Document ID: SEC-2020-1788-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-11-09T05:00Z

[Federal Register Volume 85, Number 217 (Monday, November 9, 2020)]
[Notices]
[Pages 71387-71390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24787]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90324; File No. SR-FINRA-2020-037]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a 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

November 3, 2020.
    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 October 22, 2020, the 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

[[Page 71388]]

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 the By-Laws of FINRA Regulation, Inc. 
(``FINRA Regulation''), FINRA's regulatory subsidiary, to further align 
the grounds for member removal from the National Adjudicatory Council 
(``NAC'') with an existing provision in the FINRA By-Laws related to 
the removal of a FINRA Governor from the FINRA Board of Governors 
(``FINRA Board'').\3\
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    \3\ In 2008, the FINRA Regulation By-Laws were amended to, among 
other things, designate the FINRA Board as the body authorized to 
oversee the NAC and empowered to remove NAC members for refusal, 
failure, neglect, or inability to discharge duties. See Securities 
Exchange Act Release No. 58909 (November 6, 2008), 73 FR 68467 
(November 18, 2008) (Order Approving File No. SR-FINRA-2008-046). 
Under the FINRA By-Laws, members of the FINRA Board can be removed 
under the same grounds, plus an additional ground. See infra note 8.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

BY-LAWS OF FINRA REGULATION, INC.

* * * * *

ARTICLE V NATIONAL ADJUDICATORY COUNCIL

* * * * *

Removal

    Sec. 5.8 Any or all of the members of the National Adjudicatory 
Council may be removed from office at any time for refusal, failure, 
neglect, or inability to discharge the duties of such office, or for 
any cause affecting the best interests of the National Adjudicatory 
Council the sufficiency of which the FINRA Board shall be the sole 
judge, by majority vote of the FINRA Board.
* * * * *

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 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'').\4\ The FINRA Regulation By-Laws 
authorize the NAC to function on behalf of the FINRA Board in several 
capacities.\5\ For example, the NAC presides over disciplinary matters 
appealed to or called for review by the NAC; acts on applications in 
statutory disqualification and membership proceedings; exercises 
exemptive 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.\6\ For most 
matters that the NAC considers, the NAC prepares proposed written 
decisions that become final FINRA action if the FINRA Board does not 
call them for review.
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    \4\ See Plan, II. FINRA Regulation, Inc., https://www.finra.org/rules-guidance/rulebooks/corporate-organization/ii-finra-regulation-inc.
    \5\ See Article V, Sec. 5.1 of the FINRA Regulation By-Laws.
    \6\ See supra note 5.
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    FINRA periodically reviews its and FINRA Regulation's By-Laws to 
ensure adherence to effective governance practices. The FINRA 
Regulation By-Laws currently permit the FINRA Board to remove ``any or 
all members'' of the NAC from office at any time for refusal, failure, 
neglect, or inability to discharge the duties of the office.\7\ By 
comparison, the FINRA By-Laws include those grounds for removal of a 
Governor from the FINRA Board plus an additional ground allowing for 
removal for any cause affecting the best interests of FINRA the 
sufficiency of which the FINRA Board shall be the sole judge.\8\ The 
proposed rule change would amend Article V, Section 5.8 of the FINRA 
Regulation By-Laws to align the bases for removal of a member of the 
NAC in the FINRA Regulation By-Laws with those of the FINRA By-Laws for 
removal of a Governor. Specifically, the proposed rule change would 
provide that a NAC member could 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.
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    \7\ See Article V, Section 5.8 of the FINRA Regulation By-Laws.
    \8\ See Article VII, Section 1(b) of the FINRA By-Laws.
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    FINRA notes that the voting threshold for removal of a NAC member 
differs from that of a Governor. The former requires a majority vote of 
the FINRA Board, while the latter requires a two-thirds vote.\9\ The 
higher voting threshold for removal of a Governor reflects the 
historical standard that existed at the National Association of 
Securities Dealers (``NASD'') prior to its 2007 merger with the member 
regulation, enforcement and arbitration operations of the New York 
Stock Exchange (``NYSE'') that formed FINRA, and 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.\10\
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    \9\ 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). While the standard for removal of 
NAC members is not directly subject to the Delaware General 
Corporation Law, FINRA has adopted a removal threshold for NAC 
members that is consistent with the removal threshold for directors 
under the Delaware Corporation Law.
    \10\ The FINRA Regulation By-Laws addressing the composition of 
the NAC also provide for a diverse, majority non-industry 
composition, and for the fair representation of industry. See 
Article V, Section 5.2(a) of the FINRA Regulation By-Laws; See also 
Securities Exchange Act Release No. 78094 (June 17, 2016), 81 FR 
40932, 40934-35 (June 23, 2016).
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    Given the NAC's adjudicatory role, the best interests of the NAC 
are more targeted than the best interests of FINRA. 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. In considering whether to remove a NAC member for a cause 
affecting the best interests of the NAC, the FINRA Board may consider, 
among other things, a NAC member's adherence to general standards 
concerning actual and apparent adjudicator conflicts of interest and 
bias,\11\ and to the NAC's Conflict of Interest and Bias Policy 
(``Policy''). The Policy sets forth broad-based principles of behavior 
that are expected from NAC members.\12\ Removal of a NAC member

[[Page 71389]]

from office is a facts and circumstances determination. The additional 
removal authority provided in the proposed rule change may, depending 
on the facts and circumstances, overlap in part with the FINRA Board's 
existing authority to remove a NAC member. However, depending on the 
facts and circumstances, it may also provide an additional basis for 
removal for a cause affecting the best interests of the NAC that does 
not fall within the scope of the FINRA Board's current removal 
authority.
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    \11\ See, e.g., Article IV, Section 4.14(a) of the FINRA 
Regulation By-Laws.
    \12\ The principles outlined in the 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.
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    In order to balance the NAC's ability to perform certain actions on 
behalf of FINRA \13\ with the FINRA Board's authority to review such 
actions,\14\ FINRA believes that it is reasonable and appropriate to 
amend the FINRA Regulation By-Laws to align the grounds under which 
members of the NAC and FINRA Board can be removed. In doing so, the 
proposed rule change will strengthen the FINRA Board's oversight of the 
NAC and benefit the appellate portion of FINRA's disciplinary process, 
in which the NAC prepares the decision that becomes FINRA's final 
action in the vast majority of cases.
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    \13\ See supra note 5.
    \14\ See Plan, I(B). FINRA, Inc., https://www.finra.org/rules-guidance/rulebooks/corporate-organization/i-finra-inc.
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    If the Commission approves the proposed rule change, the effective 
date of the proposed rule change will be the date of Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ 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; and Section 15A(b)(4) of the Act, which requires, 
among other things, that FINRA rules be designed to assure a fair 
representation of FINRA's members in the administration of its 
affairs.\16\ FINRA believes that the proposed By-Laws change will 
strengthen its governance practices by aligning grounds for removal of 
NAC members with those of the FINRA Governors. The FINRA By-Law 
provision that allows for the Board's direct ability to remove a 
Governor for any cause affecting the best interests of FINRA existed in 
the By-Laws of the NASD prior to its 2007 merger with the NYSE, and was 
also a part of the By-Laws that were previously found to meet the 
statutory requirement when the NASD merged with the member regulation, 
enforcement and arbitration operations of the NYSE to form FINRA.\17\ 
FINRA also believes applying the same standard to removal of NAC 
members will support a fair and impartial disciplinary process for 
members and their associated persons. FINRA further believes that the 
proposed rule change will strengthen investor protection and further 
the public interest by bolstering the integrity of the NAC and 
strengthening existing FINRA Regulation By-Laws that foster a framework 
in which NAC members may perform their duties free from bias or 
conflicts of interest. In addition, FINRA believes that the proposed 
rule change furthers FINRA's ability to assure a fair representation of 
FINRA members on the NAC by enhancing the FINRA Board's ability to 
remove NAC members for conduct that might hamper the NAC's adjudicatory 
function.
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    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ 15 U.S.C. 78o-3(b)(4).
    \17\ See Securities Exchange Act Release No. 56145 (July 26, 
2007), 72 FR 42169 (August 1, 2007), as amended by Securities 
Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 
2008) (Order Approving File No. SR-NASD-2007-023).
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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. FINRA has evaluated the 
potential for economic impacts associated with the proposed rule change 
and determined that no material costs or benefits were likely to arise. 
The proposed rule change would not require member firms or other 
persons appearing before the NAC to incur any direct costs or change 
their behaviors in any way. All potential actions taken pursuant to the 
proposed rule change would be taken by the FINRA Board. Further, 
FINRA's other By-Law provisions remain unchanged, so the proposed rule 
change will have no material impact on fair process to litigants.

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-2020-037 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-2020-037. 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 website (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 website 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 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment

[[Page 71390]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2020-037 and should be submitted on or before November 30, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-24787 Filed 11-6-20; 8:45 am]
BILLING CODE 8011-01-P