Document ID: SEC-2009-0773-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt a Temporary and Permanent Cease and Desist Authority Pilot Program on a Permanent Basis
Posted Date: 2009-06-09T04:00Z

[Federal Register: June 9, 2009 (Volume 74, Number 109)]
[Notices]
[Page 27364-27365]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jn09-149]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60028; File No. SR-FINRA-2009-035]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt a
Temporary and Permanent Cease and Desist Authority Pilot Program on a
Permanent Basis

June 2, 2009.
    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 May 18, 2009, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to adopt the temporary and permanent cease and
desist authority pilot program on a permanent basis without any
substantive changes to the terms of the existing program.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal 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
    In May 2003, the Commission approved, on a two-year pilot basis, a
rule change that gave FINRA authority to issue temporary cease and
desist orders (``TCDOs'') \3\ and made explicit FINRA's ability to
impose permanent cease and desist orders as a remedy in disciplinary
cases.\4\ The pilot program also gave FINRA authority to enforce cease
and desist orders. In June 2005 and June 2007, the SEC approved [sic]
two-year extensions of the pilot program.\5\ The current two-year pilot
expires on June 23, 2009.\6\
---------------------------------------------------------------------------

    \3\ A TCDO is a preliminary order issued in connection with an
underlying disciplinary proceeding that has been initiated or will
be initiated immediately.
    \4\ See Securities Exchange Act Release No. 47925 (May 23,
2003), 68 FR 33548 (June 4, 2003) (Order Approving File No. SR-NASD-
98-80).
    \5\ See Securities Exchange Act Release No. 51860 (June 16,
2005), 70 FR 36427 (June 23, 2005) (Notice of Filing and Immediate
Effectiveness of File No. SR-NASD-2005-061); Securities Exchange Act
Release No. 55819 (May 25, 2007), 72 FR 30895 (June 4, 2007) (Notice
of Filing and Immediate Effectiveness of File No. SR-NASD-2007-033).
The Commission notes that it did not approve these filings.
    \6\ See Securities Exchange Act Release No. 55819 (May 25,
2007), 72 FR 30895 (June 4, 2007) (Notice of Filing and Immediate
Effectiveness of File No. SR-NASD-2007-033).
---------------------------------------------------------------------------

    FINRA is proposing to make the pilot program permanent without any
substantive changes to the terms of the existing program.\7\ The
proposed action would enable FINRA to continue to issue TCDOs and
impose permanent cease and desist orders as a remedy in disciplinary
cases. The proposed action also would give FINRA authority to continue
to initiate expedited proceedings when respondents violate temporary or
permanent cease and desist orders.
---------------------------------------------------------------------------

    \7\ In a companion rule filing filed with the SEC today, FINRA
seeks to extend the pilot until the SEC approves or disapproves the
proposal to make the pilot permanent so that the cease and desist
authority does not lapse while the proposal is pending at the SEC.
See SR-FINRA-2009-034. The companion rule filing proposed certain
technical amendments to the rule text, namely to correct punctuation
in FINRA Rule 9556 and update FINRA Rule 9810 to reflect a change in
FINRA style convention when referencing the federal securities laws.
The companion rule filing does not proposal [sic] any substantive
changes to the existing pilot.
---------------------------------------------------------------------------

    When it first sought cease and desist authority, FINRA stated that
it would use the authority sparingly. That has been the case. Since the
pilot program was first approved in 2003, FINRA has issued only one
TCDO and one permanent cease and desist order (both in the same case,
which is described below). If adopted on a permanent basis, the cease
and desist rules would continue to be used judiciously. There are
times, however, when their use is crucial.
    In the one case initiated under the pilot program, FINRA's
Department of Enforcement (``Enforcement'') alleged that the member in
question was engaged in widespread fraud that included, among other
things, making material misrepresentations and omissions in connection
with the private offering of its own stock, effecting unauthorized
transactions and using customer funds improperly.\8\ Enforcement showed
that not only was the member attempting to continue the fraudulent
offering, it also was funneling money and assets to a non-member
affiliate. Enforcement alleged, and a hearing panel found, that a TCDO
was necessary because the member's continuation of the misconduct was
likely to result in further dissipation or conversion of assets and
other significant harm to investors before the completion of the
underlying disciplinary proceeding. After the hearing panel issued a
permanent cease and desist order following a full disciplinary hearing,
the parties settled the case, resulting in the expulsion of the member,
the bar of its owner and the imposition of almost $12 million in fines
and restitution.
---------------------------------------------------------------------------

    \8\ See L.H. Ross & Company, Securities Exchange Act Release No.
51270, 2005 SEC LEXIS 452 (February 28, 2005).
---------------------------------------------------------------------------

    The proposed permanent adoption of the pilot program will provide
FINRA with a mechanism to continue to take appropriate remedial action
against a

[[Page 27365]]

member or an associated person that has engaged (or is engaging) in
violative conduct that could cause continuing harm to the investing
public if not addressed expeditiously. It must be emphasized, however,
that the cease and desist provisions contain numerous procedural
protections for respondents to ensure that the proceedings are fair.
    The proposed rule change will become effective on the date of the
SEC's approval.
2. Statutory Basis
    The proposed rule change is consistent with the provisions of
Section 15A(b)(6) of the Act,\9\ which requires, among other things,
that FINRA's 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 proposed rule change also is consistent with the
provisions of Section 15A(b)(7) of the Act,\10\ which provides that
FINRA members, or persons associated with its members, must be
appropriately disciplined for violations of any provisions of the Act
or FINRA's rules. Making the pilot program permanent is consistent with
FINRA's obligations under the Act because cease and desist orders are
designed to stop violative conduct that is likely to cause dissipation
or conversion of assets or other significant harm to investors.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ 15 U.S.C. 78o-3(b)(7).
---------------------------------------------------------------------------

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.

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 35 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 the 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2009-035 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-035. This
file number should be included on the subject line if e-mail 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 inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 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; 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 No. SR-FINRA-2009-035 and should be
submitted on or before June 30, 2009.
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13397 Filed 6-8-09; 8:45 am]

BILLING CODE 8010-01-P