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Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices
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In recognition of the logistical challenges firms were facing at that time to satisfy their on-site inspection obligations, FINRA adopted Rule 3110.16 Temporary Extension of Time to Complete Office Inspections, extending the time by which firms must complete their calendar year 2020
inspection obligations under FINRA
Rule 3110c to March 31, 2021, but emphasizing that the extension of time did not relieve firms from conducting the on-site portion of the inspections of their OSJs, branch offices, and nonbranch locations.17 As noted above, FINRA thereafter adopted Rule 3110.17
to allow for FINRA member firms to conduct calendar year 2020 inspections and calendar year 2021 inspections remotely, without an on-site visit to the office or location.18
The acute health and safety concerns related to COVID19 persist, with the number of confirmed cases of COVID
19 in the U.S. continuing to increase since March 13, 2020.19 While Members have continued to supervise OSJs, branch offices, and non-branch locations by, among other things, implementing remote supervisory practices through novel uses of technology as well as existing methods of supervision e.g., supervisory checklists, surveillance tools, incident trackers, email review, and trade exception reports,20 Members are still experiencing logistical challenges related to conducting the on-site portion of their inspections due to continuing business and governmental restrictions and public health concerns.
Based on feedback described in FINRAs Regulatory Notice 2016, in comment letters submitted in response to FINRAs proposed rule changes, and discussions with industry 2020, available at https
coronavirus.health.ny.gov/system/files/documents/
2020/11/interm_guidance_travel_advisory.pdf last visited March 2, 2021; and Chicago Department of Public Health, Emergency Travel Order issued July 2, 2020 and last updated February 23, 2021, requiring travelers from states and territories meeting certain daily test metrics to test negative for COVID19 pre-arrival and quarantine for 10 days, https www.chicago.gov/city/en/sites/covid-19/
home/emergency-travel-order.html.
17 See Securities Exchange Act Release No. 89188
June 30, 2020, 85 FR 40713 July 7, 2020 SR
FINRA202019. In this rule filing, FINRA stated, among other things, that FINRA would consider whether additional relief may be warranted to address any backlog of 2020 inspections that may continue to exist in light of ongoing public health and safety concerns.
18 See supra note 8.
19 See Johns Hopkins, Coronavirus Resource Center, COVID19 Dashboard by the Center for Systems Science and Engineering at Johns Hopkins University, https coronavirus.jhu.edu/map.html last visited March 2, 2021.
20 See FINRA Regulatory Notice 2016.

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representatives, FINRA understood that beginning in or about March 2020, many firms had suspended the on-site component of their inspections scheduled for calendar year 2020. With no certainty as to when pandemicrelated health concerns and restrictions will subside, firms will have a considerable backlog of 2020
inspections. Moreover, planning on-site inspections for calendar year 2021 for OSJs, branch offices, and non-branch locations in the current environment may be impacted as well. In light of pandemic-related developments, IEX
believes further sensible and tailored temporary relief is warranted for Members to meet their inspection obligations under IEX Rule 5.110c for calendar year 2021.
Proposed Supplementary Material .15 to IEX Rule 5.110
In order to proactively address these concerns and to align its Supervision rule with corresponding FINRA rules covered by its regulatory services agreement with FINRA, IEX is proposing to adopt Supplementary Material .15. As proposed, Supplementary Material .15 would provide Members, subject to specified requirements therein, the option to conduct remotely the inspections of their OSJs, branch offices, and nonbranch locations for any inspections to be conducted in calendar year 2021, without the requirement to conduct an on-site visit to such office or location.
As described further below, the proposed rule change would set forth the dates by which inspections for calendar year 2021 are due, the requirement to amend or supplement written supervisory procedures for remote inspections, the use of remote inspections as part of an effective supervisory system, and documentation requirements. The Exchange believes this temporary remote inspection option is a reasonable alternative to provide to Members to fulfill their IEX Rule 5.110c obligations during these pressing times, and is designed to achieve the investor protection objectives of the inspection requirements under these unique circumstances.
The responsibility of Members to supervise their associated persons is a critical component of broker-dealer regulation. IEX Rule 5.110a requires that each Member . . . 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 IEX Rules . . . . The
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proposed Supplementary Material is not intended to alter this core responsibility. The advent of technology and automation in the financial industry has significantly changed the way in which Members and their associated persons conduct their business, communicate, and meet their regulatory obligations. IEX recognizes that Members generally use an array of technological tools to facilitate their supervisory practices e.g., surveillance systems; electronic tracking programs or applications; and electronic communications, including video conferencing tools, which many firms have leveraged to create and implement remote inspection plans, on a temporary basis, in response to pandemic-related operational challenges.21
IEX believes that proposed Supplementary Material .15 to IEX Rule 5.110 would provide a sensibly tailored regulatory alternative for Members to fulfill their obligations under IEX Rule 5.110c that would not materially diminish, and is reasonably designed to achieve, the investor protection objectives of the inspection requirements under these unique circumstances. IEX further notes that the proposed relief would be limited in duration to align with the extended date set forth under FINRA Rule 3110.16 of December 31, 2021 for calendar year 2021 inspections.22
A. Deadlines To Complete Calendar Year 2021 Inspections Currently, IEX Rule 5.110c1
provides that an inspection of an office or location must occur on a designated frequency, and 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 on a calendar-year basis; non-supervisory branch offices, at least every three years;
and non-branch locations, on a periodic schedule at least once every three years.
Proposed Supplementary Material .15a would provide that a Member that is obligated to complete a 2021
inspection of an OSJ, branch office or non-branch location, pursuant to the applicable periodicity set forth under 21 See FINRA Regulatory Notice 2016. See generally FINRA White Paper, Technology Based Innovations for Regulatory Compliance RegTech in the Securities Industry September 2018
reporting, among other things, that as financial services firms seek to keep pace with regulatory compliance requirements, they are turning to new and innovative regulatory tools to assist them in meeting their obligations in an effective and efficient manner, https www.finra.org/sites/
default/files/2018_RegTech_Report.pdf.
22 See supra note 8.

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