Document ID: SEC-2011-1380-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc
Posted Date: 2011-09-14T04:00Z

[Federal Register Volume 76, Number 178 (Wednesday, September 14, 2011)]
[Notices]
[Pages 56848-56850]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23377]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65281; File No. SR-FINRA-2011-031

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Amend FINRA Rule 9251 to Explicitly Protect From Discovery Those 
Documents That Federal Law Prohibits FINRA From Disclosing

September 7, 2011.

I. Introduction

    On July 8, 2011, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``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

[[Page 56849]]

amend FINRA Rule 9251 to explicitly protect from discovery those 
documents that federal law prohibits FINRA from disclosing. The 
proposed rule change was published for comment in the Federal Register 
on July 26, 2011.\3\ The Commission received two comment letters on the 
proposed rule change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64934 (July 20, 
2011), 76 FR 44645 (July 26, 2011) (``Notice'').
    \4\ See letter from Neal E. Nakagiri, President, Chief Executive 
Officer and Chief Compliance Officer, NPB Financial Group, LLC, 
dated July 27, 2011 (``NPB Letter''); letter from Joyce Dillard, 
dated August 16, 2011.
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II. Description of the Proposal

    FINRA Rule 9251 delineates the types of documents that FINRA's 
Department of Enforcement (``Enforcement'') and Department of Market 
Regulation (``Market Regulation'') must produce to respondents during 
the discovery phase of a disciplinary proceeding. The rule also 
explicitly shields certain types of documents from production. For 
example, the rule provides that Enforcement and Market Regulation may 
withhold documents that are protected by attorney-client privilege or 
constitute attorney work product.\5\ The rule also allows documents to 
be withheld where a hearing officer determines that they are irrelevant 
to the proceeding or for other good cause.\6\ The rule does not, 
however, explicitly shield from discovery documents that federal law 
prohibits FINRA from disclosing.
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    \5\ FINRA Rule 9251(b)(1)(A).
    \6\ FINRA Rule 9251(b)(1)(D).
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    The rule contains procedural safeguards to protect against 
inappropriate withholding of documents by Enforcement and Market 
Regulation. Specifically, the rule provides that the hearing officer 
may require Enforcement or Market Regulation to submit to the hearing 
officer either a list of withheld documents or any document withheld so 
that the hearing officer may privately review it to determine the 
appropriate status of a withheld document.\7\ Upon review, the hearing 
officer may order Enforcement or Market Regulation to make the list or 
document withheld available to other parties.\8\ Moreover, the rule 
prohibits Enforcement or Market Regulation from withholding a document, 
or part thereof, that contains material exculpatory evidence.\9\
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    \7\ See FINRA Rule 9251(c).
    \8\ Id.
    \9\ FINRA Rule 9251(b)(2).
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    FINRA's proposal would amend FINRA Rule 9251 to explicitly protect 
from discovery documents that are prohibited from disclosure pursuant 
to federal law. Currently, when Enforcement and Market Regulation 
possess a document that federal law prohibits them from disclosing, 
they must affirmatively seek a hearing officer determination that they 
can withhold it on the grounds of lack of relevancy or for other good 
cause.\10\ The proposed rule change will eliminate the need for such a 
hearing officer determination by adding a new provision that expressly 
provides that Market Regulation or Enforcement shall withhold a 
document from production if disclosure is prohibited by federal law.
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    \10\ See FINRA Rule 9251(b)(1)(D).
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    Certain of the rule's procedural safeguards discussed above would 
apply to documents withheld pursuant to this new provision. As 
discussed above, a hearing officer may review any documents withheld 
pursuant to this new provision, and may order Enforcement or Market 
Regulation to make the list of withheld documents or the documents 
withheld available to other parties. However, the proposed rule change 
precludes a hearing officer from requiring Enforcement or Market 
Regulation to make the list of documents withheld or any document 
withheld available to other parties if federal law prohibits disclosure 
of the document or the document's existence. Moreover, the rule's 
prohibition on withholding documents, or parts thereof, that contain 
exculpatory evidence does not apply to documents prohibited from 
disclosure by federal law.
    FINRA stated that the proposed rule change will be effective 30 
days following publication of the Regulatory Notice announcing 
Commission approval.

III. Summary of Comment Letters

    Both commenters questioned the fairness of the proposed rule 
change, and noted concerns about the opportunities afforded to those 
charged in a FINRA disciplinary proceeding.\11\ In particular, one 
commenter stated that if the present system results in ``testing'' the 
federal laws that may prevent disclosure of certain documents, then the 
current system should continue as is.\12\ The commenter was 
particularly concerned about the ability of Market Regulation or 
Enforcement to withhold documents that contain exculpatory 
evidence.\13\ While the commenter appreciated FINRA's desire to 
streamline the disciplinary process, the commenter believed that given 
the stakes involved, ``every opportunity and effort'' should be 
afforded to those charged in a disciplinary proceeding.\14\
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    \11\ See supra, note 4.
    \12\ NPB Letter.
    \13\ Id.
    \14\ Id.
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IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
the comments received, and 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.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\16\ which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission also believes that 
the proposal is consistent with Section 15A(b)(8) of the Act,\17\ which 
requires that the rules of the association provide a fair procedure for 
the disciplining of members and associated persons.
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    \15\ In approving this proposed rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(8).
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    More specifically, the Commission believes that clarifying that 
Market Regulation and Enforcement shall withhold documents prohibited 
from disclosure by federal law both promotes a fair and efficient 
disciplinary process and helps ensure compliance with federal law by 
avoiding the need for unnecessary ``good cause'' motions regarding 
documents that federal law prohibits FINRA from producing during a 
disciplinary proceeding.
    The Commission also believes that the proposed rule change is 
subject to adequate procedural safeguards to protect against 
inappropriate use by FINRA and that address the commenters' concerns. 
Specifically, a hearing officer may review and determine whether a 
document was appropriately withheld by Market Regulation or Enforcement 
as prohibited from disclosure by federal law. If the hearing officer 
determines that the document is not prohibited from disclosure by 
federal law, the hearing officer may order the document be made 
available to the other parties.
    While the Commission appreciates the commenter's concern about 
FINRA withholding exculpatory evidence, the

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proposed rule would not change current practice, as FINRA currently 
cannot legally disclose a document--even if the document contains 
exculpatory evidence--if federal law prohibits disclosure of the 
document in that instance. Moreover, the Commission believes that as 
part of determining whether FINRA appropriately withheld a document, 
the hearing officer would need to review the applicable federal law to 
assess whether the document at issue is, in fact, prohibited from 
disclosure.
    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-FINRA-2011-031) be, and it 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23377 Filed 9-13-11; 8:45 am]
BILLING CODE 8011-01-P