Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to FINRA Rule 9554 To Eliminate Explicitly the Inability-To-Pay Defense in the Expedited Proceedings Context, 21686-21688 [2010-9549]

Download as PDF sroberts on DSKD5P82C1PROD with NOTICES 21686 Federal Register / Vol. 75, No. 79 / Monday, April 26, 2010 / Notices Supplement to Claim of Person Outside the United States; OMB 3220– 0155. Under the Social Security Amendments of 1983 (Pub. L. 98–21), which amends section 202(t) of the Social Security Act, the Tier I or the O/ M (overall minimum) portion of an annuity and Medicare benefits payable under the Railroad Retirement Act to certain beneficiaries living outside the U.S., may be withheld effective January 1, 1985. The benefit withholding provision of Public Law 98–21 applies to divorced spouses, spouses, minor or disabled children, students, and survivors of railroad employees who (1) Initially became eligible for Tier I amounts, O/M shares, and Medicare benefits after December 31, 1984; (2) are not U.S citizens or U.S. nationals; and (3) have resided outside the U.S for more than six consecutive months starting with the annuity beginning date. The benefit withholding provision does not apply, however to a beneficiary who is exempt under either a treaty obligation of the U.S., in effect on August 1, 1956, or a totalization agreement between the U.S. and the country in which the beneficiary resides, or to an individual who is exempt under other criteria specified in Public Law 98–21. RRB Form G–45, Supplement to Claim of Person Outside the United States, is currently used by the RRB to determine applicability of the withholding provision of Public Law 98–21. Completion of the form is required to obtain or retain a benefit. One response is requested of each respondent. The RRB estimates that 100 Form G–45’s are completed annually. The completion time for Form G–45 is estimated at 10 minutes per response. The RRB proposes no changes to Form G–45. Additional Information or Comments: To request more information or to obtain a copy of the information collection justification, forms, and/or supporting material, please call the RRB Clearance Officer at (312) 751–3363 or send an e-mail request to Charles.Mierzwa@RRB.GOV. Comments regarding the information collection should be addressed to Patricia A. Henaghan, Railroad Retirement Board, 844 North Rush Street, Chicago, Illinois 60611–2092 or send an e-mail to Patricia.Henaghan@RRB.GOV. Written comments should be received within 60 days of this notice. Charles Mierzwa, Clearance Officer. [FR Doc. 2010–9531 Filed 4–23–10; 8:45 am] BILLING CODE 7905–01–P VerDate Nov<24>2008 16:56 Apr 23, 2010 Jkt 220001 OFFICE OF SCIENCE AND TECHNOLOGY POLICY administrative proceedings; and Other matters relating to enforcement proceedings. NATIONAL ECONOMIC COUNCIL At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Extension of Comment Period for Commercialization of University Research Request for Information ACTION: Notice; extension of comment period. The comment period for the joint request for information issued by the Office of Science and Technology Policy and the National Economic Council, originally published in the Federal Register on March 25, 2010 (75 FR 14476), is extended for an additional 30 days. The comment period will now officially close on May 26, 2010 at 11:59 p.m. EST. Please follow the original instructions. Contact nec_general@who.eop.gov with any questions. Thomas Kalil, Deputy Director for Policy, Office of Science and Technology. Diana Farrell, Deputy Assistant to the President for Economic Policy, National Economic Council. [FR Doc. 2010–9560 Filed 4–23–10; 8:45 am] BILLING CODE 3170–W0–P Dated: April 22, 2010. Elizabeth M. Murphy, Secretary. [FR Doc. 2010–9745 Filed 4–22–10; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61938; File No. SR–FINRA– 2010–014] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to FINRA Rule 9554 To Eliminate Explicitly the Inability-To-Pay Defense in the Expedited Proceedings Context April 19, 2010. SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting on Thursday, April 29, 2010 at 2 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(5), (7), 9(B) and (10) and 17 CFR 200.402(a)(5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Aguilar, as duty officer, voted to consider the items listed for the Closed Meeting in a closed session. The subject matter of the Closed Meeting scheduled for Thursday, April 29, 2010 will be: Institution and settlement of injunctive actions; Institution and settlement of PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 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 March 31, 2010, 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 substantially prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 9554 to eliminate explicitly the inability-to-pay defense in the expedited proceedings context when a member or associated person fails to pay an arbitration award to a customer. 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. 1 15 2 17 E:\FR\FM\26APN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 26APN1 Federal Register / Vol. 75, No. 79 / Monday, April 26, 2010 / Notices 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 sroberts on DSKD5P82C1PROD with NOTICES 1. Purpose FINRA Rule 9554 allows FINRA to bring expedited actions to address failures to pay FINRA arbitration awards.3 Once a monetary award has been issued in a FINRA arbitration proceeding, the party that must pay the award, the respondent (i.e., a member or an associated person), has thirty days to do so.4 FINRA coordinates between FINRA Dispute Resolution’s arbitration forum and FINRA’s enforcement program by verifying whether a respondent has paid the monetary award within thirty days. If the respondent has not paid, FINRA initiates an expedited proceeding by sending a notice explaining that the respondent will be suspended unless the respondent pays the award or requests a hearing. A respondent that requests a hearing may raise a number of defenses to the suspension. One of the current defenses is establishing a bona fide inability-topay. When a respondent successfully demonstrates a bona fide inability-topay, that is a complete defense to the suspension. Consequently, the inabilityto-pay defense currently precludes a harmed customer from obtaining payment of a valid arbitration award. FINRA’s expedited proceedings for failure to pay an arbitration award use the leverage of a potential suspension to help ensure that a member or an associated person promptly pays a valid arbitration award. However, if a 3 Expedited actions allow FINRA to address certain types of misconduct more quickly than would be possible using the ordinary disciplinary process. In general, these actions focus on encouraging respondents to comply with the law or take corrective action rather than on sanctioning them for past misconduct. As discussed in detail below, moreover, the Act uses a different standard of review for expedited actions than it does for disciplinary cases. 4 FINRA Rule 10330(h). VerDate Nov<24>2008 16:56 Apr 23, 2010 Jkt 220001 respondent demonstrates a financial inability-to-pay the award—regardless of the reason—the leverage is removed. When FINRA’s efforts to suspend a respondent who has not paid the award have been defeated, a claimant is much less likely to be paid. By eliminating the inability-to-pay defense, FINRA will increase the probability of customers having their awards paid, or, at a minimum, it should prompt meaningful settlement discussions between claimants and respondents. FINRA believes that eliminating this defense would further its goal of investor protection by facilitating the payment of arbitration awards to customers harmed by the actions of members and associated persons. Accordingly, FINRA proposes amending Rule 9554 to eliminate explicitly the inability-to-pay defense in the expedited proceedings context when a member or associated person fails to pay an arbitration award to a customer.5 The ability to work in the securities industry carries with it, among other things, an obligation to comply with the Federal securities laws, FINRA rules, and orders imposed by the disciplinary and arbitration processes. Allowing members or their associated persons that fail to pay arbitration awards to remain in the securities industry presents regulatory risks and is unfair to harmed customers. Although FINRA proposes to eliminate the inability-to-pay defense, a respondent would still have available the following four defenses: • The member or person paid the award in full or fully complied with the settlement agreement; • The arbitration claimant has agreed to installment payments or has otherwise settled the matter; • The member or person has filed a timely motion to vacate or modify the arbitration award and such motion has not been denied; and • The member or person has filed a petition in bankruptcy and the bankruptcy proceeding is pending or the award or payment owed under the settlement agreement has been discharged by the bankruptcy court.6 Regarding the last defense, FINRA believes that a Federal bankruptcy court is the best forum for adjudicating a 5 The rule change would not affect the defenses available in actions that do not involve customers. 6 In its order approving changes to the predecessor to Rule 9554, the SEC noted that the issues in these types of cases are narrow and generally limited to determining whether the respondent has proven any of these four defenses or an inability-to-pay the award. See Securities Exchange Act Release No. 40026 (May 26, 1998), 63 FR 30789, 30790 (June 5, 1998). PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 21687 financial condition defense. Bankruptcy judges are experts in evaluating whether a debtor’s obligations should be legally discharged. The bankruptcy process and associated filings are designed to consider fully and evaluate the financial condition of bankruptcy debtors.7 In addition, bankruptcy filings, which are subject to Federal perjury charges, provide greater penalties for hiding assets.8 FINRA’s lack of subpoena power over banks and other third parties raises practical concerns regarding its ability to confirm accurately the assets of the firm or person asserting the defense.9 The inability-to-pay defense emerged from a series of SEC decisions that require FINRA to consider the defense in disciplinary cases (as opposed to expedited actions), including disciplinary cases involving failures to pay arbitration awards and restitution.10 The legal underpinnings that support the inability-to-pay defense in disciplinary cases are not, however, present in the expedited proceedings context. SEC cases largely rely on the ‘‘excessive and oppressive’’ language in Section 19(e) of the Exchange Act in requiring FINRA to consider inabilityto-pay. Section 19(e) of the Exchange Act provides authority to the SEC to review and affirm, modify or set aside any final disciplinary sanctions imposed by FINRA on its members. Section 19(e), however, does not apply to expedited proceedings. Expedited proceedings are reviewed under Section 19(f), which requires that ‘‘the specific grounds’’ on which FINRA based its action ‘‘exist in fact,’’ that FINRA followed its rules, and that those rules are consistent with the Act. The different focus of these two standards and the more limited review for 7 See 4 Collier on Bankruptcy, ¶¶ 521.01, 521.09 (15th ed. 2009). 8 See 18 U.S.C. 151–58 (2010). Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both. Id. 9 The ability to legally discharge debts, the more thorough and accurate verification of a bankruptcy debtor’s financial condition, and possible criminal prosecution for intentionally inaccurate disclosures, among other aspects, distinguish bankruptcy from inability-to-pay. 10 See Toney L. Reed, 52 S.E.C. 944 (1996), recons. denied, Securities Exchange Act Release No. 39354 (Nov. 25, 1997); Bruce M. Zipper, 51 S.E.C. 928 (1993). In addition, in an order approving a rule change for a predecessor to Rule 9554, the SEC noted that it had previously recognized that a bona fide inability-to-pay an arbitration award is an important consideration in determining whether any sanction for failing to pay an arbitration award is ‘‘excessive or oppressive.’’ See Securities Exchange Act Release No. 40026 (May 26, 1998), 63 FR 30789 (June 5, 1998). Without further discussion, the order cited the SEC’s decision in Zipper, which was a disciplinary case, not an expedited action. E:\FR\FM\26APN1.SGM 26APN1 21688 Federal Register / Vol. 75, No. 79 / Monday, April 26, 2010 / Notices expedited actions are understandable and support eliminating the inability-topay defense in expedited actions.11 Unlike disciplinary cases, FINRA is not imposing a monetary sanction in these expedited actions; it is suspending a respondent for failing to pay a previously imposed arbitration award. There also is an explicit procedural mechanism built into these expedited actions that allows a suspension to be lifted once respondents satisfy any of the four defenses highlighted above. The main goal is to encourage respondents to comply with the law or previously imposed orders, not to sanction them for past misconduct. In sum, members and associated persons that fail to pay arbitration awards to customers should not be allowed to remain in the securities industry by relying on the inability-topay defense in expedited actions. This is especially true because they can avoid regulatory action by paying the award, reaching a settlement with the customers (which can include payment plans), moving to vacate the award, or filing for bankruptcy. FINRA believes that, in its expedited actions involving respondents that have failed to pay arbitration awards to customers; the inability-to-pay defense should be eliminated. The proposed rule change will automatically become effective 30 days following Commission approval. sroberts on DSKD5P82C1PROD with NOTICES 2. Statutory Basis 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’s rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in 11 In William J. Gallagher, Securities Exchange Act Release No. 47501, 2003 SEC LEXIS 599 (March 14, 2003), the SEC emphasized that expedited actions are reviewed under Section 19(f) of the Act not Section 19(e). The SEC stated, ‘‘Gallagher misconstrues the applicable review standard when he argues that [FINRA’s] sanction is ‘excessive and oppressive’ and that [FINRA’s] indefinite suspension order is inconsistent with the [FINRA] Sanction Guidelines, standards relevant in the Commission’s review of [FINRA] disciplinary proceedings under Section 19(e) of the Exchange Act.’’ Id. at *6. The SEC explained that its review is limited to analyzing whether ‘‘the specific ground on which [FINRA] based its suspension—failure to pay in full an arbitration award—‘exists in fact[,]’’’ the ‘‘SRO’s determination was in accordance with its rules, and * * * those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act.’’ Id. at *5 & *7. In Gallagher, FINRA and the SEC rejected the respondent’s claim of inability-to-pay on factual grounds. The issue of whether a respondent was permitted to raise the defense as a matter of law was neither raised nor decided. 12 15 U.S.C. 78o–3(b)(6). VerDate Nov<24>2008 16:56 Apr 23, 2010 Jkt 220001 general, to protect investors and the public interest. The proposal also is consistent with Section 15A(b)(7) of the Act,13 which provides that FINRA must take appropriate action when members and associated persons violate provisions of the Act or FINRA rules. The proposed rule change is consistent with these purposes because it would promote a fair and efficient process for taking action to encourage members and associated persons to pay arbitration awards to customers. 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 35 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 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: 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–2010–014. 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). Comments are also 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. 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–2010–014 and should be submitted on or before May 17, 2010. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–9549 Filed 4–23–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61944; File No. SR– NASDAQ–2010–035] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Accelerated Approval of Proposed Rule Change To Establish Strike Price Intervals and Trading Hours for Options on Index-Linked Securities April 20, 2010. I. Introduction Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2010–014 on the subject line. On March 11, 2010, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 14 17 13 15 PO 00000 U.S.C. 78o–3(b)(7). Frm 00112 Fmt 4703 1 15 Sfmt 4703 E:\FR\FM\26APN1.SGM CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 26APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 79 (Monday, April 26, 2010)]
[Notices]
[Pages 21686-21688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-9549]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61938; File No. SR-FINRA-2010-014]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
FINRA Rule 9554 To Eliminate Explicitly the Inability-To-Pay Defense in
the Expedited Proceedings Context

April 19, 2010.
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 March 31, 2010, 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 substantially 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 amend FINRA Rule 9554 to eliminate explicitly
the inability-to-pay defense in the expedited proceedings context when
a member or associated person fails to pay an arbitration award to a
customer.
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.

[[Page 21687]]

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 Rule 9554 allows FINRA to bring expedited actions to address
failures to pay FINRA arbitration awards.\3\ Once a monetary award has
been issued in a FINRA arbitration proceeding, the party that must pay
the award, the respondent (i.e., a member or an associated person), has
thirty days to do so.\4\ FINRA coordinates between FINRA Dispute
Resolution's arbitration forum and FINRA's enforcement program by
verifying whether a respondent has paid the monetary award within
thirty days. If the respondent has not paid, FINRA initiates an
expedited proceeding by sending a notice explaining that the respondent
will be suspended unless the respondent pays the award or requests a
hearing.
---------------------------------------------------------------------------

\3\ Expedited actions allow FINRA to address certain types of
misconduct more quickly than would be possible using the ordinary
disciplinary process. In general, these actions focus on encouraging
respondents to comply with the law or take corrective action rather
than on sanctioning them for past misconduct. As discussed in detail
below, moreover, the Act uses a different standard of review for
expedited actions than it does for disciplinary cases.
\4\ FINRA Rule 10330(h).
---------------------------------------------------------------------------

A respondent that requests a hearing may raise a number of defenses
to the suspension. One of the current defenses is establishing a bona
fide inability-to-pay. When a respondent successfully demonstrates a
bona fide inability-to-pay, that is a complete defense to the
suspension. Consequently, the inability-to-pay defense currently
precludes a harmed customer from obtaining payment of a valid
arbitration award.
FINRA's expedited proceedings for failure to pay an arbitration
award use the leverage of a potential suspension to help ensure that a
member or an associated person promptly pays a valid arbitration award.
However, if a respondent demonstrates a financial inability-to-pay the
award--regardless of the reason--the leverage is removed. When FINRA's
efforts to suspend a respondent who has not paid the award have been
defeated, a claimant is much less likely to be paid. By eliminating the
inability-to-pay defense, FINRA will increase the probability of
customers having their awards paid, or, at a minimum, it should prompt
meaningful settlement discussions between claimants and respondents.
FINRA believes that eliminating this defense would further its goal of
investor protection by facilitating the payment of arbitration awards
to customers harmed by the actions of members and associated persons.
Accordingly, FINRA proposes amending Rule 9554 to eliminate explicitly
the inability-to-pay defense in the expedited proceedings context when
a member or associated person fails to pay an arbitration award to a
customer.\5\
---------------------------------------------------------------------------

\5\ The rule change would not affect the defenses available in
actions that do not involve customers.
---------------------------------------------------------------------------

The ability to work in the securities industry carries with it,
among other things, an obligation to comply with the Federal securities
laws, FINRA rules, and orders imposed by the disciplinary and
arbitration processes. Allowing members or their associated persons
that fail to pay arbitration awards to remain in the securities
industry presents regulatory risks and is unfair to harmed customers.
Although FINRA proposes to eliminate the inability-to-pay defense,
a respondent would still have available the following four defenses:
The member or person paid the award in full or fully
complied with the settlement agreement;
The arbitration claimant has agreed to installment
payments or has otherwise settled the matter;
The member or person has filed a timely motion to vacate
or modify the arbitration award and such motion has not been denied;
and
The member or person has filed a petition in bankruptcy
and the bankruptcy proceeding is pending or the award or payment owed
under the settlement agreement has been discharged by the bankruptcy
court.\6\
---------------------------------------------------------------------------

\6\ In its order approving changes to the predecessor to Rule
9554, the SEC noted that the issues in these types of cases are
narrow and generally limited to determining whether the respondent
has proven any of these four defenses or an inability-to-pay the
award. See Securities Exchange Act Release No. 40026 (May 26, 1998),
63 FR 30789, 30790 (June 5, 1998).
---------------------------------------------------------------------------

Regarding the last defense, FINRA believes that a Federal
bankruptcy court is the best forum for adjudicating a financial
condition defense. Bankruptcy judges are experts in evaluating whether
a debtor's obligations should be legally discharged. The bankruptcy
process and associated filings are designed to consider fully and
evaluate the financial condition of bankruptcy debtors.\7\ In addition,
bankruptcy filings, which are subject to Federal perjury charges,
provide greater penalties for hiding assets.\8\ FINRA's lack of
subpoena power over banks and other third parties raises practical
concerns regarding its ability to confirm accurately the assets of the
firm or person asserting the defense.\9\
---------------------------------------------------------------------------

\7\ See 4 Collier on Bankruptcy, ]] 521.01, 521.09 (15th ed.
2009).
\8\ See 18 U.S.C. 151-58 (2010). Bankruptcy fraud is punishable
by a fine, or by up to five years in prison, or both. Id.
\9\ The ability to legally discharge debts, the more thorough
and accurate verification of a bankruptcy debtor's financial
condition, and possible criminal prosecution for intentionally
inaccurate disclosures, among other aspects, distinguish bankruptcy
from inability-to-pay.
---------------------------------------------------------------------------

The inability-to-pay defense emerged from a series of SEC decisions
that require FINRA to consider the defense in disciplinary cases (as
opposed to expedited actions), including disciplinary cases involving
failures to pay arbitration awards and restitution.\10\ The legal
underpinnings that support the inability-to-pay defense in disciplinary
cases are not, however, present in the expedited proceedings context.
SEC cases largely rely on the ``excessive and oppressive'' language in
Section 19(e) of the Exchange Act in requiring FINRA to consider
inability-to-pay. Section 19(e) of the Exchange Act provides authority
to the SEC to review and affirm, modify or set aside any final
disciplinary sanctions imposed by FINRA on its members. Section 19(e),
however, does not apply to expedited proceedings. Expedited proceedings
are reviewed under Section 19(f), which requires that ``the specific
grounds'' on which FINRA based its action ``exist in fact,'' that FINRA
followed its rules, and that those rules are consistent with the Act.
The different focus of these two standards and the more limited review
for

[[Page 21688]]

expedited actions are understandable and support eliminating the
inability-to-pay defense in expedited actions.\11\ Unlike disciplinary
cases, FINRA is not imposing a monetary sanction in these expedited
actions; it is suspending a respondent for failing to pay a previously
imposed arbitration award. There also is an explicit procedural
mechanism built into these expedited actions that allows a suspension
to be lifted once respondents satisfy any of the four defenses
highlighted above. The main goal is to encourage respondents to comply
with the law or previously imposed orders, not to sanction them for
past misconduct.
---------------------------------------------------------------------------

\10\ See Toney L. Reed, 52 S.E.C. 944 (1996), recons. denied,
Securities Exchange Act Release No. 39354 (Nov. 25, 1997); Bruce M.
Zipper, 51 S.E.C. 928 (1993). In addition, in an order approving a
rule change for a predecessor to Rule 9554, the SEC noted that it
had previously recognized that a bona fide inability-to-pay an
arbitration award is an important consideration in determining
whether any sanction for failing to pay an arbitration award is
``excessive or oppressive.'' See Securities Exchange Act Release No.
40026 (May 26, 1998), 63 FR 30789 (June 5, 1998). Without further
discussion, the order cited the SEC's decision in Zipper, which was
a disciplinary case, not an expedited action.
\11\ In William J. Gallagher, Securities Exchange Act Release
No. 47501, 2003 SEC LEXIS 599 (March 14, 2003), the SEC emphasized
that expedited actions are reviewed under Section 19(f) of the Act
not Section 19(e). The SEC stated, ``Gallagher misconstrues the
applicable review standard when he argues that [FINRA's] sanction is
`excessive and oppressive' and that [FINRA's] indefinite suspension
order is inconsistent with the [FINRA] Sanction Guidelines,
standards relevant in the Commission's review of [FINRA]
disciplinary proceedings under Section 19(e) of the Exchange Act.''
Id. at *6. The SEC explained that its review is limited to analyzing
whether ``the specific ground on which [FINRA] based its
suspension--failure to pay in full an arbitration award--`exists in
fact[,]''' the ``SRO's determination was in accordance with its
rules, and * * * those rules are, and were applied in a manner,
consistent with the purposes of the Exchange Act.'' Id. at *5 & *7.
In Gallagher, FINRA and the SEC rejected the respondent's claim of
inability-to-pay on factual grounds. The issue of whether a
respondent was permitted to raise the defense as a matter of law was
neither raised nor decided.
---------------------------------------------------------------------------

In sum, members and associated persons that fail to pay arbitration
awards to customers should not be allowed to remain in the securities
industry by relying on the inability-to-pay defense in expedited
actions. This is especially true because they can avoid regulatory
action by paying the award, reaching a settlement with the customers
(which can include payment plans), moving to vacate the award, or
filing for bankruptcy. FINRA believes that, in its expedited actions
involving respondents that have failed to pay arbitration awards to
customers; the inability-to-pay defense should be eliminated.
The proposed rule change will automatically become effective 30
days following Commission approval.
2. Statutory Basis
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'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 proposal also is consistent with Section 15A(b)(7)
of the Act,\13\ which provides that FINRA must take appropriate action
when members and associated persons violate provisions of the Act or
FINRA rules. The proposed rule change is consistent with these purposes
because it would promote a fair and efficient process for taking action
to encourage members and associated persons to pay arbitration awards
to customers.
---------------------------------------------------------------------------

\12\ 15 U.S.C. 78o-3(b)(6).
\13\ 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

Within 35 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 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 (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2010-014 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-2010-014. 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). Comments are also 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. 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-2010-014 and
should be submitted on or before May 17, 2010.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-9549 Filed 4-23-10; 8:45 am]
BILLING CODE 8011-01-P

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