Notice2021-18237
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA Rule 1011(p) (“Specified Risk Event”)
Primary source
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Published
August 25, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 162 (Wednesday, August 25, 2021)</title>
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[Federal Register Volume 86, Number 162 (Wednesday, August 25, 2021)]
[Notices]
[Pages 47527-47529]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-18237]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92710; File No. SR-FINRA-2021-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA
Rule 1011(p) (``Specified Risk Event'')
August 19, 2021.
I. Introduction
On May 12, 2021, the 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 amend FINRA Rule 1011(p)
(which defines the term ``specified risk event'') to clarify the scope
of ``final regulatory actions'' that are included in the definition of
``specified risk event'' for purposes of the Rule 1000 Series (Member
Application and Associated Person Registration).\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 90635 (Dec. 10, 2020), 85 FR
81540 (Dec. 16, 2020) (Order Approving File No. SR-FINRA-2020-011)
(``December 2020 Order'').
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The proposed rule change was published for comment in the Federal
Register on May 26, 2021.\4\ The public comment period closed on June
16, 2021. The Commission received one comment letter in response to the
Notice.\5\ On July 9, 2021, FINRA consented to an extension of the time
period in which the Commission must approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change to
August 24, 2021.\6\ This order approves the proposed rule change.
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\4\ See Exchange Act Release No. 91959 (May 20, 2021), 86 FR
28405 (May 26, 2021) (File No. SR-FINRA-2021-011) (``Notice'').
\5\ See letter from Isaiah Sanderman, dated May 28, 2021
(``Sanderman Letter''), available at <a href="https://www.sec.gov/comments/sr-finra-2021-011/srfinra2021011-8852748-238381.htm">https://www.sec.gov/comments/sr-finra-2021-011/srfinra2021011-8852748-238381.htm</a>.
\6\ See letter from Michael Garawski, Associate General Counsel,
OGC Regulatory Practice and Policy, FINRA, to Daniel Fisher, Branch
Chief, Division of Trading and Markets, Commission, dated July 9,
2021, available at SR-FINRA-2021-011-Extension1.pdf.
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II. Description of the Proposed Rule Change
On December 10, 2020, the Commission approved a proposed rule
change concerning brokers with a significant history of misconduct
(``Misconduct Rule'').\7\ Among other things, the Misconduct Rule
amended the FINRA Rule 1000 Series (Member Application and Associated
Person Registration) to require a FINRA member broker-dealer (``member
firm'') to seek a materiality consultation and approval of a continuing
membership application, if required, when a natural person seeking to
become an owner, control person, principal, or registered person of the
member firm has, in the prior five years, one or more ``final criminal
matters'' or two or more ``specified risk events.'' \8\ The amendments
to the Rule 1000 Series will become effective on September 1, 2021.\9\
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\7\ See supra note 3.
\8\ See December 2020 Order at 81541. In general, a member firm
initiates a materiality consultation with FINRA's Department of
Member Regulation (``Member Regulation'') by submitting a letter
requesting its determination as to whether a proposed change is
material such that it requires the submission of a Continuing
Membership Application (``CMA''). If Member Regulation determines
that a proposed change is material, it will instruct the broker-
dealer to file a CMA if it intends to proceed with the proposed
change. See Regulatory Notice 18-23 (Proposal Regarding the Rules
Governing the New and Continuing Membership Application Process)
(Jul. 2018); see also December 2020 Order at n. 9.
\9\ See Regulatory Notice 21-09 (Mar. 2021).
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To provide clarity to member firms determining whether they need to
seek a materiality consultation or approval of a CMA, the Misconduct
Rule defines ``specified risk event'' to mean ``any one of the . . .
events'' described in Rule 1011(p) ``that are disclosed, or are or were
required to be disclosed, on an applicable Uniform Registration Form.''
\10\ The events described in Rule 1011(p) include, among others, a
``final regulatory action'' as set forth in Rule 1011(p)(4).
Specifically, Rule 1011(p)(4) describes ``a final regulatory action''
to include final regulatory actions ``where (A) the total monetary
sanctions (including civil and administrative penalties or fines,
disgorgement, monetary penalties other than fines, or restitution) were
ordered for a dollar amount at or above $15,000; or (B) the sanction
against the person was a bar (permanently or temporarily), expulsion,
rescission, revocation, or suspension from associating with a member.''
The proposed rule change
[[Page 47528]]
would delete from Rule 1011(p)(4) the phrase ``from associating with a
member,'' which appears after the word ``suspension.'' \11\
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\10\ See FINRA Rule 1011(p); see also Notice at 28406. FINRA
Rule 1011(r) defines ``Uniform Registration Forms'' to mean the
Uniform Application for Broker-Dealer Registration (Form BD), the
Uniform Application for Securities Industry Registration or Transfer
(Form U4), the Uniform Termination Notice for Securities Industry
Registration (Form U5) and the Uniform Disciplinary Action Reporting
Form (Form U6), as such may be amended or any successor(s) thereto.
\11\ See supra note 4.
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III. Discussion and Commission Findings
After careful review of the proposed rule change and the comment
letter, the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder that are applicable to a national securities
association.\12\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\13\ 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.
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\12\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\13\ 15 U.S.C. 78o-3(b)(6).
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A. Consistent With Basis for Approving the December 2020 Order
FINRA stated that including the phrase ``from associating with a
member'' in Rule 1011(p)(4) was an ``inadvertent drafting error'' that
inappropriately narrowed the ``final regulatory actions'' included in
the ``specified risk event'' definition.\14\ In particular, FINRA notes
that the current rule may be interpreted to exclude from the definition
of ``specified risk event'' final SEC and CFTC regulatory actions where
the sanction against the person was a suspension other than a
suspension from associating with a member.\15\ FINRA stated that it did
not intend to narrow the scope of ``final regulatory actions'' that are
included in the ``specified risk event'' definition in this manner.\16\
Rather, FINRA stated that it intended Rule 1011(p)(4) to be consistent
with Rule 1011(p)(3), which describes the ``final investment-related
civil actions'' that are included in the ``specified risk event''
definition. Rule 1011(p)(3) includes final investment-related civil
actions that result in a ``suspension,'' and does not limit the
suspensions to suspensions from associating with a member.\17\ FINRA
further cited the mapping exhibits it provided in SR-FINRA-2020-011 to
illustrate its intent to include ``final regulatory actions'' beyond
those resulting in suspensions ``from associating with a member'' in
the ``specified risk event'' definition. FINRA stated that these
exhibits demonstrated how the ``final regulatory actions'' included
within the scope of the ``specified risk event'' definition should
include final regulatory actions disclosed on the Uniform Registration
Forms that resulted in a suspension.\18\ FINRA stated that those
mapping exhibits are consistent with how the relevant sanctions-related
questions on the Uniform Registration Forms require the reporting of
regulatory actions initiated by numerous regulators and self-regulatory
organizations--not just FINRA--and include data fields for
suspensions.\19\
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\14\ See Notice at 28406.
\15\ Id.
\16\ Id.
\17\ Id.
\18\ See Form 19b-4, Exs. 3a and 3b, File No. SR-FINRA-2020-011,
available at <a href="https://www.finra.org/sites/default/files/2020-04/SR-FINRA-2020-011.pdf">https://www.finra.org/sites/default/files/2020-04/SR-FINRA-2020-011.pdf</a>; see also Notice at n. 7.
\19\ See Form U4, Regulatory Action Disclosure Reporting Page,
Questions 1 (requesting information about which regulator initiated
the regulatory action) and 13 (Sanction Detail); Form BD, Regulatory
Action Disclosure Reporting Page, Part II, Questions 1 (requesting
information about which regulator initiated the regulatory action)
and Question 2 (Principal Sanction). FINRA also stated that the data
that it provided in SR-FINRA-2020-011 concerning the regulatory
action disclosures included regulatory actions that resulted in any
suspension, not just suspensions from associating with a member; see
also Notice at n. 8.
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FINRA believes that by amending Rule 1011(p)(4) to accurately
describe the ``final regulatory actions'' that the definition of
``specified risk event'' should include, the proposed rule change would
provide greater clarity to members and the public and serve the
intended investor-protection purposes of the Misconduct Rule.\20\
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\20\ See Notice at 28407.
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B. The Proposed Rule Change Would Impose No Additional Burden
FINRA does not believe that the proposed rule change would result
in any additional burdens not already contemplated in SR-FINRA-2020-
011.\21\ FINRA stated that the aspect of the economic impact assessment
undertaken in SR-FINRA-2020-011 that pertained to the amendments to the
Rule 1000 Series was based on the broader scope for the ``final
regulatory actions'' that are included in the ``specified risk event''
definition that FINRA is proposing here.\22\ Consistent with FINRA's
original intent, the broader scope for the ``final regulatory actions''
that are included in the ``specified risk event'' definition includes
final SEC and CFTC regulatory actions where the sanction against the
person was a suspension other than a suspension from associating with a
member.\23\
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\21\ Id.
\22\ Id.
\23\ Id.
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The Commission received one comment letter in response to the
proposed rule change. Because the letter failed to address any
component of the proposed rule change, the Commission believes the
comment is beyond the scope of the proposal.\24\
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\24\ See Sanderman Letter.
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In sum, the Commission finds that the proposed rule change is
consistent with its findings in the December 2020 Order. In the
December 2020 Order, the Commission found that the Misconduct Rules
would result in ``greater investor protections by helping address the
concerns raised by associated persons with a significant history of
misconduct and the broker-dealers that employ them.'' \25\
Specifically, the Commission stated that the Misconduct Rules would
``strengthen the tools available to FINRA in responding to associated
persons who have a significant history of misconduct'' and were
sufficiently tailored ``to target the specific misconduct it seeks to
address, which would minimize the potential costs to broker-dealers.''
\26\ The Commission agrees that by amending the ``final regulatory
actions'' that are included in the ``specified risk event'' definition,
the proposed rule change would provide greater clarity to members and
the public and serve the intended investor protection purposes of the
Misconduct Rules approved in the December 2020 Order.\27\ The
Commission also agrees with FINRA's assessment that the proposed rule
change would impose no additional burden not already contemplated and
approved by the Commission.
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\25\ See December 2020 Order at 81548.
\26\ Id.
\27\ See December 2020 Order at 81546 (explaining that the rules
approved in SR-FINRA-2020-011 ``further promote investor protection
by applying additional safeguards and disclosure obligations for a
broker-dealer's continuing membership with FINRA and for changes to
a current member broker-dealer's ownership, control, or business
operations,'' where those changes involve persons with a significant
history of misconduct). See Notice at note 9.
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IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \28\ that the proposal (SR-FINRA-2021-011), be and hereby
is approved.
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\28\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18237 Filed 8-24-21; 8:45 am]
BILLING CODE 8011-01-P
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