
[Federal Register Volume 80, Number 3 (Tuesday, January 6, 2015)]
[Notices]
[Pages 546-551]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73966; File No. SR-FINRA-2014-038]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Accelerated Approval of a Proposed Rule 
Change, as Modified by Amendment No. 1 Thereto, Relating to the 
Adoption of FINRA Rule 3110(e) (Responsibility of Member To Investigate 
Applicants for Registration) in the Consolidated FINRA Rulebook

December 30, 2014.

I. Introduction

    On September 18, 2014, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities and 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rule 3010(e) relating to background 
investigations as FINRA Rule 3110(e) in the consolidated FINRA rulebook 
(``Consolidated FINRA Rulebook''). The proposed rule change was 
published for comment in the Federal Register on October 3, 2014.\3\ 
The Commission received 10 comment letters in response to the 
Notice.\4\ On December 8, 2014, FINRA filed Amendment No.1 responding 
to these comments and proposing amendments in response to the 
comments.\5\ The Commission is publishing this notice to solicit 
comments from interested persons on the filing as amended by Amendment 
No.1 and is approving the proposed rule change, as amended, on an 
accelerated basis.
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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. 73238 (September 26, 
2014), 79 FR 59884 (October 3, 2014) (Notice of Filing of SR-FINRA-
2014-038) (``Notice'').
    \4\ See Letters to Brent J. Fields, Secretary, Commission, from 
Joseph C. Peiffer, Executive Vice President and President-Elect, 
Public Investors Arbitration Bar Association, dated October 16, 2014 
(``PIABA Letter''); William A. Jacobson, Clinical Professor of Law, 
Cornell University Law School, dated October 20, 2014 (``Cornell 
Letter''); William Beatty, President, North American Securities 
Administrators Association, Inc., dated October 22, 2014 (``NASAA 
Letter''); Kyle Ortiz and Kathryn Hespe, Law Student Clinicians, 
Investor Advocacy Clinic, Michigan State University College of Law, 
dated October 23, 2014 (``Michigan State Letter''); John Astarita 
and Olivia Darius, Student Interns, John Jay Legal Services, Inc., 
Pace University School of Law, dated October 24, 2014 (``Pace 
Letter''); Kevin Zambrowicz, Associate General Counsel and Managing 
Director, the Securities Industry and Financial Markets Association, 
dated October 24, 2014 (``SIFMA Letter''); Michele Van Tassel, 
President, Association of Registration Management, dated October 24, 
2014 (``ARM Letter''); Robert J. McCarthy, Director of Regulatory 
Policy, Wells Fargo Advisors, LLC, dated October 24, 2014 (``Wells 
Fargo Letter''); and David T. Bellaire, Executive Vice President and 
General Counsel, the Financial Services Institute, dated October 24, 
2014 (``FSI Letter''). See also email from Suzanne Shatto, dated 
October 6, 2014 (``Shatto Letter''). Comment Letters are available 
at: http://www.sec.gov/comments/sr-finra-2014-038/finra2014038.shtml.
    \5\ See SR-FINRA-2014-038, Amendment No. 1, dated December 8, 
2014, (``Amendment No. 1''). Amendment No. 1 is described below in 
Section II and the text of Amendment No. 1 is available on FINRA's 
Web site at http://www.finra.org, at the principal office of FINRA, 
and on the Commission's Web site at http://www.sec.gov/rules/sro.shtml.
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II. Description of the Proposal, as Modified by Amendment No. 1

    As part of the process of developing the Consolidated FINRA 
Rulebook, FINRA is proposing to adopt NASD Rule 3010(e) (Qualifications 
Investigated) relating to background investigations as FINRA Rule 
3110(e). According to FINRA, the proposed rule change streamlines and 
clarifies the rule language. For instance, NASD Rule 3010(e) currently 
provides that ``[e]ach member shall have the responsibility and duty to 
ascertain by investigation the good character, business repute, 
qualifications, and experience of any person prior to making such a 
certification in the application of such person for registration with 
this Association,'' whereas proposed FINRA Rule 3110(e) provides that 
``[e]ach member shall ascertain by investigation the good character, 
business reputation, qualifications and experience of an applicant 
before the member applies to register that applicant with FINRA and 
before making a representation to that effect on the application for 
registration.'' Further, proposed FINRA Rule 3110(e) clarifies that a 
firm is required to review a copy of an applicant's most recent Form U5 
(Uniform Termination Notice for Securities Industry Registration) if 
the applicant previously has been registered with FINRA or another 
self-regulatory organization.\6\
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    \6\ FINRA also is proposing to re-label current FINRA Rule 
3110(e) (Definitions) as FINRA Rule 3110(f) (Definitions) and update 
the cross-references in FINRA Rule 3110 to reflect this change.

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[[Page 547]]

    In addition, the proposed rule change adds to FINRA Rule 3110(e) a 
requirement that firms adopt written procedures that are reasonably 
designed to verify the accuracy and completeness of the information 
contained in an applicant's Form U4 (Uniform Application for Securities 
Industry Registration or Transfer) no later than 30 calendar days after 
the form is filed with FINRA. The proposed requirement would apply to 
an initial or a transfer Form U4 for an applicant for registration, not 
to amendments to Form U4. Proposed FINRA Rule 3110(e) would also 
require that a firm's written procedures, at a minimum, provide for a 
national search of reasonably available public records to verify the 
accuracy and completeness of the information contained in an 
applicant's Form U4. The requirement to conduct a public records search 
must be satisfied no later than 30 calendar days after the initial or 
transfer Form U4 is filed with FINRA. Further, the proposed rule change 
adds Supplementary Material .15 to FINRA Rule 3110 to establish a 
temporary program to refund Late Disclosure Fees, subject to specified 
conditions.\7\
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    \7\ The proposed rule change would delete NASD Rule 3010(f) 
because it has been rendered obsolete. The proposed rule change 
would also delete Incorporated NYSE Rule 345.11 and NYSE Rule 
Interpretation 345.11/01 and/02 as they are substantially similar to 
proposed FINRA Rule 3110(e), addressed by other rules or otherwise 
rendered obsolete by the approach reflected in proposed FINRA Rule 
3110(e). For convenience, the proposed rule change refers to 
Incorporated NYSE Rules as NYSE Rules.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change as 
modified by Amendment No. 1, the comments submitted, and FINRA's 
response to the comments, and believes that FINRA has responded 
adequately to the concerns raised by the commenters.\8\ For the reasons 
discussed below, the Commission finds that the proposal is consistent 
with the provisions of Section 15A(b)(6) of the Act,\9\ 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. By streamlining and clarifying members' obligations 
relating to background investigations of registered personnel and 
adding a requirement to adopt written procedures to verify the accuracy 
and completeness of the information contained in an applicant's Form 
U4, including the requirement to conduct a public records search, the 
proposal should result in complete and accurate information in CRD,\10\ 
which is critical from both a regulatory and an investor protection 
standpoint. Finally, the proposed temporary program under proposed 
FINRA Rule 3110.15 to refund Late Disclosure Fees under certain 
circumstances should incentivize members to more accurately and 
completely report information relating to judgments and liens. Having 
complete and accurate information in CRD is important to regulators, 
the industry, and the public.
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    \8\ 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).
    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ The information in BrokerCheck is a subset of the 
information in CRD.
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    As noted above, the Commission received ten comment letters in 
response to the proposed rule change, all of which support the 
proposal.\11\ For example, one commenter states the proposal ``will 
contribute to ensuring the accuracy and completeness of the information 
disclosed in Form U4.'' \12\ ``[A]ccurate [Form] U4 information,'' adds 
another commenter, ``is critical to FINRA's own regulatory review of an 
applicant, as well as for customers, whose primary source of public 
information . . . is through FINRA's BrokerCheck.'' \13\ Another 
commenter states that requiring ``written procedures for Form U4 
verification . . . will enable the member firm to conduct more 
consistent--and hopefully more thorough--background checks on 
applicants [for registration].'' \14\ One commenter ``supports the 
additional requirements'' aimed at enhancing the accuracy of 
information on Form U4 because ``the Form U4 serves as the primary 
avenue through which investors obtain important information about 
brokers.'' \15\ The same commenter also supports the temporary refund 
program because it ``creates an incentive for firms to make the 
required updated filings'' which in turn would ``increase the 
completeness of information contained in CRD.'' \16\
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    \11\ See supra note 4.
    \12\ See NASAA Letter.
    \13\ See PIABA Letter.
    \14\ See Cornell Letter.
    \15\ See NASAA Letter.
    \16\ Id.
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    Three commenters supported the proposal without qualifications.\17\ 
Three commenters provided suggestions, including extending the scope of 
the proposed public records search to foreign jurisdictions, specifying 
that members unable to comply with all verification requirements must 
demonstrate ``reasonable efforts'' to do so,\18\ clarifying the term 
``reasonably available public records,'' \19\ and limiting the proposed 
refund program to a one-time program.\20\ Two of these commenters also 
requested additional clarification regarding the requirements under 
proposed FINRA Rule 3110(e).\21\ One commenter supported the 
consolidation of NASD Rule 3010(e) and NYSE Rule 345.11 as proposed 
FINRA Rule 3110(e), but (1) requested further clarification regarding 
the investigation and verification requirements; (2) suggested changes 
to the verification requirement, to the implementation date of the 
proposal and to the sunset date of the refund program; and (3) 
requested clarification regarding Questions 14K and 14M on the Form 
U4.\22\ Finally, two commenters supported the purpose of the 
verification requirement, but requested additional clarification 
regarding its scope, as well as its relationship to the investigation 
requirement, suggested changes to the 30-day post-submission 
verification period,\23\ as well as to the refund program, and sought 
clarification on procedures for obtaining reimbursement.\24\ One of 
these commenters also requested clarification regarding Questions 14K 
and 14M on the Form U4.\25\
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    \17\ See Shatto Letter, NASAA Letter and Michigan State Letter.
    \18\ See PIABA Letter.
    \19\ See Cornell Letter.
    \20\ See Pace Letter.
    \21\ See PIABA Letter and Cornell Letter.
    \22\ See SIFMA Letter and Wells Fargo Letter.
    \23\ See ARM Letter.
    \24\ See FSI Letter.
    \25\ Id.
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1. Relationship Between Investigation and Verification Requirements

    Several commenters requested that FINRA clarify the relationship 
between the investigation and verification requirements under proposed 
FINRA Rule 3110(e).\26\ Two of these commenters also asked whether the 
investigation and verification requirements are duplicative, whether 
firms can use any of the information obtained in the investigation 
process to comply with the verification process, and whether firms are 
required to conduct the verification process after the Form U4 has been 
filed and separate from the investigation process.\27\
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    \26\ See PIABA Letter, Cornell Letter, SIFMA Letter and ARM 
Letter.
    \27\ See SIFMA Letter and ARM Letter.
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    FINRA responded that although the requirements are closely related, 
the requirements are complementary, not duplicative, in nature. FINRA 
states that proposed FINRA Rule 3110(e) requires

[[Page 548]]

that each member ascertain by investigation the good character, 
business reputation, qualifications and experience of an applicant 
before the member applies to register that applicant with FINRA and 
before making a representation to that effect on the application for 
registration.\28\ FINRA also states that if an applicant has been 
previously registered with FINRA or another self-regulatory 
organization, proposed FINRA Rule 3110(e) requires that a firm review a 
copy of the applicant's most recent Form U5, including any amendments, 
within 60 days of the filing date of the applicant's Form U4.\29\ FINRA 
states that, if the firm is unable to review the Form U5, the firm must 
demonstrate it has made reasonable efforts to do so.\30\
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    \28\ FINRA notes this is a principle-based requirement that is 
substantially similar to the current requirement under NASD Rule 
3010(e), and explains that firms are required to complete the 
investigation process before filing the Form U4. See FINRA, 
Regulatory Notice 07-55, Personnel Background Investigations, 
(November 2007) available at https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037480.pdf. Firms must 
also comply with MSRB Rule G-7 (Information Concerning Associated 
Persons) for those applicants engaged solely in municipal securities 
activities. See Municipal Securities Rulemaking Board, Rule Book, 
Rule G-7 (October 2014) available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-7.aspx.
    \29\ If the applicant has been recently employed by a Futures 
Commission Merchant or an Introducing Broker that is notice-
registered with the SEC pursuant to Section 15(b)(11) of the Act, 
the registering firm also is required to review a copy of the 
individual's most recent CFTC Form 8-T.
    \30\ FINRA expects firms to use this provision in very limited 
circumstances, such as where the previous firm fails to file a Form 
U5 or goes out of business before filing a Form U5.
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    Proposed FINRA Rule 3110(e) requires that a firm establish and 
implement written procedures reasonably designed to verify the accuracy 
and completeness of the information contained in an applicant's Form U4 
no later than 30 calendar days after an initial or a transfer Form U4 
is filed with FINRA. While this is a new requirement, FINRA explains 
that it is based on an existing requirement in the Form U4 that the 
person signing the form certify that he has taken appropriate steps to 
verify the accuracy and completeness of the information contained in 
that form. FINRA also states that proposed FINRA Rule 3110(e) expressly 
requires that a firm's written procedures specify the firm's process 
for verifying the information in the Form U4 and that the firm complete 
that verification process no later than 30 calendar days after the Form 
U4 is filed. FINRA notes that the verification process for some of the 
information in the Form U4 is embedded in the form itself.\31\
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    \31\ FINRA states that the verification process could vary firm 
by firm, e.g., one firm may verify an applicant's identity and name 
by checking a valid state-issued driver's license whereas another 
firm may do so by reviewing a valid government-issued passport.
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    FINRA states that under proposed FINRA Rule 3110(e), firms must 
complete the verification process no later than 30 calendar days after 
the Form U4 is filed with FINRA. The Rule 3110(e) does not require 
firms to conduct the verification process only during the 30-day window 
after the Form U4 has been filed or base the verification on 
information that is obtained only in the 30-day window after the form 
has been filed. Rather, FINRA states, the 30-day window is intended to 
accommodate firms that may find it difficult to conduct the 
verification process before filing an applicant's Form U4, such as 
where an applicant is hired immediately to fill a needed role at the 
firm. For most applicants, FINRA expects that firms will conduct the 
investigation and verification process concurrently using some of the 
same information and before filing the Form U4. FINRA also encourages 
firms to complete the verification process before filing the Form U4. 
FINRA notes that, with respect to amended filings, a firm will incur a 
Late Disclosure Fee if the disclosure event should have been reported 
on the initial or transfer Form U4, regardless of whether the firm 
completes the verification process within the 30-day window in proposed 
FINRA Rule 3110(e).
    FINRA also recognizes that there will on occasion be circumstances 
beyond a firm's control that prevent completion of the verification 
process within the 30-day window after the Form U4 is filed with FINRA. 
FINRA explains, for example, that a firm may not be able to comply with 
the proposed 30-day window where the firm is relying on fingerprint 
results for verifying criminal information, and the FBI determines the 
fingerprints to be ``illegible'' and requires resubmission of the 
fingerprints. In such circumstances, FINRA points-out, the firm's 
procedures should provide that the verification must be completed as 
soon as practical and the firm should document the basis for the delay.
    Finally, FINRA states that proposed FINRA Rule 3110(e) requires 
that a firm's verification process must, at a minimum, provide for a 
national search of reasonably available public records to verify the 
accuracy and completeness of the information contained in an 
applicant's Form U4. As FINRA explains, similar to the overall 
verification process, the requirement to conduct a public records 
search must be satisfied by no later than 30 calendar days after an 
initial or a transfer Form U4 is filed with FINRA. FINRA also states 
that the public records search is a new requirement; it is a component 
of the overall verification process described above. As FINRA explains, 
public records include, but are not limited to: General information, 
such as name and address of individuals; criminal records; bankruptcy 
records; civil litigations and judgments; liens; and business records. 
FINRA explains, however, that the proposed rule only requires a 
national search of reasonably available public records.\32\
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    \32\ FINRA notes this is a minimum or base requirement, and a 
firm may find it necessary to conduct a more in-depth search of 
public records depending on the applicant's job function, 
responsibilities or position at the firm.
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2. Member's Obligation To Adopt Written Procedures for Verification of 
Information in the Form U4

    Two commenters asked whether firms are required to verify all of 
the information in the Form U4, stating that it may not be feasible or 
practical to do so in some cases.\33\ In response, FINRA states it does 
not expect firms to verify all of the information in the Form U4 where 
such verification is not feasible or practical. In such cases, FINRA 
states that a firm should document that the information could not be 
verified and document the reason that it could not be verified.
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    \33\ See SIFMA Letter and ARM Letter.
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    One commenter recommended that the proposed verification 
requirement, including the minimum public records search requirement, 
be removed altogether.\34\ Alternatively, the commenter requested that 
firms be given 90 days to complete a public records search and any 
necessary follow ups and asked whether firms are required to complete 
the entire verification process within the proposed 30-day window. One 
commenter requested that firms be given a 60- or 90-day period to 
complete the verification process.\35\ Another commenter suggested that 
FINRA amend the proposed rule to require that a firm's written 
procedures provide that if the firm is unable to complete the 
verification process within the 30-day window, it must demonstrate to 
FINRA that it has made reasonable efforts to do

[[Page 549]]

so and explain the cause for the delayed verification.\36\
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    \34\ See SIFMA Letter.
    \35\ See ARM Letter.
    \36\ See PIABA Letter.
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    In response, FINRA states it is retaining the proposed Form U4 
verification requirement and the requirement to conduct a public 
records search, indicating it continues to believe that the proposed 
requirements will enhance the accuracy of the information in CRD and 
ultimately in BrokerCheck. FINRA also clarifies that as described 
above, firms must complete the verification process by no later than 30 
calendar days after the Form U4 is filed with FINRA. FINRA expects that 
for the majority of applicants, firms will conduct the proposed 
verification process, including the public records search, before 
filing the Form U4, a practice that FINRA encourages.
    FINRA does not believe that it is necessary to extend the period by 
which firms must complete the verification process because under FINRA 
By-Laws, a firm is obligated to file an amended Form U4 no later than 
30 calendar days after learning of the facts or circumstances giving 
rise for the need to file an amendment.\37\ Therefore, FINRA states, if 
a firm completes its verification process during the 30-day window in 
proposed FINRA Rule 3110(e) and learns of facts or circumstances that 
require the filing of an amended Form U4, the firm will have 30 
calendar days from the date it learns of such facts or circumstances to 
file an amended Form U4; the firm will be subject to any applicable 
Late Disclosure Fees.
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    \37\ See FINRA By-Laws, Article V, Section 2(c).
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    FINRA recognizes that there will on occasion be circumstances 
beyond a firm's control that prevent completion of the verification 
process within the 30-day window. In such cases, FINRA states, the 
firm's procedures should provide that the verification be completed as 
soon as practical, and the firm should document the basis for the 
delay. FINRA does not believe that it is necessary to amend the 
proposed rule text to clarify this point.
    One commenter requested that FINRA confirm that the proposed 
verification requirement, including the public records search, applies 
to an initial Form U4 filed with FINRA through CRD requesting 
registration with FINRA and that the proposed requirement does not 
apply to a Form U4 filed by an affiliate of a member or a registration 
transferred through the mass transfer process.\38\ The commenter also 
suggested that FINRA replace the term ``transfer Form U4'' as used in 
the proposed FINRA Rule 3110(e) with the term ``relicense Form U4'' and 
amend the proposed rule text to include a reference to ``an applicant's 
initial or relicense Form U4.''
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    \38\ See SIFMA Letter.
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    In response, FINRA states that the proposed verification 
requirement, including the public records search, applies to an initial 
Form U4 or a transfer Form U4. The term ``initial Form U4'' refers to 
the Form U4 filing required when an individual is registering with a 
FINRA member for the first time, including in the context of dual 
registration, or is registering with a FINRA member after more than two 
years have passed since the individual was last registered with a FINRA 
member. The term ``transfer Form U4'' refers to the Form U4 filing 
required when a registered person transfers from one FINRA member to 
another FINRA member. FINRA is not replacing the term ``transfer Form 
U4''. With respect to a Form U4 filed by a member that is an affiliate 
of another member, FINRA further states that the verification 
requirement would apply to the filing to the extent that it is 
considered an initial or a transfer Form U4 (e.g., a dual 
registration). The proposed verification requirement would not apply to 
the mass transfer process because that process does not require the 
filing of a Form U4. FINRA is proposing to clarify that the 
verification requirement, including the public records search, applies 
to an applicant's initial or transfer Form U4.

3. Member's Obligation To Conduct a Search of Reasonably Available 
Public Records

    One commenter suggested that the public records search should 
extend to foreign jurisdictions in some circumstances, such as where an 
applicant has been registered with a foreign securities regulator or 
has resided in a foreign jurisdiction.\39\ In response, FINRA states 
that it is often difficult to assess the comparability of a foreign 
country's laws, rules and regulations to those in the United States, 
particularly as it relates to the purposes of this proposed rule, and 
therefore, the requirement should be limited to a national search of 
reasonably available public records.\40\ One commenter recommended that 
FINRA clarify the term ``reasonably available public records'' so that 
firms have an objective standard for compliance purposes.\41\ One 
commenter stated that FINRA should revise the proposed rule text to 
specifically identify the information in the Form U4 that firms are 
expected to verify through a public records search or define the term 
``public records'' so the scope of the requirement is less 
uncertain.\42\ The commenter noted that business records are listed as 
an example of public records, but many business records (e.g., business 
formation documents) are not maintained in a comprehensive national 
database and may not be offered by a third-party service provider. In 
response, FINRA states that while public records include, among other 
records, business records, proposed FINRA Rule 3110(e) only requires a 
national search of reasonably available public records. FINRA further 
states that, as indicated above, the scope of what is considered 
reasonably available public records may change over time. Therefore, 
rather than define the term ``reasonably available public records,'' 
FINRA believes that it is more useful for compliance purposes to 
specify the public records that are currently considered reasonably 
available, which include criminal records, bankruptcy records, 
judgments and liens.
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    \39\ See PIABA Letter.
    \40\ FINRA notes, however, that firms may find it necessary to 
conduct a search of public records in a foreign jurisdiction as part 
of their verification process and, where appropriate, should ensure 
such a search is consistent with applicable foreign laws, rules and 
regulations.
    \41\ See Cornell Letter.
    \42\ See SIFMA Letter.
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    One commenter asked FINRA to confirm that, to the extent that the 
proposed rule requires firms to obtain an investigative consumer report 
for an applicant, firms can rely on the applicant's consent on a Form 
U4 for purposes of complying with applicable laws, rules and 
regulations requiring an applicant's consent to obtain such reports, 
otherwise firms will need to implement additional procedures to ensure 
compliance with such laws, rules and regulations in each 
jurisdiction.\43\ In response, FINRA states that the proposed rule does 
not require firms to obtain investigative consumer reports to comply 
with the requirements of the rule and that, with regard to the Form U4 
or any similar report the firm may rely upon, it is the responsibility 
of the registering firm to determine whether consent on the Form U4 or 
any other document is in compliance with the laws, rules and 
regulations of the particular jurisdiction in which the firm and the 
applicant are operating.
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    \43\ Id.
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4. Implementation Date

    One commenter requested that FINRA extend the implementation date 
of proposed FINRA Rule 3110(e) from December 1, 2014, to December 1, 
2015, so that firms have sufficient time to establish or revise their 
written

[[Page 550]]

procedures and address the operational issues resulting from the 
proposed rule.\44\ In response, FINRA states that it expects firms to 
have an existing process in place to verify the information contained 
in an applicant's Form U4 noting that currently the person signing the 
form on behalf of the firm must certify that he has taken appropriate 
steps to verify the accuracy and completeness of the information 
contained in the form. FINRA also states it understands that most firms 
already conduct some form of public records search; \45\ consequently, 
the proposed new requirements should not create an unreasonable burden 
for firms.
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    \44\ Id.
    \45\ NASAA stated that ``firms usually have in place a review 
process to verify the information contained in the Form U4 for most 
registration applicants'' and, as such, the requirement formalizes 
an industry best practice. See NASAA letter.
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    FINRA recognizes that the proposed rule imposes an affirmative 
obligation on firms to establish and implement written procedures to 
comply with the Form U4 verification process to the extent they 
currently do not have such procedures, and that such procedures must 
include a search of reasonably available public records. Thus, to 
accommodate any potential operational issues resulting from the 
proposed new requirements, FINRA is proposing to extend the 
implementation date of proposed FINRA Rule 3110(e) from December 1, 
2014 to July 1, 2015.

5. Temporary Program To Address Underreported Form U4 Information

    One commenter recommended that the refund program should be a one-
time program and stated that FINRA should not use such programs in the 
future for late disclosure reporting because it may provide firms with 
negative reinforcement for untimely Form U4 reporting.\46\ In response, 
FINRA states that the refund program under proposed FINRA Rule 3110.15 
is intended to incentivize members to report underreported information 
and save FINRA the time and regulatory resources expended in contacting 
firms and requesting that such information be reported. FINRA also 
states that program is intended to run concurrent with FINRA's one-time 
search of specific financial public records, and thus is of limited 
duration. FINRA notes it may find it necessary to provide such programs 
in the future depending on the circumstances, but it will do so 
judiciously and only where appropriate.
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    \46\ See Pace Letter.
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    Another commenter requested that FINRA consider adopting a more 
permanent refund program or extending the sunset date from March 31, 
2015 to December 1, 2015.\47\ FINRA states that the refund program is 
intended to run concurrent with FINRA's one-time search of specific 
financial public records on all registered persons, which FINRA expects 
to complete on or before August 2015. FINRA is thus proposing to extend 
the sunset date of the program from March 31, 2015 to July 31, 2015. 
One commenter suggested that Question 14M on the Form U4 is ambiguous 
and open to interpretation and requested that FINRA revise the 
eligibility conditions under the refund program to address this 
perceived ambiguity.\48\ According to the commenter, Question 14M on 
the Form U4 is confusing because one could argue that if an unsatisfied 
judgment or lien is satisfied within the 30-day window of having to 
file an amended Form U4, the firm would not have to amend the Form U4 
to mark ``yes'' because the lien was satisfied before the filing 
deadline. The commenter also stated that if a firm learns of an 
unreported satisfied lien, the language of Question 14M suggests that 
the firm does not have to report such lien because it is not currently 
unsatisfied. The commenter stated that FINRA should modify the program 
to refund Late Disclosure Fees to members if the judgment or lien (1) 
occurred while the individual was registered with a prior firm; (2) is 
more than five years old; or (3) is under $5,000. The commenter also 
asked whether the refund will be automated or whether firms have the 
burden to prove that they satisfy the conditions of the program to 
receive a refund.
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    \47\ See SIFMA Letter.
    \48\ See FSI Letter.
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    FINRA is proposing to revise the refund program to address concerns 
regarding the assessment of the Late Disclosure Fee in circumstances 
where the unsatisfied judgment or lien has been satisfied, and at the 
time it was unsatisfied was of a relatively low amount (under $5,000) 
and was reportable before the introduction of the procedures regarding 
the application of the Late Disclosure Fee to the reporting of 
judgments and liens on the Form U4 that became effective on August 13, 
2012.\49\ FINRA states the proposed revisions also address 
circumstances where the failure to report related to a mistaken belief 
that satisfying the judgment or lien shortly after learning it was 
unsatisfied (within 30 calendar days of when it became unsatisfied) 
obviated the need to report the matter.\50\
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    \49\ See FINRA, Information Notice, Late Disclosure Fee Related 
to Reporting of Judgment/Lien Events (August 2012), available at 
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p152106.pdf.
    \50\ FINRA believes that there is a misconception regarding the 
obligation to report unsatisfied judgments and liens under Question 
14M on the Form U4. The obligation to amend a Form U4 arises on the 
date a registered person receives notice or learns that he is 
subject to an unsatisfied judgment or lien, and an amended Form U4 
should be filed no later than 30 calendar days from that date, 
regardless of whether the registered person satisfies the judgment 
or lien in the interim period before the 30-day deadline for filing 
a Form U4 amendment.
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    As revised, the members will receive a refund of Late Disclosure 
Fees assessed for the late filing of responses to Form U4 Question 14M 
(unsatisfied judgments or liens) if the Form U4 amendment is filed 
between April 24, 2014, and July 31, 2015, and one of the following 
conditions is met: (1) The judgment or lien has been satisfied, and at 
the time it was unsatisfied, it was under $5,000 and the date the 
judgment or lien was filed with a court (as reported on Form U4 
Judgment/Lien DRP, Question 4.A.) was on or before August 13, 2012; or 
(2) the unsatisfied judgment or lien was satisfied within 30 days after 
the individual learned of the judgment or lien (as reported on Form U4 
Judgment/Lien DRP, Question 4.B.). The program has a retroactive 
effective date of April 24, 2014, and as revised it will sunset on July 
31, 2015. With respect to refund procedures, FINRA explains that firms 
initially will be charged a Late Disclosure Fee and subsequently 
receive a refund in their FINRA Flex-Funding Account if they can 
establish, or if FINRA otherwise determines, that the conditions of the 
revised program have been satisfied.

6. Clarification of Questions 14K and 14M on the Form U4

    One commenter requested that FINRA file with the Commission as part 
of a proposed rule change its FAQ statement \51\ that a compromise with 
creditors is a compromise with one or more creditors for purposes of 
Question 14K on the Form U4.\52\ The commenter also noted that Question 
14M on the Form U4 is confusing because it asks ``Do you have any 
unsatisfied judgments or liens against you,'' which could imply that a 
``yes'' response is required only if an applicant currently has an 
outstanding unsatisfied judgment or lien. To clarify this point, the 
commenter suggested model language for FINRA's consideration. 
Similarly, another commenter requested that

[[Page 551]]

FINRA clarify Question 14M on the Form U4 to remove any confusion 
regarding its scope.\53\ In addition, the commenter stated that FINRA 
should clarify that it will not fine firms in instances where they did 
not treat a short sale as a compromise with creditors under Question 
14K on the Form U4 prior to FINRA's guidance on the subject. In 
response, FINRA states it believes that these comments are outside the 
scope of the proposed rule change, and should be addressed in the 
context of changes to the Form U4 or its interpretations.
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    \51\ See FINRA, Form U4 and U5 Interpretive Questions and 
Answers (January 2013), available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p119944.pdf.
    \52\ See SIFMA Letter.
    \53\ See FSI Letter.
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IV. Accelerated Approval

    The Commission finds good cause to approve the proposed rule 
change, as amended by Amendment No. 1, prior to the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. The amendment responds to issues raised by commenters and 
makes minor modifications in response to the comments. Accelerated 
approval would allow FINRA to implement the amended proposal without 
delay. The proposal will provide firms with an incentive to determine 
if additional disclosures on Form U4 are required for their registered 
personnel, ultimately resulting in more complete and accurate 
information in WebCRD, and as a consequence in BrokerCheck. As noted by 
FINRA and the commenters, WebCRD is an important tool used by 
regulators, as well as the public to get information about registered 
persons with whom they may wish to do business. Therefore, implementing 
the proposal without delay is in the public interest. Accordingly, the 
Commission believes that good cause exists, pursuant to Section 
19(b)(2) of the Act,\54\ to approve the proposed rule change, as 
amended by Amendment No. 1, on an accelerated basis.
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    \54\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2014-038 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-038. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing 
also will be available for inspection and copying at the principal 
office of FINRA. All comments received will be posted without change; 
the Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2014-038 and should be submitted on or before January 27, 2015.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \55\ of the 
Act, that the proposed rule change (SR-FINRA-2014-038) be and hereby is 
approved, as amended, on an accelerated basis.
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    \55\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30902 Filed 1-5-15; 8:45 am]
BILLING CODE 8011-01-P


