Document ID: SEC-2010-1779-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-11-22T05:00Z

[Federal Register Volume 75, Number 224 (Monday, November 22, 2010)]
[Notices]
[Pages 71166-71168]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29281]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63316; File No. SR-FINRA-2010-056]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 1113 (Restriction Pertaining to New Member Applications) and 
To Amend the FINRA Rule 9520 Series (Eligibility Proceedings)

November 15, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on November 1, 2010, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') (f/k/a National Association of Securities 
Dealers, Inc. (``NASD'')) filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt new FINRA Rule 1113 (Restriction 
Pertaining to New Member Applications) and to amend the FINRA Rule 9520 
Series (Eligibility Proceedings) to restrict new member applicants' and 
certain members' association with disqualified persons.
    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 is proposing a rule change to adopt new FINRA Rule 1113 
(Restriction Pertaining to New Member Applications) and to amend the 
FINRA Rule 9520 Series (Eligibility Proceedings) to restrict new member 
applicants' and certain members' association with disqualified persons. 
The details of the proposed rule change are described below.
Background
    Article III, Section 3(b) of the FINRA By-Laws provides that no 
person shall be associated with a member, continue to be associated 
with a member, or transfer association to another member if such person 
is or becomes subject to disqualification; and that no firm shall be 
admitted to membership, and no member shall be continued in membership, 
if any person associated with it is subject to a disqualification. 
Pursuant to Article III, Section 4 of the FINRA By-Laws, a person is 
subject to a ``disqualification'' with respect to membership, or 
association with a member, if such person is subject to any ``statutory 
disqualification'' as such term is defined in Exchange Act Section 
3(a)(39).\3\
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    \3\ See 15 U.S.C. 78c(a)(39). Pursuant to Exchange Act Section 
3(a)(39), a person is subject to a ``statutory disqualification'' 
with respect to membership or participation in, or association with 
a member of, a self-regulatory organization (``SRO'') if such 
person, among other things: Has been convicted of certain 
misdemeanor and all felony criminal convictions for a period of ten 
years from the date of the filing of an application for membership 
or participation in, or to become associated with a member of, such 
SRO; is subject to a temporary or permanent injunction (regardless 
of its age) issued by a court of competent jurisdiction involving a 
broad range of unlawful investment activities; has been expelled or 
suspended from membership or participation in an SRO; or is subject 
to an SEC order denying, suspending, or revoking broker-dealer 
registration.

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[[Page 71167]]

    The FINRA Rule 9520 Series sets forth procedures for a person to 
become or remain associated with a member, notwithstanding the 
existence of a statutory disqualification, and for a current member or 
person associated with a member to obtain relief from the eligibility 
or qualification requirements of the FINRA By-Laws and rules. The FINRA 
Rule 9520 Series also contemplates that a new member applicant may 
sponsor a proposed associated person or itself for relief from the 
eligibility or qualification requirements. A member (or new member 
applicant) seeking to associate with a person subject to a 
disqualification must seek approval from FINRA by filing a Form MC-400 
application, pursuant to the FINRA Rule 9520 Series. Members (and new 
member applicants) that are themselves subject to a disqualification 
that wish to obtain relief from the eligibility requirements are 
required to submit a Form MC-400A application.
New Membership Application Rule
    FINRA is proposing to adopt new FINRA Rule 1113 providing that the 
Department of Member Regulation (``Department'') shall reject an 
application for FINRA membership \4\ in which either the applicant or 
an associated person, as defined in Article I of the FINRA By-Laws,\5\ 
of the applicant is subject to a statutory disqualification, as defined 
in Article III, Section 4 of the FINRA By-Laws.\6\ The proposed rule 
also provides that any new member application that the Department 
approves by virtue of Department or applicant error (including, but not 
limited to, an inadvertent or intentional misstatement or omission by 
the applicant or associated person) shall be subject to membership 
cancellation in accordance with FINRA Rule 9555 (Failure to Meet the 
Eligibility or Qualification Standards or Prerequisites for Access to 
Services).
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    \4\ Proposed FINRA Rule 1113, by its terms, will not apply to a 
member submitting a continuing membership application pursuant to 
NASD Rule 1017 (Application for Approval of Change in Ownership, 
Control, or Business Operations).
    \5\ Article I of the FINRA By-Laws defines an associated person 
as a: (1) A natural person who is registered or has applied for 
registration under FINRA rules; (2) a sole proprietor, partner, 
officer, director, or branch manager of a member, or other natural 
person occupying a similar status or performing similar functions, 
or a natural person engaged in the investment banking or securities 
business who is directly or indirectly controlling or controlled by 
a member, whether or not any such person is registered or exempt 
from registration with FINRA under its By-Laws or rules; and (3) for 
purposes of FINRA Rule 8210, any other person listed in Schedule A 
of Form BD of a member. See FINRA By-Laws, Article I (rr) 
(definition of ``person associated with a member'' or ``associated 
person of a member'').
    \6\ As previously noted, Article III, Section 4 of the FINRA By-
Laws incorporates the definition of ``statutory disqualification'' 
as such term is defined in Exchange Act Section 3(a)(39).
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    FINRA believes that a new member applicant should enter the 
membership application process free of the concerns and issues that can 
arise from either being associated with a disqualified person or being 
itself subject to a statutory disqualification. Also, a new member 
applicant has no prior operating or supervisory history, and therefore, 
would not be able to demonstrate adequately its ability to supervise a 
disqualified person.
FINRA Rule 9520 Series Amendments
    FINRA also is proposing several amendments to the FINRA Rule 9520 
Series, which, as noted above, set forth the eligibility proceedings. 
First, the proposed rule change would amend the FINRA Rule 9520 Series 
definition of ``sponsoring member'' \7\ to eliminate the reference to 
new member applicants. As stated above, FINRA is concerned about the 
ability of new member applicants to supervise adequately a disqualified 
person, as such new member applicants generally would not have any 
prior operating or supervisory history that would indicate the 
necessary experience to supervise disqualified persons. Thus, this 
amendment conforms to the proposed new membership application rule 
discussed above by precluding new member applicants from being able to 
sponsor disqualified persons.\8\
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    \7\ FINRA Rule 9521(b)(4).
    \8\ The proposed rule change also would make conforming 
amendments throughout the FINRA Rule 9520 Series to reflect the 
proposed amendment discussed above that a new member applicant may 
not sponsor a person subject to a disqualification.
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    Second, the proposed rule change would amend the definition of 
``disqualified member'' \9\ in the FINRA Rule 9520 Series to clarify 
that a new member applicant is not eligible to submit an application 
for relief under the FINRA Rule 9520 Series where the new member 
applicant itself is subject to a disqualification.
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    \9\ FINRA Rule 9521(b)(2).
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    Lastly, the proposed rule change would further amend the definition 
of ``sponsoring member'' to preclude any member from sponsoring the 
association or continued association of a disqualified person to be 
admitted, readmitted, or permitted to continue in association that is 
directly or indirectly a beneficial owner of more than five percent of 
the sponsoring member. This proposed change reflects FINRA's belief 
that a member cannot effectively supervise such a disqualified person 
in light of the inherent conflict of interest resulting from the 
ownership interest. In FINRA's experience, a member's decision to 
sponsor such a person is nearly always influenced more by that person's 
beneficial ownership interest in the firm, rather than by objective 
considerations, such as the person's work experience, the length of 
time since the disqualifying event, the person's professional 
activities since the time of the disqualifying event, or subsequent 
lack of disciplinary history.\10\
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    \10\ See The Ass'n of X as a Gen. Secs. Representative, 
Chairman, CEO, and owner, Redacted Decision No. SD99013 (NASD NAC 
1999) at 9 (the National Adjudicatory Council denied a sponsoring 
firm's statutory disqualification application, finding that the 
proposed supervisor would not adequately supervise a disqualified 
individual who would be 100 percent owner of the firm).
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    FINRA notes that the proposed rule change is not designed to apply 
in several situations. Proposed new FINRA Rule 1113 would not apply to 
a new member applicant that itself is subject to a statutory 
disqualification solely due to its association with a non-natural 
person that is subject to a statutory disqualification.\11\ Also, in 
such situations, notwithstanding the proposed rule change to the FINRA 
Rule 9520 Series that would preclude a new member applicant from 
submitting an application for relief under the FINRA Rule 9520 Series, 
the new member applicant would be permitted to file an MC-400A 
application on behalf of itself.
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    \11\ Exchange Act Section 3(a)(39)(E) subjects a person to a 
statutory disqualification if the person is associated with any 
person who is known, or in the exercise of reasonable care should be 
known, by him to be subject to any statutory disqualification 
described in Exchange Act Sections 3(a)(39)(A) through (D). Because 
the applicable definition of ``associated person'' (set forth in 
Exchange Act Section 3(a)(21)) includes non-natural persons, a 
member may find itself subject to a statutory disqualification 
solely because it is associated with a person who is subject to a 
statutory disqualification pursuant to Exchange Act Section 
3(a)(39)(A) through (D). For additional information, see Regulatory 
Notice 09-19 (April 2009).
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    Moreover, the proposed amendments to the FINRA Rule 9520 Series 
that would preclude any member from sponsoring a disqualified person 
that is directly or indirectly a beneficial owner of more than five 
percent of the sponsoring member would not preclude a member from 
filing an MC-400A application to sponsor itself where needed (e.g., a 
member whose majority owner is subject to a 30-day principal suspension 
for failure to supervise a books and records violation may seek to 
sponsor itself for continued membership rather than having to cease 
business for the period of its owner's suspension).
    FINRA will announce the effective date of the proposed rule change 
in a

[[Page 71168]]

Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 90 days 
following publication of the Regulatory Notice announcing Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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. The proposed rule change will further these purposes 
by restricting certain members and new member applicants from being 
able to associate with statutorily disqualified persons in light of the 
concerns to investor protection raised by such associations.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-056 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-2010-056. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of 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-2010-056 
and should be submitted on or before December 13, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29281 Filed 11-19-10; 8:45 am]
BILLING CODE 8011-01-P