[Federal Register Volume 79, Number 162 (Thursday, August 21, 2014)]
[Notices]
[Pages 49549-49552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-19807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72854; File No. SR-FINRA-2014-036]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
the Composition of Hearing Panels and Extended Hearing Panels in 
Disciplinary Proceedings

August 15, 2014.
    Pursuant to 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 August 7, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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.
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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

    FINRA is proposing to amend FINRA Rule 9231 to add a category of 
persons eligible to be a Panelist on a Hearing Panel or an Extended 
Hearing Panel constituted to conduct disciplinary proceedings. FINRA is 
also proposing to make a conforming amendment to FINRA Rule 9232, which 
comprises criteria for the appointment of a Panelist to a Hearing Panel 
or an Extended Hearing Panel.
    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets.

* * * * *
9200. DISCIPLINARY PROCEEDINGS
* * * * *
9230. Appointment of Hearing Panel, Extended Hearing Panel
9231. Appointment by the Chief Hearing Officer of Hearing Panel or 
Extended Hearing Panel or Replacement Hearing Officer

    (a) No Change.
    (b) Hearing Panel
    The Hearing Panel shall be composed of a Hearing Officer and two 
Panelists, except as provided in paragraph (e) and in Rule 9234 (a), 
(c), (d), or (e). The Hearing Officer shall serve as the chair of 
the Hearing Panel. Each Panelist shall be associated with a member 
of FINRA or retired therefrom.
    (1) Except as provided in subparagraph (2) below, the Chief 
Hearing Officer shall select as a Panelist a person who:

[[Page 49550]]

    (A) through (B) No Change.
    (C) previously served on a disciplinary subcommittee of the 
National Adjudicatory Council or the National Business Conduct 
Committee, including a Subcommittee, an Extended Proceeding 
Committee, or their predecessor subcommittees; [or,]
    (D) previously served as a Director or a Governor, but does not 
serve currently in any of these positions[.]; or,
    (E) currently serves or previously served on a committee 
appointed or approved by the FINRA Board, but does not serve 
currently on the National Adjudicatory Council or as a Director or a 
Governor.
    (2) No Change.
    (c) through (e) No Change.

9232. Criteria for Selection of Panelists and Replacement Panelists

    (a) through (c) No Change.
    (d) Criteria for Appointment of a Panelist
    After the Chief Hearing Officer designates the Primary District 
Committee, the Chief Hearing Officer shall select Panelists from the 
current members of the Primary District Committee, the other 
categories of persons eligible to serve as Panelists as set forth in 
Rule 9231(b)(1)(A) through [(D)](E) or, if applicable, in Rule 
9231(c), who are located in the same geographic area as the Primary 
District Committee, and, if applicable, from the current or former 
members of the Market Regulation Committee, based upon the following 
criteria:
    (1) through (4) No Change.
    (e) No Change.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA Rules 9231 and 9232 govern the appointment of a Hearing Panel 
or an Extended Hearing Panel and establish criteria for the selection 
of Panelists. The proposed rule change would amend FINRA Rule 9231 to 
add a category of persons eligible to serve as a Panelist on a Hearing 
Panel or an Extended Hearing Panel to include a person who currently 
serves or served previously on a committee appointed or approved by the 
FINRA Board. The proposed rule change would also make a conforming 
amendment to FINRA Rule 9232, which establishes criteria for the 
appointment of eligible Panelists to Hearing Panels and Extended 
Hearing Panels. The proposed rule change will provide FINRA with a 
larger pool of individuals that have adequate experience and expertise 
to serve as Panelists.
Background
    FINRA's disciplinary process begins with the Department of 
Enforcement or Department of Market Regulation filing a complaint with 
the Office of Hearing Officers that alleges a member or person 
associated with a member is violating or has violated any rule, 
regulation, or statutory provision, including the federal securities 
laws and related regulations.\3\ Thereafter, the Chief Hearing Officer 
assigns a Hearing Officer to preside over the disciplinary 
proceeding,\4\ and appoints Panelists to a Hearing Panel or, if 
applicable, an Extended Hearing Panel to conduct the disciplinary 
proceeding.\5\ Trial-level hearings take place before a Hearing Panel 
or an Extended Hearing Panel, which listens to the presentation of 
evidence and issues a written decision setting forth findings as to 
whether a respondent engaged in the alleged misconduct and describing 
the sanctions, if any, imposed.\6\ A Hearing Panel or an Extended 
Hearing Panel decision is generally appealable to, and subject to 
discretionary review by, the National Adjudicatory Council 
(``NAC'').\7\
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    \3\ See FINRA Rule 9211.
    \4\ See FINRA Rule 9213(a). A ``Hearing Officer'' is appointed 
by the Chief Hearing Officer to act in an adjudicative role and 
fulfill various adjudicative responsibilities in disciplinary and 
other proceedings. FINRA Rule 9120(r). The Hearing Officer exercises 
a key role in the disciplinary proceeding and, among other things, 
administers pre-hearing matters, including most motions, resolves 
procedural and evidentiary matters, oversees the settlement and 
discovery process, regulates the course of the proceeding, and 
drafts a decision that represents the view of the majority of the 
Hearing Panel or Extended Hearing Panel. See generally FINRA Rule 
9235. The proposed rule change would not alter the important role of 
professional Hearing Officers in disciplinary proceedings.
    \5\ FINRA Rules 9213(b), 9231(a). The Chief Hearing Officer 
appoints an Extended Hearing Panel if, upon consideration of the 
complexity of the issues involved, the probable length of the 
hearing, or other factors, the Chief Hearing Officer determines that 
a matter shall be an ``Extended Hearing.'' See FINRA Rules 9120(i), 
9231(c). Because of the demands on his or her time, the Chief 
Hearing officer is authorized to compensate a Panelist serving on an 
Extended Hearing Panel in accordance with the rates set for 
individuals who serve as arbitrators in the FINRA forum. See FINRA 
Rule 9231(c).
    \6\ See generally FINRA Rule 9260 Series.
    \7\ See FINRA Rule 9311.
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    Under FINRA Rule 9231, a Hearing Officer and two industry 
Panelists, who are either currently associated with FINRA member firms 
or retired therefrom, compose a Hearing Panel or an Extended Hearing 
Panel.\8\ The Chief Hearing Officer appoints Panelists from a pool of 
eligible persons that currently includes persons who: (1) Currently 
serve or previously served on a District Committee; \9\ (2) previously 
served on the NAC; (3) previously served on a disciplinary subcommittee 
of the NAC or its predecessor; (4) previously served as a Director or 
Governor, but do not currently serve in any of these positions; or (5) 
in limited cases, currently serve or previously served on the Market 
Regulation Committee.\10\
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    \8\ See FINRA Rule 9231(b) and (c).
    \9\ FINRA District Committees are called upon to apply their 
knowledge and expertise of issues facing the securities industry to 
support FINRA's investor protection mission, and they serve an 
important role in the regulatory process. District Committee members 
are elected by direct nomination based on firm size. See generally 
FINRA Regulation By-Laws, Article VIII.
    \10\ See FINRA Rule 9231(b) and (c).
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    Panelists are also the subject of certain selection criteria under 
FINRA Rule 9232. Among other things, the Chief Hearing Officer must 
designate a District Committee as the ``Primary District Committee'' 
based on the facts and circumstances of the case.\11\ After designating 
the Primary District Committee, the Chief Hearing Officer must select 
Panelists from the current members of the Primary District Committee, 
the other categories of persons eligible to serve as Panelists who are 
located in the same geographic area as the Primary District Committee, 
or current or former members of the Market Regulation Committee, based 
upon criteria that include their expertise, the absence of any conflict 
of interest or bias, availability, and the frequency with which a 
person has served as a Panelist during the previous two years.\12\
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    \11\ See FINRA Rules 9120(y), 9232(a) and (c).
    \12\ See FINRA Rule 9232(d). FINRA Rule 9232(e) provides the 
Chief Hearing Officer with the flexibility to select one or both 
Panelists from outside the area of the designated Primary District 
Committee where such Panelists more clearly meet the criteria set 
forth in the rules and the public interest or the administration of 
FINRA's regulatory and enforcement program would be enhanced by the 
selection of such Panelists.
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Proposal To Expand the Pool of Eligible Panelists
    FINRA places a high value on a fair, efficient, and expeditious 
disciplinary process. Although FINRA Rules 9231 and 9232 establish 
Panelist eligibility and selection criteria, service on a Hearing Panel 
or an Extended Hearing

[[Page 49551]]

Panel is voluntary. The pool of Panelists eligible under FINRA Rule 
9231 to serve on Hearing Panels and Extended Hearing Panels may appear 
large, but the Chief Hearing Officer, in practice, relies primarily 
upon the willingness of current and former District Committee members 
to serve as Panelists in disciplinary proceedings.\13\ These 
individuals, who are typically experienced, senior executives or 
managers of their respective firms, frequently do not possess the 
flexibility to devote significant time and attention away from their 
businesses to serve as Panelists, particularly as Panelists for those 
complex and lengthy matters that require the Chief Hearing Officer to 
appoint an Extended Hearing Panel to conduct the disciplinary 
proceeding.\14\ Even in those instances where a current or former 
member of a District Committee expresses a willingness to serve as a 
Panelist, geographic and other selection criteria under FINRA Rule 9232 
may impose additional limitations on serving.
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    \13\ For example, although former members of the NAC and former 
Directors and Governors are eligible to serve as Panelists under 
FINRA Rule 9231, they are subject to competing burdens on their time 
as they are also eligible to serve on the subcommittees of the NAC 
that hear appeals from Hearing Panel and Extended Hearing Panel 
decisions. See FINRA Rule 9331(a)(1). The number of disciplinary 
matters that require Panelists from the pool of current or past 
members of the Market Regulation Committee is small.
    \14\ Finding Panelists willing to serve on Extended Hearing 
Panels, which are commonly appointed in cases where the hearing is 
expected to last longer than four days and may last weeks, presents 
particular challenges for the Chief Hearing Officer. FINRA has 
experienced an increase in the complexity and length of some 
disciplinary matters, resulting in a rise in the number of 
proceedings requiring the service of Extended Hearing Panels.
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    To ensure that the Chief Hearing Officer is able to quickly and 
efficiently assign disciplinary matters so that they may be scheduled 
for a hearing and resolution, FINRA proposes to amend FINRA Rule 9231 
to expand the pool of persons eligible to serve as Panelists. The 
proposed rule change would add one category of persons eligible to 
serve on a Hearing Panel or an Extended Hearing Panel for a 
disciplinary proceeding.\15\ This additional category includes a person 
who currently serves or previously served on a committee appointed or 
approved by the FINRA Board that is not currently a member of the NAC 
or a Director or Governor.\16\
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    \15\ By extension, the proposed rule change would also expand 
the pool of persons eligible to serve as Panelists on Hearing Panels 
for some expedited proceedings under the FINRA Rule 9550 Series. See 
FINRA Rule 9559(d)(2) (referencing FINRA Rules 9231 and 9232 for 
panelists qualifications for serving on certain expedited 
proceedings).
    \16\ The proposed rule change does not change the stipulation 
under FINRA Rule 9231(b) that Panelists be associated with a member 
of FINRA or retired therefrom.
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    In effect, the proposed rule change enlarges the number of FINRA 
committees from which experienced and expert Panelists could be drawn 
to encompass industry members that serve, or have served, on the FINRA 
Advisory Committees, including, for example, the Compliance Advisory 
Committee, Corporate Financing Committee, Financial Responsibility 
Committee, Fixed Income Committee, Investment Dealer/Insurance 
Affiliate Committee, and Membership Committee.\17\ Members of the FINRA 
Advisory Committees, like members of the District Committees, are 
typically experienced, senior executives and managers of their 
respective firms. They provide input, advice, and recommendations to 
FINRA about best practices, regulatory initiatives, rules and policies 
concerning broker-dealer activities, compliance programs, and 
regulatory issues.
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    \17\ A complete list of the FINRA Advisory Committees, and a 
description of their roles and the advice they provide to FINRA, are 
detailed at: http://www.finra.org/AboutFINRA/Leadership/Committees/p197363.
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    Although the proposed rule change would make a conforming amendment 
to FINRA Rule 9232 to reflect the additional category of eligible 
Panelists under proposed FINRA Rule 9231, it would not alter the 
criteria currently contained within FINRA Rule 9232 for the selection 
of Panelists. The proposed rule change would not alter the Office of 
Hearing Officers' careful approach to identifying and preventing 
conflicts of interest or bias in each hearing. Panelists would remain 
subject to FINRA Rule 9234, which requires that a Panelist notify the 
Hearing Officer and withdraw from any matter where the Panelist 
possesses a conflict of interest or bias, or where circumstances 
otherwise exist where his fairness might reasonably be questioned.\18\ 
To achieve the goals of this rule, the Office of Hearing Officers 
requires Panelists to acknowledge they are free of conflicts of 
interest and bias in each disciplinary proceeding for which they are 
selected, after considering, among other things, the parties, issues, 
and lawyers involved in the matter under consideration.
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    \18\ See FINRA Rule 9234(a).
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    The effective date of the proposed rule change will be the date of 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(8) of the Act,\19\ which requires, among 
other things, that FINRA rules provide a fair procedure for the 
disciplining of members and persons associated with members. FINRA 
believes that the proposed rule change, consistent with this purpose of 
the Act, assures that complaints filed with the Officer of Hearing 
Officers will continue to be heard and resolved in a timely manner by 
Panelists with the expertise, experience, and perspective necessary to 
render a fair and informed judgment and, where necessary, to impose 
appropriately remedial sanctions. The proposed rule change will afford 
the Chief Hearing Officer additional flexibility to appoint Extended 
Hearing Panels that are composed of Panelists capable of responding to 
the complex issues and time demands that are associated with Extended 
Hearings. Furthermore, the proposed rule change will reduce the burden 
on the current and former members of the District Committees that 
currently hear cases. By expanding the pool of eligible Panelists, the 
frequency with which past and present District Committee members are 
called upon to serve on disciplinary panels should decrease. It will 
also help ensure that the Chief Hearing Officer has at her disposal 
Panelists that are more readily available to serve and are capable of 
doing so without real or perceived conflicts of interest or biases that 
could delay the appointment of a Hearing Panel or an Extended Hearing 
Panel and the resolution of individual matters.
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    \19\ 15 U.S.C. 78o-3(b)(8).
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    FINRA also believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act,\20\ 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. FINRA believes that adding qualified 
persons to the pool of eligible Panelists will enhance the 
dispassionate application of the federal securities laws and FINRA 
rules in disciplinary proceedings, promote high business standards for 
FINRA members, and allow for the prompt adjudication of allegations of 
misconduct by FINRA members and their associated persons. It is in the 
public interest, and consistent with the Act's purpose, that FINRA 
disciplinary proceedings be timely resolved and that well-timed 
sanctions be imposed where necessary to redress customer harm and deter 
future misconduct.
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    \20\ 15 U.S.C. 78o-3(b)(6).

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[[Page 49552]]

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. The proposed rule change is 
intended solely to enhance the administration of FINRA's process for 
the disciplining of members and persons associated with members. FINRA 
believes the proposed rule change will allow the Chief Hearing Officer 
flexibility to appoint Panelists and thereby maintain the timely 
progress of cases to a hearing. FINRA does not believe that the 
proposed rule change will have any negative effect on members or impose 
any new costs.

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 email to [email protected]. Please include 
File Number SR-FINRA-2014-036 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-FINRA-2014-036. 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 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-2014-036 and should be 
submitted on or before September 11, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19807 Filed 8-20-14; 8:45 am]
BILLING CODE 8011-01-P