Federal Register / Vol. 74, No. 109 / Tuesday, June 9, 2009 / Notices 27361 

10See supra, note 8. 

11 15 U.S.C. 78o–3(b)(6). 

12 15 U.S.C. 78o–3(b)(7). 

13 15 U.S.C. 78s(b)(3)(A). 

14 17 CFR 240.19b–4(f)(6). 

15 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

The proposed rule change also would 

make certain technical amendments to 

the rule text, namely to correct 

punctuation in FINRA Rule 9556 and 

update FINRA Rule 9810 to reflect a 

change in FINRA style convention when 

referencing the federal securities laws. 

FINRA has filed the proposed rule 

change to extend FINRA’s authority 

under its cease and desist pilot program 

for immediate effectiveness. The 

implementation date will be June 23, 

2009. The pilot program will remain in 

effect until the SEC approves FINRA’s 

proposed rule change to make the pilot 

permanent 10 and such rule change 

becomes effective or the SEC 

disapproves such proposed rule change. 

2. Statutory Basis 

The proposed rule change is 

consistent with the provisions of 

Section 15A(b)(6) of the Act,11 which 

requires, among other things, that 

FINRA’s 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. The proposed rule 

change also is consistent with the 

provisions of Section 15A(b)(7) of the 

Act,12 which provides that FINRA 

members, or persons associated with its 

members, must be appropriately 

disciplined for violations of any 

provisions of the Act or FINRA’s rules. 

Extending the pilot program is 

consistent with FINRA’s obligations 

under the Act because cease and desist 

orders are designed to stop violative 

conduct that is likely to cause 

dissipation or conversion of assets or 

other significant harm to investors. 

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 

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) of the Act 13 and Rule 19b– 

4(f)(6) thereunder.14

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission may summarily abrogate 

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. 

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 rulecomments@sec.gov. Please include File 

Number SR–FINRA–2009–034 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–2009–034. 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 inspection and copying 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 such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2009–034 and 

should be submitted on or before June 

30, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–13503 Filed 6–8–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60022; File No. SR–FINRA– 

2009–031] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change Relating to the 

Reporting of Over-the-Counter 

Transactions in Equity Securities 

Executed Outside Normal Market 

Hours 

June 1, 2009. 

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 May 8, 

2009, 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. On May 29, 2009, 

FINRA filed Amendment No. 1 to the 

proposed rule change. The Commission 

is publishing this notice to solicit 

comments on the proposed rule change, 

as amended, from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to amend FINRA 

trade reporting rules relating to overthe-counter transactions in equity 

securities executed outside normal 

market hours to (1) require that any 

27362 Federal Register / Vol. 74, No. 109 / Tuesday, June 9, 2009 / Notices 

3The TRFs and ORF are open between 8 a.m. and 

8 p.m. Eastern Time and the ADF is open between 

8 a.m. and 6:30 p.m. Eastern Time. 

4See Rules 6282(a)(2)(A); 6380A(a)(2)(A) and (B); 

6380B(a)(2)(A) and (B); and 6622(a)(3)(A) and (B). 

5See Rules 6282(a)(2)(B); 6380A(a)(2)(C) and (D); 

6380B(a)(2)(C) and (D); and 6622(a)(3)(C). 

6See Rules 6282(a)(2)(B); 6380A(a)(2)(C) and (D); 

6380B(a)(2)(C) and (D); and 6622(a)(3)(C). 

trades executed during the hours that a 

FINRA Facility (the Alternative Display 

Facility (‘‘ADF’’), a Trade Reporting 

Facility (‘‘TRF’’) or the OTC Reporting 

Facility (‘‘ORF’’)) is closed be reported 

within 15 minutes of the opening of the 

Facility, i.e., 8:15 a.m. Eastern Time; 

and (2) conform the trade reporting 

requirements applicable to ‘‘outside 

normal market hours’’ transactions 

across FINRA Facilities. 

The text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

FINRA rules prescribe special 

requirements applicable to the reporting 

of trades executed outside normal 

market hours (i.e., trades executed 

outside the hours of 9:30 a.m. to 4 p.m. 

Eastern Time), and the rules distinguish 

between such trades that are executed 

during the hours a FINRA Facility is 

open and trades that are executed 

during the hours the facility is closed.3

Specifically, trades that are executed 

outside normal market hours and during 

the hours that the FINRA Facility to 

which the member is reporting is open 

must be reported within 90 seconds of 

execution.4 Thus, for example, a trade 

executed at 9 a.m. or a trade executed 

at 5 p.m. must be reported within 90 

seconds. Trades that are executed 

outside normal market hours and during 

the hours that the FINRA Facility is 

closed are not subject to 90-second 

reporting, since the facility is not open 

to facilitate the reporting of the trade. 

Rather, such trades are reported as 

follows: (1) trades executed between 

midnight and 8 a.m. must be reported 

on trade date; and (2) trades executed 

between the close of the facility (i.e., 

either 6:30 p.m. or 8 p.m.) and midnight 

must be reported on an ‘‘as/of’’ basis the 

following business day.5 ‘‘Outside 

normal market hours’’ trades are 

designated with a unique trade report 

modifier, as specified by FINRA. 

Proposed Amendments To Require 

Reporting Within 15 Minutes of 

Opening of Facility 

FINRA is proposing to amend the 

trade reporting rules 6 to require that 

trades executed during the hours that 

the FINRA Facility is closed be reported 

within 15 minutes of the opening of the 

facility (i.e., 8:15 a.m. Eastern Time for 

all FINRA Facilities). Specifically, 

members would be required to report as 

follows: (1) trades executed between 

midnight and 8 a.m. must be reported 

by 8:15 a.m. on trade date, and (2) trades 

executed between the close of the 

FINRA Facility (i.e., either 6:30 p.m. or 

8 p.m.) and midnight must be reported 

on an ‘‘as/of’’ basis the following 

business day by 8:15 a.m. These trades 

would be designated with the unique 

trade report modifier to denote their 

execution outside normal market hours. 

Any such trades not reported by 8:15 

a.m. would be marked with the ‘‘outside 

normal market hours trade reported 

late’’ modifier. 

FINRA believes that the proposed rule 

change will enhance market 

transparency by ensuring that these 

‘‘outside normal market hours’’ trades 

are reported and disseminated closer to 

the actual execution time rather than 

reported at some later time during the 

trading day. As a result, market 

participants will have better information 

about the time of execution for such 

trades. For example, under current 

rules, a trade with the ‘‘outside normal 

market hours’’ modifier that is reported 

and disseminated at 9:20 a.m. could 

have been executed and reported realtime at 9:20 a.m., or it could have been 

executed at some point between 

midnight and the opening of the FINRA 

Facility at 8 a.m. There is currently 

nothing to distinguish a trade executed 

and reported at 9:20 a.m. from a trade 

executed between midnight and 8 a.m. 

and reported at 9:20 a.m. Under the 

proposed rule change, a trade executed 

between midnight and 8 a.m. that is 

reported at 9:20 a.m. would be marked 

late, thus distinguishing it from a trade 

executed and reported real-time at 9:20 

a.m. 

Proposed Conforming Amendments 

FINRA also is proposing certain 

amendments to conform the 

requirements for reporting ‘‘outside 

normal market hours’’ trades across 

FINRA Facilities. First, under current 

rules and system functionality, members 

are not permitted to submit to the 

FINRA/Nasdaq TRF and ORF a trade 

report with the ‘‘outside normal market 

hours’’ modifier during normal market 

hours. For example, if a member 

executes a trade at 9:29:00 a.m. and 

reports the trade at 9:30:15 a.m. (in 

compliance with the 90-second 

reporting requirement under FINRA 

rules), the FINRA/Nasdaq TRF and ORF 

will reject the trade report; the trade 

cannot be reported, and will not be 

disseminated, until after 4 p.m. By 

contrast, the ADF and FINRA/NYSE 

TRF permit the submission of trade 

reports with the ‘‘outside normal market 

hours’’ modifier throughout the day. 

Thus, the trade described in the 

example above can be reported to the 

ADF or FINRA/NYSE TRF and 

disseminated at 9:30:15 a.m. 

Accordingly, FINRA is proposing to 

amend Rules 6380A(a)(2)(A) and 

(a)(2)(C) relating to the FINRA/Nasdaq 

TRF and Rules 6622(a)(3)(A) and 

(a)(3)(C)(i) relating to the ORF to delete 

the requirement that ‘‘outside normal 

market hours’’ transactions that are not 

reported by 9:30 a.m. be reported after 

4 p.m. This will enhance market 

transparency by eliminating 

systematically imposed delays in the 

reporting of ‘‘outside normal market 

hours’’ trades to the FINRA/Nasdaq TRF 

and ORF. The proposed amendments 

are identical to the text of current Rules 

6282(a)(2)(A) and (a)(2)(B)(i) relating to 

the ADF. 

Additionally, FINRA is proposing 

conforming changes to Rules 

6380B(a)(2)(A) and (C) relating to the 

FINRA/NYSE TRF. Today, members 

submit trade reports with the ‘‘outside 

normal market hours’’ modifier to the 

FINRA/NYSE TRF throughout the day. 

However, when the rules for this TRF 

were originally adopted, these 

provisions inadvertently were based on 

the rules relating to the FINRA/Nasdaq 

TRF, rather than the ADF. Thus, the 

proposed amendments for the FINRA/ 

NYSE TRF do not represent a departure 

from current member reporting practices 

and systems functionality. 

In this regard, FINRA also is 

proposing to amend Rules 

6380A(a)(2)(D), 6380B(a)(2)(D) and 

6622(a)(3)(C)(ii) to require expressly that 

‘‘as/of’’ reports submitted pursuant to 

Federal Register / Vol. 74, No. 109 / Tuesday, June 9, 2009 / Notices 27363 

7FINRA is proposing to amend paragraph (a)(1) 

and adopt new paragraph (a)(6) of Rule 6282 to 

conform to Rules 6380A(a)(4), 6380B(a)(4) and 

6622(a)(5). 

8See, e.g., Rules 6282(a)(4), 6380A(a)(2) and (5) 

and 6380B(a)(2) and (5). 

9The Commission notes that in connection with 

these changes to the trade reporting rules FINRA is 

also moving language from Rule 6282(a)(1) to Rule 

6282(a)(6) concerning patterns or practices of late 

trade reporting. Rule 6282(a)(1) currently states that 

‘‘[a] pattern or practice of late trade reporting 

without exceptional circumstances shall be 

considered conduct inconsistent with high 

standards of commercial honor and just equitable 

principles of trade violation of Rule 2010.’’ The 

change FINRA is proposing would replace the word 

‘‘shall’’ with ‘‘may,’’ and applies the lower standard 

not only to a pattern or practice of late trade 

reporting outside of normal market hours, but to a 

pattern or practice of late trade reporting during 

normal market hours. Rule 6282 concerns 

transactions reported only to TRACS, and FINRA 

has told Commission staff that the change is to 

make the rule consistent with the FINRA/NASDAQ, 

FINRA/NYSE, and OTC Trade Reporting Facilities, 

all of which currently have the identical language 

to proposed Rule 6282(a)(6). See telephone call 

between Stephanie Dumont, Senior Vice President 

and Director of Capital Markets Policy, FINRA, and 

Kathy England, Assistant Director, Commission, 

May 29, 2009. The Commission notes that it has 

routinely upheld appeals from FINRA disciplinary 

actions when FINRA has charged respondents with 

violations of Rule 2010 (Standards of Commercial 

Honor and Principles of Trade) based solely on an 

underlying violation of another SRO rule. See e.g., 

Stephen J. Gluckman, 54 S.E.C. 175, 185 (1999), 

Exchange Act Release No. 41628 (July 20, 1999). 

10 15 U.S.C. 78o–3(b)(6). 

these provisions include the unique 

trade report modifier, as specified by 

FINRA, to denote their execution 

outside normal market hours. The 

proposed amendments conform to the 

text of current Rule 6282(a)(2)(C)(ii). 

Second, FINRA is proposing to amend 

Rules 6282(a), 6380A(a), 6380B(a) and 

6622(a) to consolidate the provisions 

relating to late trade reporting and make 

clear the requirement that trades that are 

required to be reported on trade date, 

but are not reported on trade date, must 

be reported on an ‘‘as/of’’ basis on a 

subsequent date (T+N) and shall be 

designated as late. This requirement 

applies to trades executed during 

normal market hours, as well as those 

‘‘outside normal market hours’’ trades 

that are required by rule to be reported 

on trade date (i.e., trades executed 

between midnight and 9:30 a.m. and 

between 4 p.m. and the close of the 

Facility at either 6:30 or 8 p.m.). The 

proposed amendments also would make 

clear the requirement that ‘‘outside 

normal market hours’’ trades that are 

required to be reported on an ‘‘as/of’’ 

basis the following business day (T+1), 

but are not reported T+1, must be 

reported on a subsequent date (T+N) 

and shall be designated as late.7

Accordingly, FINRA is proposing to 

amend Rules 6380A(a)(2)(B), 

6380B(a)(2)(B) and 6622(a)(3)(B) to 

delete the duplicative requirement that 

transactions not reported by 8:00 p.m. 

on trade date must be reported on an 

‘‘as/of’’ basis the following business day 

(T+1). 

Third, FINRA is proposing certain 

technical, non-material changes to 

conform the text of the rules relating to 

the reporting of trades executed outside 

normal market hours across FINRA 

Facilities. For example, FINRA is 

proposing to amend Rule 6282(a)(2) 

relating to the ADF and Rule 6622(a)(3) 

relating to the ORF to delete the specific 

references to the ‘‘.T’’ trade report 

modifier. This conforms to the trade 

reporting rules relating to the TRFs, as 

well as the other provisions of the ADF 

trade reporting rules, which do not refer 

to specific trade report modifier labels.8

Additionally, FINRA is proposing to 

renumber the subparagraphs in Rule 

6282(a)(2) relating to the ADF and Rule 

6622(a)(3) relating to the ORF to 

conform to the numbering of the 

subparagraphs in Rules 6380A(a)(2) and 

6380B(a)(2) relating to the TRFs. 

FINRA believes that by conforming 

the reporting requirements and systems 

functionality with respect to ‘‘outside 

normal market hours’’ trades across 

FINRA Facilities, the proposed rule 

change will promote more consistent 

trade reporting by members and a more 

complete and accurate audit trail.9

FINRA will announce the effective 

date of the proposed rule change in a 

Regulatory Notice. The effective date 

will be no earlier than 120 days and no 

later than 180 days from the date of 

Commission approval. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,10 which 

requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. FINRA believes that the 

proposed rule change will enhance 

market transparency and promote more 

consistent trade reporting by members 

and a more complete and accurate audit 

trail. 

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 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, 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 rulecomments@sec.gov. Please include File 

Number SR–FINRA–2009–031 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–2009–031. 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 

27364 Federal Register / Vol. 74, No. 109 / Tuesday, June 9, 2009 / Notices 

11 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3A TCDO is a preliminary order issued in 

connection with an underlying disciplinary 

proceeding that has been initiated or will be 

initiated immediately. 

4See Securities Exchange Act Release No. 47925 

(May 23, 2003), 68 FR 33548 (June 4, 2003) (Order 

Approving File No. SR–NASD–98–80). 

5See Securities Exchange Act Release No. 51860 

(June 16, 2005), 70 FR 36427 (June 23, 2005) (Notice 

of Filing and Immediate Effectiveness of File No. 

SR–NASD–2005–061); Securities Exchange Act 

Release No. 55819 (May 25, 2007), 72 FR 30895 

(June 4, 2007) (Notice of Filing and Immediate 

Effectiveness of File No. SR–NASD–2007–033). The 

Commission notes that it did not approve these 

filings. 

6See Securities Exchange Act Release No. 55819 

(May 25, 2007), 72 FR 30895 (June 4, 2007) (Notice 

of Filing and Immediate Effectiveness of File No. 

SR–NASD–2007–033). 

7 In a companion rule filing filed with the SEC 

today, FINRA seeks to extend the pilot until the 

SEC approves or disapproves the proposal to make 

the pilot permanent so that the cease and desist 

authority does not lapse while the proposal is 

pending at the SEC. See SR–FINRA–2009–034. The 

companion rule filing proposed certain technical 

amendments to the rule text, namely to correct 

punctuation in FINRA Rule 9556 and update 

FINRA Rule 9810 to reflect a change in FINRA style 

convention when referencing the federal securities 

laws. The companion rule filing does not proposal 

[sic] any substantive changes to the existing pilot. 

8See L.H. Ross & Company, Securities Exchange 

Act Release No. 51270, 2005 SEC LEXIS 452 

(February 28, 2005). 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying 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 such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2009–031 and 

should be submitted on or before June 

30, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.11

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–13395 Filed 6–8–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60028; File No. SR–FINRA– 

2009–035] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change To Adopt a 

Temporary and Permanent Cease and 

Desist Authority Pilot Program on a 

Permanent Basis 

June 2, 2009. 

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 May 18, 

2009, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III, below, which Items have been 

prepared by FINRA. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to adopt the 

temporary and permanent cease and 

desist authority pilot program on a 

permanent basis without any 

substantive changes to the terms of the 

existing program. 

The text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

In May 2003, the Commission 

approved, on a two-year pilot basis, a 

rule change that gave FINRA authority 

to issue temporary cease and desist 

orders (‘‘TCDOs’’) 3 and made explicit 

FINRA’s ability to impose permanent 

cease and desist orders as a remedy in 

disciplinary cases.4 The pilot program 

also gave FINRA authority to enforce 

cease and desist orders. In June 2005 

and June 2007, the SEC approved [sic] 

two-year extensions of the pilot 

program.5 The current two-year pilot 

expires on June 23, 2009.6

FINRA is proposing to make the pilot 

program permanent without any 

substantive changes to the terms of the 

existing program.7 The proposed action 

would enable FINRA to continue to 

issue TCDOs and impose permanent 

cease and desist orders as a remedy in 

disciplinary cases. The proposed action 

also would give FINRA authority to 

continue to initiate expedited 

proceedings when respondents violate 

temporary or permanent cease and 

desist orders. 

When it first sought cease and desist 

authority, FINRA stated that it would 

use the authority sparingly. That has 

been the case. Since the pilot program 

was first approved in 2003, FINRA has 

issued only one TCDO and one 

permanent cease and desist order (both 

in the same case, which is described 

below). If adopted on a permanent basis, 

the cease and desist rules would 

continue to be used judiciously. There 

are times, however, when their use is 

crucial. 

In the one case initiated under the 

pilot program, FINRA’s Department of 

Enforcement (‘‘Enforcement’’) alleged 

that the member in question was 

engaged in widespread fraud that 

included, among other things, making 

material misrepresentations and 

omissions in connection with the 

private offering of its own stock, 

effecting unauthorized transactions and 

using customer funds improperly.8

Enforcement showed that not only was 

the member attempting to continue the 

fraudulent offering, it also was 

funneling money and assets to a nonmember affiliate. Enforcement alleged, 

and a hearing panel found, that a TCDO 

was necessary because the member’s 

continuation of the misconduct was 

likely to result in further dissipation or 

conversion of assets and other 

significant harm to investors before the 

completion of the underlying 

disciplinary proceeding. After the 

hearing panel issued a permanent cease 

and desist order following a full 

disciplinary hearing, the parties settled 

the case, resulting in the expulsion of 

the member, the bar of its owner and the 

imposition of almost $12 million in 

fines and restitution. 

The proposed permanent adoption of 

the pilot program will provide FINRA 

with a mechanism to continue to take 

appropriate remedial action against a