81540 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Notices 

16 15 U.S.C. 78s(b)(3)(A)(iii). 

17 17 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. 

18 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

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. 

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 

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 (http://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 (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 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 


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3See Exchange Act Release No. 88600 (Apr. 8, 

2020), 85 FR 20745 (Apr. 14, 2020) (File No. SR– 

FINRA–2020–011) (‘‘Notice’’). 

4See 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. 

5See 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. 

6See Exchange Act Release No. 89305 (July 13, 

2020), 85 FR 43627 (July 17, 2020) (File No. SR– 

FINRA–2020–011) (‘‘Order Instituting 

Proceedings’’). 

7See 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. 

8See 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. 

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). 

10See Notice at 20745. 

11See Notice at 20746. 

12 Id. 

13See FINRA Rules 9311(b) and 9312(b). 

14See FINRA Rule 9370(a). 

15See 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 

Continued 

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 

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 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 

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 


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moving and opposition papers. See Proposed Rule 

9285(a)(2)–(5) and (c); see also Notice at 20747. 

16See Notice at 20747. 

17See Notice at 20756. 

18 Id. 

19See 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. 

20See 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. 

21See Notice at 20748. 

22See Notice at 20750. 

23See Notice at 20749. 

24 Id. 

25See 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. 

26See FINRA Rule 3170(a)(2) (defining the term 

‘‘disciplined firm’’). 

27See Notice at 20751. 

28FINRA 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. 

31See Notice at 20752. 

32 Id. 

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

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 

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 


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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. 

34See 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. 

35See Notice at 20753. 36 Id. 37See 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. 

38See Notice at 20753. 

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%). 

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. 

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 

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 


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42See 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. 

43See 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). 

44Under 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. 

45See FINRA July 2 Letter and FINRA October 7 

Letter; see also Notice at 20746. 

46See FINRA Rules 9311(b) and 9312(b). 

47See 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). 

48See letter from Lev Bagramian, Senior 

Securities Policy Advisor, Better Markets, Inc. to 

Vanessa A. Countryman, Secretary, Commission, 

dated June 19, 2020 (‘‘Better Markets Letter’’). 

49FINRA 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. 

50FINRA 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. 

51FINRA 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. 

52See Notice at 20760. 

53See Notice at 20760. 

54See 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. 

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

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

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


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55The 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. 

56See 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. 

57See FINRA Regulatory Notice 18–23 and Notice 

at 20750. 

58See 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. 

59Currently, 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. 

62See Better Markets Letter. 

63See Notice at 20765. 

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

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

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 


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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. 

65According 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. 

66See Better Markets Letter (stating that requiring 

materiality consultations before hiring is an 

important regulatory innovation); see also Notice at 

20766. 

67The 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. 

68See 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. 

69See Harvin Letter. 

70See FINRA July 2 Letter. 

71 Id. 

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. 

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 

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 

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 


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72See 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. 

73See FINRA October 7 Letter. 

74See FINRA Study at 9; see also Notice at 20761 

and 20767. 

75 Id. 

76See 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’’). 

78See FINRA October 7 Letter (citing the Lebenta 

Letter). 

79See 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. 82See supra note 33. 

83See FINRA October 7 Letter. 

84See 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. 

85See Lebenta Letter. 

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, 

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 

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 


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81548 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Notices 

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). 

88See FINRA October 7 Letter; see also Notice at 

20745–46, 20755 and note 5. 

89See FINRA October 7 Letter; see also Notice at 

20748. 

90See FINRA October 7 Letter; see also Notice at 

20750, 20754. 

91See 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. 

92See FINRA Study at 9–10. 

93 15 U.S.C. 78s(b)(2). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Self-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’’). 

4See Notice supra note 3. 

5Capitalized terms used but not defined herein 

have the meanings specified in the Procedures or 

the ICE Clear Europe Clearing Rules (the ‘‘Rules’’), 

as applicable. 

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 

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– 

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 


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