Document ID: SEC-2015-1126-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-07-07T04:00Z

[Federal Register Volume 80, Number 129 (Tuesday, July 7, 2015)]
[Notices]
[Pages 38783-38788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16543]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75333; File No. SR-FINRA-2015-019]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule Series 9100, 9200, 9300, 9550, and 9800 Regarding Temporary 
and Permanent Cease and Desist Orders

June 30, 2015.
    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 June 16, 2015, 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. 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.
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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 FINRA Rule Series 9100, 9200, 9300, 
9550, and 9800 to modify the evidentiary standard that must be met to 
impose a temporary cease and desist order, to adopt a new expedited 
proceeding for repeated failures to comply with temporary or permanent 
cease and desist orders, to ease administrative burdens in temporary 
cease and desist proceedings, to harmonize the provisions governing how 
documents are served in temporary cease and desist proceedings and 
expedited proceedings, to clarify the process for issuing permanent 
cease and desist orders, and to make conforming changes throughout 
FINRA's Code of Procedure.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal

[[Page 38784]]

office of FINRA and at the Commission's Public Reference Room.

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
(i) Background
    In 2003, the SEC approved rule amendments that authorized FINRA to 
seek and impose temporary cease and desist orders.\3\ Temporary cease 
and desist orders are designed to stop serious violative conduct and 
maintain the status quo while an underlying disciplinary proceeding is 
being litigated.\4\ They can be imposed where the potential harm 
resulting from violations to investors is likely and significant. FINRA 
believes that lowering the evidentiary standard to obtain a temporary 
cease and desist order would better serve the investor protection 
purposes of the temporary cease and desist authority and make FINRA's 
temporary cease and desist authority a more viable investor-protection 
tool. The change in the evidentiary standard may allow FINRA to 
initiate and resolve temporary cease and desist proceedings sooner, in 
which case the potential benefits could be substantial in instances 
where investors are being significantly harmed. The change would also 
improve FINRA's capacity to enforce compliance with applicable laws and 
rules by its members and persons associated with members and FINRA's 
capability to prevent fraudulent and manipulative acts and practices. 
At the same time, the proposed rule change maintains all of the 
meaningful existing restraints on FINRA's temporary cease and desist 
authority, including rule provisions that restrict who may authorize 
the initiation of a temporary cease and desist proceeding, narrowly 
define the violations that a temporary cease and desist order can 
address, and limit the issuance of temporary cease and desist orders to 
situations where the alleged violative conduct or continuation thereof 
is likely to result in significant dissipation or conversion of assets 
or other significant harm to investors.
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    \3\ Securities Exchange Act Release No. 47925 (May 23, 2003), 68 
FR 33548 (June 4, 2003) (Order Approving File No. SR-NASD-98-80). In 
2009, the SEC approved the adoption of the temporary and permanent 
cease and desist authority on a permanent basis. Securities Exchange 
Act Release No. 60306 (July 14, 2009), 74 FR 36292 (July 22, 2009) 
(Order Approving File No. SR-FINRA-2009-035).
    \4\ FINRA Rule 9810(a) provides that a temporary cease and 
desist proceeding may be initiated with respect to alleged 
violations of Section 10(b) of the Act (15 U.S.C. 78j(b)) and Rule 
10b-5 under the Act (17 CFR 240.10b-5); Rules 15g-1 through 15g-9 
under the Act (17 CFR 240.15g-1 et seq.); FINRA Rule 2010 (if the 
alleged violation is unauthorized trading, or misuse or conversion 
of customer assets, or based on violations of Section 17(a) of the 
Securities Act of 1933 (15 U.S.C. 77q(a))); FINRA Rule 2020; or 
FINRA Rule 4330 (if the alleged violation is misuse or conversion of 
customer assets).
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    The proposed rule change also adopts a new expedited proceeding to 
address situations involving repeated violations of temporary or 
permanent cease and desist orders. Finally, the proposed rule change 
includes a series of rule amendments to the temporary cease and desist 
order rules (FINRA Rule Series 9800), the expedited proceedings rules 
(FINRA Rule Series 9550), and FINRA's Code of Procedure (FINRA Rule 
Series 9000) that harmonize service provisions in temporary cease and 
desist proceedings and expedited proceedings, ease administrative 
burdens in temporary cease and desist proceedings, and clarify the 
process by which permanent cease and desist orders may be imposed.
(ii) Evidentiary Standard for Imposing a Temporary Cease and Desist 
Order
    FINRA Rule 9840(a)(1) provides, in pertinent part, that a temporary 
cease and desist order shall be imposed if the Hearing Panel finds ``by 
a preponderance of the evidence that the alleged violation specified in 
the notice has occurred.'' FINRA believes that the ``preponderance of 
the evidence'' standard sets too high an evidentiary threshold for this 
critical investor-protection tool. It is the identical standard for 
proving a violation in the underlying disciplinary proceeding that must 
be pursued at the same time. Thus, to obtain a temporary cease and 
desist order--and thereby prevent the likely and significant 
dissipation or conversion of assets or other significant harm to 
investors--FINRA's prosecuting department has to make an evidentiary 
presentation in the temporary cease and desist proceeding that is 
similar in extent to its evidentiary presentation in the subsequent 
underlying disciplinary proceeding, but in an expedited manner. This 
poses administrative challenges that create a strong disincentive to 
seeking a temporary cease and desist order.
    To increase the viability of the temporary cease and desist 
authority and improve the capacity of that authority to protect 
investors facing the likelihood of significant dissipation or 
conversion of assets, FINRA is proposing rule amendments that modify 
the evidentiary standard that must be met to obtain a temporary cease 
and desist order. In this regard, proposed FINRA Rule 9840(a)(1) 
requires that a FINRA Hearing Panel find that the Department of 
Enforcement or Department of Market Regulation has made a showing of a 
likelihood of success on the merits before issuing a temporary cease 
and desist order. FINRA's intent is to establish an evidentiary 
standard in temporary cease and desist proceedings that would require a 
lesser showing than what would be required during the subsequent, 
underlying disciplinary proceeding. Changing the evidentiary standard 
to require a showing of a likelihood of success on the merits may 
enable FINRA to initiate and resolve temporary cease and desist 
proceedings sooner and more efficiently, which would better protect 
investors' assets and prevent other significant harm until the 
underlying disciplinary hearing is held.
    The proposed rule change makes a corresponding amendment to FINRA 
Rule 9840(a)(2). Currently, FINRA Rule 9840(a)(2) provides that a 
temporary cease and desist order shall be imposed if the Hearing Panel 
finds that the violative conduct or continuation thereof is likely to 
result in significant dissipation or conversion of assets or other 
significant harm to investors prior to the completion of the underlying 
proceeding. The proposed rule change modifies this requirement to apply 
to the ``alleged'' violative conduct or continuation thereof, to be 
consistent with the proposed change to the evidentiary standard.
    FINRA remains mindful that when the Commission approved FINRA's 
temporary cease and desist authority on a permanent basis in 2009, it 
noted FINRA's statement that it would use its authority 
``judiciously.'' \5\ FINRA's actions have been consistent with that 
statement--FINRA has sought and obtained temporary cease and desist

[[Page 38785]]

orders on only seven occasions since 2003--and FINRA intends to 
continue using its authority in a similarly judicious manner. Moreover, 
the proposed rule change maintains all of the meaningful restraints on 
FINRA's temporary cease and desist authority, including that a 
temporary cease and desist proceeding must be authorized by FINRA's 
Chief Executive Officer or other designated senior officer, and that a 
temporary cease and desist order can be imposed only if there is a 
likelihood of significant dissipation or conversion of assets or 
significant harm to investors.
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    \5\ Securities Exchange Act Release No. 60306 (July 14, 2009), 
74 FR 36292, 36293 (July 22, 2009) (Order Approving File No. SR-
FINRA-2009-035).
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    In sum, FINRA's purpose in modifying the evidentiary standard for 
temporary cease and desist proceedings is to increase the effectiveness 
of this regulatory proceeding and thereby improve investor protection 
in the most threatening and serious cases until the underlying 
disciplinary hearing is held.
(iii) Failures To Comply With Temporary Cease and Desist Orders and 
Permanent Cease and Desist Orders (FINRA Rule 9556)
    The proposed rule change includes amendments to FINRA Rule 9556, 
which sets forth expedited procedures for enforcing violations of 
FINRA-issued temporary and permanent cease and desist orders. FINRA is 
concerned that the existing expedited procedures may permit cease and 
desist orders to be circumvented without any real threat of a sanction. 
Under current FINRA Rule 9556, if a member or person fails to comply 
with a temporary or permanent cease and desist order, FINRA staff (with 
prior authorization from FINRA's Chief Executive Officer or other 
designated senior officer) may issue a notice stating that the failure 
to comply within seven days will result in a suspension or cancellation 
of membership or a suspension or bar from associating with any member 
and also stating what the respondent must do to avoid such action. A 
respondent potentially could abuse the current process by repeatedly 
violating a cease and desist order and curing that violation before the 
effective date of any FINRA Rule 9556 notice, without being subject to 
immediate sanctions or review by the Office of Hearing Officers for a 
prolonged period. While FINRA could pursue disciplinary action against 
a respondent that repeatedly ``violates and cures'' in this manner, an 
inability to obtain sanctions in an expedited manner could undermine 
any cease and desist order terms that require immediate compliance to 
be effective.
    Proposed FINRA Rule 9556(h) permits FINRA staff (with prior 
authorization from FINRA's Chief Executive Officer or other designated 
senior officer) to institute a new kind of expedited proceeding if the 
subject of a temporary or permanent cease and desist order fails to 
comply with that order and has previously been served with a notice 
under FINRA Rule 9556(a) for a failure to comply with any provision of 
the same temporary or permanent cease and desist order. Proposed FINRA 
Rule 9556(h)(3) provides that, in contrast to other Rule 9556 
proceedings, a respondent's compliance with the temporary or permanent 
cease and desist order is not a ground for dismissing the FINRA Rule 
9556(h) proceeding. Thus, a respondent's compliance with a temporary or 
permanent cease and desist order after the FINRA Rule 9556(h) 
proceeding has been initiated would not prevent an adjudicator from 
reviewing the matter and imposing a fitting sanction for the 
respondent's violation.
    The proposed FINRA Rule 9556(h) proceeding differs from other FINRA 
Rule 9556 expedited proceedings in other respects that reflect the 
response that FINRA believes is warranted for situations involving 
repeated violations of temporary or permanent cease and desist orders. 
These differences include the following:
     A FINRA Rule 9556(h) proceeding could be initiated only if 
the respondent has previously been served under FINRA Rule 9556(a) with 
a notice for failing to comply with any provision of the same temporary 
or permanent cease and desist order;
     FINRA's prosecuting department would initiate a FINRA Rule 
9556(h) proceeding by filing a petition with FINRA's Office of Hearing 
Officers (and serving the respondent) that seeks the imposition of 
sanctions for the violation (rather than issuing a notice to the 
respondent);
     FINRA's prosecuting department would seek the imposition 
of any fitting sanction at the outset of the FINRA Rule 9556(h) 
proceeding (in contrast to other FINRA Rule 9556 expedited proceedings, 
where the recipient of a notice is not subject to the imposition of any 
fitting sanction unless such recipient opts for a hearing);
     a hearing is required in a FINRA Rule 9556(h) proceeding;
     the hearing for a FINRA Rule 9556(h) proceeding must be 
held in a condensed time frame (ten business days after a respondent is 
served the petition, versus other Rule 9556 proceedings which require a 
respondent to request a hearing within seven business days after 
service of a notice instituting a proceeding and require hearings to be 
held within 14 days after a request for a hearing is filed); \6\
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    \6\ See proposed FINRA Rule 9559(f)(2) and (3); FINRA Rule 
9556(e).
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     a FINRA Rule 9556(h) proceeding is presided over by a 
Hearing Officer, rather than a Hearing Panel; \7\ and
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    \7\ See proposed FINRA Rule 9559(d)(1) and (2).
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     the Hearing Officer may issue default decisions in FINRA 
Rule 9556(h) proceedings.\8\
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    \8\ See proposed FINRA Rule 9559(m)(2).
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    Under proposed FINRA Rule 9556(h)(4), the FINRA department that 
filed the petition can withdraw it without prejudice and shall be 
permitted to refile a petition based on allegations concerning the same 
facts and circumstances that are set forth in the withdrawn petition. 
This provision will provide FINRA the flexibility to withdraw the 
petition where, for instance, the respondent evidences a good faith 
intent to comply with the temporary or permanent cease and desist order 
without the need to adjudicate the petition, while preserving FINRA's 
right to refile the petition if the respondent fails to do so.
    Considering that these new FINRA Rule 9556(h) expedited proceedings 
would be limited to subsequent violations of temporary or permanent 
cease and desist orders, require appropriate authorization, provide an 
opportunity for a hearing prior to the imposition of a sanction, be 
resolved by a Hearing Officer, and be subject to appeal to the SEC, 
sufficient checks are in place to ensure that FINRA continues to use 
its FINRA Rule 9556 powers in a judicious and fair manner.
(iv) Service Provisions in Temporary Cease and Desist Proceedings and 
Expedited Proceedings
    The proposed rule change makes the FINRA rules that govern service 
of documents in temporary cease and desist proceedings and the eight 
different types of expedited proceedings more consistent. Currently, 
some provisions explicitly address service by facsimile and on counsel, 
but some do not. FINRA proposes rule amendments that explicitly allow 
service by facsimile and on counsel across all temporary cease and 
desist and expedited proceedings because doing so removes unnecessary 
burdens and inefficiencies.
    The proposed rule change also permits service by email in all 
temporary cease and desist proceedings and expedited proceedings. Email 
service will allow parties to receive information quickly, which is 
particularly important in these types of proceedings, considering the 
short time

[[Page 38786]]

frames involved. Moreover, where the proposed revisions permit email 
service, they also require duplicate service through some other means 
such as overnight courier or personal delivery.
(v) Clarifying FINRA's Authority To Impose Permanent Cease and Desist 
Orders
    When FINRA obtained the authority to impose temporary cease and 
desist orders, it also obtained the authority to impose permanent cease 
and desist orders.\9\ The proposed rule change contains amendments that 
clarify the process for imposing permanent cease and desist orders in 
disciplinary proceedings. These changes are procedural in nature and do 
not reflect any change to FINRA's prior representations concerning the 
context in which it will seek permanent cease and desist orders.\10\
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    \9\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548, 33549-50 (June 4, 2003) (Order Approving File 
No. SR-NASD-98-80).
    \10\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548, 33550 & n.18 (June 4, 2003) (Order Approving 
File No. SR-NASD-98-80).
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(vi) Administrative Changes To Temporary Cease and Desist Proceedings
    The small pool of persons who currently may serve on hearing panels 
that preside over temporary cease and desist proceedings, coupled with 
the short time in which a temporary cease and desist proceeding must be 
processed, creates administrative burdens for FINRA's Office of Hearing 
Officers. Currently, FINRA Rule 9820(a) requires that the Hearing Panel 
appointed to preside over a temporary cease and desist proceeding 
include two panelists that are ``current or former Governors, 
Directors, or National Adjudicatory Council members, and at least one 
Panelist shall be an associated person.'' This is a far more limited 
pool of potential panelists than is available for other FINRA 
adjudicatory proceedings, including the underlying disciplinary 
proceeding that follows a temporary cease and desist proceeding and any 
FINRA Rule 9556 expedited proceeding to enforce a cease and desist 
order.\11\ While FINRA's Office of Hearing Officers has presided over 
only a limited number of temporary cease and desist proceedings, those 
experiences have revealed that the narrowly circumscribed set of 
potential panelists can impede the recruitment of Hearing Panel 
members, especially considering that the expedited nature of temporary 
cease and desist proceedings will already preclude many from being able 
to serve.\12\ FINRA also has concerns that the small pool of potential 
panelists will often make it difficult to recruit hearing panelists who 
can serve on both the temporary cease and desist proceeding and the 
subsequent underlying disciplinary proceeding, as well as any related 
expedited proceeding under FINRA Rule 9556. In such situations, FINRA 
is unable to realize the corresponding benefits to judicial economy 
that come from having the same panelists preside over all such 
proceedings.
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    \11\ See FINRA Rule 9231(b) (providing that each panelist shall 
be associated with a member of FINRA or retired therefrom and that 
the pool of panelists for disciplinary proceedings includes current 
or previous members of District Committees, former members of the 
National Adjudicatory Council, past members of disciplinary 
subcommittees of the National Adjudicatory Council or the National 
Business Conduct Committee, past members of the Board of Directors 
of FINRA Regulation or past members of the Board of Governors of 
FINRA, and current or previous members of committees appointed or 
approved by the Board of Governors of FINRA); FINRA Rule 9559(d)(2) 
(providing for the same pool for FINRA Rule 9556 expedited 
proceedings).
    \12\ Hearings in temporary cease and desist proceedings are, in 
general, required to be held not later than 15 days after service of 
the notice initiating the proceeding. FINRA Rule 9830(a).
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    To address these issues, the proposed rule change expands the pool 
of persons eligible to serve on hearing panels to include those who may 
serve on hearing panels for disciplinary matters. Specifically, under 
proposed FINRA Rule 9820, the potential panelists for the Hearing 
Panels that preside over temporary cease and desist proceedings would 
include persons who currently serve or previously served on a District 
Committee; previously served on the National Adjudicatory Council; 
previously served on a disciplinary subcommittee of the National 
Adjudicatory Council or the National Business Conduct Committee; 
previously served as a member of the Board of Directors of FINRA 
Regulation or of the Board of Governors of FINRA; or currently serve or 
previously served on a committee appointed or approved by the Board of 
Governors of FINRA, but do not serve currently on the National 
Adjudicatory Council or as a member of the Board of Directors of FINRA 
Regulation or of the Board of Governors of FINRA. Likewise, the 
proposed rule change would require that each panelist be associated 
with a member of FINRA or retired therefrom.
    The proposed rule change also eases other administrative burdens 
created by the shortened time frame of a temporary cease and desist 
proceeding. These proposed changes are aimed at improving Hearing 
Panels' and parties' ability to prepare for hearings and giving Hearing 
Officers some needed flexibility. For example, under current FINRA Rule 
9830(a), a Hearing Officer is not able to extend a hearing date in a 
temporary cease and desist proceeding unless all parties consent to the 
extension. The requirement to obtain the parties' consent can be 
problematic where the Office of Hearing Officers, rather than one of 
the parties, has a need for an extension, such as when it encounters 
difficulty in quickly appointing a Hearing Panel. To address this 
problem, FINRA is proposing to change FINRA Rule 9830(a) to allow 
hearing deadlines to be extended by the Chief Hearing Officer or Deputy 
Chief Hearing Officer for good cause shown.
    Likewise, the proposed rule change makes similar amendments to the 
process by which extensions are obtained to the deadlines for issuing 
decisions in temporary cease and desist proceedings and responding to 
requests to modify, set aside, limit or suspend a temporary cease and 
desist order. Under current FINRA Rule 9840(a), the Hearing Panel's 
deadline for issuing its written decision cannot be extended, even 
where there is good cause, without the consent of the parties. 
Likewise, under current FINRA Rule 9850, a Hearing Panel's deadline for 
responding to an application to have a temporary cease and desist order 
modified, set aside, limited, or suspended cannot be extended, even 
where there is a good cause, without the consent of the Parties. A 
Hearing Panel should be allowed some flexibility where there is a need 
for additional time to prepare its decision or respond to a FINRA Rule 
9850 request (e.g., when a member of the Hearing Panel becomes ill, 
where the temporary cease and desist proceeding is highly complex). The 
proposed change to FINRA Rules 9840(a) and 9850 would permit the 
deadlines for issuing decisions and responding to FINRA Rule 9850 
applications to be extended by the Chief Hearing Officer or Deputy 
Chief Hearing Officer for good cause shown.
    To further address the burdens created by the short time frame of 
temporary cease and desist proceedings, the proposed rule change also: 
(i) Requires FINRA's prosecuting department to file a memorandum of 
points and authorities with the notice initiating a temporary cease and 
desist proceeding; and (ii) permits the Hearing Officer to order a 
party to furnish to all other parties and the Hearing Panel such 
information as deemed appropriate, including any or all of the pre-
hearing submissions described in FINRA Rule

[[Page 38787]]

9242(a).\13\ Requiring FINRA's prosecuting department to file a 
memorandum of points and authorities at the initiation of the 
proceeding will, at the outset, provide more context to the allegations 
and set forth legal authorities on which the notice seeking a temporary 
cease and desist order is premised. This, in turn, will facilitate a 
more efficient process and improve the quality of the hearing through 
more thorough preparation, which are the same goals of the pre-hearing 
processes in FINRA disciplinary proceedings.\14\ Requiring the filing 
of a memorandum of points and authorities at the initiation of a 
temporary cease and desist proceeding also will enhance disclosure of 
the prosecuting department's allegations, which will inure to the 
benefit of the respondents and further increase the fairness of the 
proceeding. All of these objectives also will be served by authorizing 
Hearing Officers to order a party to furnish other pre-hearing 
submissions.
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    \13\ The pre-hearing submissions described in FINRA Rule 9242(a) 
include: (1) An outline or narrative summary of a party's case or 
defense; (2) the legal theories upon which a party shall rely; (3) a 
list and copies of documents that a party intends to introduce at 
the hearing; (4) a list of witnesses who shall testify on a party's 
behalf, including the witnesses' names, occupations, addresses, and 
a brief summary of their expected testimony; and (5) if a witness 
shall be called to testify as an expert, a statement of the expert's 
qualifications, a listing of other proceedings in which the expert 
has given expert testimony, a list of the expert's publications, and 
copies of those publications that are not readily available to other 
parties and the Hearing Panel.
    \14\ See FINRA Rule 9241(a) (setting forth purposes of pre-
hearing conferences in disciplinary proceedings).
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    Proposed FINRA Rule 9840(e) is a delivery requirement that would 
require a member firm that is the subject of a temporary cease and 
desist order to provide a copy of the order to its associated persons, 
within one business day of receiving it. Considering the significant 
nature of the harm that a temporary cease and desist order is aimed at 
stopping, FINRA believes there is a heightened need to ensure that the 
persons who may act on behalf of the member firm are made aware of the 
contents of a temporary cease and desist order imposed against the 
member firm. The delivery requirement will further that goal.\15\
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    \15\ Similarly, the proposed rule change makes related 
amendments to FINRA Rules 9269, 9270, and 9840 to require that the 
Office of Hearing Officers, the Department of Enforcement, the 
Department of Market Regulation, or the General Counsel, as 
appropriate, disseminate default decisions, orders of acceptance of 
settlement, and temporary cease and desist orders to each member of 
FINRA with which a respondent is associated. These dissemination 
requirements are intended to ensure that a respondent's member firm 
is made aware of the disciplinary history of its associated persons, 
regardless of the specific disciplinary procedure involved. The 
proposed amendments are consistent with other FINRA Rules that 
already require the Office of Hearing Officers, the National 
Adjudicatory Council, or the Board of Governors of FINRA to provide 
copies of a decision issued by a Hearing Panel, an Extended Hearing 
Panel, the National Adjudicatory Council, or the Board of Governors 
of FINRA to each member firm with which a respondent is associated. 
See FINRA Rules 9268(d), 9349(c), 9351(e).
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    Finally, the proposed rule change clarifies the following 
additional three issues: (1) How settlements may be approved in 
temporary cease and desist proceedings; (2) which Hearing Panel has 
jurisdiction to preside over applications filed under FINRA Rule 9850 
to modify, set aside, limit or suspend temporary cease and desist 
orders that are filed after a Hearing Panel has already been appointed 
in the underlying disciplinary proceeding; and (3) whether temporary 
and permanent cease and desist orders imposed against a firm also apply 
to successors of that firm. With respect to the first issue, proposed 
FINRA Rule 9810(c) establishes that, if the parties agree to the terms 
of a proposed temporary cease and desist order, the Hearing Officer 
shall have the authority to approve and issue the order. On the second 
issue, proposed FINRA Rule 9850 provides that the Hearing Panel that 
presided over the temporary cease and desist order proceeding shall 
retain jurisdiction to review a FINRA Rule 9850 application unless at 
the time the application is filed a Hearing Panel has already been 
appointed in the underlying disciplinary proceeding commenced under 
FINRA Rule 9211, in which case the Hearing Panel appointed in the 
disciplinary proceeding has jurisdiction.\16\ As to the third issue, 
proposed FINRA Rules 9840(b) and 9291(a) establish that when a 
temporary or permanent cease and desist order is imposed against a 
member firm, it also applies to any successor of the member firm.
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    \16\ In many instances the same Hearing Panel will preside over 
both the temporary cease and desist proceeding and the underlying 
disciplinary proceeding. There may be occasions, however, where that 
is not possible.
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(vii) Effective Date
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 30 days 
following publication of the Regulatory Notice announcing Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(2) of the Act,\17\ which requires, among 
other things, that FINRA has the capacity to be able to carry out the 
purposes of the Act and to comply, and to enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act, the rules and regulations thereunder, the rules of the 
Municipal Securities Rulemaking Board, and FINRA rules; Section 
15A(b)(6) of the Act,\18\ 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; Section 
15A(b)(7) of the Act,\19\ which requires, among other things, that 
FINRA rules provide that FINRA members and persons associated with its 
members shall be appropriately disciplined for violation of any 
provision of the Act, the rules of regulations thereunder, the rules of 
the Municipal Securities Rulemaking Board, or FINRA rules by expulsion, 
suspension, limitation of activities, functions, and operations, fine, 
censure, being suspended or barred from being associated with a member, 
or any other fitting sanction; and Section 15A(b)(8) of the Act,\20\ 
which requires that FINRA rules provide a fair procedure for, among 
other things, the disciplining of members and persons associated with 
members.
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    \17\ 15 U.S.C. 78o-3(b)(2).
    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ 15 U.S.C. 78o-3(b)(7).
    \20\ 15 U.S.C. 78o-3(b)(8).
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    FINRA believes that the proposed rule change is consistent with, 
and furthers the objectives of, Sections 15A(b)(2) and 15A(b)(6) of the 
Act in that the proposed changes to the evidentiary standard required 
for imposing a temporary cease and desist order and the proposed 
adoption of a new expedited proceeding for repeated failures to comply 
with temporary or permanent cease and desist orders will protect 
investors and the public interest by improving FINRA's capacity to 
enforce compliance with applicable laws and rules by its members and 
persons associated with members and improving FINRA's capability to 
prevent fraudulent and manipulative acts and practices. FINRA believes 
that the proposed rule change is consistent with Section 15A(b)(7) of 
the Act because it allows FINRA to take appropriate action against 
members and their associated persons who are

[[Page 38788]]

engaged in serious misconduct. Finally, FINRA believes that the 
proposed rule change is consistent with Section 15A(b)(8) of the Act 
because the rules governing temporary cease and desist orders and 
expedited proceedings require notice and an opportunity to be heard 
before a neutral tribunal, in addition to the numerous other procedural 
safeguards described above and included in the rules.

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. FINRA expects that changing the 
rules that govern obtaining and enforcing temporary and permanent cease 
and desist orders will result in benefits to investors and the public 
interest, without imposing significant direct or indirect costs on 
members or the public. The primary purpose of these amendments is to 
better ensure that FINRA can protect the assets of brokerage customers 
in cases where it is demonstrably likely that violative conduct is 
taking place. These benefits would be achieved through a combination of 
changing the evidentiary standard for imposing temporary cease and 
desist orders, removing a potential gap that could allow persons to 
repeatedly ``violate and cure'' temporary or permanent cease and desist 
orders, and other administrative changes. Lowering the evidentiary 
threshold for obtaining a temporary cease and desist order would 
provide a more effective and efficient mechanism to combat serious 
misconduct and lessen the dissipation of customer funds in the presence 
of misconduct.
    Based on FINRA's past history of initiating only a small number of 
temporary cease and desist actions after gaining temporary cease and 
desist authority, the proposed rule change is anticipated to result in 
only a nominal increase in temporary cease and desist actions. 
Nonetheless, the change in the evidentiary standard may allow FINRA to 
initiate and resolve temporary cease and desist proceedings sooner, in 
which case the potential benefits can be substantial in just a single 
case where investors are being harmed.
    Moreover, there are numerous controls to assure that the temporary 
cease and desist authority is used only in limited and appropriate 
cases. First, the temporary cease and desist authority is restricted to 
those instances where the staff can demonstrate that the dissipation or 
conversion of assets or harm to customers is likely and significant. 
Second, FINRA's prosecuting departments must still be prepared to prove 
the underlying disciplinary case at the higher, ``preponderance of the 
evidence'' evidentiary standard. Third, to ensure that FINRA applies 
its temporary cease and desist authority in a manner that is fair, a 
temporary cease and desist order may be imposed only if the action has 
been authorized by FINRA's Chief Executive Officer or such other senior 
officers as the Chief Executive Officer may have designated, the 
parties have had an opportunity for a hearing prior to the imposition 
of the temporary cease and desist order, and an independent Hearing 
Panel has made findings that the standards for imposing a temporary 
cease and desist order have been met. Fourth, a party subject to a 
temporary cease and desist order may appeal to the SEC, and thereafter 
to a federal court of appeals.
    The benefits that arise from the remaining portions of the proposed 
rule change primarily accrue from added efficiency in the application 
of the temporary cease and desist process and related processes. The 
proposed service provisions and other administrative changes impose no 
material costs on firms and permit the staff to expedite the process to 
preserve customer assets and stop inappropriate activities more 
quickly.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-019 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-019. This 
file number should be included on the subject line if email 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 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of the filing will also 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-2015-019 and should be 
submitted on or before July 28, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-16543 Filed 7-6-15; 8:45 am]
BILLING CODE 8011-01-P