Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-Laws of FINRA Regulation, Inc. To Align the Grounds for Member Removal From the NAC With an Existing Provision in the FINRA By-Laws, 9110-9112 [2021-02779]

Download as PDF 9110 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Notices Program should be modified, discontinued, extended, or permanently approved. Furthermore, the Exchange’s ongoing analysis of the P.M. Pilot Program should help it monitor any potential risks from large P.M.-settled positions and take appropriate action on a timely basis if warranted. The Exchange represents that it has adequate surveillance procedures to monitor trading in these options thereby helping to ensure the maintenance of a fair and orderly market 16 and has represented that it has sufficient capacity to handle additional traffic associated with this new listing.17 For the reasons discussed above, the Commission finds that Cboe’s proposal is consistent with the Act, including Section 6(b)(5) thereof, in that it is designed to remove impediments to and perfect the mechanism of a free and open market, and, in general, to protect investors and the public interest. In light of the enhanced closing procedures at the underlying markets and the potential benefits to investors discussed by the Exchange in the Notice,18 the Commission finds that it is appropriate and consistent with the Act to approve Cboe’s proposal on a pilot basis. The collection of data during the P.M. Pilot Program and Cboe’s active monitoring of any effects of P.M.-settled MRUT options on the markets will help Cboe and the Commission assess any impact of P.M. settlement in today’s market. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,19 that the proposed rule change (SR–CBOE–2020– 116), as modified by Amendment No. 1, be, and hereby is, approved, subject to a pilot period set to expire on May 3, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–02780 Filed 2–10–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91070; File No. SR–FINRA– 2020–037] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-Laws of FINRA Regulation, Inc. To Align the Grounds for Member Removal From the NAC With an Existing Provision in the FINRA ByLaws February 5, 2021. I. Introduction On October 22, 2020, the 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 (the ‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend a provision in the ByLaws of FINRA Regulation, Inc. (‘‘FINRA Regulation’’), FINRA’s regulatory subsidiary. The proposed rule change would further align the grounds in the FINRA Regulation ByLaws for removal of a member from the National Adjudicatory Council (‘‘NAC’’) with an existing provision in the FINRA By-Laws for removal of a governor from the FINRA Board of Governors (‘‘FINRA Board’’).3 The proposed rule change was published for comment in the Federal Register on November 9, 2020.4 The Commission received no comments on the proposed rule change. This order approves the proposed rule change. II. Description of the Proposal As described in the Notice, FINRA Regulation is the regulatory subsidiary of FINRA and operates according to the Plan of Allocation and Delegation of Functions by FINRA to Subsidiaries (the ‘‘Plan’’).5 The FINRA Regulation ByLaws authorize the NAC to function on behalf of the FINRA Board in several capacities.6 For example, FINRA explains that the NAC presides over disciplinary matters that have been appealed to or called for review by the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See infra Section II. 4 See Exchange Act Release No. 90324 (November 3, 2020), 85 FR 71387 (November 9, 2020) (File No. SR–FINRA–2020–037) (the ‘‘Notice’’). 5 See id. at 71388, n.4 (citing the Plan, Sec. II., FINRA Regulation, Inc., https://www.finra.org/ rules-guidance/rulebooks/corporate-organization/iifinra-regulation-inc). 6 See id. (citing Article V, Sec. 5.1 of the FINRA Regulation By-Laws). khammond on DSKJM1Z7X2PROD with NOTICES 2 17 16 See Amendment No. 1, supra note 4. Notice, supra note 3 at 85754. 18 See Notice, supra note 3 at 85755. 19 15 U.S.C. 78s(b)(2). 20 17 CFR 200.30–3(a)(12). 17 See VerDate Sep<11>2014 16:39 Feb 10, 2021 Jkt 253001 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 NAC and also acts on applications in statutory disqualification and membership proceedings.7 In most matters that the NAC considers, FINRA states that the NAC prepares proposed written decisions that become final FINRA action if the FINRA Board does not call for review of those decisions.8 FINRA also states that it periodically reviews its and FINRA Regulation’s ByLaws to ensure adherence to effective governance practices.9 Based on that review, FINRA explains that currently, Article V, Section 5.8 of the FINRA Regulation By-Laws provides that, ‘‘[a]ny or all of the members of the [NAC] may be removed from office at any time for refusal, failure, neglect, or inability to discharge the duties of such office by majority vote of the FINRA Board.’’ 10 By comparison, however, the FINRA By-Laws provide that a governor may be removed for those grounds as well as ‘‘for any cause affecting the best interests of [FINRA] the sufficiency of which the Board shall be the sole judge.’’ 11 As a result, FINRA proposes to amend the FINRA Regulation ByLaws to add this ground for removal of a NAC member to further align the bases for removal of a NAC member with the bases for removal of a FINRA Board governor.12 Specifically, the proposed rule change would amend the FINRA Regulation By-Laws to permit a NAC member to be removed by a majority vote of the FINRA Board ‘‘for any cause affecting the best interests of the [NAC] the sufficiency of which the FINRA Board shall be the sole judge.’’ 13 FINRA further explains that the removal of a NAC member would continue to require a majority vote of the FINRA Board, while a vote to remove a FINRA Board governor requires a two-thirds vote.14 In 7 See id. FINRA states that the NAC also exercises exemption authority and acts in other proceedings as set forth in the FINRA Rule 9000 Series (Code of Procedure). The FINRA Board may also delegate other powers and duties to the NAC as the FINRA Board deems appropriate and in a manner not inconsistent with the Plan. See id. 8 See id. 9 See id. 10 See id. As FINRA explains, the FINRA Regulation By-Laws were amended in 2008 to, among other things, designate the FINRA Board as the body authorized to oversee the NAC and empowered to remove NAC members for the grounds mentioned above. See id. (citing Exchange Act Release No. 58909 (November 6, 2008), 73 FR 68467 (November 18, 2008) (Order Approving File No. SR–FINRA–2008–046) (the ‘‘FINRA Regulation By-Laws Approval Order’’). 11 See id. Compare Article VII, Section 1(b) of the FINRA By-Laws, with Article V, Sec. 5.8 of the FINRA Regulation By-Laws. 12 See Notice, 85 FR at 71388. 13 See id. 14 See id. As FINRA notes, both FINRA and FINRA Regulation are corporations organized under E:\FR\FM\11FEN1.SGM 11FEN1 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES discussing this difference between voting thresholds for removal, FINRA states that the higher voting standard for the removal of a governor reflects the historical standard that existed at the National Association of Securities Dealers (‘‘NASD’’) prior to the formation of FINRA, and that it provides an additional safeguard at the FINRA Board level ‘‘to ensure a diverse, majority nonindustry composition, and fair representation of the industry in governance matters.’’ 15 FINRA also states that, given the NAC’s adjudicatory role, the best interests of the NAC are more targeted than the best interests of FINRA.16 More specifically, FINRA explains that the best interests of the NAC are reflected in conduct and attributes that ensure that the NAC remains an unbiased and competent adjudicatory body that is free of conflicts of interest, that its members conduct themselves with integrity, and that its decisions are rendered fairly and consistently with the law and rules that govern FINRA members and their associated persons.17 FINRA also states that the FINRA Board’s decision to remove a NAC member is a facts and circumstances determination.18 In considering whether to remove a NAC member for cause affecting the best interests of the NAC, FINRA explains that its Board may consider, among other things, the NAC member’s adherence to general standards concerning actual and apparent adjudicator conflicts of interest and bias,19 and to the NAC’s Conflict of Interest and Bias Policy, which sets forth broad-based principles of behavior that are expected from NAC members.20 Delaware law. The Delaware General Corporation Law provides that, in general, directors may be removed by a majority vote of the shares then entitled to vote at an election of directors. See Del. Code Ann. Tit. 8, § 141(k). FINRA states that it has adopted a removal threshold for NAC members that is consistent with the Delaware General Corporation Law, although the NAC is not subject to this standard. See Notice, 85 FR at 71388, n.9. 15 Notice, 85 FR at 71388. FINRA also notes that the provision of the FINRA Regulation By-Laws addressing the composition of the NAC also provides for a diverse, majority non-industry composition, and for the fair representation of the industry. See id. at n.10 (citing Article V, Section 5.2(a) of the FINRA Regulation By-Laws and Exchange Act Release No. 78094 (June 17, 2016), 81 FR 40932, 40934–35 (June 23, 2016)). 16 See id. 17 See id. 18 See id. at 71388–89. 19 See id. at 71388, n.11 (citing Article IV, Section 4.14(a) of the FINRA Regulation By-Laws). 20 See id. at n.12. FINRA notes that the principles outlined in the NAC’s Conflict of Interest and Bias Policy are independence, impartiality, integrity, accountability and transparency; and place upon NAC adjudicators the responsibility for recognizing and reporting actual and apparent conflicts of interest and bias. See id. VerDate Sep<11>2014 16:39 Feb 10, 2021 Jkt 253001 FINRA recognizes that there may, depending on the facts and circumstances, be overlap in part between the new and existing grounds to remove a NAC member. However, FINRA states that, depending on the facts and circumstances, the proposed rule change may also provide an additional basis for removal for a cause affecting the best interests of the NAC that would not fall within the scope of the FINRA’s Board’s current removal authority.21 III. Discussion and Commission Findings After careful review of the proposed rule change, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association.22 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(4) of the Exchange Act,23 which requires, among other things, that the rules of a national securities association, like FINRA, assure the fair representation of its members in the administration of its affairs. Additionally, the Commission finds that the proposed rule change is also consistent with Section 15A(b)(6) of the Exchange Act,24 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. As a threshold matter, the Commission observes that the provision that is being added to the FINRA Regulation By-Laws by this proposed rule change mirrors a parallel provision found in the FINRA By-Laws.25 Moreover, the Commission has previously reviewed and approved a proposal that conformed the then-NASD Regulation By-Laws to the FINRA ByLaws, and has also previously reviewed and approved the NAC committee and its governance structure (which remains the same under this proposal), finding both proposals to be consistent with Section 15A(b)(4) of the Exchange Act.26 21 See id. at 71389. 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). 23 15 U.S.C. 78o–3(b)(4). 24 15 U.S.C. 78o–3(b)(6). 25 See Notice, 85 FR at 71388 (comparing Article VII, Section 1(b) of the FINRA By-Laws with Article V, Sec. 5.8 of the FINRA Regulation By-Laws). 26 See id. at n.17 (citing Exchange Act Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007) (the ‘‘NASD By-Laws Approval Order’’), as 22 In PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 9111 We discuss below some of the pertinent aspects of the Commission’s prior findings as they apply, at least in part, to the current proposed rule change. As the Commission explained in approving the FINRA By-Laws, Section 15A(b)(4) requires that the rules of a national securities association, like FINRA, assure the fair representation of its members in, among other things, the administration of its affairs.27 In approving the FINRA By-Laws, the Commission found, in part, that FINRA’s members’ participation on various committees provided for the fair representation of members in the administration of the affairs of a selfregulatory organization such as FINRA, particularly with respect to participation on committees relating to, among other things, the disciplinary process.28 More specifically, the Commission observed that FINRA has extensive member involvement in the administration of its affairs through representation on various subject matter committees, including the NAC.29 In connection with this proposal, FINRA states that, similar to the FINRA ByLaws addressing the composition of its Board, the FINRA Regulation By-Laws addressing the composition of the NAC provide for a diverse, majority nonindustry composition, and for the fair representation of industry.30 The Commission agrees with FINRA’s statements and, moreover, observes that the Commission found previously that the NAC’s governance structure, including the NAC’s composition as well as the nomination and election processes for NAC seats, align with those of the FINRA Board and were consistent with Section 15A(b)(4) of the Act.31 Furthermore, in approving certain amendments to the then-NASD Regulation By-Laws, the Commission found that because those amendments conformed certain NASD Regulation ByLaws provisions to the relevant amended by Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. SR–NASD–2007–023)). These orders approved FINRA’s By-Laws when the NASD merged with the member regulation, enforcement and arbitration operations of the New York Stock Exchange (‘‘NYSE’’) to form FINRA. See also infra notes 31–32. 27 See NASD By-Laws Approval Order, 72 FR at 42182 (explaining that this requirement helps to assure that members have a stake in the governance of the national securities association, which is charged with self-regulatory responsibilities under the Exchange Act). 28 See id. at 42185. 29 See id. See also supra note 7 and accompanying text. 30 See supra note 15 and accompanying text. 31 See FINRA Regulation By-Laws Approval Order, 73 FR at 68469–70. E:\FR\FM\11FEN1.SGM 11FEN1 khammond on DSKJM1Z7X2PROD with NOTICES 9112 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Notices provisions in the FINRA By-Laws and reflected the governance structure set forth in the FINRA By-Laws those amendments were consistent with the Exchange Act.32 Similarly, this proposal will also further conform the FINRA Regulation By-Laws with the FINRA ByLaws and will also continue to reflect the previously approved governance structure of the NAC. As a result, the Commission believes that this proposal will continue to help assure the fair representation of FINRA members in the administration of FINRA’s affairs and, therefore, is consistent with Section 15A(b)(4) of the Act. The Commission further observes that the NAC acts on behalf of the FINRA Board in several important capacities, including presiding over disciplinary matters that have been appealed to or called for review by the NAC and acting on applications in statutory disqualification and membership proceeding.33 Given the NAC’s ability to perform these actions and prepare written decisions on behalf of the FINRA Board, and that these decisions become FINRA’s final action in the vast majority of cases,34 the Commission finds that applying the same grounds for the removal of a NAC member as those that apply for the removal of a governor is consistent with the Act. The proposal will strengthen the FINRA Board’s oversight of the NAC and further support the principles outlined in the NAC’s Conflict of Interest and Bias Policy, which include independence, impartiality, integrity, and accountability.35 In doing so, the proposal will help protect investors and further the public interest by expanding the scope of the FINRA Board’s authority to remove NAC members that, in the Board’s view, may be biased or have actual or apparent conflicts of interest or otherwise impede the NAC’s adjudicatory responsibilities.36 In sum, the Commission finds that the proposal will continue to help assure the fair representation of FINRA members in the administration of FINRA’s affairs. The Commission also finds that this proposal will help protect investors and further the public interest by supporting fair and impartial adjudicatory processes for, among other things, FINRA’s disciplinary matters as well as statutory disqualification and membership proceedings. 32 See NASD By-Laws Approval Order, 72 FR at 42188. 33 See supra note 7 and accompanying text. 34 See Notice, 85 FR at 71389. 35 See id. at 71388, n.12. See also supra note 20 and accompanying text. 36 See id. at 71388 (citing Article IV, Section 4.14(a) of the FINRA Regulation By-Laws). VerDate Sep<11>2014 16:39 Feb 10, 2021 Jkt 253001 IV. Conclusion It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act 37 that the proposal (SR–FINRA–2020– 037) is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–02779 Filed 2–10–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91068; File No. SR– NYSEAMER–2021–06] Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify Rule 971.2NY Regarding Its Complex Customer Best Execution Auction February 5, 2021. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on January 27, 2021, NYSE American LLC (‘‘NYSE American’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to modify Rule 971.2NY regarding its Complex Customer Best Execution (‘‘CUBE’’) auction to provide optional all-or-none functionality for larger-sized orders and to make conforming changes to Rule 971.1NY to clarify existing functionality of the Single-Leg AON CUBE functionality. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 37 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 38 17 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to expand its electronic crossing mechanism—the CUBE Auction, to provide optional allor-none (‘‘AON’’) 4 functionality for ATP Holders to execute larger-sized orders (i.e., at least 500 contracts on the smallest leg) in the Complex CUBE Auction and to make conforming changes to Rule 971.1NY to clarify existing functionality of the Single-Leg AON CUBE functionality.5 The proposed rule change would be consistent with the recently approved AON CUBE Order functionality for the Single-Leg CUBE Auction.6 In this regard, the Exchange seeks to expand this functionality to the Complex CUBE Auction, which functionality is also consistent with similar priceimprovement mechanisms for largersized complex orders already available on other options exchanges.7 As such, 4 An All-or-None Order or AON Order is a ‘‘Market or Limit Order that is to be executed on the Exchange in its entirety or not at all.’’ See Rule 900.3NY(d)(4). 5 See proposed Commentary .04 to Rule 971.2NY; proposed Commentary .05 to Rule 971.1NY. Capitalized terms have the same meaning as the defined terms in Rules 971.1NY and 971.2NY. 6 See Commentary .05 to Rule 971.1NY; see also Securities Exchange Act Release No. 90584 (December 7, 2020), 85 FR 80196 (December 11, 2020) (SR–NYSEAmer–2020–60) (order approving auction functionality for Single-Leg AON CUBE Orders of at least 500 contracts). As proposed, AON Complex CUBE Orders would be processed and executed in the Complex CUBE Auction in a similar manner as Single-Leg AON CUBE Orders are processed and executed in the Single-Leg CUBE Auction—the differences for Complex relating primarily to the underlying differences between simple and complex order processing and execution (i.e., auction pricing and allocation). 7 See, e.g., Nasdaq ISE LLC (‘‘ISE’’), Options 3, Section 11(e) (setting forth its Complex Solicited Order Mechanism which allows an agency complex order to execute in full against the solicited complex order—both of which are designated as AON—at the proposed execution net price so long E:\FR\FM\11FEN1.SGM 11FEN1

Agencies

[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Notices]
[Pages 9110-9112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02779]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91070; File No. SR-FINRA-2020-037]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-
Laws of FINRA Regulation, Inc. To Align the Grounds for Member Removal 
From the NAC With an Existing Provision in the FINRA By-Laws

February 5, 2021.

I. Introduction

    On October 22, 2020, the 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 (the ``Act'' or ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend a provision in the 
By-Laws of FINRA Regulation, Inc. (``FINRA Regulation''), FINRA's 
regulatory subsidiary. The proposed rule change would further align the 
grounds in the FINRA Regulation By-Laws for removal of a member from 
the National Adjudicatory Council (``NAC'') with an existing provision 
in the FINRA By-Laws for removal of a governor from the FINRA Board of 
Governors (``FINRA Board'').\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra Section II.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 9, 2020.\4\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 90324 (November 3, 2020), 85 FR 
71387 (November 9, 2020) (File No. SR-FINRA-2020-037) (the 
``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    As described in the Notice, FINRA Regulation is the regulatory 
subsidiary of FINRA and operates according to the Plan of Allocation 
and Delegation of Functions by FINRA to Subsidiaries (the ``Plan'').\5\ 
The FINRA Regulation By-Laws authorize the NAC to function on behalf of 
the FINRA Board in several capacities.\6\ For example, FINRA explains 
that the NAC presides over disciplinary matters that have been appealed 
to or called for review by the NAC and also acts on applications in 
statutory disqualification and membership proceedings.\7\ In most 
matters that the NAC considers, FINRA states that the NAC prepares 
proposed written decisions that become final FINRA action if the FINRA 
Board does not call for review of those decisions.\8\
---------------------------------------------------------------------------

    \5\ See id. at 71388, n.4 (citing the Plan, Sec. II., FINRA 
Regulation, Inc., https://www.finra.org/rules-guidance/rulebooks/corporate-organization/ii-finra-regulation-inc).
    \6\ See id. (citing Article V, Sec. 5.1 of the FINRA Regulation 
By-Laws).
    \7\ See id. FINRA states that the NAC also exercises exemption 
authority and acts in other proceedings as set forth in the FINRA 
Rule 9000 Series (Code of Procedure). The FINRA Board may also 
delegate other powers and duties to the NAC as the FINRA Board deems 
appropriate and in a manner not inconsistent with the Plan. See id.
    \8\ See id.
---------------------------------------------------------------------------

    FINRA also states that it periodically reviews its and FINRA 
Regulation's By-Laws to ensure adherence to effective governance 
practices.\9\ Based on that review, FINRA explains that currently, 
Article V, Section 5.8 of the FINRA Regulation By-Laws provides that, 
``[a]ny or all of the members of the [NAC] may be removed from office 
at any time for refusal, failure, neglect, or inability to discharge 
the duties of such office by majority vote of the FINRA Board.'' \10\ 
By comparison, however, the FINRA By-Laws provide that a governor may 
be removed for those grounds as well as ``for any cause affecting the 
best interests of [FINRA] the sufficiency of which the Board shall be 
the sole judge.'' \11\ As a result, FINRA proposes to amend the FINRA 
Regulation By-Laws to add this ground for removal of a NAC member to 
further align the bases for removal of a NAC member with the bases for 
removal of a FINRA Board governor.\12\ Specifically, the proposed rule 
change would amend the FINRA Regulation By-Laws to permit a NAC member 
to be removed by a majority vote of the FINRA Board ``for any cause 
affecting the best interests of the [NAC] the sufficiency of which the 
FINRA Board shall be the sole judge.'' \13\
---------------------------------------------------------------------------

    \9\ See id.
    \10\ See id. As FINRA explains, the FINRA Regulation By-Laws 
were amended in 2008 to, among other things, designate the FINRA 
Board as the body authorized to oversee the NAC and empowered to 
remove NAC members for the grounds mentioned above. See id. (citing 
Exchange Act Release No. 58909 (November 6, 2008), 73 FR 68467 
(November 18, 2008) (Order Approving File No. SR-FINRA-2008-046) 
(the ``FINRA Regulation By-Laws Approval Order'').
    \11\ See id. Compare Article VII, Section 1(b) of the FINRA By-
Laws, with Article V, Sec. 5.8 of the FINRA Regulation By-Laws.
    \12\ See Notice, 85 FR at 71388.
    \13\ See id.
---------------------------------------------------------------------------

    FINRA further explains that the removal of a NAC member would 
continue to require a majority vote of the FINRA Board, while a vote to 
remove a FINRA Board governor requires a two-thirds vote.\14\ In

[[Page 9111]]

discussing this difference between voting thresholds for removal, FINRA 
states that the higher voting standard for the removal of a governor 
reflects the historical standard that existed at the National 
Association of Securities Dealers (``NASD'') prior to the formation of 
FINRA, and that it provides an additional safeguard at the FINRA Board 
level ``to ensure a diverse, majority non-industry composition, and 
fair representation of the industry in governance matters.'' \15\
---------------------------------------------------------------------------

    \14\ See id. As FINRA notes, both FINRA and FINRA Regulation are 
corporations organized under Delaware law. The Delaware General 
Corporation Law provides that, in general, directors may be removed 
by a majority vote of the shares then entitled to vote at an 
election of directors. See Del. Code Ann. Tit. 8, Sec.  141(k). 
FINRA states that it has adopted a removal threshold for NAC members 
that is consistent with the Delaware General Corporation Law, 
although the NAC is not subject to this standard. See Notice, 85 FR 
at 71388, n.9.
    \15\ Notice, 85 FR at 71388. FINRA also notes that the provision 
of the FINRA Regulation By-Laws addressing the composition of the 
NAC also provides for a diverse, majority non-industry composition, 
and for the fair representation of the industry. See id. at n.10 
(citing Article V, Section 5.2(a) of the FINRA Regulation By-Laws 
and Exchange Act Release No. 78094 (June 17, 2016), 81 FR 40932, 
40934-35 (June 23, 2016)).
---------------------------------------------------------------------------

    FINRA also states that, given the NAC's adjudicatory role, the best 
interests of the NAC are more targeted than the best interests of 
FINRA.\16\ More specifically, FINRA explains that the best interests of 
the NAC are reflected in conduct and attributes that ensure that the 
NAC remains an unbiased and competent adjudicatory body that is free of 
conflicts of interest, that its members conduct themselves with 
integrity, and that its decisions are rendered fairly and consistently 
with the law and rules that govern FINRA members and their associated 
persons.\17\ FINRA also states that the FINRA Board's decision to 
remove a NAC member is a facts and circumstances determination.\18\ In 
considering whether to remove a NAC member for cause affecting the best 
interests of the NAC, FINRA explains that its Board may consider, among 
other things, the NAC member's adherence to general standards 
concerning actual and apparent adjudicator conflicts of interest and 
bias,\19\ and to the NAC's Conflict of Interest and Bias Policy, which 
sets forth broad-based principles of behavior that are expected from 
NAC members.\20\ FINRA recognizes that there may, depending on the 
facts and circumstances, be overlap in part between the new and 
existing grounds to remove a NAC member. However, FINRA states that, 
depending on the facts and circumstances, the proposed rule change may 
also provide an additional basis for removal for a cause affecting the 
best interests of the NAC that would not fall within the scope of the 
FINRA's Board's current removal authority.\21\
---------------------------------------------------------------------------

    \16\ See id.
    \17\ See id.
    \18\ See id. at 71388-89.
    \19\ See id. at 71388, n.11 (citing Article IV, Section 4.14(a) 
of the FINRA Regulation By-Laws).
    \20\ See id. at n.12. FINRA notes that the principles outlined 
in the NAC's Conflict of Interest and Bias Policy are independence, 
impartiality, integrity, accountability and transparency; and place 
upon NAC adjudicators the responsibility for recognizing and 
reporting actual and apparent conflicts of interest and bias. See 
id.
    \21\ See id. at 71389.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\22\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(4) of the Exchange Act,\23\ which requires, among other 
things, that the rules of a national securities association, like 
FINRA, assure the fair representation of its members in the 
administration of its affairs. Additionally, the Commission finds that 
the proposed rule change is also consistent with Section 15A(b)(6) of 
the Exchange Act,\24\ 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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    \22\ 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).
    \23\ 15 U.S.C. 78o-3(b)(4).
    \24\ 15 U.S.C. 78o-3(b)(6).
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    As a threshold matter, the Commission observes that the provision 
that is being added to the FINRA Regulation By-Laws by this proposed 
rule change mirrors a parallel provision found in the FINRA By-
Laws.\25\ Moreover, the Commission has previously reviewed and approved 
a proposal that conformed the then-NASD Regulation By-Laws to the FINRA 
By-Laws, and has also previously reviewed and approved the NAC 
committee and its governance structure (which remains the same under 
this proposal), finding both proposals to be consistent with Section 
15A(b)(4) of the Exchange Act.\26\ We discuss below some of the 
pertinent aspects of the Commission's prior findings as they apply, at 
least in part, to the current proposed rule change.
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    \25\ See Notice, 85 FR at 71388 (comparing Article VII, Section 
1(b) of the FINRA By-Laws with Article V, Sec. 5.8 of the FINRA 
Regulation By-Laws).
    \26\ See id. at n.17 (citing Exchange Act Release No. 56145 
(July 26, 2007), 72 FR 42169 (August 1, 2007) (the ``NASD By-Laws 
Approval Order''), as amended by Exchange Act Release No. 56145A 
(May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. 
SR-NASD-2007-023)). These orders approved FINRA's By-Laws when the 
NASD merged with the member regulation, enforcement and arbitration 
operations of the New York Stock Exchange (``NYSE'') to form FINRA. 
See also infra notes 31-32.
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    As the Commission explained in approving the FINRA By-Laws, Section 
15A(b)(4) requires that the rules of a national securities association, 
like FINRA, assure the fair representation of its members in, among 
other things, the administration of its affairs.\27\ In approving the 
FINRA By-Laws, the Commission found, in part, that FINRA's members' 
participation on various committees provided for the fair 
representation of members in the administration of the affairs of a 
self-regulatory organization such as FINRA, particularly with respect 
to participation on committees relating to, among other things, the 
disciplinary process.\28\ More specifically, the Commission observed 
that FINRA has extensive member involvement in the administration of 
its affairs through representation on various subject matter 
committees, including the NAC.\29\ In connection with this proposal, 
FINRA states that, similar to the FINRA By-Laws addressing the 
composition of its Board, the FINRA Regulation By-Laws addressing the 
composition of the NAC provide for a diverse, majority non-industry 
composition, and for the fair representation of industry.\30\ The 
Commission agrees with FINRA's statements and, moreover, observes that 
the Commission found previously that the NAC's governance structure, 
including the NAC's composition as well as the nomination and election 
processes for NAC seats, align with those of the FINRA Board and were 
consistent with Section 15A(b)(4) of the Act.\31\
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    \27\ See NASD By-Laws Approval Order, 72 FR at 42182 (explaining 
that this requirement helps to assure that members have a stake in 
the governance of the national securities association, which is 
charged with self-regulatory responsibilities under the Exchange 
Act).
    \28\ See id. at 42185.
    \29\ See id. See also supra note 7 and accompanying text.
    \30\ See supra note 15 and accompanying text.
    \31\ See FINRA Regulation By-Laws Approval Order, 73 FR at 
68469-70.
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    Furthermore, in approving certain amendments to the then-NASD 
Regulation By-Laws, the Commission found that because those amendments 
conformed certain NASD Regulation By-Laws provisions to the relevant

[[Page 9112]]

provisions in the FINRA By-Laws and reflected the governance structure 
set forth in the FINRA By-Laws those amendments were consistent with 
the Exchange Act.\32\ Similarly, this proposal will also further 
conform the FINRA Regulation By-Laws with the FINRA By-Laws and will 
also continue to reflect the previously approved governance structure 
of the NAC. As a result, the Commission believes that this proposal 
will continue to help assure the fair representation of FINRA members 
in the administration of FINRA's affairs and, therefore, is consistent 
with Section 15A(b)(4) of the Act.
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    \32\ See NASD By-Laws Approval Order, 72 FR at 42188.
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    The Commission further observes that the NAC acts on behalf of the 
FINRA Board in several important capacities, including presiding over 
disciplinary matters that have been appealed to or called for review by 
the NAC and acting on applications in statutory disqualification and 
membership proceeding.\33\ Given the NAC's ability to perform these 
actions and prepare written decisions on behalf of the FINRA Board, and 
that these decisions become FINRA's final action in the vast majority 
of cases,\34\ the Commission finds that applying the same grounds for 
the removal of a NAC member as those that apply for the removal of a 
governor is consistent with the Act. The proposal will strengthen the 
FINRA Board's oversight of the NAC and further support the principles 
outlined in the NAC's Conflict of Interest and Bias Policy, which 
include independence, impartiality, integrity, and accountability.\35\ 
In doing so, the proposal will help protect investors and further the 
public interest by expanding the scope of the FINRA Board's authority 
to remove NAC members that, in the Board's view, may be biased or have 
actual or apparent conflicts of interest or otherwise impede the NAC's 
adjudicatory responsibilities.\36\
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    \33\ See supra note 7 and accompanying text.
    \34\ See Notice, 85 FR at 71389.
    \35\ See id. at 71388, n.12. See also supra note 20 and 
accompanying text.
    \36\ See id. at 71388 (citing Article IV, Section 4.14(a) of the 
FINRA Regulation By-Laws).
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    In sum, the Commission finds that the proposal will continue to 
help assure the fair representation of FINRA members in the 
administration of FINRA's affairs. The Commission also finds that this 
proposal will help protect investors and further the public interest by 
supporting fair and impartial adjudicatory processes for, among other 
things, FINRA's disciplinary matters as well as statutory 
disqualification and membership proceedings.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \37\ that the proposal (SR-FINRA-2020-037) is approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02779 Filed 2-10-21; 8:45 am]
BILLING CODE 8011-01-P
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