[Federal Register Volume 81, Number 93 (Friday, May 13, 2016)]
[Notices]
[Pages 29929-29932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11295]
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-77786; File No. SR-FINRA-2016-014]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
National Adjudicatory Council Composition, Member Terms and Election
Procedures
May 9, 2016.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 28, 2016, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the By-Laws of FINRA's regulatory
subsidiary, FINRA Regulation, Inc. (``FINRA Regulation''), to expand
the size of the National Adjudicatory Council (``NAC'') to 15 members,
with the number of non-industry members exceeding the number of
industry members; lengthen the terms of office of future NAC members to
four years; and update the process used for sending and counting
ballots in the event of a contested nomination and election to fill
certain NAC industry member seats.
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
In 2007, as part of the consolidation of the member firm regulatory
functions of National Association of Securities Dealers, Inc.
(``NASD'') and NYSE Regulation, Inc. into a combined organization,
FINRA, the SEC approved changes to the NASD By-Laws that, among other
things, included a governance structure that apportioned public and
industry representation on the FINRA Board of Governors (``FINRA
Board'') and designated seven governor seats to represent member firms
of various sizes based on the criteria of firm size.\3\ As a result of
these changes, the By-Laws of FINRA (``FINRA By-Laws'') require that
the FINRA Board consist of no fewer than 16 and no more than 25
governors.\4\ They provide also that the number of Public Governors
serving on the FINRA Board shall exceed the number of Industry
Governors.\5\
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\3\ See Securities Exchange Act Release No. 56145 (July 26,
2007), 72 FR 42169 (August 1, 2007), as amended by Securities
Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6,
2008) (Order Approving File No. SR-NASD-2007-023).
\4\ See FINRA By-Laws, Article VII, Section 4 (Composition and
Qualifications of the Board), paragraph (a).
\5\ Supra note 4.
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The FINRA Board consists currently of 24 governors, including 13
Public Governors, 10 Industry Governors and FINRA's chief executive
officer.\6\ The ten Industry Governors include a Floor Member Governor,
an Independent Dealer/Insurance Affiliate Governor, an Investment
Company Affiliate Governor and seven governors that are subject to
election to the FINRA Board by member broker-dealers based on the
criteria of firm size--three Small Firm Governors, one Mid-Size Firm
Governor and three Large Firm Governors.\7\
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\6\ Supra note 4. The number of Public Governors is determined
by the FINRA Board.
\7\ Supra note 4.
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The National Adjudicatory Council
The NAC acts on behalf of FINRA in several capacities and its
powers are authorized by the By-Laws of FINRA
[[Page 29930]]
Regulation (``FINRA Regulation By-Laws'') and FINRA's Code of
Procedure.\8\ The NAC presides over disciplinary matters appealed to or
called for review by the NAC.\9\ The NAC also acts, when requested, in
statutory disqualification and membership proceedings; considers the
appeals of members seeking exemptive relief; and retains the authority
to review decisions proposed in other proceedings as set forth in the
Code of Procedure.\10\ For most matters that the NAC considers, it
prepares a proposed written decision, which becomes final FINRA action
if the Board does not call the matter for review.\11\
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\8\ See FINRA Regulation By-Laws, Article V, Section 5.1
(Authority); see also FINRA Rule 9000 Series.
\9\ See generally FINRA Rule 9300 Series. FINRA's disciplinary
process begins with its Department of Enforcement or Department of
Market Regulation filing a complaint with the Office of Hearing
Officers that alleges a member or person associated with a member is
violating or has violated any rule, regulation, or statutory
provision, including the federal securities laws and related
regulations. See FINRA Rule 9212. When requested, trial-level
hearings take place before a Hearing Panel or an Extended Hearing
Panel, which listens to the presentation of evidence and issues a
written decision setting forth findings as to whether a respondent
engaged in the alleged misconduct and describing the sanctions, if
any, imposed. See FINRA Rule 9221; see generally FINRA Rule 9260
Series. A respondent or the Department of Enforcement or Market
Regulation may appeal a disciplinary decision to the NAC. See FINRA
Rule 9311. In the absence of an appeal, a decision may be subject to
NAC review if called for review by any member of the NAC, any member
of the NAC's Review Subcommittee, or in the event of a default, the
General Counsel. See FINRA Rule 9312.
\10\ See FINRA Rule 9524; NASD Rule 1015; FINRA Rule 9630; FINRA
Rule 9559; FINRA Rule 9760.
\11\ See FINRA Rule 9349.
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The FINRA Regulation By-Laws establish the composition of the NAC,
the terms of its members, and the process by which members are
selected. The NAC is composed currently of 14 members.\12\ The number
of Non-Industry Members, which must include at least three Public
Members, equals the number of Industry Members.\13\ The seven Industry
Members include two Small Firm NAC Members, one Mid-Size Firm NAC
Member, two Large Firm NAC Members and two at-large Industry
Members.\14\
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\12\ See FINRA Regulation By-Laws, Article V, Section 5.2
(Number of Members and Qualifications), paragraph (a).
\13\ Supra note 12. A ``Non-Industry Member'' of the NAC
includes any Public Member, an officer or employee of an issuer of
securities listed on a market for which FINRA provides regulation,
an officer or employee of an issuer of unlisted securities that are
traded in the over-the-counter market, or any individual who would
not otherwise fall within the definition of an Industry Member. See
FINRA Regulation By-Laws, Article I, paragraph (ee). A ``Public
Member'' is a Non-Industry Member who has no material business
relationship with a broker or dealer or a self-regulatory
organization registered under the Act. See FINRA Regulation By-Laws,
Article I, paragraph (hh). An ``Industry Member'' includes a person
who is or served in the prior year as an officer, director, employee
or controlling person of a broker-dealer; is an officer, director or
employee of an entity that owns a material equity interest in a
broker-dealer; owns personally a material equity interest in a
broker-dealer; provides professional services to broker-dealers, or
to a director, officer, or employee of a broker-dealer in their
professional capacity, where the revenues from such services meet
material thresholds; or is or served in the prior year as a
consultant, employee or provider of professional services to a self-
regulatory organization registered under the Act. See FINRA
Regulation By-Laws, Article I, paragraph (x).
\14\ Supra note 12.
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The FINRA Board appoints the NAC and its members.\15\ The FINRA
Board appoints Non-Industry Members and at-large Industry Members from
candidates recommended by the Nominating Committee. The FINRA Board
also appoints Small Firm, Mid-Size Firm and Large Firm NAC Members,
either from candidates recommended by the Nominating Committee, or in
the event of a contested election for a Small Firm, Mid-Size Firm or
Large Firm NAC Member vacancy, the candidate that results from an
election in which FINRA members have an opportunity to vote directly
for a candidate based on firm size.\16\ The Small Firm, Mid-Size Firm
or Large Firm NAC Member candidate receiving the largest number of
votes from firms of corresponding size is declared the nominee, and the
Nominating Committee sends a written certification of the results to
the FINRA Board and nominates such candidate for appointment to the
NAC.\17\
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\15\ See FINRA Regulation By-Laws, Article V, Section 5.3
(Appointments).
\16\ Supra note 15. A person who has not been nominated by the
Nominating Committee may be included on a ballot for election to
fill an open Small Firm, Mid-Size Firm or Large Firm NAC Member seat
by contesting the Nominating Committee's nominee after successfully
petitioning for inclusion on the ballot. See FINRA Regulation By-
Laws, Article VI, Section 6.2 (Designation of Additional
Candidates).
\17\ See FINRA Regulation By-Laws, Article VI, Section 6.13
(Certification of Nomination). The FINRA Board is required to
appoint to the NAC the candidate who receives the most votes in any
contested election for a Small Firm, Mid-Size Firm or Large Firm NAC
Member seat. See FINRA Regulation By-Laws Article V, Section 5.5
(Rejection of Nominating Committee Nominee).
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Discussion of the Proposed Rule Change
The proposed rule change would amend the FINRA Regulation By-Laws
in three principal ways. First, the proposed rule change would make a
limited modification to the NAC's composition and align it more closely
with that of the FINRA Board. Second, the proposed rule change would
lengthen the terms of future NAC members to encourage consistency and
continuity in NAC decision making. Finally, the proposed rule change
would modernize the selection process used in the event of a contested
nomination and election for certain industry member NAC seats by
permitting new balloting methods and streamlining the process by which
ballots are counted.
Proposal To Change the Composition of the NAC
The proposed rule change would amend Section 5.2 of the FINRA
Regulation By-Laws to expand the size of the NAC to 15 members and
apply the requirement that the NAC have more Non-Industry Members,
including three Public Members, than Industry Members, thus following
closely the requirement that exists in the FINRA By-Laws that the
number of Public Governors on the FINRA Board exceed the number of
Industry Governors.\18\ FINRA proposed, and the SEC approved, the
current FINRA Board governance structure to strike an appropriate
balance between the necessity for overall independence of the FINRA
Board and the desire for substantial, meaningful and diverse industry
representation in FINRA's governing process.\19\ The condition that the
number of Public Governors exceed the number of Industry Governors
permits the FINRA Board to consider the needs of the entire securities
industry, including issuers, large and small investors and securities
firms and their professionals, while at the same time broadly assuring
the independence of FINRA's regulatory function.\20\
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\18\ Although the terms ``Non-Industry Member'' and ``Public
Governor'' are not by their definitions exact analogs, both terms
are comparable in excluding from their definitions any person who
has a material business relationship or interests that align closely
with a FINRA member broker-dealer or a self-regulatory organization
registered under the Act. Compare FINRA Regulation By-Laws, Article
I, paragraph (ee), with FINRA By-Laws, Article I, paragraph (tt).
\19\ See supra note 3.
\20\ See supra note 3.
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Under the proposed rule change, the NAC would consist of 15
members, including eight Non-Industry Members and seven Industry
Members. FINRA would thus achieve the objective of a majority non-
industry NAC by adding one Non-Industry Member seat to the current 14-
member committee. Requiring that the number of Non-Industry Members
exceed the number of Industry Members will enhance overall the
independence of the NAC and reinforce the integrity of the NAC as an
impartial and fair adjudicatory body.
[[Page 29931]]
Proposal To Change NAC Member Terms
The proposed rule change would also lengthen the terms of office of
future NAC members. NAC members are divided currently into three
classes, with members serving three-year terms of office that commence
and expire on a staggered, annual basis.\21\ Consequently,
approximately one-third of the NAC members complete their service in a
particular year and are replaced with newly appointed members. This
represents a significant amount of turnover annually and risks
undermining the cohesion and continuity of the NAC as an adjudicatory
body.
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\21\ See FINRA Regulation By-Laws, Article V, Section 5.6 (Term
of Office), paragraphs (a) and (b).
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The proposed rule change would amend Section 5.6 of the FINRA
Regulation By-Laws to extend by one year, to four total years, the
terms of new NAC members.\22\ This would result in a NAC that is
divided into four classes, rather than the current three, that are as
equal in number as feasible.\23\ Extending to four years the term of
each NAC member will allow for greater utilization of the unique skills
and expertise of each member, diminish the risk associated with
recurrent losses of institutional knowledge and provide FINRA more
opportunity to recoup over a longer period of time its investment in
training NAC members to fulfill their roles as adjudicators.\24\
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\22\ The proposed rule change would not alter or extend the term
of any NAC member serving currently but would affect instead the
term of any NAC member appointed to serve by the FINRA Board after
the effective date of the rule change.
\23\ The proposed rule change would amend Section 5.6(a) of the
FINRA Regulation By-Laws to provide a three-year transitional period
during which the FINRA Board may appoint new NAC members to terms of
office less than four years to achieve the staggering necessary to
divide the NAC into four classes. FINRA anticipates that, beginning
in January 2017, and ending in December 2019, new NAC members shall
be appointed to terms of either three years or four years to achieve
the result of a NAC that is divided into four classes, with each NAC
member serving a term of four years. The proposed rule change would
also make a conforming amendment to Section 5.6(b) of the FINRA
Regulation By-Laws to delete obsolete text related to a prior rule
change that replaced region-based Industry NAC members with Industry
members that represent FINRA member firms of various sizes. See
Securities Exchange Act Release No. 58909 (November 6, 2008), 73 FR
68467 (November 18, 2008) (Order Approving File No. SR-FINRA-2008-
046).
\24\ A NAC member, absent a limited exception, may not serve
consecutive terms. See FINRA Regulation By-Laws, Article V, Section
5.6 (Term of Office), paragraph (c). The proposed rule change would
make a conforming amendment to this By-Law provision.
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Proposal To Change the NAC Selection Process
Finally, the proposed rule change would make limited, procedural
and administrative modifications to the NAC selection process. The
proposed changes would make the NAC election process streamlined,
accessible and align it with the process used currently for elections
involving the FINRA District Committees.
The FINRA Regulation By-Laws, as currently written, require that
the Nominating Committee prepare and deliver by mail, in the event of a
contested election for a Small Firm, Mid-Size Firm or Large Firm NAC
Member seat, a ballot with the names of the candidates standing for
election, and a FINRA member eligible to vote based on their firm size
must return the ballot envelope by mail with a postmark bearing a date
on or before the return date specified on the ballot.\25\ The proposed
rule change would amend Section 6.7 of the FINRA Regulation By-Laws to
delete language that suggests that voting by paper ballot is the sole
method of voting in contested NAC elections and recognize the delivery
of ballots by other efficient, contemporary means.\26\ The proposed
rule change would align the ballot preparation process in NAC elections
with that permitted currently in FINRA District Committee elections and
allow FINRA members to vote using online and telephonic methods in
addition to paper ballots.\27\
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\25\ See FINRA Regulation By-Laws, Article VI, Section 6.7
(Ballots).
\26\ The proposed rule change would also make a conforming
amendment to Section 6.9 of the FINRA Regulation By-Laws concerning
ballots that are returned as undelivered.
\27\ See FINRA Regulation By-Laws, Article VIII, Section 8.11
(Ballots).
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The proposed rule change would also amend Section 6.10 of the FINRA
Regulation By-Laws to simplify the tabulation of ballots by the
Independent Agent. The proposed rule change would eliminate the
provision in Section 6.10 of the FINRA Regulation By-Laws that permits
NAC candidates and their representatives to observe the Independent
Agent's accounting of ballots in contested NAC elections. The proposed
rule change would align the ballot counting process used in NAC
elections with the process used in FINRA District Committee elections,
which does not provide candidates the ability to be present while the
Independent Agent opens and counts the ballots.\28\ The proposed rule
change will allow the Independent Agent to expedite the accounting
process and permit the Secretary of FINRA to notify the candidates more
quickly of NAC election results.
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\28\ See FINRA Regulation By-Laws, Article VIII, Section 8.14
(General Procedures for Qualification and Accounting of Ballots).
The opportunity to observe the Independent Agent's qualification and
accounting of ballots is one which NAC candidates have infrequently
availed themselves and provides candidates no additional grounds for
recourse. Candidates and their representatives are not allowed to
see the vote of any FINRA member and the final determination of the
qualification of a ballot rests with the Secretary of the
Corporation. See FINRA Regulations By-Laws, Article VI, Section 6.10
(General Procedures for Qualification and Accounting of Ballots).
The proposed rule change does not alter the requirement that the
Secretary of the Corporation certify election results. See FINRA
Regulation By-Laws, Article VI, Section 6.13 (Certification of
Nomination).
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If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 30 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(8) of the Act,\29\ which requires, among
other things, that FINRA rules provide a fair procedure for the
disciplining of members and persons associated with members. FINRA
believes that the proposed rule change, consistent with this purpose of
the Act, assures that disciplinary appeals and other matters considered
by the NAC will continue to be heard and resolved by a NAC that is
composed of members with a diversity of expertise, experiences and
perspectives that fosters making fair decisions and, where necessary,
imposing appropriately remedial sanctions.
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\29\ 15 U.S.C. 78o-3(b)(8).
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FINRA believes further that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act,\30\ which
requires, among other things, that FINRA Rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade and, in general, to protect investors
and the public interest. FINRA believes that making a limited
modification to the NAC's composition to align it more closely with
that of the FINRA Board will enhance overall the independence of the
NAC as an adjudicatory body. Ensuring that the NAC has a majority of
Non-Industry Members emphasizes the importance of the unique, balanced
perspectives that
[[Page 29932]]
are valued in NAC deliberations and aid in its ability to address
issues in a neutral fashion. FINRA believes that adding one Non-
Industry Member seat to the NAC confirms that a diversity of views is
represented in the NAC's opinions.
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\30\ 15 U.S.C. 78o-3(b)(6).
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FINRA believes also that the proposed rule change is consistent
with the provisions of Section 15A(b)(4) of the Act,\31\ which
requires, among other things, that FINRA rules assure a fair
representation of its members in the administration of its affairs.
Although the proposed rule change would make a limited change to the
NAC's composition, it would nevertheless continue FINRA's custom of
substantial industry participation in FINRA's adjudicatory process and
would not dilute the critically important involvement of FINRA members
and their associated persons in NAC deliberations. Under the proposed
rule change, the opportunity for FINRA members to vote on five
designated Industry Member NAC seats based on firm size--two Small
Firm, one Mid-Size Firm and two Large Firm Member seats--is unaltered.
The right of FINRA members to elect a total of five Industry Members to
the NAC, one-third of all members, based on firm size is consistent
with the Act's fair representation requirement.\32\ The proposed rule
change will also result in a more accessible NAC election process,
which FINRA believes will assure a fair representation of its members
on the NAC.\33\
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\31\ 15 U.S.C. 78o-3(b)(4).
\32\ The Commission has found the similar composition
requirements of the FINRA Board to meet the statutory requirements
of Section 15A(b)(4) of the Act. See supra note 3.
\33\ The Commission has found that the processes used currently
for FINRA District Elections, processes with which those used in NAC
elections would be aligned under the proposed rule change, are
consistent with the statutory requirements of the Act. See
Securities Exchange Act Release No. 64363 (April 28, 2011), 76 FR
25397 (May 4, 2011) (Order Approving File No. SR-FINRA-2011-011).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is
intended solely to enhance impartiality and integrity in FINRA's
process for reviewing appeals of disciplinary and other decisions
concerning member firms and their associated persons, and will lead to
efficiencies in the process by which some NAC members are elected to
the NAC by allowing contemporary balloting methods and expediting the
process by which ballots are counted. FINRA does not believe that there
are any material economic impacts associated with the proposed rule
change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2016-014 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2016-014. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2016-014, and should
be submitted on or before June 3, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11295 Filed 5-12-16; 8:45 am]
BILLING CODE 8011-01-P