Document ID: SEC-2011-0250-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-02-25T05:00Z

[Federal Register: February 25, 2011 (Volume 76, Number 38)]
[Notices]               
[Page 10629-10631]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe11-88]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63933; File No. SR-FINRA-2010-056]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA 
Rule 1113 (Restriction Pertaining to New Member Applications) and To 
Amend the FINRA Rule 9520 Series (Eligibility Proceedings)

February 18, 2011.

I. Introduction

    On November 1, 2010, 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 (``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt new FINRA Rule 1113 
(Restriction Pertaining to New Member Applications) and to amend the 
FINRA Rule 9520 Series (Eligibility Proceedings) to restrict new member 
applicants' and certain members' association with disqualified persons. 
The proposed rule change was published for comment in the Federal 
Register on November 22, 2010.\3\ The Commission received three comment 
letters on the proposed rule change.\4\

[[Page 10630]]

FINRA responded to these comments in a letter dated February 4, 
2011.\5\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 63316 (Nov. 15, 2010), 75 FR 
71166 (Nov. 22, 2010) (``Notice'').
    \4\ See letter from Board of Directors, ASG Securities Inc., to 
the Commission, dated Dec. 13, 2010 (``ASG Letter''); letter from 
Manuel P. Asensio-Garcia, to the Commission, dated Dec. 20, 2010; 
and, letter from Manuel P. Asensio-Garcia, to Robert W. Cook, 
Director, Division of Trading and Markets, dated Dec. 20, 2010 
(Because both letters from Mr. Asensio raise substantially the same 
issues with respect to the proposed rule change, they are addressed 
in this order as a single comment letter, collectively referred to 
herein as the ``Asensio Letter'').
    \5\ See letter from Patricia M. Albrecht, Assistant General 
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated 
Feb. 4, 2011 (``FINRA Response'').
---------------------------------------------------------------------------

II. Description of Proposal

    Article III, Section 3(b) of the FINRA By-Laws provides that no 
person shall be associated with a member, continue to be associated 
with a member, or transfer association to another member if such person 
is or becomes subject to a disqualification; and, that no person shall 
be admitted to membership, and no member shall be continued in 
membership, if any person associated with it is subject to a 
disqualification. Pursuant to Article III, Section 4 of the FINRA By-
Laws, a person is subject to a ``disqualification'' with respect to 
membership, or association with a member, if such person is subject to 
any ``statutory disqualification'' as such term is defined in Exchange 
Act Section 3(a)(39).\6\
---------------------------------------------------------------------------

    \6\ See 15 U.S.C. 78c(a)(39). Pursuant to Exchange Act Section 
3(a)(39), a person is subject to a ``statutory disqualification'' 
with respect to membership or participation in, or association with 
a member of, a self-regulatory organization (``SRO'') if such 
person, among other things: (1) Has been convicted of certain 
misdemeanors or any felony criminal convictions within the ten years 
preceding the date of the filing of an application for membership or 
participation in, or to become associated with a member of, such 
SRO; (2) is subject to a temporary or permanent injunction 
(regardless of its age) issued by a court of competent jurisdiction 
involving at least one of a broad range of unlawful investment 
activities; (3) has been expelled or suspended from membership or 
participation in an SRO; or, (4) is subject to an SEC order denying, 
suspending, or revoking broker-dealer registration.
---------------------------------------------------------------------------

    The FINRA Rule 9520 Series sets forth procedures for a person to 
become or remain associated with a member, notwithstanding the 
existence of a statutory disqualification, and for a current member or 
person associated with a member to obtain relief from the eligibility 
or qualification requirements of the FINRA By-Laws and rules. The FINRA 
Rule 9520 Series also contemplates that a new member applicant may 
sponsor a proposed associated person or itself for relief from the 
eligibility or qualification requirements. A member (or new member 
applicant) seeking to associate with a person subject to a 
disqualification must seek approval from FINRA by filing a Form MC-400 
application, pursuant to the FINRA Rule 9520 Series. Members (and new 
member applicants) that are themselves subject to a disqualification 
that wish to obtain relief from the eligibility requirements are 
required to submit a Form MC-400A application.
    FINRA proposed to adopt new FINRA Rule 1113 (Restriction Pertaining 
to New Member Applications) and to amend the FINRA Rule 9520 Series 
(Eligibility Proceedings) to further restrict new member applicants' 
and certain members' association with disqualified persons.
    New FINRA Rule 1113 would direct FINRA's Department of Member 
Regulation (``Department'') to reject an application for FINRA 
membership \7\ in which either the applicant or an associated person of 
the applicant, as defined in Article I of the FINRA By-Laws,\8\ is 
subject to a statutory disqualification, as defined in Article III, 
Section 4 of the FINRA By-Laws.\9\ The proposed new rule would also 
provide that any new member application that the Department approves 
due to a Department or applicant error (including, but not limited to, 
an inadvertent or intentional misstatement or omission by the applicant 
or associated person) shall be subject to membership cancellation in 
accordance with FINRA Rule 9555 (Failure to Meet the Eligibility or 
Qualification Standards or Prerequisites for Access to Services).
---------------------------------------------------------------------------

    \7\ Proposed FINRA Rule 1113, by its terms, would not apply to a 
member submitting a continuing membership application pursuant to 
NASD Rule 1017 (Application for Approval of Change in Ownership, 
Control, or Business Operations).
    \8\ Article I of the FINRA By-Laws defines an ``associated 
person'' as a: (1) A natural person who is registered or has applied 
for registration under FINRA rules; (2) a sole proprietor, partner, 
officer, director, or branch manager of a member, or other natural 
person occupying a similar status or performing similar functions, 
or a natural person engaged in the investment banking or securities 
business who is directly or indirectly controlling or controlled by 
a member, whether or not any such person is registered or exempt 
from registration with FINRA under its By-Laws or rules; and (3) for 
purposes of FINRA Rule 8210, any other person listed in Schedule A 
of Form BD of a member. See FINRA By-Laws, Article I (rr) 
(definition of ``person associated with a member'' or ``associated 
person of a member'').
    \9\ As previously noted, Article III, Section 4 of the FINRA By-
Laws incorporates the definition of ``statutory disqualification'' 
as such term is defined in Exchange Act Section 3(a)(39).
---------------------------------------------------------------------------

    The proposed amendments to the FINRA Rule 9520 Series, which sets 
forth the eligibility proceedings for membership, would have the 
following effects: First, they would amend the FINRA Rule 9520 Series 
definition of ``sponsoring member'' \10\ to eliminate the reference to 
new member applicants. FINRA believes that because new member 
applicants do not have any prior operating or supervisory history there 
is nothing to indicate the necessary experience to supervise 
disqualified persons. FINRA believes that the proposed amendment would 
alleviate its concerns about the ability of new member applicants to 
supervise adequately a disqualified person. Furthermore, FINRA believes 
this amendment would conform to the proposed new membership application 
rule (FINRA Rule 1113), discussed above, by precluding new member 
applicants from being able to sponsor disqualified persons.\11\
---------------------------------------------------------------------------

    \10\ FINRA Rule 9521(b)(4).
    \11\ The proposed rule change also would make conforming 
amendments throughout the FINRA Rule 9520 Series to reflect the 
proposed amendment discussed above that a new member applicant may 
not sponsor a person subject to a disqualification.
---------------------------------------------------------------------------

    Second, the proposed rule change would amend the definition of 
``disqualified member'' \12\ in the FINRA Rule 9520 Series to clarify 
that a new member applicant is not eligible to submit an application 
for relief under the FINRA Rule 9520 Series if the new member applicant 
itself is subject to a disqualification. FINRA believes a new member 
applicant should enter FINRA membership free of the supervisory and 
operating concerns raised by association with a statutorily 
disqualified person or being itself subject to a statutory 
disqualification and believes this proposed rule change is consistent 
with that belief.
---------------------------------------------------------------------------

    \12\ FINRA Rule 9521(b)(2).
---------------------------------------------------------------------------

    Third, the proposed rule change would further amend the definition 
of ``sponsoring member'' to preclude any member from sponsoring the 
association or continued association of a disqualified person, who is 
directly or indirectly a beneficial owner of more than five percent of 
the sponsoring member, to be admitted, readmitted, or permitted to 
continue in association. FINRA believes that a member cannot 
effectively supervise a disqualified person in light of the inherent 
conflict of interest resulting from the disqualified person's ownership 
interest in the member. FINRA believes the proposed amendment to the 
definition of ``sponsoring member'' would address this issue.

III. Discussion of Comment Letters

    One commenter, Manuel P. Asensio-Garcia, a principal of Asensio & 
Company, Inc. (``ACO''), submitted a letter opposing the proposed rule 
change on several grounds.\13\ First, the Asensio Letter asserts that 
the proposed

[[Page 10631]]

rule change was an improper attempt to adversely impact a New Member 
Application Form (``NMA'') filed by ACO and concurrent MC-400 
application filed by ACO on Mr. Asensio's behalf. In the FINRA 
Response, FINRA contests this assertion. Specifically, the FINRA 
Response states that the proposed rule change is a separate policy-
driven proceeding based on its belief that a new member applicant 
should enter FINRA membership free of the supervisory and operating 
concerns raised by association with a statutorily disqualified person 
or being itself subject to a statutory disqualification.\14\ The FINRA 
Response further notes that the proposed rule change would apply only 
to NMAs and applications for relief from a statutory disqualification 
filed on or after the effective date of the proposed rule change and, 
consequently, would not impact any applications pending before such 
effective date.
---------------------------------------------------------------------------

    \13\ Asensio Letter.
    \14\ FINRA Response.
---------------------------------------------------------------------------

    The Asensio Letter also states that the proposed rule change was 
unnecessary because FINRA already has authority under its current rules 
to deny an NMA based on the existence of a statutory disqualification 
and to deny an MC-400 application based on the fact that a disqualified 
person is proposing to associate with a new member.\15\ The FINRA 
Response contests this assertion by citing the public policy interests 
underlying the proposed rule change's objective--to promote initiation 
of FINRA membership free of statutory disqualification concerns. 
Moreover, FINRA believes the proposed rule would allow FINRA to 
conserve regulatory resources that would otherwise be devoted to 
considering an NMA or MC-400 application that the proposed rule change 
would preclude at the outset.\16\
---------------------------------------------------------------------------

    \15\ Asensio Letter.
    \16\ FINRA Response.
---------------------------------------------------------------------------

    The Asensio Letter also states that the proposal would effectively 
foreclose use of the eligibility proceedings by a disqualified person 
seeking relief from FINRA sanctions. Specifically, the Asensio Letter 
states that the eligibility proceedings represent the only avenue for 
seeking relief outside of an appeal and to effectively use the 
eligibility proceedings for this purpose, a disqualified person must be 
able to create a new member applicant to be his sponsor; otherwise, a 
disqualified person cannot present his arguments for relief free from 
possible restrictions that could be imposed by a member sponsor.\17\ 
The FINRA Response states that the eligibility proceedings are not the 
appropriate forum for reviewing sanctions imposed in a formal 
disciplinary action brought by FINRA; rather, the correct process for 
an individual to challenge any FINRA-imposed sanctions is set forth in 
the FINRA Rule 9300 Series (Review of Disciplinary Proceeding By 
National Adjudicatory Council and FINRA Board; Application for SEC 
Review).\18\ Accordingly, FINRA believes this objection lacks 
merit.\19\
---------------------------------------------------------------------------

    \17\ Asensio Letter.
    \18\ FINRA Response.
    \19\ The Asensio Letter also describes the foreclosure of a 
review of a FINRA-imposed sanction through the eligibility 
proceedings as ``contrary to the most basic ideals of constitutional 
due process.'' As referenced above, FINRA believes that the 
eligibility proceedings are not the appropriate forum for reviewing 
FINRA-imposed sanctions; however, a process does exist for 
individuals to challenge a FINRA-imposed sanction. As such, FINRA 
also believes the Asensio Letter's argument lacks merit.
---------------------------------------------------------------------------

    The second commenter, ASG Securities, did not oppose the proposed 
rule change but requested that FINRA amend the proposal to (1) extend 
from ten business days to twenty business days the period in FINRA Rule 
9522(a)(3) (Notice Regarding an Associated Person) during which a 
member may file a Form MC-400A application for itself and an associated 
person upon receiving a disqualification notice from FINRA staff; and 
(2) prohibit a disqualified person or entity from financing a member or 
providing or lending funds to an associated person for re-investment 
into a member.\20\ The FINRA Response states that the commenter's 
suggestions are outside the scope of the rule proposal; as such, it 
does not intend to expand the proposal to address these additional 
issues at this time. However, it will consider whether to propose 
additional changes at a later date.\21\
---------------------------------------------------------------------------

    \20\ ASG Letter.
    \21\ FINRA Response.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's response to the comments, 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.\22\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\23\ which, among other things, requires that FINRA rules 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. In particular, the 
Commission agrees that a new member applicant should enter FINRA 
membership free of the supervisory and operating concerns raised by 
association with a statutorily disqualified person or being itself 
subject to a statutory disqualification.
---------------------------------------------------------------------------

    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-FINRA-2010-056), be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4216 Filed 2-24-11; 8:45 am]
BILLING CODE 8011-01-P