Document ID: SEC-2009-0717-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to the FINRA Regulation Board Composition and Conforming Changes to the FINRA Regulation By-Laws
Posted Date: 2009-05-29T04:00Z

[Federal Register Volume 74, Number 102 (Friday, May 29, 2009)]
[Notices]
[Pages 25792-25793]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-12444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59962; File No. SR-FINRA-2009-020]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to the 
FINRA Regulation Board Composition and Conforming Changes to the FINRA 
Regulation By-Laws

May 21, 2009.

I. Introduction

    On March 27, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the By-Laws of FINRA Regulation, Inc. 
(``FINRA Regulation'') to modify the composition of the board of 
directors of FINRA Regulation (``FINRA Regulation Board''), to adopt 
changes to conform the FINRA Regulation By-Laws to the FINRA By-Laws, 
and to make various non-substantive or conforming changes. The proposed 
rule change was published for comment in the Federal Register on April 
8, 2009.\3\ The Commission received no comments on the proposal. 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. 59696 (April 2, 
2009), 74 FR 16020 (``Notice'').
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II. Description of the Proposal

    On July 30, 2007, NASD and New York Stock Exchange Regulation, Inc. 
(``NYSE Regulation''), the regulatory subsidiary of the New York Stock 
Exchange, consolidated their member firm regulation operations into a 
combined organization, FINRA. As part of the consolidation, the 
Commission approved amendments to the NASD By-Laws to implement 
governance and related changes.\4\ The approved changes included a 
FINRA Board governance structure that balanced public and industry 
representation. FINRA Regulation (formerly known as NASD Regulation, 
Inc. (``NASD Regulation'')) is a subsidiary of FINRA that operates 
according to the Plan of Allocation and Delegation of Functions by NASD 
to Subsidiaries, as amended, which NASD adopted in 1996 when it formed 
NASD Regulation. FINRA Regulation's By-Laws were not amended at the 
time of the consolidation, other than in a few sections where those By-
Laws conflicted with the new FINRA By-Laws.
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    \4\ See Securities Exchange Act Release No. 56145 (July 26, 
2007), 72 FR 42169 (August 1, 2007), as amended by Securities 
Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 
2008) (File No. SR-NASD-2007-023) (``Consolidation Approval 
Order'').
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    The proposed rule change would modify the FINRA Regulation By-Laws 
to parallel more closely the composition and governance structure of 
the FINRA board of directors (``FINRA Board''). In addition, the 
proposed rule change would modify the FINRA Regulation By-Laws to 
reflect current business and legal practices concerning the 
administration and capital stock of FINRA Regulation. Furthermore, the 
proposed rule change would make non-substantive or conforming changes, 
including updating the FINRA Regulation By-Laws to reflect the 
corporate name change. A more detailed description of the proposed rule 
change is provided in the Notice.\5\ The Commission discusses below the 
most significant aspects of the proposed changes to the FINRA 
Regulation By-Laws.
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    \5\ See supra note 3.

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[[Page 25793]]

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities association.\6\ In particular, the Commission finds 
that the proposed rule change is consistent with the provisions of 
Section 15A(b)(4) of the Act,\7\ which requires that FINRA rules be 
designed to assure a fair representation of FINRA's members in the 
selection of its directors and the administration of its affairs.
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    \6\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78o-3(b)(4).
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    The FINRA By-Laws provide that the FINRA Board currently must 
consist of the Chief Executive Officer of FINRA, the Chief Executive 
Officer of NYSE Regulation, eleven Public Governors and ten Industry 
Governors, including a Floor Member Governor, an Independent Dealer/
Insurance Affiliate Governor, an Investment Company Affiliate Governor, 
three Small Firm Governors, one Mid-Size Firm Governor, and three 
Large-Firm Governors.\8\ The Small Firm Governors, Mid-Size Firm 
Governor, and Large-Firm Governors are elected by members of FINRA 
according to their classification as a Small Firm, Mid-Size Firm or 
Large Firm.\9\
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    \8\ See FINRA By-Laws, Article VII, Section 4 and XXII, Section 
2(a).
    \9\ See FINRA By-Laws, Article I(z), Article I(dd), Article 
I(xx) (defining Small Firm Governor, Mid-Size Firm Governor, and 
Large-Firm Governor), and Article VII, Section 4(a).
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    The proposed rule change would provide that the FINRA Regulation 
Board continue to consist of between 5 and 15 members,\10\ and that 
FINRA Regulation Board members be elected by, and drawn exclusively 
from, the FINRA Board. Additionally, the proposed rule change would 
require that the FINRA Regulation Board, like the FINRA Board, have a 
greater number of Public Directors than Industry Directors.\11\ In 
addition, to ensure fair representation on the FINRA Regulation Board, 
the proposed rule change also would require that at least two, and not 
less than 20%, of the Directors of the FINRA Regulation Board be Small, 
Mid-Size, or Large Firm Governors.\12\ The Commission notes that it 
previously found the composition of the FINRA Board to be consistent 
with the fair representation requirement of Section 15A(b)(4) of the 
Act.\13\ The Commission further notes that it has previously found a 
requirement that at least 20% of directors represent the exchange's 
members to be consistent with the fair representation requirement 
applicable to national securities exchanges under Section 6(b)(3) of 
the Act.\14\ Accordingly, the Commission believes that the requirement 
that the FINRA Regulation Board be composed of at least two, and not 
less than 20%, of FINRA Regulation's Directors be Small Firm, Mid-Size 
Firm or Large-Firm Governors is consistent with Section 15A(b)(4) of 
the Act.
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    \10\ See proposed FINRA Regulation By-Laws, Article IV, Section 
4.2 (Number of Directors).
    \11\ See proposed FINRA Regulation By-Laws, Article IV, Section 
4.3(a) (Qualifications).
    \12\ See id.
    \13\ See Consolidation Approval Order, supra note 4.
    \14\ See, e.g., Securities Exchange Act Release No. 58324 
(August 7, 2008), 73 FR 46936, 46941 (August 12, 2008) (SR-BSE-2008-
02, SR-BSE-2008-23, SR-BSE-2008-25, SR-BSECC-2008-01).
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    The Commission also 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, and, in general, to protect 
investors and the public interest. The Commission believes that the 
proposed changes to the FINRA Regulation By-Laws should allow the FINRA 
Regulation Board to operate in a more effective and efficient manner 
by, among other things, having a similar composition and a 
complementary governance structure to the FINRA Board.
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    \15\ 15 U.S.C. 78o-3(b)(6).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-FINRA-2009-020) be, and it 
hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-12444 Filed 5-28-09; 8:45 am]
BILLING CODE 8010-01-P