[Federal Register Volume 76, Number 38 (Friday, February 25, 2011)]
[Notices]
[Pages 10629-10631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4216]
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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.
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\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'').
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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\
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\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.
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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).
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\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).
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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\
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\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.
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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.
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\12\ FINRA Rule 9521(b)(2).
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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.
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\13\ Asensio Letter.
\14\ FINRA Response.
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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\
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\15\ Asensio Letter.
\16\ FINRA Response.
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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\
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\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.
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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\
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\20\ ASG Letter.
\21\ FINRA Response.
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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.
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\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).
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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.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4216 Filed 2-24-11; 8:45 am]
BILLING CODE 8011-01-P