Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Composition, Terms of Members and Election Procedures for the National Adjudicatory Council, 40932-40935 [2016-14837]
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Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Notices
Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
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I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s Web site (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3007.40.
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3010, and 39
CFR part 3020, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
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deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: CP2016–214; Filing
Title: Notice of the United States Postal
Service of Filing a Functionally
Equivalent Global Plus 1C Negotiated
Service Agreement and Application for
Non-Public Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
June 16, 2016; Filing Authority: 39
U.S.C. 3642 and 39 CFR 3020.30 et seq.;
Public Representative: Curtis E. Kidd;
Comments Due: June 24, 2016.
This notice will be published in the
Federal Register.
Stacy L. Ruble,
Secretary.
[FR Doc. 2016–14836 Filed 6–22–16; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78094; File No. SR–FINRA–
2016–014]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change Relating to
Composition, Terms of Members and
Election Procedures for the National
Adjudicatory Council
June 17, 2016.
I. Introduction
On April 28, 2016, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend the By-Laws of FINRA’s
regulatory subsidiary, FINRA
Regulation, Inc. (‘‘FINRA Regulation’’),
to expand the size of the National
Adjudicatory Council (‘‘NAC’’) to 15
members, with the number of nonindustry members exceeding the
number of industry members; lengthen
the terms of office of future NAC
members to four years; and update the
process used for sending and counting
ballots in the event of a contested
nomination and election to fill certain
NAC industry member seats. The
proposed rule change was published for
comment in the Federal Register on
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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May 13, 2016.3 The Commission
received four comment letters on the
proposal.4 Thereafter, FINRA submitted
a letter in response to the comment
letters.5 This order grants approval of
the proposed rule change.
II. Description of the Proposal 6
The FINRA Regulation By-Laws
establish the composition of the NAC,7
the terms of its members, and the
process by which members are selected.
The NAC is currently composed of
fourteen members.8 The number of NonIndustry Members, which must include
at least three Public Members, equals
the number of Industry Members.9 The
3 See Securities Exchange Act Release No. 77786
(May 9, 2016), 81 FR 29929 (May 13, 2016)
(‘‘Notice’’).
4 See Letters from Steven B. Caruso, Esq., Maddox
Hargett Caruso, P.C., dated May 9, 2016 (‘‘Caruso
Letter’’); David T. Bellaire, Esq., Executive Vice
President & General Counsel, Financial Services
Institute, dated May 19, 2016 (‘‘FSI Letter’’); Hugh
Berkson, Public Investors Arbitration Bar
Association, dated June 2, 2016 (‘‘PIABA Letter’’);
and Christopher E. Berman, Barry University, dated
June 2, 2016 (‘‘Berman Letter’’).
5 See Letter from Gary Dernelle, Associate General
Counsel, FINRA, dated June 13, 2016 (‘‘FINRA
Letter’’).
6 A full description of the proposal can be found
in the Notice. See Notice, supra note 3.
7 The NAC acts on behalf of FINRA in several
capacities and its powers are authorized by the ByLaws of FINRA Regulation and FINRA’s Code of
Procedure. The NAC presides over disciplinary
matters appealed to or called for review by the
NAC. The NAC also acts, when requested, in
statutory disqualification and membership
proceedings; considers the appeals of members
seeking exemptive relief; and retains the authority
to review decisions proposed in other proceedings
as set forth in the Code of Procedure. For most
matters that the NAC considers, it prepares a
proposed written decision, which becomes final
FINRA action if the Board does not call the matter
for review. See Notice, supra note 3.
8 See FINRA Regulation By-Laws, Article V
(National Adjudicatory Council), Section 5.2(a)
(Number of Members and Qualifications).
9 Id. A ‘‘Non-Industry Member’’ of the NAC
includes any Public Member, an officer or employee
of an issuer of securities listed on a market for
which FINRA provides regulation, an officer or
employee of an issuer of unlisted securities that are
traded in the over-the-counter market, or any
individual who would not otherwise fall within the
definition of an Industry Member. See FINRA
Regulation By-Laws, Article I (Definitions),
paragraph (ee). A ‘‘Public Member’’ generally is a
Non-Industry Member who has no material
business relationship with a broker or dealer or a
self-regulatory organization registered under the
Act. See FINRA Regulation By-Laws, Article I
(Definitions), paragraph (hh). An ‘‘Industry
Member’’ generally includes a person who is or
served in the prior year as an officer, director,
employee or controlling person of a broker-dealer;
is an officer, director or employee of an entity that
owns a material equity interest in a broker-dealer;
owns personally a material equity interest in a
broker-dealer; provides professional services to
broker-dealers, or to a director, officer, or employee
of a broker-dealer in their professional capacity,
where the revenues from such services meet
material thresholds; or is or served in the prior year
as a consultant, employee or provider of
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seven Industry Members include two
Small Firm NAC Members, one MidSize Firm NAC Member, two Large Firm
NAC Members and two at-large Industry
Members.10
The FINRA Board appoints the NAC
and its members.11 The FINRA Board
appoints Non-Industry Members and atlarge Industry Members from candidates
recommended by the Nominating
Committee. The FINRA Board also
appoints Small Firm, Mid-Size Firm and
Large Firm NAC Members, either from
candidates recommended by the
Nominating Committee, or in the event
of a contested election for a Small Firm,
Mid-Size Firm or Large Firm NAC
Member vacancy, the candidate who is
elected by FINRA members based on
their vote for a candidate.12 The Small
Firm, Mid-Size Firm or Large Firm NAC
Member candidate receiving the largest
number of votes from firms of
corresponding size is declared the
nominee, and the Nominating
Committee sends a written certification
of the results to the FINRA Board and
nominates such candidate for
appointment to the NAC.13
The proposed rule change amends the
FINRA Regulation By-Laws in three
ways. First, it amends Section 5.2 of the
FINRA Regulation By-Laws to expand
the size of the NAC from fourteen
members to fifteen members and require
that the NAC have more Non-Industry
Members, including at least three Public
Members, than Industry Members.
Accordingly, FINRA would add one
Non-Industry Member seat to the
current 14-member committee.
Second, the proposed rule change
lengthens the term of office of future
NAC members by one year, from three
to four years.14 In addition, the NAC
professional services to a self-regulatory
organization registered under the Act. See FINRA
Regulation By-Laws, Article I (Definitions),
paragraph (x).
10 See FINRA Regulation By-Laws, Article V
(National Adjudicatory Council), Section 5.2(a)
(Number of Members and Qualifications).
11 See FINRA Regulation By-Laws, Article V
(National Adjudicatory Council), Section 5.3
(Appointments).
12 Id.
13 See FINRA Regulation By-Laws, Article VI
(Selection of Small Firm, Mid-Size Firm and Large
Firm Industry Members of the National
Adjudicatory Council), Section 6.13 (Certification of
Nomination). The FINRA Board is required to
appoint to the NAC the candidate who receives the
most votes in any contested election for a Small
Firm, Mid-Size Firm or Large Firm NAC Member
seat. See FINRA Regulation By-Laws Article V
(National Adjudicatory Council), Section 5.5
(Rejection of Nominating Committee Nominee).
14 See Proposed FINRA Regulation By-Laws,
Article V (National Adjudicatory Council), Section
5.6(a) and (c) (Term of Office). FINRA stated that
the proposed rule change would not alter or extend
the term of any NAC member serving currently; the
rule change would apply prospectively.
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would be divided into four classes,
rather than the current three, that are as
equal in number as feasible.15
Finally, the proposed rule change
streamlines the NAC election process
and aligns it with the process currently
used for elections involving the FINRA
District Committees. The proposed rule
change amends Section 6.7 of the
FINRA Regulation By-Laws by deleting
the term ‘‘envelope’’ and adding
language to permit ballots to be
delivered by additional means.16 The
proposed rule change aligns the ballot
preparation process in NAC elections
with that used in FINRA District
Committee elections and allows FINRA
members to vote using online and
telephonic methods in addition to paper
ballots.17
The proposed rule change also
amends Section 6.10 of the FINRA
Regulation By-Laws to simplify the
tabulation of ballots by the Independent
Agent, by eliminating the provision in
Section 6.10 of the FINRA Regulation
By-Laws that permits NAC candidates
and their representatives to observe the
Independent Agent’s accounting of
ballots in contested NAC elections. The
proposed rule change would align the
ballot counting process used in NAC
elections with the process used in
FINRA District Committee elections,
which does not provide candidates the
ability to be present while the
Independent Agent opens and counts
the ballots.18 The proposed rule change
15 See Proposed FINRA Regulation By-Laws,
Article V (National Adjudicatory Council), Section
5.6(b) (Term of Office). The proposed rule change
also amends Section 5.6(a) of the FINRA Regulation
By-Laws to provide a three-year transitional period
during which the FINRA Board may appoint new
NAC members to terms of office less than four years
to achieve the staggering necessary to divide the
NAC into four classes. FINRA anticipates that,
beginning in January 2017, and ending in December
2019, new NAC members would be appointed to
terms of either three years or four years to achieve
the result of a NAC that is divided into four classes,
with each NAC member serving a term of four
years. The proposed rule change also makes a
conforming amendment to Section 5.6(b) of the
FINRA Regulation By-Laws to delete obsolete text
related to a prior rule change that replaced regionbased Industry NAC members with Industry
members that represent FINRA member firms of
various sizes. See Securities Exchange Act Release
No. 58909 (November 6, 2008), 73 FR 68467
(November 18, 2008) (Order Approving File No.
SR–FINRA–2008–046).
16 The proposed rule change would also make a
conforming amendment to Section 6.9 of the FINRA
Regulation By-Laws concerning ballots that are
returned as undelivered.
17 See FINRA Regulation By-Laws, Article VIII
(District Committees), Section 8.11 (Ballots).
18 See FINRA Regulation By-Laws, Article VIII
(District Committees), Section 8.14 (General
Procedures for Qualification and Accounting of
Ballots). According to FINRA, the opportunity to
observe the Independent Agent’s qualification and
accounting of ballots was rarely used by NAC
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40933
will thus expedite the accounting
process and permit the Secretary of
FINRA to notify the candidates more
quickly of NAC election results.
III. Summary of Comment Letters and
FINRA’s Response
One commenter supported the
proposed rule change and believed that
expanding the size of the NAC and
requiring that the number of NonIndustry Members exceed the number of
Industry Members would ‘‘clearly
advance the public interest and protect
investors. . . .’’ 19 Two commenters
generally supported the proposed rule
change, but believed that FINRA should
increase the number of Public Members
on the NAC instead of adding an
additional Non-Industry Member to the
NAC.20 Finally, one commenter
expressed concerns about modifying the
composition of the NAC and
lengthening the term of office of future
NAC members.21
A. Composition of the NAC
Two commenters suggested that
FINRA increase the number of Public
Members on the NAC.22 Specifically,
one commenter expressed concern that
while altering the NAC’s composition to
include a majority of Non-Industry
Members would ‘‘enhance its reputation
for impartiality and reduce the
possibility of deadlock[,]’’persons with
significant industry connections may
qualify as Non-Industry Members.23
Similarly, another commenter believed
that issuers and employees of issuers
who would be categorized as NonIndustry Members ‘‘may be more closely
aligned with Industry Members under
certain circumstances.’’ 24 One
commenter, however, raised concerns
about modifying the composition of the
candidates and provided candidates no additional
grounds for recourse. Candidates and their
representatives are not allowed to see the vote of
any FINRA member and the final determination of
the qualification of a ballot rests with the Secretary
of the Corporation. See FINRA Regulation By-Laws,
Article VI (Selection of Small Firm, Mid-Size Firm
and Large Firm Industry Members of the National
Adjudicatory Council), Section 6.10 (General
Procedures for Qualification and Accounting of
Ballots). FINRA noted that the Secretary of the
Corporation must still certify election results. See
FINRA Regulation By-Laws, Article VI (Selection of
Small Firm, Mid-Size Firm and Large Firm Industry
Members of the National Adjudicatory Council),
Section 6.13 (Certification of Nomination).
19 See Caruso Letter (recommending that the
proposed rule change be approved on an expedited
basis).
20 See Berman Letter and PIABA Letter.
21 See FSI Letter.
22 See Berman Letter and PIABA Letter.
23 See Berman Letter.
24 See PIABA Letter.
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NAC.25 This commenter believed that
the current composition of the NAC
achieves a more balanced perspective
and that increasing the number of NonIndustry Members on the NAC could
diminish expertise on the NAC.
In its response, FINRA noted that the
current and proposed FINRA Regulation
By-Laws do not limit the ability of the
Board to appoint more than three Public
Members to the NAC.26 However,
FINRA believed that explicitly
increasing the number of Non-Industry
Members that must also be Public
Members would unnecessarily restrict
FINRA’s flexibility to appoint to the
NAC a diversity of Non-Industry
Members and Public Members that serve
best, based on the pool of potential
candidates, to strengthen the quality of
the NAC and its deliberations and
decisions. Further, with respect to
concerns regarding Non-Industry
Members aligning with Industry
Members because of their connections
to the securities industry, FINRA made
clear that the term Non-Industry
Member explicitly excludes any
individual that would otherwise fall
within the definition of an Industry
Member 27 and that the proposed rule
change is similar to the current FINRA
By-Laws that require the number of
public governors that serve on the Board
to exceed the number of industry
governors.28
In response to the commenter’s
concern that increasing the number of
Non-Industry Members may diminish
the NAC’s balanced perspective and
expertise, FINRA noted that the
proposed rule change still maintains
FINRA’s custom of ‘‘substantial industry
participation in the NAC’s adjudication
of disciplinary and other matters.’’
Further, FINRA represented that it is
committed to appointing Non-Industry
Members that are both highly qualified
and provide unique perspectives in
NAC deliberations, including expertise
in a variety of subjects and issues
important to the matters the NAC
considers, such as the federal securities
laws, just and equitable principals of
trade, best professional practices, and
corporate governance and compliance.
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B. Terms of Office for NAC Members
One commenter explicitly supported
extending the terms of NAC members
25 See
FSI Letter.
FINRA Letter.
27 See FINRA Letter (citing to FINRA Regulation
By-Laws, Article I (Definitions), paragraph (ee)
(defining Non-Industry Member)).
28 According to FINRA, while the terms NonIndustry Member and Public Governor are not
identical, they are comparable. See FINRA Letter.
26 See
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from three to four years.29 This
commenter believed that the annual
turnover of NAC members compromised
the NAC’s effectiveness and that
unseasoned members lacked the same
institutional knowledge as members that
have spent a more significant amount of
time on the NAC.30 However, another
commenter raised concerns about
extending terms on the NAC.31 This
commenter, while recognizing the
benefit of extending member terms to
four years, believed that the current
three-year term allows for a rolling
board with a variety of views.
Accordingly, this commenter suggested
that FINRA amend its proposal to reevaluate the proposed four-year term at
a future date.
In its response, FINRA noted that the
proposed rule change would maintain
the current NAC member term limit,
which generally prohibits NAC
members from serving consecutive
terms, and staggered terms. According
to FINRA, this should allow a ‘‘regular
infusion of fresh ideas and knowledge
and generally serve the goal of
invigorating NAC deliberations’’ with
the composition of the NAC changing
each year, while allowing NAC
members to be fully productive for a
longer term. Further, with respect to the
commenter’s suggestion to re-evaluate
the four-year term at a future date,
FINRA noted that the NAC’s decisions
are generally subject to discretionary
review by the FINRA Board of
Governors. As a result, the FINRA Board
of Governors is ‘‘well placed to conduct
an ongoing evaluation of the NAC’s
effectiveness and the quality of its
decision making’’ and therefore,
amending the proposed rule change to
establish a date for reevaluating the
effectiveness of the longer member
terms is unnecessary.
C. NAC Selection Process
One commenter believed that the
revised selection process for contested
elections would make the process more
efficient and allow for electronic
balloting.32
IV. Discussion and Commission
Findings
After carefully considering the
proposal, the comments submitted, and
FINRA’s response, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder that are applicable to a
29 See
Berman Letter.
Berman Letter.
31 See FSI Letter.
32 See Berman Letter.
30 See
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national securities association.33
Specifically, the Commission finds that
the proposed rule change is consistent
with Sections 15A(b)(4), 15A(b)(6) and
15A(b)(8) of the Act, 34 which require,
among other things, that FINRA rules
assure a fair representation of its
members in the administration of its
affairs; are 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;
and provide a fair procedure for
disciplining of members and persons
associated with members.
The Commission believes that
FINRA’s proposal to add one NonIndustry Member to the NAC should
enhance the independence of the NAC
and continue to ensure that a diversity
of expertise, experiences and views are
represented on the NAC. With respect to
commenters’ suggestion that FINRA
should increase the number of Public
Members on the NAC,35 the
Commission notes that under the
proposed rule change FINRA still may
appoint more than three Public
Members to the NAC,36 but retains
flexibility to appoint an additional NonIndustry Member or Public Member.
According to FINRA, requiring that the
Non-Industry Member be a Public
Member would restrict its ability to
appoint members that serve best, ‘‘based
on the pool of potential candidates, to
strengthen the quality of the NAC as an
adjudicatory body and its deliberations
and decisions.’’ 37 Further, with respect
to concerns that the current composition
of the NAC provides a more balanced
perspective and expertise,38 FINRA has
represented that it will continue to
appoint Non-Industry Members that are
both highly qualified and provide
unique perspectives and expertise in
NAC deliberations.39 Moreover, while
Non-Industry Members would exceed
the number of Industry Members, seven
33 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).
34 15 U.S.C. 78o-3(b)(4), (b)(6) and (b)(8).
35 See Berman Letter and PIABA Letter.
36 See current and proposed FINRA Regulation
By-Laws, Article V (National Adjudicatory
Council), Section 5.2(a) (Number of Members and
Qualifications) (stating that the National
Adjudicatory Council shall consist of at least three
Public Members).
37 See FINRA Letter.
38 See FSI Letter.
39 See FINRA Letter. In the past, Non-Industry
Members have included professors of law, finance,
and business; current and former public pension
and retirement system advisers; and leaders of
independent, non-profit organizations that provide
educational and outreach programs to issuers and
investors. Id.
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of the fifteen NAC members would
continue to be Industry Members,
including two Small Firm NAC
Members, one Mid-Size Firm NAC
Member, two Large Firm NAC Members,
and two at-large Industry Members.40
Accordingly, the Commission believes
that the proposed rule change continues
to allow for substantial industry
participation, while enhancing the
overall independence of the NAC.
The Commission also believes it is
appropriate for FINRA to increase the
term of NAC members from three to four
years. While one commenter raised
concerns about extending member
terms,41 the Commission believes that
the proposed rule change will allow
NAC members to spend more time
serving and being fully productive after
gaining experience on the NAC. At the
same time, the Commission believes the
current term limits, staggered terms, and
composition of the NAC should
continue to provide the NAC with
varied perspectives and views.
The Commission also believes that the
proposed changes to the NAC selection
process to modernize and streamline the
process and to align it with the process
used in FINRA District Committee
elections are appropriate.42 The
proposed rule change would allow
ballots to be delivered and voted by
means other than the mail and further
simplify the tabulation process by
eliminating the provision that allowed
NAC candidates and their
representatives to observe the
Independent Agent’s accounting of
ballots in a contested election. FINRA
stated that candidates rarely opted to
observe the Independent Agent and
observing the Independent Agent did
not provide candidates additional
grounds for recourse. NAC candidates
and their representatives were not
allowed to see the vote of any FINRA
member and the final determination of
the qualification of a ballot rested with
the Secretary of FINRA.
V. Conclusion
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It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,43 that the
proposed rule change (FINRA–2016–
014) be, and it hereby is approved.
40 See current and proposed FINRA Regulation
By-Laws, Article V (National Adjudicatory
Council), Section 5.2(a) (Number of Members and
Qualifications).
41 See FSI Letter.
42 See FINRA Regulation By-Laws, Article VIII
(District Committees), Sections 8.11 (Ballots), 8.13
(Ballots Returned as Undelivered), and 8.14
(General Procedures for Qualification and
Accounting of Ballots).
43 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–14837 Filed 6–22–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
Extension:
Rule 19b–4 and Form 19b–4, SEC File No.
270–38, OMB Control No. 3235–0045.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 19b–4 (17 CFR
240.19b–4), under the Securities
Exchange Act of 1934 (‘‘Act’’) (15 U.S.C.
78a et seq.). The Commission plans to
submit this existing collection of
information to the Office of
Management and Budget (‘‘OMB’’) for
extension and approval.
Section 19(b) of the Act (15 U.S.C.
78s(b)) requires each self-regulatory
organization (‘‘SRO’’) to file with the
Commission copies of any proposed
rule, or any proposed change in,
addition to, or deletion from the rules of
such SRO. Rule 19b–4 implements the
requirements of Section 19(b) by
requiring the SROs to file their proposed
rule changes on Form 19b–4 and by
clarifying which actions taken by SROs
are subject to the filing requirement set
forth in Section 19(b). Rule 19b–4(n)
requires a designated clearing agency to
provide the Commission advance notice
(‘‘Advance Notice’’) of any proposed
change to its rules, procedures, or
operations that could materially affect
the nature or level of risks presented by
such clearing agency. Rule 19b–4(o)
requires a registered clearing agency to
submit for a Commission determination
any security-based swap, or any group,
category, type, or class of security-based
swaps it plans to accept for clearing
(‘‘Security-Based Swap Submission’’),
and provide notice to its members of
such submissions.
The collection of information is
designed to provide the Commission
44 17
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CFR 200.30–3(a)(12).
Frm 00089
Fmt 4703
Sfmt 4703
40935
with the information necessary to
determine, as required by the Act,
whether the proposed rule change is
consistent with the Act and the rules
thereunder. The information is used to
determine if the proposed rule change
should be approved, disapproved,
suspended, or if proceedings should be
instituted to determine whether to
approve or disapprove the proposed
rule change.
The respondents to the collection of
information are SROs (as defined by
Section 3(a)(26) of the Act),1 including
national securities exchanges, national
securities associations, registered
clearing agencies, notice registered
securities future product exchanges, and
the Municipal Securities Rulemaking
Board.
In calendar year 2015, each
respondent filed an average of
approximately 57 proposed rule
changes. Each filing takes
approximately 39 hours to complete on
average. Thus, the total annual reporting
burden for filing proposed rule changes
with the Commission is 86,697 hours
(57 proposals per year × 39 SROs × 39
hours per filing) for the estimated future
number of 39 SROs.2 In addition to
filing their proposed rule changes with
the Commission, the respondents also
are required to post each of their
proposals on their respective Web sites,
a process that takes approximately four
hours to complete per proposal. Thus,
for 1,935 proposals, the total annual
reporting burden on respondents to post
the proposals on their Web sites is 7,740
hours (1,935 proposals per year × 4
hours per filing) or 8,892 hours (57
proposals per year × 39 SROs × 4 hours
per filing) for the estimated future
number of 39 SROs. Further, the
respondents are required to update their
rulebooks, which they maintain on their
Web sites, to reflect the changes that
they make in each proposal they file.
Thus, for all filings that were not
withdrawn by a respondent (240
withdrawn filings in calendar year
2015) or disapproved by the
Commission (6 disapproved filings in
calendar year 2015), the respondents
were required to update their online
rulebooks to reflect the effectiveness of
1,689 proposals, each of which takes
approximately four hours to complete
1 15
U.S.C. 78c(a)(26).
most of 2015, 34 SROs were registered. One
registered SRO withdrew in December 2015 and
one SRO newly registered with the Commission in
January 2016. The Commission expects five
additional respondents to register during the threeyear period for which this PRA Extension is
applicable (three as registered clearing agencies and
two as national securities exchanges), bringing the
total number of respondents to 39.
2 For
E:\FR\FM\23JNN1.SGM
23JNN1
]]>Agencies
[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)]
[Notices]
[Pages 40932-40935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14837]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78094; File No. SR-FINRA-2016-014]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change Relating to
Composition, Terms of Members and Election Procedures for the National
Adjudicatory Council
June 17, 2016.
I. Introduction
On April 28, 2016, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the By-Laws of FINRA's
regulatory subsidiary, FINRA Regulation, Inc. (``FINRA Regulation''),
to expand the size of the National Adjudicatory Council (``NAC'') to 15
members, with the number of non-industry members exceeding the number
of industry members; lengthen the terms of office of future NAC members
to four years; and update the process used for sending and counting
ballots in the event of a contested nomination and election to fill
certain NAC industry member seats. The proposed rule change was
published for comment in the Federal Register on May 13, 2016.\3\ The
Commission received four comment letters on the proposal.\4\
Thereafter, FINRA submitted a letter in response to the comment
letters.\5\ This order grants approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77786 (May 9, 2016),
81 FR 29929 (May 13, 2016) (``Notice'').
\4\ See Letters from Steven B. Caruso, Esq., Maddox Hargett
Caruso, P.C., dated May 9, 2016 (``Caruso Letter''); David T.
Bellaire, Esq., Executive Vice President & General Counsel,
Financial Services Institute, dated May 19, 2016 (``FSI Letter'');
Hugh Berkson, Public Investors Arbitration Bar Association, dated
June 2, 2016 (``PIABA Letter''); and Christopher E. Berman, Barry
University, dated June 2, 2016 (``Berman Letter'').
\5\ See Letter from Gary Dernelle, Associate General Counsel,
FINRA, dated June 13, 2016 (``FINRA Letter'').
---------------------------------------------------------------------------
II. Description of the Proposal \6\
---------------------------------------------------------------------------
\6\ A full description of the proposal can be found in the
Notice. See Notice, supra note 3.
---------------------------------------------------------------------------
The FINRA Regulation By-Laws establish the composition of the
NAC,\7\ the terms of its members, and the process by which members are
selected. The NAC is currently composed of fourteen members.\8\ The
number of Non-Industry Members, which must include at least three
Public Members, equals the number of Industry Members.\9\ The
[[Page 40933]]
seven Industry Members include two Small Firm NAC Members, one Mid-Size
Firm NAC Member, two Large Firm NAC Members and two at-large Industry
Members.\10\
---------------------------------------------------------------------------
\7\ The NAC acts on behalf of FINRA in several capacities and
its powers are authorized by the By-Laws of FINRA Regulation and
FINRA's Code of Procedure. The NAC presides over disciplinary
matters appealed to or called for review by the NAC. The NAC also
acts, when requested, in statutory disqualification and membership
proceedings; considers the appeals of members seeking exemptive
relief; and retains the authority to review decisions proposed in
other proceedings as set forth in the Code of Procedure. For most
matters that the NAC considers, it prepares a proposed written
decision, which becomes final FINRA action if the Board does not
call the matter for review. See Notice, supra note 3.
\8\ See FINRA Regulation By-Laws, Article V (National
Adjudicatory Council), Section 5.2(a) (Number of Members and
Qualifications).
\9\ Id. A ``Non-Industry Member'' of the NAC includes any Public
Member, an officer or employee of an issuer of securities listed on
a market for which FINRA provides regulation, an officer or employee
of an issuer of unlisted securities that are traded in the over-the-
counter market, or any individual who would not otherwise fall
within the definition of an Industry Member. See FINRA Regulation
By-Laws, Article I (Definitions), paragraph (ee). A ``Public
Member'' generally is a Non-Industry Member who has no material
business relationship with a broker or dealer or a self-regulatory
organization registered under the Act. See FINRA Regulation By-Laws,
Article I (Definitions), paragraph (hh). An ``Industry Member''
generally includes a person who is or served in the prior year as an
officer, director, employee or controlling person of a broker-
dealer; is an officer, director or employee of an entity that owns a
material equity interest in a broker-dealer; owns personally a
material equity interest in a broker-dealer; provides professional
services to broker-dealers, or to a director, officer, or employee
of a broker-dealer in their professional capacity, where the
revenues from such services meet material thresholds; or is or
served in the prior year as a consultant, employee or provider of
professional services to a self-regulatory organization registered
under the Act. See FINRA Regulation By-Laws, Article I
(Definitions), paragraph (x).
\10\ See FINRA Regulation By-Laws, Article V (National
Adjudicatory Council), Section 5.2(a) (Number of Members and
Qualifications).
---------------------------------------------------------------------------
The FINRA Board appoints the NAC and its members.\11\ The FINRA
Board appoints Non-Industry Members and at-large Industry Members from
candidates recommended by the Nominating Committee. The FINRA Board
also appoints Small Firm, Mid-Size Firm and Large Firm NAC Members,
either from candidates recommended by the Nominating Committee, or in
the event of a contested election for a Small Firm, Mid-Size Firm or
Large Firm NAC Member vacancy, the candidate who is elected by FINRA
members based on their vote for a candidate.\12\ The Small Firm, Mid-
Size Firm or Large Firm NAC Member candidate receiving the largest
number of votes from firms of corresponding size is declared the
nominee, and the Nominating Committee sends a written certification of
the results to the FINRA Board and nominates such candidate for
appointment to the NAC.\13\
---------------------------------------------------------------------------
\11\ See FINRA Regulation By-Laws, Article V (National
Adjudicatory Council), Section 5.3 (Appointments).
\12\ Id.
\13\ See FINRA Regulation By-Laws, Article VI (Selection of
Small Firm, Mid-Size Firm and Large Firm Industry Members of the
National Adjudicatory Council), Section 6.13 (Certification of
Nomination). The FINRA Board is required to appoint to the NAC the
candidate who receives the most votes in any contested election for
a Small Firm, Mid-Size Firm or Large Firm NAC Member seat. See FINRA
Regulation By-Laws Article V (National Adjudicatory Council),
Section 5.5 (Rejection of Nominating Committee Nominee).
---------------------------------------------------------------------------
The proposed rule change amends the FINRA Regulation By-Laws in
three ways. First, it amends Section 5.2 of the FINRA Regulation By-
Laws to expand the size of the NAC from fourteen members to fifteen
members and require that the NAC have more Non-Industry Members,
including at least three Public Members, than Industry Members.
Accordingly, FINRA would add one Non-Industry Member seat to the
current 14-member committee.
Second, the proposed rule change lengthens the term of office of
future NAC members by one year, from three to four years.\14\ In
addition, the NAC would be divided into four classes, rather than the
current three, that are as equal in number as feasible.\15\
---------------------------------------------------------------------------
\14\ See Proposed FINRA Regulation By-Laws, Article V (National
Adjudicatory Council), Section 5.6(a) and (c) (Term of Office).
FINRA stated that the proposed rule change would not alter or extend
the term of any NAC member serving currently; the rule change would
apply prospectively.
\15\ See Proposed FINRA Regulation By-Laws, Article V (National
Adjudicatory Council), Section 5.6(b) (Term of Office). The proposed
rule change also amends Section 5.6(a) of the FINRA Regulation By-
Laws to provide a three-year transitional period during which the
FINRA Board may appoint new NAC members to terms of office less than
four years to achieve the staggering necessary to divide the NAC
into four classes. FINRA anticipates that, beginning in January
2017, and ending in December 2019, new NAC members would be
appointed to terms of either three years or four years to achieve
the result of a NAC that is divided into four classes, with each NAC
member serving a term of four years. The proposed rule change also
makes a conforming amendment to Section 5.6(b) of the FINRA
Regulation By-Laws to delete obsolete text related to a prior rule
change that replaced region-based Industry NAC members with Industry
members that represent FINRA member firms of various sizes. See
Securities Exchange Act Release No. 58909 (November 6, 2008), 73 FR
68467 (November 18, 2008) (Order Approving File No. SR-FINRA-2008-
046).
---------------------------------------------------------------------------
Finally, the proposed rule change streamlines the NAC election
process and aligns it with the process currently used for elections
involving the FINRA District Committees. The proposed rule change
amends Section 6.7 of the FINRA Regulation By-Laws by deleting the term
``envelope'' and adding language to permit ballots to be delivered by
additional means.\16\ The proposed rule change aligns the ballot
preparation process in NAC elections with that used in FINRA District
Committee elections and allows FINRA members to vote using online and
telephonic methods in addition to paper ballots.\17\
---------------------------------------------------------------------------
\16\ The proposed rule change would also make a conforming
amendment to Section 6.9 of the FINRA Regulation By-Laws concerning
ballots that are returned as undelivered.
\17\ See FINRA Regulation By-Laws, Article VIII (District
Committees), Section 8.11 (Ballots).
---------------------------------------------------------------------------
The proposed rule change also amends Section 6.10 of the FINRA
Regulation By-Laws to simplify the tabulation of ballots by the
Independent Agent, by eliminating the provision in Section 6.10 of the
FINRA Regulation By-Laws that permits NAC candidates and their
representatives to observe the Independent Agent's accounting of
ballots in contested NAC elections. The proposed rule change would
align the ballot counting process used in NAC elections with the
process used in FINRA District Committee elections, which does not
provide candidates the ability to be present while the Independent
Agent opens and counts the ballots.\18\ The proposed rule change will
thus expedite the accounting process and permit the Secretary of FINRA
to notify the candidates more quickly of NAC election results.
---------------------------------------------------------------------------
\18\ See FINRA Regulation By-Laws, Article VIII (District
Committees), Section 8.14 (General Procedures for Qualification and
Accounting of Ballots). According to FINRA, the opportunity to
observe the Independent Agent's qualification and accounting of
ballots was rarely used by NAC candidates and provided candidates no
additional grounds for recourse. Candidates and their
representatives are not allowed to see the vote of any FINRA member
and the final determination of the qualification of a ballot rests
with the Secretary of the Corporation. See FINRA Regulation By-Laws,
Article VI (Selection of Small Firm, Mid-Size Firm and Large Firm
Industry Members of the National Adjudicatory Council), Section 6.10
(General Procedures for Qualification and Accounting of Ballots).
FINRA noted that the Secretary of the Corporation must still certify
election results. See FINRA Regulation By-Laws, Article VI
(Selection of Small Firm, Mid-Size Firm and Large Firm Industry
Members of the National Adjudicatory Council), Section 6.13
(Certification of Nomination).
---------------------------------------------------------------------------
III. Summary of Comment Letters and FINRA's Response
One commenter supported the proposed rule change and believed that
expanding the size of the NAC and requiring that the number of Non-
Industry Members exceed the number of Industry Members would ``clearly
advance the public interest and protect investors. . . .'' \19\ Two
commenters generally supported the proposed rule change, but believed
that FINRA should increase the number of Public Members on the NAC
instead of adding an additional Non-Industry Member to the NAC.\20\
Finally, one commenter expressed concerns about modifying the
composition of the NAC and lengthening the term of office of future NAC
members.\21\
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\19\ See Caruso Letter (recommending that the proposed rule
change be approved on an expedited basis).
\20\ See Berman Letter and PIABA Letter.
\21\ See FSI Letter.
---------------------------------------------------------------------------
A. Composition of the NAC
Two commenters suggested that FINRA increase the number of Public
Members on the NAC.\22\ Specifically, one commenter expressed concern
that while altering the NAC's composition to include a majority of Non-
Industry Members would ``enhance its reputation for impartiality and
reduce the possibility of deadlock[,]''persons with significant
industry connections may qualify as Non-Industry Members.\23\
Similarly, another commenter believed that issuers and employees of
issuers who would be categorized as Non-Industry Members ``may be more
closely aligned with Industry Members under certain circumstances.''
\24\ One commenter, however, raised concerns about modifying the
composition of the
[[Page 40934]]
NAC.\25\ This commenter believed that the current composition of the
NAC achieves a more balanced perspective and that increasing the number
of Non-Industry Members on the NAC could diminish expertise on the NAC.
---------------------------------------------------------------------------
\22\ See Berman Letter and PIABA Letter.
\23\ See Berman Letter.
\24\ See PIABA Letter.
\25\ See FSI Letter.
---------------------------------------------------------------------------
In its response, FINRA noted that the current and proposed FINRA
Regulation By-Laws do not limit the ability of the Board to appoint
more than three Public Members to the NAC.\26\ However, FINRA believed
that explicitly increasing the number of Non-Industry Members that must
also be Public Members would unnecessarily restrict FINRA's flexibility
to appoint to the NAC a diversity of Non-Industry Members and Public
Members that serve best, based on the pool of potential candidates, to
strengthen the quality of the NAC and its deliberations and decisions.
Further, with respect to concerns regarding Non-Industry Members
aligning with Industry Members because of their connections to the
securities industry, FINRA made clear that the term Non-Industry Member
explicitly excludes any individual that would otherwise fall within the
definition of an Industry Member \27\ and that the proposed rule change
is similar to the current FINRA By-Laws that require the number of
public governors that serve on the Board to exceed the number of
industry governors.\28\
---------------------------------------------------------------------------
\26\ See FINRA Letter.
\27\ See FINRA Letter (citing to FINRA Regulation By-Laws,
Article I (Definitions), paragraph (ee) (defining Non-Industry
Member)).
\28\ According to FINRA, while the terms Non-Industry Member and
Public Governor are not identical, they are comparable. See FINRA
Letter.
---------------------------------------------------------------------------
In response to the commenter's concern that increasing the number
of Non-Industry Members may diminish the NAC's balanced perspective and
expertise, FINRA noted that the proposed rule change still maintains
FINRA's custom of ``substantial industry participation in the NAC's
adjudication of disciplinary and other matters.'' Further, FINRA
represented that it is committed to appointing Non-Industry Members
that are both highly qualified and provide unique perspectives in NAC
deliberations, including expertise in a variety of subjects and issues
important to the matters the NAC considers, such as the federal
securities laws, just and equitable principals of trade, best
professional practices, and corporate governance and compliance.
B. Terms of Office for NAC Members
One commenter explicitly supported extending the terms of NAC
members from three to four years.\29\ This commenter believed that the
annual turnover of NAC members compromised the NAC's effectiveness and
that unseasoned members lacked the same institutional knowledge as
members that have spent a more significant amount of time on the
NAC.\30\ However, another commenter raised concerns about extending
terms on the NAC.\31\ This commenter, while recognizing the benefit of
extending member terms to four years, believed that the current three-
year term allows for a rolling board with a variety of views.
Accordingly, this commenter suggested that FINRA amend its proposal to
re-evaluate the proposed four-year term at a future date.
---------------------------------------------------------------------------
\29\ See Berman Letter.
\30\ See Berman Letter.
\31\ See FSI Letter.
---------------------------------------------------------------------------
In its response, FINRA noted that the proposed rule change would
maintain the current NAC member term limit, which generally prohibits
NAC members from serving consecutive terms, and staggered terms.
According to FINRA, this should allow a ``regular infusion of fresh
ideas and knowledge and generally serve the goal of invigorating NAC
deliberations'' with the composition of the NAC changing each year,
while allowing NAC members to be fully productive for a longer term.
Further, with respect to the commenter's suggestion to re-evaluate the
four-year term at a future date, FINRA noted that the NAC's decisions
are generally subject to discretionary review by the FINRA Board of
Governors. As a result, the FINRA Board of Governors is ``well placed
to conduct an ongoing evaluation of the NAC's effectiveness and the
quality of its decision making'' and therefore, amending the proposed
rule change to establish a date for reevaluating the effectiveness of
the longer member terms is unnecessary.
C. NAC Selection Process
One commenter believed that the revised selection process for
contested elections would make the process more efficient and allow for
electronic balloting.\32\
---------------------------------------------------------------------------
\32\ See Berman Letter.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After carefully considering the proposal, the comments submitted,
and FINRA's response, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
association.\33\ Specifically, the Commission finds that the proposed
rule change is consistent with Sections 15A(b)(4), 15A(b)(6) and
15A(b)(8) of the Act, \34\ which require, among other things, that
FINRA rules assure a fair representation of its members in the
administration of its affairs; are 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; and provide a fair procedure for disciplining of
members and persons associated with members.
---------------------------------------------------------------------------
\33\ 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).
\34\ 15 U.S.C. 78o-3(b)(4), (b)(6) and (b)(8).
---------------------------------------------------------------------------
The Commission believes that FINRA's proposal to add one Non-
Industry Member to the NAC should enhance the independence of the NAC
and continue to ensure that a diversity of expertise, experiences and
views are represented on the NAC. With respect to commenters'
suggestion that FINRA should increase the number of Public Members on
the NAC,\35\ the Commission notes that under the proposed rule change
FINRA still may appoint more than three Public Members to the NAC,\36\
but retains flexibility to appoint an additional Non-Industry Member or
Public Member. According to FINRA, requiring that the Non-Industry
Member be a Public Member would restrict its ability to appoint members
that serve best, ``based on the pool of potential candidates, to
strengthen the quality of the NAC as an adjudicatory body and its
deliberations and decisions.'' \37\ Further, with respect to concerns
that the current composition of the NAC provides a more balanced
perspective and expertise,\38\ FINRA has represented that it will
continue to appoint Non-Industry Members that are both highly qualified
and provide unique perspectives and expertise in NAC deliberations.\39\
Moreover, while Non-Industry Members would exceed the number of
Industry Members, seven
[[Page 40935]]
of the fifteen NAC members would continue to be Industry Members,
including two Small Firm NAC Members, one Mid-Size Firm NAC Member, two
Large Firm NAC Members, and two at-large Industry Members.\40\
Accordingly, the Commission believes that the proposed rule change
continues to allow for substantial industry participation, while
enhancing the overall independence of the NAC.
---------------------------------------------------------------------------
\35\ See Berman Letter and PIABA Letter.
\36\ See current and proposed FINRA Regulation By-Laws, Article
V (National Adjudicatory Council), Section 5.2(a) (Number of Members
and Qualifications) (stating that the National Adjudicatory Council
shall consist of at least three Public Members).
\37\ See FINRA Letter.
\38\ See FSI Letter.
\39\ See FINRA Letter. In the past, Non-Industry Members have
included professors of law, finance, and business; current and
former public pension and retirement system advisers; and leaders of
independent, non-profit organizations that provide educational and
outreach programs to issuers and investors. Id.
\40\ See current and proposed FINRA Regulation By-Laws, Article
V (National Adjudicatory Council), Section 5.2(a) (Number of Members
and Qualifications).
---------------------------------------------------------------------------
The Commission also believes it is appropriate for FINRA to
increase the term of NAC members from three to four years. While one
commenter raised concerns about extending member terms,\41\ the
Commission believes that the proposed rule change will allow NAC
members to spend more time serving and being fully productive after
gaining experience on the NAC. At the same time, the Commission
believes the current term limits, staggered terms, and composition of
the NAC should continue to provide the NAC with varied perspectives and
views.
---------------------------------------------------------------------------
\41\ See FSI Letter.
---------------------------------------------------------------------------
The Commission also believes that the proposed changes to the NAC
selection process to modernize and streamline the process and to align
it with the process used in FINRA District Committee elections are
appropriate.\42\ The proposed rule change would allow ballots to be
delivered and voted by means other than the mail and further simplify
the tabulation process by eliminating the provision that allowed NAC
candidates and their representatives to observe the Independent Agent's
accounting of ballots in a contested election. FINRA stated that
candidates rarely opted to observe the Independent Agent and observing
the Independent Agent did not provide candidates additional grounds for
recourse. NAC candidates and their representatives were not allowed to
see the vote of any FINRA member and the final determination of the
qualification of a ballot rested with the Secretary of FINRA.
---------------------------------------------------------------------------
\42\ See FINRA Regulation By-Laws, Article VIII (District
Committees), Sections 8.11 (Ballots), 8.13 (Ballots Returned as
Undelivered), and 8.14 (General Procedures for Qualification and
Accounting of Ballots).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\43\ that the proposed rule change (FINRA-2016-014) be, and it
hereby is approved.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14837 Filed 6-22-16; 8:45 am]
BILLING CODE 8011-01-P
