[Federal Register Volume 75, Number 79 (Monday, April 26, 2010)]
[Notices]
[Pages 21686-21688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9549]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61938; File No. SR-FINRA-2010-014]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
FINRA Rule 9554 To Eliminate Explicitly the Inability-To-Pay Defense in
the Expedited Proceedings Context
April 19, 2010.
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 March 31, 2010, 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 substantially prepared by
FINRA. The Commission is publishing this notice to solicit comments on
the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 9554 to eliminate explicitly
the inability-to-pay defense in the expedited proceedings context when
a member or associated person fails to pay an arbitration award to a
customer.
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.
[[Page 21687]]
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
FINRA Rule 9554 allows FINRA to bring expedited actions to address
failures to pay FINRA arbitration awards.\3\ Once a monetary award has
been issued in a FINRA arbitration proceeding, the party that must pay
the award, the respondent (i.e., a member or an associated person), has
thirty days to do so.\4\ FINRA coordinates between FINRA Dispute
Resolution's arbitration forum and FINRA's enforcement program by
verifying whether a respondent has paid the monetary award within
thirty days. If the respondent has not paid, FINRA initiates an
expedited proceeding by sending a notice explaining that the respondent
will be suspended unless the respondent pays the award or requests a
hearing.
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\3\ Expedited actions allow FINRA to address certain types of
misconduct more quickly than would be possible using the ordinary
disciplinary process. In general, these actions focus on encouraging
respondents to comply with the law or take corrective action rather
than on sanctioning them for past misconduct. As discussed in detail
below, moreover, the Act uses a different standard of review for
expedited actions than it does for disciplinary cases.
\4\ FINRA Rule 10330(h).
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A respondent that requests a hearing may raise a number of defenses
to the suspension. One of the current defenses is establishing a bona
fide inability-to-pay. When a respondent successfully demonstrates a
bona fide inability-to-pay, that is a complete defense to the
suspension. Consequently, the inability-to-pay defense currently
precludes a harmed customer from obtaining payment of a valid
arbitration award.
FINRA's expedited proceedings for failure to pay an arbitration
award use the leverage of a potential suspension to help ensure that a
member or an associated person promptly pays a valid arbitration award.
However, if a respondent demonstrates a financial inability-to-pay the
award--regardless of the reason--the leverage is removed. When FINRA's
efforts to suspend a respondent who has not paid the award have been
defeated, a claimant is much less likely to be paid. By eliminating the
inability-to-pay defense, FINRA will increase the probability of
customers having their awards paid, or, at a minimum, it should prompt
meaningful settlement discussions between claimants and respondents.
FINRA believes that eliminating this defense would further its goal of
investor protection by facilitating the payment of arbitration awards
to customers harmed by the actions of members and associated persons.
Accordingly, FINRA proposes amending Rule 9554 to eliminate explicitly
the inability-to-pay defense in the expedited proceedings context when
a member or associated person fails to pay an arbitration award to a
customer.\5\
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\5\ The rule change would not affect the defenses available in
actions that do not involve customers.
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The ability to work in the securities industry carries with it,
among other things, an obligation to comply with the Federal securities
laws, FINRA rules, and orders imposed by the disciplinary and
arbitration processes. Allowing members or their associated persons
that fail to pay arbitration awards to remain in the securities
industry presents regulatory risks and is unfair to harmed customers.
Although FINRA proposes to eliminate the inability-to-pay defense,
a respondent would still have available the following four defenses:
The member or person paid the award in full or fully
complied with the settlement agreement;
The arbitration claimant has agreed to installment
payments or has otherwise settled the matter;
The member or person has filed a timely motion to vacate
or modify the arbitration award and such motion has not been denied;
and
The member or person has filed a petition in bankruptcy
and the bankruptcy proceeding is pending or the award or payment owed
under the settlement agreement has been discharged by the bankruptcy
court.\6\
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\6\ In its order approving changes to the predecessor to Rule
9554, the SEC noted that the issues in these types of cases are
narrow and generally limited to determining whether the respondent
has proven any of these four defenses or an inability-to-pay the
award. See Securities Exchange Act Release No. 40026 (May 26, 1998),
63 FR 30789, 30790 (June 5, 1998).
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Regarding the last defense, FINRA believes that a Federal
bankruptcy court is the best forum for adjudicating a financial
condition defense. Bankruptcy judges are experts in evaluating whether
a debtor's obligations should be legally discharged. The bankruptcy
process and associated filings are designed to consider fully and
evaluate the financial condition of bankruptcy debtors.\7\ In addition,
bankruptcy filings, which are subject to Federal perjury charges,
provide greater penalties for hiding assets.\8\ FINRA's lack of
subpoena power over banks and other third parties raises practical
concerns regarding its ability to confirm accurately the assets of the
firm or person asserting the defense.\9\
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\7\ See 4 Collier on Bankruptcy, ]] 521.01, 521.09 (15th ed.
2009).
\8\ See 18 U.S.C. 151-58 (2010). Bankruptcy fraud is punishable
by a fine, or by up to five years in prison, or both. Id.
\9\ The ability to legally discharge debts, the more thorough
and accurate verification of a bankruptcy debtor's financial
condition, and possible criminal prosecution for intentionally
inaccurate disclosures, among other aspects, distinguish bankruptcy
from inability-to-pay.
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The inability-to-pay defense emerged from a series of SEC decisions
that require FINRA to consider the defense in disciplinary cases (as
opposed to expedited actions), including disciplinary cases involving
failures to pay arbitration awards and restitution.\10\ The legal
underpinnings that support the inability-to-pay defense in disciplinary
cases are not, however, present in the expedited proceedings context.
SEC cases largely rely on the ``excessive and oppressive'' language in
Section 19(e) of the Exchange Act in requiring FINRA to consider
inability-to-pay. Section 19(e) of the Exchange Act provides authority
to the SEC to review and affirm, modify or set aside any final
disciplinary sanctions imposed by FINRA on its members. Section 19(e),
however, does not apply to expedited proceedings. Expedited proceedings
are reviewed under Section 19(f), which requires that ``the specific
grounds'' on which FINRA based its action ``exist in fact,'' that FINRA
followed its rules, and that those rules are consistent with the Act.
The different focus of these two standards and the more limited review
for
[[Page 21688]]
expedited actions are understandable and support eliminating the
inability-to-pay defense in expedited actions.\11\ Unlike disciplinary
cases, FINRA is not imposing a monetary sanction in these expedited
actions; it is suspending a respondent for failing to pay a previously
imposed arbitration award. There also is an explicit procedural
mechanism built into these expedited actions that allows a suspension
to be lifted once respondents satisfy any of the four defenses
highlighted above. The main goal is to encourage respondents to comply
with the law or previously imposed orders, not to sanction them for
past misconduct.
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\10\ See Toney L. Reed, 52 S.E.C. 944 (1996), recons. denied,
Securities Exchange Act Release No. 39354 (Nov. 25, 1997); Bruce M.
Zipper, 51 S.E.C. 928 (1993). In addition, in an order approving a
rule change for a predecessor to Rule 9554, the SEC noted that it
had previously recognized that a bona fide inability-to-pay an
arbitration award is an important consideration in determining
whether any sanction for failing to pay an arbitration award is
``excessive or oppressive.'' See Securities Exchange Act Release No.
40026 (May 26, 1998), 63 FR 30789 (June 5, 1998). Without further
discussion, the order cited the SEC's decision in Zipper, which was
a disciplinary case, not an expedited action.
\11\ In William J. Gallagher, Securities Exchange Act Release
No. 47501, 2003 SEC LEXIS 599 (March 14, 2003), the SEC emphasized
that expedited actions are reviewed under Section 19(f) of the Act
not Section 19(e). The SEC stated, ``Gallagher misconstrues the
applicable review standard when he argues that [FINRA's] sanction is
`excessive and oppressive' and that [FINRA's] indefinite suspension
order is inconsistent with the [FINRA] Sanction Guidelines,
standards relevant in the Commission's review of [FINRA]
disciplinary proceedings under Section 19(e) of the Exchange Act.''
Id. at *6. The SEC explained that its review is limited to analyzing
whether ``the specific ground on which [FINRA] based its
suspension--failure to pay in full an arbitration award--`exists in
fact[,]''' the ``SRO's determination was in accordance with its
rules, and * * * those rules are, and were applied in a manner,
consistent with the purposes of the Exchange Act.'' Id. at *5 & *7.
In Gallagher, FINRA and the SEC rejected the respondent's claim of
inability-to-pay on factual grounds. The issue of whether a
respondent was permitted to raise the defense as a matter of law was
neither raised nor decided.
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In sum, members and associated persons that fail to pay arbitration
awards to customers should not be allowed to remain in the securities
industry by relying on the inability-to-pay defense in expedited
actions. This is especially true because they can avoid regulatory
action by paying the award, reaching a settlement with the customers
(which can include payment plans), moving to vacate the award, or
filing for bankruptcy. FINRA believes that, in its expedited actions
involving respondents that have failed to pay arbitration awards to
customers; the inability-to-pay defense should be eliminated.
The proposed rule change will automatically become effective 30
days following Commission approval.
2. Statutory Basis
The proposed rule change is consistent with the provisions of
Section 15A(b)(6) of the Act,\12\ 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 proposal also is consistent with Section 15A(b)(7)
of the Act,\13\ which provides that FINRA must take appropriate action
when members and associated persons violate provisions of the Act or
FINRA rules. The proposed rule change is consistent with these purposes
because it would promote a fair and efficient process for taking action
to encourage members and associated persons to pay arbitration awards
to customers.
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\12\ 15 U.S.C. 78o-3(b)(6).
\13\ 15 U.S.C. 78o-3(b)(7).
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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 such 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 [email protected]. Please include
File Number SR-FINRA-2010-014 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-2010-014. 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). Comments are also available for Web site viewing and
printing 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. 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 Number SR-FINRA-2010-014 and
should be submitted on or before May 17, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-9549 Filed 4-23-10; 8:45 am]
BILLING CODE 8011-01-P