Document ID: SEC-2015-1339-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-08-12T04:00Z

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48379-48382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19759]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75629; File No. SR-FINRA-2015-019]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Rules Regarding Temporary and Permanent Cease and Desist Orders

August 6, 2015.

I. Introduction

    On June 16, 2015, the Financial Industry Regulatory Authority, Inc. 
(``FINRA''), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposal to amend FINRA Rule Series 9100, 9200, 9300, 9550, and 9800 
regarding temporary cease and desist orders (TCDO) and permanent cease 
and desist orders (PCDO). The proposed rule change was published for 
comment in the Federal Register on July 7, 2015.\3\ The Commission 
received one comment on the proposal, which supported the proposal.\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. 75333 (June 30, 
2015), 80 FR 38783 (July 7, 2015) (``Notice'').
    \4\ See Letter from Joseph C. Peiffer, President, Public 
Investors Arbitration Bar Association, to Brent J. Fields, 
Secretary, Commission dated July 28, 2015 (``PIABA Letter'').
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II. Description of the Proposed Rule Change \5\
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    \5\ The Notice contains a more detailed description of the 
proposal. See Notice, supra note 3.
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    The Code of Procedure (Rule Series 9000) governs FINRA's 
disciplinary process, and includes: Rule 9120, Definitions, Rule Series 
9200, Disciplinary Proceedings, Rule Series 9300, Review of 
Disciplinary Proceeding by National Adjudicatory Council and FINRA 
Board; Application for SEC Review, Rule Series 9500, Other Proceedings, 
and Rule Series 9800, Temporary Cease and Desist Orders. FINRA's 
temporary cease and desist authority, introduced on a pilot basis in 
2003 \6\ and approved permanently in 2009,\7\ can be used only in 
connection with the violation of specified rules,\8\ and requires that 
a Hearing Panel find by a preponderance of the evidence that the 
alleged violation has occurred in order to impose a TCDO.\9\ FINRA 
proposed to amend Rule Series 9800 to, among other things, lower the 
evidentiary standard for finding a violation to ``a showing of 
likelihood of success on the merits.'' FINRA also proposed to amend 
Rule Series 9100, 9200, 9300, and 9550 to adopt a new expedited 
proceeding for failure to comply with a TCDO or PCDO, to harmonize the 
provisions governing how documents are served in temporary cease and 
desist proceedings and related expedited proceedings, to clarify the 
process for issuing PCDOs, to ease FINRA's administrative burden in 
temporary cease and desist proceedings, particularly with respect to 
appointment of a Hearing Officer and Hearing Panel, and to make 
conforming changes throughout the Code of Procedure.
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    \6\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548 (June 4, 2003) (Order Approving File No. SR-NASD-
98-80).
    \7\ See Securities Exchange Act Release No. 60306 (July 14, 
2009), 74 FR 36292 (July 22, 2009) (Order Approving File No. SR-
FINRA-2009-035).
    \8\ 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 Rule 4330 (if the alleged 
violation is misuse or conversion of customer assets).
    \9\ Rule 9840(a)(1).
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A. TCDO Evidentiary Standard

    Rule 9840(a)(1) provides that a TCDO 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 this is too high an evidentiary threshold to obtain a TCDO, 
which FINRA considers a critical investor protection tool. FINRA notes 
that the evidentiary standard to get a TCDO is the same one needed to 
find a violation in the concurrent underlying disciplinary proceeding. 
FINRA states that it creates an administrative challenge to have to 
make the same evidentiary presentation in the temporary cease and 
desist proceeding as in the subsequent underlying disciplinary 
proceeding, but on an expedited basis. Therefore, FINRA has proposed to 
lower the evidentiary

[[Page 48380]]

standard in temporary cease and desist proceedings.

B. Expedited Proceeding for Failure To Comply With TCDOs and Permanent 
Cease and Desist Orders

    FINRA proposed to amend Rule 9556, which sets forth expedited 
procedures for enforcing violations of TCDOs and PCDOs. Under current 
Rule 9556, if a member or person fails to comply with a TCDO or PCDO, 
FINRA may issue a notice stating that the failure to comply within 
seven days of the notice 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. FINRA is 
concerned that a respondent could abuse the current expedited procedure 
by a repeated pattern of ``violate and cure,'' where a respondent could 
violate a cease and desist order and then cure that violation before 
the effective date of the notice.
    Proposed Rule 9556(h) describes a new expedited proceeding for the 
respondent of a TCDO or PCDO that fails to comply with that order and 
has previously been served with a notice under Rule 9556(a) for a 
failure to comply with any provision of the TCDO or PCDO. In contrast 
with other expedited proceedings described by Rule 9556, proposed Rule 
9556(h)(3) provides that a respondent's compliance with the TCDO or 
PCDO is not grounds for dismissing the Rule 9556(h) proceeding.

C. Service Provisions in Temporary Cease and Desist Proceedings and 
Expedited Proceedings

    FINRA proposed to amend the rules that govern service of documents 
in temporary cease and desist proceedings and other related expedited 
proceedings to make the rules consistent. Currently, some rules 
explicitly address service by facsimile and on counsel, while others do 
not. FINRA proposed to explicitly allow service by facsimile and on 
counsel, as well as by email, across all temporary cease and desist and 
expedited proceedings.
    FINRA states that email service is particularly important in 
expedited proceedings and will allow parties to receive information 
quickly and will remove unnecessary burdens and inefficiencies. FINRA 
notes that where the proposed revisions permit email service, they also 
require duplicate service through other means such as overnight courier 
or personal delivery.

D. PCDO Authority

    FINRA also proposed to clarify the process for imposing PCDOs in 
disciplinary proceedings. FINRA states that 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 PCDOs.\10\
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    \10\ See Order Approving File No. SR-NASD-98-80, at 33550 n.18, 
supra note 6.
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E. Administrative and Clarifying Changes to Temporary Cease and Desist 
Proceedings

1. Eligibility To Serve on a Hearing Panel for Temporary Cease and 
Desist Proceedings
    FINRA seeks to expand the pool of persons eligible to serve on a 
Hearing Panel. Currently, Rule 9820(a) requires that the three-person 
Hearing Panel appointed to preside over a temporary cease and desist 
proceeding include two panelists who are current or former Governors, 
Directors, or National Adjudicatory Council members, and at least one 
Panelist who is an associated person. FINRA states that the current 
rules limit the pool of potential panelists for temporary cease and 
desist proceedings and that other adjudicatory proceedings, including 
the disciplinary proceeding that underlies the temporary cease and 
desist proceeding and the various Rule 9556 expedited proceedings to 
enforce a cease and desist order, are not limited in this manner.\11\ 
FINRA believes that this limited pool, coupled with the short time in 
which a temporary cease and desist proceeding must be processed, 
creates administrative burdens for the Office of Hearing Officers.
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    \11\ See Securities Exchange Act Release No. 73230 (September 
26, 2014); 79 FR 59534 (October 2, 2014) approving SR-FINRA-2014-036 
which amended Rules 9231 and 9232 regarding eligibility to serve on 
Hearing Panels and Extended Hearing Panels and Securities Exchange 
Act Release No. 72543 (July 3, 2014); 79 FR 39440 (July 10, 2014) 
providing notice of SR-FINRA-2014-031 which amended the definition 
of Hearing Officer in Rule 9120.
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    FINRA proposed to amend Rule 9820 to permit the following persons 
to sit on Hearing Panels that preside over temporary cease and desist 
proceedings: 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. Each panelist must be 
associated with a member of FINRA or retired therefrom.\12\
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    \12\ The proposed pool of persons that would be eligible to 
serve on a Hearing Panel for TCDO proceedings is the same as that 
for disciplinary proceedings. 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).
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2. Procedure for Obtaining Extensions
    FINRA also proposed to amend the process to obtain an extension of 
deadlines for issuing decisions in temporary cease and desist 
proceedings and responding to requests to modify, set aside, limit or 
suspend a TCDO. Under current Rule 9840(a), the Hearing Panel's 
deadline for issuing its written decision can be extended by the 
Hearing Officer with the consent of the parties ``for good cause 
shown.'' FINRA believes that the Hearing Panel should have flexibility 
where it can make a good cause showing of why it needs additional time 
to prepare its decision or respond to a Rule 9850 request. The proposed 
changes to Rules 9840(a) and 9850 would permit the Chief Hearing 
Officer or Deputy Chief Hearing Officer to extend the deadlines for 
issuing decisions and responding to Rule 9850 applications where good 
cause is shown and eliminate the requirement for consent of the 
parties.
3. Additional Administrative Proposals
    FINRA also proposed to: (i) Require FINRA's prosecuting department 
to file a memorandum of points and authorities with the notice 
initiating a temporary cease and desist proceeding; and (ii) permit 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 Rule 9242(a). FINRA 
states that the requirement to file a memorandum of points and 
authorities at the initiation of the proceeding will provide more 
context to

[[Page 48381]]

the allegations, which will make the process more efficient, improve 
the quality of the hearing, and increase the fairness of the 
proceeding. FINRA believes its proposal to authorize the Hearing 
Officer to order a party to furnish other pre-hearing submissions also 
serves these objectives.
4. Delivery Requirement
    FINRA further proposed to require a member firm that is the subject 
of a TCDO to provide a copy of the order to its associated persons, 
within one business day of receiving it. FINRA states that because of 
the significant nature of the harm that a TCDO is aimed at stopping, 
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 TCDO 
imposed against the member firm.\13\
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    \13\ FINRA also proposed clarifying changes. See Notice, supra 
note 3, at 38787.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that FINRA's proposal is 
consistent with the requirements of Section 15A of the Act \14\ 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 the requirements of Section 15A(b)(2) of 
the Act,\16\ which requires, among other things, that a national 
securities association have 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 the rules of the 
association; Section 15A(b)(6) of the Act,\17\ which requires, among 
other things, that the rules of a national securities association 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,\18\ which requires, among other things, that the rules of a 
national securities association provide that its 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 
the rules of the association 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,\19\ which requires that the 
rules of a national securities association provide a fair procedure 
for, among other things, the disciplining of members and persons 
associated with members.
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    \14\ 15 U.S.C. 78(f).
    \15\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \16\ 15 U.S.C. 78o-3(b)(2).
    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 15 U.S.C. 78o-3(b)(7).
    \19\ 15 U.S.C. 78o-3(b)(8).
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    FINRA proposed to amend the evidentiary standard that must be met 
before imposing a TCDO from a preponderance of the evidence to a 
likelihood of success on the merits. The commenter expressed support 
for this amendment, noting that because a lesser showing is required at 
the TCDO stage, more time and effort could be devoted to meeting the 
``preponderance of the evidence'' standard at the disciplinary 
stage.\20\ The commenter also stated that the change in evidentiary 
standard would harmonize FINRA's standard with that used in other 
jurisdictions.\21\ Finally, the commenter noted FINRA's commitment to 
use its TCDO authority judiciously, but argued that the benefits of the 
new evidentiary standard could not be realized if the proceedings are 
used judiciously.\22\
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    \20\ See PIABA Letter, supra note 4, at 2.
    \21\ Id. at 2-3.
    \22\ Id. at 3.
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    The Commission believes that FINRA's proposed change to the 
evidentiary standard should improve FINRA's ability to initiate and 
resolve cases involving conversion of assets more quickly than under 
the current standard, which requires the same evidentiary showing that 
is required in the concurrent underlying disciplinary proceeding. The 
Commission agrees with FINRA's statement that the proposed rule change 
``maintains all of the meaningful existing restraints'' on its TCDO 
authority.\23\ The Commission expects that FINRA will continue to use 
its authority in a judicious manner under the new evidentiary standard, 
consistent with its representation in the notice seeking permanent 
approval for the use of TCDOs.\24\
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    \23\ See Notice, supra note 3, at 38785.
    \24\ In the Commission's 2009 order approving FINRA's temporary 
cease and desist authority on a permanent basis, the Commission 
noted approvingly FINRA's statement that it would use the authority 
``judiciously.'' See Order Approving SR-FINRA-2009-035, supra note 
7. In the Notice, FINRA represented that its use of the authority to 
date has been judicious in that FINRA has sought and obtained TCDOs 
on only seven occasions since 2003. FINRA intends to continue using 
its temporary cease and desist authority in a judicious manner. See 
Notice, supra note 3, at 38784-5. See also Securities Exchange Act 
Release No. 60028 (June 2, 2009), 74 FR 27364 (June 9, 2009) (Notice 
of Filing of SR-FINRA-2009-035).
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    The Commission also believes that the adoption of an expedited 
proceeding for failure to comply with a TCDO or PCDO will aid in the 
protection of investors and thus further the public interest and is 
designed to prevent fraudulent and manipulative acts and practices by 
removing the opportunity for a respondent to repeatedly violate a cease 
and desist order and then cure that violation before the effective date 
of the notice of failure to comply without any consequence to the 
respondent. The Commission also believes that the proposed expedited 
proceeding provides a fair procedure for the disciplining of members 
and persons associated with members because the proceeding can only 
occur after the respondent has been served with notice of failure to 
comply with the TCDO or PCDO, and the procedure of the expedited 
proceeding is governed by existing Rule 9559.
    Expanding the pool of persons eligible to serve on Hearing Panels 
should ensure that there is an adequate pool of persons available to 
serve on both the temporary cease and desist proceeding and the 
concurrent underlying disciplinary proceeding. Further, permitting the 
Chief Hearing Officer or Deputy Chief Hearing Officer to extend the 
deadlines for Hearing Panels to hold hearings, issue decisions, and 
respond to Rule 9850 applications where good cause is shown retains the 
requirement of the current rule that there must be a showing of good 
cause to obtain an extension, but requires that this showing be made to 
the Chief Hearing Officer or Deputy Chief Hearing Officer, rather than 
the Hearing Officer presiding over the proceeding, as the current rule 
requires. Thus, the requirement for the parties to consent to an 
extension of time is no longer necessary, as the person who is making 
the decision is not involved in the proceeding.
    FINRA's administrative proposals to (i) require FINRA's prosecuting 
department to file a memorandum of points and authorities with the 
notice initiating a temporary cease and desist proceeding; and (ii) 
permit 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 Rule 
9242(a) should enable FINRA to provide a fair procedure for the 
disciplining of

[[Page 48382]]

members and persons associated with members by providing the parties 
more information about the allegations at the outset of the proceeding.
    Requiring a member firm that is the subject of a TCDO to provide a 
copy of the order to its associated persons should help prevent 
fraudulent and manipulative acts and practices by ensuring that the 
persons who may act on behalf of the member firm are made aware of the 
contents of a TCDO imposed against the member firm.
    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with the Section 15A of the Act and 
the rules and regulations thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-FINRA-2015-019) be, and it 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19759 Filed 8-11-15; 8:45 am]
 BILLING CODE 8011-01-P