Document ID: SEC-2013-1704-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-10-02T04:00Z

[Federal Register Volume 78, Number 191 (Wednesday, October 2, 2013)]
[Notices]
[Pages 60982-60985]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24012]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70521; File No. SR-FINRA-2013-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change to Amend FINRA 
Rule 9217 (Violations Appropriate for Disposition Under Plan Pursuant 
to Securities Exchange Act Rule 19d-1(c)(2))

September 26, 2013.

I. Introduction

    On July 24, 2013, 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'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 9217 
(Violations Appropriate for Disposition Under Plan Pursuant to Exchange 
Act Rule 19d-1(c)(2)). The proposed rule change was published for 
comment in the Federal Register on August 13, 2013.\3\ The Commission 
received two comments on the proposal.\4\ On September 17, 2013,

[[Page 60983]]

FINRA responded to the comments.\5\ This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70131 (Aug. 7, 
2013), 78 FR 49313 (``Notice'').
    \4\ See Letter to the Commission from David T. Bellaire, Esq., 
Executive Vice President & General Counsel, Financial Services 
Institute (``FSI''), dated September 3, 2013. The Commission also 
received another comment letter which does not address the substance 
of the proposed rule change. See Letter to the Commission from John 
Frattellone, dated September 3, 2013.
    \5\ See Letter to the Commission from Philip Shaikun, Associate 
Vice President and Associate General Counsel, FINRA, dated September 
17, 2013 (``Response Letter'').
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II. Description of the Proposal

    FINRA proposes to amend FINRA Rule 9217 (Violations Appropriate for 
Disposition Under Plan Pursuant to Exchange Act Rule 19d-1(c)(2)) to 
include additional rule violations eligible for disposition under 
FINRA's Minor Rule Violation Plan (``MRVP''). In its proposal, FINRA 
states that it believes that the purpose of the MRVP is to provide 
reasonable but meaningful sanctions for minor or technical violations 
of rules when the conduct at issue does not warrant stronger, 
reportable disciplinary sanctions.
    In the proposal, FINRA states that the inclusion of a rule in 
FINRA's MRVP does not minimize the importance of compliance with that 
rule; nor does it preclude FINRA from choosing to pursue violations of 
eligible rules through an Acceptance, Waiver and Consent (``AWC'') or 
Complaint if the nature of the violations or prior disciplinary history 
warrants more significant sanctions. Rather, FINRA notes that the 
option to impose an MRVP sanction gives FINRA additional flexibility to 
administer its enforcement program in the most effective and efficient 
manner, while still fully meeting FINRA's remedial objectives in 
addressing violative conduct. FINRA represents that it will continue to 
examine and surveil for compliance with eligible rules in a manner 
consistent with its examination programs and will determine on a case-
by-case basis whether disposition pursuant to the MRVP is 
appropriate.\6\
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    \6\ See Notice, 78 FR at 49313.
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    FINRA has represented that it conducted a comprehensive review of 
its rules and examination dispositions to determine which rules to 
propose to add to Rule 9217.\7\ Among other things, FINRA considered 
(1) rules routinely cited in formal disciplinary actions that are not 
currently part of the MRVP; (2) rules cited frequently in informal 
actions; (3) rules comparable to existing rules in the MRVP; and (4) 
rules included in other self-regulatory organization MRVPs.
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    \7\ See id.
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    The rules FINRA proposes to include in Rule 9217 can, broadly, be 
grouped into several categories, as described below:

Filings and Notifications

    FINRA proposes to include in Rule 9217 several filing and 
notification rules because violations of these rules typically involve, 
FINRA believes, isolated failures to comply with periodic reporting, 
filing, or notification requirements and are thus appropriate for 
disposition under the MRVP. These rules include: FINRA Rule 2251(a) 
(failure to timely forward proxy and other issuer-related materials); 
FINRA Rule 4524 (failure to timely file or filing of incomplete reports 
or information); FINRA Rule 5110(b) (failure to timely file or filing 
of incomplete documents or information); FINRA Rule 5121(b)(2) (failure 
to give timely notification of termination or settlement of public 
offering or failure to file net capital computation); FINRA Rule 
5122(b)(2) (failure to timely file private placement documents); FINRA 
Rule 5190 (failure to give timely notification of participation in 
offerings); and FINRA Rule 6760 (failure to give timely or complete 
notification concerning offerings of TRACE-Eligible Securities).
    FINRA notes, however, that willful, widespread or repeated failures 
of these rules may be appropriate for disposition through an AWC or the 
filing of a Complaint.

Late Registrations

    FINRA also proposes to include in the Rule 9217 certain rule 
violations involving isolated or technical failures to timely register. 
The relevant rules include: NASD Rule 1021(d) (failure to timely 
register) and MSRB Rules G-2, G-3(b)(ii)(D), and G-3(c)(ii)(D) (failure 
to timely register).

Untimely Marking, Transaction Reporting and other Market Rules

    FINRA proposes to add rules that involve late filing and 
notification requirements related to market regulation. FINRA notes 
that the MRVP already includes several such rules. The rules FINRA 
proposes to add include: Rule 605(a)(1) and (3) of Regulation NMS \8\ 
(failure to timely report or provide complete order execution 
information); Rule 606 of Regulation NMS (failure to timely disclose or 
provide complete order routing information); FINRA Rule 6181 (failure 
to timely report transactions in NMS securities); and FINRA Rule 6623 
(failure to timely report transactions in over-the-counter (``OTC'') 
and restricted equity securities).
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    \8\ 17 CFR 242.605(a)(1) and (a)(3).
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    FINRA also proposes to include marking and reporting rules related 
to trade and audit data. These rules include: Rule 200(g) of Regulation 
SHO \9\ (failure to accurately mark sell orders of equity securities); 
FINRA Rule 6182 and FINRA 6624 (failure to accurately mark short sale 
transaction in NMS and OTC securities); FINRA Rule 6250 (failure to 
comply with quote and order access requirements for FINRA's Alternative 
Display Facility); FINRA Rule 7330 (failure to timely and accurately 
input trade reports into the OTC Reporting Facility); and FINRA Rule 
7360 (ongoing obligation to input trade reporting requirements in Rule 
7330(d) accurately and completely).
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    \9\ 17 CFR 242.200.
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    In addition, FINRA proposes to add to the MRVP three rules 
governing the FINRA/NYSE Trade Reporting Facility, because similar 
rules regarding the FINRA/NASDAQ Trade Reporting Facility are already 
included in the MRVP. These rules include: FINRA Rule 6380B 
(transaction Reporting); FINRA Rule 7230B (trade Report Input); and 
FINRA Rule 7260B (Audit Trail Requirements).

Rules to Achieve Consistency

    FINRA proposes to add certain rules to Rule 9217 to achieve 
consistency with rules that already are part of FINRA's MRVP. These 
rules include FINRA Rule 1250 in its entirety, in order to bring both 
the Regulatory Element and Firm Element of FINRA's continuing education 
requirements into the scope of Rule 9217, and MSRB Rule G-3(h), which 
likewise would bring both the Regulatory Element and Firm Element of 
the MSRB's equivalent education requirements rule into the scope of 
Rule 9217. FINRA also proposes to include MSRB Rule G-21 (advertising), 
because the FINRA's corresponding rules for communication with the 
public (FINRA Rules 2210 2212, 2213, 2215, and 2216 and NASD 
Interpretive Material 2210-2) already are subject to MRVP disposition.
    FINRA also proposes to add several rules sanctioning the failure to 
provide or update contact information. Those rules include: NASD Rule 
1150 (failure to review and update executive representative designation 
and contact information) and NASD Rule 1160 (failure to report or 
update contact information). Similarly, FINRA has also proposed to add 
MSRB Rules G-40(a) and (c) (failure to designate and update electronic 
mail contact information for communications with MSRB) and FINRA Rule 
4370(f) (Business Continuity and Emergency Contact Information), which 
requires a member to designate emergency contact persons

[[Page 60984]]

and to report emergency contact information to FINRA.

Recordkeeping

    FINRA proposes to add specific Commission and MSRB rules that 
require records to be made and preserved. These rules include: Exchange 
Act Rule 17a-3(a) (Records to be made by certain exchange members, 
brokers and dealers); Exchange Act Rule 17a-4 (Records to be preserved 
by certain exchange members, brokers and dealers); MSRB Rule G-8 (Books 
and records to be made by brokers, dealers and municipal securities 
dealers); and MSRB Rule G-9 (Preservation of records). FINRA states in 
its proposal that it is including these rules because it often charges 
recordkeeping violations under the applicable FINRA rule, MSRB rule, 
and Exchange Act rule.

Supervisory Procedures Regarding MRVP Rules

    FINRA proposes to expand the MRVP to include any violation of NASD 
Rule 3010(b) (failure to maintain adequate written supervisory 
procedures where the underlying conduct is subject to Rule 9217). 
According to FINRA, the proposal would allow FINRA to resolve under 
Rule 9217 a failure to maintain adequate written supervisory procedures 
with respect to a rule that is already subject to the MRVP, whether or 
not there is a violation of the underlying rule. FINRA's proposal also 
includes the parallel MSRB rule, MSRB Rule G-27(c) (failure to maintain 
adequate written supervisory procedures where the underlying conduct is 
subject to Rule 9217).

Options

    FINRA also proposes to include Rule 2360(b)(5) (failure to report 
options positions), which requires, among other things, that members 
report each account in which they have an interest and that has 
established an aggregate position of 200 or more option contracts.

Other Rules

    FINRA proposes to include other rules because it asserts that their 
violation, depending on the circumstances, could appropriately be 
remediated under the MRVP without compromising investor protection. 
These rules include: Exchange Act Rule 10b-10 (confirmation of 
Transactions); FINRA Rule 4360(b) (failure to maintain adequate 
fidelity bond coverage); MSRB Rule G-6 (failure to maintain adequate 
fidelity bonding coverage); MSRB Rule G-10(a) (failure to deliver 
investor brochure to customers promptly); FINRA By-Laws Schedule A, 
Sec. 1(b) (failure to make accurate payment of Trading Activity Fee); 
FINRA Rule 2266 (failure to provide written notification of 
availability of information from the Securities Investor Protection 
Corporation at account opening or annually thereafter); and FINRA Rules 
3160(a)(1), (3), (4) and (5) (standards of conduct for conducting 
broker-dealer services on or off the premises of a financial 
institution pursuant to a networking arrangement, but excluding the 
networking agreement requirements).
    FINRA also proposes to include Rule 4370(a), (b), (c) and (e) 
(requirements to create, maintain and update a written business 
continuity plan and disclosure of such to customers). FINRA notes that, 
while it recognizes the importance of a business continuity plan, FINRA 
also has seen minor violations of Rule 4370 that may not implicate the 
overall effectiveness of a business continuity plan, such as when FINRA 
members have failed for a short time to timely update their plans or 
when a member has failed in an isolated circumstance to timely provide 
disclosure about its business continuity plan after receiving a request 
from a customer under Rule 4370(d).
    FINRA notes, however, that it does not believe that a disposition 
under FINRA's MRVP would be appropriate where a member has no business 
continuity plan or procedures required by Rule 4370(a). Also, FINRA 
does not propose to include Rule 4370(d) in Rule 9217. According to 
FINRA, it does not foresee any circumstance in which a violation of 
Rule 4370(d)--which requires members to designate a member of senior 
management to approve a business continuity plan and to be responsible 
for the annual review of the plan--would be appropriately addressed 
under Rule 9217.
    FINRA also proposes to include Rule 5121(a) (failure to prominently 
disclose conflict of interest) and FINRA Rule 7430 (failure to 
synchronize business clocks used for recording date and time as 
required by applicable FINRA by-laws and rules). Regarding Rule 
5121(a), FINRA states that the disclosure of a conflict of interest in 
an insufficiently large font may constitute a violation appropriate for 
disposition under Rule 9217. With respect to Rule 7430, FINRA states 
that it believes that isolated violations due to certain business 
clocks falling out of synch because of software glitches or other 
technical reasons may be appropriate to resolve as a minor rule 
violation.
    According to FINRA, the inclusion of a rule in the MRVP does not 
mean that all violations of that rule must be treated pursuant to the 
MRVP. FINRA states that FINRA staff maintains the discretion to handle 
any violation through AWCs or Complaints with the full range of 
applicable sanctions. Similarly, members and associated persons 
maintain the right to a hearing, with all the same procedural rights 
accorded in all formal disciplinary proceedings, instead of accepting a 
Minor Rule Violation.
    FINRA proposes that the implementation date for proposed rule 
change will be the date of Commission approval of this filing.

III. Summary of Comment Letter and the FINRA's Response

    The Commission received one comment letter on the proposed rule 
change. The Financial Services Institute (``FSI'') expressed its 
general support for the appropriateness of imposing a sanction or fine 
that is appropriate to a rule violation. However, FSI stated that it 
believes that some minor violations of rule should not be subject to 
any disciplinary action at all, even under the MRVP. As an example, FSI 
noted FINRA's example of ``isolated violations where certain business 
clocks fall out of synch due to software glitches or other technical 
reasons.'' FSI wrote that ``minor violations such as the example given, 
which are isolated as opposed to systematic and are neither willful nor 
intentional, should not qualify as rule violations.'' FSI further 
stated that, where a rule violation is isolated, FINRA should inform 
the firm of the violation so the firm may undertake efforts to fix the 
issue and that FINRA should only consider the issue a rule violation if 
it is not addressed and therefore becomes ``systemic as well as 
intentional or willful.''
    In response, FINRA noted that inclusion of a rule in the MRVP does 
not obligate FINRA to treat any particular violation of that rule 
pursuant to the MRVP and that the purpose of the proposed rule change 
is to give FINRA additional flexibility to administer its enforcement 
program in the most effective and efficient manner. FINRA added that it 
retains the discretion to resolve minor violations as informal matters 
or through an AWC or the filing of a complaint, depending on the facts 
and circumstances. FINRA noted that it does not intend to develop a 
formula as to when a matter must be handled pursuant to the MRVP as 
opposed to other alternatives, including informal action. Responding 
directly to FSI's example of a member violating Rule 7430, which 
requires FINRA members to synchronize their business clocks,

[[Page 60985]]

FINRA stated that ``while many such violations may appropriately be 
handled with a Cautionary Action Letter or other informal action, FINRA 
can envision circumstances where negligence or insufficient vetting or 
oversight of a software vendor might warrant a disposition pursuant to 
the MRVP or, in more serious cases, through a reportable disciplinary 
action.'' Finally, FINRA noted that a FINRA member or associated person 
is not obligated to accept an MRV disposition and may always avail 
itself of the procedural rights under FINRA rules to challenge an 
allegation in any complaint that may be filed.

IV. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a 
Registered Securities Association.\10\ In particular, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Act,\11\ because expanding the list of FINRA rules 
that are subject to the MRVP should afford FINRA increased flexibility 
in carrying out its enforcement and disciplinary responsibilities and, 
in doing so, help to meet the aim of protecting investors and the 
public interest.
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    \10\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6).
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    The Commission also believes that the proposal is consistent with 
Section 15A(b)(2) and 15A(b)(7) of the Act,\12\ which require that the 
rules of a Registered Securities Association enforce compliance with, 
and provide appropriate discipline for, violations of Commission and 
Association rules. The Commission believes that the proposed changes to 
Rule 9217 should, by expanding the list of rules subject to the MRVP, 
strengthen FINRA's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where full 
disciplinary proceedings are unsuitable in view of the minor nature of 
the particular violation. However, the Commission notes that 
designating a rule as subject to the MRVP does not signify that 
violation of the rule will always be deemed a minor violation. In the 
proposal, FINRA represents that it will remain able to require, on a 
case-by-case basis, formal disciplinary action for any particular 
violation. Therefore, the Commission believes that the proposed rule 
change will not compromise FINRA's ability to seek more stringent 
sanctions for the more serious violations of rules listed in FINRA Rule 
9217.
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    \12\ 15 U.S.C. 78o-3(b)(2) and 78o-3(b)(7).
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    In addition, because members may contest any fine imposed under 
Rule 9217 and thus receive a full disciplinary proceeding, the 
Commission believes that FINRA's rules provide for a fair procedure for 
the disciplining of members and persons associated with members, 
consistent with Sections 15A(b)(8) and 15A(h)(1).\13\
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    \13\ 15 U.S.C. 78o-3(b)(8) and 78o-3(h)(1).
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    The Commission also finds that the proposal is consistent with the 
public interest, the protection of investors, or is otherwise in 
furtherance of the purposes of the Act, as required by Rule 19d-1(c)(2) 
under the Act,\14\ which governs minor rule violation plans. The 
Commission believes that the proposed changes to Rule 9217 will 
strengthen FINRA's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization, in cases where full 
disciplinary proceedings are unsuitable in view of the nature of a 
particular violation.
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    \14\ 17 CFR 240.19d-1(c)(2).
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    The Commission notes FSI's views that some minor violations of 
rules should not be subject to disciplinary action at all and that 
FINRA should only consider a member's activity a rule violation if the 
violation becomes systemic as well as intentional or willful. The 
Commission believes that it is appropriate and consistent with the Act 
to permit FINRA to exercise its discretion, based on the facts and 
circumstances of each situation, to assess whether or not to address 
the alleged violation of a FINRA rule through more informal means, such 
as a Cautionary Action Letter, or through progressively more formal 
actions up to and including action under the MRVP, an AWC, or a formal 
complaint against a member. The Commission notes that, as FINRA stated 
in its Response Letter, a FINRA member or associated person can always 
avail itself of the procedural rights under FINRA rules to challenge 
any allegation of a rule violation.
    In approving this proposed rule change, the Commission emphasizes 
that in no way should the amendment of the rule be seen as minimizing 
the importance of compliance with FINRA's rules and all the other rules 
subject to imposition of fines under Rule 9217. The Commission believes 
that the violation of any self-regulatory organization's rules, as well 
as Commission rules, is a serious matter. However, Rule 9216 provides a 
reasonable means of addressing rule violations that do not rise to the 
level of requiring formal disciplinary proceedings, while providing 
greater flexibility in handing certain violations. The Commission 
expects that FINRA will continue to conduct surveillance with due 
diligence and make a determination based on its findings, on a case-by-
case basis, of whether a violation requires formal disciplinary action 
under FINRA Rule 9000 et seq. The Commission also notes that Exchange 
Act Rule 19d-1(c)(2) \15\ and FINRA 9216(b) \16\ require that FINRA, on 
a quarterly basis, report to the Commission all disciplinary actions 
taken under its MRVP.
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    \15\ 17 CFR 240.19d-1(c)(2).
    \16\ See Securities Exchange Act Release No. 32076 (March 3, 
1993), 58 FR 18291 (April 3, 1993).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-FINRA-2013-033) be, and 
hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24012 Filed 10-1-13; 8:45 am]
BILLING CODE 8011-01-P