Document ID: SEC-2011-0627-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-05-04T04:00Z

[Federal Register Volume 76, Number 86 (Wednesday, May 4, 2011)]
[Notices]
[Pages 25397-25399]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10857]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64363; File No. SR-FINRA-2011-011]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-
Laws of FINRA Regulation, Inc. With Regard to District Committees

April 28, 2011.

I. Introduction

    On February 25, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``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 amend the By-Laws of FINRA's regulatory 
subsidiary (``FINRA Regulation'') with regard to District Committee 
structure and governance to, among other things, adjust the size and 
composition of District Committees to align more closely with the 
industry representation on the FINRA Board and replace District 
Nominating Committees with a process of direct nomination and election 
based on firm size. The proposed rule change was published for comment 
in the Federal Register on March 7, 2011.\3\ The Commission received 
one comment letter on the proposed rule change.\4\

[[Page 25398]]

FINRA responded to the Horwitz Letter on April 15, 2011.\5\ 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. 64002 (March 2, 
2011), 76 FR 12390 (``Notice'').
    \4\ See letter from Ed Horwitz, District and Committee Member, 
Horwitz and Associates, Inc., to Commission, dated March 25, 2011 
(``Horwitz Letter'').
    \5\ See letter from John Komoroske, Vice President, Member 
Regulation, FINRA, to Elizabeth M. Murphy, Secretary, Commission 
dated April 15, 2011 (``FINRA Response'').
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II. Background--District Committees, District Nominating Committees, 
Districts and Regions

    Pursuant to the By-Laws, the FINRA Regulation Board of Directors 
determines the boundaries of the districts and the size of the District 
Committees. The FINRA Regulation Board has established eleven 
districts, overseen by FINRA District Offices, which are 
administratively grouped within five regions (the West, the Midwest, 
the South, the North and New York).
    Currently, FINRA District Committee members contribute to the 
regulatory process by, among other things, serving as panelists in 
disciplinary proceedings in accordance with FINRA Rules; considering 
and recommending policies and rule changes; and endeavoring to educate 
FINRA members and others as to the objects, purposes and work of FINRA 
and FINRA Regulation. The District Committees meet on average twice 
each year, jointly with the other District Committees in their 
respective regions. District Committees are composed of nine members, 
with the exception of the New York District Committee which has twelve. 
Due to staggered three-year District Committee membership terms, one-
third of each District Committee's positions are available for election 
each year. In some cases, a District Committee may have additional 
positions to fill if a member has died, resigned, or been removed 
creating a vacancy on the Committee.
    The District Nominating Committees are composed of five members 
each, a majority of whom have served on a District Committee, are 
current or former FINRA Regulation Directors, or current or former 
FINRA Governors. As part of the election process, the By-Laws require 
the Corporate Secretary to provide each District Nominating Committee 
and District Director notice, on or before June 1 of each year, 
identifying the members of the District Committees and District 
Nominating Committees whose terms are expiring within the next calendar 
year. After the vacancies are announced, any interested party may 
propose a candidate profile which will be used by the District 
Nominating Committees for review, a process that usually involves 
candidate interviews and that will conclude with the nomination of a 
slate of candidates for election. The By-Laws also provide a process 
whereby a registered person meeting the vacancy requirements may be 
considered for nomination as an additional (``petition'') candidate in 
a contested election. In recent years, FINRA has witnessed a decline in 
the number of eligible individuals willing to serve on the District or 
District Nominating committees or to undergo the nomination process. 
FINRA believes this decline is due to a number of perceived problems 
which FINRA seeks to address by streamlining the nomination and 
election process as described below.

III. Description of the Proposed Rule Change

    FINRA proposed to modify the FINRA Regulation By-Laws (``By-Laws'') 
with regard to District Committees in several respects. FINRA proposed 
to:
     Adjust the size and composition of District Committees 
over a three-year transition period to align more closely with the 
industry representation on the FINRA Board;
     Replace District Nominating Committees with a process of 
direct nomination and election based on firm size;
     Codify the current practice of District Committees meeting 
on a regional basis;
     Eliminate the Advisory Council;
     Amend the qualification requirements and prescribe further 
term limits for District Committee members;
     Revise procedures for qualification and accounting of 
ballots to be administered solely by an Independent Agent; and
     Make other procedural and administrative changes.

IV. Discussion of Comment Letter

    As noted above, the Commission received one comment letter on the 
proposed rule change and FINRA responded to the comment.\6\ The 
commenter opposed the proposal for two reasons. First, the commenter 
states that the proposed rule change would give large firms 
disproportionate representation on the District Committees. The 
commenter notes that Large Firms make up 8.52 percent of FINRA's 
membership and employ 88.04 percent of the total registered 
representatives, while Small Firms make up 91.48 percent of FINRA's 
membership and employ 11.95 percent of the total registered 
representatives.\7\ Though the commenter acknowledges that large firms 
employ a significant majority of registered representatives, he notes 
that representatives do not count as members.
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    \6\ See supra notes 4 and 5.
    \7\ The commenter has combined the categories of Mid-Sized Firm 
and Large Firm. See Response letter at 2.
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    FINRA responded to the issues raised in the Horwitz Letter. FINRA 
believes that the proposed composition of the District Committees which 
is based on the size of firms will ensure fairness and balance between 
those firms that make up the largest percentage of membership and those 
firms that employ the largest percentage of the registered 
representative population. FINRA noted that three-sevenths of the 
District Committee members would be associated with Small Firms, one-
seventh with Mid-Sized Firms and three-sevenths with Large Firms, as 
these terms are defined in FINRA's rules. FINRA believes that having 
representation on the District Committees of firms of different sizes 
should result in inclusion of firms having different business models, 
and more fully represent the interests of FINRA's diverse membership in 
committee discussions. FINRA further states that the proposed 
compositional structure of the District Committees is similar to the 
compositional structures of industry representatives on the FINRA Board 
of Governors and the National Adjudicatory Council (``NAC'').
    Second, the commenter questions the proposal to eliminate the 
District Nominating Committees and replace them with a process of self-
nomination by individuals who meet the qualification requirements. The 
commenter believes that this proposed change will make the voting 
process a popularity contest rather than a selection by peers based on 
proven track records and industry background.
    FINRA stated that it has witnessed a decline in the number of 
eligible individuals willing to serve on the District or District 
Nominating committees or to undergo the nomination process. In 
response, FINRA proposed to replace District Nomination Committees with 
a process of direct candidate nomination and election by the membership 
because FINRA believes the proposal will create a more accessible, 
transparent, and effective election process. Moreover, FINRA notes that 
the District Nominating Committees are made up of a majority of former 
District Committee members, or current or former Directors of the FINRA 
Regulation Board and Governors

[[Page 25399]]

of the FINRA Board. FINRA stated that it intends to seek informal input 
from retiring District Committee members regarding potential future 
members, thus continuing to draw upon the expertise of this group, 
without the need and expense of the current District Nominating 
Committees.

V. Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comment letter, and FINRA's response to the comment, and believes that 
FINRA has appropriately responded to the commenter's concerns. The 
Commission 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, and, in particular, 
with the provisions of Section 15A(b)(6) of the Act,\8\ which requires, 
among other things, 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.\9\
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    \8\ 15 U.S.C 78o-3(b)(6).
    \9\ In approving the 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).
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    The proposed rule change is designed to streamline the nomination 
and election process for District Committees, adjust the size and 
composition of District Committees, amend the qualification 
requirements, prescribe further term limits for District Committee 
members, and make other administrative and technical changes to the 
process, and should result in additional candidates willing to serve on 
a District Committee. The proposal aligns the representation of members 
on the District Committees to be generally consistent with the industry 
representation on the FINRA Board of Governors and the industry 
representation on the NAC. As FINRA stated in its Response Letter, 
three-sevenths of the District Committee members will represent Small 
Firms, one-seventh will represent Mid-Sized Firms and three-sevenths 
will represent Large Firms. FINRA's goal is to more closely align the 
membership of the District Committees with its membership while 
streamlining the process for finding and electing candidates to serve 
on the District Committee.
    FINRA will prohibit a District Committee member from serving 
consecutive three-year terms to bring different perspectives and views 
to District Committees. Individuals interested in serving more than one 
term may do so on a non-consecutive basis. FINRA is eliminating the 
Advisory Council and will seek views on policy issues and 
recommendations directly from its membership. With these changes, the 
Commission believes that FINRA will be able to realize the goals of the 
District Committee system without the time and resource expenditures 
now required of Advisory Council members and FINRA staff. Further, 
centralizing the election process within the Corporate Secretary's 
office should streamline the process making it more efficient. The 
Corporate Secretary's office will be able to apply its administrative 
experience from other FINRA elections to the process for District 
Committee elections. \10\
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    \10\ FINRA will implement the proposal on the first day of the 
month following Commission approval.
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-FINRA-2011-011) be, and 
hereby is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10857 Filed 5-3-11; 8:45 am]
BILLING CODE 8011-01-P