[Federal Register Volume 81, Number 220 (Tuesday, November 15, 2016)]
[Notices]
[Pages 80140-80146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27364]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79259; File No. SR-NASDAQ-2016-148]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Cease and Desist Authority Rules

November 8, 2016.
    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 October 27, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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

    The Exchange proposes to adopt Rules 9556 and 9800, which were 
previously adopted as a pilot the term of which has since expired, and 
to make related changes to the 9100, 9200, 9300, 9550, and 9800 Rule 
Series.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 Exchange 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
    The Exchange is proposing to adopt new Rules 9556 and 9800, which 
were previously adopted as a pilot the term of which has since expired, 
and to make related changes to the 9100, 9200, 9300, 9550, and 9800 
Rule Series. In May 2003, the Commission approved, on a pilot basis, a 
rule change to adopt NASD Rules 9556 and 9800 that gave NASD, now known 
as FINRA, authority to issue temporary cease and desist orders and made 
explicit NASD's ability to impose permanent cease and desist orders as 
a remedy in disciplinary cases.\3\ Because NASD was, and now FINRA is, 
the Exchange's regulatory services provider and administers the 
Exchange's disciplinary program under contract, the Exchange seeks to 
maintain comparability between its disciplinary procedure rules and 
those of NASD and now FINRA. As a consequence, the Exchange adopted 
Rules 9556 and 9800 to mirror the then-NASD rules to operate as a pilot 
in conjunction with the related NASD pilot.\4\
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    \3\ See Securities Exchange Act Release No. 47925 (May 23, 2003) 
(File No. SR-NASD-98-80), 68 FR 33548 (June 4, 2003). See also 
Securities Exchange Act Release No. 51860 (June 16, 2005), 70 FR 
36427 (June 23, 2005) (SR-NASD-2005-061) (extending the pilot to 
June 23, 2007 and making non-substantive changes); and Securities 
Exchange Act Release No. 55819 (May 25, 2007), 72 FR 30895 (June 4, 
2007) (SR-NASD-2007-033) (extending the pilot to June 23, 2009 and 
making non-substantive changes).
    \4\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006). See also Securities Exchange 
Act Release No. 56120 (July 24, 2007), 72 FR 41561 (July 30, 2007) 
(SR-NASDAQ-2007-060) (extending the pilot to June 23, 2009 and 
making conforming changes); and Securities Exchange Act Release No. 
58069 (June 30, 2008), 73 FR 39360 (July 9, 2008) (SR-NASDAQ-2008-
054) (making non-substantive changes).
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    On June 23, 2009, the Exchange's Rule 9556 and 9800 pilot programs 
expired, at which time those rules and certain references thereto 
became obsolete, notwithstanding that they remained in the rulebook. 
The FINRA pilot program, however, continued and was approved on July 
14, 2009 on a permanent basis.\5\
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    \5\ Securities Exchange Act Release No. 60306 (July 14, 2009), 
74 FR 36292 (July 22, 2009) (SR-FINRA-2009-035). The Exchange notes 
that FINRA, in its rule change proposal to make its pilot program 
permanent, noted that it had used the authority under Rules 9556 and 
9800 sparingly. Id. at 36293.
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    Neither the Exchange nor FINRA, acting on behalf of the Exchange 
pursuant to agreement, have [sic] used the cease and desist authority 
under Rules 9556 and 9800 during the time that the rules were 
effective. Nonetheless, the Exchange believes that, in addition to 
maintaining similar disciplinary rules, adoption of Rules 9556 and 9800 
is important to the Exchange's disciplinary program. The authority 
under these rules will provide the Exchange and FINRA, operating on 
behalf of the Exchange, with a mechanism to take appropriate remedial 
action against a member or an associated person that has engaged (or is 
engaging) in violative conduct that could cause continuing harm to the 
investing public if not addressed expeditiously, such as dissipation or 
conversion of assets. It must be emphasized, however, that the cease 
and desist provisions contain numerous procedural protections for 
respondents to ensure that the proceedings are fair. Consequently, the 
Exchange believes that adoption of these rules is important to its 
regulatory program, notwithstanding that it anticipates exercising the 
authority provided by the rules sparingly.
    The Exchange is proposing to delete Rules 9556 and 9800 (and 
related references in other rules \6\) because the pilot period for 
these rules has expired rendering them void, and adopt new

[[Page 80141]]

Rules 9556 and 9800 (and related references in other rules) \7\ based 
on FINRA's analogous cease and desist rules, which include amendments 
to the former Nasdaq cease and desist rules to reflect changes that 
FINRA has made to its cease and desist rules in 2011 and 2015 after 
they were made permanent.\8\ The Exchange is also proposing to amend 
other Rules under the 9000 Series to incorporate changes that FINRA 
made to its analogous rules in 2015, as discussed below. These proposed 
changes include significant amendments made by FINRA to not only its 
Rules 9556 and 9800, but also to its 9100, 9200, 9300, 9550, and 9800 
Rule Series in 2015. Unless otherwise noted, Nasdaq is adopting the 
FINRA Rules with only minor changes to reflect the Exchange's committee 
structure and rules,\9\ as described below.
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    \6\ The Exchange is deleting text from related provisions of 
Rules 8310, IM-8310-3(c)(1), 9120(r), 9241(c), 9290, 9311(b), 
9312(b), and 9360 that also expired on June 23, 2009 and is 
inserting new text identical to what was deleted.
    \7\ As a consequence of the expiration of the pilot rendering 
the existing related rule text void, in certain cases the Exchange 
is deleting the void text and reinserting identical rule text 
thereafter so the text may have effect once again. For example, the 
Exchange is deleting Rule 8310(a)(6), concerning imposition of a 
temporary or permanent cease and desist order, and adopting a new 
Rule 8310(a)(6) identical to what was deleted.
    \8\ In 2013, FINRA consolidated the publication standards for 
expedited proceeding decisions, including under FINRA Rule 9556, in 
FINRA Rule 8313(a)(3) and consequently amended FINRA Rule 9556 to 
remove paragraph (h) ``Notice to Membership'' from the rule. See 
Securities Exchange Act Release No. 69825 (June 21, 2013), 78 FR 
38771 (June 27, 2013) (SR-FINRA-2013-018). The Exchange did not have 
such a provision in its Rule 9556. The Exchange's disclosure 
obligations are provided under IM-8310-3, including the Exchange's 
disclosure obligations related to expedited proceedings. See IM-
8310-3(c).
    \9\ The Exchange is replacing references to FINRA and FINRA 
staff with references to Nasdaq and Nasdaq staff, which are the 
appropriate analogous parties at Nasdaq. The Exchange is also 
replacing FINRA text that states ``Chief Executive Officer or such 
other senior officer as the Chief Executive Officer may designate'' 
with ``Chief Regulatory Officer,'' which is the Exchange officer 
vested with the authority described under the rules. For example, 
old Rules 9556(a) and 9860 vested authority with the Chief 
Regulatory Officer to authorize notice and initiation of 
proceedings, respectively, whereas the analogous FINRA rules 
authorize its Chief Executive Officer or such other senior officer 
as the Chief Executive Officer may designate instead. Last, the 
Exchange is adding clarifying language to Rule 9810 to make it clear 
that initiation of a proceeding must not only be authorized by 
FINRA's Chief Executive Officer or such other senior officer as the 
Chief Executive Officer may designate, but also Nasdaq's Chief 
Regulatory Officer. As a practical matter, the Chief Regulatory 
Officer must agree that such a proceeding should be brought pursuant 
to Nasdaq rules.
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2011 FINRA Rule Changes
    In 2011, FINRA amended Rules 9552(b), 9553(b), 9554(b), 9555(b), 
and 9556(b), all of which concern service of notice.\10\ Each of these 
rules concern [sic] the process followed when a person or entity 
subject to FINRA's jurisdiction fail [sic] to comply with various 
requirements under its rules. FINRA amended the rule provisions noted 
above to allow notice of failure to comply with a temporary or 
permanent cease and desist order to be served on counsel representing 
the member or person, or other person authorized to represent others 
under FINRA Rule 9141,\11\ when counsel or other person authorized to 
represent others under FINRA Rule 9141 agrees to accept service for the 
member or person.
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    \10\ Securities Exchange Act Release No. 60306 (January 4, 
2012), 77 FR 1524 (January 10, 2012) (SR-FINRA-2011-044). FINRA also 
amended other rules in the FINRA Rule 9000 Series not addressed in 
this filing. Id.
    \11\ FINRA Rule 9141, entitled ``Appearance and Practice; Notice 
of Appearance,'' provides, among other things, what is permissible 
in terms of representation before an Adjudicator. Exchange Rule 9141 
is consistent with FINRA Rule 9141.
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2015 FINRA Rule Changes
    In 2015, FINRA made significant changes to its temporary and 
permanent cease and desist rules.\12\ FINRA lowered the evidentiary 
standard to obtain a temporary cease and desist order, adopted a new 
expedited proceedings [sic] to address situations involving repeated 
violations of temporary or permanent cease and desist orders, and made 
a series of rule amendments to the temporary cease and desist order 
rules under FINRA Rule Series 9800, the expedited proceedings rules 
under FINRA Rule Series 9550,\13\ and FINRA's Code of Procedure (FINRA 
Rule Series 9000) that harmonize service provisions in temporary cease 
and desist proceedings and expedited proceedings, ease administrative 
burdens in temporary cease and desist proceedings, and clarify the 
process by which permanent cease and desist orders may be imposed.
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    \12\ Securities Exchange Act Release No. 75629 (August 6, 2015), 
80 FR 48379 (August 12, 2015) (SR-FINRA-2015-019).
    \13\ FINRA amended its Rule 9551 ``Failure to Comply with Public 
Communications Standards.'' Nasdaq does not have such a rule (Nasdaq 
Rule 9551 is held in reserve) and is thus not incorporating those 
changes. In a related change, the Exchange is also amending its Rule 
9559 to delete the references to Rule 9551, which were erroneously 
included in the rule.
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(i) Evidentiary Standard for Imposing a Temporary Cease and Desist 
Order
    FINRA amended FINRA Rule 9840(a)(1) to change the evidentiary 
standard applied by Hearing Panels in issuing a temporary cease and 
desist order. Specifically, FINRA changed the standard for issuing a 
temporary cease and desist order from ``by a preponderance of the 
evidence that the alleged violation specified in the notice has 
occurred'' to a ``showing of a likelihood of success on the merits.'' 
FINRA noted that it believed that the ``preponderance of the evidence'' 
standard set too high an evidentiary threshold for this critical 
investor-protection tool, and noted that it is the identical standard 
for proving a violation in the underlying disciplinary proceeding that 
must be pursued at the same time.\14\ Thus, to obtain a temporary cease 
and desist order--and thereby prevent the likely and significant 
dissipation or conversion of assets or other significant harm to 
investors--FINRA's prosecuting department had to make an evidentiary 
presentation in the temporary cease and desist proceeding that is 
similar in extent to its evidentiary presentation in the subsequent 
underlying disciplinary proceeding, but in an expedited manner.
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    \14\ See Securities Exchange Act Release No. 75333 (June 30, 
2015), 80 FR 38783 (July 7, 2015) (Notice of Filing File No. SR-
FINRA-2015-019) at 38784.
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    FINRA also made a corresponding amendment to FINRA Rule 9840(a)(2). 
Prior to the amendment, FINRA Rule 9840(a)(2) provided that a temporary 
cease and desist order shall be imposed if the Hearing Panel finds that 
the violative conduct or continuation thereof is likely to result in 
significant dissipation or conversion of assets or other significant 
harm to investors prior to the completion of the underlying proceeding. 
The 2015 rule change modified this requirement to apply to the 
``alleged'' violative conduct or continuation thereof, to be consistent 
with the proposed change to the evidentiary standard.
(ii) Failures To Comply With Temporary Cease and Desist Orders and 
Permanent Cease and Desist Orders (FINRA Rule 9556)
    FINRA also made amendments to FINRA Rule 9556, which sets forth 
expedited procedures for enforcing violations of FINRA-issued temporary 
and permanent cease and desist orders. FINRA was concerned that their 
[sic] existing expedited procedures may permit cease and desist orders 
to be circumvented without any real threat of a sanction.\15\ Thus, 
FINRA amended FINRA Rule 9556 to adopt a new paragraph (h) to permit 
its staff (with prior authorization from FINRA's Chief Executive 
Officer or other designated senior officer) to institute a new kind of 
expedited proceeding if the subject of a temporary or permanent cease 
and desist order fails to comply with that order and has previously 
been served with a notice under Rule 9556(a) for

[[Page 80142]]

failure to comply with any provision of the same temporary or permanent 
cease and desist order. FINRA adopted the change to prevent a 
respondent from abusing the existing process by repeatedly violating a 
cease and desist order and curing that violation before the effective 
date of any FINRA Rule 9556 notice,\16\ without being subject to the 
immediate sanctions or review by the Office of Hearing Officers for a 
prolonged period. FINRA noted in its filing that the new FINRA Rule 
9556(h) proceeding differs from other FINRA Rule 9556 expedited 
proceedings in other respects that reflect the response that FINRA 
believes is warranted for situations involving repeated violations of 
temporary or permanent cease and desist orders.\17\ These differences 
include the following:
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    \15\ Id. at 38785.
    \16\ Under the then-current FINRA Rule 9556, if a member or 
person failed to comply with a temporary or permanent cease and 
desist order, FINRA staff (with prior authorization from FINRA's 
Chief Executive Officer or other designated senior officer) may have 
issued a notice stating that the failure to comply within seven days 
will result in a suspension or cancellation of membership or a 
suspension or bar from associating with any member and also would 
have stated what the respondent must do to avoid such action.
    \17\ See supra note 14 at 38785.
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     a FINRA Rule 9556(h) proceeding could be initiated only if 
the respondent has previously been served, under FINRA Rule 9556(a), 
with a notice for failing to comply with any provision of the same 
temporary or permanent cease and desist order;
     FINRA's prosecuting department would initiate a FINRA Rule 
9556(h) proceeding by filing a petition with FINRA's Office of Hearing 
Officers (and serving the respondent) that seeks the imposition of 
sanctions for the violation (rather than issuing a notice to the 
respondent);
     FINRA's prosecuting department would seek the imposition 
of any fitting sanction at the outset of the FINRA Rule 9556(h) 
proceeding (in contrast to other FINRA Rule 9556 expedited proceedings, 
where the recipient of a notice is not subject to the imposition of any 
fitting sanction unless such recipient opts for a hearing);
     a hearing is required in a FINRA Rule 9556(h) proceeding;
     the hearing for a FINRA Rule 9556(h) proceeding must be 
held in a condensed time frame (ten business days after a respondent is 
served the petition, versus other Rule 9556 proceedings which require a 
respondent to request a hearing within seven business days after 
service of a notice instituting a proceeding and require hearings to be 
held within 14 days after a request for a hearing is filed); \18\
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    \18\ See FINRA Rule 9559(f)(2) and (3); FINRA Rule 9556(e).
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     a FINRA Rule 9556(h) proceeding is presided over by a 
Hearing Officer,\19\ rather than a Hearing Panel; \20\ and
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    \19\ As defined by FINRA Rule 9120(r).
    \20\ As defined by FINRA Rule 9120(s). See FINRA Rule 9559(d)(1) 
and (2) for a description of the appointment and authority [sic] of 
a Hearing Officer and/or Hearing Panel in expedited proceedings.
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     the Hearing Officer may issue default decisions in FINRA 
Rule 9556(h) proceedings.\21\
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    \21\ See FINRA Rule 9559(m)(2).
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    Under amended FINRA Rule 9556(h)(4), the FINRA department that 
filed the petition can withdraw it without prejudice and shall be 
permitted to refile a petition based on allegations concerning the same 
facts and circumstances that are set forth in the withdrawn petition. 
FINRA noted that this provision provides it the flexibility to withdraw 
the petition where, for instance, the respondent evidences a good faith 
intent to comply with the temporary or permanent cease and desist order 
without the need to adjudicate the petition, while preserving FINRA's 
right to refile the petition if the respondent fails to do so.\22\
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    \22\ See supra note 14 at 38785.
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(iii) Service Provisions in Temporary Cease and Desist Proceedings and 
Expedited Proceedings
    FINRA also made the rules that govern service of documents in 
temporary cease and desist proceedings and the eight different types of 
expedited proceedings under the Rule 9550 Series more consistent.\23\ 
Prior to the changes, some provisions of these rules explicitly 
addressed service by facsimile and on counsel, while some did not. 
FINRA's amendments explicitly allow service by facsimile and on counsel 
across all temporary cease and desist and expedited proceedings, noting 
that doing so removed unnecessary burdens and inefficiencies. FINRA 
also amended its rules to permit service by email for all temporary 
cease and desist proceedings and expedited proceedings. FINRA noted 
that email service would allow parties to receive information quickly, 
which is particularly important in these types of proceedings, 
considering the short time frames involved.\24\ As part of the changes 
allowing service by email, FINRA also now requires duplicate service 
through some other means such as overnight courier or personal delivery 
and made changes to its Rule 9550 Series to reflect this requirement.
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    \23\ The Exchange notes that in SR-FINRA-2015-019 FINRA replaced 
references to ``contact questionnaires'' with reference to the 
``FINRA Contact System,'' FINRA's proprietary system that 
facilitates member firm reporting of key contacts to FINRA. Exchange 
members are required to use the FINRA Contact System to report to 
Nasdaq all contact information required by Nasdaq and update its 
required contact information promptly. See Rule 1160. Under the 
FINRA Rule 9550 Series, the rules cite Article 4, Section III of the 
FINRA By-Laws as the authority pursuant to which its members have an 
obligation to report required contact information to it via the 
FINRA Contact System, whereas the Exchange's authority is pursuant 
to Rule 1160, as noted above. Thus, the Exchange is instead 
referencing Rule 1160 in the Rule 9550 Series as the authority 
pursuant to which members have the reporting obligation.
    \24\ See supra note 14 at 38785-6.
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(iv) Clarifying FINRA's Authority to Impose Permanent Cease and Desist 
Orders
    FINRA clarified its rules concerning the process for imposing 
permanent cease and desist orders in disciplinary proceedings. FINRA 
noted that when it obtained the authority to impose temporary cease and 
desist orders, it also obtained the authority to impose permanent cease 
and desist orders.\25\ Thus, the clarifying changes were procedural in 
nature and did not reflect any change to FINRA's prior representations 
concerning the context in which it would seek permanent cease and 
desist orders.
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    \25\ See supra note 14 at 38786.
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(v) Administrative Changes to Temporary Cease and Desist Proceedings
    FINRA also expanded the pool of persons eligible to serve on 
hearing panels to include those who may serve on hearing panels for 
disciplinary matters, as provided under FINRA Rules 9231(b) and 
9559(d)(2).\26\ Specifically, FINRA amended its Rule 9820 to provide 
that the potential panelists for the Hearing Panels that preside over 
temporary cease and desist proceedings to [sic] include persons who 
currently serve or previously served on a District Committee; \27\ 
previously served on the

[[Page 80143]]

National Adjudicatory Council; \28\ previously served on a disciplinary 
subcommittee of the National Adjudicatory Council or the National 
Business Conduct Committee; \29\ previously served as a member of the 
Board of Directors of FINRA Regulation or of the Board of Governors of 
FINRA; or currently serve or previously served on a committee appointed 
or approved by the Board of Governors of FINRA, but do not serve 
currently on the National Adjudicatory Council or as a member of the 
Board of Directors of FINRA Regulation or of the Board of Governors of 
FINRA. The amendment to FINRA Rule 9820 also required that each 
panelist be associated with a member of FINRA or retired therefrom. 
FINRA noted that, while its Office of Hearing Officers has presided 
over only a limited number of temporary cease and desist proceedings, 
those experiences have revealed that the narrowly circumscribed set of 
potential panelists can impede the recruitment of Hearing Panel 
members, especially considering that the expedited nature of temporary 
cease and desist proceedings will already preclude many from being able 
to serve.\30\ FINRA also noted that it had concerns that the small pool 
of potential panelists will often make it difficult to recruit hearing 
panelists who can serve on both the temporary cease and desist 
proceeding and the subsequent underlying disciplinary proceeding, as 
well as any related expedited proceeding under FINRA Rule 9556.\31\
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    \26\ FINRA harmonized the categories of individuals eligible for 
appointment as a Hearing Panelist under FINRA Rule 9820 with FINRA 
Rule 9231(b) (providing that each panelist shall be associated with 
a member of FINRA or retired therefrom and that the pool of 
panelists for disciplinary proceedings includes current or previous 
members of District Committees, former members of the National 
Adjudicatory Council, past members of disciplinary subcommittees of 
the National Adjudicatory Council or the National Business Conduct 
Committee, past members of the Board of Directors of FINRA 
Regulation or past members of the Board of Governors of FINRA, and 
current or previous members of committees appointed or approved by 
the Board of Governors of FINRA); FINRA Rule 9559(d)(2) (providing 
for the same pool for FINRA Rule 9556 expedited proceedings).
    \27\ As defined by FINRA Rule 9120(g).
    \28\ See By-Laws of FINRA Regulation, Inc., Article V National 
Adjudicatory Council.
    \29\ The predecessor to the FINRA National Adjudicatory Council.
    \30\ See supra note 14 at 38786.
    \31\ Id.
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    The Exchange is proposing to, likewise, expand the categories of 
individuals eligible to participate as Hearing Panelists. Like FINRA, 
the Exchange is harmonizing the categories of eligible individuals with 
the criteria under Rules 9231(b) and 9559(d)(2).\32\ Thus, the Exchange 
is allowing the Chief Hearing Officer to select as a Panelist pursuant 
to proposed Rule 9820(a) a person who: Previously served on the 
Nasdaq's Review Council; \33\ previously served on a disciplinary 
subcommittee of the Nasdaq Review Council, including a Subcommittee, an 
Extended Proceeding Committee,\34\ or their predecessor subcommittees; 
previously served as a Director, but does not serve currently in that 
position; served on the FINRA National Adjudicatory Council or on a 
disciplinary subcommittee of the FINRA National Adjudicatory Council 
prior to the date that Nasdaq commenced operating as a national 
securities exchange; or is a FINRA Panelist approved by the Nasdaq 
Board at least annually, or is drawn from other sources the Board deems 
appropriate given the responsibilities of Panelists.
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    \32\ Like FINRA's Rule 9559(d)(2), Rule 9559(d)(2) provides for 
the same pool for Rule 9556 expedited proceedings) [sic]. Supra note 
26.
    \33\ See By-Laws of The Nasdaq Stock Market LLC, Article VI, 
Nasdaq Review Council.
    \34\ As defined by Rule 9120(n).
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    FINRA's proposed changes also eased other administrative burdens 
created by the shortened time frame of a temporary cease and desist 
proceeding. Those proposed changes were aimed at improving Hearing 
Panels' and parties' ability to prepare for hearings and giving Hearing 
Officers some needed flexibility. For example, under FINRA Rule 9830(a) 
prior to the 2015 amendments a Hearing Officer was not able to extend a 
hearing date in a temporary cease and desist proceeding unless all 
parties consented to the extension. The requirement to obtain the 
parties' consent was problematic in instances whereby the Office of 
Hearing Officers, rather than one of the parties, had a need for an 
extension, such as when it encounters difficulty in quickly appointing 
a Hearing Panel. To address this problem, FINRA amended its Rule 
9830(a) to allow hearing deadlines to be extended by the Chief Hearing 
Officer or Deputy Chief Hearing Officer for good cause shown.
    FINRA also made similar amendments to the process by which 
extensions are obtained to the deadlines for issuing decisions in 
temporary cease and desist proceedings and responding to requests to 
modify, set aside, limit, or suspend a temporary cease and desist 
order. Before the amendments to FINRA Rule 9840(a), the Hearing Panel's 
deadline for issuing its written decision could not be extended, even 
where there was good cause, without the consent of the parties. 
Likewise, prior to amending FINRA Rule 9850, a Hearing Panel's deadline 
for responding to an application to have a temporary cease and desist 
order modified, set aside, limited, or suspended could not be extended, 
even where there was a good cause, without the consent of the Parties. 
To allow a Hearing Panel some flexibility where there is a need for 
additional time to prepare its decision or respond to a FINRA Rule 9850 
request (e.g., when a member of the Hearing Panel becomes ill, where 
the temporary cease and desist proceeding is highly complex), FINRA 
amended FINRA Rules 9840(a) and 9850 to permit the deadlines for 
issuing decisions and responding to FINRA Rule 9850 applications to be 
extended by the Chief Hearing Officer or Deputy Chief Hearing Officer 
for good cause shown.
    To further address the burdens created by the short time frame of 
temporary cease and desist proceedings, FINRA amended its rules to: (i) 
Require FINRA's prosecuting department to file a memorandum of points 
and authorities with the notice initiating a temporary cease and desist 
proceeding; and (ii) permit the Hearing Officer to order a party to 
furnish to all other parties and the Hearing Panel such information as 
deemed appropriate, including any or all of the pre-hearing submissions 
described in FINRA Rule 9242(a). FINRA noted that requiring its 
prosecuting department to file a memorandum of points and authorities 
at the initiation of the proceeding provides more context to the 
allegations and set [sic] forth legal authorities on which the notice 
seeking a temporary cease and desist order is premised.\35\ FINRA 
believed that the change would, in turn, facilitate a more efficient 
process and improve the quality of the hearing through more thorough 
preparation, which are the same goals of the pre-hearing processes in 
FINRA disciplinary proceedings. FINRA also noted that requiring the 
filing of a memorandum of points and authorities at the initiation of a 
temporary cease and desist proceeding also enhances disclosure of the 
prosecuting department's allegations, which would inure to the benefit 
of the respondents and further increases the fairness of the 
proceeding.\36\ Last, FINRA noted that all of these objectives are 
served by authorizing Hearing Officers to order a party to furnish 
other pre-hearing submissions.\37\
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    \35\ See supra note 14 at 38787.
    \36\ Id.
    \37\ Id.
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    FINRA also proposed Rule 9840(e), which is a delivery requirement 
that requires a member firm that is the subject of a temporary cease 
and desist order to provide a copy of the order to its associated 
persons, within one business day of receiving it. Considering the 
significant nature of the harm that a temporary cease and desist order 
is aimed at stopping, FINRA believed that there is a heightened need to 
ensure that the persons who may act on behalf of the member firm are 
made aware of the contents of a temporary cease and desist order 
imposed against the member firm and the delivery requirement furthers 
that goal.\38\
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    \38\ Similarly, FINRA made related amendments to FINRA Rules 
9269, 9270, and 9840 to require that the Office of Hearing Officers, 
the Department of Enforcement, the Department of Market Regulation, 
or the General Counsel, as appropriate, disseminate default 
decisions, orders of acceptance of settlement, and temporary cease 
and desist orders to each member of FINRA with which a respondent is 
associated. FINRA noted that these dissemination requirements are 
intended to ensure that a respondent's member firm is made aware of 
the disciplinary history of its associated persons, regardless of 
the specific disciplinary procedure involved. See supra note 14 at 
38787, n. 15. FINRA also noted that the amendments are consistent 
with other FINRA Rules that already require the Office of Hearing 
Officers, the National Adjudicatory Council, or the Board of 
Governors of FINRA to provide copies of a decision issued by a 
Hearing Panel, an Extended Hearing Panel, the National Adjudicatory 
Council, or the Board of Governors of FINRA to each member firm with 
which a respondent is associated. Id.; see also FINRA Rules 9268(d), 
9349(c), 9351(e). The Exchange is adopting these amendments to Rules 
9269, 9270, and 9840.

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[[Page 80144]]

    FINRA's rule change clarified the following additional three 
issues: (1) How settlements may be approved in temporary cease and 
desist proceedings; (2) which Hearing Panel has jurisdiction to preside 
over applications filed under FINRA Rule 9850 to modify, set aside, 
limit or suspend temporary cease and desist orders that are filed after 
a Hearing Panel has already been appointed in the underlying 
disciplinary proceeding; and (3) whether temporary and permanent cease 
and desist orders imposed against a firm also apply to successors of 
that firm.
    With respect to the first issue, new FINRA Rule 9810(c) established 
that, if the parties agree to the terms of a proposed temporary cease 
and desist order, the Hearing Officer has the authority to approve and 
issue the order. On the second issue, amended FINRA Rule 9850 provided 
that the Hearing Panel that presided over the temporary cease and 
desist order proceeding shall retain jurisdiction to review a FINRA 
Rule 9850 application unless at the time the application is filed a 
Hearing Panel has already been appointed in the underlying disciplinary 
proceeding commenced under FINRA Rule 9211, in which case the Hearing 
Panel appointed in the disciplinary proceeding has jurisdiction. As to 
the third issue, amended FINRA Rule 9840(b) and new Rule 9291(a) 
established that when a temporary or permanent cease and desist order 
is imposed against a member firm, it also applies to any successor of 
the member firm.
    Finally, FINRA amended certain provisions of FINRA Rule 9120. FINRA 
amended FINRA Rule 9120(s), ``Hearing Panel,'' to include an 
Adjudicator that is constituted under Rule 9231 to conduct a 
disciplinary proceeding governed by the Rule 9800 Series. The Exchange 
is adopting this amendment in its Rule 9120(s).
    FINRA also amended FINRA Rule 9120(t), ``Interested Staff,'' to: 
(1) Insert ``or petition'' under paragraph (2)(A) of the rule, thus 
expanding the definition to include FINRA staff that filed a petition 
in a proceeding under the Rule 9520 Series or Rule 9550 Series; and (2) 
include a new paragraph (4) to list FINRA staff that are defined as 
Interested Staff in a proceeding under the FINRA Rule 9800 Series. The 
Exchange is also adopting the amendment to its Rule 9120(t) 
``Interested Staff,'' but is expanding the definition to also include 
Nasdaq Regulation employees who directly participated in the 
authorization of the notice that initiates a temporary cease and desist 
proceeding, or directly participated in an examination, investigation, 
prosecution, or litigation related to a specific temporary cease and 
desist proceeding, under new paragraphs (t)(4)(C) and (D) of the rule.
    FINRA also amended FINRA Rule 9120(w), ``Panelists,'' to include 
references to Panelists in the Rule 9550 Series, and the Rule 9800 
Series within the definition provided by the rule. The Exchange is 
adopting this amendment in Rule 9120(z). FINRA also amended Rule 
9120(z) ``Respondent'' to define a Respondent in a proceeding governed 
by the Rule 9800 Series to mean a FINRA member or associated person 
that has been served a notice initiating a cease and desist proceeding. 
The Exchange is adopting this amendment in Rule 9120(bb) 
``Respondent.''
    The Exchange believes that the changes made by FINRA in 2011 and 
2015, as described above, improve the cease and desist authority as 
well as the service provisions. Consequently, the Exchange is proposing 
to adopt the changes, as described above, as its own.
Other Non-Substantive Changes
    The Exchange is also proposing to make other non-substantive 
changes to its rules to correct misuse of the word ``FINRA,'' which 
were introduced erroneously when the Exchange adopted the rules. 
Specifically, the Exchange is proposing to amend Rule 9555(g) to remove 
reference to FINRA and replace it with reference to Nasdaq to make 
clear that it is Nasdaq's departments that should be contacted. The 
Exchange is also replacing references to FINRA's rules under new Rule 
9810 with references to analogous rules of Nasdaq. Specifically, Nasdaq 
is replacing reference to FINRA Rule 2010 with reference to Nasdaq Rule 
2010A, reference to FINRA Rule 2020 with reference to Nasdaq Rule 2120, 
and FINRA Rule 4330 with reference to Nasdaq Rule 2150.\39\ The 
Exchange is also replacing the word ``FINRA'' with ``Nasdaq'' in 
adopting Rule 9840(d) to make it clear that the rule applies to Nasdaq 
members. The Exchange is proposing not to include the word ``FINRA'' 
prior to ``Rule 9211'' in adopting Rule 9850 to make it clear that the 
rule referenced is Nasdaq's rule, not FINRA's. Last, the Exchange is 
proposing to correct references to Nasdaq's rule concerning 
``Restrictions on Affiliation'' in Rules 9270(e) and (f)(1), and Rule 
9360. Specifically, Rules 9270(e) and (f)(1), and Rule 9360 erroneously 
reference Rule 2140 as providing the meaning of the term ``affiliate of 
Nasdaq.'' Rule 2160 is titled ``Restrictions on Affiliation'' and is 
the appropriate reference under Rules 9270(e) and (f)(1), and Rule 
9360, and accordingly the Exchange replacing references to Rule 2140 
with references to Rule 2160 under those rules.
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    \39\ Nasdaq notes that the Nasdaq rules cited in new Rule 
9810(a) are the same as those that were cited under old Rule 
9810(a). Nasdaq further notes that under FINRA Rule 9810(a), FINRA 
cites to FINRA Rules 2010, 2020, and 4330. Nasdaq is replacing 
reference to the FINRA rules with reference to Nasdaq's analogous 
Rules 2010A, 2120, and 2150, as was the case in old Rule 9810(a). 
While the provisions of Nasdaq Rules 2010A and 2120 closely mirror 
FINRA Rules 2010 and 2020, Nasdaq Rule 2150 is significantly 
different than FINRA Rule 4330. FINRA Rule 4330 concerns the 
permissible use of customers' margin securities while Nasdaq Rule 
2150 requires a member and persons associated with a member to 
comply with FINRA's Rule 2150. FINRA Rule 2150 is titled ``Improper 
Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts'' and, among other things, 
prohibits members or persons associated with a member from making 
improper use of a customer's securities or funds, guaranteeing a 
customer against loss in connection with any securities transaction 
or in any securities account of such customer, and setting forth 
what is permissible in terms of sharing in profits and losses in a 
customer account. Nasdaq believes that Nasdaq Rule 2150 is the 
appropriate rule cite under new Rule 9810(a) for purposes of alleged 
violations concerning misuse or conversion of customer assets.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\40\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\41\ in particular, in that it is designed 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.
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    \40\ 15 U.S.C. 78f(b).
    \41\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that the proposed rule is consistent 
with Section 6(b)(6) of the Act,\42\ which requires the

[[Page 80145]]

rules of an exchange provide that its members be appropriately 
disciplined for violations of the Act as well as the rules and 
regulations thereunder, or the rules of the Exchange, by expulsion, 
suspension, limitation of activities, functions, and operations, fine, 
censure, being suspended or barred from being associated with a member, 
or any other fitting sanction.
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    \42\ 15 U.S.C. 78f(b)(6).
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    The Exchange believes that the proposed rule change is consistent 
with these provisions because the proposed changes are based on the 
cease and desist authority that FINRA has adopted, which the Exchange 
believes furthers the objectives of the Act by providing it with 
ability to stop violative conduct that is likely to cause dissipation 
or conversion of assets or other significant harm to investors, and on 
other changes to its related rules that clarify, harmonize, and improve 
its disciplinary process.
    The proposed rule change will improve the Exchange's capacity to 
enforce compliance with applicable laws and rules by its members and 
persons associated with members and improving [sic] the Exchange's 
capability to prevent fraudulent and manipulative acts and practices. 
Thus, this authority is a vitally important tool to have to protect 
market participants.
    The Exchange acknowledges that, when used, the cease and desist 
authority proposed herein would significantly impact a respondent. The 
Exchange, however, notes that the proposed rules incorporate numerous 
procedural protections for respondents to ensure that the proceedings 
initiated under these rules are fair, including notice and an 
opportunity to be heard before a neutral tribunal. Moreover, the 
Exchange anticipates using the authority provided by these rules 
sparingly.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The changes are being proposed 
to provide an important regulatory tool to the Exchange and FINRA, 
acting on its behalf, which will protect investors when violative 
conduct is being taken by a member or person associated with a member, 
and time is of the essence to prevent harm, or further harm, to 
investors.
    The proposed change does not impose a burden on competition among 
participants or other venues because it will only be used in 
circumstances where investor harm is imminent or is occurring. Thus, to 
the extent a burden on competition results from use of the authority 
provided by the proposed rules, such burden is necessary to protect 
investors, which is consistent with the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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, if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A)(iii) of the 
Act \43\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\44\
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    \43\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \44\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative upon filing. The 
Exchange has stated that it is requesting this waiver so that the 
Exchange could apply, at the earliest time possible, the authority to 
issue temporary cease and desist orders and explicit authority to 
impose permanent cease and desist orders as a remedy in disciplinary 
cases. The Exchange explained that although it does not anticipate that 
it will be necessary to use this authority, when its cease and desist 
authority is needed, the Exchange must be able to move swiftly to 
prevent or stop investor harm. The Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest because this waiver will enable the Exchange to 
utilize the temporary or permanent cease and desist authority described 
herein without delay in the unlikely event that circumstances arise 
that warrant its use. For this reason, the Commission hereby waives the 
30-day operative delay and designates the proposed rule change as 
operative upon filing.\45\
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    \45\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2016-148 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-148. 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from

[[Page 80146]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2016-148, and should be submitted on or before December 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27364 Filed 11-14-16; 8:45 am]
BILLING CODE 8011-01-P