Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA Rule 1011(p) (“Specified Risk Event”)

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”) and Rule 19b-4 thereunder, 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).

The proposed rule change was published for comment in the Federal Register on May 26, 2021. The public comment period closed on June 16, 2021. The Commission received one comment letter in response to the Notice. 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. This order approves the proposed rule change.

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”). 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.” The amendments to the Rule 1000 Series will become effective on September 1, 2021.

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.” 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 would delete from Rule 1011(p)(4) the phrase “from associating with a member,” which appears after the word “suspension.”

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. Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, 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.

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. 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. 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. 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. 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. 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.

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.

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. 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. 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.

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.

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.” 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.” 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. 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.

IV. Conclusion

It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act that the proposal (SR-FINRA-2021-011), be and hereby is approved.