Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Address Brokers With a Significant History of Misconduct, 81540-81548 [2020-27626]
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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Notices
fair procedure for the disciplining of
ETP Holders and Associated Persons by
providing for a clearly demarcated and
orderly transition from the current 25
day period to the proposed 10 day
period.
Finally, the Exchange believes that
the non-substantive changes to clarify
the cross-reference to Rule 10.9310 in
Rules 10.9216 would remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, protect investors and the public
interest because the proposed nonsubstantive changes would add clarity,
transparency and consistency to the
Exchange’s disciplinary rules. The
Exchange believes that market
participants would benefit from the
increased clarity, thereby reducing
potential confusion and ensuring that
persons subject to the Exchange’s
jurisdiction, regulators, and the
investing public can more easily
navigate and understand the Exchange’s
rules.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is not intended to
address competitive issues but is rather
concerned with facilitating less
burdensome regulatory compliance and
processes and enhancing the quality of
the regulatory process. The Exchange
believes the proposed rule changes
would reduce the burdens within the
disciplinary process, as well as move
matters through the process
expeditiously by providing for more
efficient finality of negotiated
settlements and offers of settlement, to
the benefit of all ETP Holders,
Associated Persons and the investing
public.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
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
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which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 16 and
subparagraph (f)(6) of Rule 19b–4
thereunder.17
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 rule-comments@
sec.gov. Please include File Number SR–
NYSENAT–2020–36 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–NYSENAT–2020–36. 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
16 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
17 17
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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–NYSENAT–2020–36, and
should be submitted on or before
January 6, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–27595 Filed 12–15–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90635; File No. SR–FINRA–
2020–011]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, To Address Brokers
With a Significant History of
Misconduct
December 10, 2020.
I. Introduction
On April 3, 2020, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and 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
rules to help further address the issue of
associated persons with a significant
history of misconduct and the brokerdealers that employ them.
The proposed rule change was
published for comment in the Federal
18 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Notices
Register on April 14, 2020.3 On May 27,
2020, FINRA consented to an extension
of 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
July 13, 2020.4 On July 2, 2020, FINRA
responded to the comment letters
received in response to the Notice and
filed an amendment to the proposed
rule change (‘‘Amendment No. 1’’).5 On
July 13, 2020, the Commission filed an
Order Instituting Proceedings to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.6 On
October 5, 2020, FINRA consented to an
extension of 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 December 10, 2020.7 On
October 7, FINRA responded to the
comment letter received in response to
the Order Instituting Proceedings.8 This
order approves the proposed rule
change, as modified by Amendment No.
1.
II. Description of the Proposed Rule
Change
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Background
FINRA’s proposed rule change would:
(1) Amend the FINRA Rule 9200 Series
(Disciplinary Proceedings) and the 9300
Series (Review of Disciplinary
3 See Exchange Act Release No. 88600 (Apr. 8,
2020), 85 FR 20745 (Apr. 14, 2020) (File No. SR–
FINRA–2020–011) (‘‘Notice’’).
4 See letter from Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA,
to Daniel Fisher, Branch Chief, Division of Trading
and Markets, Commission, dated May 27, 2020.
5 See letter from Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, Commission,
dated July 2, 2020 (‘‘FINRA July 2 Letter’’). The
FINRA July 2 Letter is available at the
Commission’s website at https://www.sec.gov/
comments/sr-finra-2020-011/srfinra20200117399761-219028.pdf. Amendment No. 1 is available
at https://www.finra.org/sites/default/files/2020-07/
sr-finra-2020-011-amendment-no-1.pdf.
6 See Exchange Act Release No. 89305 (July 13,
2020), 85 FR 43627 (July 17, 2020) (File No. SR–
FINRA–2020–011) (‘‘Order Instituting
Proceedings’’).
7 See letter from Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA,
to Daniel Fisher, Branch Chief, Division of Trading
and Markets, Commission, dated October 5, 2020.
8 See letter from Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, Commission,
dated October 7, 2020 (‘‘FINRA October 7 Letter’’).
The FINRA October 7 Letter is available at the
Commission’s website at https://www.sec.gov/
comments/sr-finra-2020-011/srfinra20200117884211-224193.pdf.
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Proceedings by National Adjudicatory
Council and FINRA Board; Application
for SEC Review) to allow a hearing
officer to impose conditions or
restrictions on the activities of a
respondent member broker-dealer or
respondent associated person (each a
‘‘Respondent’’ or collectively
‘‘Respondents’’), and require the
member broker-dealer employing a
respondent associated person to adopt
heightened supervisory procedures for
such associated persons, when a
disciplinary matter is appealed to the
National Adjudicatory Council (‘‘NAC’’)
or called for NAC review; (2) amend the
FINRA Rule 9520 Series (Eligibility
Proceedings) to require member brokerdealers to adopt heightened supervisory
procedures for statutorily disqualified
associated persons during the period a
statutory disqualification eligibility
request is under review by FINRA; (3)
amend FINRA Rule 8312 (FINRA
BrokerCheck Disclosure) to require
disclosure through FINRA BrokerCheck
of the status of a member broker-dealer
as a ‘‘taping firm’’ under FINRA Rule
3170 (Tape Recording of Registered
Persons by Certain Firms); and (4)
amend the FINRA Rule 1000 Series
(Member Application and Associated
Person Registration) to require a
member broker-dealer to submit a
written request to FINRA’s Department
of Member Regulation (‘‘Member
Regulation’’), through the Membership
Application Group (‘‘MAP Group’’),
seeking a materiality consultation 9 and
approval of a continuing membership
application, if required, when a natural
person seeking to become an owner,
control person, principal, or registered
person of the member broker-dealer has,
in the prior five years, one or more
‘‘final criminal matters’’ or two or more
‘‘specified risk events.’’ 10
Proposed Rule Change to the FINRA
Rule 9200 Series (Disciplinary
Proceedings) and 9300 Series (Review of
Disciplinary Proceeding by National
Adjudicatory Council and FINRA Board;
Application for SEC Review)
FINRA proposed amendments to the
Rule 9200 Series and Rule 9300 Series
9 In general, a member broker-dealer initiates a
materiality consultation with Member Regulation
by submitting a letter, requesting its determination
on whether a proposed change is material such that
it requires the submission of a Continuing
Membership Application (‘‘CMA’’). If Member
Regulation determines that a proposed change is
material, it will instruct the broker-dealer to file a
CMA if it intends to proceed with the proposed
change. See Regulatory Notice 18–23 (Proposal
Regarding the Rules Governing the New and
Continuing Membership Application Process) (July
2018).
10 See Notice at 20745.
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to address investor protection concerns
during the pendency of an appeal from,
or a NAC review of, a hearing panel or
hearing officer disciplinary decision, by
authorizing hearing officers to impose
conditions or restrictions on disciplined
Respondents and requiring brokerdealers to adopt heightened supervision
plans concerning their associated
persons who are disciplined
respondents.11 The proposed rule
change would also establish a process
for an expedited review by the Review
Subcommittee of the NAC of any
conditions or restrictions imposed.12
Currently, when a hearing panel or
hearing officer decision is on appeal or
review before the NAC, any sanctions
imposed by the decision, including bars
and expulsions, are automatically
stayed and not enforced against the
Respondent during the pendency of the
appeal or review proceeding.13
Thereafter, the filing of an application
for Commission review stays the
effectiveness of any sanction, other than
a bar or an expulsion, imposed in a
decision constituting a final FINRA
disciplinary action.14
Proposed Rule 9285(a) would provide
that the hearing officer who participated
in an underlying disciplinary
proceeding may impose conditions or
restrictions on the activities of the
Respondent during the appeal of any
adverse finding. Specifically, if the
hearing officer found that a Respondent
violated a statute or rule provision,
which is subsequently appealed to the
NAC or called for NAC review, the
hearing officer may impose conditions
or restrictions reasonably necessary for
the purpose of preventing customer
harm.15 The scope of these conditions or
11 See
Notice at 20746.
12 Id.
13 See
FINRA Rules 9311(b) and 9312(b).
FINRA Rule 9370(a).
15 See Notice at 20747. Under the proposed rule,
the hearing officer could not impose these
conditions or restrictions sua sponte but rather may
only act on a motion by FINRA’s Department of
Enforcement (‘‘Enforcement’’). Proposed Rule
9285(a)(1) would allow Enforcement, within ten
days after service of a notice of appeal from, or the
notice of a call for NAC review of, a disciplinary
decision of a hearing officer or hearing panel, to file
a motion for the imposition of conditions or
restrictions on the activities of a Respondent that
are reasonably necessary for the purpose of
preventing customer harm. The motion must
specify the conditions and restrictions that are
sought to be imposed and explain why they are
necessary. A Respondent would have the right to
file an opposition or other response to the motion
within ten days after service of the motion, unless
otherwise ordered by the hearing officer, and must
explain why no conditions or restrictions should be
imposed or specify alternative conditions and
restrictions that would prevent customer harm. The
hearing officer would then decide Enforcement’s
motion for conditions or restrictions based on the
14 See
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restrictions would depend on what the
hearing officer determines to be
reasonably necessary for the purpose of
preventing customer harm. Further, the
conditions and restrictions would target
the misconduct demonstrated in the
disciplinary proceeding and be tailored
to the specific risks posed by the
Respondents during the appeal
period.16 Accordingly, the conditions
and restrictions are not intended to be
as restrictive as the underlying
sanctions and would likely not be
economically equivalent to imposing
the sanctions during the appeal.17 In
addition, Respondents would be able to
seek expedited reviews of orders
imposing conditions or restrictions.18
Currently, any sanctions imposed by
the hearing panel or hearing officer
decision, including bars and expulsions,
are automatically stayed and not
enforced against the Respondent during
the pendency of the NAC appeal or
review proceeding.19 Under the
proposed rule change, the conditions or
restrictions imposed by a hearing officer
would remain in place until FINRA’s
final decision takes effect and all
appeals are exhausted.20 In addition,
proposed FINRA Rule 9285(e) would
require a member broker-dealer to adopt
a written plan of heightened supervision
for an associated person who is found
to have violated a statute or rule
provision. The plan of heightened
supervision would be required to
comply with FINRA Rule 3110, be
reasonably designed and tailored to
include specific supervisory policies
and procedures that address the
violations found by the hearing panel or
hearing officer, and be reasonably
designed to prevent or detect a
reoccurrence of these violations.21
moving and opposition papers. See Proposed Rule
9285(a)(2)–(5) and (c); see also Notice at 20747.
16 See Notice at 20747.
17 See Notice at 20756.
18 Id.
19 See FINRA Rules 9311(b) and 9312(b); see also
Notice at 20747. See also FINRA Rule 9370(a),
which states that the filing of an application for
review by the SEC of the NAC’s decision shall stay
the effectiveness of any sanction, other than a bar
or expulsion imposed in a final disciplinary action
by FINRA.
20 See Notice at 20748. The proposed rule change
would also amend Rule 9556 to grant FINRA the
authority to bring an expedited proceeding against
a Respondent that fails to comply with conditions
and restrictions imposed pursuant to proposed Rule
9285 that could result in a suspension or
cancellation of membership or suspension or bar
from associating with any FINRA member. See
Notice at 20749.
21 See Notice at 20748.
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Proposed Rule Change to the FINRA
Rule 9520 Series (Eligibility
Proceedings)
A broker-dealer is not currently
required to place a statutorily
disqualified individual on heightened
supervision while FINRA reviews the
member broker-dealer’s application to
continue associating with the individual
(although FINRA generally will not
approve an application without an
acceptable plan of supervision).22 Under
the proposed rule change, FINRA would
amend FINRA Rule 9522 to require a
member broker-dealer that files an
application to continue associating with
a statutorily disqualified associated
person under FINRA Rule 9522(a)(3) or
9522(b)(1)(B) to include an interim plan
of heightened supervision that would be
in effect throughout the entirety of the
application review process.23 The
proposed rule changes would delineate
the circumstances under which a
statutorily disqualified individual may
remain associated with a FINRA
member while FINRA is reviewing the
application.24
Proposed Rule Change to FINRA Rule
8312 (FINRA BrokerCheck Disclosure)
FINRA proposed an amendment to
FINRA Rule 8312 governing the
information FINRA releases to the
public through its BrokerCheck system.
Currently, FINRA Rule 8312(b) requires
that FINRA release information about,
among other things, whether a
particular member broker-dealer is
subject to the provisions of FINRA Rule
3170 (‘‘Taping Rule’’), but only in
response to telephonic inquiries via the
BrokerCheck toll-free telephone
listing.25 The Taping Rule is designed to
ensure that a member broker-dealer with
a significant number of registered
persons that previously were employed
by ‘‘disciplined firms’’ 26 has specified
supervisory procedures in place to
prevent fraudulent and improper sales
practices or customer harm, including,
among other things, procedures for
recording all telephone conversations
between the taping firm’s registered
persons and both existing and potential
customers.27 Proposed Rule 8312(b)
would not eliminate the toll-free
22 See
23 See
Notice at 20750.
Notice at 20749.
24 Id.
25 See FINRA Rule 8312(b). Under the Taping
Rule, a broker-dealer with a specified percentage of
registered persons who have been associated with
disciplined firms in a registered capacity in the last
three years is designated as a ‘‘taping firm.’’ See
FINRA Rule 3170.
26 See FINRA Rule 3170(a)(2) (defining the term
‘‘disciplined firm’’).
27 See Notice at 20751.
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telephone listing but rather would also
require FINRA to release through
BrokerCheck information as to whether
a particular member broker-dealer is
subject to the Taping Rule.28 The
proposed rule change would remove the
requirement in FINRA Rule 8312(b) that
FINRA inform the public that a member
broker-dealer is subject to the Taping
Rule only in response to telephonic
inquiry via the BrokerCheck toll-free
telephone listing.29 FINRA believes that
broadening the disclosure through
BrokerCheck of the status of a member
broker-dealer as a taping firm would
help inform more investors of the
heightened procedures required of the
firm, which may incentivize investors to
research more carefully the background
of a registered representative associated
with the taping firm.30
Proposed Rule Change to FINRA Rule
1000 Series (Member Application and
Associated Person Registration)
The FINRA Rule 1000 Series governs,
among other things, FINRA’s
membership proceedings. Currently, a
member broker-dealer is permitted
(subject to exceptions) to expand its
business under the safe harbor set forth
in FINRA interpretive material IM–
1011–1 without the filing and prior
approval of a CMA.31 For example,
under the existing parameters of this
safe harbor, a broker-dealer could hire
an associated person even if he or she
has a significant history of
misconduct.32 The proposed rule
change would limit the application of
the safe harbor by imposing additional
obligations on a member broker-dealer
when a natural person who has, in the
prior five years, either one or more
‘‘final criminal matters’’ or two or more
‘‘specified risk events’’ seeks to become
28 FINRA Rule 8312 (FINRA BrokerCheck
Disclosure) governs the information FINRA releases
to the public through its BrokerCheck system (the
BrokerCheck website address is
brokercheck.finra.org). BrokerCheck helps investors
make informed choices about the brokers and
member firms with which they conduct business by
providing registration and disciplinary history to
investors. FINRA requires member firms to inform
their customers of the availability of BrokerCheck.
Specifically, FINRA Rule 2210(d)(8) requires that
each of a member’s websites include a readily
apparent reference and hyperlink to BrokerCheck
on the initial web page that the member intends to
be viewed by retail investors and any other web
page that includes a professional profile of one or
more registered persons who conduct business with
retail investors; and FINRA Rule 2267 requires
members to provide to customers the FINRA
BrokerCheck Hotline Number and a statement as to
the availability to the customer of an investor
brochure that includes information describing
BrokerCheck. See Notice at 20751.
29 Id.
30 Id.
31 See Notice at 20752.
32 Id.
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an owner, control person, principal, or
registered person of the broker-dealer.33
Specifically, when a natural person
seeking to become an owner, control
person, principal, or registered person
of a member broker-dealer has, in the
prior five years, one or more ‘‘final
criminal matters’’ or two or more
‘‘specified risk events,’’ proposed Rule
1017(a)(7) would require a member
broker-dealer to either: (1) File a CMA;
or (2) submit a written request seeking
a materiality consultation for the
contemplated activity with FINRA’s
MAP Group.34 If the broker-dealer seeks
a materiality consultation, the MAP
Group would consider, among other
things, whether the ‘‘final criminal
matters’’ or ‘‘specified risk events’’ are
customer-related; whether they
represent discrete actions or are based
on the same underlying conduct; the
anticipated activities of the person; the
disciplinary history, experience and
background of the proposed supervisors,
if applicable; and the disciplinary
history, supervisory practices,
standards, systems and internal controls
of the member broker-dealer and
whether they are reasonably designed to
achieve compliance with applicable
33 Id. The proposed rule change would also adopt
definitions of ‘‘final criminal matter’’ and
‘‘specified risk event’’ to help identify when a
member broker-dealer must submit a materiality
consultation or continuing membership application
when a natural person seeks to become an owner,
control person, principal, or registered person of the
firm and the person’s history of misconduct meets
one or more of these definitions. Amendment No.
1 amended proposed FINRA Rule 1011(h) to
include in the definition of ‘‘final criminal matter’’
a relevant criminal event that ‘‘is or was’’ required
to be disclosed on a Uniform Registration Form, and
to make some grammar- and syntax-related
modifications. The amendment clarified that both
‘‘final criminal matter’’ and ‘‘specified risk event’’
include disclosures that are required if the member
broker-dealer and natural person proceed with the
contemplated change, including disclosures that are
required on Uniform Registration Forms that have
not yet been executed. For example, Sections 14A
and 14B of Form U4 (defined below) require
representatives of broker-dealers to disclose, among
other things, if they have ever been convicted of or
pled guilty or nolo contendere (‘‘no contest’’) in a
domestic, foreign or military court to (1) any felony,
or (2) a misdemeanor involving: investments or an
investment-related business or any fraud, false
statements or omissions, wrongful taking of
property, bribery, perjury, forgery, counterfeiting,
extortion, or a conspiracy to commit any of these
offenses. Proposed Rule 1011(r) would define
‘‘Uniform Registration Forms’’ to mean the Uniform
Application for Broker-Dealer Registration (Form
BD), the Uniform Application for Securities
Industry Registration or Transfer (Form U4), the
Uniform Termination Notice for Securities Industry
Registration (Form U5) and the Uniform
Disciplinary Action Reporting Form (Form U6), as
such may be amended or any successor(s) thereto.
34 See Notice at 20752 and 20753. This
requirement would not apply when the member is
required to file a statutory disqualification
application or written request for relief pursuant to
Rule 9522 for approval of the same contemplated
association. Id. at 20753 and note 51.
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securities laws and regulations and
FINRA rules.35 Where FINRA
determines that a contemplated
organizational change is material,
FINRA would instruct the broker-dealer
to file a CMA if it intends to proceed
with such change.
Additionally, the proposed rule
change would adopt a corresponding
change to IM–1011–1 (Business
Expansions and Persons with Specified
Risk Events) to specify that the safeharbor for business expansions in IM–
1011–1 would not be available to any
broker-dealer seeking to add a natural
person who: (i) Has, in the prior five
years, one or more ‘‘final criminal
matters’’ or two or more ‘‘specified risk
events’’ and (ii) seeks to become an
owner, control person, principal, or
registered person of the member.36 In
those circumstances, proposed IM–
1011–3 would provide that if the brokerdealer is not otherwise required to file
a CMA, it must comply with the
requirements of proposed FINRA Rule
1017(a)(7).37 Proposed Rule 1017(a)(7)
would establish that the safe-harbor for
business expansions in IM–1011–1
would not be available to a member
broker-dealer when a materiality
consultation is required.38
The proposed rule change would also
make non-substantive changes to the
MAP rules by renumbering paragraphs
and updating cross-references to reflect
the other proposed rule changes.
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, as modified by Amendment
No. 1, the comment letters, and FINRA’s
responses to the comments, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the
35 See
Notice at 20753.
81543
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities association.39 Specifically, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section
15A(b)(6) of the Exchange Act,40 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.
Rule 9200 Series (Disciplinary
Proceedings) and 9300 Series (Review of
Disciplinary Proceeding by National
Adjudicatory Council and FINRA Board;
Application for SEC Review)
The proposed rule change to
authorize hearing officers to impose
conditions or restrictions on disciplined
Respondents reasonably necessary for
the purpose of preventing customer
harm, and to require broker-dealers to
adopt heightened supervision plans
concerning individual respondents, will
help protect investors from associated
persons found to have violated a statute
or rule provision, by potentially
preventing them from engaging in
additional misconduct during the
appeal process. These proposed rule
changes are designed to help prevent
fraudulent and manipulative acts and
practices and address concerns related
to misconduct that may occur during
the pendency of an appeal from, or a
NAC review of, a hearing panel or
hearing officer disciplinary decision.41
The Commission believes the ability to
impose conditions or restrictions along
with the proposed requirement to adopt
a plan of heightened supervision will
lead to greater oversight of disciplined
Respondents’ activities during the
appeal period, thereby reducing the
36 Id.
37 See Notice at 20753. Proposed Rule 1017(a)(7)
would require the broker-dealer to submit a written
request seeking a materiality consultation for the
contemplated activity so that FINRA’s MAP Group
can determine whether a CMA is required. In a
teleconference between Michael Garawski,
Associate General Counsel, Office of General
Counsel, FINRA, Kosha Dalal, Vice President and
Associate General Counsel, Legal Policy, Office of
General Counsel, FINRA, Lourdes Gonzalez,
Assistant Chief Counsel, Division of Trading and
Markets, Commission, Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission,
Edward Schellhorn, Special Counsel, Division of
Trading and Markets, Commission, and Meredith
MacVicar, Special Counsel, Division of Trading and
Markets, Commission, on December 3, 2020, FINRA
staff stated that of the 388 materiality consultations
received in 2019, the average processing time was
approximately 15 calendar days. FINRA completed
the review of 336 CMAs that were received in 2019
and the average processing time was approximately
97 calendar days.
38 See Notice at 20753.
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39 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).
40 15 U.S.C. 78o–3(b)(6).
41 In a teleconference between Michael Garawski,
Associate General Counsel, Office of General
Counsel, FINRA, Kosha Dalal, Vice President and
Associate General Counsel, Legal Policy, Office of
General Counsel, FINRA, Lourdes Gonzalez,
Assistant Chief Counsel, Division of Trading and
Markets, Commission, Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission,
Edward Schellhorn, Special Counsel, Division of
Trading and Markets, Commission, and Meredith
MacVicar, Special Counsel, Division of Trading and
Markets, Commission, on December 1, 2020
(‘‘December 1, 2020 Teleconference’’), FINRA stated
that during 2013–2019 the NAC issued decisions in
131 disciplinary matters. The NAC affirmed the
hearing panel or hearing officer findings 121 times
(92%), modified the findings 6 times (5%), and
reversed or dismissed the findings 4 times (3%).
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potential risk of customer harm that
may occur during this period.
Two commenters supported the
proposed rule change.42 Two other
commenters, however, expressed
concern that these proposed rule
changes to the Rule 9200 Series and
9300 Series do not adequately ensure
due process and one specifically
recommended FINRA take additional
steps to ‘‘ensure due process, both in
appearance and actual.’’ 43 In response,
FINRA detailed the procedural
protections proposed Rule 9285 would
establish. Specifically, prior to imposing
any conditions or restrictions the
proposed rule change would: (i) Require
Enforcement to file a motion with a
hearing officer, seeking the imposition
of conditions or restrictions that are
reasonably necessary for the purpose of
preventing customer harm, specifying
the conditions and restrictions that are
sought to be imposed, and explaining
why they are necessary; (ii) provide the
Respondent an opportunity to file a
written opposition or other response to
the motion; (iii) require the hearing
officer to issue a written order ruling
upon the motion no later than 20 days
after any opposition or response is filed;
and (iv) afford a Respondent the right to
seek expedited review 44 before the
NAC’s Review Subcommittee of an
order that imposes conditions or
restrictions, and an automatic stay when
a Respondent requests such an
expedited review.45
42 See letter from William A. Jacobson, Esq.,
Clinical Professor of Law, Cornell Law School, and
Director, Securities Law Clinic, and Ayomikun
Loye, Student, Cornell Law School, to Vanessa
Countryman, Secretary, Commission, dated May 5,
2020; letter from Samuel B. Edwards, President,
Public Investors Advocate Bar Association, to Brent
J. Fields, Secretary, Commission, dated May 5,
2020.
43 See letter from Professor Lisa Miller, Esq.,
dated April 30, 2020; see also letter from Aaron D.
Lebenta, Parsons Behle & Latimore, to Vanessa
Countryman, Secretary, Commission, dated August
3, 2020 (‘‘Lebenta Letter’’) (concerned that the
proposed rule change does not establish an effective
appeal process to help ensure FINRA’s disciplinary
decision is correct, and that the sanctions are
warranted, before they are imposed).
44 Under proposed Rule 9285, an expedited
review should take no longer than 45 days from the
date the hearing officer serves the written order
imposing conditions or restrictions on the
Respondent. Specifically, proposed Rule 9285(b)(1)
states that the Respondent may file a motion to
modify or remove any or all of the conditions or
restrictions within ten (10) days after service of the
order, proposed Rule 9285(b)(3) would provide
Enforcement up to five (5) days from service of
Respondent’s motion to file an opposition or other
response to the motion, and proposed Rule
9285(b)(5) would provide the Review Subcommittee
up to thirty (30) days after any opposition filed
pursuant to Rule 9285(b)(3) to serve a written order
ruling upon a motion to modify or remove
conditions or restrictions in an expeditious manner.
45 See FINRA July 2 Letter and FINRA October 7
Letter; see also Notice at 20746.
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As stated above, currently any
sanctions imposed by the hearing panel
or hearing officer decision, including
bars and expulsions, are automatically
stayed and not enforced against the
respondent during the pendency of the
NAC appeal or review proceeding.46
One of the commenters urging FINRA to
ensure due process stated that the
proposed rule change should not ‘‘be
stripped away’’ by changing the existing
stay and giving a hearing officer
authority to impose conditions and
restrictions on the Respondent during
the process of appealing a hearing
officer’s decision. Accordingly, the
commenter expressed concern that the
imposition of such conditions or
restrictions could ruin a broker-dealer’s
business before the expedited review
process has concluded, especially a
smaller broker-dealer with fewer
alternatives to withstand extended
impediments to one of its business
lines.47 Another commenter,48 however,
expressed support for the proposed rule
change and advocated for FINRA to go
further by eliminating the existing stay
of decisions by the hearing officer or
hearing panel in disciplinary matters
pursuant to Rule 9268 49 or Rule 9269,50
in which the adjudicator finds that a
Respondent violated a statute or rule
provision, during an appeal to the NAC
by repealing FINRA Rule 9311.51
46 See
FINRA Rules 9311(b) and 9312(b).
Lebenta Letter (stating that a hearing officer
restricting a broker-dealer from engaging in the
same activity which is the subject of the initial
sanction during its appeal of that sanction would
essentially impose the original sanction while the
matter is on appeal).
48 See letter from Lev Bagramian, Senior
Securities Policy Advisor, Better Markets, Inc. to
Vanessa A. Countryman, Secretary, Commission,
dated June 19, 2020 (‘‘Better Markets Letter’’).
49 FINRA Rule 9268(f) states that unless otherwise
provided in the majority decision constituting a
final disciplinary action of FINRA issued under
Rule 9268(a), a sanction (other than a bar or an
expulsion) specified in the decision shall become
effective on a date to be determined by FINRA, and
a bar or an expulsion specified in a decision shall
become effective immediately upon the decision
becoming the final disciplinary action of FINRA.
50 FINRA Rule 9269(d) states that unless
otherwise provided in the default decision
constituting a final disciplinary action of FINRA,
the sanctions shall become effective on a date to be
determined by FINRA staff, except that a bar or
expulsion shall become effective immediately upon
the default decision.
51 FINRA Rule 9311(b) states that an appeal to the
NAC from a decision issued pursuant to Rule 9268
or Rule 9269 shall operate as a stay of that decision
until the NAC issues a decision pursuant to Rule
9349 (National Adjudicatory Council Formal
Consideration; Decision) or, in cases called for
discretionary review by the FINRA Board, until a
decision is issued pursuant to Rule 9351
(Discretionary Review by FINRA Board). Any such
appeal, however, will not stay a decision, or that
part of a decision, that imposes a permanent cease
and desist order.
47 See
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FINRA considered both suggestions
and decided not to amend the proposed
rule change. Specifically, FINRA
believes that enforcing the hearing
panel’s disciplinary sanctions against
the Respondents during the pendency of
the appeal or review proceedings could
be too restrictive in disciplinary matters
with significant sanctions and where the
risk of harm may be specific to
particular activities.52 On the other
hand, FINRA stated that the proposed
rule change would authorize a hearing
officer to impose conditions and
restrictions that are tailored specifically
to the risk posed by the Respondent
during the pendency of the appeals, and
reasonably necessary for the purpose of
preventing customer harm that may
occur during the pendency of the
appeal. Accordingly, FINRA determined
that the proposed rule change would
strike a reasonable balance between
protecting investors and preventing
undue burden on individuals and firms
while their appeals are pending.53
A system designed to protect
investors and the public interest will
generally produce both costs and
benefits. In this instance, FINRA’s
proposed rule change should reduce the
probability of investor losses resulting
from the violation of statutes or rules. At
the same time, a decision to impose
conditions or restrictions may disrupt
the business opportunities of certain
broker-dealers and individuals. In order
to assess the potential risk posed by
brokers during the appeal period,
FINRA examined cases that were
appealed to the NAC during the period
of 2013–2016 and determined whether
the brokers associated with an appeal to
the NAC had a new disclosure event—
for this analysis, a ‘‘final criminal
matter’’ or a ‘‘specified risk event,’’ as
defined above—at any time from the
filing of the appeal through the year-end
after the year in which the appeal
reached a decision. Based on this
analysis, FINRA estimated that 21 of the
75 brokers who appealed to the NAC
during the 2013–2016 period were
associated with a total of 28 disclosure
events that occurred during the
interstitial period after the filing of their
appeal to the NAC.54
52 See
Notice at 20760.
Notice at 20760.
54 See Notice at 20756. FINRA notes that these
estimates likely underrepresent the overall risk of
customer harm posed by these brokers, because
they are based on a specific set of events and
outcomes used for classifying brokers for the
proposed amendments to the MAP Rules. In
addition, these brokers had other disclosure events
after their appeal was filed, and some of these other
events may also be associated with risk of customer
harm. See Notice at note 75.
53 See
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After considering these benefits and
costs, the Commission believes that the
proposed procedural protections
provide a reasonable process to
Respondents who may disagree with the
particular set of conditions or
restrictions imposed by a hearing officer
to challenge those conditions or
restrictions before they go into effect by,
among other things, establishing an
expedited process for the review of a
hearing officer’s order by the Review
Subcommittee of the NAC. During a
hearing officer’s review, he or she may
consider the specific facts and
circumstances when weighing the
additional risk(s) posed by the
Respondent while the matter is on
appeal against the costs of possible
restrictions and sanctions. The
Commission believes this potential
disruption of the business opportunities
of certain broker-dealers and
individuals has been appropriately
balanced against the investor
protections the proposed rule change
would establish, as well as the need to
prevent potential customer harm from
Respondents who have been found in
violation of FINRA rules by a hearing
officer or hearing panel.55
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Rule 9520 (Eligibility Proceedings)
The proposed rule change to require
broker-dealers to include a plan of
heightened supervision with an
application to continue associating with
a statutorily disqualified individual that
would be in effect throughout the
entirety of the application review
process also would address an investor
protection concern by lowering the risk
of customer harm during the pendency
of an application. One commenter
opposed this proposed rule change,
arguing that establishing plans of
heightened supervision are costly and
burdensome and would discourage
55 The Commission notes that the proposed rule
change is consistent with the adopted rules of other
SROs, including: BOX Rule 12110 (‘‘Pending
effectiveness of a decision imposing a sanction on
the Respondent, the person, committee or panel
issuing the decision (the ‘adjudicator’) may impose
such conditions and restrictions on the activities of
the Respondent as it considers reasonably necessary
for the protection of investors and the Exchange’’);
CBOE Rule 13.11(b) (‘‘Pending effectiveness of a
decision imposing a sanction on the Respondent,
the Hearing Panel or the Chief Regulatory Officer
(‘‘CRO’’), as applicable, may impose such
conditions and restrictions on the activities of the
Respondent as the Hearing Panel or the CRO, as
applicable, considers reasonably necessary for the
protection of investors and the Exchange’’); and
CBOE BZX Rule 8.11 (‘‘Pending effectiveness of a
decision imposing a penalty on the Respondent, the
CRO, Hearing Panel or committee of the Board, as
applicable, may impose such conditions and
restrictions on the activities of the Respondent as
he, she or it considers reasonably necessary for the
protection of investors, creditors and the
Exchange.’’). See Notice at note 112.
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broker-dealers from hiring associated
persons who have been disciplined.56
However, FINRA is not creating an
additional burden with respect to the
requirement to create a plan of
heightened supervision; it is only
requiring a member broker-dealer
implement such plan at an earlier point
in time than under the existing rules.
Currently, as part of the application
process, a member broker-dealer will
propose a written plan of heightened
supervision to become effective upon
approval of the application, and
generally, the continued association of a
statutorily disqualified person approved
through a FINRA eligibility proceeding
is conditioned on the individual being
subject to a heightened supervision
plan.57 This proposed rule change
would help limit the potential for
customer harm at an earlier point in
time and thereby help protect
customers. In order to assess the
potential risk posed by a statutorily
disqualified person during the
pendency of his or her application,
FINRA examined whether individuals
who filed an application between 2013–
2016 had a disclosure event at any time
from the filing of the application
through two years after filing. Based on
this analysis, FINRA estimated that 26
(or 51 percent) of the 51 individuals
associated with an applications during
the 2013–2016 period had a total of 41
disclosure events during the interstitial
period after the filing of their
application.58
As stated above, although the
Commission recognizes the potential
burden imposed by requiring the
supervision plan to become effective at
an earlier stage of this process, it
believes that the benefits of added
oversight of disqualified individuals
subject to the pending application
process justifies the earlier timeframe.
Accordingly, while the proposed rule
change may negatively impact the
ability of certain individuals to retain or
56 See Lebenta Letter. This commenter also
recommended FINRA streamline the statutory
disqualification review process to produce faster
results, noting that imposing heightened
supervisory procedures would be unduly costly and
burdensome if the statutorily disqualified
associated person’s proposed association with a
member broker-dealer is denied. See Lebenta Letter.
The Commission must consider the proposed rule
change that was filed and FINRA’s process for
reviewing applications for statutorily disqualified
associated persons to associate with a member
broker-dealer is beyond the scope of this filing.
57 See FINRA Regulatory Notice 18–23 and Notice
at 20750.
58 See Notice at 20757. FINRA notes that these
results likely underrepresent the overall risk of
customer harm, because the disclosure events in
this analysis included only final criminal matters
and specified risk events. See Notice at note 84.
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81545
find employment, it is a reasonable
approach for seeking to achieve greater
oversight by sponsoring broker-dealers
of the activities of statutorily
disqualified individuals during the
pendency of an application. The
Commission believes that applying
heightened supervision specifically
tailored in response to the misconduct
giving rise to the statutory
disqualification at an earlier stage in the
process will facilitate a broker-dealer’s
supervision of statutorily disqualified
individuals and better protect its
customers from future harm.
Rule 8312 (FINRA BrokerCheck
Disclosure)
The proposed rule change adding
disclosure in BrokerCheck of member
broker-dealers that are subject to the
Taping Rule would help inform more
investors when certain broker-dealers
are subject to certain heightened
procedures.59 One commenter stressed
that this disclosure may not be
sufficient to ensure investors
understand what it means to be
designated a ‘‘taping firm’’ and
suggested that FINRA amend the
proposed rule change to require the
BrokerCheck profiles of individual
registered representatives to denote
when they are associated with taping
firms. FINRA did not accept this
comment because it would be a
substantive amendment to what is
otherwise a proposed technical
change.60 FINRA also expressed
concern that the commenter’s
suggestion to include a disclosure on
the BrokerCheck profile of individuals
would capture registered representatives
of a taping firm with clean disciplinary
histories.61 The commenter also
recommended that any disclosure of a
firm as a taping firm on BrokerCheck
should include ‘‘clear and complete
information, comprehensible to
investors, explaining what it means to
be such a firm.’’ 62 FINRA agreed with
the view expressed that the
BrokerCheck disclosure should include
a clear explanation of what it means to
be subject to the Taping Rule to help
investors understand why the taping
firm is subject to heightened
procedures.63 FINRA did not make a
corresponding amendment to the rule
but the Commission understands that
FINRA has committed to including a
59 Currently, investors can only learn about a
broker-dealer’s status as a Taping Firm in response
to telephonic inquiries via the BrokerCheck toll-free
telephone listing. See FINRA Rule 8312(b).
60 December 1, 2020 Teleconference.
61 Id.
62 See Better Markets Letter.
63 See Notice at 20765.
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clear explanation on BrokerCheck about
what being subject to the Taping Rule
means.64
The Commission believes that this
proposed rule change would improve
the ease of obtaining this information
for investors through a preexisting
database with which the public is
already familiar. Furthermore, the
Commission believes that the proposed
rule change would incentivize investors
to research more carefully the
background of a registered
representative associated with a brokerdealer that is designated as a taping
firm, including those registered
representatives associated with the firm
who are not subject to heightened
supervision.
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Rule 1000 Series (Member Application
and Associated Person Registration)
The proposed rule change, requiring a
member broker-dealer to seek a
materiality consultation when a natural
person seeking to become an owner,
control person, principal, or registered
person has a significant history of
misconduct, would give FINRA an
opportunity to assess whether the
proposed association is material and
warrants closer regulatory scrutiny.
Similarly, in situations where a
proposed association of a natural person
with a significant history of misconduct
would require the broker-dealer to
submit a CMA, FINRA would be able to:
(i) Assess whether the broker-dealer
would continue to meet all of the
membership standards in FINRA Rule
1014 if the proposed association were
approved, and (ii) prevent the proposed
association if the broker-dealer does not
demonstrate that it can continue to meet
those standards. This proposed rule
change will further promote investor
protection by applying additional
safeguards and disclosure obligations
for a broker-dealer’s continuing
membership with FINRA and for
changes to a current member brokerdealer’s ownership, control, or business
operations. The heightened scrutiny by
FINRA of registered representatives,
registered principals, owners, and
control persons who meet the proposed
definitions and criteria would be
beneficial in promoting investor
protection by disincentivizing brokerdealers from engaging in higher-risk
64 In a teleconference between Michael Garawski,
Associate General Counsel, Office of General
Counsel, FINRA, and Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, on
October 5, 2020, FINRA confirmed with the
Division of Trading and Markets that between now
and the effective date of the proposed rule change
it has committed to including a clear explanation
on BrokerCheck about what being subject to the
Taping Rule means.
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activity that could lead to additional
regulatory restrictions.65 For example,
one commenter stated that this
proposed rule would create obstacles for
broker-dealers seeking to hire and
onboard associated persons with a
significant history of misconduct,66
which may incentivize broker-dealers to
reexamine their hiring practices and
certain associated persons to change
their behavior to avoid future
misconduct.67
Two commenters raised several
concerns about, and suggested revisions
to, the proposed rule changes to the
Rule 1000 Series (Member Application
and Associated Person Registration).68
One of these commenters questioned
whether adding one person should
constitute a material change in business
operations. Specifically, the commenter
disagreed that adding a new owner or
control person is sufficient to make a
material impact in business operations
unless that person is involved in sales.
Accordingly, the commenter
recommended revising proposed IM–
1011–3 to exclude from the IM–1011–1
safe harbor only broker-dealers
increasing their business operations by
adding associated persons involved in
sales.69 FINRA declined to amend the
proposed rule change as suggested
because adding a natural person as an
owner, control person, principal, or
registered person who has, in the prior
five years, one or more final criminal
65 According to FINRA, the cost of this proposed
rule change would fall on the broker-dealers that
seek to add owners, control persons, principals, or
registered persons who meet the proposed criteria.
These broker-dealers would be directly impacted
through the requirements to seek a materiality
consultation with FINRA and, potentially, to file a
CMA. While there is no FINRA fee for seeking a
materiality consultation, broker-dealers may incur
internal costs or costs associated with engaging
external experts in conjunction with filing a CMA.
In addition, the proposed rule change could result
in delays to a broker-dealer’s ability to add owners,
control persons, principals or registered persons
who meet the proposed criteria, during the time the
mandatory materiality consultation and any
required CMA is being processed. These anticipated
costs may deter some broker-dealers from hiring
individuals meeting the proposed criteria, who as
a result may find it difficult to remain in the
industry. See Notice at 20758.
66 See Better Markets Letter (stating that requiring
materiality consultations before hiring is an
important regulatory innovation); see also Notice at
20766.
67 The proposed rule change would not prevent
a firm from hiring an associated person with a
history of ‘‘final criminal matters’’ or ‘‘specified risk
events.’’ Instead, the proposed rule change would
establish a system of investor protections tailored
to the facts and circumstances for firms that do seek
to hire such associated persons.
68 See letter from Andrew R. Harvin, Partner,
Doyle, Restrepo, Harvin & Robbins, LLP, to Jill M.
Peterson, Assistant Secretary, Commission, dated
April 28, 2020 (‘‘Harvin Letter’’); see also Lebenta
Letter.
69 See Harvin Letter.
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matters or two or more specified risk
events could constitute a material
change in business operations given the
greater risk of harm to customers than
the risk stemming from other associated
persons. FINRA reiterated that IM–
1011–3 is designed to prevent brokerdealers from relying on the IM–1011–1
safe harbor to avoid a materiality
consultation—and any CMA that is
subsequently required—when it seeks to
add such persons.70
The Commission agrees with FINRA’s
assessment of what could constitute a
material change in business operations.
Specifically, the Commission believes
that natural persons with a certain
history of misconduct holding authority
to control a firm’s business operations
may increase the risk of investor harm.
Accordingly, limiting the interpretation
of materiality to persons involved in
sales as suggested by the commenter
could weaken the effectiveness of the
proposed rule change to protect
investors and incentivize improved
behavior. The Commission also notes
that the materiality consultation process
required by proposed Rule 1017(a)(7)
would be similar to FINRA’s existing
materiality consultation process and
would provide the member brokerdealer an opportunity to be heard on
whether the contemplated change is
material. Specifically, under proposed
Rule 1017(a)(7), a member broker-dealer
would submit a written request seeking
a materiality consultation and
addressing the issues that are central to
the materiality consultation; as part of
the materiality consultation, Member
Regulation must consider the written
request and other information or
documents provided by the member,
including whether the proposed
association would materially impact the
broker-dealer’s business operations. If
Member Regulation determines that a
CMA is required, the CMA would be
governed by the existing process set
forth in FINRA Rule 1017 and the Rule
1010 Series, including its appeal rights.
The Commission agrees with FINRA’s
assessment that these procedures would
be similar to FINRA’s existing
materiality consultation process and
would provide the member brokerdealer an opportunity to be heard on
whether the contemplated change is
material.71
The other commenter, critical of the
proposed changes to the Rule 1000
Series, believes that the proposed rule
changes are overbroad and that
inclusion of settled matters as a
70 See
FINRA July 2 Letter.
71 Id.
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criterion is ‘‘indefensible.’’ 72 FINRA
considered this comment but did not
exclude settled matters from the list of
determining factors. Instead, FINRA
chose not to include certain settled
matters in the proposed rule changes to
the Rule 1000 Series in order to exclude
individuals who are less likely to
subsequently pose risk of harm to
customers.73 Specifically, in order to
focus its analysis on outcomes that are
more likely associated with material
customer harm, FINRA studied
complaints that led to an award against
a broker or settled above a de minimis
threshold ($15,000), which is the
current CRD settlement threshold for
reporting customer complaints on
Uniform Registration Forms. FINRA
found that a proposal based on events
disclosed on the Uniform Registration
Forms, which are generally available to
firms and FINRA, was important to
avoid confusion and provide
transparency about the events that will
trigger the need for a materiality
consultation.74
The Commission agrees that the
proposed rule changes to the Rule 1000
Series are tailored sufficiently to
achieving the goal of protecting
investors from the risks associated with
associated persons who have a
significant history of misconduct.
Specifically, the Commission agrees that
excluding some settled matters from
these thresholds is appropriate. For
instance, recently settled matters are
likely more indicative of an associated
person’s future misconduct than matters
occurring over five years ago (absent any
intervening disciplinary or other
regulatory events); and individuals with
a history of misconduct who have little
or no control over a broker-dealer’s
activities may pose less threat to the
broker-dealer’s customers than
individuals who can exercise some
discretion when performing their jobs.
Accordingly, settlements beyond the
five-year lookback period and
settlements by persons other than those
seeking to be an owner, control person,
72 See Lebenta Letter (stating that the inclusion of
settlements is indefensible by FINRA because
respondents may choose to settle for any number
of reasons that do not reflect the respondent’s own
liability). When Member Regulation evaluates
compliance with the Rule 1000 Series, it takes into
consideration, among other things, whether persons
associated with an applicant are the subject of
disciplinary actions taken against them by industry
authorities, criminal actions, civil actions,
arbitrations, customer complaints, remedial actions,
or other industry-related matters that could pose a
threat to public investors. Some of these matters are
considered whether they are adjudicated, settled or
pending. See Notice at 20752.
73 See FINRA October 7 Letter.
74 See FINRA Study at 9; see also Notice at 20761
and 20767.
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Jkt 253001
principal, or registered person may have
less relevance in achieving the goal of
protecting investors from the risks
associated with associated persons who
have a significant history of
misconduct.75
This commenter also argued that
FINRA’s proposed definition of a
‘‘specified risk event’’—a key triggering
factor for the proposed enhanced
membership application proceedings—
is overbroad and would lead to
unnecessary costs, burdens and
disruptions for broker-dealer
members.76 As proposed, the definition
would include any ‘‘final investmentrelated, consumer initiated arbitration’’
that results in an award or a settlement
‘‘at or above $15,000.’’ The commenter
believes the use of arbitration awards
and settlements with customers at such
a ‘‘low’’ dollar threshold is overinclusive and would not appropriately
describe a ‘‘risk event’’ that should
require a CMA or the proposed
mandatory materiality consultation.77
FINRA disagrees with the
commenter’s assessment that the
proposed definition of ‘‘specified risk
event’’ attempts to replace the analysis
conducted in a CMA with a bright-line
rule that any customer arbitration at or
above the $15,000 threshold is defined
as creating a risk to investors.78 Under
proposed Rule 1017(a)(7), only
arbitration awards or settlements
meeting the specific parameters detailed
in Rule 1017(a)(7) and IM–1011–3
would be considered for determining
when a materiality consultation would
be required.79 Moreover, a single award
or settlement would not necessarily
75 Id.
76 See
Lebenta Letter.
This commenter also argued that FINRA’s
inclusion of customer-initiated arbitration
settlements for $15,000 or more in the statistics it
used to measure the recent rate of disciplinary
events was overly broad and thus does not support
the premise of the proposed rule change that there
is a pattern of increased risk to customers.
Similarly, the commenter believes that relying on
past violative conduct to predict future wrongdoing
undermines the principle of due process and is not
supported by FINRA’s data. But see Better Markets
Letter (opining that the proposed rule change would
reflect an improvement over the status quo but is
still insufficient, and that FINRA should do more
to reduce the number of brokers with a significant
history of misconduct and the prevalence of
recidivism (e.g., banning registered representatives
with two criminal convictions or three ‘‘specified
risk events’’ at a $5,000 level (instead of the
proposed $15,000 level) and immediately and
permanently expelling a broker-dealer where more
than 20% of its registered representatives have
three or more ‘‘specified risk events’’).
78 See FINRA October 7 Letter (citing the Lebenta
Letter).
79 See FINRA October 7 Letter (outlining the
proposed parameters including the lookback period,
the number of disclosure events required, and the
types of roles sought).
77 Id.
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
81547
require a materiality consultation. In
fact, even if a person meets the Rule
1017(a)(7) standard, it would not
necessarily mean a CMA is required or,
if it is, that the broker-dealer could not
satisfy FINRA’s membership
standards.80 FINRA also stated that the
dollar thresholds as proposed are
appropriate given that settlements at
that level are more likely to be
associated with material customer
harm 81 and they are the same
thresholds as those used for determining
appropriate disclosure events in
FINRA’s Uniform Registration Forms.82
FINRA has noted that using different
thresholds may result in less
transparency to the public, registered
persons, and broker-dealers.83
The Commission believes FINRA
made a reasonable argument for
including settlements of at least $15,000
in its study 84 and that its proposed
definition of ‘‘specified risk event’’
furthers the goal of protecting investors
from high risk associated persons. In
addition, the Commission believes that
the proposed criteria and definitions of
‘‘final criminal matter’’ and ‘‘specified
risk event’’ would provide transparency
regarding how the proposed rules would
be applied, as the underlying events are
based on disclosure events required to
be reported on the Uniform Registration
Forms. Accordingly, broker-dealers
would be able to identify the specific set
of disclosure events that would count
towards the proposed criteria and, using
available data, determine independently
whether a proposed association with an
individual would require a materiality
consultation.
One commenter also challenged
FINRA’s statistical justification for the
proposed rule change.85 In particular,
the commenter questioned whether the
studies upon which FINRA relied
adequately demonstrate that past
disciplinary and other regulatory events
associated with a member broker-dealer
or individual can be predictive of
similar future events, such as repeated
disciplinary actions, arbitrations, and
80 Id.
81 Id.
82 See
supra note 33.
FINRA October 7 Letter.
84 See Hammad Qureshi & Jonathan Sokobin, Do
Investors Have Valuable Information About
Brokers? (FINRA Office of the Chief Economist
Working Paper, Aug. 2015) (‘‘FINRA Study’’). The
Commission believes the FINRA Study dealt with
a common issue in empirical work, the tradeoff
between an increase in statistical power that results
from a larger sample size and the inclusion of data
points that may not be of the most interest, and
made a reasonable empirical design decision.
Accordingly, contrary to the commenter’s concern,
the Commission believes that FINRA had a sound
basis upon which to base the proposed rule change.
85 See Lebenta Letter.
83 See
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81548
Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
complaints.86 The commenter
suggested, among other things, that
FINRA’s reports used data (i.e., violative
events) to measure the likelihood of
recidivist behavior that would not be
the subject of a disciplinary action
under the proposed rule change.
Accordingly, the commenter did not
believe FINRA’s statistical evidence
justified the proposed rule change,
including the additional costs and loss
of rights that would result from
approving the proposed rule change.87
In response, FINRA reiterated its
concern about the potential risks posed
by broker-dealers that persistently
employ associated persons who engage
in misconduct, as well as its findings
that past disciplinary and other
regulatory events, such as repeated
disciplinary actions, arbitrations and
complaints associated with a member
broker-dealer or individual can be
predictive of similar future events.88
Moreover, FINRA believes the estimated
number of disclosure events associated
with persons who appeal disciplinary
decisions reflects a specific potential
risk to investors.89 FINRA asserted that
the proposed rule change would adopt
processes directly tailored to target this
specific misconduct and minimize
further investor harm.90
The Commission believes that the
commenter’s challenge to FINRA’s
statistical justification for the proposed
rule change obfuscates the point of the
FINRA Study. In its study, FINRA uses
a model that predicts investor harm
based on information publicly released
in BrokerCheck and non-public Central
Registration Depository data and found
that 20% of the 181,133 brokers in their
sample with the highest ex ante
predicted probability of investor harm
are associated with more than 55% of
the investor harm events and more than
55% of total dollar harm. Accordingly,
FINRA concluded that the risk of future
harm is predictable.91 The Commission
believes that the methodology used in
86 Id. (stating that in the FINRA Study, the rate
of new disclosure events by associated persons
during the pendency of their appeals is less than
30%).
87 Id. (arguing that the FINRA Study continued its
analysis through the year-end after the year in
which the appeal reached a decision thus skewing
its results).
88 See FINRA October 7 Letter; see also Notice at
20745–46, 20755 and note 5.
89 See FINRA October 7 Letter; see also Notice at
20748.
90 See FINRA October 7 Letter; see also Notice at
20750, 20754.
91 See FINRA Study at 17. Additional academic
research suggests that a higher rate of new
disciplinary and other disclosure events is highly
correlated with past disciplinary and other
disclosure events, as far back as nine years prior.
See Notice at note 5.
VerDate Sep<11>2014
17:32 Dec 15, 2020
Jkt 253001
the FINRA Study had a sound statistical
basis. The Commission understands the
commenter’s point that the FINRA
Study measured the likelihood of
recidivist behavior using data (i.e.,
violative acts) that would not be
captured under the proposed rule
change; however, the Commission
believes FINRA shows its result is not
sensitive to a particular threshold value.
In addition, while the Commission
understands the commenter’s point that
FINRA continues the analysis through
the year-end after the year in which the
appeal reached a decision, the FINRA
Study states that the complaint system
tracks the date the complaint was filed
but not the date of the actual occurrence
of investor harm. The study makes a
conservative assumption that the harm
occurred the year before the filing so
that when running a regression to
predict an occurrence of harm, FINRA
would not be predicting an event with
data that was only available
concurrently with or subsequent to the
event.92 Accordingly, the Commission
believes that the methodology FINRA
used to conduct its study had a sound
statistical basis and that FINRA had a
sound basis upon which to base the
proposed rule change.
In sum, for the above reasons, the
Commission believes that the proposed
rule change would strengthen the tools
available to FINRA in responding to
associated persons who have a
significant history of misconduct. In
addition, the Commission believes that
the proposed rule change has
sufficiently tailored the proposed
processes to target the specific
misconduct it seeks to address, which
would minimize the potential costs to
broker-dealers. Moreover, the proposed
rules would establish processes by
which an associated person or brokerdealer would have adequate
opportunities to challenge the imposed
conditions and restrictions and seek
further review.
Accordingly, the Commission finds
the proposed rule change would result
in greater investor protections by
helping address the concerns raised by
associated persons with a significant
history of misconduct and the brokerdealers that employ them while
narrowly tailoring the review process to
mitigate the potential burdens on those
individuals and broker-dealers.
IV. Conclusion
It Is Therefore Ordered pursuant to
Section 19(b)(2) of the Exchange Act 93
that the proposed rule change (SR–
92 See
93 15
PO 00000
FINRA Study at 9–10.
U.S.C. 78s(b)(2).
Frm 00107
Fmt 4703
Sfmt 4703
FINRA–2020–011), as modified by
Amendment No. 1, be, and hereby is,
approved.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020–27626 Filed 12–15–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90627; File No. SR–ICEEU–
2020–013]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Approving
Proposed Rule Change Relating to the
ICE Clear Europe Investment
Management Procedures
December 10, 2020.
I. Introduction
On October 23, 2020, ICE Clear
Europe Limited (‘‘ICE Clear Europe’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend its Investment
Management Procedures (the
‘‘Procedures’’) to make certain
clarifications and updates with respect
to permissible investments.3 The
proposed rule change was published for
comment in the Federal Register on
November 5, 2020.4 The Commission
did not receive comments regarding the
proposed rule change. For the reasons
discussed below, the Commission is
approving the proposed rule change.
II. Description of the Proposed Rule
Change
The proposed rule change would
amend the Procedures to clarify the
requirements for investment of customer
funds by FCM/BD Clearing Members 5
resulting from the expansion of
permitted investments to include
qualifying Euro-denominated non-U.S.
sovereign debt pursuant to an exemptive
order issued by the U.S. Commodity
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Self-Regulatory Organizations; ICE Clear Europe
Limited; Notice of Filing of Proposed Rule Change
Relating to the ICE Clear Europe Investment
Management Procedures, Exchange Act Release No.
90290 (October 30, 2020), 85 FR 70697 (November
5, 2020) (SR–ICEEU–2020–013) (‘‘Notice’’).
4 See Notice supra note 3.
5 Capitalized terms used but not defined herein
have the meanings specified in the Procedures or
the ICE Clear Europe Clearing Rules (the ‘‘Rules’’),
as applicable.
2 17
E:\FR\FM\16DEN1.SGM
16DEN1
]]>Agencies
[Federal Register Volume 85, Number 242 (Wednesday, December 16, 2020)]
[Notices]
[Pages 81540-81548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27626]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90635; File No. SR-FINRA-2020-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Address Brokers With a Significant History of
Misconduct
December 10, 2020.
I. Introduction
On April 3, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and 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 rules to help
further address the issue of associated persons with a significant
history of misconduct and the broker-dealers that employ them.
---------------------------------------------------------------------------
\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
[[Page 81541]]
Register on April 14, 2020.\3\ On May 27, 2020, FINRA consented to an
extension of 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 July 13, 2020.\4\ On July 2, 2020, FINRA responded to
the comment letters received in response to the Notice and filed an
amendment to the proposed rule change (``Amendment No. 1'').\5\ On July
13, 2020, the Commission filed an Order Instituting Proceedings to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\6\ On October 5, 2020, FINRA consented to
an extension of 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 December 10, 2020.\7\ On October 7, FINRA
responded to the comment letter received in response to the Order
Instituting Proceedings.\8\ This order approves the proposed rule
change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\3\ See Exchange Act Release No. 88600 (Apr. 8, 2020), 85 FR
20745 (Apr. 14, 2020) (File No. SR-FINRA-2020-011) (``Notice'').
\4\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, dated May 27, 2020.
\5\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated July 2, 2020 (``FINRA July 2 Letter''). The FINRA
July 2 Letter is available at the Commission's website at https://www.sec.gov/comments/sr-finra-2020-011/srfinra2020011-7399761-219028.pdf. Amendment No. 1 is available at https://www.finra.org/sites/default/files/2020-07/sr-finra-2020-011-amendment-no-1.pdf.
\6\ See Exchange Act Release No. 89305 (July 13, 2020), 85 FR
43627 (July 17, 2020) (File No. SR-FINRA-2020-011) (``Order
Instituting Proceedings'').
\7\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, Commission, dated October 5, 2020.
\8\ See letter from Michael Garawski, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated October 7, 2020 (``FINRA October 7 Letter''). The
FINRA October 7 Letter is available at the Commission's website at
https://www.sec.gov/comments/sr-finra-2020-011/srfinra2020011-7884211-224193.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
Background
FINRA's proposed rule change would: (1) Amend the FINRA Rule 9200
Series (Disciplinary Proceedings) and the 9300 Series (Review of
Disciplinary Proceedings by National Adjudicatory Council and FINRA
Board; Application for SEC Review) to allow a hearing officer to impose
conditions or restrictions on the activities of a respondent member
broker-dealer or respondent associated person (each a ``Respondent'' or
collectively ``Respondents''), and require the member broker-dealer
employing a respondent associated person to adopt heightened
supervisory procedures for such associated persons, when a disciplinary
matter is appealed to the National Adjudicatory Council (``NAC'') or
called for NAC review; (2) amend the FINRA Rule 9520 Series
(Eligibility Proceedings) to require member broker-dealers to adopt
heightened supervisory procedures for statutorily disqualified
associated persons during the period a statutory disqualification
eligibility request is under review by FINRA; (3) amend FINRA Rule 8312
(FINRA BrokerCheck Disclosure) to require disclosure through FINRA
BrokerCheck of the status of a member broker-dealer as a ``taping
firm'' under FINRA Rule 3170 (Tape Recording of Registered Persons by
Certain Firms); and (4) amend the FINRA Rule 1000 Series (Member
Application and Associated Person Registration) to require a member
broker-dealer to submit a written request to FINRA's Department of
Member Regulation (``Member Regulation''), through the Membership
Application Group (``MAP Group''), seeking a materiality consultation
\9\ and approval of a continuing membership application, if required,
when a natural person seeking to become an owner, control person,
principal, or registered person of the member broker-dealer has, in the
prior five years, one or more ``final criminal matters'' or two or more
``specified risk events.'' \10\
---------------------------------------------------------------------------
\9\ In general, a member broker-dealer initiates a materiality
consultation with Member Regulation by submitting a letter,
requesting its determination on whether a proposed change is
material such that it requires the submission of a Continuing
Membership Application (``CMA''). If Member Regulation determines
that a proposed change is material, it will instruct the broker-
dealer to file a CMA if it intends to proceed with the proposed
change. See Regulatory Notice 18-23 (Proposal Regarding the Rules
Governing the New and Continuing Membership Application Process)
(July 2018).
\10\ See Notice at 20745.
---------------------------------------------------------------------------
Proposed Rule Change to the FINRA Rule 9200 Series (Disciplinary
Proceedings) and 9300 Series (Review of Disciplinary Proceeding by
National Adjudicatory Council and FINRA Board; Application for SEC
Review)
FINRA proposed amendments to the Rule 9200 Series and Rule 9300
Series to address investor protection concerns during the pendency of
an appeal from, or a NAC review of, a hearing panel or hearing officer
disciplinary decision, by authorizing hearing officers to impose
conditions or restrictions on disciplined Respondents and requiring
broker-dealers to adopt heightened supervision plans concerning their
associated persons who are disciplined respondents.\11\ The proposed
rule change would also establish a process for an expedited review by
the Review Subcommittee of the NAC of any conditions or restrictions
imposed.\12\ Currently, when a hearing panel or hearing officer
decision is on appeal or review before the NAC, any sanctions imposed
by the decision, including bars and expulsions, are automatically
stayed and not enforced against the Respondent during the pendency of
the appeal or review proceeding.\13\ Thereafter, the filing of an
application for Commission review stays the effectiveness of any
sanction, other than a bar or an expulsion, imposed in a decision
constituting a final FINRA disciplinary action.\14\
---------------------------------------------------------------------------
\11\ See Notice at 20746.
\12\ Id.
\13\ See FINRA Rules 9311(b) and 9312(b).
\14\ See FINRA Rule 9370(a).
---------------------------------------------------------------------------
Proposed Rule 9285(a) would provide that the hearing officer who
participated in an underlying disciplinary proceeding may impose
conditions or restrictions on the activities of the Respondent during
the appeal of any adverse finding. Specifically, if the hearing officer
found that a Respondent violated a statute or rule provision, which is
subsequently appealed to the NAC or called for NAC review, the hearing
officer may impose conditions or restrictions reasonably necessary for
the purpose of preventing customer harm.\15\ The scope of these
conditions or
[[Page 81542]]
restrictions would depend on what the hearing officer determines to be
reasonably necessary for the purpose of preventing customer harm.
Further, the conditions and restrictions would target the misconduct
demonstrated in the disciplinary proceeding and be tailored to the
specific risks posed by the Respondents during the appeal period.\16\
Accordingly, the conditions and restrictions are not intended to be as
restrictive as the underlying sanctions and would likely not be
economically equivalent to imposing the sanctions during the
appeal.\17\ In addition, Respondents would be able to seek expedited
reviews of orders imposing conditions or restrictions.\18\
---------------------------------------------------------------------------
\15\ See Notice at 20747. Under the proposed rule, the hearing
officer could not impose these conditions or restrictions sua sponte
but rather may only act on a motion by FINRA's Department of
Enforcement (``Enforcement''). Proposed Rule 9285(a)(1) would allow
Enforcement, within ten days after service of a notice of appeal
from, or the notice of a call for NAC review of, a disciplinary
decision of a hearing officer or hearing panel, to file a motion for
the imposition of conditions or restrictions on the activities of a
Respondent that are reasonably necessary for the purpose of
preventing customer harm. The motion must specify the conditions and
restrictions that are sought to be imposed and explain why they are
necessary. A Respondent would have the right to file an opposition
or other response to the motion within ten days after service of the
motion, unless otherwise ordered by the hearing officer, and must
explain why no conditions or restrictions should be imposed or
specify alternative conditions and restrictions that would prevent
customer harm. The hearing officer would then decide Enforcement's
motion for conditions or restrictions based on the moving and
opposition papers. See Proposed Rule 9285(a)(2)-(5) and (c); see
also Notice at 20747.
\16\ See Notice at 20747.
\17\ See Notice at 20756.
\18\ Id.
---------------------------------------------------------------------------
Currently, any sanctions imposed by the hearing panel or hearing
officer decision, including bars and expulsions, are automatically
stayed and not enforced against the Respondent during the pendency of
the NAC appeal or review proceeding.\19\ Under the proposed rule
change, the conditions or restrictions imposed by a hearing officer
would remain in place until FINRA's final decision takes effect and all
appeals are exhausted.\20\ In addition, proposed FINRA Rule 9285(e)
would require a member broker-dealer to adopt a written plan of
heightened supervision for an associated person who is found to have
violated a statute or rule provision. The plan of heightened
supervision would be required to comply with FINRA Rule 3110, be
reasonably designed and tailored to include specific supervisory
policies and procedures that address the violations found by the
hearing panel or hearing officer, and be reasonably designed to prevent
or detect a reoccurrence of these violations.\21\
---------------------------------------------------------------------------
\19\ See FINRA Rules 9311(b) and 9312(b); see also Notice at
20747. See also FINRA Rule 9370(a), which states that the filing of
an application for review by the SEC of the NAC's decision shall
stay the effectiveness of any sanction, other than a bar or
expulsion imposed in a final disciplinary action by FINRA.
\20\ See Notice at 20748. The proposed rule change would also
amend Rule 9556 to grant FINRA the authority to bring an expedited
proceeding against a Respondent that fails to comply with conditions
and restrictions imposed pursuant to proposed Rule 9285 that could
result in a suspension or cancellation of membership or suspension
or bar from associating with any FINRA member. See Notice at 20749.
\21\ See Notice at 20748.
---------------------------------------------------------------------------
Proposed Rule Change to the FINRA Rule 9520 Series (Eligibility
Proceedings)
A broker-dealer is not currently required to place a statutorily
disqualified individual on heightened supervision while FINRA reviews
the member broker-dealer's application to continue associating with the
individual (although FINRA generally will not approve an application
without an acceptable plan of supervision).\22\ Under the proposed rule
change, FINRA would amend FINRA Rule 9522 to require a member broker-
dealer that files an application to continue associating with a
statutorily disqualified associated person under FINRA Rule 9522(a)(3)
or 9522(b)(1)(B) to include an interim plan of heightened supervision
that would be in effect throughout the entirety of the application
review process.\23\ The proposed rule changes would delineate the
circumstances under which a statutorily disqualified individual may
remain associated with a FINRA member while FINRA is reviewing the
application.\24\
---------------------------------------------------------------------------
\22\ See Notice at 20750.
\23\ See Notice at 20749.
\24\ Id.
---------------------------------------------------------------------------
Proposed Rule Change to FINRA Rule 8312 (FINRA BrokerCheck Disclosure)
FINRA proposed an amendment to FINRA Rule 8312 governing the
information FINRA releases to the public through its BrokerCheck
system. Currently, FINRA Rule 8312(b) requires that FINRA release
information about, among other things, whether a particular member
broker-dealer is subject to the provisions of FINRA Rule 3170 (``Taping
Rule''), but only in response to telephonic inquiries via the
BrokerCheck toll-free telephone listing.\25\ The Taping Rule is
designed to ensure that a member broker-dealer with a significant
number of registered persons that previously were employed by
``disciplined firms'' \26\ has specified supervisory procedures in
place to prevent fraudulent and improper sales practices or customer
harm, including, among other things, procedures for recording all
telephone conversations between the taping firm's registered persons
and both existing and potential customers.\27\ Proposed Rule 8312(b)
would not eliminate the toll-free telephone listing but rather would
also require FINRA to release through BrokerCheck information as to
whether a particular member broker-dealer is subject to the Taping
Rule.\28\ The proposed rule change would remove the requirement in
FINRA Rule 8312(b) that FINRA inform the public that a member broker-
dealer is subject to the Taping Rule only in response to telephonic
inquiry via the BrokerCheck toll-free telephone listing.\29\ FINRA
believes that broadening the disclosure through BrokerCheck of the
status of a member broker-dealer as a taping firm would help inform
more investors of the heightened procedures required of the firm, which
may incentivize investors to research more carefully the background of
a registered representative associated with the taping firm.\30\
---------------------------------------------------------------------------
\25\ See FINRA Rule 8312(b). Under the Taping Rule, a broker-
dealer with a specified percentage of registered persons who have
been associated with disciplined firms in a registered capacity in
the last three years is designated as a ``taping firm.'' See FINRA
Rule 3170.
\26\ See FINRA Rule 3170(a)(2) (defining the term ``disciplined
firm'').
\27\ See Notice at 20751.
\28\ FINRA Rule 8312 (FINRA BrokerCheck Disclosure) governs the
information FINRA releases to the public through its BrokerCheck
system (the BrokerCheck website address is brokercheck.finra.org).
BrokerCheck helps investors make informed choices about the brokers
and member firms with which they conduct business by providing
registration and disciplinary history to investors. FINRA requires
member firms to inform their customers of the availability of
BrokerCheck. Specifically, FINRA Rule 2210(d)(8) requires that each
of a member's websites include a readily apparent reference and
hyperlink to BrokerCheck on the initial web page that the member
intends to be viewed by retail investors and any other web page that
includes a professional profile of one or more registered persons
who conduct business with retail investors; and FINRA Rule 2267
requires members to provide to customers the FINRA BrokerCheck
Hotline Number and a statement as to the availability to the
customer of an investor brochure that includes information
describing BrokerCheck. See Notice at 20751.
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
Proposed Rule Change to FINRA Rule 1000 Series (Member Application and
Associated Person Registration)
The FINRA Rule 1000 Series governs, among other things, FINRA's
membership proceedings. Currently, a member broker-dealer is permitted
(subject to exceptions) to expand its business under the safe harbor
set forth in FINRA interpretive material IM-1011-1 without the filing
and prior approval of a CMA.\31\ For example, under the existing
parameters of this safe harbor, a broker-dealer could hire an
associated person even if he or she has a significant history of
misconduct.\32\ The proposed rule change would limit the application of
the safe harbor by imposing additional obligations on a member broker-
dealer when a natural person who has, in the prior five years, either
one or more ``final criminal matters'' or two or more ``specified risk
events'' seeks to become
[[Page 81543]]
an owner, control person, principal, or registered person of the
broker-dealer.\33\ Specifically, when a natural person seeking to
become an owner, control person, principal, or registered person of a
member broker-dealer has, in the prior five years, one or more ``final
criminal matters'' or two or more ``specified risk events,'' proposed
Rule 1017(a)(7) would require a member broker-dealer to either: (1)
File a CMA; or (2) submit a written request seeking a materiality
consultation for the contemplated activity with FINRA's MAP Group.\34\
If the broker-dealer seeks a materiality consultation, the MAP Group
would consider, among other things, whether the ``final criminal
matters'' or ``specified risk events'' are customer-related; whether
they represent discrete actions or are based on the same underlying
conduct; the anticipated activities of the person; the disciplinary
history, experience and background of the proposed supervisors, if
applicable; and the disciplinary history, supervisory practices,
standards, systems and internal controls of the member broker-dealer
and whether they are reasonably designed to achieve compliance with
applicable securities laws and regulations and FINRA rules.\35\ Where
FINRA determines that a contemplated organizational change is material,
FINRA would instruct the broker-dealer to file a CMA if it intends to
proceed with such change.
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\31\ See Notice at 20752.
\32\ Id.
\33\ Id. The proposed rule change would also adopt definitions
of ``final criminal matter'' and ``specified risk event'' to help
identify when a member broker-dealer must submit a materiality
consultation or continuing membership application when a natural
person seeks to become an owner, control person, principal, or
registered person of the firm and the person's history of misconduct
meets one or more of these definitions. Amendment No. 1 amended
proposed FINRA Rule 1011(h) to include in the definition of ``final
criminal matter'' a relevant criminal event that ``is or was''
required to be disclosed on a Uniform Registration Form, and to make
some grammar- and syntax-related modifications. The amendment
clarified that both ``final criminal matter'' and ``specified risk
event'' include disclosures that are required if the member broker-
dealer and natural person proceed with the contemplated change,
including disclosures that are required on Uniform Registration
Forms that have not yet been executed. For example, Sections 14A and
14B of Form U4 (defined below) require representatives of broker-
dealers to disclose, among other things, if they have ever been
convicted of or pled guilty or nolo contendere (``no contest'') in a
domestic, foreign or military court to (1) any felony, or (2) a
misdemeanor involving: investments or an investment-related business
or any fraud, false statements or omissions, wrongful taking of
property, bribery, perjury, forgery, counterfeiting, extortion, or a
conspiracy to commit any of these offenses. Proposed Rule 1011(r)
would define ``Uniform Registration Forms'' to mean the Uniform
Application for Broker-Dealer Registration (Form BD), the Uniform
Application for Securities Industry Registration or Transfer (Form
U4), the Uniform Termination Notice for Securities Industry
Registration (Form U5) and the Uniform Disciplinary Action Reporting
Form (Form U6), as such may be amended or any successor(s) thereto.
\34\ See Notice at 20752 and 20753. This requirement would not
apply when the member is required to file a statutory
disqualification application or written request for relief pursuant
to Rule 9522 for approval of the same contemplated association. Id.
at 20753 and note 51.
\35\ See Notice at 20753.
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Additionally, the proposed rule change would adopt a corresponding
change to IM-1011-1 (Business Expansions and Persons with Specified
Risk Events) to specify that the safe-harbor for business expansions in
IM-1011-1 would not be available to any broker-dealer seeking to add a
natural person who: (i) Has, in the prior five years, one or more
``final criminal matters'' or two or more ``specified risk events'' and
(ii) seeks to become an owner, control person, principal, or registered
person of the member.\36\ In those circumstances, proposed IM-1011-3
would provide that if the broker-dealer is not otherwise required to
file a CMA, it must comply with the requirements of proposed FINRA Rule
1017(a)(7).\37\ Proposed Rule 1017(a)(7) would establish that the safe-
harbor for business expansions in IM-1011-1 would not be available to a
member broker-dealer when a materiality consultation is required.\38\
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\36\ Id.
\37\ See Notice at 20753. Proposed Rule 1017(a)(7) would require
the broker-dealer to submit a written request seeking a materiality
consultation for the contemplated activity so that FINRA's MAP Group
can determine whether a CMA is required. In a teleconference between
Michael Garawski, Associate General Counsel, Office of General
Counsel, FINRA, Kosha Dalal, Vice President and Associate General
Counsel, Legal Policy, Office of General Counsel, FINRA, Lourdes
Gonzalez, Assistant Chief Counsel, Division of Trading and Markets,
Commission, Daniel Fisher, Branch Chief, Division of Trading and
Markets, Commission, Edward Schellhorn, Special Counsel, Division of
Trading and Markets, Commission, and Meredith MacVicar, Special
Counsel, Division of Trading and Markets, Commission, on December 3,
2020, FINRA staff stated that of the 388 materiality consultations
received in 2019, the average processing time was approximately 15
calendar days. FINRA completed the review of 336 CMAs that were
received in 2019 and the average processing time was approximately
97 calendar days.
\38\ See Notice at 20753.
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The proposed rule change would also make non-substantive changes to
the MAP rules by renumbering paragraphs and updating cross-references
to reflect the other proposed rule changes.
III. Discussion and Commission Findings
After careful review of the proposed rule change, as modified by
Amendment No. 1, the comment letters, and FINRA's responses to the
comments, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\39\ Specifically, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange
Act,\40\ 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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\39\ 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).
\40\ 15 U.S.C. 78o-3(b)(6).
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Rule 9200 Series (Disciplinary Proceedings) and 9300 Series (Review of
Disciplinary Proceeding by National Adjudicatory Council and FINRA
Board; Application for SEC Review)
The proposed rule change to authorize hearing officers to impose
conditions or restrictions on disciplined Respondents reasonably
necessary for the purpose of preventing customer harm, and to require
broker-dealers to adopt heightened supervision plans concerning
individual respondents, will help protect investors from associated
persons found to have violated a statute or rule provision, by
potentially preventing them from engaging in additional misconduct
during the appeal process. These proposed rule changes are designed to
help prevent fraudulent and manipulative acts and practices and address
concerns related to misconduct that may occur during the pendency of an
appeal from, or a NAC review of, a hearing panel or hearing officer
disciplinary decision.\41\ The Commission believes the ability to
impose conditions or restrictions along with the proposed requirement
to adopt a plan of heightened supervision will lead to greater
oversight of disciplined Respondents' activities during the appeal
period, thereby reducing the
[[Page 81544]]
potential risk of customer harm that may occur during this period.
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\41\ In a teleconference between Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA, Kosha Dalal, Vice
President and Associate General Counsel, Legal Policy, Office of
General Counsel, FINRA, Lourdes Gonzalez, Assistant Chief Counsel,
Division of Trading and Markets, Commission, Daniel Fisher, Branch
Chief, Division of Trading and Markets, Commission, Edward
Schellhorn, Special Counsel, Division of Trading and Markets,
Commission, and Meredith MacVicar, Special Counsel, Division of
Trading and Markets, Commission, on December 1, 2020 (``December 1,
2020 Teleconference''), FINRA stated that during 2013-2019 the NAC
issued decisions in 131 disciplinary matters. The NAC affirmed the
hearing panel or hearing officer findings 121 times (92%), modified
the findings 6 times (5%), and reversed or dismissed the findings 4
times (3%).
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Two commenters supported the proposed rule change.\42\ Two other
commenters, however, expressed concern that these proposed rule changes
to the Rule 9200 Series and 9300 Series do not adequately ensure due
process and one specifically recommended FINRA take additional steps to
``ensure due process, both in appearance and actual.'' \43\ In
response, FINRA detailed the procedural protections proposed Rule 9285
would establish. Specifically, prior to imposing any conditions or
restrictions the proposed rule change would: (i) Require Enforcement to
file a motion with a hearing officer, seeking the imposition of
conditions or restrictions that are reasonably necessary for the
purpose of preventing customer harm, specifying the conditions and
restrictions that are sought to be imposed, and explaining why they are
necessary; (ii) provide the Respondent an opportunity to file a written
opposition or other response to the motion; (iii) require the hearing
officer to issue a written order ruling upon the motion no later than
20 days after any opposition or response is filed; and (iv) afford a
Respondent the right to seek expedited review \44\ before the NAC's
Review Subcommittee of an order that imposes conditions or
restrictions, and an automatic stay when a Respondent requests such an
expedited review.\45\
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\42\ See letter from William A. Jacobson, Esq., Clinical
Professor of Law, Cornell Law School, and Director, Securities Law
Clinic, and Ayomikun Loye, Student, Cornell Law School, to Vanessa
Countryman, Secretary, Commission, dated May 5, 2020; letter from
Samuel B. Edwards, President, Public Investors Advocate Bar
Association, to Brent J. Fields, Secretary, Commission, dated May 5,
2020.
\43\ See letter from Professor Lisa Miller, Esq., dated April
30, 2020; see also letter from Aaron D. Lebenta, Parsons Behle &
Latimore, to Vanessa Countryman, Secretary, Commission, dated August
3, 2020 (``Lebenta Letter'') (concerned that the proposed rule
change does not establish an effective appeal process to help ensure
FINRA's disciplinary decision is correct, and that the sanctions are
warranted, before they are imposed).
\44\ Under proposed Rule 9285, an expedited review should take
no longer than 45 days from the date the hearing officer serves the
written order imposing conditions or restrictions on the Respondent.
Specifically, proposed Rule 9285(b)(1) states that the Respondent
may file a motion to modify or remove any or all of the conditions
or restrictions within ten (10) days after service of the order,
proposed Rule 9285(b)(3) would provide Enforcement up to five (5)
days from service of Respondent's motion to file an opposition or
other response to the motion, and proposed Rule 9285(b)(5) would
provide the Review Subcommittee up to thirty (30) days after any
opposition filed pursuant to Rule 9285(b)(3) to serve a written
order ruling upon a motion to modify or remove conditions or
restrictions in an expeditious manner.
\45\ See FINRA July 2 Letter and FINRA October 7 Letter; see
also Notice at 20746.
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As stated above, currently any sanctions imposed by the hearing
panel or hearing officer decision, including bars and expulsions, are
automatically stayed and not enforced against the respondent during the
pendency of the NAC appeal or review proceeding.\46\ One of the
commenters urging FINRA to ensure due process stated that the proposed
rule change should not ``be stripped away'' by changing the existing
stay and giving a hearing officer authority to impose conditions and
restrictions on the Respondent during the process of appealing a
hearing officer's decision. Accordingly, the commenter expressed
concern that the imposition of such conditions or restrictions could
ruin a broker-dealer's business before the expedited review process has
concluded, especially a smaller broker-dealer with fewer alternatives
to withstand extended impediments to one of its business lines.\47\
Another commenter,\48\ however, expressed support for the proposed rule
change and advocated for FINRA to go further by eliminating the
existing stay of decisions by the hearing officer or hearing panel in
disciplinary matters pursuant to Rule 9268 \49\ or Rule 9269,\50\ in
which the adjudicator finds that a Respondent violated a statute or
rule provision, during an appeal to the NAC by repealing FINRA Rule
9311.\51\
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\46\ See FINRA Rules 9311(b) and 9312(b).
\47\ See Lebenta Letter (stating that a hearing officer
restricting a broker-dealer from engaging in the same activity which
is the subject of the initial sanction during its appeal of that
sanction would essentially impose the original sanction while the
matter is on appeal).
\48\ See letter from Lev Bagramian, Senior Securities Policy
Advisor, Better Markets, Inc. to Vanessa A. Countryman, Secretary,
Commission, dated June 19, 2020 (``Better Markets Letter'').
\49\ FINRA Rule 9268(f) states that unless otherwise provided in
the majority decision constituting a final disciplinary action of
FINRA issued under Rule 9268(a), a sanction (other than a bar or an
expulsion) specified in the decision shall become effective on a
date to be determined by FINRA, and a bar or an expulsion specified
in a decision shall become effective immediately upon the decision
becoming the final disciplinary action of FINRA.
\50\ FINRA Rule 9269(d) states that unless otherwise provided in
the default decision constituting a final disciplinary action of
FINRA, the sanctions shall become effective on a date to be
determined by FINRA staff, except that a bar or expulsion shall
become effective immediately upon the default decision.
\51\ FINRA Rule 9311(b) states that an appeal to the NAC from a
decision issued pursuant to Rule 9268 or Rule 9269 shall operate as
a stay of that decision until the NAC issues a decision pursuant to
Rule 9349 (National Adjudicatory Council Formal Consideration;
Decision) or, in cases called for discretionary review by the FINRA
Board, until a decision is issued pursuant to Rule 9351
(Discretionary Review by FINRA Board). Any such appeal, however,
will not stay a decision, or that part of a decision, that imposes a
permanent cease and desist order.
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FINRA considered both suggestions and decided not to amend the
proposed rule change. Specifically, FINRA believes that enforcing the
hearing panel's disciplinary sanctions against the Respondents during
the pendency of the appeal or review proceedings could be too
restrictive in disciplinary matters with significant sanctions and
where the risk of harm may be specific to particular activities.\52\ On
the other hand, FINRA stated that the proposed rule change would
authorize a hearing officer to impose conditions and restrictions that
are tailored specifically to the risk posed by the Respondent during
the pendency of the appeals, and reasonably necessary for the purpose
of preventing customer harm that may occur during the pendency of the
appeal. Accordingly, FINRA determined that the proposed rule change
would strike a reasonable balance between protecting investors and
preventing undue burden on individuals and firms while their appeals
are pending.\53\
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\52\ See Notice at 20760.
\53\ See Notice at 20760.
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A system designed to protect investors and the public interest will
generally produce both costs and benefits. In this instance, FINRA's
proposed rule change should reduce the probability of investor losses
resulting from the violation of statutes or rules. At the same time, a
decision to impose conditions or restrictions may disrupt the business
opportunities of certain broker-dealers and individuals. In order to
assess the potential risk posed by brokers during the appeal period,
FINRA examined cases that were appealed to the NAC during the period of
2013-2016 and determined whether the brokers associated with an appeal
to the NAC had a new disclosure event--for this analysis, a ``final
criminal matter'' or a ``specified risk event,'' as defined above--at
any time from the filing of the appeal through the year-end after the
year in which the appeal reached a decision. Based on this analysis,
FINRA estimated that 21 of the 75 brokers who appealed to the NAC
during the 2013-2016 period were associated with a total of 28
disclosure events that occurred during the interstitial period after
the filing of their appeal to the NAC.\54\
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\54\ See Notice at 20756. FINRA notes that these estimates
likely underrepresent the overall risk of customer harm posed by
these brokers, because they are based on a specific set of events
and outcomes used for classifying brokers for the proposed
amendments to the MAP Rules. In addition, these brokers had other
disclosure events after their appeal was filed, and some of these
other events may also be associated with risk of customer harm. See
Notice at note 75.
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[[Page 81545]]
After considering these benefits and costs, the Commission believes
that the proposed procedural protections provide a reasonable process
to Respondents who may disagree with the particular set of conditions
or restrictions imposed by a hearing officer to challenge those
conditions or restrictions before they go into effect by, among other
things, establishing an expedited process for the review of a hearing
officer's order by the Review Subcommittee of the NAC. During a hearing
officer's review, he or she may consider the specific facts and
circumstances when weighing the additional risk(s) posed by the
Respondent while the matter is on appeal against the costs of possible
restrictions and sanctions. The Commission believes this potential
disruption of the business opportunities of certain broker-dealers and
individuals has been appropriately balanced against the investor
protections the proposed rule change would establish, as well as the
need to prevent potential customer harm from Respondents who have been
found in violation of FINRA rules by a hearing officer or hearing
panel.\55\
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\55\ The Commission notes that the proposed rule change is
consistent with the adopted rules of other SROs, including: BOX Rule
12110 (``Pending effectiveness of a decision imposing a sanction on
the Respondent, the person, committee or panel issuing the decision
(the `adjudicator') may impose such conditions and restrictions on
the activities of the Respondent as it considers reasonably
necessary for the protection of investors and the Exchange''); CBOE
Rule 13.11(b) (``Pending effectiveness of a decision imposing a
sanction on the Respondent, the Hearing Panel or the Chief
Regulatory Officer (``CRO''), as applicable, may impose such
conditions and restrictions on the activities of the Respondent as
the Hearing Panel or the CRO, as applicable, considers reasonably
necessary for the protection of investors and the Exchange''); and
CBOE BZX Rule 8.11 (``Pending effectiveness of a decision imposing a
penalty on the Respondent, the CRO, Hearing Panel or committee of
the Board, as applicable, may impose such conditions and
restrictions on the activities of the Respondent as he, she or it
considers reasonably necessary for the protection of investors,
creditors and the Exchange.''). See Notice at note 112.
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Rule 9520 (Eligibility Proceedings)
The proposed rule change to require broker-dealers to include a
plan of heightened supervision with an application to continue
associating with a statutorily disqualified individual that would be in
effect throughout the entirety of the application review process also
would address an investor protection concern by lowering the risk of
customer harm during the pendency of an application. One commenter
opposed this proposed rule change, arguing that establishing plans of
heightened supervision are costly and burdensome and would discourage
broker-dealers from hiring associated persons who have been
disciplined.\56\ However, FINRA is not creating an additional burden
with respect to the requirement to create a plan of heightened
supervision; it is only requiring a member broker-dealer implement such
plan at an earlier point in time than under the existing rules.
Currently, as part of the application process, a member broker-dealer
will propose a written plan of heightened supervision to become
effective upon approval of the application, and generally, the
continued association of a statutorily disqualified person approved
through a FINRA eligibility proceeding is conditioned on the individual
being subject to a heightened supervision plan.\57\ This proposed rule
change would help limit the potential for customer harm at an earlier
point in time and thereby help protect customers. In order to assess
the potential risk posed by a statutorily disqualified person during
the pendency of his or her application, FINRA examined whether
individuals who filed an application between 2013-2016 had a disclosure
event at any time from the filing of the application through two years
after filing. Based on this analysis, FINRA estimated that 26 (or 51
percent) of the 51 individuals associated with an applications during
the 2013-2016 period had a total of 41 disclosure events during the
interstitial period after the filing of their application.\58\
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\56\ See Lebenta Letter. This commenter also recommended FINRA
streamline the statutory disqualification review process to produce
faster results, noting that imposing heightened supervisory
procedures would be unduly costly and burdensome if the statutorily
disqualified associated person's proposed association with a member
broker-dealer is denied. See Lebenta Letter. The Commission must
consider the proposed rule change that was filed and FINRA's process
for reviewing applications for statutorily disqualified associated
persons to associate with a member broker-dealer is beyond the scope
of this filing.
\57\ See FINRA Regulatory Notice 18-23 and Notice at 20750.
\58\ See Notice at 20757. FINRA notes that these results likely
underrepresent the overall risk of customer harm, because the
disclosure events in this analysis included only final criminal
matters and specified risk events. See Notice at note 84.
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As stated above, although the Commission recognizes the potential
burden imposed by requiring the supervision plan to become effective at
an earlier stage of this process, it believes that the benefits of
added oversight of disqualified individuals subject to the pending
application process justifies the earlier timeframe. Accordingly, while
the proposed rule change may negatively impact the ability of certain
individuals to retain or find employment, it is a reasonable approach
for seeking to achieve greater oversight by sponsoring broker-dealers
of the activities of statutorily disqualified individuals during the
pendency of an application. The Commission believes that applying
heightened supervision specifically tailored in response to the
misconduct giving rise to the statutory disqualification at an earlier
stage in the process will facilitate a broker-dealer's supervision of
statutorily disqualified individuals and better protect its customers
from future harm.
Rule 8312 (FINRA BrokerCheck Disclosure)
The proposed rule change adding disclosure in BrokerCheck of member
broker-dealers that are subject to the Taping Rule would help inform
more investors when certain broker-dealers are subject to certain
heightened procedures.\59\ One commenter stressed that this disclosure
may not be sufficient to ensure investors understand what it means to
be designated a ``taping firm'' and suggested that FINRA amend the
proposed rule change to require the BrokerCheck profiles of individual
registered representatives to denote when they are associated with
taping firms. FINRA did not accept this comment because it would be a
substantive amendment to what is otherwise a proposed technical
change.\60\ FINRA also expressed concern that the commenter's
suggestion to include a disclosure on the BrokerCheck profile of
individuals would capture registered representatives of a taping firm
with clean disciplinary histories.\61\ The commenter also recommended
that any disclosure of a firm as a taping firm on BrokerCheck should
include ``clear and complete information, comprehensible to investors,
explaining what it means to be such a firm.'' \62\ FINRA agreed with
the view expressed that the BrokerCheck disclosure should include a
clear explanation of what it means to be subject to the Taping Rule to
help investors understand why the taping firm is subject to heightened
procedures.\63\ FINRA did not make a corresponding amendment to the
rule but the Commission understands that FINRA has committed to
including a
[[Page 81546]]
clear explanation on BrokerCheck about what being subject to the Taping
Rule means.\64\
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\59\ Currently, investors can only learn about a broker-dealer's
status as a Taping Firm in response to telephonic inquiries via the
BrokerCheck toll-free telephone listing. See FINRA Rule 8312(b).
\60\ December 1, 2020 Teleconference.
\61\ Id.
\62\ See Better Markets Letter.
\63\ See Notice at 20765.
\64\ In a teleconference between Michael Garawski, Associate
General Counsel, Office of General Counsel, FINRA, and Daniel
Fisher, Branch Chief, Division of Trading and Markets, Commission,
on October 5, 2020, FINRA confirmed with the Division of Trading and
Markets that between now and the effective date of the proposed rule
change it has committed to including a clear explanation on
BrokerCheck about what being subject to the Taping Rule means.
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The Commission believes that this proposed rule change would
improve the ease of obtaining this information for investors through a
preexisting database with which the public is already familiar.
Furthermore, the Commission believes that the proposed rule change
would incentivize investors to research more carefully the background
of a registered representative associated with a broker-dealer that is
designated as a taping firm, including those registered representatives
associated with the firm who are not subject to heightened supervision.
Rule 1000 Series (Member Application and Associated Person
Registration)
The proposed rule change, requiring a member broker-dealer to seek
a materiality consultation when a natural person seeking to become an
owner, control person, principal, or registered person has a
significant history of misconduct, would give FINRA an opportunity to
assess whether the proposed association is material and warrants closer
regulatory scrutiny. Similarly, in situations where a proposed
association of a natural person with a significant history of
misconduct would require the broker-dealer to submit a CMA, FINRA would
be able to: (i) Assess whether the broker-dealer would continue to meet
all of the membership standards in FINRA Rule 1014 if the proposed
association were approved, and (ii) prevent the proposed association if
the broker-dealer does not demonstrate that it can continue to meet
those standards. This proposed rule change will further promote
investor protection by applying additional safeguards and disclosure
obligations for a broker-dealer's continuing membership with FINRA and
for changes to a current member broker-dealer's ownership, control, or
business operations. The heightened scrutiny by FINRA of registered
representatives, registered principals, owners, and control persons who
meet the proposed definitions and criteria would be beneficial in
promoting investor protection by disincentivizing broker-dealers from
engaging in higher-risk activity that could lead to additional
regulatory restrictions.\65\ For example, one commenter stated that
this proposed rule would create obstacles for broker-dealers seeking to
hire and onboard associated persons with a significant history of
misconduct,\66\ which may incentivize broker-dealers to reexamine their
hiring practices and certain associated persons to change their
behavior to avoid future misconduct.\67\
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\65\ According to FINRA, the cost of this proposed rule change
would fall on the broker-dealers that seek to add owners, control
persons, principals, or registered persons who meet the proposed
criteria. These broker-dealers would be directly impacted through
the requirements to seek a materiality consultation with FINRA and,
potentially, to file a CMA. While there is no FINRA fee for seeking
a materiality consultation, broker-dealers may incur internal costs
or costs associated with engaging external experts in conjunction
with filing a CMA. In addition, the proposed rule change could
result in delays to a broker-dealer's ability to add owners, control
persons, principals or registered persons who meet the proposed
criteria, during the time the mandatory materiality consultation and
any required CMA is being processed. These anticipated costs may
deter some broker-dealers from hiring individuals meeting the
proposed criteria, who as a result may find it difficult to remain
in the industry. See Notice at 20758.
\66\ See Better Markets Letter (stating that requiring
materiality consultations before hiring is an important regulatory
innovation); see also Notice at 20766.
\67\ The proposed rule change would not prevent a firm from
hiring an associated person with a history of ``final criminal
matters'' or ``specified risk events.'' Instead, the proposed rule
change would establish a system of investor protections tailored to
the facts and circumstances for firms that do seek to hire such
associated persons.
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Two commenters raised several concerns about, and suggested
revisions to, the proposed rule changes to the Rule 1000 Series (Member
Application and Associated Person Registration).\68\ One of these
commenters questioned whether adding one person should constitute a
material change in business operations. Specifically, the commenter
disagreed that adding a new owner or control person is sufficient to
make a material impact in business operations unless that person is
involved in sales. Accordingly, the commenter recommended revising
proposed IM-1011-3 to exclude from the IM-1011-1 safe harbor only
broker-dealers increasing their business operations by adding
associated persons involved in sales.\69\ FINRA declined to amend the
proposed rule change as suggested because adding a natural person as an
owner, control person, principal, or registered person who has, in the
prior five years, one or more final criminal matters or two or more
specified risk events could constitute a material change in business
operations given the greater risk of harm to customers than the risk
stemming from other associated persons. FINRA reiterated that IM-1011-3
is designed to prevent broker-dealers from relying on the IM-1011-1
safe harbor to avoid a materiality consultation--and any CMA that is
subsequently required--when it seeks to add such persons.\70\
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\68\ See letter from Andrew R. Harvin, Partner, Doyle, Restrepo,
Harvin & Robbins, LLP, to Jill M. Peterson, Assistant Secretary,
Commission, dated April 28, 2020 (``Harvin Letter''); see also
Lebenta Letter.
\69\ See Harvin Letter.
\70\ See FINRA July 2 Letter.
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The Commission agrees with FINRA's assessment of what could
constitute a material change in business operations. Specifically, the
Commission believes that natural persons with a certain history of
misconduct holding authority to control a firm's business operations
may increase the risk of investor harm. Accordingly, limiting the
interpretation of materiality to persons involved in sales as suggested
by the commenter could weaken the effectiveness of the proposed rule
change to protect investors and incentivize improved behavior. The
Commission also notes that the materiality consultation process
required by proposed Rule 1017(a)(7) would be similar to FINRA's
existing materiality consultation process and would provide the member
broker-dealer an opportunity to be heard on whether the contemplated
change is material. Specifically, under proposed Rule 1017(a)(7), a
member broker-dealer would submit a written request seeking a
materiality consultation and addressing the issues that are central to
the materiality consultation; as part of the materiality consultation,
Member Regulation must consider the written request and other
information or documents provided by the member, including whether the
proposed association would materially impact the broker-dealer's
business operations. If Member Regulation determines that a CMA is
required, the CMA would be governed by the existing process set forth
in FINRA Rule 1017 and the Rule 1010 Series, including its appeal
rights. The Commission agrees with FINRA's assessment that these
procedures would be similar to FINRA's existing materiality
consultation process and would provide the member broker-dealer an
opportunity to be heard on whether the contemplated change is
material.\71\
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\71\ Id.
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The other commenter, critical of the proposed changes to the Rule
1000 Series, believes that the proposed rule changes are overbroad and
that inclusion of settled matters as a
[[Page 81547]]
criterion is ``indefensible.'' \72\ FINRA considered this comment but
did not exclude settled matters from the list of determining factors.
Instead, FINRA chose not to include certain settled matters in the
proposed rule changes to the Rule 1000 Series in order to exclude
individuals who are less likely to subsequently pose risk of harm to
customers.\73\ Specifically, in order to focus its analysis on outcomes
that are more likely associated with material customer harm, FINRA
studied complaints that led to an award against a broker or settled
above a de minimis threshold ($15,000), which is the current CRD
settlement threshold for reporting customer complaints on Uniform
Registration Forms. FINRA found that a proposal based on events
disclosed on the Uniform Registration Forms, which are generally
available to firms and FINRA, was important to avoid confusion and
provide transparency about the events that will trigger the need for a
materiality consultation.\74\
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\72\ See Lebenta Letter (stating that the inclusion of
settlements is indefensible by FINRA because respondents may choose
to settle for any number of reasons that do not reflect the
respondent's own liability). When Member Regulation evaluates
compliance with the Rule 1000 Series, it takes into consideration,
among other things, whether persons associated with an applicant are
the subject of disciplinary actions taken against them by industry
authorities, criminal actions, civil actions, arbitrations, customer
complaints, remedial actions, or other industry-related matters that
could pose a threat to public investors. Some of these matters are
considered whether they are adjudicated, settled or pending. See
Notice at 20752.
\73\ See FINRA October 7 Letter.
\74\ See FINRA Study at 9; see also Notice at 20761 and 20767.
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The Commission agrees that the proposed rule changes to the Rule
1000 Series are tailored sufficiently to achieving the goal of
protecting investors from the risks associated with associated persons
who have a significant history of misconduct. Specifically, the
Commission agrees that excluding some settled matters from these
thresholds is appropriate. For instance, recently settled matters are
likely more indicative of an associated person's future misconduct than
matters occurring over five years ago (absent any intervening
disciplinary or other regulatory events); and individuals with a
history of misconduct who have little or no control over a broker-
dealer's activities may pose less threat to the broker-dealer's
customers than individuals who can exercise some discretion when
performing their jobs. Accordingly, settlements beyond the five-year
lookback period and settlements by persons other than those seeking to
be an owner, control person, principal, or registered person may have
less relevance in achieving the goal of protecting investors from the
risks associated with associated persons who have a significant history
of misconduct.\75\
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\75\ Id.
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This commenter also argued that FINRA's proposed definition of a
``specified risk event''--a key triggering factor for the proposed
enhanced membership application proceedings--is overbroad and would
lead to unnecessary costs, burdens and disruptions for broker-dealer
members.\76\ As proposed, the definition would include any ``final
investment-related, consumer initiated arbitration'' that results in an
award or a settlement ``at or above $15,000.'' The commenter believes
the use of arbitration awards and settlements with customers at such a
``low'' dollar threshold is over-inclusive and would not appropriately
describe a ``risk event'' that should require a CMA or the proposed
mandatory materiality consultation.\77\
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\76\ See Lebenta Letter.
\77\ Id. This commenter also argued that FINRA's inclusion of
customer-initiated arbitration settlements for $15,000 or more in
the statistics it used to measure the recent rate of disciplinary
events was overly broad and thus does not support the premise of the
proposed rule change that there is a pattern of increased risk to
customers. Similarly, the commenter believes that relying on past
violative conduct to predict future wrongdoing undermines the
principle of due process and is not supported by FINRA's data. But
see Better Markets Letter (opining that the proposed rule change
would reflect an improvement over the status quo but is still
insufficient, and that FINRA should do more to reduce the number of
brokers with a significant history of misconduct and the prevalence
of recidivism (e.g., banning registered representatives with two
criminal convictions or three ``specified risk events'' at a $5,000
level (instead of the proposed $15,000 level) and immediately and
permanently expelling a broker-dealer where more than 20% of its
registered representatives have three or more ``specified risk
events'').
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FINRA disagrees with the commenter's assessment that the proposed
definition of ``specified risk event'' attempts to replace the analysis
conducted in a CMA with a bright-line rule that any customer
arbitration at or above the $15,000 threshold is defined as creating a
risk to investors.\78\ Under proposed Rule 1017(a)(7), only arbitration
awards or settlements meeting the specific parameters detailed in Rule
1017(a)(7) and IM-1011-3 would be considered for determining when a
materiality consultation would be required.\79\ Moreover, a single
award or settlement would not necessarily require a materiality
consultation. In fact, even if a person meets the Rule 1017(a)(7)
standard, it would not necessarily mean a CMA is required or, if it is,
that the broker-dealer could not satisfy FINRA's membership
standards.\80\ FINRA also stated that the dollar thresholds as proposed
are appropriate given that settlements at that level are more likely to
be associated with material customer harm \81\ and they are the same
thresholds as those used for determining appropriate disclosure events
in FINRA's Uniform Registration Forms.\82\ FINRA has noted that using
different thresholds may result in less transparency to the public,
registered persons, and broker-dealers.\83\
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\78\ See FINRA October 7 Letter (citing the Lebenta Letter).
\79\ See FINRA October 7 Letter (outlining the proposed
parameters including the lookback period, the number of disclosure
events required, and the types of roles sought).
\80\ Id.
\81\ Id.
\82\ See supra note 33.
\83\ See FINRA October 7 Letter.
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The Commission believes FINRA made a reasonable argument for
including settlements of at least $15,000 in its study \84\ and that
its proposed definition of ``specified risk event'' furthers the goal
of protecting investors from high risk associated persons. In addition,
the Commission believes that the proposed criteria and definitions of
``final criminal matter'' and ``specified risk event'' would provide
transparency regarding how the proposed rules would be applied, as the
underlying events are based on disclosure events required to be
reported on the Uniform Registration Forms. Accordingly, broker-dealers
would be able to identify the specific set of disclosure events that
would count towards the proposed criteria and, using available data,
determine independently whether a proposed association with an
individual would require a materiality consultation.
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\84\ See Hammad Qureshi & Jonathan Sokobin, Do Investors Have
Valuable Information About Brokers? (FINRA Office of the Chief
Economist Working Paper, Aug. 2015) (``FINRA Study''). The
Commission believes the FINRA Study dealt with a common issue in
empirical work, the tradeoff between an increase in statistical
power that results from a larger sample size and the inclusion of
data points that may not be of the most interest, and made a
reasonable empirical design decision. Accordingly, contrary to the
commenter's concern, the Commission believes that FINRA had a sound
basis upon which to base the proposed rule change.
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One commenter also challenged FINRA's statistical justification for
the proposed rule change.\85\ In particular, the commenter questioned
whether the studies upon which FINRA relied adequately demonstrate that
past disciplinary and other regulatory events associated with a member
broker-dealer or individual can be predictive of similar future events,
such as repeated disciplinary actions, arbitrations, and
[[Page 81548]]
complaints.\86\ The commenter suggested, among other things, that
FINRA's reports used data (i.e., violative events) to measure the
likelihood of recidivist behavior that would not be the subject of a
disciplinary action under the proposed rule change. Accordingly, the
commenter did not believe FINRA's statistical evidence justified the
proposed rule change, including the additional costs and loss of rights
that would result from approving the proposed rule change.\87\
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\85\ See Lebenta Letter.
\86\ Id. (stating that in the FINRA Study, the rate of new
disclosure events by associated persons during the pendency of their
appeals is less than 30%).
\87\ Id. (arguing that the FINRA Study continued its analysis
through the year-end after the year in which the appeal reached a
decision thus skewing its results).
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In response, FINRA reiterated its concern about the potential risks
posed by broker-dealers that persistently employ associated persons who
engage in misconduct, as well as its findings that past disciplinary
and other regulatory events, such as repeated disciplinary actions,
arbitrations and complaints associated with a member broker-dealer or
individual can be predictive of similar future events.\88\ Moreover,
FINRA believes the estimated number of disclosure events associated
with persons who appeal disciplinary decisions reflects a specific
potential risk to investors.\89\ FINRA asserted that the proposed rule
change would adopt processes directly tailored to target this specific
misconduct and minimize further investor harm.\90\
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\88\ See FINRA October 7 Letter; see also Notice at 20745-46,
20755 and note 5.
\89\ See FINRA October 7 Letter; see also Notice at 20748.
\90\ See FINRA October 7 Letter; see also Notice at 20750,
20754.
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The Commission believes that the commenter's challenge to FINRA's
statistical justification for the proposed rule change obfuscates the
point of the FINRA Study. In its study, FINRA uses a model that
predicts investor harm based on information publicly released in
BrokerCheck and non-public Central Registration Depository data and
found that 20% of the 181,133 brokers in their sample with the highest
ex ante predicted probability of investor harm are associated with more
than 55% of the investor harm events and more than 55% of total dollar
harm. Accordingly, FINRA concluded that the risk of future harm is
predictable.\91\ The Commission believes that the methodology used in
the FINRA Study had a sound statistical basis. The Commission
understands the commenter's point that the FINRA Study measured the
likelihood of recidivist behavior using data (i.e., violative acts)
that would not be captured under the proposed rule change; however, the
Commission believes FINRA shows its result is not sensitive to a
particular threshold value. In addition, while the Commission
understands the commenter's point that FINRA continues the analysis
through the year-end after the year in which the appeal reached a
decision, the FINRA Study states that the complaint system tracks the
date the complaint was filed but not the date of the actual occurrence
of investor harm. The study makes a conservative assumption that the
harm occurred the year before the filing so that when running a
regression to predict an occurrence of harm, FINRA would not be
predicting an event with data that was only available concurrently with
or subsequent to the event.\92\ Accordingly, the Commission believes
that the methodology FINRA used to conduct its study had a sound
statistical basis and that FINRA had a sound basis upon which to base
the proposed rule change.
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\91\ See FINRA Study at 17. Additional academic research
suggests that a higher rate of new disciplinary and other disclosure
events is highly correlated with past disciplinary and other
disclosure events, as far back as nine years prior. See Notice at
note 5.
\92\ See FINRA Study at 9-10.
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In sum, for the above reasons, the Commission believes that the
proposed rule change would strengthen the tools available to FINRA in
responding to associated persons who have a significant history of
misconduct. In addition, the Commission believes that the proposed rule
change has sufficiently tailored the proposed processes to target the
specific misconduct it seeks to address, which would minimize the
potential costs to broker-dealers. Moreover, the proposed rules would
establish processes by which an associated person or broker-dealer
would have adequate opportunities to challenge the imposed conditions
and restrictions and seek further review.
Accordingly, the Commission finds the proposed rule change would
result in greater investor protections by helping address the concerns
raised by associated persons with a significant history of misconduct
and the broker-dealers that employ them while narrowly tailoring the
review process to mitigate the potential burdens on those individuals
and broker-dealers.
IV. Conclusion
It Is Therefore Ordered pursuant to Section 19(b)(2) of the
Exchange Act \93\ that the proposed rule change (SR-FINRA-2020-011), as
modified by Amendment No. 1, be, and hereby is, approved.
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\93\ 15 U.S.C. 78s(b)(2).
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-27626 Filed 12-15-20; 8:45 am]
BILLING CODE 8011-01-P
