Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Adoption of FINRA Rule 3110(e) (Responsibility of Member To Investigate Applicants for Registration) in the Consolidated FINRA Rulebook, 546-551 [2014-30902]
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546
Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the 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:
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2014–127 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2014–127. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NASDAQ–2014–127 and should be
submitted on or before January 27, 2015.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Brent J. Fields,
Secretary.
[FR Doc. 2014–30896 Filed 1–5–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73966; File No. SR–FINRA–
2014–038]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to
the Adoption of FINRA Rule 3110(e)
(Responsibility of Member To
Investigate Applicants for Registration)
in the Consolidated FINRA Rulebook
December 30, 2014.
I. Introduction
On September 18, 2014, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
pursuant to Section 19(b)(1) of the
Securities and Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt NASD
Rule 3010(e) relating to background
investigations as FINRA Rule 3110(e) in
the consolidated FINRA rulebook
(‘‘Consolidated FINRA Rulebook’’). The
proposed rule change was published for
comment in the Federal Register on
October 3, 2014.3 The Commission
received 10 comment letters in response
to the Notice.4 On December 8, 2014,
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 73238
(September 26, 2014), 79 FR 59884 (October 3,
2014) (Notice of Filing of SR–FINRA–2014–038)
(‘‘Notice’’).
4 See Letters to Brent J. Fields, Secretary,
Commission, from Joseph C. Peiffer, Executive Vice
President and President-Elect, Public Investors
Arbitration Bar Association, dated October 16, 2014
(‘‘PIABA Letter’’); William A. Jacobson, Clinical
Professor of Law, Cornell University Law School,
dated October 20, 2014 (‘‘Cornell Letter’’); William
Beatty, President, North American Securities
Administrators Association, Inc., dated October 22,
2014 (‘‘NASAA Letter’’); Kyle Ortiz and Kathryn
Hespe, Law Student Clinicians, Investor Advocacy
Clinic, Michigan State University College of Law,
dated October 23, 2014 (‘‘Michigan State Letter’’);
John Astarita and Olivia Darius, Student Interns,
John Jay Legal Services, Inc., Pace University
School of Law, dated October 24, 2014 (‘‘Pace
Letter’’); Kevin Zambrowicz, Associate General
Counsel and Managing Director, the Securities
Industry and Financial Markets Association, dated
October 24, 2014 (‘‘SIFMA Letter’’); Michele Van
Tassel, President, Association of Registration
1 15
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FINRA filed Amendment No.1
responding to these comments and
proposing amendments in response to
the comments.5 The Commission is
publishing this notice to solicit
comments from interested persons on
the filing as amended by Amendment
No.1 and is approving the proposed rule
change, as amended, on an accelerated
basis.
II. Description of the Proposal, as
Modified by Amendment No. 1
As part of the process of developing
the Consolidated FINRA Rulebook,
FINRA is proposing to adopt NASD
Rule 3010(e) (Qualifications
Investigated) relating to background
investigations as FINRA Rule 3110(e).
According to FINRA, the proposed rule
change streamlines and clarifies the rule
language. For instance, NASD Rule
3010(e) currently provides that ‘‘[e]ach
member shall have the responsibility
and duty to ascertain by investigation
the good character, business repute,
qualifications, and experience of any
person prior to making such a
certification in the application of such
person for registration with this
Association,’’ whereas proposed FINRA
Rule 3110(e) provides that ‘‘[e]ach
member shall ascertain by investigation
the good character, business reputation,
qualifications and experience of an
applicant before the member applies to
register that applicant with FINRA and
before making a representation to that
effect on the application for
registration.’’ Further, proposed FINRA
Rule 3110(e) clarifies that a firm is
required to review a copy of an
applicant’s most recent Form U5
(Uniform Termination Notice for
Securities Industry Registration) if the
applicant previously has been registered
with FINRA or another self-regulatory
organization.6
Management, dated October 24, 2014 (‘‘ARM
Letter’’); Robert J. McCarthy, Director of Regulatory
Policy, Wells Fargo Advisors, LLC, dated October
24, 2014 (‘‘Wells Fargo Letter’’); and David T.
Bellaire, Executive Vice President and General
Counsel, the Financial Services Institute, dated
October 24, 2014 (‘‘FSI Letter’’). See also email from
Suzanne Shatto, dated October 6, 2014 (‘‘Shatto
Letter’’). Comment Letters are available at: https://
www.sec.gov/comments/sr-finra-2014-038/
finra2014038.shtml.
5 See SR–FINRA–2014–038, Amendment No. 1,
dated December 8, 2014, (‘‘Amendment No. 1’’).
Amendment No. 1 is described below in Section II
and the text of Amendment No. 1 is available on
FINRA’s Web site at https://www.finra.org, at the
principal office of FINRA, and on the Commission’s
Web site at https://www.sec.gov/rules/sro.shtml.
6 FINRA also is proposing to re-label current
FINRA Rule 3110(e) (Definitions) as FINRA Rule
3110(f) (Definitions) and update the crossreferences in FINRA Rule 3110 to reflect this
change.
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In addition, the proposed rule change
adds to FINRA Rule 3110(e) a
requirement that firms adopt written
procedures that are reasonably designed
to verify the accuracy and completeness
of the information contained in an
applicant’s Form U4 (Uniform
Application for Securities Industry
Registration or Transfer) no later than 30
calendar days after the form is filed with
FINRA. The proposed requirement
would apply to an initial or a transfer
Form U4 for an applicant for
registration, not to amendments to Form
U4. Proposed FINRA Rule 3110(e)
would also require that a firm’s written
procedures, at a minimum, provide for
a national search of reasonably available
public records to verify the accuracy
and completeness of the information
contained in an applicant’s Form U4.
The requirement to conduct a public
records search must be satisfied no later
than 30 calendar days after the initial or
transfer Form U4 is filed with FINRA.
Further, the proposed rule change adds
Supplementary Material .15 to FINRA
Rule 3110 to establish a temporary
program to refund Late Disclosure Fees,
subject to specified conditions.7
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III. Discussion and Commission
Findings
The Commission has carefully
considered the proposed rule change as
modified by Amendment No. 1, the
comments submitted, and FINRA’s
response to the comments, and believes
that FINRA has responded adequately to
the concerns raised by the commenters.8
For the reasons discussed below, the
Commission finds that the proposal is
consistent with the provisions of
Section 15A(b)(6) of the Act,9 which
requires, among other things, that
FINRA rules 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.
By streamlining and clarifying members’
obligations relating to background
investigations of registered personnel
and adding a requirement to adopt
written procedures to verify the
7 The proposed rule change would delete NASD
Rule 3010(f) because it has been rendered obsolete.
The proposed rule change would also delete
Incorporated NYSE Rule 345.11 and NYSE Rule
Interpretation 345.11/01 and/02 as they are
substantially similar to proposed FINRA Rule
3110(e), addressed by other rules or otherwise
rendered obsolete by the approach reflected in
proposed FINRA Rule 3110(e). For convenience, the
proposed rule change refers to Incorporated NYSE
Rules as NYSE Rules.
8 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
9 15 U.S.C. 78o–3(b)(6).
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accuracy and completeness of the
information contained in an applicant’s
Form U4, including the requirement to
conduct a public records search, the
proposal should result in complete and
accurate information in CRD,10 which is
critical from both a regulatory and an
investor protection standpoint. Finally,
the proposed temporary program under
proposed FINRA Rule 3110.15 to refund
Late Disclosure Fees under certain
circumstances should incentivize
members to more accurately and
completely report information relating
to judgments and liens. Having
complete and accurate information in
CRD is important to regulators, the
industry, and the public.
As noted above, the Commission
received ten comment letters in
response to the proposed rule change,
all of which support the proposal.11 For
example, one commenter states the
proposal ‘‘will contribute to ensuring
the accuracy and completeness of the
information disclosed in Form U4.’’ 12
‘‘[A]ccurate [Form] U4 information,’’
adds another commenter, ‘‘is critical to
FINRA’s own regulatory review of an
applicant, as well as for customers,
whose primary source of public
information . . . is through FINRA’s
BrokerCheck.’’ 13 Another commenter
states that requiring ‘‘written procedures
for Form U4 verification . . . will
enable the member firm to conduct
more consistent—and hopefully more
thorough—background checks on
applicants [for registration].’’ 14 One
commenter ‘‘supports the additional
requirements’’ aimed at enhancing the
accuracy of information on Form U4
because ‘‘the Form U4 serves as the
primary avenue through which
investors obtain important information
about brokers.’’ 15 The same commenter
also supports the temporary refund
program because it ‘‘creates an incentive
for firms to make the required updated
filings’’ which in turn would ‘‘increase
the completeness of information
contained in CRD.’’ 16
Three commenters supported the
proposal without qualifications.17 Three
commenters provided suggestions,
including extending the scope of the
proposed public records search to
foreign jurisdictions, specifying that
members unable to comply with all
verification requirements must
demonstrate ‘‘reasonable efforts’’ to do
so,18 clarifying the term ‘‘reasonably
available public records,’’ 19 and
limiting the proposed refund program to
a one-time program.20 Two of these
commenters also requested additional
clarification regarding the requirements
under proposed FINRA Rule 3110(e).21
One commenter supported the
consolidation of NASD Rule 3010(e) and
NYSE Rule 345.11 as proposed FINRA
Rule 3110(e), but (1) requested further
clarification regarding the investigation
and verification requirements; (2)
suggested changes to the verification
requirement, to the implementation date
of the proposal and to the sunset date
of the refund program; and (3) requested
clarification regarding Questions 14K
and 14M on the Form U4.22 Finally, two
commenters supported the purpose of
the verification requirement, but
requested additional clarification
regarding its scope, as well as its
relationship to the investigation
requirement, suggested changes to the
30-day post-submission verification
period,23 as well as to the refund
program, and sought clarification on
procedures for obtaining
reimbursement.24 One of these
commenters also requested clarification
regarding Questions 14K and 14M on
the Form U4.25
1. Relationship Between Investigation
and Verification Requirements
Several commenters requested that
FINRA clarify the relationship between
the investigation and verification
requirements under proposed FINRA
Rule 3110(e).26 Two of these
commenters also asked whether the
investigation and verification
requirements are duplicative, whether
firms can use any of the information
obtained in the investigation process to
comply with the verification process,
and whether firms are required to
conduct the verification process after
the Form U4 has been filed and separate
from the investigation process.27
FINRA responded that although the
requirements are closely related, the
requirements are complementary, not
duplicative, in nature. FINRA states that
proposed FINRA Rule 3110(e) requires
18 See
10 The
information in BrokerCheck is a subset of
the information in CRD.
11 See supra note 4.
12 See NASAA Letter.
13 See PIABA Letter.
14 See Cornell Letter.
15 See NASAA Letter.
16 Id.
17 See Shatto Letter, NASAA Letter and Michigan
State Letter.
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547
PIABA Letter.
Cornell Letter.
20 See Pace Letter.
21 See PIABA Letter and Cornell Letter.
22 See SIFMA Letter and Wells Fargo Letter.
23 See ARM Letter.
24 See FSI Letter.
25 Id.
26 See PIABA Letter, Cornell Letter, SIFMA Letter
and ARM Letter.
27 See SIFMA Letter and ARM Letter.
19 See
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
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that each member ascertain by
investigation the good character,
business reputation, qualifications and
experience of an applicant before the
member applies to register that
applicant with FINRA and before
making a representation to that effect on
the application for registration.28 FINRA
also states that if an applicant has been
previously registered with FINRA or
another self-regulatory organization,
proposed FINRA Rule 3110(e) requires
that a firm review a copy of the
applicant’s most recent Form U5,
including any amendments, within 60
days of the filing date of the applicant’s
Form U4.29 FINRA states that, if the firm
is unable to review the Form U5, the
firm must demonstrate it has made
reasonable efforts to do so.30
Proposed FINRA Rule 3110(e)
requires that a firm establish and
implement written procedures
reasonably designed to verify the
accuracy and completeness of the
information contained in an applicant’s
Form U4 no later than 30 calendar days
after an initial or a transfer Form U4 is
filed with FINRA. While this is a new
requirement, FINRA explains that it is
based on an existing requirement in the
Form U4 that the person signing the
form certify that he has taken
appropriate steps to verify the accuracy
and completeness of the information
contained in that form. FINRA also
states that proposed FINRA Rule 3110(e)
expressly requires that a firm’s written
procedures specify the firm’s process for
verifying the information in the Form
U4 and that the firm complete that
verification process no later than 30
calendar days after the Form U4 is filed.
FINRA notes that the verification
process for some of the information in
28 FINRA notes this is a principle-based
requirement that is substantially similar to the
current requirement under NASD Rule 3010(e), and
explains that firms are required to complete the
investigation process before filing the Form U4. See
FINRA, Regulatory Notice 07–55, Personnel
Background Investigations, (November 2007)
available at https://www.finra.org/web/groups/
industry/@ip/@reg/@notice/documents/notices/
p037480.pdf. Firms must also comply with MSRB
Rule G–7 (Information Concerning Associated
Persons) for those applicants engaged solely in
municipal securities activities. See Municipal
Securities Rulemaking Board, Rule Book, Rule
G–7 (October 2014) available at https://
www.msrb.org/Rules-and-Interpretations/MSRBRules/General/Rule-G-7.aspx.
29 If the applicant has been recently employed by
a Futures Commission Merchant or an Introducing
Broker that is notice-registered with the SEC
pursuant to Section 15(b)(11) of the Act, the
registering firm also is required to review a copy of
the individual’s most recent CFTC Form 8–T.
30 FINRA expects firms to use this provision in
very limited circumstances, such as where the
previous firm fails to file a Form U5 or goes out of
business before filing a Form U5.
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the Form U4 is embedded in the form
itself.31
FINRA states that under proposed
FINRA Rule 3110(e), firms must
complete the verification process no
later than 30 calendar days after the
Form U4 is filed with FINRA. The Rule
3110(e) does not require firms to
conduct the verification process only
during the 30-day window after the
Form U4 has been filed or base the
verification on information that is
obtained only in the 30-day window
after the form has been filed. Rather,
FINRA states, the 30-day window is
intended to accommodate firms that
may find it difficult to conduct the
verification process before filing an
applicant’s Form U4, such as where an
applicant is hired immediately to fill a
needed role at the firm. For most
applicants, FINRA expects that firms
will conduct the investigation and
verification process concurrently using
some of the same information and
before filing the Form U4. FINRA also
encourages firms to complete the
verification process before filing the
Form U4. FINRA notes that, with
respect to amended filings, a firm will
incur a Late Disclosure Fee if the
disclosure event should have been
reported on the initial or transfer Form
U4, regardless of whether the firm
completes the verification process
within the 30-day window in proposed
FINRA Rule 3110(e).
FINRA also recognizes that there will
on occasion be circumstances beyond a
firm’s control that prevent completion
of the verification process within the 30day window after the Form U4 is filed
with FINRA. FINRA explains, for
example, that a firm may not be able to
comply with the proposed 30-day
window where the firm is relying on
fingerprint results for verifying criminal
information, and the FBI determines the
fingerprints to be ‘‘illegible’’ and
requires resubmission of the
fingerprints. In such circumstances,
FINRA points-out, the firm’s procedures
should provide that the verification
must be completed as soon as practical
and the firm should document the basis
for the delay.
Finally, FINRA states that proposed
FINRA Rule 3110(e) requires that a
firm’s verification process must, at a
minimum, provide for a national search
of reasonably available public records to
verify the accuracy and completeness of
the information contained in an
31 FINRA states that the verification process could
vary firm by firm, e.g., one firm may verify an
applicant’s identity and name by checking a valid
state-issued driver’s license whereas another firm
may do so by reviewing a valid government-issued
passport.
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applicant’s Form U4. As FINRA
explains, similar to the overall
verification process, the requirement to
conduct a public records search must be
satisfied by no later than 30 calendar
days after an initial or a transfer Form
U4 is filed with FINRA. FINRA also
states that the public records search is
a new requirement; it is a component of
the overall verification process
described above. As FINRA explains,
public records include, but are not
limited to: General information, such as
name and address of individuals;
criminal records; bankruptcy records;
civil litigations and judgments; liens;
and business records. FINRA explains,
however, that the proposed rule only
requires a national search of reasonably
available public records.32
2. Member’s Obligation To Adopt
Written Procedures for Verification of
Information in the Form U4
Two commenters asked whether firms
are required to verify all of the
information in the Form U4, stating that
it may not be feasible or practical to do
so in some cases.33 In response, FINRA
states it does not expect firms to verify
all of the information in the Form U4
where such verification is not feasible or
practical. In such cases, FINRA states
that a firm should document that the
information could not be verified and
document the reason that it could not be
verified.
One commenter recommended that
the proposed verification requirement,
including the minimum public records
search requirement, be removed
altogether.34 Alternatively, the
commenter requested that firms be
given 90 days to complete a public
records search and any necessary follow
ups and asked whether firms are
required to complete the entire
verification process within the proposed
30-day window. One commenter
requested that firms be given a 60- or
90-day period to complete the
verification process.35 Another
commenter suggested that FINRA
amend the proposed rule to require that
a firm’s written procedures provide that
if the firm is unable to complete the
verification process within the 30-day
window, it must demonstrate to FINRA
that it has made reasonable efforts to do
32 FINRA notes this is a minimum or base
requirement, and a firm may find it necessary to
conduct a more in-depth search of public records
depending on the applicant’s job function,
responsibilities or position at the firm.
33 See SIFMA Letter and ARM Letter.
34 See SIFMA Letter.
35 See ARM Letter.
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so and explain the cause for the delayed
verification.36
In response, FINRA states it is
retaining the proposed Form U4
verification requirement and the
requirement to conduct a public records
search, indicating it continues to believe
that the proposed requirements will
enhance the accuracy of the information
in CRD and ultimately in BrokerCheck.
FINRA also clarifies that as described
above, firms must complete the
verification process by no later than 30
calendar days after the Form U4 is filed
with FINRA. FINRA expects that for the
majority of applicants, firms will
conduct the proposed verification
process, including the public records
search, before filing the Form U4, a
practice that FINRA encourages.
FINRA does not believe that it is
necessary to extend the period by which
firms must complete the verification
process because under FINRA By-Laws,
a firm is obligated to file an amended
Form U4 no later than 30 calendar days
after learning of the facts or
circumstances giving rise for the need to
file an amendment.37 Therefore, FINRA
states, if a firm completes its verification
process during the 30-day window in
proposed FINRA Rule 3110(e) and
learns of facts or circumstances that
require the filing of an amended Form
U4, the firm will have 30 calendar days
from the date it learns of such facts or
circumstances to file an amended Form
U4; the firm will be subject to any
applicable Late Disclosure Fees.
FINRA recognizes that there will on
occasion be circumstances beyond a
firm’s control that prevent completion
of the verification process within the
30-day window. In such cases, FINRA
states, the firm’s procedures should
provide that the verification be
completed as soon as practical, and the
firm should document the basis for the
delay. FINRA does not believe that it is
necessary to amend the proposed rule
text to clarify this point.
One commenter requested that FINRA
confirm that the proposed verification
requirement, including the public
records search, applies to an initial
Form U4 filed with FINRA through CRD
requesting registration with FINRA and
that the proposed requirement does not
apply to a Form U4 filed by an affiliate
of a member or a registration transferred
through the mass transfer process.38 The
commenter also suggested that FINRA
replace the term ‘‘transfer Form U4’’ as
used in the proposed FINRA Rule
3110(e) with the term ‘‘relicense Form
36 See
PIABA Letter.
FINRA By-Laws, Article V, Section 2(c).
38 See SIFMA Letter.
37 See
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U4’’ and amend the proposed rule text
to include a reference to ‘‘an applicant’s
initial or relicense Form U4.’’
In response, FINRA states that the
proposed verification requirement,
including the public records search,
applies to an initial Form U4 or a
transfer Form U4. The term ‘‘initial
Form U4’’ refers to the Form U4 filing
required when an individual is
registering with a FINRA member for
the first time, including in the context
of dual registration, or is registering
with a FINRA member after more than
two years have passed since the
individual was last registered with a
FINRA member. The term ‘‘transfer
Form U4’’ refers to the Form U4 filing
required when a registered person
transfers from one FINRA member to
another FINRA member. FINRA is not
replacing the term ‘‘transfer Form U4’’.
With respect to a Form U4 filed by a
member that is an affiliate of another
member, FINRA further states that the
verification requirement would apply to
the filing to the extent that it is
considered an initial or a transfer Form
U4 (e.g., a dual registration). The
proposed verification requirement
would not apply to the mass transfer
process because that process does not
require the filing of a Form U4. FINRA
is proposing to clarify that the
verification requirement, including the
public records search, applies to an
applicant’s initial or transfer Form U4.
3. Member’s Obligation To Conduct a
Search of Reasonably Available Public
Records
One commenter suggested that the
public records search should extend to
foreign jurisdictions in some
circumstances, such as where an
applicant has been registered with a
foreign securities regulator or has
resided in a foreign jurisdiction.39 In
response, FINRA states that it is often
difficult to assess the comparability of a
foreign country’s laws, rules and
regulations to those in the United States,
particularly as it relates to the purposes
of this proposed rule, and therefore, the
requirement should be limited to a
national search of reasonably available
public records.40 One commenter
recommended that FINRA clarify the
term ‘‘reasonably available public
records’’ so that firms have an objective
standard for compliance purposes.41
39 See
PIABA Letter.
notes, however, that firms may find it
necessary to conduct a search of public records in
a foreign jurisdiction as part of their verification
process and, where appropriate, should ensure such
a search is consistent with applicable foreign laws,
rules and regulations.
41 See Cornell Letter.
40 FINRA
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549
One commenter stated that FINRA
should revise the proposed rule text to
specifically identify the information in
the Form U4 that firms are expected to
verify through a public records search or
define the term ‘‘public records’’ so the
scope of the requirement is less
uncertain.42 The commenter noted that
business records are listed as an
example of public records, but many
business records (e.g., business
formation documents) are not
maintained in a comprehensive national
database and may not be offered by a
third-party service provider. In
response, FINRA states that while
public records include, among other
records, business records, proposed
FINRA Rule 3110(e) only requires a
national search of reasonably available
public records. FINRA further states
that, as indicated above, the scope of
what is considered reasonably available
public records may change over time.
Therefore, rather than define the term
‘‘reasonably available public records,’’
FINRA believes that it is more useful for
compliance purposes to specify the
public records that are currently
considered reasonably available, which
include criminal records, bankruptcy
records, judgments and liens.
One commenter asked FINRA to
confirm that, to the extent that the
proposed rule requires firms to obtain
an investigative consumer report for an
applicant, firms can rely on the
applicant’s consent on a Form U4 for
purposes of complying with applicable
laws, rules and regulations requiring an
applicant’s consent to obtain such
reports, otherwise firms will need to
implement additional procedures to
ensure compliance with such laws,
rules and regulations in each
jurisdiction.43 In response, FINRA states
that the proposed rule does not require
firms to obtain investigative consumer
reports to comply with the requirements
of the rule and that, with regard to the
Form U4 or any similar report the firm
may rely upon, it is the responsibility of
the registering firm to determine
whether consent on the Form U4 or any
other document is in compliance with
the laws, rules and regulations of the
particular jurisdiction in which the firm
and the applicant are operating.
4. Implementation Date
One commenter requested that FINRA
extend the implementation date of
proposed FINRA Rule 3110(e) from
December 1, 2014, to December 1, 2015,
so that firms have sufficient time to
establish or revise their written
42 See
SIFMA Letter.
43 Id.
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
procedures and address the operational
issues resulting from the proposed
rule.44 In response, FINRA states that it
expects firms to have an existing
process in place to verify the
information contained in an applicant’s
Form U4 noting that currently the
person signing the form on behalf of the
firm must certify that he has taken
appropriate steps to verify the accuracy
and completeness of the information
contained in the form. FINRA also states
it understands that most firms already
conduct some form of public records
search; 45 consequently, the proposed
new requirements should not create an
unreasonable burden for firms.
FINRA recognizes that the proposed
rule imposes an affirmative obligation
on firms to establish and implement
written procedures to comply with the
Form U4 verification process to the
extent they currently do not have such
procedures, and that such procedures
must include a search of reasonably
available public records. Thus, to
accommodate any potential operational
issues resulting from the proposed new
requirements, FINRA is proposing to
extend the implementation date of
proposed FINRA Rule 3110(e) from
December 1, 2014 to July 1, 2015.
tkelley on DSK3SPTVN1PROD with NOTICES
5. Temporary Program To Address
Underreported Form U4 Information
One commenter recommended that
the refund program should be a onetime program and stated that FINRA
should not use such programs in the
future for late disclosure reporting
because it may provide firms with
negative reinforcement for untimely
Form U4 reporting.46 In response,
FINRA states that the refund program
under proposed FINRA Rule 3110.15 is
intended to incentivize members to
report underreported information and
save FINRA the time and regulatory
resources expended in contacting firms
and requesting that such information be
reported. FINRA also states that
program is intended to run concurrent
with FINRA’s one-time search of
specific financial public records, and
thus is of limited duration. FINRA notes
it may find it necessary to provide such
programs in the future depending on the
circumstances, but it will do so
judiciously and only where appropriate.
Another commenter requested that
FINRA consider adopting a more
permanent refund program or extending
the sunset date from March 31, 2015 to
December 1, 2015.47 FINRA states that
the refund program is intended to run
concurrent with FINRA’s one-time
search of specific financial public
records on all registered persons, which
FINRA expects to complete on or before
August 2015. FINRA is thus proposing
to extend the sunset date of the program
from March 31, 2015 to July 31, 2015.
One commenter suggested that Question
14M on the Form U4 is ambiguous and
open to interpretation and requested
that FINRA revise the eligibility
conditions under the refund program to
address this perceived ambiguity.48
According to the commenter, Question
14M on the Form U4 is confusing
because one could argue that if an
unsatisfied judgment or lien is satisfied
within the 30-day window of having to
file an amended Form U4, the firm
would not have to amend the Form U4
to mark ‘‘yes’’ because the lien was
satisfied before the filing deadline. The
commenter also stated that if a firm
learns of an unreported satisfied lien,
the language of Question 14M suggests
that the firm does not have to report
such lien because it is not currently
unsatisfied. The commenter stated that
FINRA should modify the program to
refund Late Disclosure Fees to members
if the judgment or lien (1) occurred
while the individual was registered with
a prior firm; (2) is more than five years
old; or (3) is under $5,000. The
commenter also asked whether the
refund will be automated or whether
firms have the burden to prove that they
satisfy the conditions of the program to
receive a refund.
FINRA is proposing to revise the
refund program to address concerns
regarding the assessment of the Late
Disclosure Fee in circumstances where
the unsatisfied judgment or lien has
been satisfied, and at the time it was
unsatisfied was of a relatively low
amount (under $5,000) and was
reportable before the introduction of the
procedures regarding the application of
the Late Disclosure Fee to the reporting
of judgments and liens on the Form U4
that became effective on August 13,
2012.49 FINRA states the proposed
revisions also address circumstances
where the failure to report related to a
mistaken belief that satisfying the
judgment or lien shortly after learning it
was unsatisfied (within 30 calendar
44 Id.
45 NASAA stated that ‘‘firms usually have in
place a review process to verify the information
contained in the Form U4 for most registration
applicants’’ and, as such, the requirement
formalizes an industry best practice. See NASAA
letter.
46 See Pace Letter.
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19:38 Jan 05, 2015
Jkt 235001
47 See
SIFMA Letter.
FSI Letter.
49 See FINRA, Information Notice, Late Disclosure
Fee Related to Reporting of Judgment/Lien Events
(August 2012), available at https://www.finra.org/
web/groups/industry/@ip/@reg/@notice/documents/
notices/p152106.pdf.
48 See
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
days of when it became unsatisfied)
obviated the need to report the matter.50
As revised, the members will receive
a refund of Late Disclosure Fees
assessed for the late filing of responses
to Form U4 Question 14M (unsatisfied
judgments or liens) if the Form U4
amendment is filed between April 24,
2014, and July 31, 2015, and one of the
following conditions is met: (1) The
judgment or lien has been satisfied, and
at the time it was unsatisfied, it was
under $5,000 and the date the judgment
or lien was filed with a court (as
reported on Form U4 Judgment/Lien
DRP, Question 4.A.) was on or before
August 13, 2012; or (2) the unsatisfied
judgment or lien was satisfied within 30
days after the individual learned of the
judgment or lien (as reported on Form
U4 Judgment/Lien DRP, Question 4.B.).
The program has a retroactive effective
date of April 24, 2014, and as revised it
will sunset on July 31, 2015. With
respect to refund procedures, FINRA
explains that firms initially will be
charged a Late Disclosure Fee and
subsequently receive a refund in their
FINRA Flex-Funding Account if they
can establish, or if FINRA otherwise
determines, that the conditions of the
revised program have been satisfied.
6. Clarification of Questions 14K and
14M on the Form U4
One commenter requested that FINRA
file with the Commission as part of a
proposed rule change its FAQ
statement 51 that a compromise with
creditors is a compromise with one or
more creditors for purposes of Question
14K on the Form U4.52 The commenter
also noted that Question 14M on the
Form U4 is confusing because it asks
‘‘Do you have any unsatisfied judgments
or liens against you,’’ which could
imply that a ‘‘yes’’ response is required
only if an applicant currently has an
outstanding unsatisfied judgment or
lien. To clarify this point, the
commenter suggested model language
for FINRA’s consideration. Similarly,
another commenter requested that
50 FINRA believes that there is a misconception
regarding the obligation to report unsatisfied
judgments and liens under Question 14M on the
Form U4. The obligation to amend a Form U4 arises
on the date a registered person receives notice or
learns that he is subject to an unsatisfied judgment
or lien, and an amended Form U4 should be filed
no later than 30 calendar days from that date,
regardless of whether the registered person satisfies
the judgment or lien in the interim period before
the 30-day deadline for filing a Form U4
amendment.
51 See FINRA, Form U4 and U5 Interpretive
Questions and Answers (January 2013), available at
https://www.finra.org/web/groups/industry/@ip/@
comp/@regis/documents/appsupportdocs/
p119944.pdf.
52 See SIFMA Letter.
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
FINRA clarify Question 14M on the
Form U4 to remove any confusion
regarding its scope.53 In addition, the
commenter stated that FINRA should
clarify that it will not fine firms in
instances where they did not treat a
short sale as a compromise with
creditors under Question 14K on the
Form U4 prior to FINRA’s guidance on
the subject. In response, FINRA states it
believes that these comments are
outside the scope of the proposed rule
change, and should be addressed in the
context of changes to the Form U4 or its
interpretations.
IV. Accelerated Approval
The Commission finds good cause to
approve the proposed rule change, as
amended by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of filing thereof in
the Federal Register. The amendment
responds to issues raised by
commenters and makes minor
modifications in response to the
comments. Accelerated approval would
allow FINRA to implement the amended
proposal without delay. The proposal
will provide firms with an incentive to
determine if additional disclosures on
Form U4 are required for their registered
personnel, ultimately resulting in more
complete and accurate information in
WebCRD, and as a consequence in
BrokerCheck. As noted by FINRA and
the commenters, WebCRD is an
important tool used by regulators, as
well as the public to get information
about registered persons with whom
they may wish to do business.
Therefore, implementing the proposal
without delay is in the public interest.
Accordingly, the Commission believes
that good cause exists, pursuant to
Section 19(b)(2) of the Act,54 to approve
the proposed rule change, as amended
by Amendment No. 1, on an accelerated
basis.
tkelley on DSK3SPTVN1PROD with NOTICES
V. 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 email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2014–038 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2014–038. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2014–038 and
should be submitted on or before
January 27, 2015.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) 55 of the Act, that the
proposed rule change (SR–FINRA–
2014–038) be and hereby is approved, as
amended, on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.56
Brent J. Fields,
Secretary.
[FR Doc. 2014–30902 Filed 1–5–15; 8:45 am]
BILLING CODE 8011–01–P
53 See
55 Id.
54 15
56 17
FSI Letter.
U.S.C. 78s(b)(2).
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19:38 Jan 05, 2015
Jkt 235001
PO 00000
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73963; File No. SR–
NYSEArca–2014–141]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending the Bylaws of
the Exchange’s Ultimate Parent
Company, Intercontinental Exchange,
Inc., To Designate Its Chief Strategic
Officer, Chief Technology Officer and
General Counsel as ‘‘Senior Officers’’
of ICE
December 30, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on December
29, 2014, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
Bylaws (the ‘‘ICE Bylaws’’) of the
Exchange’s ultimate parent company,
Intercontinental Exchange, Inc. (‘‘ICE’’),
to designate its Chief Strategic Officer,
Chief Technology Officer and General
Counsel as ‘‘Senior Officers’’ of ICE. The
text of the proposed rule change is
available on the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
1 15
CFR 200.30–3(a)(12).
Frm 00071
Fmt 4703
Sfmt 4703
551
2 17
E:\FR\FM\06JAN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
06JAN1
]]>Agencies
[Federal Register Volume 80, Number 3 (Tuesday, January 6, 2015)]
[Notices]
[Pages 546-551]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30902]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73966; File No. SR-FINRA-2014-038]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1 Thereto, Relating to the
Adoption of FINRA Rule 3110(e) (Responsibility of Member To Investigate
Applicants for Registration) in the Consolidated FINRA Rulebook
December 30, 2014.
I. Introduction
On September 18, 2014, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities and
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt NASD Rule 3010(e) relating to background
investigations as FINRA Rule 3110(e) in the consolidated FINRA rulebook
(``Consolidated FINRA Rulebook''). The proposed rule change was
published for comment in the Federal Register on October 3, 2014.\3\
The Commission received 10 comment letters in response to the
Notice.\4\ On December 8, 2014, FINRA filed Amendment No.1 responding
to these comments and proposing amendments in response to the
comments.\5\ The Commission is publishing this notice to solicit
comments from interested persons on the filing as amended by Amendment
No.1 and is approving the proposed rule change, as amended, on an
accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 73238 (September 26,
2014), 79 FR 59884 (October 3, 2014) (Notice of Filing of SR-FINRA-
2014-038) (``Notice'').
\4\ See Letters to Brent J. Fields, Secretary, Commission, from
Joseph C. Peiffer, Executive Vice President and President-Elect,
Public Investors Arbitration Bar Association, dated October 16, 2014
(``PIABA Letter''); William A. Jacobson, Clinical Professor of Law,
Cornell University Law School, dated October 20, 2014 (``Cornell
Letter''); William Beatty, President, North American Securities
Administrators Association, Inc., dated October 22, 2014 (``NASAA
Letter''); Kyle Ortiz and Kathryn Hespe, Law Student Clinicians,
Investor Advocacy Clinic, Michigan State University College of Law,
dated October 23, 2014 (``Michigan State Letter''); John Astarita
and Olivia Darius, Student Interns, John Jay Legal Services, Inc.,
Pace University School of Law, dated October 24, 2014 (``Pace
Letter''); Kevin Zambrowicz, Associate General Counsel and Managing
Director, the Securities Industry and Financial Markets Association,
dated October 24, 2014 (``SIFMA Letter''); Michele Van Tassel,
President, Association of Registration Management, dated October 24,
2014 (``ARM Letter''); Robert J. McCarthy, Director of Regulatory
Policy, Wells Fargo Advisors, LLC, dated October 24, 2014 (``Wells
Fargo Letter''); and David T. Bellaire, Executive Vice President and
General Counsel, the Financial Services Institute, dated October 24,
2014 (``FSI Letter''). See also email from Suzanne Shatto, dated
October 6, 2014 (``Shatto Letter''). Comment Letters are available
at: https://www.sec.gov/comments/sr-finra-2014-038/finra2014038.shtml.
\5\ See SR-FINRA-2014-038, Amendment No. 1, dated December 8,
2014, (``Amendment No. 1''). Amendment No. 1 is described below in
Section II and the text of Amendment No. 1 is available on FINRA's
Web site at https://www.finra.org, at the principal office of FINRA,
and on the Commission's Web site at https://www.sec.gov/rules/sro.shtml.
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II. Description of the Proposal, as Modified by Amendment No. 1
As part of the process of developing the Consolidated FINRA
Rulebook, FINRA is proposing to adopt NASD Rule 3010(e) (Qualifications
Investigated) relating to background investigations as FINRA Rule
3110(e). According to FINRA, the proposed rule change streamlines and
clarifies the rule language. For instance, NASD Rule 3010(e) currently
provides that ``[e]ach member shall have the responsibility and duty to
ascertain by investigation the good character, business repute,
qualifications, and experience of any person prior to making such a
certification in the application of such person for registration with
this Association,'' whereas proposed FINRA Rule 3110(e) provides that
``[e]ach member shall ascertain by investigation the good character,
business reputation, qualifications and experience of an applicant
before the member applies to register that applicant with FINRA and
before making a representation to that effect on the application for
registration.'' Further, proposed FINRA Rule 3110(e) clarifies that a
firm is required to review a copy of an applicant's most recent Form U5
(Uniform Termination Notice for Securities Industry Registration) if
the applicant previously has been registered with FINRA or another
self-regulatory organization.\6\
---------------------------------------------------------------------------
\6\ FINRA also is proposing to re-label current FINRA Rule
3110(e) (Definitions) as FINRA Rule 3110(f) (Definitions) and update
the cross-references in FINRA Rule 3110 to reflect this change.
---------------------------------------------------------------------------
[[Page 547]]
In addition, the proposed rule change adds to FINRA Rule 3110(e) a
requirement that firms adopt written procedures that are reasonably
designed to verify the accuracy and completeness of the information
contained in an applicant's Form U4 (Uniform Application for Securities
Industry Registration or Transfer) no later than 30 calendar days after
the form is filed with FINRA. The proposed requirement would apply to
an initial or a transfer Form U4 for an applicant for registration, not
to amendments to Form U4. Proposed FINRA Rule 3110(e) would also
require that a firm's written procedures, at a minimum, provide for a
national search of reasonably available public records to verify the
accuracy and completeness of the information contained in an
applicant's Form U4. The requirement to conduct a public records search
must be satisfied no later than 30 calendar days after the initial or
transfer Form U4 is filed with FINRA. Further, the proposed rule change
adds Supplementary Material .15 to FINRA Rule 3110 to establish a
temporary program to refund Late Disclosure Fees, subject to specified
conditions.\7\
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\7\ The proposed rule change would delete NASD Rule 3010(f)
because it has been rendered obsolete. The proposed rule change
would also delete Incorporated NYSE Rule 345.11 and NYSE Rule
Interpretation 345.11/01 and/02 as they are substantially similar to
proposed FINRA Rule 3110(e), addressed by other rules or otherwise
rendered obsolete by the approach reflected in proposed FINRA Rule
3110(e). For convenience, the proposed rule change refers to
Incorporated NYSE Rules as NYSE Rules.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change as
modified by Amendment No. 1, the comments submitted, and FINRA's
response to the comments, and believes that FINRA has responded
adequately to the concerns raised by the commenters.\8\ For the reasons
discussed below, the Commission finds that the proposal is consistent
with the provisions of Section 15A(b)(6) of the Act,\9\ which requires,
among other things, that FINRA rules 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. By streamlining and clarifying members' obligations
relating to background investigations of registered personnel and
adding a requirement to adopt written procedures to verify the accuracy
and completeness of the information contained in an applicant's Form
U4, including the requirement to conduct a public records search, the
proposal should result in complete and accurate information in CRD,\10\
which is critical from both a regulatory and an investor protection
standpoint. Finally, the proposed temporary program under proposed
FINRA Rule 3110.15 to refund Late Disclosure Fees under certain
circumstances should incentivize members to more accurately and
completely report information relating to judgments and liens. Having
complete and accurate information in CRD is important to regulators,
the industry, and the public.
---------------------------------------------------------------------------
\8\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78o-3(b)(6).
\10\ The information in BrokerCheck is a subset of the
information in CRD.
---------------------------------------------------------------------------
As noted above, the Commission received ten comment letters in
response to the proposed rule change, all of which support the
proposal.\11\ For example, one commenter states the proposal ``will
contribute to ensuring the accuracy and completeness of the information
disclosed in Form U4.'' \12\ ``[A]ccurate [Form] U4 information,'' adds
another commenter, ``is critical to FINRA's own regulatory review of an
applicant, as well as for customers, whose primary source of public
information . . . is through FINRA's BrokerCheck.'' \13\ Another
commenter states that requiring ``written procedures for Form U4
verification . . . will enable the member firm to conduct more
consistent--and hopefully more thorough--background checks on
applicants [for registration].'' \14\ One commenter ``supports the
additional requirements'' aimed at enhancing the accuracy of
information on Form U4 because ``the Form U4 serves as the primary
avenue through which investors obtain important information about
brokers.'' \15\ The same commenter also supports the temporary refund
program because it ``creates an incentive for firms to make the
required updated filings'' which in turn would ``increase the
completeness of information contained in CRD.'' \16\
---------------------------------------------------------------------------
\11\ See supra note 4.
\12\ See NASAA Letter.
\13\ See PIABA Letter.
\14\ See Cornell Letter.
\15\ See NASAA Letter.
\16\ Id.
---------------------------------------------------------------------------
Three commenters supported the proposal without qualifications.\17\
Three commenters provided suggestions, including extending the scope of
the proposed public records search to foreign jurisdictions, specifying
that members unable to comply with all verification requirements must
demonstrate ``reasonable efforts'' to do so,\18\ clarifying the term
``reasonably available public records,'' \19\ and limiting the proposed
refund program to a one-time program.\20\ Two of these commenters also
requested additional clarification regarding the requirements under
proposed FINRA Rule 3110(e).\21\ One commenter supported the
consolidation of NASD Rule 3010(e) and NYSE Rule 345.11 as proposed
FINRA Rule 3110(e), but (1) requested further clarification regarding
the investigation and verification requirements; (2) suggested changes
to the verification requirement, to the implementation date of the
proposal and to the sunset date of the refund program; and (3)
requested clarification regarding Questions 14K and 14M on the Form
U4.\22\ Finally, two commenters supported the purpose of the
verification requirement, but requested additional clarification
regarding its scope, as well as its relationship to the investigation
requirement, suggested changes to the 30-day post-submission
verification period,\23\ as well as to the refund program, and sought
clarification on procedures for obtaining reimbursement.\24\ One of
these commenters also requested clarification regarding Questions 14K
and 14M on the Form U4.\25\
---------------------------------------------------------------------------
\17\ See Shatto Letter, NASAA Letter and Michigan State Letter.
\18\ See PIABA Letter.
\19\ See Cornell Letter.
\20\ See Pace Letter.
\21\ See PIABA Letter and Cornell Letter.
\22\ See SIFMA Letter and Wells Fargo Letter.
\23\ See ARM Letter.
\24\ See FSI Letter.
\25\ Id.
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1. Relationship Between Investigation and Verification Requirements
Several commenters requested that FINRA clarify the relationship
between the investigation and verification requirements under proposed
FINRA Rule 3110(e).\26\ Two of these commenters also asked whether the
investigation and verification requirements are duplicative, whether
firms can use any of the information obtained in the investigation
process to comply with the verification process, and whether firms are
required to conduct the verification process after the Form U4 has been
filed and separate from the investigation process.\27\
---------------------------------------------------------------------------
\26\ See PIABA Letter, Cornell Letter, SIFMA Letter and ARM
Letter.
\27\ See SIFMA Letter and ARM Letter.
---------------------------------------------------------------------------
FINRA responded that although the requirements are closely related,
the requirements are complementary, not duplicative, in nature. FINRA
states that proposed FINRA Rule 3110(e) requires
[[Page 548]]
that each member ascertain by investigation the good character,
business reputation, qualifications and experience of an applicant
before the member applies to register that applicant with FINRA and
before making a representation to that effect on the application for
registration.\28\ FINRA also states that if an applicant has been
previously registered with FINRA or another self-regulatory
organization, proposed FINRA Rule 3110(e) requires that a firm review a
copy of the applicant's most recent Form U5, including any amendments,
within 60 days of the filing date of the applicant's Form U4.\29\ FINRA
states that, if the firm is unable to review the Form U5, the firm must
demonstrate it has made reasonable efforts to do so.\30\
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\28\ FINRA notes this is a principle-based requirement that is
substantially similar to the current requirement under NASD Rule
3010(e), and explains that firms are required to complete the
investigation process before filing the Form U4. See FINRA,
Regulatory Notice 07-55, Personnel Background Investigations,
(November 2007) available at https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037480.pdf. Firms must
also comply with MSRB Rule G-7 (Information Concerning Associated
Persons) for those applicants engaged solely in municipal securities
activities. See Municipal Securities Rulemaking Board, Rule Book,
Rule G-7 (October 2014) available at https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-7.aspx.
\29\ If the applicant has been recently employed by a Futures
Commission Merchant or an Introducing Broker that is notice-
registered with the SEC pursuant to Section 15(b)(11) of the Act,
the registering firm also is required to review a copy of the
individual's most recent CFTC Form 8-T.
\30\ FINRA expects firms to use this provision in very limited
circumstances, such as where the previous firm fails to file a Form
U5 or goes out of business before filing a Form U5.
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Proposed FINRA Rule 3110(e) requires that a firm establish and
implement written procedures reasonably designed to verify the accuracy
and completeness of the information contained in an applicant's Form U4
no later than 30 calendar days after an initial or a transfer Form U4
is filed with FINRA. While this is a new requirement, FINRA explains
that it is based on an existing requirement in the Form U4 that the
person signing the form certify that he has taken appropriate steps to
verify the accuracy and completeness of the information contained in
that form. FINRA also states that proposed FINRA Rule 3110(e) expressly
requires that a firm's written procedures specify the firm's process
for verifying the information in the Form U4 and that the firm complete
that verification process no later than 30 calendar days after the Form
U4 is filed. FINRA notes that the verification process for some of the
information in the Form U4 is embedded in the form itself.\31\
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\31\ FINRA states that the verification process could vary firm
by firm, e.g., one firm may verify an applicant's identity and name
by checking a valid state-issued driver's license whereas another
firm may do so by reviewing a valid government-issued passport.
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FINRA states that under proposed FINRA Rule 3110(e), firms must
complete the verification process no later than 30 calendar days after
the Form U4 is filed with FINRA. The Rule 3110(e) does not require
firms to conduct the verification process only during the 30-day window
after the Form U4 has been filed or base the verification on
information that is obtained only in the 30-day window after the form
has been filed. Rather, FINRA states, the 30-day window is intended to
accommodate firms that may find it difficult to conduct the
verification process before filing an applicant's Form U4, such as
where an applicant is hired immediately to fill a needed role at the
firm. For most applicants, FINRA expects that firms will conduct the
investigation and verification process concurrently using some of the
same information and before filing the Form U4. FINRA also encourages
firms to complete the verification process before filing the Form U4.
FINRA notes that, with respect to amended filings, a firm will incur a
Late Disclosure Fee if the disclosure event should have been reported
on the initial or transfer Form U4, regardless of whether the firm
completes the verification process within the 30-day window in proposed
FINRA Rule 3110(e).
FINRA also recognizes that there will on occasion be circumstances
beyond a firm's control that prevent completion of the verification
process within the 30-day window after the Form U4 is filed with FINRA.
FINRA explains, for example, that a firm may not be able to comply with
the proposed 30-day window where the firm is relying on fingerprint
results for verifying criminal information, and the FBI determines the
fingerprints to be ``illegible'' and requires resubmission of the
fingerprints. In such circumstances, FINRA points-out, the firm's
procedures should provide that the verification must be completed as
soon as practical and the firm should document the basis for the delay.
Finally, FINRA states that proposed FINRA Rule 3110(e) requires
that a firm's verification process must, at a minimum, provide for a
national search of reasonably available public records to verify the
accuracy and completeness of the information contained in an
applicant's Form U4. As FINRA explains, similar to the overall
verification process, the requirement to conduct a public records
search must be satisfied by no later than 30 calendar days after an
initial or a transfer Form U4 is filed with FINRA. FINRA also states
that the public records search is a new requirement; it is a component
of the overall verification process described above. As FINRA explains,
public records include, but are not limited to: General information,
such as name and address of individuals; criminal records; bankruptcy
records; civil litigations and judgments; liens; and business records.
FINRA explains, however, that the proposed rule only requires a
national search of reasonably available public records.\32\
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\32\ FINRA notes this is a minimum or base requirement, and a
firm may find it necessary to conduct a more in-depth search of
public records depending on the applicant's job function,
responsibilities or position at the firm.
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2. Member's Obligation To Adopt Written Procedures for Verification of
Information in the Form U4
Two commenters asked whether firms are required to verify all of
the information in the Form U4, stating that it may not be feasible or
practical to do so in some cases.\33\ In response, FINRA states it does
not expect firms to verify all of the information in the Form U4 where
such verification is not feasible or practical. In such cases, FINRA
states that a firm should document that the information could not be
verified and document the reason that it could not be verified.
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\33\ See SIFMA Letter and ARM Letter.
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One commenter recommended that the proposed verification
requirement, including the minimum public records search requirement,
be removed altogether.\34\ Alternatively, the commenter requested that
firms be given 90 days to complete a public records search and any
necessary follow ups and asked whether firms are required to complete
the entire verification process within the proposed 30-day window. One
commenter requested that firms be given a 60- or 90-day period to
complete the verification process.\35\ Another commenter suggested that
FINRA amend the proposed rule to require that a firm's written
procedures provide that if the firm is unable to complete the
verification process within the 30-day window, it must demonstrate to
FINRA that it has made reasonable efforts to do
[[Page 549]]
so and explain the cause for the delayed verification.\36\
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\34\ See SIFMA Letter.
\35\ See ARM Letter.
\36\ See PIABA Letter.
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In response, FINRA states it is retaining the proposed Form U4
verification requirement and the requirement to conduct a public
records search, indicating it continues to believe that the proposed
requirements will enhance the accuracy of the information in CRD and
ultimately in BrokerCheck. FINRA also clarifies that as described
above, firms must complete the verification process by no later than 30
calendar days after the Form U4 is filed with FINRA. FINRA expects that
for the majority of applicants, firms will conduct the proposed
verification process, including the public records search, before
filing the Form U4, a practice that FINRA encourages.
FINRA does not believe that it is necessary to extend the period by
which firms must complete the verification process because under FINRA
By-Laws, a firm is obligated to file an amended Form U4 no later than
30 calendar days after learning of the facts or circumstances giving
rise for the need to file an amendment.\37\ Therefore, FINRA states, if
a firm completes its verification process during the 30-day window in
proposed FINRA Rule 3110(e) and learns of facts or circumstances that
require the filing of an amended Form U4, the firm will have 30
calendar days from the date it learns of such facts or circumstances to
file an amended Form U4; the firm will be subject to any applicable
Late Disclosure Fees.
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\37\ See FINRA By-Laws, Article V, Section 2(c).
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FINRA recognizes that there will on occasion be circumstances
beyond a firm's control that prevent completion of the verification
process within the 30-day window. In such cases, FINRA states, the
firm's procedures should provide that the verification be completed as
soon as practical, and the firm should document the basis for the
delay. FINRA does not believe that it is necessary to amend the
proposed rule text to clarify this point.
One commenter requested that FINRA confirm that the proposed
verification requirement, including the public records search, applies
to an initial Form U4 filed with FINRA through CRD requesting
registration with FINRA and that the proposed requirement does not
apply to a Form U4 filed by an affiliate of a member or a registration
transferred through the mass transfer process.\38\ The commenter also
suggested that FINRA replace the term ``transfer Form U4'' as used in
the proposed FINRA Rule 3110(e) with the term ``relicense Form U4'' and
amend the proposed rule text to include a reference to ``an applicant's
initial or relicense Form U4.''
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\38\ See SIFMA Letter.
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In response, FINRA states that the proposed verification
requirement, including the public records search, applies to an initial
Form U4 or a transfer Form U4. The term ``initial Form U4'' refers to
the Form U4 filing required when an individual is registering with a
FINRA member for the first time, including in the context of dual
registration, or is registering with a FINRA member after more than two
years have passed since the individual was last registered with a FINRA
member. The term ``transfer Form U4'' refers to the Form U4 filing
required when a registered person transfers from one FINRA member to
another FINRA member. FINRA is not replacing the term ``transfer Form
U4''. With respect to a Form U4 filed by a member that is an affiliate
of another member, FINRA further states that the verification
requirement would apply to the filing to the extent that it is
considered an initial or a transfer Form U4 (e.g., a dual
registration). The proposed verification requirement would not apply to
the mass transfer process because that process does not require the
filing of a Form U4. FINRA is proposing to clarify that the
verification requirement, including the public records search, applies
to an applicant's initial or transfer Form U4.
3. Member's Obligation To Conduct a Search of Reasonably Available
Public Records
One commenter suggested that the public records search should
extend to foreign jurisdictions in some circumstances, such as where an
applicant has been registered with a foreign securities regulator or
has resided in a foreign jurisdiction.\39\ In response, FINRA states
that it is often difficult to assess the comparability of a foreign
country's laws, rules and regulations to those in the United States,
particularly as it relates to the purposes of this proposed rule, and
therefore, the requirement should be limited to a national search of
reasonably available public records.\40\ One commenter recommended that
FINRA clarify the term ``reasonably available public records'' so that
firms have an objective standard for compliance purposes.\41\ One
commenter stated that FINRA should revise the proposed rule text to
specifically identify the information in the Form U4 that firms are
expected to verify through a public records search or define the term
``public records'' so the scope of the requirement is less
uncertain.\42\ The commenter noted that business records are listed as
an example of public records, but many business records (e.g., business
formation documents) are not maintained in a comprehensive national
database and may not be offered by a third-party service provider. In
response, FINRA states that while public records include, among other
records, business records, proposed FINRA Rule 3110(e) only requires a
national search of reasonably available public records. FINRA further
states that, as indicated above, the scope of what is considered
reasonably available public records may change over time. Therefore,
rather than define the term ``reasonably available public records,''
FINRA believes that it is more useful for compliance purposes to
specify the public records that are currently considered reasonably
available, which include criminal records, bankruptcy records,
judgments and liens.
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\39\ See PIABA Letter.
\40\ FINRA notes, however, that firms may find it necessary to
conduct a search of public records in a foreign jurisdiction as part
of their verification process and, where appropriate, should ensure
such a search is consistent with applicable foreign laws, rules and
regulations.
\41\ See Cornell Letter.
\42\ See SIFMA Letter.
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One commenter asked FINRA to confirm that, to the extent that the
proposed rule requires firms to obtain an investigative consumer report
for an applicant, firms can rely on the applicant's consent on a Form
U4 for purposes of complying with applicable laws, rules and
regulations requiring an applicant's consent to obtain such reports,
otherwise firms will need to implement additional procedures to ensure
compliance with such laws, rules and regulations in each
jurisdiction.\43\ In response, FINRA states that the proposed rule does
not require firms to obtain investigative consumer reports to comply
with the requirements of the rule and that, with regard to the Form U4
or any similar report the firm may rely upon, it is the responsibility
of the registering firm to determine whether consent on the Form U4 or
any other document is in compliance with the laws, rules and
regulations of the particular jurisdiction in which the firm and the
applicant are operating.
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\43\ Id.
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4. Implementation Date
One commenter requested that FINRA extend the implementation date
of proposed FINRA Rule 3110(e) from December 1, 2014, to December 1,
2015, so that firms have sufficient time to establish or revise their
written
[[Page 550]]
procedures and address the operational issues resulting from the
proposed rule.\44\ In response, FINRA states that it expects firms to
have an existing process in place to verify the information contained
in an applicant's Form U4 noting that currently the person signing the
form on behalf of the firm must certify that he has taken appropriate
steps to verify the accuracy and completeness of the information
contained in the form. FINRA also states it understands that most firms
already conduct some form of public records search; \45\ consequently,
the proposed new requirements should not create an unreasonable burden
for firms.
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\44\ Id.
\45\ NASAA stated that ``firms usually have in place a review
process to verify the information contained in the Form U4 for most
registration applicants'' and, as such, the requirement formalizes
an industry best practice. See NASAA letter.
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FINRA recognizes that the proposed rule imposes an affirmative
obligation on firms to establish and implement written procedures to
comply with the Form U4 verification process to the extent they
currently do not have such procedures, and that such procedures must
include a search of reasonably available public records. Thus, to
accommodate any potential operational issues resulting from the
proposed new requirements, FINRA is proposing to extend the
implementation date of proposed FINRA Rule 3110(e) from December 1,
2014 to July 1, 2015.
5. Temporary Program To Address Underreported Form U4 Information
One commenter recommended that the refund program should be a one-
time program and stated that FINRA should not use such programs in the
future for late disclosure reporting because it may provide firms with
negative reinforcement for untimely Form U4 reporting.\46\ In response,
FINRA states that the refund program under proposed FINRA Rule 3110.15
is intended to incentivize members to report underreported information
and save FINRA the time and regulatory resources expended in contacting
firms and requesting that such information be reported. FINRA also
states that program is intended to run concurrent with FINRA's one-time
search of specific financial public records, and thus is of limited
duration. FINRA notes it may find it necessary to provide such programs
in the future depending on the circumstances, but it will do so
judiciously and only where appropriate.
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\46\ See Pace Letter.
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Another commenter requested that FINRA consider adopting a more
permanent refund program or extending the sunset date from March 31,
2015 to December 1, 2015.\47\ FINRA states that the refund program is
intended to run concurrent with FINRA's one-time search of specific
financial public records on all registered persons, which FINRA expects
to complete on or before August 2015. FINRA is thus proposing to extend
the sunset date of the program from March 31, 2015 to July 31, 2015.
One commenter suggested that Question 14M on the Form U4 is ambiguous
and open to interpretation and requested that FINRA revise the
eligibility conditions under the refund program to address this
perceived ambiguity.\48\ According to the commenter, Question 14M on
the Form U4 is confusing because one could argue that if an unsatisfied
judgment or lien is satisfied within the 30-day window of having to
file an amended Form U4, the firm would not have to amend the Form U4
to mark ``yes'' because the lien was satisfied before the filing
deadline. The commenter also stated that if a firm learns of an
unreported satisfied lien, the language of Question 14M suggests that
the firm does not have to report such lien because it is not currently
unsatisfied. The commenter stated that FINRA should modify the program
to refund Late Disclosure Fees to members if the judgment or lien (1)
occurred while the individual was registered with a prior firm; (2) is
more than five years old; or (3) is under $5,000. The commenter also
asked whether the refund will be automated or whether firms have the
burden to prove that they satisfy the conditions of the program to
receive a refund.
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\47\ See SIFMA Letter.
\48\ See FSI Letter.
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FINRA is proposing to revise the refund program to address concerns
regarding the assessment of the Late Disclosure Fee in circumstances
where the unsatisfied judgment or lien has been satisfied, and at the
time it was unsatisfied was of a relatively low amount (under $5,000)
and was reportable before the introduction of the procedures regarding
the application of the Late Disclosure Fee to the reporting of
judgments and liens on the Form U4 that became effective on August 13,
2012.\49\ FINRA states the proposed revisions also address
circumstances where the failure to report related to a mistaken belief
that satisfying the judgment or lien shortly after learning it was
unsatisfied (within 30 calendar days of when it became unsatisfied)
obviated the need to report the matter.\50\
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\49\ See FINRA, Information Notice, Late Disclosure Fee Related
to Reporting of Judgment/Lien Events (August 2012), available at
https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p152106.pdf.
\50\ FINRA believes that there is a misconception regarding the
obligation to report unsatisfied judgments and liens under Question
14M on the Form U4. The obligation to amend a Form U4 arises on the
date a registered person receives notice or learns that he is
subject to an unsatisfied judgment or lien, and an amended Form U4
should be filed no later than 30 calendar days from that date,
regardless of whether the registered person satisfies the judgment
or lien in the interim period before the 30-day deadline for filing
a Form U4 amendment.
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As revised, the members will receive a refund of Late Disclosure
Fees assessed for the late filing of responses to Form U4 Question 14M
(unsatisfied judgments or liens) if the Form U4 amendment is filed
between April 24, 2014, and July 31, 2015, and one of the following
conditions is met: (1) The judgment or lien has been satisfied, and at
the time it was unsatisfied, it was under $5,000 and the date the
judgment or lien was filed with a court (as reported on Form U4
Judgment/Lien DRP, Question 4.A.) was on or before August 13, 2012; or
(2) the unsatisfied judgment or lien was satisfied within 30 days after
the individual learned of the judgment or lien (as reported on Form U4
Judgment/Lien DRP, Question 4.B.). The program has a retroactive
effective date of April 24, 2014, and as revised it will sunset on July
31, 2015. With respect to refund procedures, FINRA explains that firms
initially will be charged a Late Disclosure Fee and subsequently
receive a refund in their FINRA Flex-Funding Account if they can
establish, or if FINRA otherwise determines, that the conditions of the
revised program have been satisfied.
6. Clarification of Questions 14K and 14M on the Form U4
One commenter requested that FINRA file with the Commission as part
of a proposed rule change its FAQ statement \51\ that a compromise with
creditors is a compromise with one or more creditors for purposes of
Question 14K on the Form U4.\52\ The commenter also noted that Question
14M on the Form U4 is confusing because it asks ``Do you have any
unsatisfied judgments or liens against you,'' which could imply that a
``yes'' response is required only if an applicant currently has an
outstanding unsatisfied judgment or lien. To clarify this point, the
commenter suggested model language for FINRA's consideration.
Similarly, another commenter requested that
[[Page 551]]
FINRA clarify Question 14M on the Form U4 to remove any confusion
regarding its scope.\53\ In addition, the commenter stated that FINRA
should clarify that it will not fine firms in instances where they did
not treat a short sale as a compromise with creditors under Question
14K on the Form U4 prior to FINRA's guidance on the subject. In
response, FINRA states it believes that these comments are outside the
scope of the proposed rule change, and should be addressed in the
context of changes to the Form U4 or its interpretations.
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\51\ See FINRA, Form U4 and U5 Interpretive Questions and
Answers (January 2013), available at https://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p119944.pdf.
\52\ See SIFMA Letter.
\53\ See FSI Letter.
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IV. Accelerated Approval
The Commission finds good cause to approve the proposed rule
change, as amended by Amendment No. 1, prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. The amendment responds to issues raised by commenters and
makes minor modifications in response to the comments. Accelerated
approval would allow FINRA to implement the amended proposal without
delay. The proposal will provide firms with an incentive to determine
if additional disclosures on Form U4 are required for their registered
personnel, ultimately resulting in more complete and accurate
information in WebCRD, and as a consequence in BrokerCheck. As noted by
FINRA and the commenters, WebCRD is an important tool used by
regulators, as well as the public to get information about registered
persons with whom they may wish to do business. Therefore, implementing
the proposal without delay is in the public interest. Accordingly, the
Commission believes that good cause exists, pursuant to Section
19(b)(2) of the Act,\54\ to approve the proposed rule change, as
amended by Amendment No. 1, on an accelerated basis.
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\54\ 15 U.S.C. 78s(b)(2).
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V. 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 email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2014-038 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-038. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing
also will be available for inspection and copying at the principal
office of FINRA. All comments received will be posted without change;
the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2014-038 and should be submitted on or before January 27, 2015.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \55\ of the
Act, that the proposed rule change (SR-FINRA-2014-038) be and hereby is
approved, as amended, on an accelerated basis.
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\55\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30902 Filed 1-5-15; 8:45 am]
BILLING CODE 8011-01-P
