Document ID: SEC-2021-0204-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-02-11T05:00Z

[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Notices]
[Pages 9110-9112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02779]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91070; File No. SR-FINRA-2020-037]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-
Laws of FINRA Regulation, Inc. To Align the Grounds for Member Removal 
From the NAC With an Existing Provision in the FINRA By-Laws

February 5, 2021.

I. Introduction

    On October 22, 2020, the 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 (the ``Act'' or ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend a provision in the 
By-Laws of FINRA Regulation, Inc. (``FINRA Regulation''), FINRA's 
regulatory subsidiary. The proposed rule change would further align the 
grounds in the FINRA Regulation By-Laws for removal of a member from 
the National Adjudicatory Council (``NAC'') with an existing provision 
in the FINRA By-Laws for removal of a governor from the FINRA Board of 
Governors (``FINRA Board'').\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra Section II.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 9, 2020.\4\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 90324 (November 3, 2020), 85 FR 
71387 (November 9, 2020) (File No. SR-FINRA-2020-037) (the 
``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    As described in the Notice, FINRA Regulation is the regulatory 
subsidiary of FINRA and operates according to the Plan of Allocation 
and Delegation of Functions by FINRA to Subsidiaries (the ``Plan'').\5\ 
The FINRA Regulation By-Laws authorize the NAC to function on behalf of 
the FINRA Board in several capacities.\6\ For example, FINRA explains 
that the NAC presides over disciplinary matters that have been appealed 
to or called for review by the NAC and also acts on applications in 
statutory disqualification and membership proceedings.\7\ In most 
matters that the NAC considers, FINRA states that the NAC prepares 
proposed written decisions that become final FINRA action if the FINRA 
Board does not call for review of those decisions.\8\
---------------------------------------------------------------------------

    \5\ See id. at 71388, n.4 (citing the Plan, Sec. II., FINRA 
Regulation, Inc., https://www.finra.org/rules-guidance/rulebooks/corporate-organization/ii-finra-regulation-inc).
    \6\ See id. (citing Article V, Sec. 5.1 of the FINRA Regulation 
By-Laws).
    \7\ See id. FINRA states that the NAC also exercises exemption 
authority and acts in other proceedings as set forth in the FINRA 
Rule 9000 Series (Code of Procedure). The FINRA Board may also 
delegate other powers and duties to the NAC as the FINRA Board deems 
appropriate and in a manner not inconsistent with the Plan. See id.
    \8\ See id.
---------------------------------------------------------------------------

    FINRA also states that it periodically reviews its and FINRA 
Regulation's By-Laws to ensure adherence to effective governance 
practices.\9\ Based on that review, FINRA explains that currently, 
Article V, Section 5.8 of the FINRA Regulation By-Laws provides that, 
``[a]ny or all of the members of the [NAC] may be removed from office 
at any time for refusal, failure, neglect, or inability to discharge 
the duties of such office by majority vote of the FINRA Board.'' \10\ 
By comparison, however, the FINRA By-Laws provide that a governor may 
be removed for those grounds as well as ``for any cause affecting the 
best interests of [FINRA] the sufficiency of which the Board shall be 
the sole judge.'' \11\ As a result, FINRA proposes to amend the FINRA 
Regulation By-Laws to add this ground for removal of a NAC member to 
further align the bases for removal of a NAC member with the bases for 
removal of a FINRA Board governor.\12\ Specifically, the proposed rule 
change would amend the FINRA Regulation By-Laws to permit a NAC member 
to be removed by a majority vote of the FINRA Board ``for any cause 
affecting the best interests of the [NAC] the sufficiency of which the 
FINRA Board shall be the sole judge.'' \13\
---------------------------------------------------------------------------

    \9\ See id.
    \10\ See id. As FINRA explains, the FINRA Regulation By-Laws 
were amended in 2008 to, among other things, designate the FINRA 
Board as the body authorized to oversee the NAC and empowered to 
remove NAC members for the grounds mentioned above. See id. (citing 
Exchange Act Release No. 58909 (November 6, 2008), 73 FR 68467 
(November 18, 2008) (Order Approving File No. SR-FINRA-2008-046) 
(the ``FINRA Regulation By-Laws Approval Order'').
    \11\ See id. Compare Article VII, Section 1(b) of the FINRA By-
Laws, with Article V, Sec. 5.8 of the FINRA Regulation By-Laws.
    \12\ See Notice, 85 FR at 71388.
    \13\ See id.
---------------------------------------------------------------------------

    FINRA further explains that the removal of a NAC member would 
continue to require a majority vote of the FINRA Board, while a vote to 
remove a FINRA Board governor requires a two-thirds vote.\14\ In

[[Page 9111]]

discussing this difference between voting thresholds for removal, FINRA 
states that the higher voting standard for the removal of a governor 
reflects the historical standard that existed at the National 
Association of Securities Dealers (``NASD'') prior to the formation of 
FINRA, and that it provides an additional safeguard at the FINRA Board 
level ``to ensure a diverse, majority non-industry composition, and 
fair representation of the industry in governance matters.'' \15\
---------------------------------------------------------------------------

    \14\ See id. As FINRA notes, both FINRA and FINRA Regulation are 
corporations organized under Delaware law. The Delaware General 
Corporation Law provides that, in general, directors may be removed 
by a majority vote of the shares then entitled to vote at an 
election of directors. See Del. Code Ann. Tit. 8, Sec.  141(k). 
FINRA states that it has adopted a removal threshold for NAC members 
that is consistent with the Delaware General Corporation Law, 
although the NAC is not subject to this standard. See Notice, 85 FR 
at 71388, n.9.
    \15\ Notice, 85 FR at 71388. FINRA also notes that the provision 
of the FINRA Regulation By-Laws addressing the composition of the 
NAC also provides for a diverse, majority non-industry composition, 
and for the fair representation of the industry. See id. at n.10 
(citing Article V, Section 5.2(a) of the FINRA Regulation By-Laws 
and Exchange Act Release No. 78094 (June 17, 2016), 81 FR 40932, 
40934-35 (June 23, 2016)).
---------------------------------------------------------------------------

    FINRA also states that, given the NAC's adjudicatory role, the best 
interests of the NAC are more targeted than the best interests of 
FINRA.\16\ More specifically, FINRA explains that the best interests of 
the NAC are reflected in conduct and attributes that ensure that the 
NAC remains an unbiased and competent adjudicatory body that is free of 
conflicts of interest, that its members conduct themselves with 
integrity, and that its decisions are rendered fairly and consistently 
with the law and rules that govern FINRA members and their associated 
persons.\17\ FINRA also states that the FINRA Board's decision to 
remove a NAC member is a facts and circumstances determination.\18\ In 
considering whether to remove a NAC member for cause affecting the best 
interests of the NAC, FINRA explains that its Board may consider, among 
other things, the NAC member's adherence to general standards 
concerning actual and apparent adjudicator conflicts of interest and 
bias,\19\ and to the NAC's Conflict of Interest and Bias Policy, which 
sets forth broad-based principles of behavior that are expected from 
NAC members.\20\ FINRA recognizes that there may, depending on the 
facts and circumstances, be overlap in part between the new and 
existing grounds to remove a NAC member. However, FINRA states that, 
depending on the facts and circumstances, the proposed rule change may 
also provide an additional basis for removal for a cause affecting the 
best interests of the NAC that would not fall within the scope of the 
FINRA's Board's current removal authority.\21\
---------------------------------------------------------------------------

    \16\ See id.
    \17\ See id.
    \18\ See id. at 71388-89.
    \19\ See id. at 71388, n.11 (citing Article IV, Section 4.14(a) 
of the FINRA Regulation By-Laws).
    \20\ See id. at n.12. FINRA notes that the principles outlined 
in the NAC's Conflict of Interest and Bias Policy are independence, 
impartiality, integrity, accountability and transparency; and place 
upon NAC adjudicators the responsibility for recognizing and 
reporting actual and apparent conflicts of interest and bias. See 
id.
    \21\ See id. at 71389.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposed rule change, 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.\22\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(4) of the Exchange Act,\23\ which requires, among other 
things, that the rules of a national securities association, like 
FINRA, assure the fair representation of its members in the 
administration of its affairs. Additionally, the Commission finds that 
the proposed rule change is also consistent with Section 15A(b)(6) of 
the Exchange Act,\24\ 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.
---------------------------------------------------------------------------

    \22\ 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).
    \23\ 15 U.S.C. 78o-3(b)(4).
    \24\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    As a threshold matter, the Commission observes that the provision 
that is being added to the FINRA Regulation By-Laws by this proposed 
rule change mirrors a parallel provision found in the FINRA By-
Laws.\25\ Moreover, the Commission has previously reviewed and approved 
a proposal that conformed the then-NASD Regulation By-Laws to the FINRA 
By-Laws, and has also previously reviewed and approved the NAC 
committee and its governance structure (which remains the same under 
this proposal), finding both proposals to be consistent with Section 
15A(b)(4) of the Exchange Act.\26\ We discuss below some of the 
pertinent aspects of the Commission's prior findings as they apply, at 
least in part, to the current proposed rule change.
---------------------------------------------------------------------------

    \25\ See Notice, 85 FR at 71388 (comparing Article VII, Section 
1(b) of the FINRA By-Laws with Article V, Sec. 5.8 of the FINRA 
Regulation By-Laws).
    \26\ See id. at n.17 (citing Exchange Act Release No. 56145 
(July 26, 2007), 72 FR 42169 (August 1, 2007) (the ``NASD By-Laws 
Approval Order''), as amended by Exchange Act Release No. 56145A 
(May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. 
SR-NASD-2007-023)). These orders approved FINRA's By-Laws when the 
NASD merged with the member regulation, enforcement and arbitration 
operations of the New York Stock Exchange (``NYSE'') to form FINRA. 
See also infra notes 31-32.
---------------------------------------------------------------------------

    As the Commission explained in approving the FINRA By-Laws, Section 
15A(b)(4) requires that the rules of a national securities association, 
like FINRA, assure the fair representation of its members in, among 
other things, the administration of its affairs.\27\ In approving the 
FINRA By-Laws, the Commission found, in part, that FINRA's members' 
participation on various committees provided for the fair 
representation of members in the administration of the affairs of a 
self-regulatory organization such as FINRA, particularly with respect 
to participation on committees relating to, among other things, the 
disciplinary process.\28\ More specifically, the Commission observed 
that FINRA has extensive member involvement in the administration of 
its affairs through representation on various subject matter 
committees, including the NAC.\29\ In connection with this proposal, 
FINRA states that, similar to the FINRA By-Laws addressing the 
composition of its Board, the FINRA Regulation By-Laws addressing the 
composition of the NAC provide for a diverse, majority non-industry 
composition, and for the fair representation of industry.\30\ The 
Commission agrees with FINRA's statements and, moreover, observes that 
the Commission found previously that the NAC's governance structure, 
including the NAC's composition as well as the nomination and election 
processes for NAC seats, align with those of the FINRA Board and were 
consistent with Section 15A(b)(4) of the Act.\31\
---------------------------------------------------------------------------

    \27\ See NASD By-Laws Approval Order, 72 FR at 42182 (explaining 
that this requirement helps to assure that members have a stake in 
the governance of the national securities association, which is 
charged with self-regulatory responsibilities under the Exchange 
Act).
    \28\ See id. at 42185.
    \29\ See id. See also supra note 7 and accompanying text.
    \30\ See supra note 15 and accompanying text.
    \31\ See FINRA Regulation By-Laws Approval Order, 73 FR at 
68469-70.
---------------------------------------------------------------------------

    Furthermore, in approving certain amendments to the then-NASD 
Regulation By-Laws, the Commission found that because those amendments 
conformed certain NASD Regulation By-Laws provisions to the relevant

[[Page 9112]]

provisions in the FINRA By-Laws and reflected the governance structure 
set forth in the FINRA By-Laws those amendments were consistent with 
the Exchange Act.\32\ Similarly, this proposal will also further 
conform the FINRA Regulation By-Laws with the FINRA By-Laws and will 
also continue to reflect the previously approved governance structure 
of the NAC. As a result, the Commission believes that this proposal 
will continue to help assure the fair representation of FINRA members 
in the administration of FINRA's affairs and, therefore, is consistent 
with Section 15A(b)(4) of the Act.
---------------------------------------------------------------------------

    \32\ See NASD By-Laws Approval Order, 72 FR at 42188.
---------------------------------------------------------------------------

    The Commission further observes that the NAC acts on behalf of the 
FINRA Board in several important capacities, including presiding over 
disciplinary matters that have been appealed to or called for review by 
the NAC and acting on applications in statutory disqualification and 
membership proceeding.\33\ Given the NAC's ability to perform these 
actions and prepare written decisions on behalf of the FINRA Board, and 
that these decisions become FINRA's final action in the vast majority 
of cases,\34\ the Commission finds that applying the same grounds for 
the removal of a NAC member as those that apply for the removal of a 
governor is consistent with the Act. The proposal will strengthen the 
FINRA Board's oversight of the NAC and further support the principles 
outlined in the NAC's Conflict of Interest and Bias Policy, which 
include independence, impartiality, integrity, and accountability.\35\ 
In doing so, the proposal will help protect investors and further the 
public interest by expanding the scope of the FINRA Board's authority 
to remove NAC members that, in the Board's view, may be biased or have 
actual or apparent conflicts of interest or otherwise impede the NAC's 
adjudicatory responsibilities.\36\
---------------------------------------------------------------------------

    \33\ See supra note 7 and accompanying text.
    \34\ See Notice, 85 FR at 71389.
    \35\ See id. at 71388, n.12. See also supra note 20 and 
accompanying text.
    \36\ See id. at 71388 (citing Article IV, Section 4.14(a) of the 
FINRA Regulation By-Laws).
---------------------------------------------------------------------------

    In sum, the Commission finds that the proposal will continue to 
help assure the fair representation of FINRA members in the 
administration of FINRA's affairs. The Commission also finds that this 
proposal will help protect investors and further the public interest by 
supporting fair and impartial adjudicatory processes for, among other 
things, FINRA's disciplinary matters as well as statutory 
disqualification and membership proceedings.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \37\ that the proposal (SR-FINRA-2020-037) is approved.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02779 Filed 2-10-21; 8:45 am]
BILLING CODE 8011-01-P