[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Notices]
[Pages 41537-41539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17682]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64841; File No. SR-FINRA-2011-032]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Implement Revolving Door Restrictions on Former
Officers of FINRA
July 8, 2011.
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 July 1, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. FINRA has
designated the proposed rule change as concerned solely with the
administration of the self-regulatory organization under Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(3) thereunder,\4\
which renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(3).
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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 (i) FINRA Rule 9141 (Appearance and
Practice; Notice of Appearance) to prohibit a former officer of FINRA,
for a period of one year after termination of employment with FINRA,
from making an appearance before an adjudicator on behalf of any other
person under the FINRA Rule 9000 Series; and (ii) FINRA Rule 9242 (Pre-
hearing Submission) to prohibit a former officer of FINRA, for a period
of one year after termination of employment with FINRA, from providing
expert testimony on behalf of any other person under the FINRA Rule
9000 Series.
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.
[[Page 41538]]
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
FINRA seeks to diligently uphold a high degree of fairness in
disciplinary and similar proceedings that take place before FINRA
hearing panels and other FINRA adjudicators. To further this goal,
FINRA is amending two procedural rules that will prevent former FINRA
officers--for one year--from appearing on behalf of a client before a
FINRA adjudicator or testifying as an expert witness in a FINRA forum.
The FINRA Rule 9000 Series is FINRA's Code of Procedure (the
``Code'') and provides detailed procedures for initiating and
adjudicating various types of actions, including disciplinary,
eligibility, expedited, and cease and desist proceedings. FINRA is
imposing a temporal forum appearance prohibition under the Code on
FINRA officers that restricts former officers from acting in two
different capacities in a FINRA forum (``Revolving Door
Restrictions''). The proposed rule change maintains the perception of
fairness and safeguards against former FINRA officers potentially
exerting undue influence in FINRA proceedings. Although FINRA is not
aware of any instances of former officers exerting undue influence in
FINRA's disciplinary and similar forums, FINRA seeks to prevent such an
incident by implementing the Revolving Door Restrictions under the
Code.
First, the proposed rule change addresses a former officer
appearing as a lawyer in FINRA's forum. FINRA Rule 9141 governs, among
other things, the appearance and practice of lawyers before an
adjudicator under the Code.\5\ The proposed rule change amends FINRA
Rule 9141 to prohibit a former FINRA officer, for a period of one year
after termination of employment with FINRA, from making an appearance
before an adjudicator on behalf of any other person under the FINRA
Rule 9000 Series. The proposed rule change accordingly restricts former
FINRA officers who are attorneys from appearing on behalf of clients
before Hearing Officers, Hearing Panels, the National Adjudicatory
Council, and the FINRA Board of Governors.\6\ While the most common
impact of the proposed rule change will be to prohibit a former FINRA
officer from appearing on behalf of a respondent, the prohibition also
applies to a former FINRA officer appearing on behalf of a witness who
is not a respondent but is testifying before a Hearing Panel, Hearing
Officer, or other adjudicator.
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\5\ See FINRA Rule 9141(b) (requiring attorneys that seek to
represent a party in a FINRA proceeding to be licensed to practice
law before the highest court of any state).
\6\ FINRA Rule 9120(a) defines the term ``Adjudicator.'' For
purposes of the proposed rule change, ``adjudicator'' includes the
FINRA Board of Governors, when it is calling a case for review, see
FINRA Rule 9351, a Subcommittee, Review Subcommittee or Extended
Proceeding Committee of the National Adjudicatory Council, see FINRA
Rule 9331 and FINRA Regulation By-Law Article V, Sec. 5.13, a
Hearing Officer, see FINRA Rule 9120(r), a Hearing Panel, see FINRA
Rule 9120(s), a Hearing Panel in an eligibility proceeding or the
Statutory Disqualification Committee, see FINRA Rule 9524(a)(1) and
(10), and the Waiver Subcommittee, see FINRA Rule 9630.
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Second, the Revolving Door Restrictions amend FINRA Rule 9242 to
prohibit a former officer of FINRA, for a period of one year after
termination of employment with FINRA, from providing expert testimony
on behalf of a respondent under the FINRA Rule 9000 Series. The
proposed rule change makes clear, however, that nothing in the rule
prohibits a former officer of FINRA from testifying as either a fact
witness or as an expert witness on behalf of FINRA.
The Revolving Door Restrictions are designed to provide clear
boundaries that limit specific activities of former FINRA officers in a
manner that is consistent with restrictions currently imposed on other
regulators in the securities industry.\7\ One aspect of the
restrictions focuses on a former FINRA officer's appearance before a
FINRA adjudicator because that event is recorded in a written notice
that is currently required under the Code.\8\ Moreover, once a matter
is pending before an adjudicator, both the prohibitions on appearing
before an adjudicator and testifying as an expert witness can be
enforced quickly in the context of a pending FINRA proceeding either
directly by the adjudicator or through a motion to disqualify the
former FINRA officer, which is filed with the adjudicator.\9\ In sum,
the proposed rule change is designed to create restrictions that are
precisely defined and straightforward to enforce.
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\7\ FINRA officers include Vice Presidents, Senior Vice
Presidents, and higher ranking FINRA executives.
\8\ See FINRA Rule 9141(b).
\9\ FINRA Rule 9150 authorizes an adjudicator to exclude an
attorney from acting as counsel in FINRA disciplinary and similar
proceedings.
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Although FINRA's proposed rule change will serve as one safeguard
against unfairness in its proceedings, it is not the only safeguard.
Former FINRA employees, whether officers or not, who are attorneys that
seek to represent a client in a FINRA proceeding must, as noted
earlier, be licensed to practice law before the highest court of any
state.\10\ The vast majority of state jurisdictions have adopted rules
of professional conduct that are based on the American Bar
Association's Model Rules of Professional Conduct.\11\ Model Rule
1.9(a) addresses a lawyer's conflict of interest regarding a former
client and prohibits a lawyer who has represented a client in a matter
from subsequently representing any other person in that matter or a
substantially related matter when that person's interests are
materially adverse to the interests of the former client.\12\ For
example, in a FINRA disciplinary case, this means that FINRA Department
of Enforcement attorneys who have litigated for FINRA and have ended
their FINRA employment may not subsequently represent any respondent in
appeals in that case, any other continuing litigation in that case, or
a substantially related matter in which the respondent's interests are
materially adverse to FINRA's interests.\13\ By augmenting the
protections imposed by state bar ethical rules with the Revolving Door
Restrictions, FINRA believes that it will further insulate its
proceedings from the appearance of any undue influence.
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\10\ See FINRA Rule 9141(b).
\11\ Richard Acello, New York Makes Itself a `Model' State:
California Now the Only Holdout on Adopting ABA Model Rules, 95 ABA
J., Sept. 2009, at 22.
\12\ The ABA Model Rules of Professional Conduct (2010),
available at http://www.americanbar.org.
\13\ A conflict of interest may be waived by a former client who
gives informed consent. Model Rule 1.9(a) and comment 9 (2010).
FINRA, as the former client with the option to waive, does not
anticipate waiving any such conflicts.
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FINRA has filed the proposed rule change for immediate
effectiveness. The implementation date will be July 2, 2012.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\14\ which
[[Page 41539]]
requires, among other things, that FINRA rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. FINRA believes that the proposed
rule change will maintain the perception of fairness in its
disciplinary and similar proceedings and will safeguard against former
FINRA officers potentially exerting undue influence in FINRA
proceedings.
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\14\ 15 U.S.C. 78o-3(b)(6).
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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.
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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \15\ and paragraph (f)(3) of Rule 19b-4
thereunder.\16\ 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.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(3).
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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 e-mail to [email protected]. Please include
File Number SR-FINRA-2011-032 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-032. This
file number should be included on the subject line if e-mail 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 a.m. and 3
p.m. Copies of the 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-2011-032 and
should be submitted on or before August 4, 2011.
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\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17682 Filed 7-13-11; 8:45 am]
BILLING CODE 8011-01-P