Document ID: SEC-2021-1145-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-08-25T04:00Z

[Federal Register Volume 86, Number 162 (Wednesday, August 25, 2021)]
[Notices]
[Pages 47527-47529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18237]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92710; File No. SR-FINRA-2021-011]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Rule 1011(p) (``Specified Risk Event'')

August 19, 2021.

I. Introduction

    On May 12, 2021, the 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 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 1011(p) 
(which defines the term ``specified risk event'') to clarify the scope 
of ``final regulatory actions'' that are included in the definition of 
``specified risk event'' for purposes of the Rule 1000 Series (Member 
Application and Associated Person Registration).\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 90635 (Dec. 10, 2020), 85 FR 
81540 (Dec. 16, 2020) (Order Approving File No. SR-FINRA-2020-011) 
(``December 2020 Order'').
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    The proposed rule change was published for comment in the Federal 
Register on May 26, 2021.\4\ The public comment period closed on June 
16, 2021. The Commission received one comment letter in response to the 
Notice.\5\ On July 9, 2021, 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 
August 24, 2021.\6\ This order approves the proposed rule change.
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    \4\ See Exchange Act Release No. 91959 (May 20, 2021), 86 FR 
28405 (May 26, 2021) (File No. SR-FINRA-2021-011) (``Notice'').
    \5\ See letter from Isaiah Sanderman, dated May 28, 2021 
(``Sanderman Letter''), available at https://www.sec.gov/comments/sr-finra-2021-011/srfinra2021011-8852748-238381.htm.
    \6\ See letter from Michael Garawski, Associate General Counsel, 
OGC Regulatory Practice and Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated July 9, 
2021, available at SR-FINRA-2021-011-Extension1.pdf.
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II. Description of the Proposed Rule Change

    On December 10, 2020, the Commission approved a proposed rule 
change concerning brokers with a significant history of misconduct 
(``Misconduct Rule'').\7\ Among other things, the Misconduct Rule 
amended the FINRA Rule 1000 Series (Member Application and Associated 
Person Registration) to require a FINRA member broker-dealer (``member 
firm'') to seek a materiality consultation 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 firm has, in the prior five years, one or more ``final criminal 
matters'' or two or more ``specified risk events.'' \8\ The amendments 
to the Rule 1000 Series will become effective on September 1, 2021.\9\
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    \7\ See supra note 3.
    \8\ See December 2020 Order at 81541. In general, a member firm 
initiates a materiality consultation with FINRA's Department of 
Member Regulation (``Member Regulation'') by submitting a letter 
requesting its determination as to 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) 
(Jul. 2018); see also December 2020 Order at n. 9.
    \9\ See Regulatory Notice 21-09 (Mar. 2021).
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    To provide clarity to member firms determining whether they need to 
seek a materiality consultation or approval of a CMA, the Misconduct 
Rule defines ``specified risk event'' to mean ``any one of the . . . 
events'' described in Rule 1011(p) ``that are disclosed, or are or were 
required to be disclosed, on an applicable Uniform Registration Form.'' 
\10\ The events described in Rule 1011(p) include, among others, a 
``final regulatory action'' as set forth in Rule 1011(p)(4). 
Specifically, Rule 1011(p)(4) describes ``a final regulatory action'' 
to include final regulatory actions ``where (A) the total monetary 
sanctions (including civil and administrative penalties or fines, 
disgorgement, monetary penalties other than fines, or restitution) were 
ordered for a dollar amount at or above $15,000; or (B) the sanction 
against the person was a bar (permanently or temporarily), expulsion, 
rescission, revocation, or suspension from associating with a member.'' 
The proposed rule change

[[Page 47528]]

would delete from Rule 1011(p)(4) the phrase ``from associating with a 
member,'' which appears after the word ``suspension.'' \11\
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    \10\ See FINRA Rule 1011(p); see also Notice at 28406. FINRA 
Rule 1011(r) defines ``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.
    \11\ See supra note 4.
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III. Discussion and Commission Findings

    After careful review of the proposed rule change and the comment 
letter, the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder that are applicable to a national securities 
association.\12\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\13\ 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.
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    \12\ 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).
    \13\ 15 U.S.C. 78o-3(b)(6).
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A. Consistent With Basis for Approving the December 2020 Order

    FINRA stated that including the phrase ``from associating with a 
member'' in Rule 1011(p)(4) was an ``inadvertent drafting error'' that 
inappropriately narrowed the ``final regulatory actions'' included in 
the ``specified risk event'' definition.\14\ In particular, FINRA notes 
that the current rule may be interpreted to exclude from the definition 
of ``specified risk event'' final SEC and CFTC regulatory actions where 
the sanction against the person was a suspension other than a 
suspension from associating with a member.\15\ FINRA stated that it did 
not intend to narrow the scope of ``final regulatory actions'' that are 
included in the ``specified risk event'' definition in this manner.\16\ 
Rather, FINRA stated that it intended Rule 1011(p)(4) to be consistent 
with Rule 1011(p)(3), which describes the ``final investment-related 
civil actions'' that are included in the ``specified risk event'' 
definition. Rule 1011(p)(3) includes final investment-related civil 
actions that result in a ``suspension,'' and does not limit the 
suspensions to suspensions from associating with a member.\17\ FINRA 
further cited the mapping exhibits it provided in SR-FINRA-2020-011 to 
illustrate its intent to include ``final regulatory actions'' beyond 
those resulting in suspensions ``from associating with a member'' in 
the ``specified risk event'' definition. FINRA stated that these 
exhibits demonstrated how the ``final regulatory actions'' included 
within the scope of the ``specified risk event'' definition should 
include final regulatory actions disclosed on the Uniform Registration 
Forms that resulted in a suspension.\18\ FINRA stated that those 
mapping exhibits are consistent with how the relevant sanctions-related 
questions on the Uniform Registration Forms require the reporting of 
regulatory actions initiated by numerous regulators and self-regulatory 
organizations--not just FINRA--and include data fields for 
suspensions.\19\
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    \14\ See Notice at 28406.
    \15\ Id.
    \16\ Id.
    \17\ Id.
    \18\ See Form 19b-4, Exs. 3a and 3b, File No. SR-FINRA-2020-011, 
available at https://www.finra.org/sites/default/files/2020-04/SR-FINRA-2020-011.pdf; see also Notice at n. 7.
    \19\ See Form U4, Regulatory Action Disclosure Reporting Page, 
Questions 1 (requesting information about which regulator initiated 
the regulatory action) and 13 (Sanction Detail); Form BD, Regulatory 
Action Disclosure Reporting Page, Part II, Questions 1 (requesting 
information about which regulator initiated the regulatory action) 
and Question 2 (Principal Sanction). FINRA also stated that the data 
that it provided in SR-FINRA-2020-011 concerning the regulatory 
action disclosures included regulatory actions that resulted in any 
suspension, not just suspensions from associating with a member; see 
also Notice at n. 8.
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    FINRA believes that by amending Rule 1011(p)(4) to accurately 
describe the ``final regulatory actions'' that the definition of 
``specified risk event'' should include, the proposed rule change would 
provide greater clarity to members and the public and serve the 
intended investor-protection purposes of the Misconduct Rule.\20\
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    \20\ See Notice at 28407.
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B. The Proposed Rule Change Would Impose No Additional Burden

    FINRA does not believe that the proposed rule change would result 
in any additional burdens not already contemplated in SR-FINRA-2020-
011.\21\ FINRA stated that the aspect of the economic impact assessment 
undertaken in SR-FINRA-2020-011 that pertained to the amendments to the 
Rule 1000 Series was based on the broader scope for the ``final 
regulatory actions'' that are included in the ``specified risk event'' 
definition that FINRA is proposing here.\22\ Consistent with FINRA's 
original intent, the broader scope for the ``final regulatory actions'' 
that are included in the ``specified risk event'' definition includes 
final SEC and CFTC regulatory actions where the sanction against the 
person was a suspension other than a suspension from associating with a 
member.\23\
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    \21\ Id.
    \22\ Id.
    \23\ Id.
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    The Commission received one comment letter in response to the 
proposed rule change. Because the letter failed to address any 
component of the proposed rule change, the Commission believes the 
comment is beyond the scope of the proposal.\24\
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    \24\ See Sanderman Letter.
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    In sum, the Commission finds that the proposed rule change is 
consistent with its findings in the December 2020 Order. In the 
December 2020 Order, the Commission found that the Misconduct Rules 
would result in ``greater investor protections by helping address the 
concerns raised by associated persons with a significant history of 
misconduct and the broker-dealers that employ them.'' \25\ 
Specifically, the Commission stated that the Misconduct Rules would 
``strengthen the tools available to FINRA in responding to associated 
persons who have a significant history of misconduct'' and were 
sufficiently tailored ``to target the specific misconduct it seeks to 
address, which would minimize the potential costs to broker-dealers.'' 
\26\ The Commission agrees that by amending the ``final regulatory 
actions'' that are included in the ``specified risk event'' definition, 
the proposed rule change would provide greater clarity to members and 
the public and serve the intended investor protection purposes of the 
Misconduct Rules approved in the December 2020 Order.\27\ The 
Commission also agrees with FINRA's assessment that the proposed rule 
change would impose no additional burden not already contemplated and 
approved by the Commission.
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    \25\ See December 2020 Order at 81548.
    \26\ Id.
    \27\ See December 2020 Order at 81546 (explaining that the rules 
approved in SR-FINRA-2020-011 ``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 broker-dealer's ownership, control, or business 
operations,'' where those changes involve persons with a significant 
history of misconduct). See Notice at note 9.
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \28\ that the proposal (SR-FINRA-2021-011), be and hereby 
is approved.
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    \28\ 15 U.S.C. 78s(b)(2).

[[Page 47529]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18237 Filed 8-24-21; 8:45 am]
BILLING CODE 8011-01-P