Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Membership Application Program (“MAP”) Rules To Address the Issue of Pending Arbitration Claims, 18299-18304 [2020-06722]
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Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–88491]
• 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–
ISE–2020–13 on the subject line.
Order Under Section 15b of The
Securities Exchange Act of 1934
Granting an Exemption for Municipal
Advisors From Specified Provisions of
The Securities Exchange Act and Rule
15ba1–5(A)(1) Thereunder
Paper Comments
March 26, 2020.
jbell on DSKJLSW7X2PROD with NOTICES
• 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–ISE–2020–13. 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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
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–ISE–2020–13 and should be
submitted on or beforeApril 22, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06739 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
12 17
CFR 200.30–3(a)(12).
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The Commission has been monitoring
the effects of the current outbreak of
coronavirus disease 19 (‘‘COVID–19’’).
In light of the current situation, we are
issuing this Order providing a
temporary conditional exemption from
certain requirements of the Exchange
Act for municipal advisors. In
particular, the Commission recognizes
that municipal advisors may face
challenges in timely satisfying the
provisions of Section 15B of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) and Rule 15Ba1–
5(a)(1) thereunder concerning the filing
of a municipal advisor’s annual update
to Form MA as a result of COVID–19.
Section 15B(a)(4) of the Exchange Act
provides that the Commission, by rule
or order, upon its own motion or upon
application, may conditionally or
unconditionally exempt any broker,
dealer, municipal securities dealer, or
municipal advisor, or class of brokers,
dealers, municipal securities dealers, or
municipal advisors from any provision
of Section 15B or the rules or
regulations thereunder, if the
Commission finds that such exemption
is consistent with the public interest,
the protection of investors, and the
purposes of Section 15B.
I. Time Period for the Relief
The relief specified in this Order is
limited to filing obligations for which
the original due date for an annual
update to Form MA is on or after the
date of this Order but on or prior to June
30, 2020. The Commission intends to
continue to monitor the current
situation. The time period for the relief
may, if necessary, be extended with any
additional conditions that are deemed
appropriate, and the Commission may
issue other relief consistent with
Section 15B(a)(4).
II. Form MA Annual Update Filing
Requirement for Registered Municipal
Advisors
The disruptions resulting from
COVID–19 mentioned above could
hamper the efforts of municipal advisors
to timely meet filing deadlines for
annual updates to Form MA. In light of
the current and potential effects of
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18299
COVID–19, the Commission finds that
the exemption set forth below is
consistent with the public interest, the
protection of investors and the purposes
of Section 15B of the Exchange Act.
Accordingly, it is ordered, pursuant to
Section 15B(a)(4) of the Exchange Act:
For time period specified in Section I,
a registered municipal advisor is exempt
from the requirements under Exchange
Act Rule 15Ba1–(a)(5) to file an annual
update to Form MA within 90 days of
the end of its fiscal year, where the
conditions below are satisfied.
Conditions
(a) The municipal advisor is unable to
meet the filing deadline for its annual
update to Form MA due to
circumstances related to current or
potential effects of COVID–19.
(b) The municipal advisor relying on
this Order promptly notifies the
Commission staff via email at munis@
sec.gov stating:
i. That it is relying on this Order; and
ii. A brief description of the reasons
why it could not file its annual update
to Form MA on a timely basis.
(c) The municipal advisor relying on
this Order must promptly disclose on its
public website (or if it does not have a
public website, promptly disclose to its
clients) the information required in
condition (b) above.
(d) The municipal advisor files the
annual update to Form MA required by
Rule 15Ba1–5(a)(1) under the Exchange
Act, as soon as practicable but not later
than 45 days after the original due date
for filing.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–06742 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88482; File No. SR–FINRA–
2019–030]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the
Membership Application Program
(‘‘MAP’’) Rules To Address the Issue of
Pending Arbitration Claims
March 26, 2020.
I. Introduction
On December 13, 2019, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
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Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend FINRA’s Membership
Application Program (‘‘MAP’’) rules to
help further address the issue of
pending arbitration claims, as well as
arbitration awards and settlement
agreements related to arbitrations that
have not been paid in full in accordance
with their terms.
The proposed rule change was
published for comment in the Federal
Register on December 30, 2019.3 The
public comment period closed on
January 21, 2020. The Commission
received two comment letters in
response to the Notice, both generally
supporting the proposed rule change.4
On January 31, 2020, FINRA responded
to the comment letters received in
response to the Notice.5 On February 6,
2020, FINRA filed an amendment to the
proposal (‘‘Amendment No. 1’’).6 On
February 10, 2020, FINRA extended the
time period in which the Commission
must approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule change to March 27,
2020. This order approves the proposed
rule change, as modified by Amendment
No. 1.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 87810 (Dec. 20,
2019), 84 FR 72088 (Dec. 30, 2019) (File No. SR–
FINRA–2019–030) (‘‘Notice’’).
4 See Letter from Steven B. Caruso, Maddox
Hargett Caruso, P.C., dated January 7, 2020 (‘‘Caruso
Letter’’); and letter from Christine Lazaro, Director
of the Securities Arbitration Clinic and Professor of
Clinical Legal Education, St. John’s University
School of Law, dated January 21, 2020 (‘‘SJU
Letter’’). Comment letters are available on the
Commission’s website at https://www.sec.gov.
5 See Letter from Victoria Crane, Vice President
and Associate General Counsel, FINRA, to Vanessa
Countryman, Secretary, U.S. Securities and
Exchange Commission, dated January 31, 2020
(‘‘FINRA Letter’’). The FINRA Letter is available on
FINRA’s website at https://www.finra.org, at the
principal office of FINRA, on the Commission’s
website at https://www.sec.gov/comments/sr-finra2019-030/srfinra2019030-6730822-207419.pdf, and
at the Commission’s Public Reference Room.
6 Amendment No. 1 is available at https://
www.finra.org/sites/default/files/2020-02/SRFINRA-2019-030_Amendment1.pdf. With
Amendment No. 1, FINRA made a technical change
to the text of the proposal reflecting a crossreference to FINRA Rule 1017(a)(5). Specifically,
FINRA’s initial proposal did not amend Rule
1017(a)(5), which currently cross-references Rule
1011(k) defining ‘‘material change in business
operations.’’ Amendment No. 1 changes that crossreference to ‘‘Rule 1011(l)’’ to reflect the
renumbered paragraphs as proposed in amended
Rule 1011.
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II. Description of the Proposed Rule
Change 7
Background
The MAP Rules govern the way in
which FINRA reviews a new
membership application (‘‘NMA’’) and a
continuing membership application
(‘‘CMA’’).8 They are currently found
under the FINRA Rule 1000 Series as
FINRA Rules 1011 through 1019. These
rules require an applicant to
demonstrate its ability to comply with
applicable securities laws and FINRA
rules, including observing high
standards of commercial honor and just
and equitable principles of trade. The
MAP rules require FINRA to evaluate an
applicant’s financial, operational, and
supervisory and compliance systems to
ensure that the applicant meets the
standards set forth in the rules.
FINRA’s proposed rule changes
would: (1) Amend Rule 1014
(Department Decision) to: (a) Create a
rebuttable presumption that an
application for new membership would
be denied if the applicant or its
associated persons are subject to a
pending arbitration claim, and (b)
permit an applicant to overcome a
presumption of denial by demonstrating
its ability to satisfy an unpaid
arbitration award, other adjudicated
customer award, unpaid arbitration
settlement, or pending arbitration claim;
(2) create a new requirement for a
member, that is not otherwise required
to submit an application for continuing
membership for a specified change in
ownership, control or business
operations, including a business
expansion, to seek a materiality
consultation if the member or its
associated persons have a defined
‘‘covered pending arbitration claim,’’
unpaid arbitration award, or an unpaid
arbitration settlement; (3) amend Rule
1017 (Application for Approval of
Change in Ownership, Control, or
Business Operations) to require a
member to demonstrate its ability to
satisfy an unpaid arbitration award or
unpaid settlement related to an
arbitration before effecting the proposed
change thereunder; and (4) amend Rule
1013 (New Member Application and
Interview) and Rule 1017 to require an
applicant to provide prompt written
notification of any pending arbitration
claim that is filed, awarded, settled, or
7 The
subsequent description of the proposed rule
change is substantially excerpted from FINRA’s
description in the Notice. See Notice, 83 FR at
72088–72093.
8 Unless otherwise specified, the term
‘‘application’’ refers to either an NMA (or Form
NMA) or CMA (or Form CMA), depending on
context.
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becomes unpaid before a decision on an
application constituting final action on
FINRA is served on the applicant.9
Additionally, FINRA is proposing nonsubstantive changes in specified MAP
rules.10
Proposed Rule Change for Presumption
To Deny an Application
FINRA is proposing an amendment to
the standard for admission and the
corresponding factors therein relating to
the presumption to deny an application
for new or continuing membership.11
Currently, FINRA Rule 1014 sets forth
standards for admission FINRA must
consider in determining whether to
approve an application. Under Rule
1014(a)(3), FINRA is required to
determine whether an applicant for new
or continuing membership and its
associated persons are capable of
complying with the federal securities
laws, the rules and regulations
thereunder, and FINRA Rules. Rule
1014(a)(3) sets forth six factors that
FINRA must consider in making that
determination. Additionally, FINRA
notes that under Rule 1014(b)(1), where
an applicant or its associated persons
are subject to certain regulatory events
enumerated in Rule 1014(a)(3), a
presumption exists that the application
should be denied.12 However, FINRA
notes that ‘‘the existence of a record of
a pending arbitration, as set forth in
Rule 1014(a)(3)(B), is currently not
among the enumerated factors that
trigger the presumption to deny an
application.’’ 13
The proposed amendment to Rule
1014 would create the rebuttable
presumption to deny an application in
cases where the prospective applicant or
its associated persons are the subject of
pending arbitration claims.14 This
presumption of denial for a pending
arbitration claim would not apply to an
existing member firm filing a CMA.15
Instead, consistent with today’s
practice, FINRA would continue to
consider whether an applicant or its
associated persons are the subject of a
pending arbitration claim in
determining whether the applicant for
continuing membership is capable of
complying with applicable federal
securities laws and FINRA rules.16
9 See
Notice at 72088.
id.
11 See id.
12 Notice at 72089.
13 Id.
14 Id.
15 Id.
16 Id.
10 See
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Proposed Rule Change To Demonstrate
Ability To Satisfy Unpaid Arbitration
Awards, Other Adjudicated Customer
Awards, Unpaid Arbitration
Settlements, or for New Member
Applications, Pending Arbitration
Claims
FINRA is also proposing to clarify the
various ways in which an applicant for
new or continuing membership may
demonstrate its ability to satisfy an
unpaid arbitration award, other
adjudicated customer award, unpaid
arbitration settlement, or a pending
arbitration claim during the application
review process, and to preclude an
applicant from effecting any
contemplated change in ownership,
control, or business operations until
such demonstration is made and FINRA
approves the application.17 For
example, proposed IM–1014–1 would
allow applicants to demonstrate the
ability to satisfy an unpaid arbitration
award, other adjudicated customer
award, unpaid arbitration settlement, or
a pending arbitration claim, through an
escrow agreement, insurance coverage, a
clearing deposit, a guarantee, a reserve
fund, or the retention of proceeds from
an asset transfer or such other forms of
documentation that FINRA may
determine to be acceptable.18 Proposed
IM–1014–1 would also allow an
applicant to overcome the presumption
to deny the application by guaranteeing
that any funds used to evidence the
applicant’s ability to satisfy any awards,
settlements, or claims will be used for
that purpose.19
Any demonstration by an applicant of
its ability to satisfy these outstanding
obligations would be subject to a
reasonableness assessment by FINRA.20
Proposed Rule Change To Mandate
Materiality Consultations
To further incentivize members to pay
arbitration awards and settlements,
FINRA is proposing to mandate that a
member seek a materiality consultation
in two situations in which specified
pending arbitration claims, unpaid
arbitration awards, or unpaid arbitration
settlements are involved.21 Currently,
the materiality consultation process is
voluntary, and exists to provide a
member with the option of seeking
guidance, or a materiality consultation,
from FINRA on whether certain
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17 See
Notice at 72088.
at 72089. Proposed IM–1014–1 would also
allow an applicant to provide a written opinion of
an independent, reputable U.S. licensed counsel
knowledgeable in the area as to the value of the
arbitration claims.
19 Notice at 72090.
20 Id.
21 See id. at 72089.
18 Id.
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proposed events (e.g., acquisition or
transfer of the member’s assets, or a
business expansion) would be material
and thus require the member to file a
CMA when it plans to undergo an event
specified under Rule 1017.22 According
to FINRA, ‘‘[t]he characterization of a
contemplated change as material
depends on an assessment of all the
relevant facts and circumstances,
including, among others, the nature of
the contemplated change, the effect the
contemplated change may have on the
firm’s capital, the qualifications and
experience of the firm’s personnel, and
the degree to which the firm’s existing
financial, operational, supervisory, and
compliance systems can accommodate
the contemplated change.’’ 23 Where
FINRA determines that a contemplated
change is material, FINRA instructs the
member to file a CMA if it intends to
proceed with the change.24
Mandatory Materiality Consultation for
Business Expansion To Add One or
More Associated Persons Involved in
Sales (Proposed IM–1011–2 and
Proposed Rules 1011(c)(1) and
1017(a)(6)(B))
Current Rule 1017 specifies the
changes in a member’s ownership,
control, or business operations that
require a CMA and FINRA’s approval.25
However, current IM–1011–1 creates a
safe harbor for incremental increases in
certain business expansions that are
presumed not to be material changes in
business operations.26 Under this safe
harbor, a member, subject to specified
conditions and thresholds, may undergo
such business expansions without filing
a CMA.27
Proposed IM–1011–2 (Business
Expansions and Covered Pending
Arbitration Claims) would provide that
if a member is contemplating to add one
or more associated persons involved in
sales and one or more of those
22 See Notice at 72090. A request for a materiality
consultation, for which there is no fee, is a written
request from a member firm for FINRA’s
determination on whether a contemplated change
in business operations or activities is material and
would therefore require a CMA or whether the
contemplated change can fit within the framework
of the firm’s current activities and structure without
the need to file a CMA. Id.
23 Notice at 72090 (citing Notice to Members 00–
73 (October 2000) (FINRA Requests Comment on a
Proposal Regarding the Rules Governing the New
and Continuing Membership Application Process)).
24 See id. As FINRA explains in the Notice, the
member is responsible for compliance with Rule
1017. If FINRA determines during the materiality
consultation that the contemplated business change
is material, then the member potentially could be
subject to disciplinary action for failure to file a
CMA under Rule 1017. Id.
25 See id.
26 See Notice at 72090.
27 See id.
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associated persons: (1) Has a ‘‘covered
pending arbitration claim’’ 28 (as that
term is defined in proposed Rule
1011(c)(1) described below), an unpaid
arbitration award or an unpaid
settlement related to an arbitration, and
(2) the member is not otherwise
required to file a CMA, the member may
not effect the contemplated business
expansion unless the member complies
with the proposed new requirements in
Rule 1017(a)(6)(B).29 Proposed Rule
1017(a)(6)(B) would require a member
firm to file a CMA for approval of the
business expansion described in
proposed IM–1011–2 unless the member
first submits a written request to FINRA
seeking a materiality consultation for
the contemplated business expansion.
As part of the materiality consultation,
FINRA would determine whether: (1)
The member is not required to file a
CMA in accordance with Rule 1017 and
may effect the contemplated business
expansion; or (2) the member is required
to file a CMA in accordance with Rule
1017 and the member may not effect the
contemplated business expansion
unless FINRA approves the CMA.30
Mandatory Materiality Consultation for
Any Acquisition or Transfer of
Member’s Assets (Proposed Rule
1011(c)(2) and Proposed Rule
1017(a)(6)(A))
Currently, Rule 1017(a) requires a
member to file a CMA for direct or
indirect acquisitions or transfers of 25
percent or more in the aggregate of the
member’s assets or any asset, business,
or line of operation that generates
revenues composing 25 percent or more
in the aggregate of the member’s
earnings measured on a rolling 36month basis, unless both the seller and
acquirer are NYSE members.31
FINRA is proposing to add a new
subparagraph (6)(A) to Rule 1017(a) to
provide that if a member is
contemplating any direct or indirect
28 Proposed Rule 1011(c)(1) would define a
‘‘covered pending arbitration claim’’ as an
investment-related, consumer-initiated claim filed
against the associated person in any arbitration
forum that is unresolved; and whose claim amount
(individually or, if there is more than one claim, in
the aggregate) exceeds the hiring member’s excess
net capital. See id. at 72091.
For purposes of this definition, FINRA explains
that the claim would only include claimed
compensatory loss amounts, not requests for pain
and suffering, punitive damages, or attorney’s fees,
and shall be the maximum amount for which the
associated person is potentially liable regardless of
whether the claim was brought against additional
persons or the associated person reasonably expects
to be indemnified, share liability, or otherwise
lawfully avoid being held responsible for all or part
of such maximum amount.
29 See id. at 72091.
30 See Notice at 72091.
31 See id.
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acquisition or transfer of a member’s
assets or any asset, business, or line of
operations where the transferring
member or an associated person of the
transferring member: (1) Has a ‘‘covered
pending arbitration claim,’’ 32 an unpaid
arbitration award or an unpaid
settlement related to an arbitration, and
(2) the member is not otherwise
required to file a CMA, the member may
not effect the contemplated transaction
unless the member first submits a
written request to FINRA seeking a
materiality consultation for the
contemplated acquisition or transfer.33
As part of the materiality consultation,
FINRA would determine whether: (1)
The member is not required to file a
CMA in accordance with Rule 1017 and
may effect the contemplated acquisition
of transfer; or (2) the member is required
to file a CMA in accordance with Rule
1017 and the member may not effect the
contemplated acquisition or transfer
unless FINRA approves the CMA.34
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Proposed Rule Change Requiring
Notification of Unpaid Arbitration
Awards
The proposal would require an
applicant for new or continuing
membership to notify FINRA of any
pending arbitration claims that are filed,
awarded, settled, or become unpaid
before FINRA renders a decision on the
application.35 Current Rule 1013(a) lists
items that must be submitted with an
NMA and Rule 1017(b) sets forth the
documents and other information
required to accompany a CMA,
depending on the nature of the CMA.36
FINRA is proposing to add Rules
1013(c) and 1017(h) to require an
applicant to provide prompt
notification, in writing, of any pending
arbitration claim involving the applicant
or its associated persons that is filed,
awarded, settled, or becomes unpaid
32 Proposed Rule 1011(c)(2) would define a
‘‘covered pending arbitration claim’’ as an
investment-related, consumer-initiated claim filed
against the transferring member or its associated
persons in any arbitration forum that is unresolved;
and whose claim amount (individually or, if there
is more than one claim, in the aggregate) exceeds
the transferring member’s excess net capital. See id.
at 72092.
For purposes of this definition, FINRA explains
that the claim would only include claimed
compensatory loss amounts, not requests for pain
and suffering, punitive damages or attorney’s fees,
and shall be the maximum amount for which the
associated person is potentially liable regardless of
whether the claim was brought against additional
persons or the associated person reasonably expects
to be indemnified, share liability or otherwise
lawfully avoid being held responsible for all or part
of such maximum amount.
33 See Notice at 72091.
34 See id.
35 See id. at 72089.
36 See id. at 72092.
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before a decision on the application
constituting final action of FINRA is
served on the applicant.37 FINRA
indicated that any such unpaid
arbitration award, other adjudicated
customer award, unpaid arbitration
settlement, or pending arbitration claim
(for a new member applicant only) that
comes to light in this manner during the
application review process would result
in FINRA being able to presumptively
deny the application under the
applicable factors set forth in Rule
1014(a)(3), and the ability of the
applicant to overcome such
presumption by demonstrating its
ability to satisfy the obligation.38
Current Rule 1017(c) describes the
timing and conditions for effecting a
change under Rule 1017.39 Rule
1017(c)(1) requires a member to file a
CMA for approval of a change in
ownership or control at least 30 days
before the change is expected to occur.40
A member may effect the change prior
to the conclusion of FINRA’s review of
the CMA, however, FINRA may place
interim restrictions on the member
based upon the standards in Rule 1014
pending a final determination. Under
Rule 1017(c)(2), a member may file a
CMA to remove or modify a
membership agreement restriction at
any time, but any such existing
restriction shall remain in effect during
the pendency of the proceeding.41
Finally, Rule 1017(c)(3) permits a
member to file a CMA for approval of
a material change in business operations
at any time, but the member may not
effect such change until the conclusion
of the proceeding, unless FINRA and the
member otherwise agree.42 FINRA is
proposing to add subparagraph (4) to
Rule 1017(c), providing that,
notwithstanding the existing timing and
conditions for effecting a change as
described under Rule 1017(c)(1) through
(3), where a member or an associated
person has an unpaid arbitration award
or unpaid settlement related to an
arbitration at the time of filing a CMA,
the member may not effect such change
until demonstrating that it has the
ability to satisfy such obligations in
accordance with Rule 1014 and
proposed IM–1014–1, as discussed
above, and obtaining FINRA’s approval
of the CMA.43
37 See
id.
id. at 72092.
39 See id.
40 See id.
41 See id.
42 See id.
43 See Notice at 72092.
38 See
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Additional Proposed Changes
The proposal would also make nonsubstantive changes in the MAP rules by
renumbering paragraphs in Rules 1011,
1014, and 1017, as well as updating
cross-references.44
III. Comment Summary
As noted above, the Commission
received two comment letters on the
proposed rule change supporting the
proposal.45 While both commenters
were generally supportive of the
proposal, they believed that further
action was necessary to address the
issue of unpaid financial obligations
that broker-dealers and their associated
persons owe to their customers.46
Supportive Comments
In one commenter’s view, the
proposed rule changes represented a
‘‘fair, equitable and reasonable approach
that would expedite and facilitate the
efficiency of the arbitration process’’
and recommended that they should be
‘‘approved by the SEC on an expedited
basis.’’ 47 The second commenter noted
the proposed rules changes would
provide FINRA with ‘‘another tool with
which it may scrutinize the business of
its members and new member
applicants to ensure they can comply
with the relevant rules and regulations,
and that investors are protected.’’ 48
Proposal Is Insufficient
As stated above, both commenters
believed that FINRA needed to take
further action to address unpaid
financial obligations that broker-dealers
and their associated persons owe to
their customers.49 One commenter
stated ‘‘it is clear that these rule
amendments . . . will not completely
solve the large number of customer
awards that remain unpaid each
year.’’ 50 The second commenter
suggested that either in this rulemaking
or a subsequent rulemaking, FINRA
should consider addressing all investor
settlements that have not been fully
paid, such as a settled mediation claim
or a settlement resulting from a written
or oral complaint.51 The commenter
believes that the proposal should cover
these settlements because these types of
settlements also may never be fully
satisfied by a firm.52
44 See id. at 72088. FINRA will also make
conforming changes to Forms NMA and CMA.
45 See supra note 4.
46 Id.
47 Caruso Letter.
48 SJU Letter.
49 See Caruso Letter and SJU Letter.
50 Caruso Letter.
51 See SJU Letter.
52 See id.
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In response, FINRA recognizes that
the issue of unpaid financial obligations
that broker-dealers and their associated
persons owe to their customers is not
unique to the FINRA arbitration forum
or the broker-dealer industry and that
investors may have claims that arise
outside of FINRA arbitration.53 But
FINRA also believes this particular rule
filing is only one of the ways it is
proceeding to implement additional
steps to strengthen its rules on this
topic.54 In addition, FINRA noted that it
has ‘‘encouraged a continuing dialogue
about addressing the challenges of
customer recovery across the financial
services industry while directly
informing the further enhancement of
recovery in FINRA’s forum[.]’’ 55 For
example, FINRA cited to its 2018 White
Paper and ‘‘additional data regarding
the circumstances under which awards
may be unpaid, along with a discussion
of potential regulatory and legislative
responses.’’ 56 For these reasons, FINRA
declined to amend this proposal in
response to commenters.57
IV. Discussion and Commission
Findings
After careful review of the proposed
rule change and the comment letters,
the Commission finds that the proposal
is consistent with the requirements of
the Exchange Act and the rules and
regulations thereunder that are
applicable to a national securities
association. 58 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,59 which
requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
53 See
FINRA Letter.
See e.g., Exchange Act Release No. 88254
(Feb. 20, 2020), 85 FR 11157 (Feb 26, 2020) (File
No. SR–FINRA–2019–027) (amending FINRA rules
to expand customers’ options in arbitration with
respect to claims brought against inactive member
firms and associated persons).
55 FINRA Letter.
56 Id. In FINRA Perspectives on Customer
Recovery, available at https://www.finra.org/sites/
default/files/finra_perspectives_on_customer_
recovery.pdf. FINRA also makes available
additional data on unpaid arbitration awards arising
in the forum for the past five years, available at
https://www.finra.org/arbitration-mediation/
statistics-unpaid-customer-awardsfinra-arbitration
(‘‘White Paper’’). In addition, FINRA has published
a list of firms and associated persons responsible for
unpaid arbitration awards, available at https://
www.finra.org/arbitration-mediation/member-firmsand-associated-personsunpaid-customerarbitration-awards. See FINRA Letter at note 3.
57 See FINRA Letter.
58 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
59 15 U.S.C. 78o–3(b)(6).
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54 Id.
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18303
principles of trade, and, in general, to
protect investors and the public interest.
settlements, or claims will be used
specifically for that purpose.
Presumption To Deny an Application
The Commission agrees with FINRA
that this proposal to add a presumption
to deny an NMA helps to address
concerns related to prospective
applicants for new membership
planning to hire principals and
registered persons with pending
arbitration claims without being able to
adequately demonstrate: (1) How those
claims would be paid if they go to
award or result in a settlement; and (2)
how the new member applicant would
be able to effectively supervise such
individuals who may have a history of
noncompliance. In particular, the
Commission agrees with FINRA that
creating a presumption of denial in
connection with a pending arbitration
claim for an NMA would appropriately
shift the burden to the new member
applicant to demonstrate how its
pending arbitration claim would be paid
should it go to award or result in a
settlement. As FINRA notes, this
proposed amendment promotes investor
protection by requiring more thorough
scrutiny of certain prospective member
firms to help protect the potential
customers of those firms.60
Materiality Consultation
FINRA has expressed concern that,
under current Rule 1017 and the
existing safe harbor for business
expansions to increase the number of
associated persons involved in sales,61 a
member could hire principals and
registered representatives with
substantial pending arbitration claims
without considering how the firm
would supervise such individuals or the
potential financial impact on the firm if
the individual, while employed at the
hiring firm, engages in potential
misconduct that results in a customer
arbitration.62 The Commission agrees
with FINRA that requiring a materiality
consultation for this type of business
expansion would allow FINRA to,
among other things, assess the nature of
the anticipated activities of the
principals and registered representatives
with pending arbitration claims, unpaid
arbitration awards, or arbitration
settlements; the impact on the firm’s
supervisory and compliance systems,
personnel, and finances; and any other
impact on investor protection raised by
adding such individuals.
Additionally, the Commission agrees
that FINRA is better able to assess,
among other things, the adequacy of any
plan a member firm has in place to
satisfy pending arbitration claims,
unpaid arbitration awards, or unpaid
arbitration settlements, by requiring a
materiality consultation when a member
firm is contemplating any direct or
indirect acquisition or transfer of assets
involving a ‘‘covered pending
arbitration claim.’’ The Commission
further agrees that this proposal helps
reduce the risk that a firm with pending
arbitration claims that ultimately
produce awards or settlements could
avoid satisfying those awards or
settlements by transferring assets
without encumbrance and then closing
down. The Commission agrees with
FINRA that a decrease in the ability of
firms to avoid satisfying their arbitration
awards or settlements in this manner
may result in a higher likelihood that
they are paid in full in accordance with
their terms.
Demonstration of Ability To Pay
The Commission agrees with FINRA
that it would improve the efficiency of
the MAP process to institute the
proposal requiring evidence of an
applicant’s ability to satisfy unpaid
arbitration awards, other adjudicated
customer awards, unpaid arbitration
settlements, or, in the case of NMAs,
pending arbitration claims. Specifically,
the Commission agrees with FINRA that
this rule will increase the ability of
applicants to anticipate the information
necessary to demonstrate their ability to
satisfy outstanding obligations or
potential obligations, and reduce the
need for applicants to submit additional
information after the initial filing. The
Commission also believes the proposal
could help reduce the number of unpaid
arbitration awards by permitting an
applicant to overcome the presumption
to deny an application by guaranteeing
that any funds used to evidence the
applicant’s ability to satisfy any awards,
60 See
Notice at 72093. FINRA noted that the
majority of new member applicants are unlikely to
be effected by the proposed amendments. FINRA
reviewed the 317 NMAs that it received from
January 2015 through December 2017 and found
that of those 317 NMAs only 13 NMAs included a
new member applicant or its associated persons
that had a pending arbitration claim at the time of
FINRA’s receipt of the NMA. Under the proposed
amendments, FINRA could have presumptively
denied those NMAs. See id. at 72093, 72094.
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Frm 00119
Fmt 4703
Sfmt 4703
Notification of Unpaid Arbitration
Awards
The Commission agrees with FINRA
that requiring applicants to provide
prompt notification to FINRA of a
pending arbitration claim that is filed,
61 See FINRA IM–1011–1 (Safe Harbor for
Business Expansions).
62 See Notice at 72090.
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Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices
awarded, settled, or becomes unpaid
before a decision on the application is
served will improve FINRA’s ability to
oversee and review the pending
arbitrations of applicants to help ensure
that arbitration awards and settlements
are paid in full in accordance with their
terms.
In sum, the Commission agrees with
FINRA and the commenters who
supported the proposed rule change that
it would help address the issue of
unpaid arbitration awards. Specifically,
the proposal would link a firm’s or
associated person’s unpaid arbitration
awards, unpaid arbitration settlement,
or specified pending arbitration claims
(collectively, ‘‘unpaid and potential
financial obligations related to
arbitration’’) to FINRA’s membership
application review process, in certain
instances, to provide FINRA greater
oversight.63 These changes will enable
FINRA to more directly address
concerns over unpaid and potential
financial obligations related to
arbitration, as well as the adequacy of
the supervision of individuals with
unpaid and potential financial
obligations related to arbitration in
situations where, for example: (1) A
FINRA member firm hires individuals
with pending arbitration claims, where
there are concerns about: (a) The
payment of those claims should they go
to award or result in settlement, and (b)
the supervision of those individuals;
and (2) a member firm with pending
arbitration claims seeks to avoid
payment of the claims should they go to
award or result in a settlement by
shifting its assets, or its managers and
owners, to another firm and closing
down. Additionally, the Commission
agrees with FINRA that amendments
adopted here will enable FINRA to
place greater emphasis on the adequacy
of the supervision of individuals with
pending arbitration claims given their
history of noncompliance. While the
Commission acknowledges the concerns
of commenters regarding the potential
for further action to address unpaid
claims that arise outside of FINRA
arbitration, as FINRA noted, this
proposal represents one step in the
ongoing process of addressing these
issues and FINRA continues to evaluate
further action.64
030), as modified by Amendment No. 1,
be, and hereby is,approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.66
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06722 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88483; File No. SR–MIAX–
2020–02]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Withdrawal of a
Proposed Rule Change To Amend
MIAX Chapter XVII, Consolidated Audit
Trail Compliance Rule
March 27, 2020.
On January 24, 2020, Miami
International Securities Exchange, LLC
(‘‘MIAX Options’’) filed with the
Securities and Exchange Commission
(‘‘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 MIAX Options Chapter XVII,
Consolidated Audit Trail Compliance
Rule. The proposed rule change was
published for comment in the Federal
Register on February 5, 2020.3 On
March 16, 2020, MIAX Options
withdrew the proposed rule change
(SR–MIAX–2020–02).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06738 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
jbell on DSKJLSW7X2PROD with NOTICES
63 See
Notice at 72089.
FINRA Letter.
65 15 U.S.C. 78s(b)(2).
64 See
VerDate Sep<11>2014
18:31 Mar 31, 2020
Jkt 250001
[Release No. 34–88481; File No. SR–
CboeBZX–2019–107]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, To Adopt Rule
14.11(m), Tracking Fund Shares, and
To List and Trade Shares of the
Fidelity Blue Chip Value ETF, Fidelity
Blue Chip Growth ETF, and Fidelity
New Millennium ETF
March 26, 2020.
On December 12, 2019, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’ or
‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt BZX Rule 14.11(m), and to list
and trade shares (‘‘Shares’’) of the
Fidelity Value ETF, Fidelity Growth
ETF, and Fidelity Opportunistic ETF
(individually, ‘‘Fund,’’ and, collectively,
‘‘Funds’’),3 each a series of the Fidelity
Beach Street Trust (‘‘Trust’’), under
proposed BZX Rule 14.11(m). The
proposed rule change was published for
comment in the Federal Register on
December 31, 2019.4
On February 12, 2020, the Exchange
filed Amendment No. 1 to the proposed
rule change, which amended and
replaced the proposed rule change in its
entirety.5 On February 13, 2020,
pursuant to Section 19(b)(2) of the
Exchange Act,6 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.7 The Commission has
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, the names of the Funds
were changed to Fidelity Blue Chip Value ETF,
Fidelity Blue Chip Growth ETF, and Fidelity New
Millennium ETF. See infra note 5.
4 See Securities Exchange Act Release No. 87856
(Dec. 23, 2019), 84 FR 72414 (‘‘Notice’’).
5 Amendment No. 1 is available at: https://
www.sec.gov/comments/sr-cboebzx-2019-107/
srcboebzx2019107.htm.
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 88195,
85 FR 9888 (Feb. 20, 2020). The Commission
designated March 30, 2020, as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
2 17
V. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 65
that the proposal (SR–FINRA–2019–
SECURITIES AND EXCHANGE
COMMISSION
66 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 88096
(January 30, 2020), 85 FR 6613.
4 17 CFR 200.30–3(a)(12).
1 15
PO 00000
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E:\FR\FM\01APN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 63 (Wednesday, April 1, 2020)]
[Notices]
[Pages 18299-18304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06722]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88482; File No. SR-FINRA-2019-030]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the Membership Application Program (``MAP'')
Rules To Address the Issue of Pending Arbitration Claims
March 26, 2020.
I. Introduction
On December 13, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and
[[Page 18300]]
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to amend FINRA's Membership
Application Program (``MAP'') rules to help further address the issue
of pending arbitration claims, as well as arbitration awards and
settlement agreements related to arbitrations that have not been paid
in full in accordance with their terms.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on December 30, 2019.\3\ The public comment period closed on
January 21, 2020. The Commission received two comment letters in
response to the Notice, both generally supporting the proposed rule
change.\4\ On January 31, 2020, FINRA responded to the comment letters
received in response to the Notice.\5\ On February 6, 2020, FINRA filed
an amendment to the proposal (``Amendment No. 1'').\6\ On February 10,
2020, FINRA extended the time period in which the Commission must
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change to March 27, 2020. This order approves the
proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\3\ See Exchange Act Release No. 87810 (Dec. 20, 2019), 84 FR
72088 (Dec. 30, 2019) (File No. SR-FINRA-2019-030) (``Notice'').
\4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso,
P.C., dated January 7, 2020 (``Caruso Letter''); and letter from
Christine Lazaro, Director of the Securities Arbitration Clinic and
Professor of Clinical Legal Education, St. John's University School
of Law, dated January 21, 2020 (``SJU Letter''). Comment letters are
available on the Commission's website at https://www.sec.gov.
\5\ See Letter from Victoria Crane, Vice President and Associate
General Counsel, FINRA, to Vanessa Countryman, Secretary, U.S.
Securities and Exchange Commission, dated January 31, 2020 (``FINRA
Letter''). The FINRA Letter is available on FINRA's website at
https://www.finra.org, at the principal office of FINRA, on the
Commission's website at https://www.sec.gov/comments/sr-finra-2019-030/srfinra2019030-6730822-207419.pdf, and at the Commission's
Public Reference Room.
\6\ Amendment No. 1 is available at https://www.finra.org/sites/default/files/2020-02/SR-FINRA-2019-030_Amendment1.pdf. With
Amendment No. 1, FINRA made a technical change to the text of the
proposal reflecting a cross-reference to FINRA Rule 1017(a)(5).
Specifically, FINRA's initial proposal did not amend Rule
1017(a)(5), which currently cross-references Rule 1011(k) defining
``material change in business operations.'' Amendment No. 1 changes
that cross-reference to ``Rule 1011(l)'' to reflect the renumbered
paragraphs as proposed in amended Rule 1011.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change \7\
---------------------------------------------------------------------------
\7\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 83 FR at 72088-72093.
---------------------------------------------------------------------------
Background
The MAP Rules govern the way in which FINRA reviews a new
membership application (``NMA'') and a continuing membership
application (``CMA'').\8\ They are currently found under the FINRA Rule
1000 Series as FINRA Rules 1011 through 1019. These rules require an
applicant to demonstrate its ability to comply with applicable
securities laws and FINRA rules, including observing high standards of
commercial honor and just and equitable principles of trade. The MAP
rules require FINRA to evaluate an applicant's financial, operational,
and supervisory and compliance systems to ensure that the applicant
meets the standards set forth in the rules.
---------------------------------------------------------------------------
\8\ Unless otherwise specified, the term ``application'' refers
to either an NMA (or Form NMA) or CMA (or Form CMA), depending on
context.
---------------------------------------------------------------------------
FINRA's proposed rule changes would: (1) Amend Rule 1014
(Department Decision) to: (a) Create a rebuttable presumption that an
application for new membership would be denied if the applicant or its
associated persons are subject to a pending arbitration claim, and (b)
permit an applicant to overcome a presumption of denial by
demonstrating its ability to satisfy an unpaid arbitration award, other
adjudicated customer award, unpaid arbitration settlement, or pending
arbitration claim; (2) create a new requirement for a member, that is
not otherwise required to submit an application for continuing
membership for a specified change in ownership, control or business
operations, including a business expansion, to seek a materiality
consultation if the member or its associated persons have a defined
``covered pending arbitration claim,'' unpaid arbitration award, or an
unpaid arbitration settlement; (3) amend Rule 1017 (Application for
Approval of Change in Ownership, Control, or Business Operations) to
require a member to demonstrate its ability to satisfy an unpaid
arbitration award or unpaid settlement related to an arbitration before
effecting the proposed change thereunder; and (4) amend Rule 1013 (New
Member Application and Interview) and Rule 1017 to require an applicant
to provide prompt written notification of any pending arbitration claim
that is filed, awarded, settled, or becomes unpaid before a decision on
an application constituting final action on FINRA is served on the
applicant.\9\ Additionally, FINRA is proposing non-substantive changes
in specified MAP rules.\10\
---------------------------------------------------------------------------
\9\ See Notice at 72088.
\10\ See id.
---------------------------------------------------------------------------
Proposed Rule Change for Presumption To Deny an Application
FINRA is proposing an amendment to the standard for admission and
the corresponding factors therein relating to the presumption to deny
an application for new or continuing membership.\11\ Currently, FINRA
Rule 1014 sets forth standards for admission FINRA must consider in
determining whether to approve an application. Under Rule 1014(a)(3),
FINRA is required to determine whether an applicant for new or
continuing membership and its associated persons are capable of
complying with the federal securities laws, the rules and regulations
thereunder, and FINRA Rules. Rule 1014(a)(3) sets forth six factors
that FINRA must consider in making that determination. Additionally,
FINRA notes that under Rule 1014(b)(1), where an applicant or its
associated persons are subject to certain regulatory events enumerated
in Rule 1014(a)(3), a presumption exists that the application should be
denied.\12\ However, FINRA notes that ``the existence of a record of a
pending arbitration, as set forth in Rule 1014(a)(3)(B), is currently
not among the enumerated factors that trigger the presumption to deny
an application.'' \13\
---------------------------------------------------------------------------
\11\ See id.
\12\ Notice at 72089.
\13\ Id.
---------------------------------------------------------------------------
The proposed amendment to Rule 1014 would create the rebuttable
presumption to deny an application in cases where the prospective
applicant or its associated persons are the subject of pending
arbitration claims.\14\ This presumption of denial for a pending
arbitration claim would not apply to an existing member firm filing a
CMA.\15\ Instead, consistent with today's practice, FINRA would
continue to consider whether an applicant or its associated persons are
the subject of a pending arbitration claim in determining whether the
applicant for continuing membership is capable of complying with
applicable federal securities laws and FINRA rules.\16\
---------------------------------------------------------------------------
\14\ Id.
\15\ Id.
\16\ Id.
---------------------------------------------------------------------------
[[Page 18301]]
Proposed Rule Change To Demonstrate Ability To Satisfy Unpaid
Arbitration Awards, Other Adjudicated Customer Awards, Unpaid
Arbitration Settlements, or for New Member Applications, Pending
Arbitration Claims
FINRA is also proposing to clarify the various ways in which an
applicant for new or continuing membership may demonstrate its ability
to satisfy an unpaid arbitration award, other adjudicated customer
award, unpaid arbitration settlement, or a pending arbitration claim
during the application review process, and to preclude an applicant
from effecting any contemplated change in ownership, control, or
business operations until such demonstration is made and FINRA approves
the application.\17\ For example, proposed IM-1014-1 would allow
applicants to demonstrate the ability to satisfy an unpaid arbitration
award, other adjudicated customer award, unpaid arbitration settlement,
or a pending arbitration claim, through an escrow agreement, insurance
coverage, a clearing deposit, a guarantee, a reserve fund, or the
retention of proceeds from an asset transfer or such other forms of
documentation that FINRA may determine to be acceptable.\18\ Proposed
IM-1014-1 would also allow an applicant to overcome the presumption to
deny the application by guaranteeing that any funds used to evidence
the applicant's ability to satisfy any awards, settlements, or claims
will be used for that purpose.\19\
---------------------------------------------------------------------------
\17\ See Notice at 72088.
\18\ Id. at 72089. Proposed IM-1014-1 would also allow an
applicant to provide a written opinion of an independent, reputable
U.S. licensed counsel knowledgeable in the area as to the value of
the arbitration claims.
\19\ Notice at 72090.
---------------------------------------------------------------------------
Any demonstration by an applicant of its ability to satisfy these
outstanding obligations would be subject to a reasonableness assessment
by FINRA.\20\
---------------------------------------------------------------------------
\20\ Id.
---------------------------------------------------------------------------
Proposed Rule Change To Mandate Materiality Consultations
To further incentivize members to pay arbitration awards and
settlements, FINRA is proposing to mandate that a member seek a
materiality consultation in two situations in which specified pending
arbitration claims, unpaid arbitration awards, or unpaid arbitration
settlements are involved.\21\ Currently, the materiality consultation
process is voluntary, and exists to provide a member with the option of
seeking guidance, or a materiality consultation, from FINRA on whether
certain proposed events (e.g., acquisition or transfer of the member's
assets, or a business expansion) would be material and thus require the
member to file a CMA when it plans to undergo an event specified under
Rule 1017.\22\ According to FINRA, ``[t]he characterization of a
contemplated change as material depends on an assessment of all the
relevant facts and circumstances, including, among others, the nature
of the contemplated change, the effect the contemplated change may have
on the firm's capital, the qualifications and experience of the firm's
personnel, and the degree to which the firm's existing financial,
operational, supervisory, and compliance systems can accommodate the
contemplated change.'' \23\ Where FINRA determines that a contemplated
change is material, FINRA instructs the member to file a CMA if it
intends to proceed with the change.\24\
---------------------------------------------------------------------------
\21\ See id. at 72089.
\22\ See Notice at 72090. A request for a materiality
consultation, for which there is no fee, is a written request from a
member firm for FINRA's determination on whether a contemplated
change in business operations or activities is material and would
therefore require a CMA or whether the contemplated change can fit
within the framework of the firm's current activities and structure
without the need to file a CMA. Id.
\23\ Notice at 72090 (citing Notice to Members 00-73 (October
2000) (FINRA Requests Comment on a Proposal Regarding the Rules
Governing the New and Continuing Membership Application Process)).
\24\ See id. As FINRA explains in the Notice, the member is
responsible for compliance with Rule 1017. If FINRA determines
during the materiality consultation that the contemplated business
change is material, then the member potentially could be subject to
disciplinary action for failure to file a CMA under Rule 1017. Id.
---------------------------------------------------------------------------
Mandatory Materiality Consultation for Business Expansion To Add One or
More Associated Persons Involved in Sales (Proposed IM-1011-2 and
Proposed Rules 1011(c)(1) and 1017(a)(6)(B))
Current Rule 1017 specifies the changes in a member's ownership,
control, or business operations that require a CMA and FINRA's
approval.\25\ However, current IM-1011-1 creates a safe harbor for
incremental increases in certain business expansions that are presumed
not to be material changes in business operations.\26\ Under this safe
harbor, a member, subject to specified conditions and thresholds, may
undergo such business expansions without filing a CMA.\27\
---------------------------------------------------------------------------
\25\ See id.
\26\ See Notice at 72090.
\27\ See id.
---------------------------------------------------------------------------
Proposed IM-1011-2 (Business Expansions and Covered Pending
Arbitration Claims) would provide that if a member is contemplating to
add one or more associated persons involved in sales and one or more of
those associated persons: (1) Has a ``covered pending arbitration
claim'' \28\ (as that term is defined in proposed Rule 1011(c)(1)
described below), an unpaid arbitration award or an unpaid settlement
related to an arbitration, and (2) the member is not otherwise required
to file a CMA, the member may not effect the contemplated business
expansion unless the member complies with the proposed new requirements
in Rule 1017(a)(6)(B).\29\ Proposed Rule 1017(a)(6)(B) would require a
member firm to file a CMA for approval of the business expansion
described in proposed IM-1011-2 unless the member first submits a
written request to FINRA seeking a materiality consultation for the
contemplated business expansion. As part of the materiality
consultation, FINRA would determine whether: (1) The member is not
required to file a CMA in accordance with Rule 1017 and may effect the
contemplated business expansion; or (2) the member is required to file
a CMA in accordance with Rule 1017 and the member may not effect the
contemplated business expansion unless FINRA approves the CMA.\30\
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\28\ Proposed Rule 1011(c)(1) would define a ``covered pending
arbitration claim'' as an investment-related, consumer-initiated
claim filed against the associated person in any arbitration forum
that is unresolved; and whose claim amount (individually or, if
there is more than one claim, in the aggregate) exceeds the hiring
member's excess net capital. See id. at 72091.
For purposes of this definition, FINRA explains that the claim
would only include claimed compensatory loss amounts, not requests
for pain and suffering, punitive damages, or attorney's fees, and
shall be the maximum amount for which the associated person is
potentially liable regardless of whether the claim was brought
against additional persons or the associated person reasonably
expects to be indemnified, share liability, or otherwise lawfully
avoid being held responsible for all or part of such maximum amount.
\29\ See id. at 72091.
\30\ See Notice at 72091.
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Mandatory Materiality Consultation for Any Acquisition or Transfer of
Member's Assets (Proposed Rule 1011(c)(2) and Proposed Rule
1017(a)(6)(A))
Currently, Rule 1017(a) requires a member to file a CMA for direct
or indirect acquisitions or transfers of 25 percent or more in the
aggregate of the member's assets or any asset, business, or line of
operation that generates revenues composing 25 percent or more in the
aggregate of the member's earnings measured on a rolling 36-month
basis, unless both the seller and acquirer are NYSE members.\31\
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\31\ See id.
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FINRA is proposing to add a new subparagraph (6)(A) to Rule 1017(a)
to provide that if a member is contemplating any direct or indirect
[[Page 18302]]
acquisition or transfer of a member's assets or any asset, business, or
line of operations where the transferring member or an associated
person of the transferring member: (1) Has a ``covered pending
arbitration claim,'' \32\ an unpaid arbitration award or an unpaid
settlement related to an arbitration, and (2) the member is not
otherwise required to file a CMA, the member may not effect the
contemplated transaction unless the member first submits a written
request to FINRA seeking a materiality consultation for the
contemplated acquisition or transfer.\33\ As part of the materiality
consultation, FINRA would determine whether: (1) The member is not
required to file a CMA in accordance with Rule 1017 and may effect the
contemplated acquisition of transfer; or (2) the member is required to
file a CMA in accordance with Rule 1017 and the member may not effect
the contemplated acquisition or transfer unless FINRA approves the
CMA.\34\
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\32\ Proposed Rule 1011(c)(2) would define a ``covered pending
arbitration claim'' as an investment-related, consumer-initiated
claim filed against the transferring member or its associated
persons in any arbitration forum that is unresolved; and whose claim
amount (individually or, if there is more than one claim, in the
aggregate) exceeds the transferring member's excess net capital. See
id. at 72092.
For purposes of this definition, FINRA explains that the claim
would only include claimed compensatory loss amounts, not requests
for pain and suffering, punitive damages or attorney's fees, and
shall be the maximum amount for which the associated person is
potentially liable regardless of whether the claim was brought
against additional persons or the associated person reasonably
expects to be indemnified, share liability or otherwise lawfully
avoid being held responsible for all or part of such maximum amount.
\33\ See Notice at 72091.
\34\ See id.
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Proposed Rule Change Requiring Notification of Unpaid Arbitration
Awards
The proposal would require an applicant for new or continuing
membership to notify FINRA of any pending arbitration claims that are
filed, awarded, settled, or become unpaid before FINRA renders a
decision on the application.\35\ Current Rule 1013(a) lists items that
must be submitted with an NMA and Rule 1017(b) sets forth the documents
and other information required to accompany a CMA, depending on the
nature of the CMA.\36\ FINRA is proposing to add Rules 1013(c) and
1017(h) to require an applicant to provide prompt notification, in
writing, of any pending arbitration claim involving the applicant or
its associated persons that is filed, awarded, settled, or becomes
unpaid before a decision on the application constituting final action
of FINRA is served on the applicant.\37\ FINRA indicated that any such
unpaid arbitration award, other adjudicated customer award, unpaid
arbitration settlement, or pending arbitration claim (for a new member
applicant only) that comes to light in this manner during the
application review process would result in FINRA being able to
presumptively deny the application under the applicable factors set
forth in Rule 1014(a)(3), and the ability of the applicant to overcome
such presumption by demonstrating its ability to satisfy the
obligation.\38\
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\35\ See id. at 72089.
\36\ See id. at 72092.
\37\ See id.
\38\ See id. at 72092.
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Current Rule 1017(c) describes the timing and conditions for
effecting a change under Rule 1017.\39\ Rule 1017(c)(1) requires a
member to file a CMA for approval of a change in ownership or control
at least 30 days before the change is expected to occur.\40\ A member
may effect the change prior to the conclusion of FINRA's review of the
CMA, however, FINRA may place interim restrictions on the member based
upon the standards in Rule 1014 pending a final determination. Under
Rule 1017(c)(2), a member may file a CMA to remove or modify a
membership agreement restriction at any time, but any such existing
restriction shall remain in effect during the pendency of the
proceeding.\41\ Finally, Rule 1017(c)(3) permits a member to file a CMA
for approval of a material change in business operations at any time,
but the member may not effect such change until the conclusion of the
proceeding, unless FINRA and the member otherwise agree.\42\ FINRA is
proposing to add subparagraph (4) to Rule 1017(c), providing that,
notwithstanding the existing timing and conditions for effecting a
change as described under Rule 1017(c)(1) through (3), where a member
or an associated person has an unpaid arbitration award or unpaid
settlement related to an arbitration at the time of filing a CMA, the
member may not effect such change until demonstrating that it has the
ability to satisfy such obligations in accordance with Rule 1014 and
proposed IM-1014-1, as discussed above, and obtaining FINRA's approval
of the CMA.\43\
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\39\ See id.
\40\ See id.
\41\ See id.
\42\ See id.
\43\ See Notice at 72092.
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Additional Proposed Changes
The proposal would also make non-substantive changes in the MAP
rules by renumbering paragraphs in Rules 1011, 1014, and 1017, as well
as updating cross-references.\44\
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\44\ See id. at 72088. FINRA will also make conforming changes
to Forms NMA and CMA.
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III. Comment Summary
As noted above, the Commission received two comment letters on the
proposed rule change supporting the proposal.\45\ While both commenters
were generally supportive of the proposal, they believed that further
action was necessary to address the issue of unpaid financial
obligations that broker-dealers and their associated persons owe to
their customers.\46\
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\45\ See supra note 4.
\46\ Id.
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Supportive Comments
In one commenter's view, the proposed rule changes represented a
``fair, equitable and reasonable approach that would expedite and
facilitate the efficiency of the arbitration process'' and recommended
that they should be ``approved by the SEC on an expedited basis.'' \47\
The second commenter noted the proposed rules changes would provide
FINRA with ``another tool with which it may scrutinize the business of
its members and new member applicants to ensure they can comply with
the relevant rules and regulations, and that investors are protected.''
\48\
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\47\ Caruso Letter.
\48\ SJU Letter.
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Proposal Is Insufficient
As stated above, both commenters believed that FINRA needed to take
further action to address unpaid financial obligations that broker-
dealers and their associated persons owe to their customers.\49\ One
commenter stated ``it is clear that these rule amendments . . . will
not completely solve the large number of customer awards that remain
unpaid each year.'' \50\ The second commenter suggested that either in
this rulemaking or a subsequent rulemaking, FINRA should consider
addressing all investor settlements that have not been fully paid, such
as a settled mediation claim or a settlement resulting from a written
or oral complaint.\51\ The commenter believes that the proposal should
cover these settlements because these types of settlements also may
never be fully satisfied by a firm.\52\
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\49\ See Caruso Letter and SJU Letter.
\50\ Caruso Letter.
\51\ See SJU Letter.
\52\ See id.
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[[Page 18303]]
In response, FINRA recognizes that the issue of unpaid financial
obligations that broker-dealers and their associated persons owe to
their customers is not unique to the FINRA arbitration forum or the
broker-dealer industry and that investors may have claims that arise
outside of FINRA arbitration.\53\ But FINRA also believes this
particular rule filing is only one of the ways it is proceeding to
implement additional steps to strengthen its rules on this topic.\54\
In addition, FINRA noted that it has ``encouraged a continuing dialogue
about addressing the challenges of customer recovery across the
financial services industry while directly informing the further
enhancement of recovery in FINRA's forum[.]'' \55\ For example, FINRA
cited to its 2018 White Paper and ``additional data regarding the
circumstances under which awards may be unpaid, along with a discussion
of potential regulatory and legislative responses.'' \56\ For these
reasons, FINRA declined to amend this proposal in response to
commenters.\57\
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\53\ See FINRA Letter.
\54\ Id. See e.g., Exchange Act Release No. 88254 (Feb. 20,
2020), 85 FR 11157 (Feb 26, 2020) (File No. SR-FINRA-2019-027)
(amending FINRA rules to expand customers' options in arbitration
with respect to claims brought against inactive member firms and
associated persons).
\55\ FINRA Letter.
\56\ Id. In FINRA Perspectives on Customer Recovery, available
at https://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf. FINRA also makes
available additional data on unpaid arbitration awards arising in
the forum for the past five years, available at https://www.finra.org/arbitration-mediation/statistics-unpaid-customer-awardsfinra-arbitration (``White Paper''). In addition, FINRA has
published a list of firms and associated persons responsible for
unpaid arbitration awards, available at https://www.finra.org/arbitration-mediation/member-firms-and-associated-personsunpaid-customer-arbitration-awards. See FINRA Letter at note 3.
\57\ See FINRA Letter.
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IV. Discussion and Commission Findings
After careful review of the proposed rule change and the comment
letters, the Commission finds that the proposal is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to a national securities association.
\58\ Specifically, the Commission finds that the proposed rule change
is consistent with Section 15A(b)(6) of the Exchange Act,\59\ which
requires, among other things, that FINRA rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
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\58\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\59\ 15 U.S.C. 78o-3(b)(6).
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Presumption To Deny an Application
The Commission agrees with FINRA that this proposal to add a
presumption to deny an NMA helps to address concerns related to
prospective applicants for new membership planning to hire principals
and registered persons with pending arbitration claims without being
able to adequately demonstrate: (1) How those claims would be paid if
they go to award or result in a settlement; and (2) how the new member
applicant would be able to effectively supervise such individuals who
may have a history of noncompliance. In particular, the Commission
agrees with FINRA that creating a presumption of denial in connection
with a pending arbitration claim for an NMA would appropriately shift
the burden to the new member applicant to demonstrate how its pending
arbitration claim would be paid should it go to award or result in a
settlement. As FINRA notes, this proposed amendment promotes investor
protection by requiring more thorough scrutiny of certain prospective
member firms to help protect the potential customers of those
firms.\60\
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\60\ See Notice at 72093. FINRA noted that the majority of new
member applicants are unlikely to be effected by the proposed
amendments. FINRA reviewed the 317 NMAs that it received from
January 2015 through December 2017 and found that of those 317 NMAs
only 13 NMAs included a new member applicant or its associated
persons that had a pending arbitration claim at the time of FINRA's
receipt of the NMA. Under the proposed amendments, FINRA could have
presumptively denied those NMAs. See id. at 72093, 72094.
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Demonstration of Ability To Pay
The Commission agrees with FINRA that it would improve the
efficiency of the MAP process to institute the proposal requiring
evidence of an applicant's ability to satisfy unpaid arbitration
awards, other adjudicated customer awards, unpaid arbitration
settlements, or, in the case of NMAs, pending arbitration claims.
Specifically, the Commission agrees with FINRA that this rule will
increase the ability of applicants to anticipate the information
necessary to demonstrate their ability to satisfy outstanding
obligations or potential obligations, and reduce the need for
applicants to submit additional information after the initial filing.
The Commission also believes the proposal could help reduce the number
of unpaid arbitration awards by permitting an applicant to overcome the
presumption to deny an application by guaranteeing that any funds used
to evidence the applicant's ability to satisfy any awards, settlements,
or claims will be used specifically for that purpose.
Materiality Consultation
FINRA has expressed concern that, under current Rule 1017 and the
existing safe harbor for business expansions to increase the number of
associated persons involved in sales,\61\ a member could hire
principals and registered representatives with substantial pending
arbitration claims without considering how the firm would supervise
such individuals or the potential financial impact on the firm if the
individual, while employed at the hiring firm, engages in potential
misconduct that results in a customer arbitration.\62\ The Commission
agrees with FINRA that requiring a materiality consultation for this
type of business expansion would allow FINRA to, among other things,
assess the nature of the anticipated activities of the principals and
registered representatives with pending arbitration claims, unpaid
arbitration awards, or arbitration settlements; the impact on the
firm's supervisory and compliance systems, personnel, and finances; and
any other impact on investor protection raised by adding such
individuals.
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\61\ See FINRA IM-1011-1 (Safe Harbor for Business Expansions).
\62\ See Notice at 72090.
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Additionally, the Commission agrees that FINRA is better able to
assess, among other things, the adequacy of any plan a member firm has
in place to satisfy pending arbitration claims, unpaid arbitration
awards, or unpaid arbitration settlements, by requiring a materiality
consultation when a member firm is contemplating any direct or indirect
acquisition or transfer of assets involving a ``covered pending
arbitration claim.'' The Commission further agrees that this proposal
helps reduce the risk that a firm with pending arbitration claims that
ultimately produce awards or settlements could avoid satisfying those
awards or settlements by transferring assets without encumbrance and
then closing down. The Commission agrees with FINRA that a decrease in
the ability of firms to avoid satisfying their arbitration awards or
settlements in this manner may result in a higher likelihood that they
are paid in full in accordance with their terms.
Notification of Unpaid Arbitration Awards
The Commission agrees with FINRA that requiring applicants to
provide prompt notification to FINRA of a pending arbitration claim
that is filed,
[[Page 18304]]
awarded, settled, or becomes unpaid before a decision on the
application is served will improve FINRA's ability to oversee and
review the pending arbitrations of applicants to help ensure that
arbitration awards and settlements are paid in full in accordance with
their terms.
In sum, the Commission agrees with FINRA and the commenters who
supported the proposed rule change that it would help address the issue
of unpaid arbitration awards. Specifically, the proposal would link a
firm's or associated person's unpaid arbitration awards, unpaid
arbitration settlement, or specified pending arbitration claims
(collectively, ``unpaid and potential financial obligations related to
arbitration'') to FINRA's membership application review process, in
certain instances, to provide FINRA greater oversight.\63\ These
changes will enable FINRA to more directly address concerns over unpaid
and potential financial obligations related to arbitration, as well as
the adequacy of the supervision of individuals with unpaid and
potential financial obligations related to arbitration in situations
where, for example: (1) A FINRA member firm hires individuals with
pending arbitration claims, where there are concerns about: (a) The
payment of those claims should they go to award or result in
settlement, and (b) the supervision of those individuals; and (2) a
member firm with pending arbitration claims seeks to avoid payment of
the claims should they go to award or result in a settlement by
shifting its assets, or its managers and owners, to another firm and
closing down. Additionally, the Commission agrees with FINRA that
amendments adopted here will enable FINRA to place greater emphasis on
the adequacy of the supervision of individuals with pending arbitration
claims given their history of noncompliance. While the Commission
acknowledges the concerns of commenters regarding the potential for
further action to address unpaid claims that arise outside of FINRA
arbitration, as FINRA noted, this proposal represents one step in the
ongoing process of addressing these issues and FINRA continues to
evaluate further action.\64\
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\63\ See Notice at 72089.
\64\ See FINRA Letter.
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V. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \65\ that the proposal (SR-FINRA-2019-030), as modified by
Amendment No. 1, be, and hereby is, approved.
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\65\ 15 U.S.C. 78s(b)(2).
\66\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06722 Filed 3-31-20; 8:45 am]
BILLING CODE 8011-01-P
