[Federal Register Volume 76, Number 86 (Wednesday, May 4, 2011)]
[Notices]
[Pages 25397-25399]
From the Federal Register Online via the Government Publishing 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