Document ID: SEC-2011-0995-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-07-14T04:00Z

[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Notices]
[Pages 41537-41539]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17682]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64841; File No. SR-FINRA-2011-032]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Implement Revolving Door Restrictions on Former 
Officers of FINRA

July 8, 2011.
    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 July 1, 2011, 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. FINRA has 
designated the proposed rule change as concerned solely with the 
administration of the self-regulatory organization under Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(3) thereunder,\4\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend (i) FINRA Rule 9141 (Appearance and 
Practice; Notice of Appearance) to prohibit a former officer of FINRA, 
for a period of one year after termination of employment with FINRA, 
from making an appearance before an adjudicator on behalf of any other 
person under the FINRA Rule 9000 Series; and (ii) FINRA Rule 9242 (Pre-
hearing Submission) to prohibit a former officer of FINRA, for a period 
of one year after termination of employment with FINRA, from providing 
expert testimony on behalf of any other person under the FINRA Rule 
9000 Series.
    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.

[[Page 41538]]

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 seeks to diligently uphold a high degree of fairness in 
disciplinary and similar proceedings that take place before FINRA 
hearing panels and other FINRA adjudicators. To further this goal, 
FINRA is amending two procedural rules that will prevent former FINRA 
officers--for one year--from appearing on behalf of a client before a 
FINRA adjudicator or testifying as an expert witness in a FINRA forum.
    The FINRA Rule 9000 Series is FINRA's Code of Procedure (the 
``Code'') and provides detailed procedures for initiating and 
adjudicating various types of actions, including disciplinary, 
eligibility, expedited, and cease and desist proceedings. FINRA is 
imposing a temporal forum appearance prohibition under the Code on 
FINRA officers that restricts former officers from acting in two 
different capacities in a FINRA forum (``Revolving Door 
Restrictions''). The proposed rule change maintains the perception of 
fairness and safeguards against former FINRA officers potentially 
exerting undue influence in FINRA proceedings. Although FINRA is not 
aware of any instances of former officers exerting undue influence in 
FINRA's disciplinary and similar forums, FINRA seeks to prevent such an 
incident by implementing the Revolving Door Restrictions under the 
Code.
    First, the proposed rule change addresses a former officer 
appearing as a lawyer in FINRA's forum. FINRA Rule 9141 governs, among 
other things, the appearance and practice of lawyers before an 
adjudicator under the Code.\5\ The proposed rule change amends FINRA 
Rule 9141 to prohibit a former FINRA officer, for a period of one year 
after termination of employment with FINRA, from making an appearance 
before an adjudicator on behalf of any other person under the FINRA 
Rule 9000 Series. The proposed rule change accordingly restricts former 
FINRA officers who are attorneys from appearing on behalf of clients 
before Hearing Officers, Hearing Panels, the National Adjudicatory 
Council, and the FINRA Board of Governors.\6\ While the most common 
impact of the proposed rule change will be to prohibit a former FINRA 
officer from appearing on behalf of a respondent, the prohibition also 
applies to a former FINRA officer appearing on behalf of a witness who 
is not a respondent but is testifying before a Hearing Panel, Hearing 
Officer, or other adjudicator.
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    \5\ See FINRA Rule 9141(b) (requiring attorneys that seek to 
represent a party in a FINRA proceeding to be licensed to practice 
law before the highest court of any state).
    \6\ FINRA Rule 9120(a) defines the term ``Adjudicator.'' For 
purposes of the proposed rule change, ``adjudicator'' includes the 
FINRA Board of Governors, when it is calling a case for review, see 
FINRA Rule 9351, a Subcommittee, Review Subcommittee or Extended 
Proceeding Committee of the National Adjudicatory Council, see FINRA 
Rule 9331 and FINRA Regulation By-Law Article V, Sec. 5.13, a 
Hearing Officer, see FINRA Rule 9120(r), a Hearing Panel, see FINRA 
Rule 9120(s), a Hearing Panel in an eligibility proceeding or the 
Statutory Disqualification Committee, see FINRA Rule 9524(a)(1) and 
(10), and the Waiver Subcommittee, see FINRA Rule 9630.
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    Second, the Revolving Door Restrictions amend FINRA Rule 9242 to 
prohibit a former officer of FINRA, for a period of one year after 
termination of employment with FINRA, from providing expert testimony 
on behalf of a respondent under the FINRA Rule 9000 Series. The 
proposed rule change makes clear, however, that nothing in the rule 
prohibits a former officer of FINRA from testifying as either a fact 
witness or as an expert witness on behalf of FINRA.
    The Revolving Door Restrictions are designed to provide clear 
boundaries that limit specific activities of former FINRA officers in a 
manner that is consistent with restrictions currently imposed on other 
regulators in the securities industry.\7\ One aspect of the 
restrictions focuses on a former FINRA officer's appearance before a 
FINRA adjudicator because that event is recorded in a written notice 
that is currently required under the Code.\8\ Moreover, once a matter 
is pending before an adjudicator, both the prohibitions on appearing 
before an adjudicator and testifying as an expert witness can be 
enforced quickly in the context of a pending FINRA proceeding either 
directly by the adjudicator or through a motion to disqualify the 
former FINRA officer, which is filed with the adjudicator.\9\ In sum, 
the proposed rule change is designed to create restrictions that are 
precisely defined and straightforward to enforce.
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    \7\ FINRA officers include Vice Presidents, Senior Vice 
Presidents, and higher ranking FINRA executives.
    \8\ See FINRA Rule 9141(b).
    \9\ FINRA Rule 9150 authorizes an adjudicator to exclude an 
attorney from acting as counsel in FINRA disciplinary and similar 
proceedings.
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    Although FINRA's proposed rule change will serve as one safeguard 
against unfairness in its proceedings, it is not the only safeguard. 
Former FINRA employees, whether officers or not, who are attorneys that 
seek to represent a client in a FINRA proceeding must, as noted 
earlier, be licensed to practice law before the highest court of any 
state.\10\ The vast majority of state jurisdictions have adopted rules 
of professional conduct that are based on the American Bar 
Association's Model Rules of Professional Conduct.\11\ Model Rule 
1.9(a) addresses a lawyer's conflict of interest regarding a former 
client and prohibits a lawyer who has represented a client in a matter 
from subsequently representing any other person in that matter or a 
substantially related matter when that person's interests are 
materially adverse to the interests of the former client.\12\ For 
example, in a FINRA disciplinary case, this means that FINRA Department 
of Enforcement attorneys who have litigated for FINRA and have ended 
their FINRA employment may not subsequently represent any respondent in 
appeals in that case, any other continuing litigation in that case, or 
a substantially related matter in which the respondent's interests are 
materially adverse to FINRA's interests.\13\ By augmenting the 
protections imposed by state bar ethical rules with the Revolving Door 
Restrictions, FINRA believes that it will further insulate its 
proceedings from the appearance of any undue influence.
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    \10\ See FINRA Rule 9141(b).
    \11\ Richard Acello, New York Makes Itself a `Model' State: 
California Now the Only Holdout on Adopting ABA Model Rules, 95 ABA 
J., Sept. 2009, at 22.
    \12\ The ABA Model Rules of Professional Conduct (2010), 
available at http://www.americanbar.org.
    \13\ A conflict of interest may be waived by a former client who 
gives informed consent. Model Rule 1.9(a) and comment 9 (2010). 
FINRA, as the former client with the option to waive, does not 
anticipate waiving any such conflicts.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be July 2, 2012.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ which

[[Page 41539]]

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 maintain the perception of fairness in its 
disciplinary and similar proceedings and will safeguard against former 
FINRA officers potentially exerting undue influence in FINRA 
proceedings.
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    \14\ 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f)(3) of Rule 19b-4 
thereunder.\16\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
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. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(3).
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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-2011-032 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-2011-032. 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 the 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-2011-032 and 
should be submitted on or before August 4, 2011.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17682 Filed 7-13-11; 8:45 am]
BILLING CODE 8011-01-P