[Federal Register Volume 75, Number 224 (Monday, November 22, 2010)]
[Notices]
[Pages 71166-71168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29281]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63316; File No. SR-FINRA-2010-056]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rule 1113 (Restriction Pertaining to New Member Applications) and
To Amend the FINRA Rule 9520 Series (Eligibility Proceedings)
November 15, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 1, 2010, Financial Industry Regulatory
Authority, Inc. (``FINRA'') (f/k/a National Association of Securities
Dealers, Inc. (``NASD'')) filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by FINRA. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt new FINRA Rule 1113 (Restriction
Pertaining to New Member Applications) and to amend the FINRA Rule 9520
Series (Eligibility Proceedings) to restrict new member applicants' and
certain members' association with disqualified persons.
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing a rule change to adopt new FINRA Rule 1113
(Restriction Pertaining to New Member Applications) and to amend the
FINRA Rule 9520 Series (Eligibility Proceedings) to restrict new member
applicants' and certain members' association with disqualified persons.
The details of the proposed rule change are described below.
Background
Article III, Section 3(b) of the FINRA By-Laws provides that no
person shall be associated with a member, continue to be associated
with a member, or transfer association to another member if such person
is or becomes subject to disqualification; and that no firm shall be
admitted to membership, and no member shall be continued in membership,
if any person associated with it is subject to a disqualification.
Pursuant to Article III, Section 4 of the FINRA By-Laws, a person is
subject to a ``disqualification'' with respect to membership, or
association with a member, if such person is subject to any ``statutory
disqualification'' as such term is defined in Exchange Act Section
3(a)(39).\3\
---------------------------------------------------------------------------
\3\ See 15 U.S.C. 78c(a)(39). Pursuant to Exchange Act Section
3(a)(39), a person is subject to a ``statutory disqualification''
with respect to membership or participation in, or association with
a member of, a self-regulatory organization (``SRO'') if such
person, among other things: Has been convicted of certain
misdemeanor and all felony criminal convictions for a period of ten
years from the date of the filing of an application for membership
or participation in, or to become associated with a member of, such
SRO; is subject to a temporary or permanent injunction (regardless
of its age) issued by a court of competent jurisdiction involving a
broad range of unlawful investment activities; has been expelled or
suspended from membership or participation in an SRO; or is subject
to an SEC order denying, suspending, or revoking broker-dealer
registration.
---------------------------------------------------------------------------
[[Page 71167]]
The FINRA Rule 9520 Series sets forth procedures for a person to
become or remain associated with a member, notwithstanding the
existence of a statutory disqualification, and for a current member or
person associated with a member to obtain relief from the eligibility
or qualification requirements of the FINRA By-Laws and rules. The FINRA
Rule 9520 Series also contemplates that a new member applicant may
sponsor a proposed associated person or itself for relief from the
eligibility or qualification requirements. A member (or new member
applicant) seeking to associate with a person subject to a
disqualification must seek approval from FINRA by filing a Form MC-400
application, pursuant to the FINRA Rule 9520 Series. Members (and new
member applicants) that are themselves subject to a disqualification
that wish to obtain relief from the eligibility requirements are
required to submit a Form MC-400A application.
New Membership Application Rule
FINRA is proposing to adopt new FINRA Rule 1113 providing that the
Department of Member Regulation (``Department'') shall reject an
application for FINRA membership \4\ in which either the applicant or
an associated person, as defined in Article I of the FINRA By-Laws,\5\
of the applicant is subject to a statutory disqualification, as defined
in Article III, Section 4 of the FINRA By-Laws.\6\ The proposed rule
also provides that any new member application that the Department
approves by virtue of Department or applicant error (including, but not
limited to, an inadvertent or intentional misstatement or omission by
the applicant or associated person) shall be subject to membership
cancellation in accordance with FINRA Rule 9555 (Failure to Meet the
Eligibility or Qualification Standards or Prerequisites for Access to
Services).
---------------------------------------------------------------------------
\4\ Proposed FINRA Rule 1113, by its terms, will not apply to a
member submitting a continuing membership application pursuant to
NASD Rule 1017 (Application for Approval of Change in Ownership,
Control, or Business Operations).
\5\ Article I of the FINRA By-Laws defines an associated person
as a: (1) A natural person who is registered or has applied for
registration under FINRA rules; (2) a sole proprietor, partner,
officer, director, or branch manager of a member, or other natural
person occupying a similar status or performing similar functions,
or a natural person engaged in the investment banking or securities
business who is directly or indirectly controlling or controlled by
a member, whether or not any such person is registered or exempt
from registration with FINRA under its By-Laws or rules; and (3) for
purposes of FINRA Rule 8210, any other person listed in Schedule A
of Form BD of a member. See FINRA By-Laws, Article I (rr)
(definition of ``person associated with a member'' or ``associated
person of a member'').
\6\ As previously noted, Article III, Section 4 of the FINRA By-
Laws incorporates the definition of ``statutory disqualification''
as such term is defined in Exchange Act Section 3(a)(39).
---------------------------------------------------------------------------
FINRA believes that a new member applicant should enter the
membership application process free of the concerns and issues that can
arise from either being associated with a disqualified person or being
itself subject to a statutory disqualification. Also, a new member
applicant has no prior operating or supervisory history, and therefore,
would not be able to demonstrate adequately its ability to supervise a
disqualified person.
FINRA Rule 9520 Series Amendments
FINRA also is proposing several amendments to the FINRA Rule 9520
Series, which, as noted above, set forth the eligibility proceedings.
First, the proposed rule change would amend the FINRA Rule 9520 Series
definition of ``sponsoring member'' \7\ to eliminate the reference to
new member applicants. As stated above, FINRA is concerned about the
ability of new member applicants to supervise adequately a disqualified
person, as such new member applicants generally would not have any
prior operating or supervisory history that would indicate the
necessary experience to supervise disqualified persons. Thus, this
amendment conforms to the proposed new membership application rule
discussed above by precluding new member applicants from being able to
sponsor disqualified persons.\8\
---------------------------------------------------------------------------
\7\ FINRA Rule 9521(b)(4).
\8\ The proposed rule change also would make conforming
amendments throughout the FINRA Rule 9520 Series to reflect the
proposed amendment discussed above that a new member applicant may
not sponsor a person subject to a disqualification.
---------------------------------------------------------------------------
Second, the proposed rule change would amend the definition of
``disqualified member'' \9\ in the FINRA Rule 9520 Series to clarify
that a new member applicant is not eligible to submit an application
for relief under the FINRA Rule 9520 Series where the new member
applicant itself is subject to a disqualification.
---------------------------------------------------------------------------
\9\ FINRA Rule 9521(b)(2).
---------------------------------------------------------------------------
Lastly, the proposed rule change would further amend the definition
of ``sponsoring member'' to preclude any member from sponsoring the
association or continued association of a disqualified person to be
admitted, readmitted, or permitted to continue in association that is
directly or indirectly a beneficial owner of more than five percent of
the sponsoring member. This proposed change reflects FINRA's belief
that a member cannot effectively supervise such a disqualified person
in light of the inherent conflict of interest resulting from the
ownership interest. In FINRA's experience, a member's decision to
sponsor such a person is nearly always influenced more by that person's
beneficial ownership interest in the firm, rather than by objective
considerations, such as the person's work experience, the length of
time since the disqualifying event, the person's professional
activities since the time of the disqualifying event, or subsequent
lack of disciplinary history.\10\
---------------------------------------------------------------------------
\10\ See The Ass'n of X as a Gen. Secs. Representative,
Chairman, CEO, and owner, Redacted Decision No. SD99013 (NASD NAC
1999) at 9 (the National Adjudicatory Council denied a sponsoring
firm's statutory disqualification application, finding that the
proposed supervisor would not adequately supervise a disqualified
individual who would be 100 percent owner of the firm).
---------------------------------------------------------------------------
FINRA notes that the proposed rule change is not designed to apply
in several situations. Proposed new FINRA Rule 1113 would not apply to
a new member applicant that itself is subject to a statutory
disqualification solely due to its association with a non-natural
person that is subject to a statutory disqualification.\11\ Also, in
such situations, notwithstanding the proposed rule change to the FINRA
Rule 9520 Series that would preclude a new member applicant from
submitting an application for relief under the FINRA Rule 9520 Series,
the new member applicant would be permitted to file an MC-400A
application on behalf of itself.
---------------------------------------------------------------------------
\11\ Exchange Act Section 3(a)(39)(E) subjects a person to a
statutory disqualification if the person is associated with any
person who is known, or in the exercise of reasonable care should be
known, by him to be subject to any statutory disqualification
described in Exchange Act Sections 3(a)(39)(A) through (D). Because
the applicable definition of ``associated person'' (set forth in
Exchange Act Section 3(a)(21)) includes non-natural persons, a
member may find itself subject to a statutory disqualification
solely because it is associated with a person who is subject to a
statutory disqualification pursuant to Exchange Act Section
3(a)(39)(A) through (D). For additional information, see Regulatory
Notice 09-19 (April 2009).
---------------------------------------------------------------------------
Moreover, the proposed amendments to the FINRA Rule 9520 Series
that would preclude any member from sponsoring a disqualified person
that is directly or indirectly a beneficial owner of more than five
percent of the sponsoring member would not preclude a member from
filing an MC-400A application to sponsor itself where needed (e.g., a
member whose majority owner is subject to a 30-day principal suspension
for failure to supervise a books and records violation may seek to
sponsor itself for continued membership rather than having to cease
business for the period of its owner's suspension).
FINRA will announce the effective date of the proposed rule change
in a
[[Page 71168]]
Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 90 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\12\ 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. The proposed rule change will further these purposes
by restricting certain members and new member applicants from being
able to associate with statutorily disqualified persons in light of the
concerns to investor protection raised by such associations.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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 (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2010-056 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2010-056. This
file number should be included on the subject line if e-mail 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 Web site (http://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 Web site
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 such filing also will be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2010-056
and should be submitted on or before December 13, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29281 Filed 11-19-10; 8:45 am]
BILLING CODE 8011-01-P