Document ID: SEC-2012-0876-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-06-06T04:00Z

[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33539-33541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13639]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67082; File No. SR-FINRA-2012-018]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Approval of Proposed Rule Change as Modified by Amendment No. 1, To 
Amend NASD Rules 1012 (General Provisions) and 1017 (Application for 
Approval of Change in Ownership, Control, or Business Operations) To 
Adopt Form CMA

May 31, 2012.

I. Introduction

    On February 28, 2012, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NASD Rules 1012 (General Provisions) and 
1017 (Application for Approval of Change in Ownership, Control, or 
Business Operations) and to adopt Form CMA (``Form''), a new 
standardized electronic form. The Form must be used by members who 
apply for approval of a change in ownership, control, or business 
operations consistent with Rule 1017. The proposed rule change was 
published for comment in the Federal Register on March 8, 2012.\3\ The 
Commission received four comment letters on the proposed rule 
change.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66508 (March 2, 
2012), 77 FR 14052.
    \4\ See March 14, 2012 letter from Kevin A. Carreno, President, 
Experts Counsel Inc. (``EC Letter''); March 29, 2012 letter from 
David T. Bellaire, Esq., General Counsel and Director of Government 
Affairs, Financial Services Institute, to Elizabeth M. Murphy, 
Secretary (``Secretary''), Commission (``FSI Letter''); March 29, 
2012 letter from Stephen H. Cohen, Partner, Loeb & Loeb LLP, to 
Secretary, Commission (``LL Letter''); March 29, 2012 letter from 
Howard Spindel, Senior Managing Director, Integrated Management 
Solutions, to Secretary, Commission (``IMS Letter'').
---------------------------------------------------------------------------

    On May 8, 2012, FINRA filed Amendment No. 1 \5\ and a letter in 
response to the comments.\6\ The Commission is approving the proposed 
rule change as modified by Amendment No 1.\7\
---------------------------------------------------------------------------

    \5\ Amendment No. 1 is technical in nature, and the Commission 
is not publishing it for public comment.
    \6\ See May 8, 2012, letter from Patricia Albrecht, Associate 
General Counsel, FINRA, to Secretary, Commission (``FINRA Letter'').
    \7\ On April 18, 2012, FINRA granted an extension of time until 
June 6, 2012, for the Commission to act on the filing.
---------------------------------------------------------------------------

II. Description of the Proposal

    NASD Rule 1017 requires members, upon specified changes in 
ownership, control, or business operations, to file a continuing 
membership application and enumerates the information that must be 
provided to FINRA for FINRA to review. FINRA proposes to amend NASD 
Rules 1012 (General Provisions) and 1017 (Application for Approval of 
change in Ownership, Control, or Business Operations) to adopt the 
Form, a new standardized electronic form to be used by members subject 
to the continuing membership process. FINRA worked with an industry 
task force comprised of representatives from small and large firms to 
develop the Form. FINRA believes that the Form will reduce the 
administrative burden for applicants that must comply with the Rule and 
enable its staff to review the applications in more effective and 
efficient manner.

III. Summary of Comments

    The Commission received four comment letters on the proposed rule 
change.\8\ One commenter urged the Commission to approve the proposed 
rule change, stating the use of the Form will provide member firms with 
clarity and will streamline the process.\9\ The remaining commenters 
raised the following issues:
---------------------------------------------------------------------------

    \8\ See supra note 4.
    \9\ FSI Letter at 3. Another commenter supported the proposed 
rule change, but expressed concern about ``problems embedded in the 
CMA process that puts [sic] smaller firms at a huge disadvantage.'' 
IMS Letter at 5.
---------------------------------------------------------------------------

The Form is Overbroad and Confusing

    Three commenters expressed concern that the Form would impose new 
and unnecessary demands for information, adding to confusion and 
resulting in greater delays for most members.\10\ One commenter 
expressed concern the Form would impose needless, burdensome 
requirements on both member firms and FINRA to sift through irrelevant 
information, adding unnecessarily to the time required for applicants 
to file, and for FINRA to review, an application pursuant to Rule 
1017.\11\ Another commenter said the amount of detail requested in the 
Form will have a negative effect on most members, and

[[Page 33540]]

place an increased administrative burden on small firms.\12\ Another 
commenter questioned whether the Form will require members to provide 
irrelevant data, given that members will have one basic application 
process that must serve the needs of all FINRA members, regardless of 
size and complexity.\13\ The commenter expressed hope that indicating a 
negative response that maintains the status quo will result in an 
application process that is relatively short.\14\ Additionally, the 
commenter stated FINRA staff should be allowed to exercise its judgment 
when determining the potential harm to the public and whether a closer 
analysis is warranted, depending on the size and complexity of 
operations of the firm.\15\
---------------------------------------------------------------------------

    \10\ IMS Letter, LL Letter, EC Letter.
    \11\ LL Letter at 2. The commenter offered seven examples of how 
the Form is overbroad, confusing, and beyond the scope of a member 
firm's current obligations under Rule 1017. Id. at 3-4.
    \12\ EC Letter (``* * * the amount of detail requested in over 
45 pages in an electronic application will lead to much greater 
delays and confusion for most members. It will also significantly 
increase the administrative burden on small firms.'').
    \13\ IMS Letter at 1, 3.
    \14\ Id. at 3.
    \15\ Id.
---------------------------------------------------------------------------

FINRA Should Conduct a More Comprehensive Review of the CMA Process and 
Shorten Timeframes for Approval of Rule 1017 Applications

    One commenter stated that Rule 1017 has a disproportionate impact 
on small firms, and that FINRA staff ``has routinely used the 1017 
process to delay potential business opportunities for small firms to 
the detriment of the firms [sic] shareholders, employees and clients.'' 
\16\ The commenter asked the Commission to reject the proposed 
amendments, and to require FINRA to conduct a more comprehensive review 
of the Change of Membership process to allow for greater flexibility 
for small firms.\17\
---------------------------------------------------------------------------

    \16\ EC Letter.
    \17\ Id.
---------------------------------------------------------------------------

    Two commenters stated FINRA should reduce the timeframe for 
approval of Rule 1017 applications. One commenter suggested 60 days was 
appropriate.\18\ Another commenter suggested that 30 days was adequate 
for a simple continuing membership application that has been accepted 
as substantially complete, and that 60 days should suffice for more 
complex applications.\19\
---------------------------------------------------------------------------

    \18\ EC Letter.
    \19\ IMS Letter at 5.
---------------------------------------------------------------------------

IV. FINRA's Response to Comments

    FINRA disagreed that the Form employed a ``one size fits all'' 
approach, and that the Form would result in unnecessary burdens, 
delays, and confusion.\20\ FINRA stated the Form is designed to gather 
basic information necessary for all applicants, with ``embedded 
flexibility'' to allow for differences among applicants, depending on 
the type of application being submitted.\21\ FINRA noted that the Form 
uses pre-populating fields that contain information applicants 
previously provided to FINRA, as well as optional information fields 
that applicants may use to provide additional information, and that 
these features were designed to minimize the time required of 
applicants in filling out the Form, and to reduce the administrative 
burden on applicants.\22\ FINRA stated the use of optional fields is 
also intended to accommodate the differences in structures among 
applicants and to allow applicants the ability to provide relevant 
information depending on their circumstances.\23\
---------------------------------------------------------------------------

    \20\ FINRA Letter at 3.
    \21\ Id.
    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    FINRA does not believe that the Form will increase the 
administrative burden on small firm applicants.\24\ Having worked with 
an industry task force comprised with a majority of representatives 
from small firms, FINRA stated it ``gained valuable insight regarding 
the potential impact of Form CMA on small firm applicants.'' \25\ FINRA 
used this information ``to make changes intended to provide flexibility 
and reduce all applicants' administrative burdens'' when completing the 
Form.\26\
---------------------------------------------------------------------------

    \24\ Id.
    \25\ Id. at 3-4.
    \26\ Id. at 4.
---------------------------------------------------------------------------

    FINRA amended the proposed rule change in response to concerns 
raised by one commenter that FINRA should delete references to a 
business plan, pro forma financials, organization chart, and written 
supervisory procedures contained in NASD Rule 1017(b)(2) to avoid 
potential confusion. FINRA proposes to delete references to those 
items, and revised the proposed rule language to require an applicant 
to submit an application that includes a ``Form CMA that includes a 
detailed description of the change in ownership, control, or business 
operations.'' \27\
---------------------------------------------------------------------------

    \27\ Id. at 4.
---------------------------------------------------------------------------

    FINRA addressed a number of questions and comments raised by the 
commenters regarding the format of the Form, as well as content issues, 
by clarifying the scope of information that FINRA expects applicants to 
provide when completing the Form.\28\ FINRA does not believe that the 
information requested in the Form is broader and beyond the scope of 
information that FINRA currently requests during the continuing 
membership application process.
---------------------------------------------------------------------------

    \28\ Id., generally, at 4-11.
---------------------------------------------------------------------------

    With regard to the commenters' suggestions that FINRA reduce the 
180-day timeframe provided in NASD Rule 1017 for approving a continuing 
membership application, FINRA believes these comments are beyond the 
scope of the proposed rule change.\29\ However, FINRA ``continues to 
evaluate opportunities to streamline the application process or, where 
appropriate, consider revisions or amendments to FINRA's membership 
rules.'' \30\
---------------------------------------------------------------------------

    \29\ Id. at 11.
    \30\ Id.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response to the comments, 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 and, in particular, the requirements of 
15A of the Act.\31\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 15A(b)(6) \32\ of the 
Act, which, among other things, requires that rules of a national 
securities association be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and to protect 
investors and the public interest.\33\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78o-3.
    \32\ 15.U.S.C. 78o-3(b)(6).
    \33\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change is 
reasonable, and specifically, that the Form and corresponding changes 
to NASD Rules 1012 and 1017 are reasonably designed to streamline the 
process for compliance with the continuing membership responsibilities 
of FINRA members. The Commission supports FINRA's efforts to improve 
the efficiency of the process and its desire to reduce the overall 
administrative burden shouldered by members who are subject to the 
continuing membership process of Rule 1017.
    The Commission is not persuaded by the commenters' assertions that 
the proposal places undue burdens on small firms. The Commission 
believes that FINRA's efforts to address this issue are sufficient. The 
Commission notes that

[[Page 33541]]

FINRA solicited input from small firms in redesigning the continuing 
membership application process, and the Form is structured to allow for 
some degree of flexibility, so that each applicant may tailor its 
application appropriately. Furthermore, in FINRA's response to the 
comments, FINRA provided detailed guidance and clarification to help 
alleviate concerns and confusion generated by the proposal. The 
Commission supports FINRA's desire to continually examine its policies 
and procedures to reduce administrative burdens and increase efficiency 
with regard to continuing membership applications whenever possible. As 
FINRA undergoes this self-evaluation, the Commission believes FINRA 
will consider the commenters' suggestion that FINRA reevaluate the 
necessity of a 180-day approval period for continuing membership 
applications. In the interim, however, the Commission believes the 
proposed rule change is both reasonable and consistent with the Act.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-FINRA-2012-018), as modified 
by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13639 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P