Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend FINRA's Authority Under the Cease and Desist Pilot Program, 27360-27361 [E9-13503]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 109 (Tuesday, June 9, 2009)]
[Notices]
[Pages 27360-27361]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13503]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60035; File No. SR-FINRA-2009-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Extend FINRA's Authority Under the Cease and 
Desist Pilot Program

June 3, 2009.
    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 May 18, 2009, the 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. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to extend FINRA's authority under its cease and 
desist pilot program, as further detailed herein, and to make certain 
technical amendments. The proposed rule change does not propose any 
substantive changes to the existing cease and desist authority pilot 
program.
    The text of the proposed rule change is available on FINRA's Web 
site at https://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
    In May 2003, the Commission approved, on a two-year pilot basis, a 
rule change that gave FINRA authority to issue temporary cease and 
desist orders (``TCDOs'') \4\ and made explicit FINRA's ability to 
impose permanent cease and desist orders as a remedy in disciplinary 
cases.\5\ The pilot program also gave FINRA authority to enforce cease 
and desist orders. In June 2005 and June 2007, the SEC approved [sic] 
two-year extensions of the pilot program.\6\ The current two-year pilot 
expires on June 23, 2009.\7\
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    \4\ A TCDO is a preliminary order issued in connection with an 
underlying disciplinary proceeding that has been initiated or will 
be initiated immediately.
    \5\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548 (June 4, 2003) (Order Approving File No. SR-NASD-
98-80).
    \6\ See Securities Exchange Act Release No. 51860 (June 16, 
2005), 70 FR 36427 (June 23, 2005) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASD-2005-061); Securities Exchange Act 
Release No. 55819 (May 25, 2007), 72 FR 30895 (June 4, 2007) (Notice 
of Filing and Immediate Effectiveness of File No. SR-NASD-2007-033).
    \7\ See Securities Exchange Act Release No. 55819 (May 25, 
2007), 72 FR 30895 (June 4, 2007) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASD-2007-033).
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    In a companion rule filing filed with the SEC on May 18, 2009,\8\ 
FINRA is proposing to make the pilot program permanent without any 
substantive changes to the terms of the existing program. In the 
current rule filing, FINRA seeks to extend the pilot until the SEC 
approves or disapproves the proposal to make the pilot permanent so 
that the cease and desist authority does not lapse while the proposal 
is pending at the SEC. The proposed action would enable FINRA to 
continue to issue TCDOs and impose permanent cease and desist orders as 
a remedy in disciplinary cases. The proposed action also would give 
FINRA authority to continue to initiate expedited proceedings when 
respondents violate temporary or permanent cease and desist orders.
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    \8\ See Securities Exchange Act Release No. 60028 (June 2, 2009) 
(SR-FINRA-2009-035).
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    When it first sought cease and desist authority, FINRA stated that 
it would use the authority sparingly. That has been the case. Since the 
pilot program was first approved in 2003, FINRA has issued only one 
TCDO and one permanent cease and desist order (both in the same case, 
which is described below). If the pilot is extended, the cease and 
desist rules would continue to be used judiciously. There are times, 
however, when their use is crucial.
    In the one case initiated under the pilot program, FINRA's 
Department of Enforcement (``Enforcement'') alleged that the member in 
question was engaged in widespread fraud that included, among other 
things, making material misrepresentations and omissions in connection 
with the private offering of its own stock, effecting unauthorized 
transactions and using customer funds improperly.\9\ Enforcement showed 
that not only was the member attempting to continue the fraudulent 
offering, it also was funneling money and assets to a non-member 
affiliate. Enforcement alleged, and a hearing panel found, that a TCDO 
was necessary because the member's continuation of the misconduct was 
likely to result in further dissipation or conversion of assets and 
other significant harm to investors before the completion of the 
underlying disciplinary proceeding. After the hearing panel issued a 
permanent cease and desist order following a full disciplinary hearing, 
the parties settled the case, resulting in the expulsion of the member, 
the bar of its owner and the imposition of almost $12 million in fines 
and restitution.
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    \9\ See L.H. Ross & Company, Securities Exchange Act Release No. 
51270, 2005 SEC LEXIS 452 (February 28, 2005).
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    The proposed temporary extension of the pilot program will provide 
FINRA with a mechanism to continue 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 while the SEC is 
considering FINRA's proposal to permanently adopt the pilot program. It 
must be emphasized, however, that the cease and desist provisions 
contain numerous procedural protections for respondents to ensure that 
the proceedings are fair.

[[Page 27361]]

    The proposed rule change also would make certain technical 
amendments to the rule text, namely to correct punctuation in FINRA 
Rule 9556 and update FINRA Rule 9810 to reflect a change in FINRA style 
convention when referencing the federal securities laws.
    FINRA has filed the proposed rule change to extend FINRA's 
authority under its cease and desist pilot program for immediate 
effectiveness. The implementation date will be June 23, 2009. The pilot 
program will remain in effect until the SEC approves FINRA's proposed 
rule change to make the pilot permanent \10\ and such rule change 
becomes effective or the SEC disapproves such proposed rule change.
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    \10\ See supra, note 8.
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2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\11\ which requires, among other things, 
that FINRA's 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 also is consistent with the 
provisions of Section 15A(b)(7) of the Act,\12\ which provides that 
FINRA members, or persons associated with its members, must be 
appropriately disciplined for violations of any provisions of the Act 
or FINRA's rules. Extending the pilot program is consistent with 
FINRA's obligations under the Act because cease and desist orders are 
designed to stop violative conduct that is likely to cause dissipation 
or conversion of assets or other significant harm to investors.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78o-3(b)(7).
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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

    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, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-034 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-2009-034. 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 (https://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 inspection 
and copying 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-2009-034 and should be 
submitted on or before June 30, 2009.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13503 Filed 6-8-09; 8:45 am]
BILLING CODE 8010-01-P