Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the By-Laws of FINRA Regulation, Inc. With Regard to District Committee Structure and Governance, 12390-12394 [2011-5080]

Download as PDF 12390 Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices 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 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 offices of the Exchange. 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–CBOE–2011–014, and should be submitted on or before March 28, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–5061 Filed 3–4–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64002; File No. SR–FINRA– 2011–011] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the By-Laws of FINRA Regulation, Inc. With Regard to District Committee Structure and Governance srobinson on DSKHWCL6B1PROD with NOTICES March 2, 2011. 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 February 25, 2011, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 17:54 Mar 04, 2011 Jkt 223001 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 the ByLaws of FINRA’s regulatory subsidiary (‘‘FINRA Regulation’’) with regard to District Committee structure and governance to, among other things, adjust the size and composition of District Committees to align more closely with the industry representation on the FINRA Board and replace District Nominating Committees with a process of direct nomination and election based on firm size, as discussed in more detail below. The text of the proposed rule change is available on FINRA’s Web site at http://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background On July 30, 2007, NASD and the New York Stock Exchange consolidated their member firm regulation operations into a combined organization, FINRA. As part of the consolidation, the SEC approved amendments to the NASD ByLaws to implement governance and related changes.3 The approved changes included a FINRA Board governance structure that balanced public and industry representation and designated seven governor seats to represent 3 See Securities Exchange Act Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. SR–NASD–2007–023). PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 member firms based on the criteria of firm size. FINRA Regulation (formerly known as NASD Regulation) is a subsidiary of FINRA that operates according to the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries, as amended, which was first adopted at NASD Regulation’s formation in 1996.4 The proposed rule change would modify the FINRA Regulation By-Laws (or ‘‘By-Laws’’) with regard to District Committees in several respects. It would: • Adjust the size and composition of District Committees over a three-year transition period to align more closely with the industry representation on the FINRA Board; • Replace District Nominating Committees with a process of direct nomination and election based on firm size; • Codify current practice that District Committees meet on a regional basis; • Eliminate the Advisory Council; • Amend the qualification requirements and prescribe further term limits for District Committee members; • Revise procedures for qualification and accounting of ballots to be administered solely by an Independent Agent; and • Make other procedural and administrative changes. District Committees, District Nominating Committees, Districts and Regions The By-Laws establish the procedures for setting the size and electing the members to FINRA District Committees and District Nominating Committees.5 These By-Law provisions have not changed significantly since becoming permanently effective in January 1998.6 They were adopted in part to respond to undertakings ordered by the SEC in 1996 (the ‘‘1996 SEC Settlement Order’’) concurrent with the issuance of a report pursuant to Section 21(a) of the Exchange Act regarding NASD (the ‘‘1996 21(a) Report’’).7 The role of the District Committees was significantly narrowed as a result of undertakings in the 1996 SEC Settlement Order.8 Until January 1998, 4 See Securities Exchange Act Release No. 37106 (April 11, 1996), 61 FR 16944 (April 18, 1996) (Order Approving File No. SR–NASD–96–02). 5 See FINRA Regulation By-Laws, Article VIII, Section 8.1 (Establishment of Districts) and Section 8.2 (Composition of District Committees). 6 See Securities Exchange Act Release No. 39326 (November 14, 1997), 62 FR 62385 (November 21, 1997) (Order Approving File No. SR–NASD–96–29). 7 See In the Matter of National Association of Securities Dealers, Inc., Securities Exchange Act Release No. 37538, 1996 SEC LEXIS 2146 (August 8, 1996). 8 Supra note 7, at Undertaking 4. E:\FR\FM\07MRN1.SGM 07MRN1 Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices the role of District Committees was addressed in the NASD By-Laws, which provided in part that District Committees shall also serve as the District Business Conduct Committees (‘‘DBCCs’’) for their respective districts.9 The undertakings in the 1996 Settlement Order provided, among other things, that DBCCs not be involved in deciding whether or not to institute disciplinary proceedings, and that District Committees not be involved in the review or approval of membership applications.10 As a consequence, NASD amended its corporate governance documents to comply with these undertakings, including adopting NASD Regulation By-Laws that, among other things, did not provide a role for District Committees in the review or approval of membership applications and eliminated DBCCs.11 The By-Laws task the FINRA Regulation Board of Directors with determining the boundaries of the districts and the size of the District Committees.12 The FINRA Regulation Board has established eleven districts, overseen by FINRA District Offices, which are administratively grouped within five regions: • West Region—Districts 1 (San Francisco), 2 (Los Angeles), and 3 (Denver and Seattle); • Midwest Region—Districts 4 (Kansas City) and 8 (Chicago); • South Region—Districts 5 (New Orleans), 6 (Dallas) and 7 (Atlanta and Boca Raton); • North Region—Districts 9 (Philadelphia and Woodbridge) and 11 (Boston); and • New York Region—District 10 (New York City and Long Island).13 Today, as provided in the By-Laws, FINRA District Committee members contribute to the regulatory process by, among other things, serving as panelists in disciplinary proceedings in accordance with FINRA Rules; considering and recommending policies and rule changes; and endeavoring to educate FINRA members and others as to the objects, purposes and work of FINRA and FINRA Regulation.14 The District Committees meet on average twice each year, jointly with the other District Committees in their respective regions. Currently, District Committees are composed of nine members, with the exception of the New York District Committee’s twelve. Due to staggered three-year District Committee membership terms, one-third of each District Committee’s positions are available for election each year. In some cases, a District Committee may have additional positions to fill if a vacancy has been created by death, resignation, removal or other cause.15 The District Nominating Committees are composed of five members each, a majority of whom have served on a District Committee, are current or former FINRA Regulation Directors, or current or former FINRA Governors.16 Current Nomination and Election Process As part of the election process, the By-Laws require the Corporate Secretary to provide each District Nominating Committee and District Director annual notice, due on or before June 1 of each year, identifying the members of the District Committees and District Nominating Committees whose terms are expiring within the next calendar year.17 FINRA’s Office of the Corporate Secretary issues an Election Notice announcing the vacancies in all eleven districts and soliciting any interested party to complete and submit a candidate profile form to the applicable FINRA District Director.18 Completed candidate profile forms received before the prescribed cutoff date are shared with the District Nominating Committees for review, a process that usually involves candidate interviews.19 After its review, each District Nominating Committee nominates a slate of candidates for election, which may include an alternate candidate for each position.20 The District Directors, acting for the District Nominating Committees, notify srobinson on DSKHWCL6B1PROD with NOTICES 14 See 9 See NASD By-Laws, Article VIII, Section 2(c) (District Committees and District Business Conduct Committees), amended effective September 4, 1990, prior to the permanent adoption of the NASD Regulation By-Laws effective January 15, 1998 (‘‘The District Committees shall also serve as the District Business Conduct Committees for their respective districts’’). 10 Supra note 7, at Undertaking 4. 11 See Securities Exchange Act Release No. 39326 (November 14, 1997), 62 FR 62385 (November 21, 1997) (File No. SR–NASD–96–29). 12 See FINRA Regulation By-Laws, Article VIII, Section 8.1 (Establishment of Districts) and Section 8.2 (Composition of District Committees). 13 See Schedule A to FINRA Regulation By-Laws. VerDate Mar<15>2010 17:54 Mar 04, 2011 Jkt 223001 FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees). 15 See FINRA Regulation By-Laws, Article VIII, Section 8.4 (Filling of Vacancies on District Committees). 16 See FINRA Regulation By-Laws, Article VIII, Section 8.9 (Composition of District Nominating Committees). 17 See FINRA Regulation By-Laws, Article VIII, Section 8.15 (Notice to District Nominating Committee). 18 See FINRA Regulation By-Laws, Article VIII, Section 8.16 (Solicitation of Candidates and Secretary’s Notice to FINRA Members). 19 See FINRA Regulation By-Laws, Article VIII, Section 8.17 (District Nominating Committee Slate). 20 Supra note 19. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 12391 FINRA’s Corporate Secretary of each nominated candidate and the office to which the candidate is nominated (i.e., District Committee member or District Nominating Committee member).21 Soon after receiving the District Nominating Committees’ slates (and, as mandated by the By-Laws, on or before October 1 of each year), FINRA’s Office of the Corporate Secretary issues another Election Notice announcing the nominees for upcoming vacancies on the District and the District Nominating Committees and informing members about the petition and election process.22 If the slate is not contested (i.e., there is one candidate for each position), it is deemed elected without a vote by the district’s member firms.23 The By-Laws also provide a process whereby a registered person meeting the vacancy requirements may be considered for nomination as an additional (‘‘petition’’) candidate in a contested election. To be considered for nomination as a petition candidate, such individual must deliver a written notice to the District Director within 14 calendar days of the issuance of the Election Notice of nominated candidates.24 The Secretary of FINRA Regulation must provide to any such candidate a list, with applicable contact information, of FINRA members eligible to vote in the candidate’s district.25 Within 30 calendar days after the date of mailing of the list to the candidate, the candidate must submit a petition to the District Nominating Committee with signatures from at least ten percent of the FINRA members eligible to vote in his or her district.26 If a candidate submits a petition with the requisite number of valid signatures by the designated date, he or she is nominated and a contested election is held.27 In recent years, FINRA has witnessed a decline in eligible individuals willing to serve on the District or District Nominating Committees or undergo the nomination process. Potential candidates have expressed several reasons for their lack of interest, 21 See FINRA Regulation By-Laws, Article VIII, Section 8.18 (Notification of Nomination). 22 Supra note 21. 23 See FINRA Regulation By-Laws, Article VIII, Section 8.19 (Uncontested Election). 24 See FINRA Regulation By-Laws, Article VIII, Section 8.20 (Designation of Additional Candidates). 25 See FINRA Regulation By-Laws, Article VIII, Section 8.21 (List of FINRA Members Eligible to Vote). 26 See FINRA Regulation By-Laws, Article VIII, Section 8.22 (Requirement for Petition Supporting Additional Candidate). 27 See FINRA Regulation By-Laws, Article VIII, Section 8.22 (Requirement for Petition Supporting Additional Candidate) and Section 8.23 (Notice of Contested Election). E:\FR\FM\07MRN1.SGM 07MRN1 12392 Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices including: the reduced role of the District Committees following the 1996 21(a) Report; the perceived difficulties of undergoing the District Nominating Committee process (usually including rigorous interviews) as compared to the signature-collecting process of becoming a petition candidate; and the perception that slate candidates nominated by District Nominating Committees represent the industry less effectively than more ‘‘independent’’ petition candidates. Proposed Changes to the Nomination Process and Composition of District Committees srobinson on DSKHWCL6B1PROD with NOTICES Based on the concerns described above, FINRA proposes to eliminate the current nomination and petition process, including eliminating District Nominating Committees in their entirety,28 and to adopt a more streamlined self-nomination and election process that facilitates member candidacy and fosters representation from Small Firms, Mid-Size Firms and Large Firms (as further described below). As proposed, an individual meeting the qualification requirements of Section 8.2(a) of the By-Laws who is interested in running for election to a District Committee would simply deliver written notice of such intent to the Secretary of FINRA Regulation within 30 calendar days of the Secretary’s issuance of the Notice of election to FINRA members.29 Any individual meeting the qualification requirements would be designated as a candidate without having to undergo the current nominating or petition process.30 FINRA believes that direct candidate nomination and election by the membership would create a more 28 See, e.g., proposed deletions of FINRA Regulation By-Laws, Article VIII, Section 8.9 (Composition of District Nominating Committees); Section 8.10 (Term of Office of District Nominating Committee Members); Section 8.11 (Filling of Vacancies for District Nominating Committees); Section 8.12 (Meetings of District Nominating Committees); Section 8.13 (Election of District Nominating Committee Officers); Section 8.14 (Expenses of District Nominating Committees); Section 8.15 (Notice to District Nominating Committee); Section 8.17 (District Nominating Committee Slate); Section 8.18 (Notification of Nomination); Section 8.19 (Uncontested Election); Section 8.20 (Designation of Additional Candidates); Section 8.22 (Requirement for Petition Supporting Additional Candidate); Section 8.23 (Notice of Contested Election). See also proposed deletion of the term ‘‘District Nominating Committee’’ in FINRA Regulation By-Laws, Article I (Definitions) and Article IV, Section 4.16 (Communication of Views Regarding Contested Election or Nomination). 29 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.8 (Self-Nomination of Candidates and Vacancy Appointments). 30 Supra note 29. VerDate Mar<15>2010 17:54 Mar 04, 2011 Jkt 223001 accessible, transparent and effective election process. The current By-Laws task District Nominating Committees with endeavoring to secure appropriate and fair representation of the various sections of the district and classes and types of FINRA members within the district.31 To further this goal, FINRA proposes to require that each District Committee member represent and be directly elected by the applicable classification of members (that are eligible to vote in the district) based on the size of the firm with which he or she is associated. Specifically, candidates would represent one of the following three classifications, as are currently defined in the By-Laws, depending on the size of the firm with which they are associated: Small Firm (up to 150 registered representatives),32 Mid-Size Firm (151 to 499 registered representatives),33 or Large Firm (500 or more registered representatives) 34 (the ‘‘firm size classifications’’).35 As proposed, the Board would determine the composition of District Committees based on firm size classifications, taking into account the composition of the membership and the Board.36 To reflect the District Committees’ current composition, as well as the representation classifications employed by the FINRA Board of Governors (i.e., Large Firm, Mid-Size Firm and Small Firm Governors), the FINRA Regulation Board has determined that, if the proposed rule change is approved, three-sevenths of the District Committee members would be associated with Small Firms, one-seventh with Mid-Size Firms, and three-sevenths with Large Firms. Each classification of candidates would self-nominate and be subject to the vote of eligible firms in their size classification.37 Such ratios are generally consistent with those established under the FINRA By-Laws for the election of industry Governors on the Board of Governors and under the FINRA Regulation By-Laws for the 31 See FINRA Regulation By-Laws, Article VIII, Section 8.17 (District Nominating Committee Slate). 32 FINRA Regulation By-Laws, Article I, paragraph (kk). 33 FINRA Regulation By-Laws, Article I, paragraph (bb). 34 FINRA Regulation By-Laws, Article I, paragraph (z). 35 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees). 36 Supra note 35. 37 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees), Section 8.9 (FINRA Members Eligible to Vote) and Section 8.17 (Election Results). PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 election of industry members of the National Adjudicatory Council.38 The FINRA Regulation By-Laws currently require that a District Committee member be registered with a FINRA member eligible to vote in the applicable district and work primarily from such member’s principal office or a branch office that is located within the district where the member serves on a District Committee.39 The proposal would clarify that each District Committee member be associated with a FINRA member eligible to vote in the district for District Committee elections and registered in the capacity of a branch manager or principal or denoted as a corporate officer of the FINRA member.40 This requirement is designed to ensure that District Committee members have requisite experience for purposes of participating in the District Committee meetings. The FINRA Regulation By-Laws currently limit District Committee members to serving no more than two full three-year terms consecutively. The proposed rule change would limit this provision further, to prohibit consecutive full terms.41 This requirement would provide for turnover of representation on the District Committees, with the goal of bringing different perspectives and views to them, while still allowing individuals interested in serving multiple terms to do so on a non-consecutive basis. The proposed rule change would codify that District Committees would meet on a regional level, as has been their practice for several years; 42 as proposed, Schedule A of the By-Laws sets out the five regions and the districts in them. The proposed rule change would also eliminate the requirement for the election of district officers in 38 See FINRA By-Laws, Article I (Definitions) and Article VII, Section 4 (Composition and Qualifications of the Board); FINRA Regulation ByLaws, Article V, Section 5.2 (Number of Members and Qualifications). See also Securities Exchange Act Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. SR–NASD–2007–023). 39 See FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees). 40 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees). 41 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.3 (Term of Office of District Committee Members). 42 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.5 (Meetings of District Committees). See also proposed FINRA Regulation By-Laws, Article VIII, Section 8.1 (Establishment of Districts and Regions) (authorizing the Board to organize the districts into regions to promote efficiency and sound administration). E:\FR\FM\07MRN1.SGM 07MRN1 Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices current Section 8.6,43 to allow the flexibility to run a District Committee without officers if that is more efficient in particular districts, especially since the meetings are held on a regional basis and many administrative duties formerly performed by District Committee chairpersons (e.g., preparing meeting agendas and inviting speakers) are currently performed by FINRA staff.44 srobinson on DSKHWCL6B1PROD with NOTICES Committee Size Recalibration The FINRA Regulation By-Laws provide that a District Committee shall consist of between five and 20 members, unless otherwise provided by resolution of the Board, and that the authorized number of members shall be determined from time to time by the Board, with the caveat that any reduction in the authorized number of such members shall not shorten any existing member’s term.45 FINRA is proposing a recalibration of District Committee size consistent with this provision. Specifically, the Board has determined to reduce the size of each District Committee other than the New York District Committee by two, from nine to seven, and to increase the New York District Committee—the only district comprising its entire region—by two, from 12 to 14. The proposed reduction in the size of most District Committees would address the membership’s generally reduced interest in serving on District Committees, as described above, and accommodate the larger number of participants in current regional combined District Committee meetings as compared with former individual District Committee meetings. Both current and former District Committee members and FINRA staff have stated that while the meetings should be held on a regional basis, the number of participants can inhibit productive discussion by all committee members. Under the current structure, the West and South Regions, each composed of three districts, have up to 27 District Committee members attend regional meetings. The Midwest and North Regions, each composed of two districts, have up to 18 District Committee members attend regional meetings. The proposed structure would reduce 43 See FINRA Regulation By-Laws, Article VIII, Section 8.6 (Election of District Officers). 44 The proposed rule change would make a conforming amendment to eliminate the reference to consultation with the Chair of the District Committee regarding the logistics of District Committee meetings. See proposed FINRA Regulation By-Laws, Article VIII, Section 8.5 (Meetings of District Committees). 45 See FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District Committees). VerDate Mar<15>2010 17:54 Mar 04, 2011 Jkt 223001 attendees to 21 in the West and South Regions and 14 in the Midwest and North Regions. This size recalibration would allow each District Committee to meet the proposed 3–1–3 ratio of Small Firm, Mid-Size Firm and Large Firm representation. In contrast, the proposed increased District Committee size for the New York District would assure a larger pool of District Committee members is available to serve on hearing panels in the district; recognize the fact that, unlike any other district, it comprises its own region entirely; and allow it to meet the proposed 3–1–3 ratio of Small Firm, Mid-Size Firm and Large Firm representation. The proposed decrease in the authorized number of members from nine to seven on each District Committee (except New York, which would increase from 12 to 14) would not shorten the term of office of any existing District Committee member. The change in District Committee size would be effected over three years, concurrent with the expiration of current District Committee members’ terms, so that all current District Committee members would serve out their full terms.46 FINRA proposes that, if no individual seeks to be a candidate for a particular District Committee vacancy, the FINRA CEO, or his or her designee, will appoint an individual meeting the qualification requirements of Section 8.2(a), including representing the applicable firm size classification, to the 46 As noted above, all District Committees currently have nine members, with the exception of the New York District Committee, which has 12 members; one-third of each District Committee’s positions are available for election each year. To effect the transition for all District Committees (except New York), and assuming the transition period were to start in 2011, the three current District Committee members whose terms expire in 2011 would be replaced with three newly elected District Committee members, each representing a different firm size classification (Small Firm, MidSize Firm and Large Firm); in 2012 and 2013, the three current District Committee members whose terms expire in each of those years would be replaced with two newly elected District Committee members (in each year, one representing a Small Firm and one representing a Large Firm). At the end of the three-year transition period, the District Committee would consist of seven District Committee members with the proposed 3–1–3 ratio of Small Firm, Mid-Size Firm and Large Firm representation. The New York District Committee, which currently has four positions available for election each year, would elect five District Committee members in 2011 and 2012 (in each year, two representing Small Firms, one representing a Mid-Size Firm and two representing Large Firms) and four District Committee members in 2013 (two representing Small Firms and two representing Large Firms). The New York District Committee would then consist of 14 District Committee members, meeting the proposed 3–1–3 ratio of Small Firm, Mid-Size Firm and Large Firm representation. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 12393 full term of that vacancy.47 If the FINRA CEO, or his or her designee, is unable to identify or appoint an individual meeting the requirement of representing the applicable firm size classification, he or she may appoint for that vacancy a qualified individual from another firm size classification.48 Proposed Elimination of the Advisory Council The proposed rule change would eliminate the Advisory Council. The Advisory Council is composed of the chairs of each of the District Committees, and is charged to provide input to the Committees and the Board on policy issues, including evaluation of the hearing process and industry practices, and to work closely with the District Committees to develop policy recommendations.49 The proposed streamlined District Committee structure and directly nominated and elected representation process, together with an initiative by FINRA to refocus District Committee meetings to better seek member views on their districts’ needs and responses to FINRA proposals, obviate the need for the Advisory Council. Given the changes proposed, FINRA would be able to realize the goals of the District Committee system, i.e., to seek member views on policy issues and recommendations, directly from the membership without the time and resource expenditures now required of Advisory Council members and FINRA staff. Other Proposed Changes The proposed rule change would make several other procedural and administrative changes. It would replace references to ‘‘Executive Vice President, Regulatory Policy and Programs’’ and the ‘‘Executive Vice President, Member Regulation’’ with the ‘‘Chief Executive Officer or his or her designee’’ to recognize organizational changes and provide for flexibility for future organizational changes without the need to amend the By-Laws in the future.50 It 47 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.8 (Self-Nomination of Candidates and Vacancy Appointments). 48 Supra note 47. See also proposed FINRA Regulation By-Laws, Article VIII, Section 8.4 (Filling of Vacancies on District Committees) (granting comparable authority to the District Committee members to fill vacancies arising prior to the expiration of a District Committee member’s term of office, where the CEO or his or her designee determines, pursuant to Section 8.2(d), that such vacancy should be filled). 49 See FINRA Regulation By-Laws, Article VIII, Section 8.7 (Advisory Council). 50 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.2 (Composition of District E:\FR\FM\07MRN1.SGM Continued 07MRN1 12394 Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices would also make several changes to the election process to make it more streamlined and efficient, including centralizing it within the Corporate Secretary’s office, and diminishing the need for FINRA District office effort. FINRA proposes to permit the Corporate Secretary to develop published procedures for administrative support provided to candidates, which would allow the Secretary’s administrative experience with other FINRA elections to inform these procedures.51 The proposed rule change also would modify the ballot preparation to recognize this centralization within the Corporate Secretary’s office and the elimination of the District Nomination Committees.52 In addition, the proposed rule change would make the vote qualification lists in current Section 8.26 tailored to firm size classification and the applicable list available upon request to a candidate based on the size of the firm with which he or she is associated, since many more candidates are foreseen under the new process, and FINRA anticipates that not all of them would likely need or seek these lists.53 The proposed rule change would simplify the tabulation of ballots by the Independent Agent by centralizing it under the Corporate Secretary.54 In addition, it would recognize that election results would be determined based on those firms in particular firm size classifications.55 Finally, it would make certain other administrative changes, such as revising the By-Laws to reflect the current address of FINRA Regulation’s registered office 56 and eliminating the obsolete reference to the Canal Zone in District No. 7.57 As noted in Item 2 of this filing, the effective date of the proposed rule change will be the date of Commission approval. srobinson on DSKHWCL6B1PROD with NOTICES 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions Committees), Section 8.4 (Filling of Vacancies on District Committees), Section 8.5 (Meeting of District Committees), and Section 8.8 (SelfNomination of Candidates and Vacancy Appointments). 51 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.10 (Administrative Support). 52 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.11 (Ballots). 53 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.12 (Vote Qualification List). 54 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.14 (General Procedures for Qualification and Accounting of Ballots). 55 See proposed FINRA Regulation By-Laws, Article VIII, Section 8.17 (Election Results). 56 See proposed FINRA Regulation By-Laws, Article II, Section 2.1 (Location). 57 See proposed Schedule A to the FINRA Regulation By-Laws. VerDate Mar<15>2010 17:54 Mar 04, 2011 Jkt 223001 of Section 15A(b)(6) of the Act,58 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change will result in a more accessible, transparent and effective District Committee election process and will align the representation of members on the District Committees to follow more closely the industry representation on the FINRA Board. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2011–011 on the subject line. 58 15 PO 00000 U.S.C. 78o–3(b)(6). Frm 00080 Fmt 4703 Paper Comments • Send paper comments in triplicate to Cathy H. Ahn, Deputy Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2011–011. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2011–011 and should be submitted on or before March 28, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.59 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–5080 Filed 3–4–11; 8:45 am] BILLING CODE 8011–01–P SELECTIVE SERVICE SYSTEM Form Submitted to the Office of Management and Budget for Extension of Clearance ACTION: The following form has been submitted to the Office of Management and Budget (OMB) for extension of 59 17 Sfmt 4703 Selective Service System. Notice. AGENCY: E:\FR\FM\07MRN1.SGM CFR 200.30–3(a)(12). 07MRN1

Agencies

[Federal Register Volume 76, Number 44 (Monday, March 7, 2011)]
[Notices]
[Pages 12390-12394]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-5080]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64002; File No. SR-FINRA-2011-011]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
By-Laws of FINRA Regulation, Inc. With Regard to District Committee 
Structure and Governance

March 2, 2011.
    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 February 25, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the By-Laws of FINRA's regulatory 
subsidiary (``FINRA Regulation'') with regard to District Committee 
structure and governance to, among other things, adjust the size and 
composition of District Committees to align more closely with the 
industry representation on the FINRA Board and replace District 
Nominating Committees with a process of direct nomination and election 
based on firm size, as discussed in more detail below.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On July 30, 2007, NASD and the New York Stock Exchange consolidated 
their member firm regulation operations into a combined organization, 
FINRA. As part of the consolidation, the SEC approved amendments to the 
NASD By-Laws to implement governance and related changes.\3\ The 
approved changes included a FINRA Board governance structure that 
balanced public and industry representation and designated seven 
governor seats to represent member firms based on the criteria of firm 
size.
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    \3\ See Securities Exchange Act Release No. 56145 (July 26, 
2007), 72 FR 42169 (August 1, 2007), as amended by Securities 
Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 
2008) (Order Approving File No. SR-NASD-2007-023).
---------------------------------------------------------------------------

    FINRA Regulation (formerly known as NASD Regulation) is a 
subsidiary of FINRA that operates according to the Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries, as amended, which 
was first adopted at NASD Regulation's formation in 1996.\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 37106 (April 11, 
1996), 61 FR 16944 (April 18, 1996) (Order Approving File No. SR-
NASD-96-02).
---------------------------------------------------------------------------

    The proposed rule change would modify the FINRA Regulation By-Laws 
(or ``By-Laws'') with regard to District Committees in several 
respects. It would:
     Adjust the size and composition of District Committees 
over a three-year transition period to align more closely with the 
industry representation on the FINRA Board;
     Replace District Nominating Committees with a process of 
direct nomination and election based on firm size;
     Codify current practice that District Committees meet on a 
regional basis;
     Eliminate the Advisory Council;
     Amend the qualification requirements and prescribe further 
term limits for District Committee members;
     Revise procedures for qualification and accounting of 
ballots to be administered solely by an Independent Agent; and
     Make other procedural and administrative changes.
District Committees, District Nominating Committees, Districts and 
Regions
    The By-Laws establish the procedures for setting the size and 
electing the members to FINRA District Committees and District 
Nominating Committees.\5\ These By-Law provisions have not changed 
significantly since becoming permanently effective in January 1998.\6\ 
They were adopted in part to respond to undertakings ordered by the SEC 
in 1996 (the ``1996 SEC Settlement Order'') concurrent with the 
issuance of a report pursuant to Section 21(a) of the Exchange Act 
regarding NASD (the ``1996 21(a) Report'').\7\
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    \5\ See FINRA Regulation By-Laws, Article VIII, Section 8.1 
(Establishment of Districts) and Section 8.2 (Composition of 
District Committees).
    \6\ See Securities Exchange Act Release No. 39326 (November 14, 
1997), 62 FR 62385 (November 21, 1997) (Order Approving File No. SR-
NASD-96-29).
    \7\ See In the Matter of National Association of Securities 
Dealers, Inc., Securities Exchange Act Release No. 37538, 1996 SEC 
LEXIS 2146 (August 8, 1996).
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    The role of the District Committees was significantly narrowed as a 
result of undertakings in the 1996 SEC Settlement Order.\8\ Until 
January 1998,

[[Page 12391]]

the role of District Committees was addressed in the NASD By-Laws, 
which provided in part that District Committees shall also serve as the 
District Business Conduct Committees (``DBCCs'') for their respective 
districts.\9\ The undertakings in the 1996 Settlement Order provided, 
among other things, that DBCCs not be involved in deciding whether or 
not to institute disciplinary proceedings, and that District Committees 
not be involved in the review or approval of membership 
applications.\10\ As a consequence, NASD amended its corporate 
governance documents to comply with these undertakings, including 
adopting NASD Regulation By-Laws that, among other things, did not 
provide a role for District Committees in the review or approval of 
membership applications and eliminated DBCCs.\11\
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    \8\ Supra note 7, at Undertaking 4.
    \9\ See NASD By-Laws, Article VIII, Section 2(c) (District 
Committees and District Business Conduct Committees), amended 
effective September 4, 1990, prior to the permanent adoption of the 
NASD Regulation By-Laws effective January 15, 1998 (``The District 
Committees shall also serve as the District Business Conduct 
Committees for their respective districts'').
    \10\ Supra note 7, at Undertaking 4.
    \11\ See Securities Exchange Act Release No. 39326 (November 14, 
1997), 62 FR 62385 (November 21, 1997) (File No. SR-NASD-96-29).
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    The By-Laws task the FINRA Regulation Board of Directors with 
determining the boundaries of the districts and the size of the 
District Committees.\12\ The FINRA Regulation Board has established 
eleven districts, overseen by FINRA District Offices, which are 
administratively grouped within five regions:
---------------------------------------------------------------------------

    \12\ See FINRA Regulation By-Laws, Article VIII, Section 8.1 
(Establishment of Districts) and Section 8.2 (Composition of 
District Committees).
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     West Region--Districts 1 (San Francisco), 2 (Los Angeles), 
and 3 (Denver and Seattle);
     Midwest Region--Districts 4 (Kansas City) and 8 (Chicago);
     South Region--Districts 5 (New Orleans), 6 (Dallas) and 7 
(Atlanta and Boca Raton);
     North Region--Districts 9 (Philadelphia and Woodbridge) 
and 11 (Boston); and
     New York Region--District 10 (New York City and Long 
Island).\13\
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    \13\ See Schedule A to FINRA Regulation By-Laws.
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    Today, as provided in the By-Laws, FINRA District Committee members 
contribute to the regulatory process by, among other things, serving as 
panelists in disciplinary proceedings in accordance with FINRA Rules; 
considering and recommending policies and rule changes; and endeavoring 
to educate FINRA members and others as to the objects, purposes and 
work of FINRA and FINRA Regulation.\14\ The District Committees meet on 
average twice each year, jointly with the other District Committees in 
their respective regions. Currently, District Committees are composed 
of nine members, with the exception of the New York District 
Committee's twelve. Due to staggered three-year District Committee 
membership terms, one-third of each District Committee's positions are 
available for election each year. In some cases, a District Committee 
may have additional positions to fill if a vacancy has been created by 
death, resignation, removal or other cause.\15\ The District Nominating 
Committees are composed of five members each, a majority of whom have 
served on a District Committee, are current or former FINRA Regulation 
Directors, or current or former FINRA Governors.\16\
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    \14\ See FINRA Regulation By-Laws, Article VIII, Section 8.2 
(Composition of District Committees).
    \15\ See FINRA Regulation By-Laws, Article VIII, Section 8.4 
(Filling of Vacancies on District Committees).
    \16\ See FINRA Regulation By-Laws, Article VIII, Section 8.9 
(Composition of District Nominating Committees).
---------------------------------------------------------------------------

Current Nomination and Election Process
    As part of the election process, the By-Laws require the Corporate 
Secretary to provide each District Nominating Committee and District 
Director annual notice, due on or before June 1 of each year, 
identifying the members of the District Committees and District 
Nominating Committees whose terms are expiring within the next calendar 
year.\17\ FINRA's Office of the Corporate Secretary issues an Election 
Notice announcing the vacancies in all eleven districts and soliciting 
any interested party to complete and submit a candidate profile form to 
the applicable FINRA District Director.\18\
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    \17\ See FINRA Regulation By-Laws, Article VIII, Section 8.15 
(Notice to District Nominating Committee).
    \18\ See FINRA Regulation By-Laws, Article VIII, Section 8.16 
(Solicitation of Candidates and Secretary's Notice to FINRA 
Members).
---------------------------------------------------------------------------

    Completed candidate profile forms received before the prescribed 
cutoff date are shared with the District Nominating Committees for 
review, a process that usually involves candidate interviews.\19\ After 
its review, each District Nominating Committee nominates a slate of 
candidates for election, which may include an alternate candidate for 
each position.\20\ The District Directors, acting for the District 
Nominating Committees, notify FINRA's Corporate Secretary of each 
nominated candidate and the office to which the candidate is nominated 
(i.e., District Committee member or District Nominating Committee 
member).\21\ Soon after receiving the District Nominating Committees' 
slates (and, as mandated by the By-Laws, on or before October 1 of each 
year), FINRA's Office of the Corporate Secretary issues another 
Election Notice announcing the nominees for upcoming vacancies on the 
District and the District Nominating Committees and informing members 
about the petition and election process.\22\ If the slate is not 
contested (i.e., there is one candidate for each position), it is 
deemed elected without a vote by the district's member firms.\23\
---------------------------------------------------------------------------

    \19\ See FINRA Regulation By-Laws, Article VIII, Section 8.17 
(District Nominating Committee Slate).
    \20\ Supra note 19.
    \21\ See FINRA Regulation By-Laws, Article VIII, Section 8.18 
(Notification of Nomination).
    \22\ Supra note 21.
    \23\ See FINRA Regulation By-Laws, Article VIII, Section 8.19 
(Uncontested Election).
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    The By-Laws also provide a process whereby a registered person 
meeting the vacancy requirements may be considered for nomination as an 
additional (``petition'') candidate in a contested election. To be 
considered for nomination as a petition candidate, such individual must 
deliver a written notice to the District Director within 14 calendar 
days of the issuance of the Election Notice of nominated 
candidates.\24\ The Secretary of FINRA Regulation must provide to any 
such candidate a list, with applicable contact information, of FINRA 
members eligible to vote in the candidate's district.\25\ Within 30 
calendar days after the date of mailing of the list to the candidate, 
the candidate must submit a petition to the District Nominating 
Committee with signatures from at least ten percent of the FINRA 
members eligible to vote in his or her district.\26\ If a candidate 
submits a petition with the requisite number of valid signatures by the 
designated date, he or she is nominated and a contested election is 
held.\27\
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    \24\ See FINRA Regulation By-Laws, Article VIII, Section 8.20 
(Designation of Additional Candidates).
    \25\ See FINRA Regulation By-Laws, Article VIII, Section 8.21 
(List of FINRA Members Eligible to Vote).
    \26\ See FINRA Regulation By-Laws, Article VIII, Section 8.22 
(Requirement for Petition Supporting Additional Candidate).
    \27\ See FINRA Regulation By-Laws, Article VIII, Section 8.22 
(Requirement for Petition Supporting Additional Candidate) and 
Section 8.23 (Notice of Contested Election).
---------------------------------------------------------------------------

    In recent years, FINRA has witnessed a decline in eligible 
individuals willing to serve on the District or District Nominating 
Committees or undergo the nomination process. Potential candidates have 
expressed several reasons for their lack of interest,

[[Page 12392]]

including: the reduced role of the District Committees following the 
1996 21(a) Report; the perceived difficulties of undergoing the 
District Nominating Committee process (usually including rigorous 
interviews) as compared to the signature-collecting process of becoming 
a petition candidate; and the perception that slate candidates 
nominated by District Nominating Committees represent the industry less 
effectively than more ``independent'' petition candidates.
Proposed Changes to the Nomination Process and Composition of District 
Committees
    Based on the concerns described above, FINRA proposes to eliminate 
the current nomination and petition process, including eliminating 
District Nominating Committees in their entirety,\28\ and to adopt a 
more streamlined self-nomination and election process that facilitates 
member candidacy and fosters representation from Small Firms, Mid-Size 
Firms and Large Firms (as further described below). As proposed, an 
individual meeting the qualification requirements of Section 8.2(a) of 
the By-Laws who is interested in running for election to a District 
Committee would simply deliver written notice of such intent to the 
Secretary of FINRA Regulation within 30 calendar days of the 
Secretary's issuance of the Notice of election to FINRA members.\29\ 
Any individual meeting the qualification requirements would be 
designated as a candidate without having to undergo the current 
nominating or petition process.\30\ FINRA believes that direct 
candidate nomination and election by the membership would create a more 
accessible, transparent and effective election process.
---------------------------------------------------------------------------

    \28\ See, e.g., proposed deletions of FINRA Regulation By-Laws, 
Article VIII, Section 8.9 (Composition of District Nominating 
Committees); Section 8.10 (Term of Office of District Nominating 
Committee Members); Section 8.11 (Filling of Vacancies for District 
Nominating Committees); Section 8.12 (Meetings of District 
Nominating Committees); Section 8.13 (Election of District 
Nominating Committee Officers); Section 8.14 (Expenses of District 
Nominating Committees); Section 8.15 (Notice to District Nominating 
Committee); Section 8.17 (District Nominating Committee Slate); 
Section 8.18 (Notification of Nomination); Section 8.19 (Uncontested 
Election); Section 8.20 (Designation of Additional Candidates); 
Section 8.22 (Requirement for Petition Supporting Additional 
Candidate); Section 8.23 (Notice of Contested Election). See also 
proposed deletion of the term ``District Nominating Committee'' in 
FINRA Regulation By-Laws, Article I (Definitions) and Article IV, 
Section 4.16 (Communication of Views Regarding Contested Election or 
Nomination).
    \29\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.8 (Self-Nomination of Candidates and Vacancy 
Appointments).
    \30\ Supra note 29.
---------------------------------------------------------------------------

    The current By-Laws task District Nominating Committees with 
endeavoring to secure appropriate and fair representation of the 
various sections of the district and classes and types of FINRA members 
within the district.\31\ To further this goal, FINRA proposes to 
require that each District Committee member represent and be directly 
elected by the applicable classification of members (that are eligible 
to vote in the district) based on the size of the firm with which he or 
she is associated. Specifically, candidates would represent one of the 
following three classifications, as are currently defined in the By-
Laws, depending on the size of the firm with which they are associated: 
Small Firm (up to 150 registered representatives),\32\ Mid-Size Firm 
(151 to 499 registered representatives),\33\ or Large Firm (500 or more 
registered representatives) \34\ (the ``firm size 
classifications'').\35\ As proposed, the Board would determine the 
composition of District Committees based on firm size classifications, 
taking into account the composition of the membership and the 
Board.\36\
---------------------------------------------------------------------------

    \31\ See FINRA Regulation By-Laws, Article VIII, Section 8.17 
(District Nominating Committee Slate).
    \32\ FINRA Regulation By-Laws, Article I, paragraph (kk).
    \33\ FINRA Regulation By-Laws, Article I, paragraph (bb).
    \34\ FINRA Regulation By-Laws, Article I, paragraph (z).
    \35\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2 (Composition of District Committees).
    \36\ Supra note 35.
---------------------------------------------------------------------------

    To reflect the District Committees' current composition, as well as 
the representation classifications employed by the FINRA Board of 
Governors (i.e., Large Firm, Mid-Size Firm and Small Firm Governors), 
the FINRA Regulation Board has determined that, if the proposed rule 
change is approved, three-sevenths of the District Committee members 
would be associated with Small Firms, one-seventh with Mid-Size Firms, 
and three-sevenths with Large Firms. Each classification of candidates 
would self-nominate and be subject to the vote of eligible firms in 
their size classification.\37\ Such ratios are generally consistent 
with those established under the FINRA By-Laws for the election of 
industry Governors on the Board of Governors and under the FINRA 
Regulation By-Laws for the election of industry members of the National 
Adjudicatory Council.\38\
---------------------------------------------------------------------------

    \37\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2 (Composition of District Committees), Section 8.9 (FINRA 
Members Eligible to Vote) and Section 8.17 (Election Results).
    \38\ See FINRA By-Laws, Article I (Definitions) and Article VII, 
Section 4 (Composition and Qualifications of the Board); FINRA 
Regulation By-Laws, Article V, Section 5.2 (Number of Members and 
Qualifications). See also Securities Exchange Act Release No. 56145 
(July 26, 2007), 72 FR 42169 (August 1, 2007), as amended by 
Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 
32377 (June 6, 2008) (Order Approving File No. SR-NASD-2007-023).
---------------------------------------------------------------------------

    The FINRA Regulation By-Laws currently require that a District 
Committee member be registered with a FINRA member eligible to vote in 
the applicable district and work primarily from such member's principal 
office or a branch office that is located within the district where the 
member serves on a District Committee.\39\ The proposal would clarify 
that each District Committee member be associated with a FINRA member 
eligible to vote in the district for District Committee elections and 
registered in the capacity of a branch manager or principal or denoted 
as a corporate officer of the FINRA member.\40\ This requirement is 
designed to ensure that District Committee members have requisite 
experience for purposes of participating in the District Committee 
meetings.
---------------------------------------------------------------------------

    \39\ See FINRA Regulation By-Laws, Article VIII, Section 8.2 
(Composition of District Committees).
    \40\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2 (Composition of District Committees).
---------------------------------------------------------------------------

    The FINRA Regulation By-Laws currently limit District Committee 
members to serving no more than two full three-year terms 
consecutively. The proposed rule change would limit this provision 
further, to prohibit consecutive full terms.\41\ This requirement would 
provide for turnover of representation on the District Committees, with 
the goal of bringing different perspectives and views to them, while 
still allowing individuals interested in serving multiple terms to do 
so on a non-consecutive basis.
---------------------------------------------------------------------------

    \41\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.3 (Term of Office of District Committee Members).
---------------------------------------------------------------------------

    The proposed rule change would codify that District Committees 
would meet on a regional level, as has been their practice for several 
years; \42\ as proposed, Schedule A of the By-Laws sets out the five 
regions and the districts in them. The proposed rule change would also 
eliminate the requirement for the election of district officers in

[[Page 12393]]

current Section 8.6,\43\ to allow the flexibility to run a District 
Committee without officers if that is more efficient in particular 
districts, especially since the meetings are held on a regional basis 
and many administrative duties formerly performed by District Committee 
chairpersons (e.g., preparing meeting agendas and inviting speakers) 
are currently performed by FINRA staff.\44\
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    \42\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.5 (Meetings of District Committees). See also proposed 
FINRA Regulation By-Laws, Article VIII, Section 8.1 (Establishment 
of Districts and Regions) (authorizing the Board to organize the 
districts into regions to promote efficiency and sound 
administration).
    \43\ See FINRA Regulation By-Laws, Article VIII, Section 8.6 
(Election of District Officers).
    \44\ The proposed rule change would make a conforming amendment 
to eliminate the reference to consultation with the Chair of the 
District Committee regarding the logistics of District Committee 
meetings. See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.5 (Meetings of District Committees).
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Committee Size Recalibration
    The FINRA Regulation By-Laws provide that a District Committee 
shall consist of between five and 20 members, unless otherwise provided 
by resolution of the Board, and that the authorized number of members 
shall be determined from time to time by the Board, with the caveat 
that any reduction in the authorized number of such members shall not 
shorten any existing member's term.\45\ FINRA is proposing a 
recalibration of District Committee size consistent with this 
provision. Specifically, the Board has determined to reduce the size of 
each District Committee other than the New York District Committee by 
two, from nine to seven, and to increase the New York District 
Committee--the only district comprising its entire region--by two, from 
12 to 14.
---------------------------------------------------------------------------

    \45\ See FINRA Regulation By-Laws, Article VIII, Section 8.2 
(Composition of District Committees).
---------------------------------------------------------------------------

    The proposed reduction in the size of most District Committees 
would address the membership's generally reduced interest in serving on 
District Committees, as described above, and accommodate the larger 
number of participants in current regional combined District Committee 
meetings as compared with former individual District Committee 
meetings. Both current and former District Committee members and FINRA 
staff have stated that while the meetings should be held on a regional 
basis, the number of participants can inhibit productive discussion by 
all committee members. Under the current structure, the West and South 
Regions, each composed of three districts, have up to 27 District 
Committee members attend regional meetings. The Midwest and North 
Regions, each composed of two districts, have up to 18 District 
Committee members attend regional meetings. The proposed structure 
would reduce attendees to 21 in the West and South Regions and 14 in 
the Midwest and North Regions. This size recalibration would allow each 
District Committee to meet the proposed 3-1-3 ratio of Small Firm, Mid-
Size Firm and Large Firm representation.
    In contrast, the proposed increased District Committee size for the 
New York District would assure a larger pool of District Committee 
members is available to serve on hearing panels in the district; 
recognize the fact that, unlike any other district, it comprises its 
own region entirely; and allow it to meet the proposed 3-1-3 ratio of 
Small Firm, Mid-Size Firm and Large Firm representation.
    The proposed decrease in the authorized number of members from nine 
to seven on each District Committee (except New York, which would 
increase from 12 to 14) would not shorten the term of office of any 
existing District Committee member. The change in District Committee 
size would be effected over three years, concurrent with the expiration 
of current District Committee members' terms, so that all current 
District Committee members would serve out their full terms.\46\
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    \46\ As noted above, all District Committees currently have nine 
members, with the exception of the New York District Committee, 
which has 12 members; one-third of each District Committee's 
positions are available for election each year. To effect the 
transition for all District Committees (except New York), and 
assuming the transition period were to start in 2011, the three 
current District Committee members whose terms expire in 2011 would 
be replaced with three newly elected District Committee members, 
each representing a different firm size classification (Small Firm, 
Mid-Size Firm and Large Firm); in 2012 and 2013, the three current 
District Committee members whose terms expire in each of those years 
would be replaced with two newly elected District Committee members 
(in each year, one representing a Small Firm and one representing a 
Large Firm). At the end of the three-year transition period, the 
District Committee would consist of seven District Committee members 
with the proposed 3-1-3 ratio of Small Firm, Mid-Size Firm and Large 
Firm representation. The New York District Committee, which 
currently has four positions available for election each year, would 
elect five District Committee members in 2011 and 2012 (in each 
year, two representing Small Firms, one representing a Mid-Size Firm 
and two representing Large Firms) and four District Committee 
members in 2013 (two representing Small Firms and two representing 
Large Firms). The New York District Committee would then consist of 
14 District Committee members, meeting the proposed 3-1-3 ratio of 
Small Firm, Mid-Size Firm and Large Firm representation.
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    FINRA proposes that, if no individual seeks to be a candidate for a 
particular District Committee vacancy, the FINRA CEO, or his or her 
designee, will appoint an individual meeting the qualification 
requirements of Section 8.2(a), including representing the applicable 
firm size classification, to the full term of that vacancy.\47\ If the 
FINRA CEO, or his or her designee, is unable to identify or appoint an 
individual meeting the requirement of representing the applicable firm 
size classification, he or she may appoint for that vacancy a qualified 
individual from another firm size classification.\48\
---------------------------------------------------------------------------

    \47\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.8 (Self-Nomination of Candidates and Vacancy 
Appointments).
    \48\ Supra note 47. See also proposed FINRA Regulation By-Laws, 
Article VIII, Section 8.4 (Filling of Vacancies on District 
Committees) (granting comparable authority to the District Committee 
members to fill vacancies arising prior to the expiration of a 
District Committee member's term of office, where the CEO or his or 
her designee determines, pursuant to Section 8.2(d), that such 
vacancy should be filled).
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Proposed Elimination of the Advisory Council
    The proposed rule change would eliminate the Advisory Council. The 
Advisory Council is composed of the chairs of each of the District 
Committees, and is charged to provide input to the Committees and the 
Board on policy issues, including evaluation of the hearing process and 
industry practices, and to work closely with the District Committees to 
develop policy recommendations.\49\ The proposed streamlined District 
Committee structure and directly nominated and elected representation 
process, together with an initiative by FINRA to refocus District 
Committee meetings to better seek member views on their districts' 
needs and responses to FINRA proposals, obviate the need for the 
Advisory Council. Given the changes proposed, FINRA would be able to 
realize the goals of the District Committee system, i.e., to seek 
member views on policy issues and recommendations, directly from the 
membership without the time and resource expenditures now required of 
Advisory Council members and FINRA staff.
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    \49\ See FINRA Regulation By-Laws, Article VIII, Section 8.7 
(Advisory Council).
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Other Proposed Changes
    The proposed rule change would make several other procedural and 
administrative changes. It would replace references to ``Executive Vice 
President, Regulatory Policy and Programs'' and the ``Executive Vice 
President, Member Regulation'' with the ``Chief Executive Officer or 
his or her designee'' to recognize organizational changes and provide 
for flexibility for future organizational changes without the need to 
amend the By-Laws in the future.\50\ It

[[Page 12394]]

would also make several changes to the election process to make it more 
streamlined and efficient, including centralizing it within the 
Corporate Secretary's office, and diminishing the need for FINRA 
District office effort. FINRA proposes to permit the Corporate 
Secretary to develop published procedures for administrative support 
provided to candidates, which would allow the Secretary's 
administrative experience with other FINRA elections to inform these 
procedures.\51\ The proposed rule change also would modify the ballot 
preparation to recognize this centralization within the Corporate 
Secretary's office and the elimination of the District Nomination 
Committees.\52\ In addition, the proposed rule change would make the 
vote qualification lists in current Section 8.26 tailored to firm size 
classification and the applicable list available upon request to a 
candidate based on the size of the firm with which he or she is 
associated, since many more candidates are foreseen under the new 
process, and FINRA anticipates that not all of them would likely need 
or seek these lists.\53\
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    \50\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2 (Composition of District Committees), Section 8.4 
(Filling of Vacancies on District Committees), Section 8.5 (Meeting 
of District Committees), and Section 8.8 (Self-Nomination of 
Candidates and Vacancy Appointments).
    \51\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.10 (Administrative Support).
    \52\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.11 (Ballots).
    \53\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.12 (Vote Qualification List).
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    The proposed rule change would simplify the tabulation of ballots 
by the Independent Agent by centralizing it under the Corporate 
Secretary.\54\ In addition, it would recognize that election results 
would be determined based on those firms in particular firm size 
classifications.\55\ Finally, it would make certain other 
administrative changes, such as revising the By-Laws to reflect the 
current address of FINRA Regulation's registered office \56\ and 
eliminating the obsolete reference to the Canal Zone in District No. 
7.\57\
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    \54\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.14 (General Procedures for Qualification and Accounting of 
Ballots).
    \55\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.17 (Election Results).
    \56\ See proposed FINRA Regulation By-Laws, Article II, Section 
2.1 (Location).
    \57\ See proposed Schedule A to the FINRA Regulation By-Laws.
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    As noted in Item 2 of this filing, the effective date of the 
proposed rule change will be the date of Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\58\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
result in a more accessible, transparent and effective District 
Committee election process and will align the representation of members 
on the District Committees to follow more closely the industry 
representation on the FINRA Board.
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    \58\ 15 U.S.C. 78o-3(b)(6).
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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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Cathy H. Ahn, Deputy 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2011-011. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2011-011 
and should be submitted on or before March 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
Cathy H. Ahn,
Deputy Secretary.
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    \59\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2011-5080 Filed 3-4-11; 8:45 am]
BILLING CODE 8011-01-P