[Federal Register Volume 85, Number 138 (Friday, July 17, 2020)]
[Notices]
[Pages 43627-43630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89305; File No. SR-FINRA-2020-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change, as Modified by Amendment
No. 1, To Address Broker-Dealers With a Significant History of
Misconduct
July 13, 2020.
I. Introduction
On April 3, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA's rules to help
further address the issue of broker-dealers with a significant history
of misconduct and the firms that employ them. The proposed rule change
was published for comment in the Federal Register on April 14, 2020.\3\
On May 27, 2020, FINRA consented to an extension of the time period in
which the Commission must approve the proposed rule change, disapprove
the proposed rule change, or institute proceedings to determine whether
to approve or disapprove the proposed rule change to July 13, 2020.\4\
On July 2, 2020, FINRA responded to the comment letters received in
response to the Notice and filed an amendment to the proposed rule
change (``Amendment No. 1'').\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 88600 (Apr. 8, 2020), 85 FR
20745 (Apr. 14, 2020) (File No. SR-FINRA-2020-011) (``Notice'').
\4\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, U.S. Securities and Exchange
Commission, dated May 27, 2020.
\5\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission, dated July 2, 2020 (``FINRA
Letter''). The FINRA Letter is available at the Commission's website
at https://www.sec.gov/comments/sr-finra-2020-011/srfinra2020011-7399761-219028.pdf.
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The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \6\ to solicit comments on Amendment
No. 1 from interested persons and to institute proceedings to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1.
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\6\ 15 U.S.C. 78s(b)(2)(B).
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Institution of proceedings does not indicate that the Commission
has reached any conclusions with respect to the proposed rule change,
nor does it mean that the Commission will ultimately disapprove the
proposed rule change. Rather, as discussed below, the Commission seeks
additional input from interested parties on the changes to the proposed
rule change, as set forth in Amendment No. 1.
II. Description of the Proposed Rule Change
Background
FINRA's proposed rule change would: (1) Amend the FINRA Rule 9200
Series (Disciplinary Proceedings) and the 9300 Series (Review of
Disciplinary Proceedings by National Adjudicatory Council and FINRA
Board; Application for SEC Review) to allow a hearing officer to impose
conditions or restrictions on the activities of a respondent member
broker-dealer or respondent associated person, and require the member
broker-dealer employing a respondent associated person to adopt
heightened supervisory procedures for such associated person, when a
disciplinary matter is appealed to the National Adjudicatory Council
(``NAC'') or called for NAC review; (2) amend the FINRA Rule 9520
Series (Eligibility Proceedings) to require member broker-dealers to
adopt heightened supervisory procedures for statutorily disqualified
associated persons during the period a statutory disqualification
eligibility request is under review by FINRA; (3) amend FINRA Rule 8312
(FINRA BrokerCheck Disclosure) to require the disclosure through FINRA
BrokerCheck of the status of a member broker-dealer as a ``taping
firm'' under FINRA Rule 3170 (Tape Recording of Registered Persons by
Certain Firms); and (4) amend the FINRA Rule 1000 Series (Member
Application and Associated Person Registration) to require a member
broker-dealer to submit a written request to FINRA's Department of
Member Regulation, through the Membership Application Group (``MAP
Group''), seeking a materiality consultation and approval of a
continuing membership application, if required, when a natural person
that has, in the prior five years, one or more ``final criminal
matters'' or two or more ``specified risk events'' seeks to become an
owner, control person, principal or registered person of the member
broker-dealer.\7\
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\7\ See Notice at 20745.
The proposed rule change would impact all members, including
members that are funding portals or have elected to be treated as
capital acquisition brokers (``CABs''), given that the funding
portal rule set incorporates the Rule 9200 Series and Rule 9300
Series and Rule 9556 by reference, and the CAB rule set incorporates
Rules 1011, 1017 and 8312 and the Rule 9200 Series, Rule 9300 Series
and Rule 9500 Series by reference. In addition, FINRA is proposing
corresponding amendments to CAB Rule 111, to reflect that a CAB
would be subject to IM-1011-3, and amendments to Funding Portal Rule
900(b) to require heightened supervision during the time an
eligibility request is pending. See Notice at note 61.
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Proposed Rule Change to the FINRA Rule 9200 Series (Disciplinary
Proceedings) and the 9300 Series (Review of Disciplinary Proceeding by
National Adjudicatory Council and FINRA Board; Application for SEC
Review)
Currently, FINRA rules require that when a hearing panel or hearing
officer decision is on appeal or review before the NAC, any sanctions
imposed by the hearing panel or hearing officer decision, including
bars and expulsions, are automatically stayed and not enforced against
the respondent during the pendency of the appeal or review
proceeding.\8\ In turn, the filing of an application for Commission
review stays the effectiveness of any sanction, other than a bar or an
expulsion, imposed in a decision constituting a final FINRA
disciplinary action.\9\
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\8\ See FINRA Rules 9311(b) and 9312(b). In contrast, an appeal
to the NAC or a call for NAC review does not stay a decision, or
that part of a decision, that imposes a permanent cease and desist
order. See FINRA Rules 9311(b) and 9312(b).
\9\ See FINRA Rule 9370(a).
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In the Notice, FINRA expressed concern about customers who could
engage in securities transactions with
[[Page 43628]]
disciplined respondents during the pendency of an appeal from, or a NAC
review of, a hearing panel or hearing officer disciplinary
decision.\10\ According to FINRA, ``authorizing Hearing Officers to
impose conditions or restrictions during the period an appeal or review
proceeding is pending would allow FINRA to target the demonstrated bad
conduct of a respondent during the pendency of an appeal or review and
add an interim layer of investor protection while the appellate review
of the disciplinary proceeding remains pending.'' \11\
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\10\ See Notice at 20746.
\11\ See Notice at 20748.
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Accordingly, FINRA proposed amendments to its Rule 9200 Series and
Rule 9300 Series that would authorize hearing officers to impose
conditions or restrictions on disciplined respondents and require
broker-dealers to adopt heightened supervision plans concerning their
associated persons who are the disciplined respondents.\12\ The
proposed rule change would require a heightened supervision plan to be
reasonably designed and tailored to include specific supervisory
policies and procedures that address the violations found and be
reasonably designed to prevent or detect a reoccurrence of the
violations.\13\ The proposed rule change would also establish a process
for an expedited review by the Review Subcommittee of the NAC of any
such conditions or restrictions imposed.\14\ Specifically, proposed
Rule 9285(a) would provide that the hearing officer who participated in
an underlying disciplinary proceeding and found that a respondent
violated a statute or rule provision which is subsequently appealed to
the NAC or called for NAC review, may impose conditions or restrictions
on the activities of the respondent during the appeal as the hearing
officer considers reasonably necessary for the purpose of preventing
customer harm.\15\ Under the proposed rule change, the conditions or
restrictions imposed by a hearing officer would remain in place until
FINRA's final decision takes effect and all appeals are exhausted.\16\
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\12\ See Notice at 20746.
\13\ See Notice at 20748.
\14\ See Notice at 20746.
\15\ See Notice at 20747. Additionally, the Notice sets forth in
greater detail how this process would operate.
\16\ See Notice at 20748. The proposed rule change would also
amend Rule 9556 to grant FINRA the authority to bring an expedited
proceeding against a respondent that fails to comply with conditions
and restrictions imposed pursuant to proposed Rule 9285 that could
result in a suspension or cancellation of membership or suspension
or bar from associating with any FINRA member. See Notice at 20749.
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Proposed Rule Change to the FINRA Rule 9520 Series (Eligibility
Proceedings)
The FINRA Rule 9520 Series sets forth rules governing eligibility
proceedings, in which FINRA evaluates whether to allow a member, person
associated with a member, potential member or potential associated
person subject to a statutory disqualification to enter or remain in
the securities industry.\17\ These eligibility proceedings require a
broker-dealer to propose a written plan of heightened supervision of
the statutorily disqualified associated person that would become
effective upon FINRA's approval of the broker-dealer's application to
associate with the statutorily disqualified person.\18\
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\17\ See Notice at 20750.
\18\ See Notice at 20750.
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The proposed rule change would amend FINRA Rule 9522 to require a
member broker-dealer that files an application to continue associating
with a disqualified person under FINRA Rule 9522(a)(3) or Rule
9522(b)(1)(B) to include an interim plan of heightened supervision that
would be in effect throughout the entirety of the application review
process.\19\ The proposed rule change would delineate the circumstances
under which a statutorily disqualified person may remain associated
with a member broker-dealer while FINRA is reviewing the
application.\20\
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\19\ See Notice at 20749.
\20\ See id.
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Proposed Rule Change to FINRA Rule 8312 (FINRA BrokerCheck Disclosure)
FINRA Rule 8312 governs the information FINRA releases to the
public through its BrokerCheck system. Currently, FINRA Rule 8312(b)
requires that FINRA release information about, among other things,
whether a particular member broker-dealer is subject to the provisions
of FINRA Rule 3170 (the ``Taping Rule''), but only in response to
telephonic inquiries via the BrokerCheck toll-free telephone
listing.\21\ The proposed rule change would remove the requirement that
FINRA inform the public that a broker-dealer is subject to the Taping
Rule only in response to telephonic inquiry via the BrokerCheck toll-
free telephone listing.\22\ Specifically, proposed FINRA Rule 8312(b)
would require FINRA to release through BrokerCheck information as to
whether a particular broker-dealer is subject to the Taping Rule (a
``taping firm'').\23\ FINRA believes that broadening the disclosure
through BrokerCheck of the status of a broker-dealer as a taping firm
would help inform more investors of the heightened procedures required
of the broker-dealer, which may incentivize investors to research more
carefully the background of an associated person associated with the
taping firm.\24\
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\21\ See FINRA Rule 8312(b). The Taping Rule is designed to help
ensure that a broker-dealer with a significant number of registered
persons that previously were employed by ``disciplined firms'' has
specified supervisory procedures in place to prevent fraudulent and
improper sales practices or customer harm. See Notice at 20751.
Under the Taping Rule, a broker-dealer with a specified percentage
of registered persons who have been associated with disciplined
firms in a registered capacity in the last three years is designated
as a ``taping firm.'' See FINRA Rule 3170.
\22\ See Notice at 20751.
\23\ See id.
\24\ See id.
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Proposed Rule Change to FINRA Rule 1000 Series (Member Application and
Associated Person Registration)
The FINRA Rule 1000 Series govern, among other things, FINRA's
membership proceedings. Currently, a member broker-dealer is permitted
(subject to exceptions) to expand its business under the safe-harbor
set forth in IM-1011-1 without the filing and prior approval of a
continuing membership application.\25\ For example, under the existing
parameters of this safe harbor, a broker-dealer could hire an
associated person even if he or she has a significant history of
misconduct.\26\ The proposed rule change would limit the application of
the safe harbor by imposing additional obligations on a member broker-
dealer when a natural person who has, in the prior five years, either
one or more ``final criminal matters'' or two or more ``specified risk
events'' seeks to become an owner, control person, principal or
registered person of the broker-dealer.\27\
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\25\ See Notice at 20752.
\26\ See id.
Currently, none of the safe harbor's parameters relates to the
history of a broker-dealer's associated persons. However, based on
its review of studies indicating the predictability of future
regulatory-related events for associated persons with a history of
past regulatory-related events, FINRA is concerned about instances
where a broker-dealer hires associated persons with a significant
history of misconduct within the safe-harbor parameters, thus
avoiding prior consultation or review by FINRA. FINRA believes there
are instances in which hiring of an associated person with a
significant history of misconduct should be considered a material
change in business operations. See Notice at 20752.
\27\ See Notice at 20752. The proposed rule change would also
adopt definitions of ``final criminal matter'' and ``specified risk
event.''
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Specifically, when a natural person seeking to become an owner,
control person, principal or registered person of a member broker-
dealer has, in the prior
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five years, one or more ``final criminal matters'' or two or more
``specified risk events,'' proposed Rule 1017(a)(7) would require a
member broker-dealer to either: (1) File a continuing membership
application or (2) submit a written request seeking a materiality
consultation for the contemplated activity with the MAP Group.\28\ If
the broker-dealer seeks a materiality consultation, the MAP Group would
consider, among other things, whether the ``final criminal matters'' or
``specified risk events'' are customer-related; whether they represent
discrete actions or are based on the same underlying conduct; the
anticipated activities of the person; the disciplinary history,
experience and background of the proposed supervisor, if applicable;
the disciplinary history, supervisory practices, standards, systems and
internal controls of the member firm and whether they are reasonably
designed to achieve compliance with applicable securities laws and
regulations and FINRA rules.\29\ Where FINRA determines that a
contemplated change is material, FINRA would instruct the broker-dealer
to file a continuing membership application if it intends to proceed
with such change. Proposed Rule 1017(a)(7) would establish that the
safe-harbor for business expansions in IM-1011-1 would not be available
to a member broker-dealer when a materiality consultation is
required.\30\
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\28\ See Notice at 20752 and 20753.
\29\ See Notice at 20753.
\30\ See id.
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Additionally, the proposed rule change would adopt a corresponding
change to IM-1011-3 (Business Expansions and Persons with Specified
Risk Events) to specify that the safe-harbor for business expansions in
IM-1011-1 would not be available to any broker-dealer seeking to add a
natural person who: (i) Has, in the prior five years, one or more
``final criminal matters'' or two or more ``specified risk events'' and
(ii) seeks to become an owner, control person, principal or registered
person of the member.\31\ In those circumstances, proposed IM-1011-3
would provide that if the broker-dealer is not otherwise required to
file a continuing membership application, it must comply with the
requirements of proposed FINRA Rule 1017(a)(7).\32\
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\31\ See id.
\32\ See id.
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The Commission has received five comment letters on the proposed
rule change. In response to comments, FINRA submitted the FINRA Letter
and Amendment No. 1, amending the proposed rule change as described
below.
III. Description of Amendment No. 1
In the initial filing of the proposed rule change, proposed FINRA
Rule 1011(h) defined the term ``final criminal matter'' to mean ``a
final criminal matter that resulted in a conviction of, or guilty plea
or nolo contendere (no contest) by, a person that is disclosed, or was
required to be disclosed, on the applicable Uniform Registration
Forms.'' Proposed FINRA Rule 1011(p) defined the term ``specified risk
event'' to mean any one of several specified events ``that are
disclosed, or are or were required to be disclosed, on an applicable
Uniform Registration Form.'' The ``was required to be disclosed''
language in the proposed ``final criminal matter'' definition differs
in substance from the ``are or were required to be disclosed'' language
in the proposed ``specified risk event'' definition.\33\ In response to
comments, FINRA agreed with some commenters that ``this difference
should be eliminated, and that both definitions should include
disclosures that are required if the member firm and person proceed
with the contemplated change, including disclosures that are required
on Uniform Registration Forms that have not yet been executed.'' Thus,
FINRA amended proposed FINRA Rule 1011(h) to include in the definition
of ``final criminal matter'' a relevant criminal event that ``is or
was'' required to be disclosed on a Uniform Registration Form, and to
make some grammar- and syntax-related modifications.\34\
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\33\ See id.
\34\ See id.
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Also in response to comments, FINRA amended proposed FINRA Rule
1017(a)(7) to define ``owner'' and ``control person'' for purposes of
that proposed rule (and, by extension, IM-1011-3).\35\ Specifically,
Amendment No. 1 would modify proposed FINRA Rule 1017(a)(7) to provide
that, ``for purposes of FINRA Rule 1017(a)(7): (i) the term `owner' has
the same meaning as `direct owner' on Form BD Schedule A and `indirect
owner' on Form BD Schedule B; and (ii) that `control person' means a
person who would have `control' as defined on Form BD.'' \36\
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\35\ See id.
\36\ See id. (stating that ``[d]efining `control person' by
reference to the Form BD definition of `control' means that the term
would not be defined with reference to the term `controlling' as
defined in the FINRA By-Laws, Art. I(h).'')
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IV. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-FINRA-2020-011 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change should be approved or disapproved.\37\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. As noted above, institution
of proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved.
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\37\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\38\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis and input concerning whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Exchange
Act and the rules thereunder, in particular Section 15A(b)(6) of the
Exchange Act, which requires, among other things, that FINRA rules must
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.\39\
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\38\ See id.
\39\ 15 U.S.C. 78o-3(b)(6).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the
[Exchange Act] and the rules and regulations issued thereunder . . . is
on the [SRO] that proposed the rule change.'' \40\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding,\41\ and any failure of an SRO to provide this
information may result in the Commission not having a sufficient basis
to make an affirmative finding that a proposed rule change is
consistent with the Exchange Act and the applicable rules and
regulations.\42\ For the reasons discussed above, the Commission
believes it is appropriate to institute proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to allow for additional consideration
of the issues raised by the proposed rule
[[Page 43630]]
change, as modified by Amendment No. 1, as it determines whether the
proposed rule change should be approved or disapproved.\43\
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\40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\41\ See id.
\42\ See id.
\43\ 15 U.S.C. 78s(b)(2)(B).
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V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposed rule change, as modified by Amendment No. 1. In
particular, the Commission invites the written views of interested
persons concerning whether the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange
Act, or any other provision of the Exchange Act, rules, and regulations
thereunder. Although there do not appear to be any issues relevant to
approval or disapproval that would be facilitated by an oral
presentation of views, data, and arguments, the Commission will
consider, pursuant to Rule 19b-4, any request for an opportunity to
make an oral presentation.\44\
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\44\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposed
rule change by a self-regulatory organization. See Securities Acts
Amendments of 1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved by August 3, 2020.
Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by August 7, 2020.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-FINRA-2020-011 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 No. SR-FINRA-2020-011. 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 (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change, as modified by
Amendment No. 1, that are filed with the Commission, and all written
communications relating to the proposed rule change, as modified by
Amendment No. 1, 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 such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File No. SR-FINRA-2020-011 and should be
submitted on or before August 3, 2020. Rebuttal comments should be
submitted by August 7, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15450 Filed 7-16-20; 8:45 am]
BILLING CODE 8011-01-P