Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule Series 9100, 9200, 9300, 9550, and 9800 Regarding Temporary and Permanent Cease and Desist Orders, 38783-38788 [2015-16543]
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Federal Register / Vol. 80, No. 129 / Tuesday, July 7, 2015 / Notices
equitable and not unreasonably
discriminatory because it applies
equally to all Members regardless of
type. All similarly situated Members,
with the same number of FIX Ports, will
be subject to the same fee, and access to
the Exchange is offered on terms that are
not unfairly discriminatory. The
Exchange believes that the proposed
fees are reasonable in that the rates are
within the range of that charged by
another competing options exchange.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange 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, as amended.
The Exchange believes that the proposal
increases both intermarket and
intramarket competition by increasing
FIX Port fees for Members on the
Exchange in the range of comparable
fees on another exchange. The Exchange
notes that it operates in a highly
competitive market in which market
participants can readily favor competing
venues if they deem fee levels at a
particular venue to be excessive. In such
an environment, the Exchange must
continually adjust its fees to remain
competitive with other exchanges and
in order to attract market participants to
use its services. The Exchange believes
that the proposal reflects this
competitive environment because it
increases the Exchange’s fees in a
manner that continues to encourage
market participants to register as
Members on the Exchange, to provide
liquidity, and to attract order flow. To
the extent that this purpose is achieved,
all the Exchange’s market participants
should benefit from the improved
market liquidity.
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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
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.6 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
6 15
U.S.C. 78s(b)(3)(A)(ii).
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2015–43, and should be submitted on or
before July 28,2015.
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Robert W. Errett,
Deputy Secretary.
IV. Solicitation of Comments
[FR Doc. 2015–16545 Filed 7–6–15; 8:45 am]
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:
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75333; File No. SR–FINRA–
2015–019]
• 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–
MIAX–2015–43 on the subject line.
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule Series 9100, 9200, 9300,
9550, and 9800 Regarding Temporary
and Permanent Cease and Desist
Orders
Paper Comments
June 30, 2015.
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
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 June 16,
2015, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
Electronic Comments
All submissions should refer to File
Number SR–MIAX–2015–43. 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 such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MIAX–
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule Series 9100, 9200, 9300, 9550, and
9800 to modify the evidentiary standard
that must be met to impose a temporary
cease and desist order, to adopt a new
expedited proceeding for repeated
failures to comply with temporary or
permanent cease and desist orders, to
ease administrative burdens in
temporary cease and desist proceedings,
to harmonize the provisions governing
how documents are served in temporary
cease and desist proceedings and
expedited proceedings, to clarify the
process for issuing permanent cease and
desist orders, and to make conforming
changes throughout FINRA’s Code of
Procedure.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
7 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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
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(i) Background
In 2003, the SEC approved rule
amendments that authorized FINRA to
seek and impose temporary cease and
desist orders.3 Temporary cease and
desist orders are designed to stop
serious violative conduct and maintain
the status quo while an underlying
disciplinary proceeding is being
litigated.4 They can be imposed where
the potential harm resulting from
violations to investors is likely and
significant. FINRA believes that
lowering the evidentiary standard to
obtain a temporary cease and desist
order would better serve the investor
protection purposes of the temporary
cease and desist authority and make
FINRA’s temporary cease and desist
authority a more viable investorprotection tool. The change in the
evidentiary standard may allow FINRA
to initiate and resolve temporary cease
and desist proceedings sooner, in which
case the potential benefits could be
3 Securities Exchange Act Release No. 47925 (May
23, 2003), 68 FR 33548 (June 4, 2003) (Order
Approving File No. SR–NASD–98–80). In 2009, the
SEC approved the adoption of the temporary and
permanent cease and desist authority on a
permanent basis. Securities Exchange Act Release
No. 60306 (July 14, 2009), 74 FR 36292 (July 22,
2009) (Order Approving File No. SR–FINRA–2009–
035).
4 FINRA Rule 9810(a) provides that a temporary
cease and desist proceeding may be initiated with
respect to alleged violations of Section 10(b) of the
Act (15 U.S.C. 78j(b)) and Rule 10b–5 under the Act
(17 CFR 240.10b–5); Rules 15g–1 through 15g–9
under the Act (17 CFR 240.15g–1 et seq.); FINRA
Rule 2010 (if the alleged violation is unauthorized
trading, or misuse or conversion of customer assets,
or based on violations of Section 17(a) of the
Securities Act of 1933 (15 U.S.C. 77q(a))); FINRA
Rule 2020; or FINRA Rule 4330 (if the alleged
violation is misuse or conversion of customer
assets).
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substantial in instances where investors
are being significantly harmed. The
change would also improve FINRA’s
capacity to enforce compliance with
applicable laws and rules by its
members and persons associated with
members and FINRA’s capability to
prevent fraudulent and manipulative
acts and practices. At the same time, the
proposed rule change maintains all of
the meaningful existing restraints on
FINRA’s temporary cease and desist
authority, including rule provisions that
restrict who may authorize the initiation
of a temporary cease and desist
proceeding, narrowly define the
violations that a temporary cease and
desist order can address, and limit the
issuance of temporary cease and desist
orders to situations where the alleged
violative conduct or continuation
thereof is likely to result in significant
dissipation or conversion of assets or
other significant harm to investors.
The proposed rule change also adopts
a new expedited proceeding to address
situations involving repeated violations
of temporary or permanent cease and
desist orders. Finally, the proposed rule
change includes a series of rule
amendments to the temporary cease and
desist order rules (FINRA Rule Series
9800), the expedited proceedings rules
(FINRA Rule Series 9550), and FINRA’s
Code of Procedure (FINRA Rule Series
9000) that harmonize service provisions
in temporary cease and desist
proceedings and expedited proceedings,
ease administrative burdens in
temporary cease and desist proceedings,
and clarify the process by which
permanent cease and desist orders may
be imposed.
(ii) Evidentiary Standard for Imposing a
Temporary Cease and Desist Order
FINRA Rule 9840(a)(1) provides, in
pertinent part, that a temporary cease
and desist order shall be imposed if the
Hearing Panel finds ‘‘by a
preponderance of the evidence that the
alleged violation specified in the notice
has occurred.’’ FINRA believes that the
‘‘preponderance of the evidence’’
standard sets too high an evidentiary
threshold for this critical investorprotection tool. It is the identical
standard for proving a violation in the
underlying disciplinary proceeding that
must be pursued at the same time. Thus,
to obtain a temporary cease and desist
order—and thereby prevent the likely
and significant dissipation or
conversion of assets or other significant
harm to investors—FINRA’s prosecuting
department has to make an evidentiary
presentation in the temporary cease and
desist proceeding that is similar in
extent to its evidentiary presentation in
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the subsequent underlying disciplinary
proceeding, but in an expedited manner.
This poses administrative challenges
that create a strong disincentive to
seeking a temporary cease and desist
order.
To increase the viability of the
temporary cease and desist authority
and improve the capacity of that
authority to protect investors facing the
likelihood of significant dissipation or
conversion of assets, FINRA is
proposing rule amendments that modify
the evidentiary standard that must be
met to obtain a temporary cease and
desist order. In this regard, proposed
FINRA Rule 9840(a)(1) requires that a
FINRA Hearing Panel find that the
Department of Enforcement or
Department of Market Regulation has
made a showing of a likelihood of
success on the merits before issuing a
temporary cease and desist order.
FINRA’s intent is to establish an
evidentiary standard in temporary cease
and desist proceedings that would
require a lesser showing than what
would be required during the
subsequent, underlying disciplinary
proceeding. Changing the evidentiary
standard to require a showing of a
likelihood of success on the merits may
enable FINRA to initiate and resolve
temporary cease and desist proceedings
sooner and more efficiently, which
would better protect investors’ assets
and prevent other significant harm until
the underlying disciplinary hearing is
held.
The proposed rule change makes a
corresponding amendment to FINRA
Rule 9840(a)(2). Currently, FINRA Rule
9840(a)(2) provides that a temporary
cease and desist order shall be imposed
if the Hearing Panel finds that the
violative conduct or continuation
thereof is likely to result in significant
dissipation or conversion of assets or
other significant harm to investors prior
to the completion of the underlying
proceeding. The proposed rule change
modifies this requirement to apply to
the ‘‘alleged’’ violative conduct or
continuation thereof, to be consistent
with the proposed change to the
evidentiary standard.
FINRA remains mindful that when
the Commission approved FINRA’s
temporary cease and desist authority on
a permanent basis in 2009, it noted
FINRA’s statement that it would use its
authority ‘‘judiciously.’’ 5 FINRA’s
actions have been consistent with that
statement—FINRA has sought and
obtained temporary cease and desist
5 Securities Exchange Act Release No. 60306 (July
14, 2009), 74 FR 36292, 36293 (July 22, 2009)
(Order Approving File No. SR–FINRA–2009–035).
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orders on only seven occasions since
2003—and FINRA intends to continue
using its authority in a similarly
judicious manner. Moreover, the
proposed rule change maintains all of
the meaningful restraints on FINRA’s
temporary cease and desist authority,
including that a temporary cease and
desist proceeding must be authorized by
FINRA’s Chief Executive Officer or
other designated senior officer, and that
a temporary cease and desist order can
be imposed only if there is a likelihood
of significant dissipation or conversion
of assets or significant harm to
investors.
In sum, FINRA’s purpose in
modifying the evidentiary standard for
temporary cease and desist proceedings
is to increase the effectiveness of this
regulatory proceeding and thereby
improve investor protection in the most
threatening and serious cases until the
underlying disciplinary hearing is held.
(iii) Failures To Comply With
Temporary Cease and Desist Orders and
Permanent Cease and Desist Orders
(FINRA Rule 9556)
The proposed rule change includes
amendments to FINRA Rule 9556,
which sets forth expedited procedures
for enforcing violations of FINRA-issued
temporary and permanent cease and
desist orders. FINRA is concerned that
the existing expedited procedures may
permit cease and desist orders to be
circumvented without any real threat of
a sanction. Under current FINRA Rule
9556, if a member or person fails to
comply with a temporary or permanent
cease and desist order, FINRA staff
(with prior authorization from FINRA’s
Chief Executive Officer or other
designated senior officer) may issue a
notice stating that the failure to comply
within seven days will result in a
suspension or cancellation of
membership or a suspension or bar from
associating with any member and also
stating what the respondent must do to
avoid such action. A respondent
potentially could abuse the current
process by repeatedly violating a cease
and desist order and curing that
violation before the effective date of any
FINRA Rule 9556 notice, without being
subject to immediate sanctions or
review by the Office of Hearing Officers
for a prolonged period. While FINRA
could pursue disciplinary action against
a respondent that repeatedly ‘‘violates
and cures’’ in this manner, an inability
to obtain sanctions in an expedited
manner could undermine any cease and
desist order terms that require
immediate compliance to be effective.
Proposed FINRA Rule 9556(h) permits
FINRA staff (with prior authorization
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from FINRA’s Chief Executive Officer or
other designated senior officer) to
institute a new kind of expedited
proceeding if the subject of a temporary
or permanent cease and desist order
fails to comply with that order and has
previously been served with a notice
under FINRA Rule 9556(a) for a failure
to comply with any provision of the
same temporary or permanent cease and
desist order. Proposed FINRA Rule
9556(h)(3) provides that, in contrast to
other Rule 9556 proceedings, a
respondent’s compliance with the
temporary or permanent cease and
desist order is not a ground for
dismissing the FINRA Rule 9556(h)
proceeding. Thus, a respondent’s
compliance with a temporary or
permanent cease and desist order after
the FINRA Rule 9556(h) proceeding has
been initiated would not prevent an
adjudicator from reviewing the matter
and imposing a fitting sanction for the
respondent’s violation.
The proposed FINRA Rule 9556(h)
proceeding differs from other FINRA
Rule 9556 expedited proceedings in
other respects that reflect the response
that FINRA believes is warranted for
situations involving repeated violations
of temporary or permanent cease and
desist orders. These differences include
the following:
• A FINRA Rule 9556(h) proceeding
could be initiated only if the respondent
has previously been served under
FINRA Rule 9556(a) with a notice for
failing to comply with any provision of
the same temporary or permanent cease
and desist order;
• FINRA’s prosecuting department
would initiate a FINRA Rule 9556(h)
proceeding by filing a petition with
FINRA’s Office of Hearing Officers (and
serving the respondent) that seeks the
imposition of sanctions for the violation
(rather than issuing a notice to the
respondent);
• FINRA’s prosecuting department
would seek the imposition of any fitting
sanction at the outset of the FINRA Rule
9556(h) proceeding (in contrast to other
FINRA Rule 9556 expedited
proceedings, where the recipient of a
notice is not subject to the imposition of
any fitting sanction unless such
recipient opts for a hearing);
• a hearing is required in a FINRA
Rule 9556(h) proceeding;
• the hearing for a FINRA Rule
9556(h) proceeding must be held in a
condensed time frame (ten business
days after a respondent is served the
petition, versus other Rule 9556
proceedings which require a respondent
to request a hearing within seven
business days after service of a notice
instituting a proceeding and require
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38785
hearings to be held within 14 days after
a request for a hearing is filed); 6
• a FINRA Rule 9556(h) proceeding is
presided over by a Hearing Officer,
rather than a Hearing Panel; 7 and
• the Hearing Officer may issue
default decisions in FINRA Rule 9556(h)
proceedings.8
Under proposed FINRA Rule
9556(h)(4), the FINRA department that
filed the petition can withdraw it
without prejudice and shall be
permitted to refile a petition based on
allegations concerning the same facts
and circumstances that are set forth in
the withdrawn petition. This provision
will provide FINRA the flexibility to
withdraw the petition where, for
instance, the respondent evidences a
good faith intent to comply with the
temporary or permanent cease and
desist order without the need to
adjudicate the petition, while preserving
FINRA’s right to refile the petition if the
respondent fails to do so.
Considering that these new FINRA
Rule 9556(h) expedited proceedings
would be limited to subsequent
violations of temporary or permanent
cease and desist orders, require
appropriate authorization, provide an
opportunity for a hearing prior to the
imposition of a sanction, be resolved by
a Hearing Officer, and be subject to
appeal to the SEC, sufficient checks are
in place to ensure that FINRA continues
to use its FINRA Rule 9556 powers in
a judicious and fair manner.
(iv) Service Provisions in Temporary
Cease and Desist Proceedings and
Expedited Proceedings
The proposed rule change makes the
FINRA rules that govern service of
documents in temporary cease and
desist proceedings and the eight
different types of expedited proceedings
more consistent. Currently, some
provisions explicitly address service by
facsimile and on counsel, but some do
not. FINRA proposes rule amendments
that explicitly allow service by facsimile
and on counsel across all temporary
cease and desist and expedited
proceedings because doing so removes
unnecessary burdens and inefficiencies.
The proposed rule change also
permits service by email in all
temporary cease and desist proceedings
and expedited proceedings. Email
service will allow parties to receive
information quickly, which is
particularly important in these types of
proceedings, considering the short time
6 See proposed FINRA Rule 9559(f)(2) and (3);
FINRA Rule 9556(e).
7 See proposed FINRA Rule 9559(d)(1) and (2).
8 See proposed FINRA Rule 9559(m)(2).
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frames involved. Moreover, where the
proposed revisions permit email service,
they also require duplicate service
through some other means such as
overnight courier or personal delivery.
(v) Clarifying FINRA’s Authority To
Impose Permanent Cease and Desist
Orders
When FINRA obtained the authority
to impose temporary cease and desist
orders, it also obtained the authority to
impose permanent cease and desist
orders.9 The proposed rule change
contains amendments that clarify the
process for imposing permanent cease
and desist orders in disciplinary
proceedings. These changes are
procedural in nature and do not reflect
any change to FINRA’s prior
representations concerning the context
in which it will seek permanent cease
and desist orders.10
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(vi) Administrative Changes To
Temporary Cease and Desist
Proceedings
The small pool of persons who
currently may serve on hearing panels
that preside over temporary cease and
desist proceedings, coupled with the
short time in which a temporary cease
and desist proceeding must be
processed, creates administrative
burdens for FINRA’s Office of Hearing
Officers. Currently, FINRA Rule 9820(a)
requires that the Hearing Panel
appointed to preside over a temporary
cease and desist proceeding include two
panelists that are ‘‘current or former
Governors, Directors, or National
Adjudicatory Council members, and at
least one Panelist shall be an associated
person.’’ This is a far more limited pool
of potential panelists than is available
for other FINRA adjudicatory
proceedings, including the underlying
disciplinary proceeding that follows a
temporary cease and desist proceeding
and any FINRA Rule 9556 expedited
proceeding to enforce a cease and desist
order.11 While FINRA’s Office of
9 See Securities Exchange Act Release No. 47925
(May 23, 2003), 68 FR 33548, 33549–50 (June 4,
2003) (Order Approving File No. SR–NASD–98–80).
10 See Securities Exchange Act Release No. 47925
(May 23, 2003), 68 FR 33548, 33550 & n.18 (June
4, 2003) (Order Approving File No. SR–NASD–98–
80).
11 See FINRA Rule 9231(b) (providing that each
panelist shall be associated with a member of
FINRA or retired therefrom and that the pool of
panelists for disciplinary proceedings includes
current or previous members of District
Committees, former members of the National
Adjudicatory Council, past members of disciplinary
subcommittees of the National Adjudicatory
Council or the National Business Conduct
Committee, past members of the Board of Directors
of FINRA Regulation or past members of the Board
of Governors of FINRA, and current or previous
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Hearing Officers has presided over only
a limited number of temporary cease
and desist proceedings, those
experiences have revealed that the
narrowly circumscribed set of potential
panelists can impede the recruitment of
Hearing Panel members, especially
considering that the expedited nature of
temporary cease and desist proceedings
will already preclude many from being
able to serve.12 FINRA also has concerns
that the small pool of potential panelists
will often make it difficult to recruit
hearing panelists who can serve on both
the temporary cease and desist
proceeding and the subsequent
underlying disciplinary proceeding, as
well as any related expedited
proceeding under FINRA Rule 9556. In
such situations, FINRA is unable to
realize the corresponding benefits to
judicial economy that come from having
the same panelists preside over all such
proceedings.
To address these issues, the proposed
rule change expands the pool of persons
eligible to serve on hearing panels to
include those who may serve on hearing
panels for disciplinary matters.
Specifically, under proposed FINRA
Rule 9820, the potential panelists for the
Hearing Panels that preside over
temporary cease and desist proceedings
would include persons who currently
serve or previously served on a District
Committee; previously served on the
National Adjudicatory Council;
previously served on a disciplinary
subcommittee of the National
Adjudicatory Council or the National
Business Conduct Committee;
previously served as a member of the
Board of Directors of FINRA Regulation
or of the Board of Governors of FINRA;
or currently serve or previously served
on a committee appointed or approved
by the Board of Governors of FINRA, but
do not serve currently on the National
Adjudicatory Council or as a member of
the Board of Directors of FINRA
Regulation or of the Board of Governors
of FINRA. Likewise, the proposed rule
change would require that each panelist
be associated with a member of FINRA
or retired therefrom.
The proposed rule change also eases
other administrative burdens created by
the shortened time frame of a temporary
cease and desist proceeding. These
proposed changes are aimed at
improving Hearing Panels’ and parties’
members of committees appointed or approved by
the Board of Governors of FINRA); FINRA Rule
9559(d)(2) (providing for the same pool for FINRA
Rule 9556 expedited proceedings).
12 Hearings in temporary cease and desist
proceedings are, in general, required to be held not
later than 15 days after service of the notice
initiating the proceeding. FINRA Rule 9830(a).
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ability to prepare for hearings and
giving Hearing Officers some needed
flexibility. For example, under current
FINRA Rule 9830(a), a Hearing Officer
is not able to extend a hearing date in
a temporary cease and desist proceeding
unless all parties consent to the
extension. The requirement to obtain
the parties’ consent can be problematic
where the Office of Hearing Officers,
rather than one of the parties, has a need
for an extension, such as when it
encounters difficulty in quickly
appointing a Hearing Panel. To address
this problem, FINRA is proposing to
change FINRA Rule 9830(a) to allow
hearing deadlines to be extended by the
Chief Hearing Officer or Deputy Chief
Hearing Officer for good cause shown.
Likewise, the proposed rule change
makes similar amendments to the
process by which extensions are
obtained to the deadlines for issuing
decisions in temporary cease and desist
proceedings and responding to requests
to modify, set aside, limit or suspend a
temporary cease and desist order. Under
current FINRA Rule 9840(a), the
Hearing Panel’s deadline for issuing its
written decision cannot be extended,
even where there is good cause, without
the consent of the parties. Likewise,
under current FINRA Rule 9850, a
Hearing Panel’s deadline for responding
to an application to have a temporary
cease and desist order modified, set
aside, limited, or suspended cannot be
extended, even where there is a good
cause, without the consent of the
Parties. A Hearing Panel should be
allowed some flexibility where there is
a need for additional time to prepare its
decision or respond to a FINRA Rule
9850 request (e.g., when a member of
the Hearing Panel becomes ill, where
the temporary cease and desist
proceeding is highly complex). The
proposed change to FINRA Rules
9840(a) and 9850 would permit the
deadlines for issuing decisions and
responding to FINRA Rule 9850
applications to be extended by the Chief
Hearing Officer or Deputy Chief Hearing
Officer for good cause shown.
To further address the burdens
created by the short time frame of
temporary cease and desist proceedings,
the proposed rule change also: (i)
Requires FINRA’s prosecuting
department to file a memorandum of
points and authorities with the notice
initiating a temporary cease and desist
proceeding; and (ii) permits the Hearing
Officer to order a party to furnish to all
other parties and the Hearing Panel such
information as deemed appropriate,
including any or all of the pre-hearing
submissions described in FINRA Rule
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9242(a).13 Requiring FINRA’s
prosecuting department to file a
memorandum of points and authorities
at the initiation of the proceeding will,
at the outset, provide more context to
the allegations and set forth legal
authorities on which the notice seeking
a temporary cease and desist order is
premised. This, in turn, will facilitate a
more efficient process and improve the
quality of the hearing through more
thorough preparation, which are the
same goals of the pre-hearing processes
in FINRA disciplinary proceedings.14
Requiring the filing of a memorandum
of points and authorities at the initiation
of a temporary cease and desist
proceeding also will enhance disclosure
of the prosecuting department’s
allegations, which will inure to the
benefit of the respondents and further
increase the fairness of the proceeding.
All of these objectives also will be
served by authorizing Hearing Officers
to order a party to furnish other prehearing submissions.
Proposed FINRA Rule 9840(e) is a
delivery requirement that would require
a member firm that is the subject of a
temporary cease and desist order to
provide a copy of the order to its
associated persons, within one business
day of receiving it. Considering the
significant nature of the harm that a
temporary cease and desist order is
aimed at stopping, FINRA believes there
is a heightened need to ensure that the
persons who may act on behalf of the
member firm are made aware of the
contents of a temporary cease and desist
order imposed against the member firm.
The delivery requirement will further
that goal.15
Finally, the proposed rule change
clarifies the following additional three
issues: (1) How settlements may be
approved in temporary cease and desist
proceedings; (2) which Hearing Panel
has jurisdiction to preside over
applications filed under FINRA Rule
9850 to modify, set aside, limit or
suspend temporary cease and desist
orders that are filed after a Hearing
Panel has already been appointed in the
underlying disciplinary proceeding; and
(3) whether temporary and permanent
cease and desist orders imposed against
a firm also apply to successors of that
firm. With respect to the first issue,
proposed FINRA Rule 9810(c)
establishes that, if the parties agree to
the terms of a proposed temporary cease
and desist order, the Hearing Officer
shall have the authority to approve and
issue the order. On the second issue,
proposed FINRA Rule 9850 provides
that the Hearing Panel that presided
over the temporary cease and desist
order proceeding shall retain
jurisdiction to review a FINRA Rule
9850 application unless at the time the
application is filed a Hearing Panel has
already been appointed in the
underlying disciplinary proceeding
commenced under FINRA Rule 9211, in
which case the Hearing Panel appointed
in the disciplinary proceeding has
jurisdiction.16 As to the third issue,
proposed FINRA Rules 9840(b) and
9291(a) establish that when a temporary
or permanent cease and desist order is
imposed against a member firm, it also
applies to any successor of the member
firm.
(vii) Effective Date
tkelley on DSK3SPTVN1PROD with NOTICES
13 The
pre-hearing submissions described in
FINRA Rule 9242(a) include: (1) An outline or
narrative summary of a party’s case or defense; (2)
the legal theories upon which a party shall rely; (3)
a list and copies of documents that a party intends
to introduce at the hearing; (4) a list of witnesses
who shall testify on a party’s behalf, including the
witnesses’ names, occupations, addresses, and a
brief summary of their expected testimony; and (5)
if a witness shall be called to testify as an expert,
a statement of the expert’s qualifications, a listing
of other proceedings in which the expert has given
expert testimony, a list of the expert’s publications,
and copies of those publications that are not readily
available to other parties and the Hearing Panel.
14 See FINRA Rule 9241(a) (setting forth purposes
of pre-hearing conferences in disciplinary
proceedings).
15 Similarly, the proposed rule change makes
related amendments to FINRA Rules 9269, 9270,
and 9840 to require that the Office of Hearing
Officers, the Department of Enforcement, the
Department of Market Regulation, or the General
Counsel, as appropriate, disseminate default
decisions, orders of acceptance of settlement, and
temporary cease and desist orders to each member
of FINRA with which a respondent is associated.
These dissemination requirements are intended to
ensure that a respondent’s member firm is made
aware of the disciplinary history of its associated
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FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 60 days following
Commission approval. The effective
date will be no later than 30 days
following publication of the Regulatory
Notice announcing Commission
approval.
persons, regardless of the specific disciplinary
procedure involved. The proposed amendments are
consistent with other FINRA Rules that already
require the Office of Hearing Officers, the National
Adjudicatory Council, or the Board of Governors of
FINRA to provide copies of a decision issued by a
Hearing Panel, an Extended Hearing Panel, the
National Adjudicatory Council, or the Board of
Governors of FINRA to each member firm with
which a respondent is associated. See FINRA Rules
9268(d), 9349(c), 9351(e).
16 In many instances the same Hearing Panel will
preside over both the temporary cease and desist
proceeding and the underlying disciplinary
proceeding. There may be occasions, however,
where that is not possible.
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Frm 00127
Fmt 4703
Sfmt 4703
38787
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(2) of the Act,17 which
requires, among other things, that
FINRA has the capacity to be able to
carry out the purposes of the Act and to
comply, and to enforce compliance by
its members and persons associated
with its members, with the provisions of
the Act, the rules and regulations
thereunder, the rules of the Municipal
Securities Rulemaking Board, and
FINRA rules; Section 15A(b)(6) of the
Act,18 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;
Section 15A(b)(7) of the Act,19 which
requires, among other things, that
FINRA rules provide that FINRA
members and persons associated with
its members shall be appropriately
disciplined for violation of any
provision of the Act, the rules of
regulations thereunder, the rules of the
Municipal Securities Rulemaking Board,
or FINRA rules by expulsion,
suspension, limitation of activities,
functions, and operations, fine, censure,
being suspended or barred from being
associated with a member, or any other
fitting sanction; and Section 15A(b)(8)
of the Act,20 which requires that FINRA
rules provide a fair procedure for,
among other things, the disciplining of
members and persons associated with
members.
FINRA believes that the proposed rule
change is consistent with, and furthers
the objectives of, Sections 15A(b)(2) and
15A(b)(6) of the Act in that the proposed
changes to the evidentiary standard
required for imposing a temporary cease
and desist order and the proposed
adoption of a new expedited proceeding
for repeated failures to comply with
temporary or permanent cease and
desist orders will protect investors and
the public interest by improving
FINRA’s capacity to enforce compliance
with applicable laws and rules by its
members and persons associated with
members and improving FINRA’s
capability to prevent fraudulent and
manipulative acts and practices. FINRA
believes that the proposed rule change
is consistent with Section 15A(b)(7) of
the Act because it allows FINRA to take
appropriate action against members and
their associated persons who are
17 15
U.S.C. 78o–3(b)(2).
U.S.C. 78o–3(b)(6).
19 15 U.S.C. 78o–3(b)(7).
20 15 U.S.C. 78o–3(b)(8).
18 15
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tkelley on DSK3SPTVN1PROD with NOTICES
engaged in serious misconduct. Finally,
FINRA believes that the proposed rule
change is consistent with Section
15A(b)(8) of the Act because the rules
governing temporary cease and desist
orders and expedited proceedings
require notice and an opportunity to be
heard before a neutral tribunal, in
addition to the numerous other
procedural safeguards described above
and included in the rules.
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. FINRA
expects that changing the rules that
govern obtaining and enforcing
temporary and permanent cease and
desist orders will result in benefits to
investors and the public interest,
without imposing significant direct or
indirect costs on members or the public.
The primary purpose of these
amendments is to better ensure that
FINRA can protect the assets of
brokerage customers in cases where it is
demonstrably likely that violative
conduct is taking place. These benefits
would be achieved through a
combination of changing the evidentiary
standard for imposing temporary cease
and desist orders, removing a potential
gap that could allow persons to
repeatedly ‘‘violate and cure’’ temporary
or permanent cease and desist orders,
and other administrative changes.
Lowering the evidentiary threshold for
obtaining a temporary cease and desist
order would provide a more effective
and efficient mechanism to combat
serious misconduct and lessen the
dissipation of customer funds in the
presence of misconduct.
Based on FINRA’s past history of
initiating only a small number of
temporary cease and desist actions after
gaining temporary cease and desist
authority, the proposed rule change is
anticipated to result in only a nominal
increase in temporary cease and desist
actions. Nonetheless, the change in the
evidentiary standard may allow FINRA
to initiate and resolve temporary cease
and desist proceedings sooner, in which
case the potential benefits can be
substantial in just a single case where
investors are being harmed.
Moreover, there are numerous
controls to assure that the temporary
cease and desist authority is used only
in limited and appropriate cases. First,
the temporary cease and desist authority
is restricted to those instances where the
staff can demonstrate that the
dissipation or conversion of assets or
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Jkt 235001
harm to customers is likely and
significant. Second, FINRA’s
prosecuting departments must still be
prepared to prove the underlying
disciplinary case at the higher,
‘‘preponderance of the evidence’’
evidentiary standard. Third, to ensure
that FINRA applies its temporary cease
and desist authority in a manner that is
fair, a temporary cease and desist order
may be imposed only if the action has
been authorized by FINRA’s Chief
Executive Officer or such other senior
officers as the Chief Executive Officer
may have designated, the parties have
had an opportunity for a hearing prior
to the imposition of the temporary cease
and desist order, and an independent
Hearing Panel has made findings that
the standards for imposing a temporary
cease and desist order have been met.
Fourth, a party subject to a temporary
cease and desist order may appeal to the
SEC, and thereafter to a federal court of
appeals.
The benefits that arise from the
remaining portions of the proposed rule
change primarily accrue from added
efficiency in the application of the
temporary cease and desist process and
related processes. The proposed service
provisions and other administrative
changes impose no material costs on
firms and permit the staff to expedite
the process to preserve customer assets
and stop inappropriate activities more
quickly.
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
PO 00000
Frm 00128
Fmt 4703
Sfmt 9990
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–2015–019 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–FINRA–2015–019. 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 20549–1090 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also 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–
2015–019 and should be submitted on
or before July 28, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–16543 Filed 7–6–15; 8:45 am]
BILLING CODE 8011–01–P
21 17
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Agencies
[Federal Register Volume 80, Number 129 (Tuesday, July 7, 2015)]
[Notices]
[Pages 38783-38788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16543]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75333; File No. SR-FINRA-2015-019]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule Series 9100, 9200, 9300, 9550, and 9800 Regarding Temporary
and Permanent Cease and Desist Orders
June 30, 2015.
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 June 16, 2015, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule Series 9100, 9200, 9300,
9550, and 9800 to modify the evidentiary standard that must be met to
impose a temporary cease and desist order, to adopt a new expedited
proceeding for repeated failures to comply with temporary or permanent
cease and desist orders, to ease administrative burdens in temporary
cease and desist proceedings, to harmonize the provisions governing how
documents are served in temporary cease and desist proceedings and
expedited proceedings, to clarify the process for issuing permanent
cease and desist orders, and to make conforming changes throughout
FINRA's Code of Procedure.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal
[[Page 38784]]
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
(i) Background
In 2003, the SEC approved rule amendments that authorized FINRA to
seek and impose temporary cease and desist orders.\3\ Temporary cease
and desist orders are designed to stop serious violative conduct and
maintain the status quo while an underlying disciplinary proceeding is
being litigated.\4\ They can be imposed where the potential harm
resulting from violations to investors is likely and significant. FINRA
believes that lowering the evidentiary standard to obtain a temporary
cease and desist order would better serve the investor protection
purposes of the temporary cease and desist authority and make FINRA's
temporary cease and desist authority a more viable investor-protection
tool. The change in the evidentiary standard may allow FINRA to
initiate and resolve temporary cease and desist proceedings sooner, in
which case the potential benefits could be substantial in instances
where investors are being significantly harmed. The change would also
improve FINRA's capacity to enforce compliance with applicable laws and
rules by its members and persons associated with members and FINRA's
capability to prevent fraudulent and manipulative acts and practices.
At the same time, the proposed rule change maintains all of the
meaningful existing restraints on FINRA's temporary cease and desist
authority, including rule provisions that restrict who may authorize
the initiation of a temporary cease and desist proceeding, narrowly
define the violations that a temporary cease and desist order can
address, and limit the issuance of temporary cease and desist orders to
situations where the alleged violative conduct or continuation thereof
is likely to result in significant dissipation or conversion of assets
or other significant harm to investors.
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release No. 47925 (May 23, 2003), 68
FR 33548 (June 4, 2003) (Order Approving File No. SR-NASD-98-80). In
2009, the SEC approved the adoption of the temporary and permanent
cease and desist authority on a permanent basis. Securities Exchange
Act Release No. 60306 (July 14, 2009), 74 FR 36292 (July 22, 2009)
(Order Approving File No. SR-FINRA-2009-035).
\4\ FINRA Rule 9810(a) provides that a temporary cease and
desist proceeding may be initiated with respect to alleged
violations of Section 10(b) of the Act (15 U.S.C. 78j(b)) and Rule
10b-5 under the Act (17 CFR 240.10b-5); Rules 15g-1 through 15g-9
under the Act (17 CFR 240.15g-1 et seq.); FINRA Rule 2010 (if the
alleged violation is unauthorized trading, or misuse or conversion
of customer assets, or based on violations of Section 17(a) of the
Securities Act of 1933 (15 U.S.C. 77q(a))); FINRA Rule 2020; or
FINRA Rule 4330 (if the alleged violation is misuse or conversion of
customer assets).
---------------------------------------------------------------------------
The proposed rule change also adopts a new expedited proceeding to
address situations involving repeated violations of temporary or
permanent cease and desist orders. Finally, the proposed rule change
includes a series of rule amendments to the temporary cease and desist
order rules (FINRA Rule Series 9800), the expedited proceedings rules
(FINRA Rule Series 9550), and FINRA's Code of Procedure (FINRA Rule
Series 9000) that harmonize service provisions in temporary cease and
desist proceedings and expedited proceedings, ease administrative
burdens in temporary cease and desist proceedings, and clarify the
process by which permanent cease and desist orders may be imposed.
(ii) Evidentiary Standard for Imposing a Temporary Cease and Desist
Order
FINRA Rule 9840(a)(1) provides, in pertinent part, that a temporary
cease and desist order shall be imposed if the Hearing Panel finds ``by
a preponderance of the evidence that the alleged violation specified in
the notice has occurred.'' FINRA believes that the ``preponderance of
the evidence'' standard sets too high an evidentiary threshold for this
critical investor-protection tool. It is the identical standard for
proving a violation in the underlying disciplinary proceeding that must
be pursued at the same time. Thus, to obtain a temporary cease and
desist order--and thereby prevent the likely and significant
dissipation or conversion of assets or other significant harm to
investors--FINRA's prosecuting department has to make an evidentiary
presentation in the temporary cease and desist proceeding that is
similar in extent to its evidentiary presentation in the subsequent
underlying disciplinary proceeding, but in an expedited manner. This
poses administrative challenges that create a strong disincentive to
seeking a temporary cease and desist order.
To increase the viability of the temporary cease and desist
authority and improve the capacity of that authority to protect
investors facing the likelihood of significant dissipation or
conversion of assets, FINRA is proposing rule amendments that modify
the evidentiary standard that must be met to obtain a temporary cease
and desist order. In this regard, proposed FINRA Rule 9840(a)(1)
requires that a FINRA Hearing Panel find that the Department of
Enforcement or Department of Market Regulation has made a showing of a
likelihood of success on the merits before issuing a temporary cease
and desist order. FINRA's intent is to establish an evidentiary
standard in temporary cease and desist proceedings that would require a
lesser showing than what would be required during the subsequent,
underlying disciplinary proceeding. Changing the evidentiary standard
to require a showing of a likelihood of success on the merits may
enable FINRA to initiate and resolve temporary cease and desist
proceedings sooner and more efficiently, which would better protect
investors' assets and prevent other significant harm until the
underlying disciplinary hearing is held.
The proposed rule change makes a corresponding amendment to FINRA
Rule 9840(a)(2). Currently, FINRA Rule 9840(a)(2) provides that a
temporary cease and desist order shall be imposed if the Hearing Panel
finds that the violative conduct or continuation thereof is likely to
result in significant dissipation or conversion of assets or other
significant harm to investors prior to the completion of the underlying
proceeding. The proposed rule change modifies this requirement to apply
to the ``alleged'' violative conduct or continuation thereof, to be
consistent with the proposed change to the evidentiary standard.
FINRA remains mindful that when the Commission approved FINRA's
temporary cease and desist authority on a permanent basis in 2009, it
noted FINRA's statement that it would use its authority
``judiciously.'' \5\ FINRA's actions have been consistent with that
statement--FINRA has sought and obtained temporary cease and desist
[[Page 38785]]
orders on only seven occasions since 2003--and FINRA intends to
continue using its authority in a similarly judicious manner. Moreover,
the proposed rule change maintains all of the meaningful restraints on
FINRA's temporary cease and desist authority, including that a
temporary cease and desist proceeding must be authorized by FINRA's
Chief Executive Officer or other designated senior officer, and that a
temporary cease and desist order can be imposed only if there is a
likelihood of significant dissipation or conversion of assets or
significant harm to investors.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 60306 (July 14, 2009),
74 FR 36292, 36293 (July 22, 2009) (Order Approving File No. SR-
FINRA-2009-035).
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In sum, FINRA's purpose in modifying the evidentiary standard for
temporary cease and desist proceedings is to increase the effectiveness
of this regulatory proceeding and thereby improve investor protection
in the most threatening and serious cases until the underlying
disciplinary hearing is held.
(iii) Failures To Comply With Temporary Cease and Desist Orders and
Permanent Cease and Desist Orders (FINRA Rule 9556)
The proposed rule change includes amendments to FINRA Rule 9556,
which sets forth expedited procedures for enforcing violations of
FINRA-issued temporary and permanent cease and desist orders. FINRA is
concerned that the existing expedited procedures may permit cease and
desist orders to be circumvented without any real threat of a sanction.
Under current FINRA Rule 9556, if a member or person fails to comply
with a temporary or permanent cease and desist order, FINRA staff (with
prior authorization from FINRA's Chief Executive Officer or other
designated senior officer) may issue a notice stating that the failure
to comply within seven days will result in a suspension or cancellation
of membership or a suspension or bar from associating with any member
and also stating what the respondent must do to avoid such action. A
respondent potentially could abuse the current process by repeatedly
violating a cease and desist order and curing that violation before the
effective date of any FINRA Rule 9556 notice, without being subject to
immediate sanctions or review by the Office of Hearing Officers for a
prolonged period. While FINRA could pursue disciplinary action against
a respondent that repeatedly ``violates and cures'' in this manner, an
inability to obtain sanctions in an expedited manner could undermine
any cease and desist order terms that require immediate compliance to
be effective.
Proposed FINRA Rule 9556(h) permits FINRA staff (with prior
authorization from FINRA's Chief Executive Officer or other designated
senior officer) to institute a new kind of expedited proceeding if the
subject of a temporary or permanent cease and desist order fails to
comply with that order and has previously been served with a notice
under FINRA Rule 9556(a) for a failure to comply with any provision of
the same temporary or permanent cease and desist order. Proposed FINRA
Rule 9556(h)(3) provides that, in contrast to other Rule 9556
proceedings, a respondent's compliance with the temporary or permanent
cease and desist order is not a ground for dismissing the FINRA Rule
9556(h) proceeding. Thus, a respondent's compliance with a temporary or
permanent cease and desist order after the FINRA Rule 9556(h)
proceeding has been initiated would not prevent an adjudicator from
reviewing the matter and imposing a fitting sanction for the
respondent's violation.
The proposed FINRA Rule 9556(h) proceeding differs from other FINRA
Rule 9556 expedited proceedings in other respects that reflect the
response that FINRA believes is warranted for situations involving
repeated violations of temporary or permanent cease and desist orders.
These differences include the following:
A FINRA Rule 9556(h) proceeding could be initiated only if
the respondent has previously been served under FINRA Rule 9556(a) with
a notice for failing to comply with any provision of the same temporary
or permanent cease and desist order;
FINRA's prosecuting department would initiate a FINRA Rule
9556(h) proceeding by filing a petition with FINRA's Office of Hearing
Officers (and serving the respondent) that seeks the imposition of
sanctions for the violation (rather than issuing a notice to the
respondent);
FINRA's prosecuting department would seek the imposition
of any fitting sanction at the outset of the FINRA Rule 9556(h)
proceeding (in contrast to other FINRA Rule 9556 expedited proceedings,
where the recipient of a notice is not subject to the imposition of any
fitting sanction unless such recipient opts for a hearing);
a hearing is required in a FINRA Rule 9556(h) proceeding;
the hearing for a FINRA Rule 9556(h) proceeding must be
held in a condensed time frame (ten business days after a respondent is
served the petition, versus other Rule 9556 proceedings which require a
respondent to request a hearing within seven business days after
service of a notice instituting a proceeding and require hearings to be
held within 14 days after a request for a hearing is filed); \6\
---------------------------------------------------------------------------
\6\ See proposed FINRA Rule 9559(f)(2) and (3); FINRA Rule
9556(e).
---------------------------------------------------------------------------
a FINRA Rule 9556(h) proceeding is presided over by a
Hearing Officer, rather than a Hearing Panel; \7\ and
---------------------------------------------------------------------------
\7\ See proposed FINRA Rule 9559(d)(1) and (2).
---------------------------------------------------------------------------
the Hearing Officer may issue default decisions in FINRA
Rule 9556(h) proceedings.\8\
---------------------------------------------------------------------------
\8\ See proposed FINRA Rule 9559(m)(2).
---------------------------------------------------------------------------
Under proposed FINRA Rule 9556(h)(4), the FINRA department that
filed the petition can withdraw it without prejudice and shall be
permitted to refile a petition based on allegations concerning the same
facts and circumstances that are set forth in the withdrawn petition.
This provision will provide FINRA the flexibility to withdraw the
petition where, for instance, the respondent evidences a good faith
intent to comply with the temporary or permanent cease and desist order
without the need to adjudicate the petition, while preserving FINRA's
right to refile the petition if the respondent fails to do so.
Considering that these new FINRA Rule 9556(h) expedited proceedings
would be limited to subsequent violations of temporary or permanent
cease and desist orders, require appropriate authorization, provide an
opportunity for a hearing prior to the imposition of a sanction, be
resolved by a Hearing Officer, and be subject to appeal to the SEC,
sufficient checks are in place to ensure that FINRA continues to use
its FINRA Rule 9556 powers in a judicious and fair manner.
(iv) Service Provisions in Temporary Cease and Desist Proceedings and
Expedited Proceedings
The proposed rule change makes the FINRA rules that govern service
of documents in temporary cease and desist proceedings and the eight
different types of expedited proceedings more consistent. Currently,
some provisions explicitly address service by facsimile and on counsel,
but some do not. FINRA proposes rule amendments that explicitly allow
service by facsimile and on counsel across all temporary cease and
desist and expedited proceedings because doing so removes unnecessary
burdens and inefficiencies.
The proposed rule change also permits service by email in all
temporary cease and desist proceedings and expedited proceedings. Email
service will allow parties to receive information quickly, which is
particularly important in these types of proceedings, considering the
short time
[[Page 38786]]
frames involved. Moreover, where the proposed revisions permit email
service, they also require duplicate service through some other means
such as overnight courier or personal delivery.
(v) Clarifying FINRA's Authority To Impose Permanent Cease and Desist
Orders
When FINRA obtained the authority to impose temporary cease and
desist orders, it also obtained the authority to impose permanent cease
and desist orders.\9\ The proposed rule change contains amendments that
clarify the process for imposing permanent cease and desist orders in
disciplinary proceedings. These changes are procedural in nature and do
not reflect any change to FINRA's prior representations concerning the
context in which it will seek permanent cease and desist orders.\10\
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\9\ See Securities Exchange Act Release No. 47925 (May 23,
2003), 68 FR 33548, 33549-50 (June 4, 2003) (Order Approving File
No. SR-NASD-98-80).
\10\ See Securities Exchange Act Release No. 47925 (May 23,
2003), 68 FR 33548, 33550 & n.18 (June 4, 2003) (Order Approving
File No. SR-NASD-98-80).
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(vi) Administrative Changes To Temporary Cease and Desist Proceedings
The small pool of persons who currently may serve on hearing panels
that preside over temporary cease and desist proceedings, coupled with
the short time in which a temporary cease and desist proceeding must be
processed, creates administrative burdens for FINRA's Office of Hearing
Officers. Currently, FINRA Rule 9820(a) requires that the Hearing Panel
appointed to preside over a temporary cease and desist proceeding
include two panelists that are ``current or former Governors,
Directors, or National Adjudicatory Council members, and at least one
Panelist shall be an associated person.'' This is a far more limited
pool of potential panelists than is available for other FINRA
adjudicatory proceedings, including the underlying disciplinary
proceeding that follows a temporary cease and desist proceeding and any
FINRA Rule 9556 expedited proceeding to enforce a cease and desist
order.\11\ While FINRA's Office of Hearing Officers has presided over
only a limited number of temporary cease and desist proceedings, those
experiences have revealed that the narrowly circumscribed set of
potential panelists can impede the recruitment of Hearing Panel
members, especially considering that the expedited nature of temporary
cease and desist proceedings will already preclude many from being able
to serve.\12\ FINRA also has concerns that the small pool of potential
panelists will often make it difficult to recruit hearing panelists who
can serve on both the temporary cease and desist proceeding and the
subsequent underlying disciplinary proceeding, as well as any related
expedited proceeding under FINRA Rule 9556. In such situations, FINRA
is unable to realize the corresponding benefits to judicial economy
that come from having the same panelists preside over all such
proceedings.
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\11\ See FINRA Rule 9231(b) (providing that each panelist shall
be associated with a member of FINRA or retired therefrom and that
the pool of panelists for disciplinary proceedings includes current
or previous members of District Committees, former members of the
National Adjudicatory Council, past members of disciplinary
subcommittees of the National Adjudicatory Council or the National
Business Conduct Committee, past members of the Board of Directors
of FINRA Regulation or past members of the Board of Governors of
FINRA, and current or previous members of committees appointed or
approved by the Board of Governors of FINRA); FINRA Rule 9559(d)(2)
(providing for the same pool for FINRA Rule 9556 expedited
proceedings).
\12\ Hearings in temporary cease and desist proceedings are, in
general, required to be held not later than 15 days after service of
the notice initiating the proceeding. FINRA Rule 9830(a).
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To address these issues, the proposed rule change expands the pool
of persons eligible to serve on hearing panels to include those who may
serve on hearing panels for disciplinary matters. Specifically, under
proposed FINRA Rule 9820, the potential panelists for the Hearing
Panels that preside over temporary cease and desist proceedings would
include persons who currently serve or previously served on a District
Committee; previously served on the National Adjudicatory Council;
previously served on a disciplinary subcommittee of the National
Adjudicatory Council or the National Business Conduct Committee;
previously served as a member of the Board of Directors of FINRA
Regulation or of the Board of Governors of FINRA; or currently serve or
previously served on a committee appointed or approved by the Board of
Governors of FINRA, but do not serve currently on the National
Adjudicatory Council or as a member of the Board of Directors of FINRA
Regulation or of the Board of Governors of FINRA. Likewise, the
proposed rule change would require that each panelist be associated
with a member of FINRA or retired therefrom.
The proposed rule change also eases other administrative burdens
created by the shortened time frame of a temporary cease and desist
proceeding. These proposed changes are aimed at improving Hearing
Panels' and parties' ability to prepare for hearings and giving Hearing
Officers some needed flexibility. For example, under current FINRA Rule
9830(a), a Hearing Officer is not able to extend a hearing date in a
temporary cease and desist proceeding unless all parties consent to the
extension. The requirement to obtain the parties' consent can be
problematic where the Office of Hearing Officers, rather than one of
the parties, has a need for an extension, such as when it encounters
difficulty in quickly appointing a Hearing Panel. To address this
problem, FINRA is proposing to change FINRA Rule 9830(a) to allow
hearing deadlines to be extended by the Chief Hearing Officer or Deputy
Chief Hearing Officer for good cause shown.
Likewise, the proposed rule change makes similar amendments to the
process by which extensions are obtained to the deadlines for issuing
decisions in temporary cease and desist proceedings and responding to
requests to modify, set aside, limit or suspend a temporary cease and
desist order. Under current FINRA Rule 9840(a), the Hearing Panel's
deadline for issuing its written decision cannot be extended, even
where there is good cause, without the consent of the parties.
Likewise, under current FINRA Rule 9850, a Hearing Panel's deadline for
responding to an application to have a temporary cease and desist order
modified, set aside, limited, or suspended cannot be extended, even
where there is a good cause, without the consent of the Parties. A
Hearing Panel should be allowed some flexibility where there is a need
for additional time to prepare its decision or respond to a FINRA Rule
9850 request (e.g., when a member of the Hearing Panel becomes ill,
where the temporary cease and desist proceeding is highly complex). The
proposed change to FINRA Rules 9840(a) and 9850 would permit the
deadlines for issuing decisions and responding to FINRA Rule 9850
applications to be extended by the Chief Hearing Officer or Deputy
Chief Hearing Officer for good cause shown.
To further address the burdens created by the short time frame of
temporary cease and desist proceedings, the proposed rule change also:
(i) Requires FINRA's prosecuting department to file a memorandum of
points and authorities with the notice initiating a temporary cease and
desist proceeding; and (ii) permits the Hearing Officer to order a
party to furnish to all other parties and the Hearing Panel such
information as deemed appropriate, including any or all of the pre-
hearing submissions described in FINRA Rule
[[Page 38787]]
9242(a).\13\ Requiring FINRA's prosecuting department to file a
memorandum of points and authorities at the initiation of the
proceeding will, at the outset, provide more context to the allegations
and set forth legal authorities on which the notice seeking a temporary
cease and desist order is premised. This, in turn, will facilitate a
more efficient process and improve the quality of the hearing through
more thorough preparation, which are the same goals of the pre-hearing
processes in FINRA disciplinary proceedings.\14\ Requiring the filing
of a memorandum of points and authorities at the initiation of a
temporary cease and desist proceeding also will enhance disclosure of
the prosecuting department's allegations, which will inure to the
benefit of the respondents and further increase the fairness of the
proceeding. All of these objectives also will be served by authorizing
Hearing Officers to order a party to furnish other pre-hearing
submissions.
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\13\ The pre-hearing submissions described in FINRA Rule 9242(a)
include: (1) An outline or narrative summary of a party's case or
defense; (2) the legal theories upon which a party shall rely; (3) a
list and copies of documents that a party intends to introduce at
the hearing; (4) a list of witnesses who shall testify on a party's
behalf, including the witnesses' names, occupations, addresses, and
a brief summary of their expected testimony; and (5) if a witness
shall be called to testify as an expert, a statement of the expert's
qualifications, a listing of other proceedings in which the expert
has given expert testimony, a list of the expert's publications, and
copies of those publications that are not readily available to other
parties and the Hearing Panel.
\14\ See FINRA Rule 9241(a) (setting forth purposes of pre-
hearing conferences in disciplinary proceedings).
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Proposed FINRA Rule 9840(e) is a delivery requirement that would
require a member firm that is the subject of a temporary cease and
desist order to provide a copy of the order to its associated persons,
within one business day of receiving it. Considering the significant
nature of the harm that a temporary cease and desist order is aimed at
stopping, FINRA believes there is a heightened need to ensure that the
persons who may act on behalf of the member firm are made aware of the
contents of a temporary cease and desist order imposed against the
member firm. The delivery requirement will further that goal.\15\
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\15\ Similarly, the proposed rule change makes related
amendments to FINRA Rules 9269, 9270, and 9840 to require that the
Office of Hearing Officers, the Department of Enforcement, the
Department of Market Regulation, or the General Counsel, as
appropriate, disseminate default decisions, orders of acceptance of
settlement, and temporary cease and desist orders to each member of
FINRA with which a respondent is associated. These dissemination
requirements are intended to ensure that a respondent's member firm
is made aware of the disciplinary history of its associated persons,
regardless of the specific disciplinary procedure involved. The
proposed amendments are consistent with other FINRA Rules that
already require the Office of Hearing Officers, the National
Adjudicatory Council, or the Board of Governors of FINRA to provide
copies of a decision issued by a Hearing Panel, an Extended Hearing
Panel, the National Adjudicatory Council, or the Board of Governors
of FINRA to each member firm with which a respondent is associated.
See FINRA Rules 9268(d), 9349(c), 9351(e).
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Finally, the proposed rule change clarifies the following
additional three issues: (1) How settlements may be approved in
temporary cease and desist proceedings; (2) which Hearing Panel has
jurisdiction to preside over applications filed under FINRA Rule 9850
to modify, set aside, limit or suspend temporary cease and desist
orders that are filed after a Hearing Panel has already been appointed
in the underlying disciplinary proceeding; and (3) whether temporary
and permanent cease and desist orders imposed against a firm also apply
to successors of that firm. With respect to the first issue, proposed
FINRA Rule 9810(c) establishes that, if the parties agree to the terms
of a proposed temporary cease and desist order, the Hearing Officer
shall have the authority to approve and issue the order. On the second
issue, proposed FINRA Rule 9850 provides that the Hearing Panel that
presided over the temporary cease and desist order proceeding shall
retain jurisdiction to review a FINRA Rule 9850 application unless at
the time the application is filed a Hearing Panel has already been
appointed in the underlying disciplinary proceeding commenced under
FINRA Rule 9211, in which case the Hearing Panel appointed in the
disciplinary proceeding has jurisdiction.\16\ As to the third issue,
proposed FINRA Rules 9840(b) and 9291(a) establish that when a
temporary or permanent cease and desist order is imposed against a
member firm, it also applies to any successor of the member firm.
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\16\ In many instances the same Hearing Panel will preside over
both the temporary cease and desist proceeding and the underlying
disciplinary proceeding. There may be occasions, however, where that
is not possible.
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(vii) Effective Date
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 30 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(2) of the Act,\17\ which requires, among
other things, that FINRA has the capacity to be able to carry out the
purposes of the Act and to comply, and to enforce compliance by its
members and persons associated with its members, with the provisions of
the Act, the rules and regulations thereunder, the rules of the
Municipal Securities Rulemaking Board, and FINRA rules; Section
15A(b)(6) of the Act,\18\ 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; Section
15A(b)(7) of the Act,\19\ which requires, among other things, that
FINRA rules provide that FINRA members and persons associated with its
members shall be appropriately disciplined for violation of any
provision of the Act, the rules of regulations thereunder, the rules of
the Municipal Securities Rulemaking Board, or FINRA rules by expulsion,
suspension, limitation of activities, functions, and operations, fine,
censure, being suspended or barred from being associated with a member,
or any other fitting sanction; and Section 15A(b)(8) of the Act,\20\
which requires that FINRA rules provide a fair procedure for, among
other things, the disciplining of members and persons associated with
members.
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\17\ 15 U.S.C. 78o-3(b)(2).
\18\ 15 U.S.C. 78o-3(b)(6).
\19\ 15 U.S.C. 78o-3(b)(7).
\20\ 15 U.S.C. 78o-3(b)(8).
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FINRA believes that the proposed rule change is consistent with,
and furthers the objectives of, Sections 15A(b)(2) and 15A(b)(6) of the
Act in that the proposed changes to the evidentiary standard required
for imposing a temporary cease and desist order and the proposed
adoption of a new expedited proceeding for repeated failures to comply
with temporary or permanent cease and desist orders will protect
investors and the public interest by improving FINRA's capacity to
enforce compliance with applicable laws and rules by its members and
persons associated with members and improving FINRA's capability to
prevent fraudulent and manipulative acts and practices. FINRA believes
that the proposed rule change is consistent with Section 15A(b)(7) of
the Act because it allows FINRA to take appropriate action against
members and their associated persons who are
[[Page 38788]]
engaged in serious misconduct. Finally, FINRA believes that the
proposed rule change is consistent with Section 15A(b)(8) of the Act
because the rules governing temporary cease and desist orders and
expedited proceedings require notice and an opportunity to be heard
before a neutral tribunal, in addition to the numerous other procedural
safeguards described above and included in the rules.
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. FINRA expects that changing the
rules that govern obtaining and enforcing temporary and permanent cease
and desist orders will result in benefits to investors and the public
interest, without imposing significant direct or indirect costs on
members or the public. The primary purpose of these amendments is to
better ensure that FINRA can protect the assets of brokerage customers
in cases where it is demonstrably likely that violative conduct is
taking place. These benefits would be achieved through a combination of
changing the evidentiary standard for imposing temporary cease and
desist orders, removing a potential gap that could allow persons to
repeatedly ``violate and cure'' temporary or permanent cease and desist
orders, and other administrative changes. Lowering the evidentiary
threshold for obtaining a temporary cease and desist order would
provide a more effective and efficient mechanism to combat serious
misconduct and lessen the dissipation of customer funds in the presence
of misconduct.
Based on FINRA's past history of initiating only a small number of
temporary cease and desist actions after gaining temporary cease and
desist authority, the proposed rule change is anticipated to result in
only a nominal increase in temporary cease and desist actions.
Nonetheless, the change in the evidentiary standard may allow FINRA to
initiate and resolve temporary cease and desist proceedings sooner, in
which case the potential benefits can be substantial in just a single
case where investors are being harmed.
Moreover, there are numerous controls to assure that the temporary
cease and desist authority is used only in limited and appropriate
cases. First, the temporary cease and desist authority is restricted to
those instances where the staff can demonstrate that the dissipation or
conversion of assets or harm to customers is likely and significant.
Second, FINRA's prosecuting departments must still be prepared to prove
the underlying disciplinary case at the higher, ``preponderance of the
evidence'' evidentiary standard. Third, to ensure that FINRA applies
its temporary cease and desist authority in a manner that is fair, a
temporary cease and desist order may be imposed only if the action has
been authorized by FINRA's Chief Executive Officer or such other senior
officers as the Chief Executive Officer may have designated, the
parties have had an opportunity for a hearing prior to the imposition
of the temporary cease and desist order, and an independent Hearing
Panel has made findings that the standards for imposing a temporary
cease and desist order have been met. Fourth, a party subject to a
temporary cease and desist order may appeal to the SEC, and thereafter
to a federal court of appeals.
The benefits that arise from the remaining portions of the proposed
rule change primarily accrue from added efficiency in the application
of the temporary cease and desist process and related processes. The
proposed service provisions and other administrative changes impose no
material costs on firms and permit the staff to expedite the process to
preserve customer assets and stop inappropriate activities more
quickly.
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2015-019 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-FINRA-2015-019. 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 20549-1090 on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of the filing will also 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-2015-019 and should be
submitted on or before July 28, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-16543 Filed 7-6-15; 8:45 am]
BILLING CODE 8011-01-P