Document ID: SEC-2009-0384-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Amend the FINRA Rule 9520 Series Regarding Eligibility Procedures for Persons Subject to Certain Disqualifications
Posted Date: 2009-03-23T04:00Z

[Federal Register: March 23, 2009 (Volume 74, Number 54)]
[Notices]               
[Page 12166-12167]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23mr09-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59586; File No. SR-FINRA-2008-045]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To Amend the FINRA Rule 9520 Series Regarding 
Eligibility Procedures for Persons Subject to Certain Disqualifications

March 17, 2009.

I. Introduction

    The 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'') 
and amended on December 11, 2008,\1\ pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change relating to amendments to the 
FINRA Rule 9520 Series, which governs the eligibility procedures for 
persons subject to certain disqualifications, to comport with the 
amended definition of disqualification in the FINRA By-Laws. The 
proposed rule change was published for comment in the Federal Register 
on January 13, 2009.\4\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change, as 
modified by Amendment No. 1.
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    \1\ Amendment No. 1 to SR-FINRA-2008-045 replaced and superseded 
the original rule filing submitted to the Commission on September 8, 
2008.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 59208 (January 6, 
2009), 74 FR 1738 (January 13, 2009) (SR-FINRA-2008-045) (notice).
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II. Description of the Proposed Rule Change

    In light of FINRA's obligation to enforce the federal securities 
laws, and as part of the consolidation of the member firm regulatory 
functions of NASD and NYSE Regulation, Inc. and the formation of FINRA, 
FINRA adopted by Board and membership vote a revised By-Law definition 
of disqualification that is consistent with the federal securities 
laws, such that any person subject to a statutory disqualification 
under Section 3(a)(39) of the Act also is subject to disqualification 
under Article III, Section 4 of the FINRA By-Laws.\5\ Consequently, as 
further detailed in the proposed Regulatory Notice (filed with the 
Commission as Exhibit 2 to SR-FINRA-2008-045), FINRA's revised 
definition of disqualification incorporates three additional categories 
of statutory disqualification, including willful violations of the 
federal securities or commodities laws, grounds for statutory 
disqualification that were enacted in the Sarbanes-Oxley Act, and 
associations with certain other persons subject to disqualification.
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    \5\ See Securities Exchange Act Release No. 55495 (March 20, 
2007), 72 FR 14149 (March 26, 2007) (SR-NASD-2007-023) (notice). See 
also Securities Exchange Act Release No. 56145 (July 26, 2007), 72 
FR 42169 (August 1, 2007) (SR-NASD-2007-023) (approval order), as 
amended by Securities Exchange Act Release No. 56145A (May 30, 
2008), 73 FR 32377 (June 6, 2008). See also NASD, SEC No-Action 
Letter, 2007 SEC No-Act. LEXIS 540 (July 27, 2007).
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    Absent the proposed rule change, all persons subject to any of the 
added categories of disqualification would be required to obtain 
approval from FINRA to enter or remain in the securities industry. The 
proposed rule change would both amend the text of the FINRA Rule 9520 
Series generally to reflect the amended definition of disqualification 
in the By-Laws, as well as include the proposed Regulatory Notice that 
outlines in detail the applicable eligibility procedures. The amended 
FINRA Rule 9520 Series would incorporate by reference the procedures 
set forth in the Regulatory Notice. As further detailed in the 
Regulatory Notice, the need for a member to file an application with 
FINRA for approval notwithstanding the disqualification would depend on 
(1) the type of the disqualification; (2) the date of the 
disqualification; and (3) whether the firm or individual is seeking 
admission, readmission or continuation in the securities industry.
    The proposed rule change would amend FINRA Rule 9522 to address the 
initiation of eligibility proceedings and the authority of FINRA's 
Department of Member Regulation (``Member Regulation'') to approve 
applications relating to a disqualification, where the disqualification 
arises from findings or orders specified in Section 15(b)(4)(D), (E) or 
(H) of the Act or arises under Section 3(a)(39)(E) of the Act (i.e., 
the added categories of disqualification). Currently, FINRA Rule 
9522(a)(1) provides, among other things, that if FINRA staff has reason 
to believe that a disqualification exists, FINRA staff will issue a 
written notice to the member or applicant for membership under NASD 
Rule 1013, specifying the grounds for such disqualification. The 
proposed amendments to FINRA Rule 9522(a)(1) provide that FINRA staff 
would issue such written notice with respect to the added categories of 
disqualification only when the member or applicant is required to file 
an application pursuant to the Regulatory Notice. Similarly, the 
proposed rule change would amend FINRA Rule 9522(b) to require a member 
to file an application with FINRA with respect to the added categories 
of disqualification only when instructed to submit one by the 
Regulatory Notice.
    Moreover, under the current rules, Member Regulation is responsible 
for evaluating applications for relief from a disqualification filed by 
a disqualified member or sponsoring member. In certain circumstances, 
Member Regulation is authorized to approve the application, while in 
other cases, Member Regulation must make a recommendation to either 
approve or deny the applications to the National Adjudicatory Council 
(``NAC''). The proposed amendments to FINRA Rule 9522 would authorize 
Member Regulation to approve applications based on the added categories 
of disqualification. In the event Member Regulation does not approve 
these applications, the disqualified member or sponsoring member would 
have the right to have the matter decided by the NAC after a hearing 
and consideration by the Statutory Disqualification Committee under 
FINRA Rule 9524.
    In addition, if Member Regulation determines that an application 
relating to a disqualification that arises from findings or orders 
specified in Section 15(b)(4)(D), (E), or (H) of the Act or arises 
under Section 3(a)(39)(E) of the

[[Page 12167]]

Act should be approved, but with specific supervisory requirements that 
have the consent of the disqualified member, sponsoring member and/or 
disqualified person, then proposed FINRA Rule 9523(b) would authorize 
Member Regulation to approve a supervisory plan, without submitting a 
recommendation to the Chairman of the Statutory Disqualification 
Committee, acting on behalf of the NAC. Consistent with the current 
rule regarding the submission of supervisory plans,\6\ proposed FINRA 
Rule 9523(b)(1) would provide that, by submitting an executed letter 
consenting to a supervisory plan, a disqualified member, sponsoring 
member and/or disqualified person waive the following (in summary):
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    \6\ See FINRA Rule 9523(b)(1) (to be renumbered as FINRA Rule 
9523(a)(1)).
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    (a) The right to a hearing and any right of appeal to challenge the 
validity of the supervisory plan;
    (b) The right to claim bias or prejudgment by Member Regulation or 
the General Counsel regarding the supervisory plan; and
    (c) The right to claim a violation of the ex parte prohibitions or 
the separation of functions provisions of FINRA Rules 9143 and 9144, 
respectively, in connection with participation in the supervisory plan.

If the supervisory plan is rejected, the disqualified member, 
sponsoring member and/or disqualified person would have the right to 
proceed under FINRA Rule 9524.
    The proposed rule change also would make several technical 
amendments. For example, the proposed rule change would amend FINRA 
Rule 9522(c) to allow a member that has filed a statutory 
disqualification application to withdraw that application after the 
start of a hearing but prior to the issuance of a decision by the NAC 
by filing a written notice with FINRA's Department of Registration and 
Disclosure and FINRA's Office of General Counsel. In addition, for 
purposes of clarity and consistency, the proposed rule change would 
amend FINRA Rule 9522(e) to replace references that Member Regulation 
``may grant'' or ``may approve'' certain matters with ``is authorized 
to approve'' such matters.

III. Discussion and 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 that are 
applicable to a national securities association.\7\ In particular, the 
Commission believes the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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 rule change 
is consistent with the provisions of the Act noted above because it 
should allow FINRA to integrate filings mandated by the revised 
definition of disqualification into established programs that monitor 
subject persons and allow FINRA and the Commission to focus resources 
on filings that raise important investor protection concerns.
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    \7\ 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).
    \8\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-FINRA-2008-045), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-6208 Filed 3-20-09; 8:45 am]