Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Notices 32525 

10 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 61938 

(Apr. 19, 2010), 75 FR 21686 (Apr. 26, 2010). 

4See letters from Michael T. Nommensen, dated 

May 14, 2010; William A Jacobson, Esq., Associate 

Clinical Professor of Law, Cornell Law School, and 

Director, Cornell Securities Law Clinic, and Lennie 

Sliwinski, Cornell Law School class of 2011, dated 

May 15, 2010; and Scott R. Shewan, President, 

Public Investors Arbitration Bar Association 

(‘‘PIABA’’), dated May 17, 2010. 

5Expedited actions allow FINRA to address 

certain types of misconduct quicker than would be 

possible using the ordinary disciplinary process. In 

general, expedited actions are designed to 

encourage respondents to comply with the law or 

take corrective action rather than sanction them for 

past misconduct. Moreover, as discussed in detail 

below, the Act uses a different standard of review 

for expedited actions than it does for disciplinary 

cases. 

6FINRA Rule 10330(h). 

7 In its order approving changes to the 

predecessor to Rule 9554, the SEC noted that the 

issues raised in cases in which at least one of the 

aforementioned defenses is raised are narrow and 

generally limited to determining whether the 

respondent has proven any of these four defenses 

or an inability-to-pay the award. See Securities 

Exchange Act Release No. 40026 (May 26, 1998), 63 

FR 30789 (June 5, 1998). 

8See 4 Collier on Bankruptcy, ¶¶ 521.01, 521.09 

(15th ed. 2009). 

9See 18 U.S.C. 151–58 (2010). Bankruptcy fraud 

is punishable by a fine, or by up to five years in 

prison, or both. Id. 

10The ability to legally discharge debts, the more 

thorough and accurate verification of a bankruptcy 

Continued 

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 pm. Copies of such filing also 

will be available for inspection and 

copying at the principal office of the 

CBOE. 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–CBOE–2010–049 and 

should be submitted on or before June 

29, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–13663 Filed 6–7–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62211; File No. SR–FINRA– 

2010–014] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change Relating to 

FINRA Rule 9554 To Eliminate 

Explicitly the Inability-To-Pay Defense 

in the Expedited Proceedings Context 

June 2, 2010. 

On March 31, 2010, Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and 

Rule 19b–4 thereunder,2 a proposed rule 

change to FINRA Rule 9554 to eliminate 

explicitly the inability-to-pay defense in 

the expedited proceedings context. The 

proposed rule change was published for 

comment in the Federal Register on 

April 26, 2010.3 The Commission 

received three comments, all of which 

supported the proposed rule change.4

This order approves the proposed rule 

change. 

I. Description of the Proposed Rule 

Change 

FINRA proposed to amend FINRA 

Rule 9554 to eliminate explicitly the 

inability-to-pay defense in the expedited 

proceedings context when a member or 

associated person fails to pay an 

arbitration award to a customer. 

FINRA Rule 9554 allows FINRA to 

bring expedited actions to address 

failures to pay FINRA arbitration 

awards.5 Once a monetary award has 

been issued in a FINRA arbitration 

proceeding, the party that must pay the 

award has thirty days to do so.6 If the 

party that must pay the award is a 

respondent, (i.e., a member or an 

associated person, FINRA coordinates 

between FINRA Dispute Resolution’s 

arbitration forum and FINRA’s 

enforcement program to verify whether 

such respondent has done so. If the 

respondent has not paid, FINRA 

initiates an expedited proceeding by 

sending a notice explaining that the 

respondent will be suspended unless 

the respondent pays the award or 

requests a hearing. 

A respondent that requests a hearing 

may raise a number of defenses to the 

suspension. One of the current defenses 

is establishing a bona fide inability-topay. When a respondent successfully 

demonstrates a bona fide inability-topay, it is a complete defense to the 

suspension. Consequently, the inabilityto-pay defense currently precludes a 

harmed customer from obtaining 

payment of a valid arbitration award. 

FINRA’s expedited proceedings for 

failure to pay an arbitration award use 

the leverage of a potential suspension to 

help ensure that a member or an 

associated person promptly pays a valid 

arbitration award. However, if a 

respondent demonstrates a financial 

inability to pay the award—regardless of 

the reason—the leverage is removed. 

When FINRA’s efforts to suspend a 

respondent who has not paid an award 

have been defeated, a claimant is much 

less likely to be paid. FINRA believes 

that by eliminating the inability-to-pay 

defense, it will increase the probability 

of customers having their awards paid, 

or, at a minimum, it should prompt 

meaningful settlement discussions 

between claimants and respondents. 

The ability to work in the securities 

industry carries with it, among other 

things, an obligation to comply with the 

federal securities laws, FINRA rules, 

and orders imposed by the disciplinary 

and arbitration processes. Allowing 

members or their associated persons 

that fail to pay arbitration awards to 

remain in the securities industry 

presents regulatory risks and is unfair to 

harmed customers. 

Although FINRA proposes to 

eliminate the inability-to-pay defense, a 

respondent would still have available 

the following four defenses: 

• The member or person paid the 

award in full or fully complied with the 

settlement agreement; 

• The arbitration claimant has agreed 

to installment payments or has 

otherwise settled the matter; 

• The member or person has filed a 

timely motion to vacate or modify the 

arbitration award and such motion has 

not been denied; and 

• The member or person has filed a 

petition in bankruptcy and the 

bankruptcy proceeding is pending or the 

award or payment owed under the 

settlement agreement has been 

discharged by the bankruptcy court.7

Regarding the last defense, FINRA 

believes that a federal bankruptcy court 

is the best forum for adjudicating a 

financial condition defense. Bankruptcy 

judges are experts in evaluating whether 

a debtor’s obligations should be legally 

discharged. The bankruptcy process and 

associated filings are designed to 

consider fully and evaluate the financial 

condition of bankruptcy debtors.8 In 

addition, bankruptcy filings, which are 

subject to federal perjury charges, 

provide greater penalties for hiding 

assets.9 FINRA’s lack of subpoena 

power over banks and other third 

parties raises practical concerns 

regarding its ability to confirm 

accurately the assets of the firm or 

person asserting the defense.10


emcdonald on DSK2BSOYB1PROD with NOTICES
32526 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Notices 

debtor’s financial condition, and possible criminal 

prosecution for intentionally inaccurate disclosures, 

among other aspects, distinguish bankruptcy from 

inability-to-pay. 

11See Toney L. Reed, 52 S.E.C. 944 (1996), 

recons. denied, Securities Exchange Act Release No. 

39354 (Nov. 25, 1997); Bruce M. Zipper, 51 S.E.C. 

928 (1993). In addition, the SEC had previously 

recognized that a bona fide inability-to-pay an 

arbitration award is an important consideration in 

determining whether any sanction for failing to pay 

an arbitration award is ‘‘excessive or oppressive.’’ 

See Securities Exchange Act Release No. 40026 

(May 26, 1998), 63 FR 30789 (June 5, 1998). 

(Without further discussion, the order cited the 

SEC’s decision in Zipper, which was a disciplinary 

case, not an expedited action.) 

12 In William J. Gallagher, Securities Exchange 

Act Release No. 47501 (March 14, 2003), the SEC 

emphasized that expedited actions are reviewed 

under Section 19(f) of the Act not Section 19(e). The 

SEC stated, ‘‘Gallagher misconstrues the applicable 

review standard when he argues that [FINRA’s] 

sanction is ‘excessive and oppressive’ and that 

[FINRA’s] indefinite suspension order is 

inconsistent with the [FINRA] Sanction Guidelines, 

standards relevant in the Commission’s review of 

[FINRA] disciplinary proceedings under Section 

19(e) of the Exchange Act.’’ Id. at *6. The SEC 

explained that its review is limited to analyzing 

whether ‘‘the specific ground on which [FINRA] 

based its suspension—failure to pay in full an 

arbitration award—‘exists in fact[,]’’’ the ‘‘SRO’s 

determination was in accordance with its rules, and 

* * * those rules are, and were applied in a 

manner, consistent with the purposes of the 

Exchange Act.’’ Id. at *5 & *7. In Gallagher, FINRA 

and the SEC rejected the respondent’s claim of 

inability-to-pay on factual grounds. The issue of 

whether a respondent was permitted to raise the 

defense as a matter of law was neither raised nor 

decided. 

13 In its comment, PIABA also recommended that 

FINRA eliminate or restrict the bankruptcy defense 

in expedited proceedings. Those suggestions are 

outside the scope of the current proposed rule 

change. 14 In approving the proposed rule change, the 

Commission has considered the rule change’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

15 15 U.S.C. 78o–3(b)(6). 

16 15 U.S.C. 78o–3(b)(7). 

17 15 U.S.C. 78s(b)(2). 

18 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

The inability-to-pay defense emerged 

from a series of SEC decisions that 

require FINRA to consider the defense 

in disciplinary cases (as opposed to 

expedited actions), including 

disciplinary cases involving failures to 

pay arbitration awards and restitution.11

The legal underpinnings that support 

the inability-to-pay defense in 

disciplinary cases are not, however, 

present in the expedited proceedings 

context. The aforementioned SEC 

decisions largely rely on the ‘‘excessive 

and oppressive’’ language in Section 

19(e) of the Exchange Act in requiring 

FINRA to consider inability-to-pay. 

Section 19(e) of the Exchange Act 

provides authority to the SEC to review 

and affirm, modify or set aside any final 

disciplinary sanctions imposed by 

FINRA on its members. Section 19(e), 

however, does not apply to expedited 

proceedings. Expedited proceedings are 

reviewed under Exchange Act Section 

19(f), which requires that ‘‘the specific 

grounds’’ on which FINRA based its 

action ‘‘exist in fact,’’ that FINRA 

followed its rules, and that those rules 

are consistent with the Act. The 

different focus of these two standards 

and the more limited review for 

expedited actions are understandable 

and support eliminating the inability-topay defense in expedited actions.12

Unlike in disciplinary cases, FINRA is 

not imposing a monetary sanction in 

these expedited actions; it is suspending 

a respondent for failing to pay a 

previously imposed arbitration award. 

There also is an explicit procedural 

mechanism built into these expedited 

actions that allows a suspension to be 

lifted once respondents satisfy any of 

the four defenses listed above. The main 

goal is to encourage respondents to 

comply with the law or previously 

imposed orders, not to sanction them for 

past misconduct. 

In sum, members and associated 

persons that fail to pay arbitration 

awards to customers should not be 

allowed to remain in the securities 

industry by relying on the inability-topay defense in expedited actions. This 

is especially true because they can avoid 

regulatory action by paying the award, 

reaching a settlement with the 

customers (which can include payment 

plans), moving to vacate the award, or 

filing for bankruptcy. Three commenters 

addressed the proposed rule change and 

all three urged the Commission to 

approve it.13

II. Discussion and Commission 

Findings 

After careful review, the Commission 

finds the proposed rule change to be 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities association.14 In particular, 

the Commission finds that the proposed 

rule change is consistent with the 

provisions of Section 15A(b)(6) of the 

Act,15 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; to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system; and, in general, to protect 

investors and the public interest. The 

proposal also is consistent with Section 

15A(b)(7) of the Act,16 which provides 

that FINRA must take appropriate action 

when members and associated persons 

violate provisions of the Act or FINRA 

rules. 

The Commission believes that the 

proposed rule change will further 

FINRA’s investor protection mandate by 

promoting a fair and efficient process 

for taking action to encourage members 

and associated persons to pay 

arbitration awards to customers. The 

Commission also believes that the 

proposed rule change will further 

FINRA’s statutory obligation to take 

appropriate action when members and 

associated persons violate provisions of 

the Act or FINRA rules. 

III. Conclusion 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change is consistent with the Act 

and the rules and regulations 

thereunder applicable to a national 

securities association. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,17 that the 

proposed rule change (SR–FINRA– 

2010–0014) be and hereby is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.18

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–13764 Filed 6–7–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62207; File No. SR–ISE– 

2010–55] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change Relating to Amending the 

Direct Edge ECN Fee Schedule 

June 2, 2010. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on May 28, 

2010, the International Securities 

Exchange, LLC (the ‘‘Exchange’’ or the 

‘‘ISE’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which items 

have been prepared by the selfregulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 


emcdonald on DSK2BSOYB1PROD with NOTICES