Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to District Committee Structure and Governance, 25062-25066 [2018-11728]
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Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
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Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to District
Committee Structure and Governance
May 25, 2018.
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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 May 18,
2018, 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. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend the ByLaws of FINRA Regulation, Inc.
(‘‘FINRA Regulation By-Laws’’ or ‘‘ByLaws’’), FINRA’s regulatory subsidiary,
with regard to the District Committee
structure and governance by, among
other things, reorganizing the District
Committees into Regional Committees
that mirror the regions in which
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
2 17
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FINRA’s districts are administratively
grouped and managed by FINRA and
revising candidate and member voting
eligibility standards in a manner
designed to result in committees that
better reflect the industry and members
within each region. The proposed rule
change also makes conforming
amendments to the FINRA Regulation
By-Laws and FINRA rules to replace,
where appropriate, District Committee
references with Regional Committee
references.4
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
a. Background
In March 2017, FINRA issued a
Special Notice 5 on engagement
soliciting comment regarding its
engagement programs, including
FINRA’s District Committees generally.
Several commenters to the Special
Notice provided observations and
suggestions regarding the District
4 The current FINRA rulebook consists of: (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from New York Stock Exchange LLC
(‘‘NYSE’’) (‘‘Incorporated NYSE Rules’’) (together,
the NASD Rules and Incorporated NYSE Rules are
referred to as the ‘‘Transitional Rulebook’’). While
the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only
to those members of FINRA that are also members
of the NYSE (‘‘Dual Members’’). The FINRA Rules
apply to all FINRA members, unless such rules
have a more limited application by their terms. For
more information about the rulebook consolidation
process, see Information Notice, March 12, 2008
(Rulebook Consolidation Process).
5 Special Notice—Engagement Initiative (March
21, 2017), available at https://www.finra.org/
industry/special-notice-032117. The comment
period closed on June 19, 2017. FINRA received 46
comment letters in response to the Special Notice.
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Committees.6 Some commenters
commended the District Committees,7
noting among other things, that they
provide an opportunity to interact with
FINRA senior staff,8 serve as an
important means of receiving
constructive feedback,9 and provide
important service on disciplinary
panels.10 One commenter also stated
that the committee meetings offer
FINRA the opportunity to obtain more
field-based feedback from financial
advisors that directly serve investors
and that the financial advisors benefit
from open dialogue on timely, relevant
topics.11 Another commenter, however,
questioned the committees’ usefulness,
referring to the committee meetings as
‘‘one-way information session[s]’’ about
soon-to-be-introduced rules.12 In a
different vein, one commenter suggested
increasing committee ‘‘diversity’’ by
including non-industry
representatives.13
In addition to the Special Notice
feedback, FINRA has noted the
membership’s general lack of interest in
District Committee service. The number
of District Committee seat vacancies is
the primary indicator of the
membership’s declining interest in
District Committee service. For the past
six years, there has been an average of
29 vacant District Committee seats per
year. Of this 29-seat average, 13
(approximately 45%) have been
contested seats (two or more
candidates), eight (approximately 28%)
have been seats with only one
candidate, and eight (approximately
28%) have been seats without any
candidates, thus requiring FINRA to
find an eligible person to appoint to the
seat.14
6 Richard Wallace (‘‘Wallace’’), Wells Fargo
Advisors (‘‘Wells Fargo’’), National Society of
Compliance Professionals (‘‘NSCP’’),
Commonwealth Financial Network
(‘‘Commonwealth’’), Richard K. Bryant (‘‘Bryant’’),
Midwest Region Committees, Elmcore Securities,
LLC, Better Markets, Inc., Financial Services
Institute (‘‘FSI’’) and Lara, May & Associates, LLC
(‘‘Lara, May’’).
7 Wallace, Commonwealth, NSCP, Wells Fargo,
and FSI.
8 Commonwealth.
9 FSI.
10 Wallace.
11 Wells Fargo. The commenter also
recommended adding two quarterly teleconference
District Committee meetings in addition to the
District Committees’ bi-annual in-person meetings.
12 Bryant.
13 Better Markets, Inc.
14 See FINRA Regulation By-Laws, Article VIII,
Section 8.8(b) (in the event there is no candidate
designated for a vacant seat, FINRA’s Chief
Executive Officer or his or her designee shall
appoint a qualified individual to fill the vacancy for
a full term). A number of reasons may contribute
to individuals’ failure to pursue a District
Committee seat, such as a lack of awareness by
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b. Proposed Rule Change
FINRA is proposing to amend the
FINRA Regulation By-Laws to
reorganize the District Committees as
Regional Committees and to modify the
committees’ size, structure, and
governance to respond to Special Notice
feedback and address decreasing
interest in District Committee service.
Reorganizing District Committees as
Regional Committees
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The By-Laws require the FINRA
Regulation Board of Directors (‘‘FINRA
Regulation Board’’) 15 to establish
districts to assist with the
administration of its affairs and provide
that the FINRA Regulation Board may
organize the districts into regions to
promote efficiency and sound
administration.16 The By-Laws further
provide that the FINRA Regulation
Board may make changes from time to
time in the number or boundaries of the
districts or regions as it deems necessary
or appropriate.17 The FINRA Regulation
Board has established 11 districts,
overseen by FINRA District Offices, and
has organized them into five regions:
• West (Districts 1 (San Francisco), 2
(Los Angeles) and 3 (Denver));
• Midwest (Districts 4 (Kansas City)
and 8 (Chicago));
• South (Districts 5 (New Orleans), 6
(Dallas) and 7 (Atlanta and Boca
Raton));
• North (Districts 9 (Philadelphia and
New Jersey) and 11 (Boston)); and
• New York (District 10 (Long Island
and New York)).18
Pursuant to the By-Laws, each district
elects a District Committee.19 FINRA
currently manages the 11 District
Committees as region-wide committees
based on the administrative groupings
outlined above, including having them
meet bi-annually on a regional basis.20
some members of the opportunity and benefits of
serving on a District Committee, a perceived lack
of time to devote to the position or an individual’s
belief that he or she lacks sufficient industry
experience to carry out a District Committee
member’s responsibilities. In addition, based on the
Special Notice commenters’ feedback outlined
above, some people may not consider the District
Committees to be useful or performing a meaningful
role.
15 FINRA Regulation, Inc. (‘‘FINRA Regulation’’)
is a subsidiary of FINRA that operates according to
the Plan of Allocation and Delegation of Functions
by FINRA to FINRA Regulation, Inc.
16 See FINRA Regulation By-Laws, Article VIII,
Section 8.1 (Establishment of Districts and Regions).
17 See supra note 16.
18 See Schedule A to FINRA Regulation By-Laws
and https://www.finra.org/industry/finra-districtoffices.
19 See FINRA Regulation By-Laws, Article VIII,
Section 8.2(a).
20 See Securities Exchange Act Release No. 64363
(April 28, 2011), 76 FR 25397 (May 4, 2011) (Order
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FINRA proposes to formally
restructure the District Committees as
Regional Committees. The proposed
change will align the committee
structure with FINRA’s practice of
managing the District Committees as
region-wide committees.
Regional Committee Composition and
Size
FINRA proposes amending Section
8.2(a) of the FINRA Regulation By-Laws
to require that each Regional Committee
have six elected members from each
district within that committee’s region.
Regional Committees representing three
districts (i.e., the South and West) will
have 18 members, and Regional
Committees representing two districts
(i.e., Midwest, North, and New York)
will have 12 members. Currently,
District Committees are generally
composed of seven to 14 elected
members, with each committee
reflecting a configuration of three small,
one mid-size and three large firm
representatives.21 The three-one-three
composition is intended to align District
Committee representation more closely
with the industry representation on the
FINRA Board.22 However, that
configuration does not necessarily
reflect the industry composition within
the regions as each region differs
regarding firm number, size and
business lines. For instance, while the
vast majority of branch offices within
each region are large firm branch offices,
most of the firms headquartered in each
region are small firms.23 In addition,
Approving File No. SR–FINRA–2011–011) (‘‘2011
Rule Filing Approval Order’’) (amending the ByLaws to, among other things, codify the practice of
having the District Committees meet on a regional
basis).
21 See FINRA Regulation By-Laws, Article VIII,
Section 8.2(a); see also FINRA Regulation By-Laws,
Article I, paragraph (jj) (definition of ‘‘Small Firm’’),
FINRA Regulation By-Laws, Article I, paragraph
(aa) (definition of ‘‘Mid-Size Firm’’), and FINRA
Regulation By-Laws, Article I, paragraph (y)
(definition of ‘‘Large Firm’’).
22 See supra note 20 (2011 Rule Filing Approval
Order amending the FINRA Regulation By-Laws to,
among other things, adjust the size and composition
of the District Committees to require three-sevenths
of the District Committee members to be associated
with Small Firms (up to 150 registered persons),
one-seventh with Mid-Size Firms (151 to 499
registered persons), and three-sevenths with Large
Firms (500 or more registered persons), thereby
aligning District Committee representation more
closely with the industry representation on the
FINRA Board).
23 Based on data from the Central Registration
Depository (‘‘Web CRD’’®), the West Region has
31,075 large-firm, 2,198 mid-size-firm, and 2,292
small-firm branch offices and 24 large firms, 24
mid-size firms, and 592 small firms headquartered
in the region. The Midwest Region has 34,661 largefirm, 3,071 mid-size-firm, and 2,269 small-firm
branch offices and 48 large firms, 50 mid-size firms,
and 486 small firms headquartered in the region.
The South Region has 36,290 large-firm, 2,680 mid-
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when vacancies arise, the three-onethree District Committee configuration
can make it more challenging to find
eligible individuals within the districts
who can be appointed to serve as
committee members. Although large
firms have many branches per district,
FINRA staff has found it more difficult
to find large-firm individuals to serve in
districts where the firm is not
headquartered. Conversely, FINRA staff
has found that small-firm individuals
are interested in committee service, but
otherwise eligible individuals cannot be
appointed if the prescribed small-firm
committee positions are already filled.
Thus, FINRA is not proposing to retain
the three-one-three configuration.
The proposed amendments would
reduce the number of committee
members in the West and South regions
from 21 to 18 and in the Midwest,
North, and New York regions from 14 to
12. This size recalibration is intended to
align the number of committee seats
with the declining membership interest
in committee service while still
maintaining adequate district-level
representation on the Regional
Committees.24
Regional Committee Member Eligibility
and Member Voting Standards
FINRA also proposes amending
FINRA Regulation By-Laws Section
8.2(a) to require that each Regional
Committee member be associated with a
FINRA member eligible to vote in the
district-level elections and work for a
FINRA member headquartered within
the district the member will be
representing on the committee. For
purposes of the provision, a firm is
headquartered where it designates its
main address on the firm’s Form BD. A
firm can only have one main address on
its Form BD, and FINRA’s member firms
are assigned to one of the 11 districts
outlined above based on the location of
their main office.
The proposed eligibility requirement
differs from the current requirement that
size-firm, and 2,560 small-firm branch offices and
26 large firms, 33 mid-size firms, and 606 small
firms headquartered in the region. The North
Region has 28,663 large-firm, 1,899 mid-size-firm,
and 2,392 small-firm branch offices and 39 large
firms, 47 mid-size firms, and 726 small firms
headquartered in the region. The New York Region
has 4,022 large-firm, 463 mid-size-firm, and 1,590
small-firm branch offices and 40 large firms, 42
mid-size firms, and 936 small firms headquartered
in the region.
24 The proposed amendments to Section 8.2(a)
retain the current committee size parameters that a
committee consist of no fewer than five and no
more than 20 members, unless otherwise provided
by resolution of the FINRA Regulation Board and
the provision that any reduction in the authorized
number of such members shall not shorten any
existing member’s term. See proposed FINRA
Regulation By-Laws, Article VIII, Section 8.2(a).
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District Committee members must be
associated with a FINRA member firm
eligible to vote in the district and work
primarily from the member’s principal
office or a branch office that is located
within the district where the member
would serve on a District Committee.25
FINRA believes that requiring
committee member candidates to work
for a firm that is headquartered in the
district being represented rather than
working from a firm’s office in a
particular district will result in
committee member candidates that
better reflect the type of firms within the
respective regions, while ensuring that
all districts have adequate
representation within their respective
Regional Committees. Committee
member candidates from firms
headquartered in a district also often
bring regional and product expertise
pertinent to that area.
FINRA proposes retaining the
requirement that a committee member
be registered in the capacity of a branch
manager or principal or denoted as a
corporate officer of the FINRA
member.26 This requirement is designed
to ensure that committee members have
requisite experience for purposes of
participating in meetings.27
In addition, the proposed
amendments retain district-level
elections for Regional Committee
members. As noted above, each district
within its respective region will elect
six Regional Committee members.28
Each firm headquartered in the district
shall be eligible to cast one vote for each
position to be filled on a district’s
election ballot with the candidate
receiving the largest number of votes
cast by FINRA members eligible to vote
in the district filling the vacant seat.29
The proposed amendments do not retain
the current requirement that member
firms are only eligible to vote for
committee members based on the
applicable classification of the firm with
which the committee member
candidates are associated (e.g., only
large firms are currently eligible to vote
for one of the three large-firm committee
member candidates).30 Also, as noted
previously, firms with a branch office
located in the district will no longer be
25 See FINRA Regulation By-Laws, Article VIII,
Section 8.2(a)(1)–(2).
26 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.2(a)(1).
27 See Securities Exchange Act Release No. 64002
(March 2, 2011), 76 FR 12390 (March 7, 2011)
(Notice of Filing of File No. SR–FINRA–2011–011).
28 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.2(a).
29 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.9 and Section 8.17.
30 See FINRA Regulation By-Laws, Article VIII,
Section 8.9 and Section 8.17.
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eligible to vote in the district-level
elections (unless a firm with a branch
office in a particular district is also
headquartered in that district).
However, the proposed change will
expand the voting opportunities for
eligible member firms headquartered
within a district by providing them the
opportunity to cast a vote for every open
seat rather than requiring that each firm
vote only for seats representing that
firm’s size classification (small, mid-size
or large). In addition, as with the other
proposed composition and eligibility
changes, FINRA believes that the
revised voting eligibility requirements
and election process will reduce
potential impediments that could
hinder Regional Committee composition
from reflecting the industry within that
region. FINRA intends to monitor
Regional Committee composition and
will consider other changes, as
appropriate, if the proposed changes do
not achieve the intended goal. The
proposed amendments retain the direct
candidate self-nomination and vacancy
appointment process currently used for
District Committee elections.31
As a transitional measure, and to
ensure that the Regional Committees
begin with a full complement of
members, upon the proposed rule
change becoming effective, FINRA
would appoint all current District
Committee members to serve on the
Regional Committees. As a result, the
Regional Committee members initially
would include: (1) Any current District
Committee members from within each
region who meet the proposed eligibility
requirement that the member be
associated with a firm headquartered in
the district the member is representing;
and (2) the six current District
Committee members who do not meet
the proposed eligibility requirement that
they be associated with a member firm
headquartered within the district they
are representing. This transitional
measure will allow all current
committee members to serve their full
terms, consistent with the By-Laws,32
and prevent them from being
disenfranchised as a result of the
proposed rule change.33 If the number of
District Committee members is
insufficient to fulfill all the Regional
Committee seats, FINRA will appoint
31 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.8.
32 See FINRA Regulation By-Laws, Article VIII,
Section 8.2(a) (providing that no decrease in the
authorized number of members of a District
Committee shall shorten the term of office of any
member).
33 Four of the committee members have one year
remaining on their terms, while the other two
committee members have two years remaining on
their terms.
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eligible individuals who are willing to
serve on the Regional Committees.34
The initial 12 or 18 members for each
Regional Committee would be
appointed for rolling terms, with four or
six members appointed for three years,
four or six members appointed for two
years, and four or six members
appointed for one year. As noted
previously, the majority of the initial
Regional Committee members will be
current District Committee members.
FINRA intends to appoint the District
Committee members for terms
concurrent with the expiration of their
current terms. Thus, the District
Committee members elected or
appointed in 2017 for full terms will
serve three-year terms, the District
Committee members elected or
appointed in 2016 for full terms will
serve two-year terms, and the District
Committee members elected or
appointed in 2015 for full terms will
serve one-year terms. The purpose of the
rolling terms is to preserve the current
practice described below of providing
that one-third of the committees’
positions will be available for election
each year.
Regional Committee Term of Office and
Meeting Location and Frequency
The proposed amendments retain for
Regional Committee members the
District Committees’ three-year ‘‘full
term’’ limit.35 Also, consistent with the
District Committees’ term of office
provisions, the proposed rule change
does not impose a limit on the number
of total terms that may be served, with
the exception that a committee member
may serve no more than two full terms
consecutively.36 The proposed rule
change differs from the current
provision that District Committee
members may not serve two consecutive
full terms. The proposed change is
based, in part, on a Special Notice
commenter’s suggestion that FINRA
eliminate the prohibition against
District Committee members serving
two consecutive full terms.37 In
34 FINRA would appoint the initial Regional
Committee members using its power to appoint
qualified persons to fill Regional Committee
vacancies where there is no designated candidate.
See proposed FINRA Regulation By-Laws, Article
VIII, Section 8.8(b).
35 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.3.
36 See supra note 35. The proposed rule change
would not prohibit someone appointed or elected
to the committee to serve a partial term from
serving two consecutive terms in addition to the
partial term.
37 Commonwealth. One Special Notice
commenter suggested limiting District Committee
members to one term. See Elmcore Securities, LLC.
(noting also that she did not have enough input
regarding the District Committees’ activities to
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addition, as noted above, the proposed
amendments continue the current
District Committee practice of staggering
the three-year committee membership
terms to provide that one-third of each
Regional Committee’s positions be
available for election each year.
FINRA also proposes that the
Regional Committees retain the current
requirement to meet on a regional
basis.38 In addition, the Regional
Committees will meet in-person two
times a year, consistent with the general
practice for District Committee meeting
frequency.
Regional Committee Regulatory Role
and Purpose
FINRA proposes that the Regional
Committees assume the District
Committees’ regulatory roles outlined in
the FINRA Regulation By-Laws to:
• Serve as panelists in disciplinary
proceedings in accordance with FINRA
rules;
• consider and recommend policies
and rule changes to the Board; and
• endeavor to educate FINRA
members and others as to the objects,
purposes and work of FINRA and
FINRA Regulation.39
In addition, FINRA intends to have
Regional Committee members be
responsible for communicating highlevel information regarding meeting
discussions to their constituents. This
responsibility would be consistent with
the role noted above that the Regional
Committees educate FINRA members
and others regarding FINRA and its
work. The added responsibility also is
consistent with a Special Notice
commenter’s suggestion that District
Committees be used to greater effect by
helping educate FINRA about district
developments.40
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Regional Committee Administration and
Procedures
The staff proposes retaining without
significant changes (other than
answer the Special Notice question asking about the
District Committees’ usefulness). Another
commenter approved the current prohibition
against serving two consecutive full terms. See
Midwest Region Committees; see also Lara, May
(indicating, without further detail, support for the
current three-year term and term limits). Both
commenters supported their suggestions as a means
of providing more opportunities for interested
individuals to become committee members and
provide input. However, as noted above, there has
been a general lack of interest in committee service.
In addition, FINRA does not have any evidence
supporting the supposition that interest in
committee service will increase by imposing term
limitations.
38 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.5.
39 See proposed FINRA Regulation By-Laws,
Article VIII, Section 8.2(a).
40 NSCP.
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conforming changes to reflect the
proposed elimination of firm-size
classifications and the committee
member candidate and member voting
eligibility criteria that a firm have a
principal or branch office within a
district) the administrative and
procedural provisions relating to
meetings, vacancies, committee support,
expenses and compensation, selfnomination, ballots, candidate
solicitation, voter qualification list,
extensions of time, and definitions.41
Proposed Conforming Amendments
FINRA is proposing to amend Article
I (Definitions) of the FINRA Regulation
By-Laws to delete the term ‘‘District
Committee’’ and add the term ‘‘Regional
Committee’’ 42 and make conforming
amendments to the FINRA Regulation
By-Laws to replace District Committee
references with Regional Committee
references. FINRA also proposes
amending the FINRA 9000 Rule Series
(Code of Procedure) to replace, where
appropriate, the term ‘‘District
Committee’’ with ‘‘Regional
Committee.’’ In addition, FINRA
proposes amending FINRA Rule 9120
(Definitions) to clarify that the ‘‘District
Committee’’ definition is referring to the
District Committees that will be
replaced by the proposed Regional
Committees, replace the term ‘‘Primary
District Committee’’ with ‘‘Primary
Regional Committee,’’ and add the term
‘‘Regional Committee.’’ 43
FINRA also is proposing amendments
to FINRA Rule 9231 (Appointment by
the Chief Hearing Officer of Hearing
Panel or Extended Hearing Panel or
Replacement Hearing Officer) and
FINRA Rule 9820 (Appointment of
Hearing Officer and Hearing Panel) to
clarify that former District Committee
members and current and former
41 See generally proposed FINRA Regulation ByLaws, Article VIII, Sections 8.2(b)–(d), 8.4 (Filling
of Vacancies on Regional Committees), 8.5
(Meetings of Regional Committees), 8.6 (Expenses of
Regional Committees), 8.7 (Solicitation of
Candidates and Secretary’s Notice to FINRA
Members), 8.8 (Self-Nomination of Candidates and
Vacancy Appointments), 8.10 (Administrative
Support), 8.11 (Ballots), 8.12 (Vote Qualification
List), 8.13 (Ballots Returned as Undelivered), 8.14
(General Procedures for Qualification and
Accounting of Ballots), 8.15 (Ballots Set Aside),
8.16 (Invalid Ballots), 8.17 (Election Results), 8.18
(Extensions of Time and Additional Procedures),
8.19 (Definitions) and 9.1 (Compensation of Board,
Council, and Committee Members).
42 See proposed FINRA Regulation By-Laws,
Article I(hh) (definition of ‘‘Regional Committee’’).
43 See proposed amendments to FINRA Rule
9120(g) (adding the term ‘‘former’’ to the District
Committee definition) and FINRA Rule 9120(y)
(replacing the term ‘‘District’’ with ‘‘Regional’’ in
the ‘‘Primary District Committee’’ definition) and
proposed FINRA Rule 9120(z) (‘‘Regional
Committee’’).
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Regional Committee members are
eligible to serve as disciplinary hearing
panelists.44 FINRA also is exploring
options to enlarge the pool of panelists
and better educate the Regional
Committees about the critical function
of serving on hearing panels in FINRA
disciplinary proceedings.
FINRA has filed the proposed rule
change for immediate effectiveness and
has requested that the SEC waive the
requirement that the proposed rule
change not become operative for 30 days
after the date of the filing so FINRA can
implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(4) of the Act,45 which
requires, among other things, that
FINRA rules must be designed to assure
a fair representation of its members in
the selection of its directors and
administration of its affairs, and with
Section 15A(b)(6) of the Act,46 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed rule change will result in a
more effective Regional Committee
structure that aligns with how FINRA
administratively groups and manages
the current District Committees. The
proposed rule change also will continue
to provide members with the
opportunity to elect and serve as
committee members. More specifically,
the proposed rule change will expand
the voting opportunities for members
headquartered within a district by
providing them the opportunity to cast
a vote for every open seat rather than
requiring each member to vote only for
seats representing that member’s size
classification (small, mid-size or large).
However, pursuant to the proposed rule
change, members with a branch office
located in the district will no longer be
eligible to vote in the district-level
elections (unless a firm with a branch
office in a particular district is also
headquartered in that district). As
further detailed above, the
representation of Regional Committee
members will more closely reflect the
membership and industry configuration
within the respective regions.
44 The proposed rule change also updates the
cross-reference to FINRA Rule 9231 in FINRA Rule
9232(d) (Criteria for Appointment of a Panelist).
45 15 U.S.C. 78o–3(b)(4).
46 15 U.S.C. 78o–3(b)(6).
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Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
FINRA further believes that the
proposed rule change is consistent with
Section 15A(b)(8) of the Act,47 which
requires, among other things, that
FINRA rules must be designed to
provide a fair procedure for the
disciplining of members and persons
associated with members. The proposed
rule change maintains the necessary
eligibility requirements to ensure that
the pool of potential panelists is
composed of qualified members. In
addition, by reducing the number of
committee members in the West and
South Regions from 21 to 18 and in the
Midwest, North, and New York Regions
from 14 to 12, the proposed rule change
only reduces by 12 the maximum
number of eligible panelists who would
be current committee members. FINRA
is exploring options to enlarge the pool
of panelists and better educate the
Regional Committees about the critical
function of serving on hearing panels in
FINRA disciplinary proceedings.
amozie on DSK3GDR082PROD with NOTICES1
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. The
proposed rule change will not impose
any direct costs or additional regulatory
obligations on members. FINRA will
continue its practice of covering
committee meeting costs and expenses
committee members incur by attending
meetings in person.
The proposed rule change will reduce
representation within each Regional
Committee from seven seats to six seats
per district. However, FINRA does not
believe that it reduces overall
opportunities for members to interact
with FINRA staff or serve on
committees. As noted in Special Notice,
FINRA has over 30 advisory and ad hoc
committees that include member
representatives who routinely provide
input and feedback on regulatory
initiatives, proposed rule changes, and
emerging regulatory issues. FINRA
regularly engages with the industry
through its public comment process on
proposed rule changes. In addition,
FINRA conducts member outreach
through a number of regularly
scheduled events, including member
meetings, round tables, district
compliance meetings, and conferences.
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 on the proposed
rule change. As noted above, in March
2017, FINRA issued a Special Notice on
engagement, which solicited comment
regarding FINRA’s engagement
programs, including the District
Committees generally, and, in response,
several commenters discussed the
District Committees.48
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 49 and Rule 19b–
4(f)(6) thereunder.50
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 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.
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:
All submissions should refer to File
Number SR–FINRA–2018–021. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2018–021, and should be submitted on
or before June 21, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–11728 Filed 5–30–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
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–2018–021 on the subject line.
Submission for OMB Review;
Comment Request
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
Extension:
OWMI Contract Standard for Contractor
Workforce Inclusion; SEC File No.270–
666, OMB Control No. 3235–0725
48 See
supra notes 5 and 6.
U.S.C. 78s(b)(3)(A).
50 17 CFR 240.19b–4(f)(6).
Upon Written Request Copies Available
From: U.S. Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
49 15
47 15
U.S.C. 78o–3(b)(8).
VerDate Sep<11>2014
17:46 May 30, 2018
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CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 83, Number 105 (Thursday, May 31, 2018)]
[Notices]
[Pages 25062-25066]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11728]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83332; File No. SR-FINRA-2018-021]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change Relating to District Committee Structure and
Governance
May 25, 2018.
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 May 18, 2018, 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. FINRA has
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under
the Act,\3\ which renders the proposal effective upon receipt of this
filing by the Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the By-Laws of FINRA Regulation, Inc.
(``FINRA Regulation By-Laws'' or ``By-Laws''), FINRA's regulatory
subsidiary, with regard to the District Committee structure and
governance by, among other things, reorganizing the District Committees
into Regional Committees that mirror the regions in which FINRA's
districts are administratively grouped and managed by FINRA and
revising candidate and member voting eligibility standards in a manner
designed to result in committees that better reflect the industry and
members within each region. The proposed rule change also makes
conforming amendments to the FINRA Regulation By-Laws and FINRA rules
to replace, where appropriate, District Committee references with
Regional Committee references.\4\
---------------------------------------------------------------------------
\4\ The current FINRA rulebook consists of: (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from New York Stock Exchange
LLC (``NYSE'') (``Incorporated NYSE Rules'') (together, the NASD
Rules and Incorporated NYSE Rules are referred to as the
``Transitional Rulebook''). While the NASD Rules generally apply to
all FINRA members, the Incorporated NYSE Rules apply only to those
members of FINRA that are also members of the NYSE (``Dual
Members''). The FINRA Rules apply to all FINRA members, unless such
rules have a more limited application by their terms. For more
information about the rulebook consolidation process, see
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
a. Background
In March 2017, FINRA issued a Special Notice \5\ on engagement
soliciting comment regarding its engagement programs, including FINRA's
District Committees generally. Several commenters to the Special Notice
provided observations and suggestions regarding the District
Committees.\6\ Some commenters commended the District Committees,\7\
noting among other things, that they provide an opportunity to interact
with FINRA senior staff,\8\ serve as an important means of receiving
constructive feedback,\9\ and provide important service on disciplinary
panels.\10\ One commenter also stated that the committee meetings offer
FINRA the opportunity to obtain more field-based feedback from
financial advisors that directly serve investors and that the financial
advisors benefit from open dialogue on timely, relevant topics.\11\
Another commenter, however, questioned the committees' usefulness,
referring to the committee meetings as ``one-way information
session[s]'' about soon-to-be-introduced rules.\12\ In a different
vein, one commenter suggested increasing committee ``diversity'' by
including non-industry representatives.\13\
---------------------------------------------------------------------------
\5\ Special Notice--Engagement Initiative (March 21, 2017),
available at https://www.finra.org/industry/special-notice-032117.
The comment period closed on June 19, 2017. FINRA received 46
comment letters in response to the Special Notice.
\6\ Richard Wallace (``Wallace''), Wells Fargo Advisors (``Wells
Fargo''), National Society of Compliance Professionals (``NSCP''),
Commonwealth Financial Network (``Commonwealth''), Richard K. Bryant
(``Bryant''), Midwest Region Committees, Elmcore Securities, LLC,
Better Markets, Inc., Financial Services Institute (``FSI'') and
Lara, May & Associates, LLC (``Lara, May'').
\7\ Wallace, Commonwealth, NSCP, Wells Fargo, and FSI.
\8\ Commonwealth.
\9\ FSI.
\10\ Wallace.
\11\ Wells Fargo. The commenter also recommended adding two
quarterly teleconference District Committee meetings in addition to
the District Committees' bi-annual in-person meetings.
\12\ Bryant.
\13\ Better Markets, Inc.
---------------------------------------------------------------------------
In addition to the Special Notice feedback, FINRA has noted the
membership's general lack of interest in District Committee service.
The number of District Committee seat vacancies is the primary
indicator of the membership's declining interest in District Committee
service. For the past six years, there has been an average of 29 vacant
District Committee seats per year. Of this 29-seat average, 13
(approximately 45%) have been contested seats (two or more candidates),
eight (approximately 28%) have been seats with only one candidate, and
eight (approximately 28%) have been seats without any candidates, thus
requiring FINRA to find an eligible person to appoint to the seat.\14\
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\14\ See FINRA Regulation By-Laws, Article VIII, Section 8.8(b)
(in the event there is no candidate designated for a vacant seat,
FINRA's Chief Executive Officer or his or her designee shall appoint
a qualified individual to fill the vacancy for a full term). A
number of reasons may contribute to individuals' failure to pursue a
District Committee seat, such as a lack of awareness by some members
of the opportunity and benefits of serving on a District Committee,
a perceived lack of time to devote to the position or an
individual's belief that he or she lacks sufficient industry
experience to carry out a District Committee member's
responsibilities. In addition, based on the Special Notice
commenters' feedback outlined above, some people may not consider
the District Committees to be useful or performing a meaningful
role.
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[[Page 25063]]
b. Proposed Rule Change
FINRA is proposing to amend the FINRA Regulation By-Laws to
reorganize the District Committees as Regional Committees and to modify
the committees' size, structure, and governance to respond to Special
Notice feedback and address decreasing interest in District Committee
service.
Reorganizing District Committees as Regional Committees
The By-Laws require the FINRA Regulation Board of Directors
(``FINRA Regulation Board'') \15\ to establish districts to assist with
the administration of its affairs and provide that the FINRA Regulation
Board may organize the districts into regions to promote efficiency and
sound administration.\16\ The By-Laws further provide that the FINRA
Regulation Board may make changes from time to time in the number or
boundaries of the districts or regions as it deems necessary or
appropriate.\17\ The FINRA Regulation Board has established 11
districts, overseen by FINRA District Offices, and has organized them
into five regions:
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\15\ FINRA Regulation, Inc. (``FINRA Regulation'') is a
subsidiary of FINRA that operates according to the Plan of
Allocation and Delegation of Functions by FINRA to FINRA Regulation,
Inc.
\16\ See FINRA Regulation By-Laws, Article VIII, Section 8.1
(Establishment of Districts and Regions).
\17\ See supra note 16.
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West (Districts 1 (San Francisco), 2 (Los Angeles) and 3
(Denver));
Midwest (Districts 4 (Kansas City) and 8 (Chicago));
South (Districts 5 (New Orleans), 6 (Dallas) and 7
(Atlanta and Boca Raton));
North (Districts 9 (Philadelphia and New Jersey) and 11
(Boston)); and
New York (District 10 (Long Island and New York)).\18\
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\18\ See Schedule A to FINRA Regulation By-Laws and https://www.finra.org/industry/finra-district-offices.
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Pursuant to the By-Laws, each district elects a District
Committee.\19\ FINRA currently manages the 11 District Committees as
region-wide committees based on the administrative groupings outlined
above, including having them meet bi-annually on a regional basis.\20\
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\19\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a).
\20\ See Securities Exchange Act Release No. 64363 (April 28,
2011), 76 FR 25397 (May 4, 2011) (Order Approving File No. SR-FINRA-
2011-011) (``2011 Rule Filing Approval Order'') (amending the By-
Laws to, among other things, codify the practice of having the
District Committees meet on a regional basis).
---------------------------------------------------------------------------
FINRA proposes to formally restructure the District Committees as
Regional Committees. The proposed change will align the committee
structure with FINRA's practice of managing the District Committees as
region-wide committees.
Regional Committee Composition and Size
FINRA proposes amending Section 8.2(a) of the FINRA Regulation By-
Laws to require that each Regional Committee have six elected members
from each district within that committee's region. Regional Committees
representing three districts (i.e., the South and West) will have 18
members, and Regional Committees representing two districts (i.e.,
Midwest, North, and New York) will have 12 members. Currently, District
Committees are generally composed of seven to 14 elected members, with
each committee reflecting a configuration of three small, one mid-size
and three large firm representatives.\21\ The three-one-three
composition is intended to align District Committee representation more
closely with the industry representation on the FINRA Board.\22\
However, that configuration does not necessarily reflect the industry
composition within the regions as each region differs regarding firm
number, size and business lines. For instance, while the vast majority
of branch offices within each region are large firm branch offices,
most of the firms headquartered in each region are small firms.\23\ In
addition, when vacancies arise, the three-one-three District Committee
configuration can make it more challenging to find eligible individuals
within the districts who can be appointed to serve as committee
members. Although large firms have many branches per district, FINRA
staff has found it more difficult to find large-firm individuals to
serve in districts where the firm is not headquartered. Conversely,
FINRA staff has found that small-firm individuals are interested in
committee service, but otherwise eligible individuals cannot be
appointed if the prescribed small-firm committee positions are already
filled. Thus, FINRA is not proposing to retain the three-one-three
configuration.
---------------------------------------------------------------------------
\21\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a);
see also FINRA Regulation By-Laws, Article I, paragraph (jj)
(definition of ``Small Firm''), FINRA Regulation By-Laws, Article I,
paragraph (aa) (definition of ``Mid-Size Firm''), and FINRA
Regulation By-Laws, Article I, paragraph (y) (definition of ``Large
Firm'').
\22\ See supra note 20 (2011 Rule Filing Approval Order amending
the FINRA Regulation By-Laws to, among other things, adjust the size
and composition of the District Committees to require three-sevenths
of the District Committee members to be associated with Small Firms
(up to 150 registered persons), one-seventh with Mid-Size Firms (151
to 499 registered persons), and three-sevenths with Large Firms (500
or more registered persons), thereby aligning District Committee
representation more closely with the industry representation on the
FINRA Board).
\23\ Based on data from the Central Registration Depository
(``Web CRD''[supreg]), the West Region has 31,075 large-firm, 2,198
mid-size-firm, and 2,292 small-firm branch offices and 24 large
firms, 24 mid-size firms, and 592 small firms headquartered in the
region. The Midwest Region has 34,661 large-firm, 3,071 mid-size-
firm, and 2,269 small-firm branch offices and 48 large firms, 50
mid-size firms, and 486 small firms headquartered in the region. The
South Region has 36,290 large-firm, 2,680 mid-size-firm, and 2,560
small-firm branch offices and 26 large firms, 33 mid-size firms, and
606 small firms headquartered in the region. The North Region has
28,663 large-firm, 1,899 mid-size-firm, and 2,392 small-firm branch
offices and 39 large firms, 47 mid-size firms, and 726 small firms
headquartered in the region. The New York Region has 4,022 large-
firm, 463 mid-size-firm, and 1,590 small-firm branch offices and 40
large firms, 42 mid-size firms, and 936 small firms headquartered in
the region.
---------------------------------------------------------------------------
The proposed amendments would reduce the number of committee
members in the West and South regions from 21 to 18 and in the Midwest,
North, and New York regions from 14 to 12. This size recalibration is
intended to align the number of committee seats with the declining
membership interest in committee service while still maintaining
adequate district-level representation on the Regional Committees.\24\
---------------------------------------------------------------------------
\24\ The proposed amendments to Section 8.2(a) retain the
current committee size parameters that a committee consist of no
fewer than five and no more than 20 members, unless otherwise
provided by resolution of the FINRA Regulation Board and the
provision that any reduction in the authorized number of such
members shall not shorten any existing member's term. See proposed
FINRA Regulation By-Laws, Article VIII, Section 8.2(a).
---------------------------------------------------------------------------
Regional Committee Member Eligibility and Member Voting Standards
FINRA also proposes amending FINRA Regulation By-Laws Section
8.2(a) to require that each Regional Committee member be associated
with a FINRA member eligible to vote in the district-level elections
and work for a FINRA member headquartered within the district the
member will be representing on the committee. For purposes of the
provision, a firm is headquartered where it designates its main address
on the firm's Form BD. A firm can only have one main address on its
Form BD, and FINRA's member firms are assigned to one of the 11
districts outlined above based on the location of their main office.
The proposed eligibility requirement differs from the current
requirement that
[[Page 25064]]
District Committee members must be associated with a FINRA member firm
eligible to vote in the district and work primarily from the member's
principal office or a branch office that is located within the district
where the member would serve on a District Committee.\25\ FINRA
believes that requiring committee member candidates to work for a firm
that is headquartered in the district being represented rather than
working from a firm's office in a particular district will result in
committee member candidates that better reflect the type of firms
within the respective regions, while ensuring that all districts have
adequate representation within their respective Regional Committees.
Committee member candidates from firms headquartered in a district also
often bring regional and product expertise pertinent to that area.
---------------------------------------------------------------------------
\25\ See FINRA Regulation By-Laws, Article VIII, Section
8.2(a)(1)-(2).
---------------------------------------------------------------------------
FINRA proposes retaining the requirement that a committee member be
registered in the capacity of a branch manager or principal or denoted
as a corporate officer of the FINRA member.\26\ This requirement is
designed to ensure that committee members have requisite experience for
purposes of participating in meetings.\27\
---------------------------------------------------------------------------
\26\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.2(a)(1).
\27\ See Securities Exchange Act Release No. 64002 (March 2,
2011), 76 FR 12390 (March 7, 2011) (Notice of Filing of File No. SR-
FINRA-2011-011).
---------------------------------------------------------------------------
In addition, the proposed amendments retain district-level
elections for Regional Committee members. As noted above, each district
within its respective region will elect six Regional Committee
members.\28\ Each firm headquartered in the district shall be eligible
to cast one vote for each position to be filled on a district's
election ballot with the candidate receiving the largest number of
votes cast by FINRA members eligible to vote in the district filling
the vacant seat.\29\ The proposed amendments do not retain the current
requirement that member firms are only eligible to vote for committee
members based on the applicable classification of the firm with which
the committee member candidates are associated (e.g., only large firms
are currently eligible to vote for one of the three large-firm
committee member candidates).\30\ Also, as noted previously, firms with
a branch office located in the district will no longer be eligible to
vote in the district-level elections (unless a firm with a branch
office in a particular district is also headquartered in that
district). However, the proposed change will expand the voting
opportunities for eligible member firms headquartered within a district
by providing them the opportunity to cast a vote for every open seat
rather than requiring that each firm vote only for seats representing
that firm's size classification (small, mid-size or large). In
addition, as with the other proposed composition and eligibility
changes, FINRA believes that the revised voting eligibility
requirements and election process will reduce potential impediments
that could hinder Regional Committee composition from reflecting the
industry within that region. FINRA intends to monitor Regional
Committee composition and will consider other changes, as appropriate,
if the proposed changes do not achieve the intended goal. The proposed
amendments retain the direct candidate self-nomination and vacancy
appointment process currently used for District Committee
elections.\31\
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\28\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.2(a).
\29\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.9 and Section 8.17.
\30\ See FINRA Regulation By-Laws, Article VIII, Section 8.9 and
Section 8.17.
\31\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.8.
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As a transitional measure, and to ensure that the Regional
Committees begin with a full complement of members, upon the proposed
rule change becoming effective, FINRA would appoint all current
District Committee members to serve on the Regional Committees. As a
result, the Regional Committee members initially would include: (1) Any
current District Committee members from within each region who meet the
proposed eligibility requirement that the member be associated with a
firm headquartered in the district the member is representing; and (2)
the six current District Committee members who do not meet the proposed
eligibility requirement that they be associated with a member firm
headquartered within the district they are representing. This
transitional measure will allow all current committee members to serve
their full terms, consistent with the By-Laws,\32\ and prevent them
from being disenfranchised as a result of the proposed rule change.\33\
If the number of District Committee members is insufficient to fulfill
all the Regional Committee seats, FINRA will appoint eligible
individuals who are willing to serve on the Regional Committees.\34\
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\32\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a)
(providing that no decrease in the authorized number of members of a
District Committee shall shorten the term of office of any member).
\33\ Four of the committee members have one year remaining on
their terms, while the other two committee members have two years
remaining on their terms.
\34\ FINRA would appoint the initial Regional Committee members
using its power to appoint qualified persons to fill Regional
Committee vacancies where there is no designated candidate. See
proposed FINRA Regulation By-Laws, Article VIII, Section 8.8(b).
---------------------------------------------------------------------------
The initial 12 or 18 members for each Regional Committee would be
appointed for rolling terms, with four or six members appointed for
three years, four or six members appointed for two years, and four or
six members appointed for one year. As noted previously, the majority
of the initial Regional Committee members will be current District
Committee members. FINRA intends to appoint the District Committee
members for terms concurrent with the expiration of their current
terms. Thus, the District Committee members elected or appointed in
2017 for full terms will serve three-year terms, the District Committee
members elected or appointed in 2016 for full terms will serve two-year
terms, and the District Committee members elected or appointed in 2015
for full terms will serve one-year terms. The purpose of the rolling
terms is to preserve the current practice described below of providing
that one-third of the committees' positions will be available for
election each year.
Regional Committee Term of Office and Meeting Location and Frequency
The proposed amendments retain for Regional Committee members the
District Committees' three-year ``full term'' limit.\35\ Also,
consistent with the District Committees' term of office provisions, the
proposed rule change does not impose a limit on the number of total
terms that may be served, with the exception that a committee member
may serve no more than two full terms consecutively.\36\ The proposed
rule change differs from the current provision that District Committee
members may not serve two consecutive full terms. The proposed change
is based, in part, on a Special Notice commenter's suggestion that
FINRA eliminate the prohibition against District Committee members
serving two consecutive full terms.\37\ In
[[Page 25065]]
addition, as noted above, the proposed amendments continue the current
District Committee practice of staggering the three-year committee
membership terms to provide that one-third of each Regional Committee's
positions be available for election each year.
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\35\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.3.
\36\ See supra note 35. The proposed rule change would not
prohibit someone appointed or elected to the committee to serve a
partial term from serving two consecutive terms in addition to the
partial term.
\37\ Commonwealth. One Special Notice commenter suggested
limiting District Committee members to one term. See Elmcore
Securities, LLC. (noting also that she did not have enough input
regarding the District Committees' activities to answer the Special
Notice question asking about the District Committees' usefulness).
Another commenter approved the current prohibition against serving
two consecutive full terms. See Midwest Region Committees; see also
Lara, May (indicating, without further detail, support for the
current three-year term and term limits). Both commenters supported
their suggestions as a means of providing more opportunities for
interested individuals to become committee members and provide
input. However, as noted above, there has been a general lack of
interest in committee service. In addition, FINRA does not have any
evidence supporting the supposition that interest in committee
service will increase by imposing term limitations.
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FINRA also proposes that the Regional Committees retain the current
requirement to meet on a regional basis.\38\ In addition, the Regional
Committees will meet in-person two times a year, consistent with the
general practice for District Committee meeting frequency.
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\38\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.5.
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Regional Committee Regulatory Role and Purpose
FINRA proposes that the Regional Committees assume the District
Committees' regulatory roles outlined in the FINRA Regulation By-Laws
to:
Serve as panelists in disciplinary proceedings in
accordance with FINRA rules;
consider and recommend policies and rule changes to the
Board; and
endeavor to educate FINRA members and others as to the
objects, purposes and work of FINRA and FINRA Regulation.\39\
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\39\ See proposed FINRA Regulation By-Laws, Article VIII,
Section 8.2(a).
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In addition, FINRA intends to have Regional Committee members be
responsible for communicating high-level information regarding meeting
discussions to their constituents. This responsibility would be
consistent with the role noted above that the Regional Committees
educate FINRA members and others regarding FINRA and its work. The
added responsibility also is consistent with a Special Notice
commenter's suggestion that District Committees be used to greater
effect by helping educate FINRA about district developments.\40\
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\40\ NSCP.
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Regional Committee Administration and Procedures
The staff proposes retaining without significant changes (other
than conforming changes to reflect the proposed elimination of firm-
size classifications and the committee member candidate and member
voting eligibility criteria that a firm have a principal or branch
office within a district) the administrative and procedural provisions
relating to meetings, vacancies, committee support, expenses and
compensation, self-nomination, ballots, candidate solicitation, voter
qualification list, extensions of time, and definitions.\41\
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\41\ See generally proposed FINRA Regulation By-Laws, Article
VIII, Sections 8.2(b)-(d), 8.4 (Filling of Vacancies on Regional
Committees), 8.5 (Meetings of Regional Committees), 8.6 (Expenses of
Regional Committees), 8.7 (Solicitation of Candidates and
Secretary's Notice to FINRA Members), 8.8 (Self-Nomination of
Candidates and Vacancy Appointments), 8.10 (Administrative Support),
8.11 (Ballots), 8.12 (Vote Qualification List), 8.13 (Ballots
Returned as Undelivered), 8.14 (General Procedures for Qualification
and Accounting of Ballots), 8.15 (Ballots Set Aside), 8.16 (Invalid
Ballots), 8.17 (Election Results), 8.18 (Extensions of Time and
Additional Procedures), 8.19 (Definitions) and 9.1 (Compensation of
Board, Council, and Committee Members).
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Proposed Conforming Amendments
FINRA is proposing to amend Article I (Definitions) of the FINRA
Regulation By-Laws to delete the term ``District Committee'' and add
the term ``Regional Committee'' \42\ and make conforming amendments to
the FINRA Regulation By-Laws to replace District Committee references
with Regional Committee references. FINRA also proposes amending the
FINRA 9000 Rule Series (Code of Procedure) to replace, where
appropriate, the term ``District Committee'' with ``Regional
Committee.'' In addition, FINRA proposes amending FINRA Rule 9120
(Definitions) to clarify that the ``District Committee'' definition is
referring to the District Committees that will be replaced by the
proposed Regional Committees, replace the term ``Primary District
Committee'' with ``Primary Regional Committee,'' and add the term
``Regional Committee.'' \43\
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\42\ See proposed FINRA Regulation By-Laws, Article I(hh)
(definition of ``Regional Committee'').
\43\ See proposed amendments to FINRA Rule 9120(g) (adding the
term ``former'' to the District Committee definition) and FINRA Rule
9120(y) (replacing the term ``District'' with ``Regional'' in the
``Primary District Committee'' definition) and proposed FINRA Rule
9120(z) (``Regional Committee'').
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FINRA also is proposing amendments to FINRA Rule 9231 (Appointment
by the Chief Hearing Officer of Hearing Panel or Extended Hearing Panel
or Replacement Hearing Officer) and FINRA Rule 9820 (Appointment of
Hearing Officer and Hearing Panel) to clarify that former District
Committee members and current and former Regional Committee members are
eligible to serve as disciplinary hearing panelists.\44\ FINRA also is
exploring options to enlarge the pool of panelists and better educate
the Regional Committees about the critical function of serving on
hearing panels in FINRA disciplinary proceedings.
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\44\ The proposed rule change also updates the cross-reference
to FINRA Rule 9231 in FINRA Rule 9232(d) (Criteria for Appointment
of a Panelist).
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days after the
date of the filing so FINRA can implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(4) of the Act,\45\ which requires, among
other things, that FINRA rules must be designed to assure a fair
representation of its members in the selection of its directors and
administration of its affairs, and with Section 15A(b)(6) of the
Act,\46\ which requires, among other things, that FINRA rules must be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. FINRA believes that the
proposed rule change will result in a more effective Regional Committee
structure that aligns with how FINRA administratively groups and
manages the current District Committees. The proposed rule change also
will continue to provide members with the opportunity to elect and
serve as committee members. More specifically, the proposed rule change
will expand the voting opportunities for members headquartered within a
district by providing them the opportunity to cast a vote for every
open seat rather than requiring each member to vote only for seats
representing that member's size classification (small, mid-size or
large). However, pursuant to the proposed rule change, members with a
branch office located in the district will no longer be eligible to
vote in the district-level elections (unless a firm with a branch
office in a particular district is also headquartered in that
district). As further detailed above, the representation of Regional
Committee members will more closely reflect the membership and industry
configuration within the respective regions.
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\45\ 15 U.S.C. 78o-3(b)(4).
\46\ 15 U.S.C. 78o-3(b)(6).
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[[Page 25066]]
FINRA further believes that the proposed rule change is consistent
with Section 15A(b)(8) of the Act,\47\ which requires, among other
things, that FINRA rules must be designed to provide a fair procedure
for the disciplining of members and persons associated with members.
The proposed rule change maintains the necessary eligibility
requirements to ensure that the pool of potential panelists is composed
of qualified members. In addition, by reducing the number of committee
members in the West and South Regions from 21 to 18 and in the Midwest,
North, and New York Regions from 14 to 12, the proposed rule change
only reduces by 12 the maximum number of eligible panelists who would
be current committee members. FINRA is exploring options to enlarge the
pool of panelists and better educate the Regional Committees about the
critical function of serving on hearing panels in FINRA disciplinary
proceedings.
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\47\ 15 U.S.C. 78o-3(b)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change will
not impose any direct costs or additional regulatory obligations on
members. FINRA will continue its practice of covering committee meeting
costs and expenses committee members incur by attending meetings in
person.
The proposed rule change will reduce representation within each
Regional Committee from seven seats to six seats per district. However,
FINRA does not believe that it reduces overall opportunities for
members to interact with FINRA staff or serve on committees. As noted
in Special Notice, FINRA has over 30 advisory and ad hoc committees
that include member representatives who routinely provide input and
feedback on regulatory initiatives, proposed rule changes, and emerging
regulatory issues. FINRA regularly engages with the industry through
its public comment process on proposed rule changes. In addition, FINRA
conducts member outreach through a number of regularly scheduled
events, including member meetings, round tables, district compliance
meetings, and conferences.
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 on the
proposed rule change. As noted above, in March 2017, FINRA issued a
Special Notice on engagement, which solicited comment regarding FINRA's
engagement programs, including the District Committees generally, and,
in response, several commenters discussed the District Committees.\48\
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\48\ See supra notes 5 and 6.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \49\ and Rule 19b-
4(f)(6) thereunder.\50\
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\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 17 CFR 240.19b-4(f)(6).
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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 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.
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 [email protected]. Please include
File Number SR-FINRA-2018-021 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-2018-021. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2018-021, and should be submitted
on or before June 21, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11728 Filed 5-30-18; 8:45 am]
BILLING CODE 8011-01-P
