The SEC approved FINRA's proposed rule changes, with some amendments, permitting certain conditions or restrictions to be imposed on broker-dealers that have a "significant history" of misconduct or that hired associated persons with such a history.

As previously covered, the proposed rule changes would allow restrictions to be imposed on firms during the period of an appeal or review of disciplinary decisions by the National Adjudicatory Council, including requiring the establishment of heightened supervision plans.

The SEC approved FINRA's proposed rule changes, as partially amended. The final rule changes include, among other things:

  • amendments to the FINRA Rule 9200 Series ("Disciplinary Proceedings") and 9300 Series ("Review of Disciplinary Proceedings by National Adjudicatory Council and FINRA Board; Application for SEC Review") (i) authorizing hearing officers to impose conditions or restrictions on disciplined broker-dealers or associated persons, and (ii) requiring member firms employing Respondent associated persons to adopt heightened supervisory procedures for such persons in situations where disciplinary matters are appealed to the National Adjudicatory Council;
  • revisions to FINRA Rule 9520 ("Eligibility Proceedings") obligating member firms to adopt elevated supervisory procedures with respect to statutorily disqualified associated persons while a statutory disqualification eligibility request is under FINRA's review;
  • revisions to FINRA Rule 8312 ("FINRA BrokerCheck Disclosure") to allow FINRA to disclose that a firm is subject to the "Taping Rule" through BrokerCheck; and
  • amendments to the FINRA Rule 1000 Series ("Member Application and Associated Person Registration") requiring member firms to submit written requests to FINRA's Department of Member Regulation to seek (i) a "materiality consultation" and (ii) an approval of an application for continuing membership (if necessary), when hiring persons who have a significant history of misconduct (i.e., one or more "final criminal matters," or two or more "specified risk events," in the prior five years before being hired by the member firm).

Commissioner Statement

SEC Commissioner Hester Peirce dissented, stating that the amendments do not adequately consider due process and the right of an individual to earn a livelihood. Ms. Peirce expressed concern regarding authority granted to hearing officers to impose any conditions or restrictions "reasonably necessary for the purpose of preventing customer harm." Ms. Peirce argued that this provision may in fact maximize the discretion given to hearing officers, and reduce the bar for imposing interim disciplinary measures.

Further, Ms. Peirce disagreed with the scope of individuals that would be subject to additional scrutiny under the amendments. Specifically, Ms. Peirce stated that it is "overly broad" to subject all individuals with felony convictions (in the five years prior to an individual's request to become an owner, control person, principal or registered person of a firm) to a materiality consultation with FINRA and the potential submission of a continuing membership application. Ms. Peirce stated that this requirement will "trigger a burdensome, invasive consultation process" for firms that seek to associate with any such individual, even if the felony they are associated with (i) involves unknowing violations of largely technical regulations or (ii) did not result in harm to others.

Ms. Peirce emphasized that, while the "good intentions" of investor protections underlie the amendments, the impact will result in those with felony records being deprived of exercising their talents and society being deprived of "the full value of their talents and labor."

Primary Sources

  1. SEC Order: Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, to Address Brokers with a Significant History of Misconduct
  2. SEC Statement, Hester Peirce: Statement of Dissent from the Commission's Order Approving the Financial Industry Regulatory Authority's Proposed Rule Change, as Modified by Amendment No. 1, to Address Brokers with a Significant History of Misconduct
  3. SR-FINRA-2020-011 Amendment

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