA pilot program on remote inspections (the “Remote Inspections Pilot Program”) will also satisfy the internal inspection requirements found in IEX's rules.

The text of the proposed rule change is available at the Exchange's website at www.iextrading.com, 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 .16 to IEX Rule 5.110, which would provide that any IEX Member that participates in the FINRA Remote Inspections Pilot Program, thereby satisfying the internal inspections requirements in FINRA Rule 3110(c), would also satisfy the equivalent internal inspections requirements in IEX Rule 5.110(c). This proposed rule change would supplant Supplementary Material .15 to IEX Rule 5.110, which allowed Members to fulfill any calendar year 2024 internal inspection obligations set forth in IEX Rule 5.110(c) by conducting remote inspections of the applicable offices of supervisory jurisdiction (“OSJs”), branch offices (both supervisory and non-supervisory), and non-branch locations. This temporary relief, which was analogous to relief that FINRA provided for, automatically sunset on June 30, 2024. As described below, adding Proposed Supplementary Material .16 to IEX Rule 5.110 would harmonize IEX's internal inspections obligations for its Members with FINRA's comparable obligations for its members, thereby avoiding confusion to IEX Members with respect to the applicability of participation in the FINRA Remote Inspections Pilot Program with respect to compliance with IEX Rule 5.110. Additionally, because Proposed Supplementary Material .16 to IEX Rule 5.110 incorporates by reference FINRA Rule 3110.18, 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”).

Standards for Supervision of Remote Offices

The responsibility of firms to supervise their associated persons is a critical component of broker-dealer regulation. Members must supervise all of their associated persons, regardless of their location, compensation or employment arrangement, or registration status. IEX Rule 5.110, which is substantially identical to FINRA Rule 3110(c), requires any 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 the applicable securities laws and regulations and IEX rules, and that sets forth the minimum requirements for such supervisory system. The internal inspection obligation under IEX Rule 5.110(c) and FINRA Rule 3110(c) is one component of such system.

IEX Rule 5.110(c) sets forth three main requirements for inspections. First, an inspection of an office or location must occur on a designated frequency. The periodicity of the required inspection varies depending on the classification of the location or the nature of the activities that take place: OSJs and supervisory branch offices must be inspected at least annually; non-supervisory branch offices must be inspected at least every three years; and non-branch locations must be inspected on a periodic schedule, presumed to be at least every three years. Second, a Member 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. 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. Third, to prevent compromising the effectiveness of inspections due to conflicts of interest, 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 that location. All OSJs, branch offices, and non-branch locations are subject to IEX Rule 5.110(c).

Further, Supplementary Material .12 to IEX Rule 5.110 sets out factors that constitute a reasonable review. This provision emphasizes establishing reasonable supervisory procedures and conducting reviews of locations, taking into consideration, among other things, the Member's size, organizational structure, scope of business activities, number and location of the Member's offices, the nature and complexity of the products and services offered by the Member, 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”). The provision further states that the procedures established and reviews conducted must provide that the quality of supervision at remote ( i.e., geographically dispersed) locations is sufficient to ensure compliance with applicable securities laws and regulations and with IEX rules, and that Members must be especially diligent with respect to a non-branch location where a registered representative engages in securities activities. This provision incorporates guidance FINRA has previously issued about supervising associated persons working in geographically dispersed offices.

Notably, all of the above requirements about supervision and inspections of OSJs, branch offices, and non-branch locations reflected a business environment in which Members conducted in-person inspections of all of their offices.

FINRA's Recent Attempts To Change the In-Person Inspection Requirements of OSJs, Branch Offices, and Non-Branch Locations

In the Remote Inspections Pilot Program Proposal, FINRA described its efforts during the past several years to offer its members the option of remotely conducting internal inspections of their OSJs, branch offices, and non-branch locations. As stated therein, FINRA believed that as more recordkeeping moved from paper to electronic records, and as more meetings were conducted virtually using platforms such as Zoom and WebEx, the burden on FINRA members of conducting in-person inspections for all their remote office locations became harder to justify.

Thus, when the COVID-19 pandemic required many securities industry professionals to work from home, FINRA implemented several forms of regulatory relief to its members, including introducing FINRA Rule 3110.17, which IEX also introduced as Supplementary Material .15 to IEX Rule 5.110, to permit remote internal inspections of their OSJs, branch offices, and non-branch locations.

The pandemic accelerated the industry's adoption of a broad remote work environment and IEX recognizes that the pandemic has profoundly changed attitudes on where work can occur. As a result of this change many firms have adopted, in varying scale, hybrid work models involving personnel who are working at least part time from alternative work locations ( e.g., private residences). As part of an effort to modernize its rules to reflect evolving technologies and business models, in April 2023, FINRA filed the Remote Inspections Pilot Program Proposal with the Commission to establish a voluntary, three-year remote inspections pilot program that would allow eligible firms to conduct inspections of all or some offices or locations, remotely, subject to the specified terms therein. The SEC approved the FINRA Remote Inspection Pilot Program Proposal in November 2023, and FINRA commenced the pilot program on July 1, 2024.

FINRA's Remote Inspections Pilot Program

FINRA's Remote Inspection Pilot Program builds on the terms of the temporary relief in FINRA Rule 3110.17, while requiring members to provide even more information about their remote inspections to allow FINRA to assess the overall impact and effectiveness of remote inspections. The pilot program is designed to provide broader systemized information to supplement the information obtained through the FINRA examination process in an environment where offices and locations were closed. The information firms would be required to produce as a pilot program participant will help FINRA more accurately assess the overall impact and effectiveness of remote inspections.

FINRA's Remote Inspection Pilot Program includes, among other things, the following requirements for participating firms:

• Risk Assessment. Prior to electing a remote inspection for an office or location, participating firms must develop a reasonable risk-based approach to using remote inspections and conduct and document a risk assessment for that office or location.

• Written Supervisory Procedures for Remote Inspections. Participating firms must establish, maintain, and enforce written procedures that are reasonably designed for conducting remote inspections and reasonably designed to achieve compliance with applicable securities laws and regulations.

• Effective Supervisory System. Participating firms must have an effective supervisory system for remote inspections that will be held to the same standards of review (set forth under FINRA Rule 3110.12). 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.

• Documentation Requirement. Participating firms must maintain and preserve a centralized record for each of the Pilot Years specified in the pilot program that separately identifies: (1) all offices or locations that were inspected remotely; and (2) any offices or locations for which the member determined to impose additional supervisory procedures or more frequent monitoring, as provided in FINRA Rule 3110.18(d). 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.

• Firm Level Requirements. Participating firms must meet certain firm-level eligibility requirements to participate in the program set forth in FINRA Rule 3110.18(f)(1). For example, a firm cannot participate if it 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 have been found by the SEC or FINRA to have violated FINRA Rule 3110(c) are ineligible to participate. Participating firms must also comply with firm-level conditions to participate in the program. For example, a firm must have a recordkeeping system that keeps records current and promptly accessible, and that does not maintain physical or electronic records at the location subject to remote inspection. Additionally, participating firms must have firm-wide tools such as electronic recordkeeping systems, system security tools such as secure network connections and effective cybersecurity protocols, and tools specifically applied to each office or location based on the activities of associated persons, products offered, or any restrictions on the activity of the office or location.

• Location Level Requirements. Participating firms must exclude from participating in the program any locations that do not meet the location level eligibility criteria set forth in FINRA Rule 3110.18(g)(1) (e.g., the location includes: (i) persons subject to a disciplinary action, a statutory disqualification, or a mandated heightened supervisory plan; (ii) persons engaged in proprietary trading; or (iii) the handling of customer funds or securities). Additionally, eligible locations must use the firm's electronic communication system and may not maintain any original copies of books or records at the location.

• Data and Information Collection Requirement. Participating firms must collect and on a quarterly basis produce to FINRA data consisting of separate counts for OSJs, supervisory branch offices, non-supervisory branch offices, and non-branch locations. This data must include information about the number of remote inspections conducted and any significant findings. Firms shall establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the data collection and transmission requirements.

• Election to Participate in Remote Inspections Pilot Program. Participating firms must opt-in to the pilot program in a manner specified by FINRA.

• Failure to Satisfy Conditions and Determination of Ineligibility. Participating firms that fail to satisfy terms of the Remote Inspections Pilot Program will be ineligible to participate in the pilot program and return to conducting only on-site inspections. FINRA may also make a determination to revoke a member's eligibility to participate if FINRA finds it to be in the public interest.

• Definitions of Pilot Year periods. Includes clarifications that Pilot Year 1 is the second half of 2024, and Pilot Year 4 is the first half of 2027.

Proposal

IEX proposes to adopt Supplementary Material .16 to IEX Rule 5.110. This proposed new supplementary material reads as follows:

Members that are obligated to conduct an inspection of an office of supervisory jurisdiction, branch office or non-branch location pursuant to, as applicable, paragraphs (c)(1)(A), (B) and (C) under IEX Rule 5.110 may satisfy such obligation by participating in the FINRA Remote Inspections Pilot Program, as set forth in FINRA Rule 3110.18. The FINRA Remote Inspections Pilot Program shall cover required inspections of such offices or locations for a period of three years starting on September 4, 2024 (“pilot period”), and such pilot period shall expire on July 1, 2027. If the pilot period is not extended, this Supplementary Material will automatically sunset on July 1, 2027. Members will not be able to participate in the FINRA Remote Inspections Pilot Program after such date.

As stated in proposed new Supplementary Material .16 to IEX Rule 5.110, any IEX Member that participates in the FINRA Remote Inspections Pilot Program, thereby satisfying the internal inspections requirements in FINRA Rule 3110(c), will satisfy the equivalent internal inspections requirements in IEX Rule 5.110(c).

IEX is not proposing to add the entire FINRA Remote Inspections Pilot Program to its rules, because it would be unnecessarily duplicative and burdensome for IEX Members to submit the data and information required as part of the Remote Inspections Pilot Program to both IEX and FINRA. Based upon conversations with FINRA staff, IEX understands that adopting Proposed Supplementary Material .16 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.

As noted above, all IEX Members were temporarily eligible to conduct remote office inspections until June 30, 2024. This proposed rule change allows those Members who have enrolled in FINRA's Remote Inspections Pilot Program to continue to use remote inspections as part of an effective supervisory system. IEX believes this Remote Inspections Pilot Program is a reasonable alternative for firms to fulfill their IEX Rule 5.110(c) obligations while permitting FINRA to collect data as the regulatory authority in this area under the 17d-2 Agreement to assess the efficacy and long-term viability of a permanent remote office inspections program. IEX emphasizes that the inspection requirement is one aspect of a firm's overall supervisory system, and that the inspection, whether done in accordance with the FINRA Remote Inspections Pilot Program, or on-site, would be held to the existing standards of review under Supplementary Material .12 to IEX Rule 5.110 (Standards for Reasonable Review).

2. Statutory Basis

IEX believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act in general, and furthers the objectives of Section 6(b)(5) of the Act 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 the requirements for inspections of Members' branch offices and other locations, with those of FINRA, on which they are based. As discussed in the Purpose section, because Proposed Supplementary Material .16 to IEX Rule 5.110 incorporates by reference FINRA Rule 3110.18, 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 3110.18 shall mean the Member is also in compliance with Supplementary Material .16 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.

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) of the Act and Rule 19b-4(f)(6) 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.

A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b-4(f)(6)(iii), 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.

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 the FINRA Remote Inspections Pilot Program commenced on July 1, 2024, waiving the 30-day operative delay would provide assurances to IEX members who enroll in the Remote Inspections Pilot Program that they can plan the remainder of their 2024 inspection program under a harmonized rule set, with just a short window of time in which the FINRA pilot program was not part of IEX's rules, while at the same time helping ensure that IEX members continue to perform their supervisory obligations. Further, the Exchange stated that waiver of the operative delay should reduce any 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.

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) of the Act to determine whether the proposed rule change should be approved or disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( https://www.sec.gov/rules/sro.shtml ); or
• Send an email torule-comments@sec.gov. Please include file number SR-IEX-2024-16 on the subject line.

Paper Comments

• 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-2024-16. 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 ( https://www.sec.gov/rules/sro.shtml ). 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-2024-16 and should be submitted on or before October 11, 2024.

[FR Doc. 2024-21491 Filed 9-19-24; 8:45 am]

BILLING CODE 8011-01-P